The use of counterfeit electronic components may have serious consequences in all industries, but their use in defense systems may compromise performance and reliability, risk national security, and endanger the safety of military personnel. As a result, the prevalence of counterfeit electronic parts in the U.S. aerospace and defense supply chain drew the attention of the Senate Armed Services Committee and prompted a call for change within the U.S. Department of Defense (DoD).
Earlier this week, the DoD issued its final rule on Detection and Avoidance of Counterfeit Electronic Parts, which reflects several significant changes from the initial rule it proposed a year ago. It also ends speculation that the requirements might be extended to non-electronic components sourced for use by the DoD.
There are several points worth mentioning. For instance, the DoD revised a key term in DFARS 202.101, dropping the proposed term “counterfeit part” and replacing it with “counterfeit electronic part.” The change clarifies DoD’s intent to limit the scope of the final rule to only counterfeit electronic parts, not other items in the DoD supply chain, explain Jon W. Burd and Craig Smith in an article from Wiley Rein LLP which ran on Lexology.
The DoD also revised the definition of “counterfeit electronic part” to expressly acknowledge an intent element. In the final rule, a counterfeit electronic part is one that has been “knowingly mismarked, misidentified, or otherwise misrepresented.” That definition is a response to industry concerns that the scope of the rule could have swept up unintentional production, packaging or marking errors that were not designed to mislead the buyer.
There are two other points in the rule that caught my attention. First, the DoD has included greater flexibility for contractors to implement “risk-based” systems for detecting and avoiding counterfeit parts. The final rule implements a new DFARS clause, which requires covered contractors—those with contracts subject to the Cost Accounting Standards—to implement business systems to detect and avoid counterfeit electronic parts. Nevertheless, the rule recognizes that such systems need not be “one-size-fits-all,” and expressly acknowledges that contractors may adopt “risk-based policies and procedures” for the system. Furthermore, in the preamble, DoD suggests that this risk-based approach recognizes that contractors who rely on original equipment manufacturers and other trusted suppliers have a lower risk profile that affects how they should be required to manage supply chain risks of counterfeit electronic parts, Burd and Smith wrote in their article.
A final DoD revision is to explain that the clause must be pushed down to all subcontracts at all tiers—including subcontracts for commercial items and commercial-off-the-shelf (COTS) items. Although the clause applies directly to only a limited set of prime contracts covered by the CAS, the rule notes that any electronic part procured by a CAS-covered prime contractor is subject to the restrictions concerning counterfeit and suspect counterfeit parts, without regard to whether the purchased part is a commercial or COTS item. Consequently, Burd and Smith write, DoD will require prime contractors with covered contracts to impose the requirements for detection and avoidance of counterfeit parts throughout their supply chains for those covered contracts.
An earlier proposed draft was, in some ways, more stringent so this final rule—which responds to industry concerns—may be better received. There were, for example, concerns that the rule would financially harm some suppliers, and perhaps even force others out of the market. Spreading the cost through the supply chain to include prime contractors, subcontractors and off-the-shelf items should alleviate that risk to some degree.
If you are in the A&D industry—or, for that matter, other industries—what do you think of the final ruling?