By Michelle Litteken

You may have heard about DFARS 252.246-7007, Contractor Counterfeit Electronic Part Detection and Avoidance System, also known as the “Counterfeit Parts Rule.” The rule requires contractors who provide electronic parts to the Department of Defense (“DOD”) to establish a counterfeit electronic part detection and avoidance system.

When the Counterfeit Parts Rule was issued in May 2014, it drew a great deal of criticism from contractors because of the obligations and risks that it imposed. Up until now, the Counterfeit Parts Rule has not been a significant concern for most small businesses because it was limited to contractors subject to the Cost Accounting Standards. Although some small businesses are subject to the rule through flow-down provisions in subcontracts, the impact on small businesses has been relatively minor. That may change.

On September 21, 2015, the DOD published a proposed rule that would amend the Counterfeit Parts Rule. In addition to defining terms and clarifying existing requirements, the proposed rule contains a provision that would apply to all contractors—including small businesses and set-asides.

The new clause, DFARS 252.246-70XX, Sources of Electronic Parts, would be applicable to all contracts involving electronic parts, including contracts for services that include the supply of electronic parts or components containing electronic parts. Under this clause, all contractors and subcontractors would be required to obtain electronic parts currently in production from original manufacturers, authorized dealers, or suppliers that obtain the parts exclusively from such sources.

And, contractors and subcontractors would be required to use risk-based processes for traceability that track the electronic parts from the original manufacturer to the point of government acceptance. Under the rule, contractors are liable for the costs of any counterfeit or suspect counterfeit parts, as well as any rework or corrective action costs required to remedy the use of such parts.

The Counterfeit Parts Rule was not well-received by contractors in 2012 because of the burdens and risks it imposed. If the proposed rule is adopted, small businesses that supply electronic parts to the DOD will face some of the same burdens and risks. For example, the proposed rule would require contractors to track electronic parts from the original manufacturer to product acceptance or “complete an evaluation that includes consideration of alternative parts or utilization of tests and inspections commensurate with the risk.”  In an international and complex supply chain, tracking electronic parts is no easy feat. Such measures could impose significant costs on small businesses, and those costs could make contracting with the DOD unsustainable for some small businesses.

It is worth noting that in the period leading up to the issuance of the final Counterfeit Parts Rule, the DOD revised the rule to address many of the concerns raised by industry. Although the final version of the Counterfeit Parts Rule was not perfect, many contractors believed that the original proposed rule was more problematic. Contractors may be able to influence the terms of the new proposed rule. If you have concerns about the proposed rule, you may submit comments to the Defense Acquisition Regulations System until November 20, 2015.

About the author: Michelle Litteken is an associate with PilieroMazza in the Government Contracting and .Litigation law groups. She may be reached at [email protected].