NDAA2016 and further amendments to Sec 818 of NDAA2012

The House passed the conference National Defense Authorization Act for FY2016.

https://www.congress.gov/bill/114th-congress/house-bill/1735

The conference report is available here. 

HR1735 includes further amendments to the counterfeit electronic parts legislation found in Sec 818 of NDAA2012. …

“The House bill contained a provision (sec. 885) that would amend section 818(c)(2)(B) of the National Defense Authorization Act for Fiscal Year 2012 (Public Law 112–81) to expand the eligibility for covered contractors to include costs associated with rework and corrective action related to counterfeit electronic parts as allowable costs under Department of Defense contracts.

The Senate amendment contained no similar provision.

The Senate recedes with an amendment that would allow the Department of Defense to approve of industry-selected trusted suppliers.”

While this amendment to 818(c)(2)(B) does expand the scope for allowable costs, all three conditions must apply:

1. Contractor has an operational system … reviewed and approved by DoD;
2. The parts were provided as Government property or were obtained per regulations described in paragraph (3) [Trusted Suppliers]…; AND
3. Contractor discovers the counterfeit or suspect counterfeit parts and provides timely notice to the Government

[ 7 Oct update: Expanded item 2 above to include an addition within this amendment shown below. ]

HR1735 also includes a requirement for DoD to conduct a “Study of field failures involving counterfeit electronic parts”(sec. 238) …

“The Senate amendment contained a provision (sec. 232) that would require the Secretary of Defense to task the Joint Federated Assurance Center (JFAC) to conduct a hardware assurance study to assess the presence, scope, and effect on Department of Defense operations of counterfeit electronic parts that have passed through the Department of Defense supply chain and into fielded systems.

The House bill contained no similar provision.

The conference agreement includes the provision with an amendment to assign responsibility for the study to the executive agent for printed circuit board technology. The conferees believe that the executive agent is the most appropriate official to conduct such a study. The amendment would also require JFAC to conduct a technical assessment for indications of malicious tampering on any parts assessed that demonstrate unusual or suspicious failure mechanisms. The conferees believe that such follow-up is critical for ensuring maximum impact and benefit of the study.”

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The following is a markup of the amended sections of NDAA2012S818 …

(c) Regulations-

(2) CONTRACTOR RESPONSIBILITIES- The revised regulations issued pursuant to paragraph (1) shall provide that–

(A) covered contractors who supply electronic parts or products that include electronic parts are responsible for detecting and avoiding the use or inclusion of counterfeit electronic parts or suspect counterfeit electronic parts in such products and for any rework or corrective action that may be required to remedy the use or inclusion of such parts;

(B) the cost of counterfeit electronic parts and suspect counterfeit electronic parts and the cost of rework or corrective action that may be required to remedy the use or inclusion of such parts are not allowable costs under Department contracts, unless–

(i) the covered contractor has an operational system to detect and avoid counterfeit electronic parts and suspect counterfeit electronic parts that has been reviewed and approved by the Department of Defense pursuant to subsection (e)(2)(B);

(ii) the counterfeit electronic parts or suspect counterfeit electronic parts were provided to the covered contractor as Government property in accordance with part 45 of the Federal Acquisition Regulation or were obtained by the covered contractor in accordance with regulations described in paragraph (3); and

(iii) the covered contractor discovers the counterfeit electronic parts or suspect counterfeit electronic parts and provides timely notice to the Government pursuant to paragraph (4);

(3) TRUSTED SUPPLIERS- The revised regulations issued pursuant to paragraph (1) shall—

(A) require that the Department and Department contractors and subcontractors at all tiers–

(i) obtain electronic parts that are in production or currently available in stock from the original manufacturers of the parts or their authorized dealers, or from suppliers identified as trusted suppliers in accordance with regulations issued pursuant to subparagraphs (C) and (D)’; and who obtain such parts exclusively from the original manufacturers of the parts or their authorized dealers;

(ii) obtain electronic parts that are not in production or currently available in stock from suppliers identified as trusted suppliers in accordance with the regulations issued pursuant to subparagraphs (C) and (D); and

(iii) obtain electronic parts from alternate suppliers when such parts are not available from original manufacturers, their authorized dealers, or in accordance with the regulations issued pursuant to subparagraphs (C) and (D;

(B) establish requirements for notification of the Department, and for inspection, testing, and authentication of electronic parts that the Department or a Department contractor or subcontractor obtains from any source other than a source described in clause (i) or (ii) of subparagraph (A), if obtaining the electronic parts in accordance with such clauses is not possible;

(C) establish qualification requirements, consistent with the requirements of section 2319 of title 10, United States Code, pursuant to which the Department may identify as trusted suppliers those that have appropriate policies and procedures in place to detect and avoid counterfeit electronic parts and suspect counterfeit electronic parts; and

(D) authorize Department contractors and subcontractors to identify and use additional trusted suppliers, provided that–

(i) the standards and processes for identifying such trusted suppliers comply with established industry standards;

(ii) the contractor or subcontractor assumes responsibility for the authenticity of parts provided by such suppliers as provided in paragraph (2); and

(iii) the selection of such trusted suppliers is subject to review, audit, and approval by appropriate Department officials.