Proposed Rules on Counterfeit Parts Puts Onus on Industry

If implemented, new Defense Department regulations could leave contractors to foot the bill for the use of counterfeit parts.

The Defense Federal Acquisition Regulation Supplement 2012-D055 would add a new section to regulations prohibiting contractors from being reimbursed for the cost of actual or suspected counterfeit electronic parts. It would also keep contractors from receiving reimbursements for work done to correct any problems resulting from counterfeit parts.

Steve Charles, executive vice president and co-founder of immixGroup Inc., characterized the regulations as “Congress putting the burn back on industry [and] all the suppliers and distribution partners without a lot of details on how to … mitigate risk.”

ImmixGroup helps technology companies sell hardware and software to the government.

“The proposed regulation asks prime contractors to develop a system for detection and avoidance of counterfeit parts,” he continued. “Industry has some concerns because it doesn’t provide much guidance about what will be an acceptable system.”

Companies had until July 15 to formally comment on the proposed rule, including the definitions for what constitutes actual or suspected counterfeit electric parts.

“In the definition for counterfeit parts … there seems to be a difference between the statute and the proposed rule,” Charles said. He expected industry would focus on this language — specifically on what constitutes a “legally-authorized source.”

Contracts and subcontracts with small businesses are exempt from the rules, but small companies in the supply chain of a large prime will have to abide by the regulations, according to the notice in the Federal Register. “The [economic] impact should be negligible as long as the small entity is not supplying counterfeit electronic parts to the prime contractor,” it said.

The new policy may be causing headaches for defense contractors, but it offers an opportunity for suppliers who can help businesses comply with requirements.

In response to the proposed regulations, immixGroup in June launched its trusted supplier program, which guarantees that all electronic parts sold through the company are verified to be current, authentic products from the original equipment manufacturer or were in its authorized chain of custody. 

By doing so, the company can assure customers that products are legitimate, no matter how the final regulations pan out. While that may not erase companies’ concerns about any proposed rule changes, it can give them peace of mind that their electronic parts are not repackaged components from China, Charles said.

“We’re in sync with anything that’s going to go down, but it’s in the details,” he said. “The primes are totally at risk and totally frustrated.”

Based on the Pentagon’s current pace, industry will likely have to wait at least six months for the next round of drafts, he said. 

These proposed rules are just the beginning of counterfeit part regulations stemming from sections of the 2012 and 2013 National Defense Authorization Acts. The Pentagon still has to decide how to implement remaining sections. 

“We have more rules coming,” Charles said. Companies are eager to see “what’s coming next, and how is this going to connect?”

Topics: Business Trends, Doing Business with the Government, Defense Contracting, Defense Department, DOD Policy