[Federal Register Volume 79, Number 87 (Tuesday, May 6, 2014)]
[Rules and Regulations]
[Pages 26091-26108]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-10326]



[[Page 26091]]

Vol. 79

Tuesday,

No. 87

May 6, 2014

Part IV





Department of Defense





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 Defense Acquisition Regulations System





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48 CFR Parts 202, 231, 244, et. al.





 Defense Federal Acquisition Regulation Supplement: Detection and 
Avoidance of Counterfeit Electronic Parts (DFARS Case 2012-D055); Final 
Rule

Federal Register / Vol. 79, No. 87 / Tuesday, May 6, 2014 / Rules and 
Regulations

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DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Parts 202, 231, 244, 246, and 252

RIN 0750-AH88


Defense Federal Acquisition Regulation Supplement: Detection and 
Avoidance of Counterfeit Electronic Parts (DFARS Case 2012-D055)

AGENCY: Defense Acquisition Regulations System, Department of Defense 
(DoD).

ACTION: Final rule.

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SUMMARY: DoD is issuing a final rule amending the DFARS in partial 
implementation of a section of the National Defense Authorization Act 
for Fiscal Year 2012, and a section of the National Defense 
Authorization Act for Fiscal Year 2013, relating to the detection and 
avoidance of counterfeit electronic parts.

DATES: Effective May 6, 2014.

FOR FURTHER INFORMATION CONTACT: Ms. Amy Williams, telephone 571-372-
6106.

SUPPLEMENTARY INFORMATION: 

I. Background

    DoD published a proposed rule in the Federal Register at 78 FR 
28780 on May 16, 2013, to implement paragraphs (a), (c), and (f) of 
section 818, entitled ``Detection and Avoidance of Counterfeit 
Electronic Parts,'' of the National Defense Authorization Act (NDAA) 
for Fiscal Year (FY) 2012 (Pub. L. 112-81, enacted December 31, 2011). 
Paragraph (c) of section 818 requires the issuance of DFARS regulations 
addressing contractor responsibilities for detecting and avoiding the 
use or inclusion of counterfeit electronic parts or suspect counterfeit 
electronic parts, the use of trusted suppliers, and requirements for 
contractors to report counterfeit electronic parts and suspect 
counterfeit electronic parts. Paragraph (f) of section 818 contains the 
definitions of ``covered contractor'' and ``electronic part.'' Also, 
paragraph (a) of section 818 requires DoD to provide definitions of 
``counterfeit electronic part'' and ``suspect counterfeit electronic 
part.'' Other aspects of section 818 are being implemented separately.
    The proposed rule and this final rule also address the amendments 
to section 818 made by section 833, entitled ``Contractor 
Responsibilities in Regulations Relating to Detection and Avoidance of 
Counterfeit Electronic Parts,'' of the NDAA for FY 2013 (Pub. L. 112-
239, enacted January 2, 2013). Fifty respondents submitted public 
comments in response to the proposed rule.
    After publication of the proposed rule, DoD hosted a public meeting 
to obtain the views of experts and interested parties in Government and 
the private sector regarding the electronic parts detection and 
avoidance coverage proposed for inclusion in the DFARS (see 78 FR 
35262, dated June 12, 2013). A dozen representatives of private-sector 
firms, industry associations, and Government agencies made 
presentations. Many recommendations were made for improving the 
definition of counterfeit part, and these were carefully considered in 
preparing the final rule. Another frequently voiced recommendation was 
to expand on the nine criteria provided by statute for counterfeit part 
detection and avoidance systems, a recommendation also acted upon for 
the final rule. There were many comments made on the applicability of 
the proposed rule only to Cost Accounting Standards (CAS)-covered 
contractors and the resultant exemption of small businesses and 
contracts for the acquisition of commercial items.

II. Discussion and Analysis

    DoD reviewed the public comments in the development of the final 
rule. A discussion of the comments and the changes made to the rule as 
a result of those comments is provided, as follows:

A. Summary of Significant Changes From Proposed Rule

     In the definitions at DFARS 202.101 and the clause at 
DFARS 252.246-7007--
    [cir] The definitions of ``counterfeit part'' and ``suspect 
counterfeit part'' are substantively revised and limited to electronic 
parts;
    [cir] The definition of ``legally authorized source'' is deleted; 
and
    [cir] A new definition of ``obsolete part'' is added.
     The criteria for a contractor's counterfeit electronic 
part detection and avoidance system at DFARS 246.870-2(b) and paragraph 
(c) of the clause at DFARS 252.246-7007 are expanded and clarified and 
three new criteria have been added. In addition, the use of a risk-
based system by the contractor is clarified.
     Applicability of the counterfeit system criteria only to 
CAS-covered prime contractors is clarified, as is the required flow 
down to all subcontractor tiers providing electronic parts or 
assemblies containing electronic parts.

B. Analysis of Public Comments

    Outline of issues:

1. Comment Period
2. Definitions
    a. ``Counterfeit [Electronic] Part'' and ``Suspect Counterfeit 
[Electronic] Part''
    b. ``Trusted Supplier''
    c. ``Legally Authorized Source''
    d. ``Electronic Part''
3. System Criteria
    a. General
    b. Training of Personnel
    c. Inspection and Testing
    d. Proliferation of Counterfeit Electronic Parts
    e. Traceability
    f. Use of Trusted Suppliers
    g. Reporting and Quarantining
    h. Suspect Counterfeit Electronic Parts
    i. Design, Operations, and Maintenance of System
    j. Flow Down
4. Applicability
    a. CAS-Covered Contractors
    b. Commercial Items, Especially COTS Items
    c. Parts Already on the Shelf
    d. Other
5. Flowdown Requirements
6. Contractor Purchasing System Review (CPSR)
7. Cost Allowability
8. Industry Standards
9. Testing/Item Unique Identification (IUID) Use
10. Reporting
11. Clauses
12. Obsolete Parts
13. Other Comments
1. Comment Period
    Comment: Five respondents submitted comments on this subject. Three 
respondents recommended extending the public comment period. One 
recommended an extension of 12 months, another recommended aligning the 
comment period for this DFARS rule with that of the two associated FAR 
proposed rules, and a third respondent recommended delaying this case 
until formal publication of the report of the Intellectual Property 
Enforcement Coordinator. Two of these respondents also recommended 
establishment of a formal Government-industry dialogue to ``minimize 
costs and avoid adverse impacts to . . . supply chains.'' A respondent 
recommended that, given the complexities of this issue, DoD would 
benefit from issuing a second proposed rule and soliciting additional 
public comment. However, one respondent argued strongly against any 
further delay, citing the threats that counterfeit parts pose to 
warfighters and the country's economic and physical security.
    Response: While DoD is aware that many issues associated with

[[Page 26093]]

management of the counterfeit parts problem remain to be resolved, DoD 
cannot afford to wait to take action. Further, the Congress has spoken 
on counterfeit electronic parts and mandated certain DoD implementation 
actions in section 818 of the NDAA for FY 2012. All of the 
possibilities cited by respondents above were considered, and the best 
course of action was determined to be issuance of this final rule 
without undue delay. However, a means of accomplishing the suggested 
Government-industry dialogue is being pursued, and future changes to 
the DFARS regulations will be considered as they are identified.
2. Definitions
a. ``Counterfeit [Electronic] Part'' and ``Suspect Counterfeit 
[Electronic] Part''
    Twenty three respondents provided comments on the definitions of 
``counterfeit part'' and ``suspect counterfeit part.''
i. Definition of ``Counterfeit Part''
    Comment: One respondent said that the proposed definition of 
``counterfeit part'' is too broad and allows for undefined and 
unregulated purchases of electronic parts from sources not authorized 
by the original manufacturer. Six respondents said that the definition 
must be limited to electronic parts, i.e., counterfeit electronic 
parts.'' One respondent recommended using the term ``item'' rather than 
``part'' (see DFARS 202.101 and 252.246-7007).
    Response: DoD has revised the definition to limit it to electronic 
parts. The DFARS definition for ``electronic part'' is the statutory 
definition included at paragraph (f)(2) of section 818 (see paragraph 
2.d. of this section, ``Electronic part''). The coverage in this final 
rule is clearly limited to electronic parts. Therefore, ``part'' is 
retained in lieu of ``item'' in accordance with the language used by 
the Congress in section 818.
    Comment: Several respondents cited a preference for the definitions 
from the SAE AS5553A and (pending) AS6081 standards (``A fraudulent 
part that has been confirmed to be a copy, imitation, or substitute 
that has been represented, identified, or marked as genuine, and/or 
altered by a source without legal right with intent to mislead, 
deceive, or defraud''). Another respondent suggested that the 
definition of ``counterfeit item'' should be the same as that provided 
in DoDI 4140.67, DoD Counterfeit Prevention Policy.
    Response: The revised definition takes into account current 
published agency and industry definitions. Some changes have been made 
to bring the DFARS definition in line with the best features of these 
definitions. However, because of the continually evolving nature of the 
definitions in industry standards and the inconsistencies among the 
definitions in the standards, it was not possible to adopt the 
definitions as included in industry standards. For example, the 
definition is revised to (1) address the element of intent by adding 
``misrepresented'' and (2) add ``unlawful or unauthorized 
substitution.'' Given the wide variety of industry standards and the 
evolving state of knowledge on the elements needed to be included in a 
workable definition, it is likely there will continue to be differences 
between industry standards. Furthermore, using the definition of 
``counterfeit item'' in DoDI 4140.67 verbatim was not feasible because 
it was developed before the public comment period for this DFARS case 
and did not benefit from the information provided during the public 
comment period.
    Comment: A number of other respondents provided various alternative 
definitions.
    Response: DoD carefully reviewed all suggested wording and 
formulated a comprehensive definition that includes many of the 
respondents' recommendations (see response immediately above).
    Comment: Several respondents commented that the element of 
``intent'' was missing from the definition in the proposed rule, and, 
as claimed by one of these respondents, the definition therefore is 
inconsistent with 18 U.S.C. 2320. Another respondent agreed that the 
definition needs an ``intent'' element. In the estimation of this 
respondent, ``intent'' is especially important because, without it, 
many more costs become unallowable under the terms of DFARS 231.205-71. 
Two additional respondents said, by omitting an ``intent'' element, 
inadvertent delivery of an incorrect part by a bona fide source could 
result in liabilities and other obligations that should be limited to 
situations where there is evidence of intent to mislead or deceive. 
Another respondent stated that adding an intent element to the 
definition would mitigate the strict-liability aspect present in the 
proposed rule. However, the respondent's proposed definition includes 
``reckless'' and ``negligent'' ``misrepresentation'' in addition to 
``knowingly misrepresented'' in order to prevent occurrences of willful 
blindness or lack of due care. A last element related to ``intent'' 
came from a respondent who said that parts that are out of warranty or 
are genuine but out of specification or suffer from quality 
deficiencies should be addressed under the warranty provisions of the 
contract rather than treated as counterfeit parts.
    Response: DoD has added an element of intent to the definition of 
``counterfeit electronic part'' by including the term 
``misrepresented.'' Terms indicating supplier failure to exercise 
appropriate counterfeit detection and avoidance measures, such as 
``recklessly'' and ``negligently,'' are not included in the definition 
because they have no bearing on whether the part itself is counterfeit 
(i.e., supplier negligence cannot change the status of a counterfeit 
part to a non-counterfeit part).
    Comment: Many comments addressed one or more of the three parts of 
the definition in the proposed rule. Regarding Part 1 of the 
definition, two respondents noted favorably that it conformed to DoDI 
4140.67. Another respondent recommended adding ``, reproduction, 
overrun,'' after ``copy'' and before ``or substitute.'' A respondent 
stated that the definition of ``legally authorized source'' would have 
to be expanded to include the authorized distributor before the 
respondent could agree with it.
    Response: Based on comments received, DoD added to the definition 
to explain what is meant by ``unlawful or unauthorized substitution.'' 
This enabled deletion of the third portion of the ``counterfeit'' 
definition in the proposed rule.
    Comment: With regard to Part 2 of the proposed rule's definition, a 
respondent said that it was inconsistent with the intent of the statute 
and utilized the Lanham Act meanings. Another respondent recommended 
revising Part 2 to use the term ``legally authorizing source'' because 
it would be clearer to apply the term to the source of the item rather 
than the item itself. A third respondent said that Part 2 constitutes 
fraud and should be considered in the appropriate areas of law that 
deal with fraud. Another respondent asked if Part 2 was intended to be 
different from Part 1. A respondent stated that ``intended use'' was 
ambiguous.
    Four respondents offered a solution by recommending that Part 2 of 
the three elements be deleted, given that Part 1, in their estimation, 
captured the intent of Part 2. A respondent said that an item 
misrepresented to be an authorized item of the legally authorized 
source could exclude supply by bona-fide distributors or brokers that 
acquire excess and out-of-production authentic parts.
    Response: DoD has revised the definition of ``counterfeit 
electronic part'' to list the sources legally

[[Page 26094]]

authorized to permit manufacturing or resale of the item (see above 
responses in this section). In addition, the reference to ``intended 
use'' is removed.
    Comment: Commenting on Part 3 of the definition, one respondent 
concluded that Part 3 was overbroad because it equated contract-
requirements compliance with counterfeiting. This respondent 
recommended that Part 3 of the definition be struck altogether. A 
respondent said that it was alright to use ``previously used parts 
represented as new,'' but other terms went too far (e.g., new, unused 
genuine part from the original manufacturer that is discovered to have 
an unintentional quality issue). Several respondents stated that Part 3 
is overly broad because ``even newly made parts from original 
manufacturers that fail acceptance tests would be deemed counterfeits 
that contractors would be liable for.'' One respondent suggested that 
requiring willful misrepresentation may narrow the scope of the 
definition appropriately. According to one respondent, basing a 
counterfeit determination solely on age-related criteria or solely on 
performance requirements is unnecessary and goes beyond the concerns 
articulated by Congress. The respondent recommended deleting Part 3 and 
using a single definition. A respondent proposed to revise Part 3 of 
the definition to read ``(3) A used, outdated, or expired genuine item 
from any source that is misrepresented to the end user as new or as 
meeting new part performance requirements'' because the revised wording 
focuses on genuine parts that may not perform as new due to the passage 
of time or prior misuse. A respondent said that Part 3 of the 
definition is incorrect because ``any source'' includes sources that 
have the right to re-mark, re-label, and reconfigure their device to 
meet performance specifications. This respondent recommended the 
following Part 3 language: ``A new, used, outdated, or expired item 
that has been represented, identified, or marked as genuine, and/or 
altered by a source without legal right as meeting the performance 
requirements for the intended use.'' Another respondent proposed to 
revise Part 3 into two parts. The respondent, as justification, noted 
that the AS5553 definition of ``counterfeit part'' is focused on the 
misrepresentation of the origin of the part, not its performance with 
respect to the end user's requirements, and it is unnecessary to 
protect the DoD supply chain.
    A respondent said that a nonconforming item, even one that is 
wholly unintentional and furnished by its original source, would be 
considered ``counterfeit''. Out-of-specification escapes could well be 
unintentional and unobserved by the supplier and thus represented to 
the customer ``as meeting the performance requirements for the intended 
use;'' this would expose the supplier to False Claims Act liability.
    Two respondents were concerned with ``misrepresentation'' issues. 
An escape due to a temporary lapse of manufacturing and testing process 
control could be unintentional and unobserved, these respondents said, 
and could subject the supplier to False Claims Act liability. Further, 
``misrepresented'' could be misinterpreted manufacturing defects.
    Several respondents addressed the use of terms like ``new, used, 
outdated, or expired item.'' These respondents said that ``outdated'' 
may indicate a date code or lot number that may or may not be equal to 
either an older or newer date code, and that, left undefined, 
``expired'' could be read to mean packing material such as humidity 
indicator cards, shelf life that can legitimately be restored in most 
parts, and other transactions as long as the customer is fully informed 
and approves. The respondents asked whether an obsolete but original 
part carried in distributor inventory and still in use in fielded 
products was considered to be an ``outdated'' or ``expired'' item.
    Similarly, several respondents raised concerns with regard to 
``intended use,'' asking who determines what the ``intended use'' is. 
The respondents said that the DoD end-user ``would certainly have 
knowledge for the `intended use' of the equipment containing the 
electronic part but would likely not have design application knowledge 
for the `intended use' for the electronic part within the design of the 
equipment.''
    Response: DoD addressed concerns about Part 3 of the definition by 
removing it and including an ``intent'' element in the revised 
definition.
    Comment: A respondent recommended that the definition be revised to 
delete ``from a legally authorized source that is misrepresented by any 
source to the end user.'' Another respondent recommended deleting 
``from a legally authorized source.'' A third respondent said that the 
definition of ``legally authorized source'' would have to be revised 
before the respondent could accept Parts 1 and 2 of the definition. A 
respondent wondered how a legally authorized source was identified and 
who gets to decide.
    Response: DoD is revising the definition of ``counterfeit part'' to 
specify what constitutes the legally authorized source, i.e., the 
current design activity, the original manufacturer, or a source with 
the express written authority of the original manufacturer or current 
design activity, including an authorized aftermarket manufacturer. The 
separate definition of that term has been deleted (see also paragraph 
2.c. of this section, ``Legally authorized source'').
    Comment: A respondent recommended removing references to substitute 
equipment because genuine replacement equipment may be ``identified 
(or) marked . . . by a source other than the part's legally authorized 
source.'' According to the respondent, this could exclude legitimate 
substitutes for, or alternatives to, original-manufacturer parts due to 
such circumstances as a legally authorized source no longer producing 
the equipment. The current definition, the respondent said, could also 
be interpreted as precluding the use of certain commercially available 
off-the-shelf (COTS) items.
    Response: The word ``substitute'' is replaced with the term 
``unlawful or unauthorized substitution'' in order to distinguish such 
items from legitimate substitutes.
    Comment: One respondent suggested replacing ``meeting the 
performance requirements'' with ``being the current or authorized 
part.'' This respondent also recommended deleting ``new'' and 
inserting, between ``outdated,'' and ``or expedited item,'' 
``decommissioned, recalled.''
    Two respondents suggested that the final rule provide a definition 
for ``outdated or expired'' item. Another respondent recommended 
defining ``authentic part'' as ``a part manufactured by the original 
component manufacturer or by a source authorized by the original 
component manufacturer, including the authorized aftermarket 
manufacturer.'' A respondent asked that the term ``source'' be revised 
to ``supplier'' in two places and ``item'' to ``part'' in two places.
    Response: Part 3 of the proposed definition, which referred to 
outdated or expired items and items that do not meet performance 
requirements, is removed. These items, as well as decommissioned and 
recalled items, fall under the revised definition of counterfeit, which 
includes ``unlawful or unauthorized substitutions.''
ii. Definition of ``Suspect Counterfeit [Electronic] Part''
    Comment: One respondent suggested that DFARS should set forth who 
has the burden of proof, including

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procedures for determination, how it is done, and what should be done 
with the part once it is classified as ``suspect.'' This respondent 
suggested that any part obtained from a non-authorized source be 
considered a ``suspect counterfeit part'' if the non-authorized source 
does not use detection, avoidance, testing, and/or verification 
processes in accordance with industry standards. One respondent stated 
its belief that any finding based on testing ``can, and should, be 
supported by `visual inspection' and `other information.'''
    Several respondents provided alternate definitions. Two respondents 
declared the definition to be overbroad. Another respondent said that, 
to be consistent with legal precedents, the definition should be 
revised as follows: ``An electronic part for which there is an 
indication that it may be Counterfeit based on analysis, testing and/or 
evidence, although not yet confirmed.'' Yet another respondent 
recommended a revised definition as follows: ``An electronic item, or 
any electronic component thereof, for which visual inspection, testing, 
or other information provide reason to believe that an electronic part 
may be a counterfeit item.'' A different respondent recommended that 
the definition should be ``one for which there is reasonable cause 
under the circumstances to believe a part is counterfeit, based on 
either (1) physical inspection of the part, or (2) credible evidence 
from other sources.'' The respondent considered this to be a better 
definition because ordinary quality problems could emerge that are 
treated initially as suspect counterfeit parts but, after 
investigation, turn out to be otherwise. But, the respondent said, the 
cost principle at DFARS 231.205-71 would make any costs associated with 
the item unallowable. Industry should have the authority, according to 
the respondent, to make a determination whether a part is a ``suspect 
counterfeit'' part, and the rule should clarify the processes that 
should be followed.
    Response: As with all nonconforming items, the contracting officer 
is the official responsible for acceptance under the FAR. The 
definition is revised to include the phrase ``credible evidence,'' 
along with examples, to strengthen the fact-based approach. It is not 
practical or cost effective to test in every case of a suspected 
counterfeit.
b. ``Trusted Supplier''
    Comment: Nineteen respondents submitted comments requesting a 
definition for ``trusted supplier,'' many noting that section 818 
relies heavily on the concept of trusted suppliers. Two of these 
respondents stated that the law, at section 818(c)(3)(C), requires the 
regulations to establish qualification requirements pursuant to which 
DoD may identify trusted suppliers that have appropriate policies and 
procedures in place to detect and avoid counterfeit electronic parts 
and suspect counterfeit electronic parts. A respondent offered an 
alternate definition, which was supported by a separate respondent as 
consistent with SAE industry standards AS5553A and AS6081. A respondent 
suggested that that term ``trustworthy supplier'' would be more 
appropriate and less likely to be confused with other, existing 
programs. A similar definition was provided by another respondent. 
Concerns about confusion with other, existing programs were expressed 
by another respondent, which requested that the DFARS require that 
companies that are not Defense Microelectronics Activity (DMEA)-
accredited trusted suppliers be required to disclose this fact and, 
further, that the final rule include a statement in the Federal 
Register notice that ``clearly underscores that existing requirements 
to use DMEA-accredited Trusted Suppliers remain in force.''
    Other respondents suggested simpler definitions. One respondent 
recommended that trusted supplier be equated to legally authorized 
source, as long as these sources were able to document traceability and 
chain of custody to the original manufacturer.
    A respondent recommended that the term ``independent suppliers'' be 
used in lieu of ``trusted suppliers,'' so as not to confuse it with 
other programs, such as the Trusted Access Program. Another respondent 
recommended that authorization to purchase electronic parts from 
trusted suppliers should only be given when it is not possible to 
purchase the parts from the original manufacturer or sources authorized 
by the original manufacturer (legally authorized sources).
    A respondent pointed out that the DFARS hadn't defined ``supplier'' 
and suggested that the final rule add such a definition. A respondent 
provided a definition of ``authorized distributor.'' One respondent 
stated that it had signed agreements between it and various suppliers 
that bind the company's relationship to ensure original manufactured 
product only is supplied to customers; consideration of these 
agreements was not included in the proposed rule and, according to the 
respondent, would unfairly designate authorized distribution as an 
illegal source. One respondent suggested that use and qualification of 
trusted suppliers should be defined by the contractor, not by the 
Government.
    One respondent noted that industry is well aware that it should 
purchase electronic parts from original manufacturers and their 
authorized distributors, but this is not always possible because there 
are thousands of systems in the inventory for which parts remain in 
demand but are not available from such trusted suppliers.
    Response: Paragraph (c)(3)(A)(i) of section 818 requires that DoD, 
and its contractors and subcontractors, whenever possible, obtain 
electronic parts that are in production or currently available in stock 
from the original manufacturer, dealers authorized by the original 
manufacturer, or from trusted suppliers that ``obtain such parts 
exclusively from the original manufacturers of the parts or their 
authorized dealers.''
    Paragraph (c)(3)(A)(ii) of section 818 also permits the acquisition 
of electronic parts that are not in production or currently available 
in stock from trusted suppliers. Paragraphs (c)(3)(C) and (c)(3)(D) 
require DoD and contractors and subcontractors to establish procedures 
and criteria for the identification of such trusted suppliers. DoD 
contemplates further implementation with regard to identification of 
trusted suppliers under DFARS Case 2014-D005.
    Paragraph (c)(3)(B) of section 818 requires DoD regulations to 
establish requirements for notification of DoD and inspection, testing, 
and authentication of electronic parts that a DoD contractor or 
subcontractor obtains from any source other than a source identified in 
paragraph (c)(3)(A).
    Therefore, testing or additional inspection is not generally 
required for electronic parts purchased from the original manufacturer, 
the design authority, or an original manufacturer-authorized dealer(s). 
Furthermore, DFARS 252.246-7007(c)(2) specifies that selection of tests 
and inspection shall be based on minimizing risk to the Government. One 
of the criteria for determination of risk is the assessed probability 
of receiving a counterfeit electronic part.
    DoD is concerned that defining and using the term ``trusted 
supplier,'' or a variation of it, would create confusion due to the use 
of this term in other, current DoD and industry initiatives. 
Accordingly, the systems criteria in DFARS are revised to express what 
is intended by ``trusted supplier'' without directly using the term, 
e.g., 252.246-7007(c)(5) uses the phrase ``suppliers that meet 
applicable counterfeit

[[Page 26096]]

detection and avoidance system criteria.''
c. ``Legally Authorized Source''
    Comment: Seventeen respondents commented on the definition of 
``legally authorized source'' at DFARS 202.101 in the proposed rule. 
Many of the comments alleged ambiguity in the definition and expressed 
concerns about the treatment of millions of parts made by original 
manufacturers that are in circulation worldwide and are purchased 
legally by responsible brokers and distributors, parts that are still 
in demand. Three respondents recommended adding ``or distribute'' 
between ``produce'' and ``an item,'' in order to capture distributors 
that have agreements in place with the original manufacturers to 
distribute items sourced direct from the original manufacturer. Similar 
changes were recommended by another respondent. Other respondents 
recommended adding reputable, or authorized, distributors to the 
definition. Four respondents supported the change with a more strongly 
worded alternate definition. One of these respondents noted the 
proposed definition of ``legally authorized source'' is consistent with 
the definition of ``current design activity'' in MIL-STD-130N. A 
respondent wanted to revise the definition to include licensors of 
software to clarify that the term applies to both hardware and 
software.
    However, two respondents stated that using the term ``legally'' 
added unnecessary complexity to the definition. Another respondent took 
a different approach, stating that the term ``authorized source'' 
needed its own definition. One other respondent was concerned that the 
current definition could be construed to mean that the actions of an 
authorized reseller could create a legal liability for the original 
manufacturer where the reseller integrated third-party components to 
configure or customize the product at DoD's direction.
    Response: DoD has removed the definition of ``legally authorized 
source'' and, instead, spelled out at DFARS 246.870-2(b)(5) the 
entities that are authorized to produce a genuine item, i.e., the 
original manufacturer, current design activity, or an authorized 
aftermarket manufacturer.
d. ``Electronic Part''
    Comment: Five respondents provided comments on the definition of 
electronic part at DFARS 202.101 in the proposed rule. One respondent 
proposed adding to the end of the definition provided in the statute 
(section 818(f)(2)) the phrase ``, or materials used to produce 
assemblies and cables.'' Another respondent stated that electronic 
parts are usually more inclusive than indicated in the proposed rule's 
definition. A third respondent recommended that the definition 
expressly include software, so that there was no opportunity to assume 
that software was not included. Two other respondents suggested that, 
for electronic parts where physical marking is not possible and where 
the risk of counterfeit parts presents a significant mission, security, 
or safety hazard, DoD should consider requiring ``electronic unique 
identification.''
    Response: Paragraph (f) of section 818 provided only two 
definitions, one for ``covered contractor'' and the other for 
``electronic part.'' The proposed definition directly implements the 
statutory definition.
    However, while retaining the statutory definition, DoD has added to 
the definition the statement that ``The term electronic part includes 
any embedded software or firmware.''
    Requiring electronic unique identification is addressed in 
paragraph 9.b. of this section, IUID use.
3. System Criteria
a. General
    Comments: Twenty respondents submitted comments on this subject 
area. A number of respondents criticized the proposed rule for merely 
repeating the system criteria from section 818 without elaboration. One 
respondent said that, while the DFARS requires an operational system, 
it does not define the approval criteria or specify who will conduct 
the review or the frequency of reviews. Many of the respondents 
concluded that the proposed rule did not correctly implement section 
818 of the law, specifically the requirement at section 818(b)(2) ``to 
implement a risk-based approach to minimize the impact of counterfeit 
electronic parts or suspect counterfeit electronic parts on DoD.'' In 
the opinion of some respondents, the proposed rule would impose 
unreasonable strict liability standards on industry, regardless of 
significant and good-faith efforts to address the issue. This comment 
was supported by other respondents that stated, considering the 
potentially unaffordable costs of treating all acquisitions of 
electronic parts equally, the final rule should provide for weighing 
the odds of occurrence and the potential consequences in responding to 
potential threats of counterfeit parts, which can vary from serious 
impact to negligible impact. One of these respondents recommended that 
DoD enable its largest contractors to take the lead in detection and 
avoidance of counterfeit electronic parts by allowing those contractors 
to make risk-based decisions on how best to implement supply chain 
assurance measures.
    A respondent suggested that one way to address the broad-ranging 
concerns would be to revise DFARS 246.870-2(a) effectively to define a 
``counterfeit avoidance and detection system'' to mean ``the 
contractor's system for risk analysis based on inspection and testing 
to mitigate the acquisition and use of counterfeit electronic parts 
from the supply chain.'' The respondent's use of the term ``mitigate'' 
would alleviate the strict liability requirement for 100 percent 
detection in the proposed rule. A second respondent supported the use 
of ``mitigation'' in lieu of a 100 percent avoidance requirement.
    Response: The final rule adds criteria to the system requirements 
and expands and clarifies the intent of the criteria in the clause at 
252.246-7007. The respondent stating that the DFARS does not define the 
approval criteria or specify who will conduct the review is referred to 
FAR subpart 44.3, Contractor Purchasing Systems Reviews, and its 
supplement, DFARS subpart 244.3. DCMA has developed and published 
guidance for the conduct of Contractor Purchasing Systems Reviews 
(CPSRs) that is available on the agency's Web site. In addition, DCMA 
is developing a ``Counterfeit Detection and Avoidance System 
Checklist'' that will be available when finalized.
    The DFARS does take a risk-based approach, as is further clarified 
in the final rule. DoD has modified DFARS 246.870-2(b) to read, ``A 
counterfeit electronic part detection and avoidance system shall 
include risk-based policies and procedures that address . . .''. This 
change conforms the final rule with DoDI 4140.67. The contractor is 
responsible for establishing a risk-based counterfeit detection and 
avoidance system with the amount of risk based on the potential for 
receipt of counterfeit parts from different types of sources. Three 
additional system criteria are added to the nine criteria set forth in 
the statute. These criteria are elaborated in the additions to the 
system criteria that are included in the final rule in the clause at 
DFARS 252.246-7007.
    Comment: One respondent made specific suggestions for improving the 
system criteria at DFARS 246.870-2(b) by requiring the use of ``secure 
mass serialization with alphanumeric tokens for digital 
authentication'' and not

[[Page 26097]]

limiting the coverage only to electronic parts.
    Response: DoD does not endorse specific mechanisms or technology in 
the rule, but rather focuses on the desired outcome. Furthermore, DoD 
is restricting initial implementation to electronic parts as specified 
in section 818, although other items are considered critical and can be 
subject to counterfeiting.
b. Training of Personnel
    Comment: With regard to DFARS 246.870-2(b)(1) (training of 
personnel), a respondent noted that the training criteria and the scope 
of the required training were not identified in the listing of minimum 
system criteria.
    Response: DoD agrees with the respondent's statement, but notes 
that this is an intentional omission. DoD is providing contractors with 
the flexibility to determine the appropriate type of training required 
for individual firms, based upon each contractor's assessment of what 
programs and capabilities are already in place within the firm and the 
assessment of what more is needed.
c. Inspection and Testing
    Comment: Another respondent, commenting on DFARS 246.870-2(b)(2) 
(inspection and testing of electronic parts), suggested that DoD 
provide a listing of minimum inspections and tests.
    Response: DoD agrees that requiring the contractor to test and 
inspect all electronic parts would be prohibitive. However, the DFARS 
does not require all electronic parts to be treated equally. The 
requirement to test or inspect is dependent on the source of the 
electronic part. The potential for receipt of counterfeit electronic 
items is considerably lower when the item is procured from authorized 
sources and retains traceability. The final rule allows contractors to 
make risk-based decisions based on supply chain assurance measures.
d. Proliferation of Counterfeit Electronic Parts
    Comment: For DFARS 246.870-2(b)(3) (processes to abolish 
counterfeit parts proliferation), a respondent commented that DoD 
should provide minimum requirements for selection of suppliers that 
include a requirement to purchase products from authorized suppliers 
whenever possible. Another respondent recommended the addition of the 
phrase ``, such as the quarantine of counterfeit parts.'' The 
respondent stated that this addition would provide a path of legal 
justification for quarantining counterfeit parts.
    Response: DoD has amended DFARS 246.870-2(b)(4) and (b)(6) to 
address quarantining of counterfeit electronic parts and suspect 
counterfeit electronic parts. These criteria are elaborated on in 
paragraph (c) of the clause at DFARS 252.246-7007.
e. Traceability
    Comment: Multiple respondents commented on the traceability 
requirements in DFARS 246.870-2(b)(4) (process for maintaining 
electronic traceability). Two respondents took issue with the perceived 
significant implementation and compliance problems posed by 
traceability. One respondent suggested that DoD incorporate a 
traceability provision that is in accordance with prevailing industry 
standards to ensure that covered contractors establish and verify the 
source of electronic parts and the chain of custody. One respondent 
stated that traceability cannot resolve unreliability concerns and 
recommended that purchase of electronic parts from an independent 
supplier should be permitted only after an exhaustive search of all 
legally authorized sources proved fruitless, and any such purchases 
must come with required testing. A third respondent stated that the use 
of the term ``mechanisms'' required something more than ``best 
practices,'' and strongly recommended that DoD establish a technology 
solution that is proactive and strategic, and one which provides 
quality, measurable data.
    Two other respondents recommended requiring the use of Item Unique 
Identification (IUID) as a mandatory traceability mechanism.
    Another respondent expressed its strong belief that, although the 
requirement to maintain traceability is taken directly from the 
statute, it is not realistic to promulgate a zero-tolerance standard. 
Instead, the respondent recommended that paragraph (b)(4) be revised to 
make it clear that DoD will be satisfied if a contractor has a system 
that meets applicable industry standards.
    Response: DoD intentionally did not mandate specific technology 
solutions for traceability. The rule provides a contractor flexibility 
to utilize industry standards and best practices to achieve the 
required outcome of traceability.
    References to IUID marking are added to the final rule as an 
optional means of maintaining traceability.
    With regard to mission-critical electronic parts and electronic 
parts that could impact human safety, DoD does have a zero-tolerance 
policy.
f. Trusted Suppliers
    Comment: For DFARS 246.870-2(b)(5)(use and qualification of trusted 
suppliers), a respondent recommended that it include guidance on what 
would need to be included in a trusted supplier program. The respondent 
stated its belief that the Congress intended that a trusted supplier 
should be one that can demonstrate that it has processes in place to 
evidence traceability to the original manufacturer or its authorized 
distributor chain. The respondent stated that, because of the 
importance of this change to contractors' purchasing systems 
requirements, any standards imposed by DoD related to trusted suppliers 
should be subject to notice and comment by industry. A respondent 
stated that DoD should have a list or checklist of requirements for 
determining what is a trusted supplier, including auditing processes. 
Another respondent said that there is a pressing need for industry to 
receive more guidance about how to handle situations where parts are 
obsolete or not available from authorized sources or original 
manufacturers. A third respondent suggested that paragraph (b)(5) would 
be much improved by adding, at the end, the phrase ``as defined by the 
contractor.''
    Response: For reasons explained in detail in paragraph 2.b. of this 
section, ``Trusted supplier'', the term ``trusted supplier'' is not 
defined in the final rule. However, a categorization of what types of 
suppliers may be deemed ``trusted'' and therefore treated differently 
from other suppliers is included in the system criteria and explained 
further in paragraph (c) of the clause at DFARS 252.246-7007.
g. Reporting and Quarantining
    Comment: Two respondents commented that DFARS 246.870-2(b)(6)(The 
reporting and quarantining of counterfeit electronic parts and suspect 
counterfeit electronic parts) should be revised by adding, at the end, 
``by use of a global serialized item identifier or IUID per MIL STD 
130.'' Another respondent referenced section 818(c)(4), (5), and 
(e)(2)(a)(vi), noting that these provisions directed revision of the 
DFARS to address reporting requirements, reporting methods, and 
reporting-related civil liability protections, but paragraph (b)(6) 
referred only to the requirement to report and did not address the 
level of reporting detail DoD expects or to whom at DoD or elsewhere 
the contractor should report. One respondent recommended adding a 
qualification

[[Page 26098]]

that the requirement to report and quarantine didn't come into play 
until ``confirmation of a suspect status by a third-party inspection 
and, if necessary, testing to the extent of destructive testing of a 
sample(s).''
    Response: DoD agrees with respondents who requested additional 
guidance on reporting and quarantining procedures. The clause at DFARS 
252.246-7007 is expanded in the final rule to provide information on 
where to report, what to report, and the circumstances that require a 
report. Additionally, the Government plans to address reporting and 
quarantining requirements more fully in FAR Case 2013-002, Expanded 
Reporting of Nonconforming Supplies.
h. Suspect Counterfeit Electronic Parts
    Comment: With regard to DFARS 246.870-2(b)(7)(methodologies to 
identify suspect counterfeit electronic parts and to determine if a 
suspect counterfeit electronic part is counterfeit), a respondent said 
that only the original manufacturer, not the prime contractor, can make 
the determination that a particular part is actually counterfeit, but 
experience indicates that the original manufacturer will not 
participate, in most cases, in an investigation. Further, the 
respondent claimed, it is often more cost effective for both the prime 
contractor and the Government to declare the parts suspect or scrap and 
reprocure the parts.
    Response: DFARS 246.870-2(b)(7) requires the contractor's 
counterfeit electronic part detection and avoidance system to address 
methodologies to identify suspect parts and to rapidly determine if a 
suspect counterfeit part is, in fact, counterfeit. However, the rule 
provides the contractor flexibility to employ a risk-based approach to 
tests and inspections.
i. Design, Operations, and Maintenance of System
    Comment: A respondent commented on DFARS 246.870-2(b)(8) (Design, 
operation, and maintenance of systems to detect and avoid counterfeit 
electronic parts and suspect counterfeit electronic parts) and asked 
whether compliance with industry standards such as AS5553 would fulfill 
the requirement. Another respondent recommended inserting the phrase 
``the use and supply of'' after ``detect and avoid'' and before 
``counterfeit electronic parts.''
    Response: DoD does not specify industry standards in the rule, 
because industry standards are continually evolving. However, a 
contractor may elect to use current Government- and industry-recognized 
standards to meet this requirement. This clarification has been added 
to the clause 252.246-7007 in paragraph (c)(8). ``Use and supply of'' 
is implied in the current language.
j. Flow Down
    Comment: With regard to DFARS 246.870-2(b)(9) (the flow down of 
counterfeit detection and avoidance requirements to subcontractors), 
two respondents recommended the addition, at the end of ``including the 
use of IUID to enable supply chain traceability.''
    Response: Paragraph (b)(9) requires the flow down of all 
counterfeit detection and avoidance requirements, without the need to 
specifically identify or list individual requirements. See the response 
at paragraph 9.b. of this section, IUID use.
4. Applicability
    Comments: Eighteen respondents submitted comments on applicability.
a. CAS-Covered Contractors
    Comments: Several respondents objected to limiting the 
applicability of the rule to CAS-covered contractors. Although 
recognizing that the statute (section 818(f)(1), with reference to 
section 893(f)(2) of the National Defense Authorization Act for Fiscal 
Year 2011), defined ``covered contractor'' to mean a CAS-covered 
contractor, a respondent expressed concern that limiting applicability 
to CAS-covered contractors might provide undue risk for the 
infiltration of counterfeit parts into the DoD supply chain.
    Another respondent questioned the exclusion of educational 
institutions, Federally Funded Research and Development Centers 
(FFRDCs), and University Associated Research Centers (UARCs) from the 
new requirements. The respondent stated that the statute does not carve 
out any of the institutions listed in the proposed rule as exempt from 
the counterfeit parts strictures. The respondent said that the proposed 
rule did not sufficiently explain why DoD exempted these institutions 
and whether they are exempt from the rule even if they are a 
subcontractor to prime contracts that do include the clause.
    Some other respondents, however, interpreted the flowdown 
requirement not to apply to subcontractors unless the subcontractor 
also was subject to CAS, leaving, in the opinion of one respondent, a 
substantial gap in the regulatory coverage.
    One of these respondents, for example, stated that ``(r)ather than 
. . . directing counterfeit prevention requirements toward lower-tier 
suppliers that tend to be associated with the sale of suspect 
counterfeit electronic parts, the proposed rule focuses on prime and 
upper-tier subcontractors (large entities that are subject to CAS) that 
are not as well positioned to `eliminate counterfeit electronic parts 
from the defense supply chain.' '' Regardless of this interpretation, 
these respondents recommended making all subcontractors at all tiers 
subject to the requirements of the rule.
    A respondent noted that the preponderance of sales of counterfeit 
items is far less than the limits required here and said that it was 
unclear if subcontracts under the CAS threshold were covered.
    One respondent objected that small entities, educational 
institutions, FFRDCs, and UARCs could be impacted by the rule as 
subcontractors to CAS-covered prime contractors.
    A respondent asked how the regulations would apply to contractors 
and subcontractors subject to modified-CAS.
    Response: Section 818 specifically limited to ``covered 
contractors'' the applicability of paragraphs--
     (c)(2)(1)(A) (the responsibility for detecting and 
avoiding the use or inclusion of counterfeit parts or suspect 
counterfeit electronic parts and for rework or corrective action); and
     (e) (Improvement of Contractor Systems for Detection and 
Avoidance of Counterfeit Electronic Parts).
    The definition of ``covered contractor'' at 818(f)(1) referred to 
the definition at section 893(f)(2) of the National Defense 
Authorization Act for Fiscal Year 2011, i.e., ``the term `covered 
contractor' means a contractor that is subject to the cost accounting 
standards under section 26 of the Office of Federal Procurement Policy 
Act (41 U.S.C. 422.'' Section 422, in conjunction with the 
recodification of title 41 of the United States Code, is now sections 
1501-1504 of title 41.
    As an initial implementation of section 818, this rule has limited 
application at the prime contract level (including implementation of 
paragraph (c)(3) of section 818 (Trusted Suppliers)) to CAS-covered 
contractors.
    The final rule does not specifically exempt educational 
institutions, FFRDCs, and UARCs from application of the rule. Rather, 
the clause specifies that it does not apply to any contractor that is 
not CAS-covered pursuant to 41 U.S.C. chapter 15, as implemented in 
regulations found at 48 CFR 9903.201-1.
    The final rule does exclude set-asides for small business from the 
clause prescriptions for 252.246-7007,

[[Page 26099]]

Contractor Counterfeit Electronic Part Detection and Avoidance System 
(and thus indirectly 252.244-7001, Contractor Purchasing System 
Administration-Alternative I), because CAS does not apply to contracts 
with small businesses.
    However, all levels of the supply chain have the potential for 
introducing counterfeit or suspect-counterfeit electronic items into 
the end items contracted for under a CAS-covered prime contract. The 
prime contractor cannot bear all responsibility for preventing the 
introduction of counterfeit parts. By flowing down the prohibitions 
against counterfeit and suspect counterfeit electronic items and the 
requirements for systems to detect such parts to all subcontractors 
that provide electronic parts or assemblies containing electronic parts 
(without regard to CAS-coverage of the subcontractor), there will be 
checks instituted at multiple levels within the supply chain, reducing 
the opportunities for counterfeit parts to slip through into end items. 
As requested by many respondents, the flowdown requirement is clarified 
by the addition of a paragraph in the clause at DFARS 252.246-7007 (see 
also paragraph 5. of this section, Flowdown requirements).
    It is correct that small entities, educational institutions, 
FFRDCs, and UARCS may be impacted by the rule as subcontractors to CAS-
covered prime contractors.
    With regard to contractors or subcontractors with modified CAS-
coverage, the law does not specify a distinction. Therefore any prime 
contract subject to CAS coverage, whether full or modified, is subject 
to the final rule.
b. Commercial Items, Especially COTS Items
    Comments: Several respondents questioned making the rule applicable 
to commercial items in general and commercially available off-the-shelf 
(COTS) items in particular. One respondent noted that it would not be 
in DoD's best interest to apply the Government-unique requirements of 
section 818 to COTS items. Two respondents recommended that, instead, 
DoD should recognize that commercial and COTS items purchased directly 
from the original manufacturers and their authorized distributors 
should be held only to the requirements of the commercial warranties 
and any other standard commercial obligations. One respondent suggested 
that, if a COTS item is purchased directly from the original 
manufacturer, then its authenticity should not be subject to question. 
Another respondent stated its belief that the Congress intended to 
exclude commercial and COTS items from the coverage of the statute.
    A respondent concluded that the rule must not be applicable to 
commercial items because the Federal Register notice for the proposed 
rule did not contain a determination (required by law) that it would 
not be in the best interest of DoD to exempt commercial items. While 
agreeing that it was proper to exempt commercial items, the respondent 
wanted that exemption for commercial items clearly stated in the rule.
    Response: Section 818 does not specifically address application to 
contracts or subcontracts for the acquisition of commercial items, 
either to exempt or to make applicable. However, the provisions of 
section 818 that require implementation in a contract clause meet the 
criteria for a covered law subject to 41 U.S.C. 1906 and 1907. That 
means that DoD shall not apply the clauses to implement section 818 to 
contracts or subcontracts for the acquisition of commercial items 
(including COTS items), unless the Director, DPAP, makes a written 
determination that it would not be in the best interest of the 
Government to exempt contracts and subcontracts for the acquisition of 
commercial items (including COTS items) from the applicability of the 
provisions of section 818.
    Therefore, the final rule, like the proposed rule, does not 
prescribe the clause at 252.246-7007 (and the related clause at 
252.244-7001, Alternate I) for use in prime contracts for the 
acquisition of commercial items (including COTS items). In order to 
require application to the acquisition of commercial items, it would be 
necessary to list the clauses at 212.301. However, CAS does not apply 
to acquisitions of commercial items, and therefore most contractors 
providing commercial items are not CAS-covered (unless they also 
provide non-commercial items to the Government under contracts covered 
by CAS).
    The Director, DPAP has determined that the aforementioned clauses 
in the final rule do apply to subcontracts for the acquisition of 
commercial items (including COTS items). The proposed rule required at 
252.246-7007(c)(9) that the contractor shall flow down counterfeit 
detection and avoidance requirements to all levels in the supply chain, 
and did not specify any exceptions. Because this requirement did not 
specify mandatory flow down of the clause itself, it was not covered by 
252.244-7000, which specifies that the contractor is not required to 
flow down the terms of DFARS clauses in subcontracts for commercial 
items, unless so specified in the clause. The final rule adds a 
flowdown paragraph to the clause at 252.246-7007 and makes 
applicability to subcontracts for commercial items explicit (see 
paragraph 5. of this section, Flowdown requirement).
    Any electronic part procured by a CAS-covered prime contractor is 
therefore subject to the restrictions concerning counterfeit and 
suspect counterfeit parts, without regard to whether the purchased part 
is a commercial or COTS item. Further, studies have shown that a large 
proportion of proven counterfeit parts were initially purchased as 
commercial or COTS items.
c. Parts Already on the Shelf
    Comment: A respondent asked how the rules would be applied to parts 
that had been purchased already and were on the shelf.
    Response: If the parts are already on the contractor's shelf or in 
inventory, and they were not procured in connection with a previous DoD 
contract, they will be subject to the same requirements, such as 
traceability and authentication.
d. Other
    Comments: One respondent objected to limiting applicability to 
electronic parts and suggested that the rule should apply to all types 
of DoD purchases. Another respondent wanted to know if the rule was 
intended to apply only to contractual deliverables or also to 
``tooling, GSE or other manufacturing aides that are procured with 
contract funds.''
    Response: DoD is restricting initial implementation to electronic 
parts as specified in section 818, although other items are considered 
critical and can be subject to counterfeiting.
    Comments: One respondent recommended that the final rule apply not 
only to the acquisition of electronic parts but also to their use, as 
the latter may well involve software through which malware or exploits 
are introduced into a company's information technology networks.
    Response: DoD is not expanding upon the applicability required by 
the statute, but understands the term ``electronic part'' to include 
embedded software. Accordingly, the definition at 202.101 for 
``electronic part'' is revised to add ``The term ``electronic part'' 
includes any embedded software or firmware.''

[[Page 26100]]

5. Flowdown Requirements
    Comments: Ten respondents submitted comments on flowdown 
requirements. Several respondents strongly recommended that the final 
rule must ensure compliance throughout the supply chain, and the clause 
must therefore include a mandatory flowdown requirement for use in all 
subcontracts at every tier. Some of these respondents did note that, 
even if the requirements were flowed down by prime contractors, there 
is no way to ensure that a subcontractor would accept the mandatory 
flowdown. One of these respondents said that ``(s)ome companies 
important to the Department, below the level of primes, but in the 
higher tiers of the supply chain, may choose not to participate in the 
defense market if they are forced to shoulder excess risk and cost but 
have no effective means of control over exposure to counterfeit 
parts.'' In such cases, the respondent urged that a mechanism be 
provided for notification to DoD and relief from the flowdown 
requirement or other instruction or assumption of responsibility by 
DoD.
    Another position was taken by two respondents that recommended that 
a legally authorized source, including an original manufacturer and 
distributor that only purchases from an original manufacturer, 
regardless of what subcontractor tier it might reside at, should not be 
subjected to the unnecessary costs and man-hours associated with a 
counterfeit detection and avoidance requirement.
    A respondent believed that the flowdown requirement was unnecessary 
and burdensome and recommended that DoD utilize instead a requirement 
for compliance with the industry standard AS5553A ``that many companies 
have already implemented.''
    Response: The final rule flows down the requirements to all 
subcontractors of prime CAS-covered contractors, at all tiers, without 
regard to whether the subcontractor itself is subject to CAS or is a 
commercial item (see also paragraphs 4.a. and 4.b. of this section, 
CAS-covered contractors and Commercial items (especially CORS items). 
DoD has expanded system criterion at (e)(2)(A)(ix) of the statute and 
clarified the flowdown requirements for the clause at DFARS 252.246-
7007 by also adding a flowdown paragraph that applies when the 
subcontractor is providing electronic parts or assemblies containing 
electronic parts.
6. Contractor Purchasing Systems Review (CPSR)
    Comments: Fifteen respondents submitted comments on the inclusion 
of the counterfeit detection and avoidance system as part of the 
contractor's purchasing system. Several respondents were dubious that 
DCMA has the manpower to execute the additional requirements associated 
with this rule.
    Response: The DCMA CPSR Group will include a review of the 
counterfeit electronic parts detection and avoidance system of a 
contractor when performing a CPSR. The review will include assistance 
from the local DCMA Quality Assurance Representative. Based on yearly 
risk assessments and requests from administrative contracting officers 
(ACOs), the CPSR Group performs as many reviews as possible. A priority 
determination is considered when preparing the yearly schedule of 
contractors to be reviewed to mitigate the demand exceeding 
capabilities.
    Comment: A respondent noted that section 818 did not specifically 
require the creation of a new business system or the inclusion of a 
counterfeit parts detection and avoidance system in an existing 
business system. This respondent pointed out its interpretation that a 
contractor's failure to establish and maintain an acceptable detection 
and avoidance system could result in disapproval of the contractor's 
entire purchasing system and the withholding of payments. Another 
respondent requested that DoD ensure that a deficiency solely related 
to the counterfeit part detection and avoidance system would not 
prevent the overall purchasing system from functioning as if approved. 
One respondent further requested that the clauses be revised to ``make 
it clear that a `significant deficiency' in a counterfeit system should 
not result in the imposition of a withhold in addition to any withholds 
due to such significant deficiency findings in the CPSR system audit.'' 
Several respondents considered that inclusion of the counterfeit parts 
detection and avoidance system within the purchasing system goes well 
beyond the intended scope of a contractor's purchasing system, fails to 
address the many other contractor systems (e.g., design, engineering, 
and quality assurance), and fails to acknowledge or incentivize 
responsible corrective action. If DoD were to proceed as in the 
proposed rule and retain this as part of the contractor's purchasing 
system, then a respondent recommended that any part purchased from a 
legally authorized source be exempted. Another respondent suggested 
that contractors be given wide discretion in their use of industry 
standards and internal processes to meet goals, particularly with 
regard to commercial items, and that DoD be given the authority to 
provide short-term waivers for the introduction of new technology 
products. Another alternative came from a respondent recommending that 
the rule include a contractor self-certification declaration of the 
contractor's compliance with the AS5553A standard. Two respondents 
suggested that compliance would be possible if DoD adopted a 
requirement to capture and authenticate the DoD IUID of each electronic 
part received from a supplier. (See also section B.9.)
    Other respondents stated unequivocally that paragraph (c)(21) of 
the clause at DFARS 252.244-7001 (the requirement to comply with the 
counterfeit parts detection and avoidance system (DFARS 246.870-2(b)) 
could not be met until those requirements are defined with more 
specificity.
    Response: If a deficiency is determined by the ACO to be 
significant in reference to the counterfeit electronic parts detection 
and avoidance system, the purchasing system may be disapproved, and a 
withholding of payments can result. There are factors considered by 
DCMA when making a determination of significance, some of which include 
public law violations and repeat occurrences.
    A CPSR can include the expertise from technical support personnel 
such as engineering and quality assurance. A contractor's corrective 
actions are considered when performing a CPSR, but no incentive program 
has been developed.
    When performing a CPSR, the contractor's subcontract management 
policies and procedures are reviewed to ensure they are effective and 
are being followed. The review will include an examination of the 
contractor's policies and procedures related to the detection and 
avoidance of counterfeit electronic parts.
    The definition of legally authorized source is addressed in the 
definition section of this document. The NDAA for FY 2012 (Pub. L. 112-
81) requires that, whenever possible, electronic parts be purchased 
from original manufacturers, their authorized dealers, or trusted 
suppliers. DoD reads this requirement as requiring suppliers to have a 
counterfeit detection and avoidance system that meets the requirements 
of DFARS 246.870-2(b) and section 818.
    The prime contractor is responsible for accepting only non-
counterfeit electronic parts from its subcontractors

[[Page 26101]]

and suppliers. Requiring electronic unique identification is addressed 
at section paragraph 9.b. of this section, IUID use.
    A CPSR currently ensures compliance with paragraph (c)(21) of DFARS 
252.244-7001 by examining the contractor's vendor rating system or 
equivalent. There is no need for additional definition or 
clarification.
    Comment: A respondent recommended that the following sentence be 
added to paragraph (a) of DFARS 244.303, Extent of review: ``Criteria 
for assessing the adequacy of rationale documenting ``commercial item'' 
determinations shall be based on guidance from the `DoD Commercial Item 
Handbook.' ''
    Response: The respondent's comment is outside the scope of this 
case.
7. Cost Allowability
    Comments: Seven respondents submitted comments on the cost 
allowability section of the proposed rule. The majority of these 
respondents deemed the cost principle at DFARS 231.205-71 an overreach 
because it would apply, not just to contractors covered by the Cost 
Accounting Standards (CAS), but to their suppliers and subcontractors 
as well. Another respondent read the proposed rule to apply only to a 
contractor or subcontractor subject to CAS, which argues, at the least, 
for clarification of the flowdown requirements in the final rule. A 
respondent stated that the report of the Senate Armed Services 
Committee assumed ``that contractors will recover costs associated with 
counterfeit part quality escapes from their lower-tier suppliers that 
provided the counterfeit.'' This respondent claimed that the Senate 
Armed Services Committee report and the DFARS proposed rule do not 
acknowledge realities that a DoD contractor faces.
    Response: Section 818 paragraph (c)(2)(B) (subsequently modified to 
provide limited exceptions by section 833 of the NDAA for FY 2013) 
makes the blanket statement that the regulations shall provide that the 
cost of counterfeit electronic parts and suspect counterfeit electronic 
parts and the cost for rework or corrective action that may be required 
. . . are not allowable costs under Department contracts. This requires 
treatment in the regulations like any other cost principle. The new 
cost principle has been located in DFARS subpart 231.2, Contracts with 
Commercial Organizations. It is therefore applicable to any contract 
with a commercial organization (i.e., not an educational institution 
State, local, or federally recognized Indian tribal government; or a 
non-profit institution). The cost principles are applied to the pricing 
of contracts, subcontracts, and modifications to contracts and 
subcontracts whenever cost analysis is performed, and is used for the 
determination, negotiation, or allowance of costs when required by a 
contract clause (see FAR 31.000).
    To clarify applicability of the cost principle, the final rule has 
been modified by removing the statement of contractor responsibility 
(derived from section 818(c)(2)(A)) that was included in the proposed 
rule at 231.205-71(b) and could lead to misinterpretation of the 
applicability of the cost principle.
    The prime contractor's responsibility with regard to dealing with 
unallowable costs incurred by a subcontractor is no different for this 
cost principle than for any other cost principle.
    Comment: Two respondents pointed out that the use of ``expressly'' 
in the phrase ``expressly unallowable'' makes the associated costs 
subject to penalties and, because the statute did not use the term 
``expressly,'' suggested that it be removed from the DFARS.
    Response: DoD has removed the term ``expressly'' from the final 
rule. Section 833 does not employ the term ``expressly.'' However, even 
without the inclusion of the term ``expressly'' in the regulations, the 
costs are nevertheless expressly unallowable, because DFARS 231.205-71 
explicitly states that the costs are unallowable. Therefore, inclusion 
of the term is unnecessary.
    Comment: Some respondents read section 833 to apply only a two-part 
test, i.e., when (1) the contractor has an approved system or the parts 
at issue were provided by the Government and (2) timely notice was 
provided to DoD. However, other respondents read both the statute and 
DoD as applying a three-part test for allowability. One respondent 
considered that the use of the conjunctive ``and'' between the second 
and third prongs could create ambiguity, given that there is no 
conjunction between the first and second prongs. Several of these 
respondents recommended revisions to the cost principle to make it a 
two-part test rather than a three-part test, as it was expressed in the 
proposed rule. These respondents also submitted that it would clarify 
the issue of cost allowability if DoD were to express a preference for 
purchases from the original manufacturer or a Government procurement 
center (e.g., the Defense Logistics Agency), thus effectively isolating 
contractors from any liability associated with such parts.
    Response: Subsequently, the NDAA for FY 2013 (Pub. L. 112-239) was 
enacted on January 2, 2013. It contained section 833, which modified 
the language of section 818 quoted above, to read as follows:
    ``(T)he 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 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 contractor as Government property 
in accordance with part 45 of the Federal Acquisition Regulation; and
    (iii) the covered contractor provides timely notice to the 
Government pursuant to paragraph (4).''
    The proposed rule correctly reflects the most recent statutory 
language, i.e., section 833. Furthermore, review of the legislative 
history indicated that this structure and resultant meaning was 
deliberate.
    Comments: Several respondents proffered other safe-harbor proposals 
(see also prior comment and response) as follows:
     Change the requirement for notice to the Government from 
``timely'' to ``immediate.''
     The costs of rework and corrective action should be exempt 
from the express unallowability of costs if the part was purchased from 
the original manufacturer or a source authorized by the original 
manufacturer, or, alternatively, if the contractor ``mitigated'' (as 
opposed to ``avoided'') counterfeit electronic parts.
     When ``evidence reveals that questioned parts stemmed from 
an overt criminal enterprise or the work of foreign intelligence 
attack, the prime contractor's liability should be limited.''
     A safe harbor should be created for old parts that the 
original manufacturer no longer manufactures and for which no trusted 
suppliers have been named.
    Response: The term ``immediate'' would institute an unreasonable 
requirement, and it would not conform to the section 818(c)(4) 
requirement for the contractor to ``report in writing within 60 days to 
appropriate Government authorities and the Government-Industry Data 
Exchange Program (or a similar program designated by the Secretary).'' 
Thus, the laws define ``timely'' as 60 days, not ``immediately.'' Sixty 
days is also the

[[Page 26102]]

time period specified in DoDI 4140.67. DoD agreed that ``timely,'' as 
used in DFARS 231.205-71(c)(3), would be clearer if a reference to the 
60-day period were added.
    The language of section 833 does not allow for the additional 
exemptions or carve-outs as suggested by respondents.
    Comment: One respondent noted that, if adopted as final, DFARS 
231.205-71(c) would conflict with the clause at FAR 52.245-1, 
Government Property, by adding an extra requirement (i.e., the 
requirement at DFARS 231.205-71(c)(1) for the contractor to have an 
approved, operational system to detect and avoid counterfeit parts) 
that contractors must meet before they are able to receive equitable 
adjustment for delivery of Government-furnished property in a condition 
not suitable for its intended use. The respondent considered this to 
have relieved the Government of a responsibility that currently exists 
within FAR 52.245-1, to provide conforming material without regard to 
whether the contractor has an approved operational system to detect and 
avoid counterfeit parts.
    Response: The requirements of DFARS 231.205-71(c), as written, do 
not conflict with FAR 52.245-1. First, the clause at FAR 52.245-1 
places Government contract property management requirements on the 
contractor. This clause does not contain terms and conditions related 
to the allowability of costs (which can found at FAR part 31). Further, 
the cost principle included at DFARS 231.205-71 is based on the 
statutory language contained in section 833.
8. Industry Standards
    Comments: Eleven respondents submitted comments on the issue of 
industry standards. Most of these respondents urged DoD, for its 
contractors' use, to adopt industry standards such as SAE AS5553A, 
entitled ``Counterfeit Electronic Parts; Avoidance, Detection, 
Mitigation, and Disposition,'' which respondents said provided uniform 
requirements, practices, and methods to mitigate the risk of receiving 
and installing counterfeit electronic parts, including requirements, 
practices, and methods related to (i) parts management, (ii) supplier 
management, (iii) procurement, (iv) inspection, test, and evaluation, 
and (v) response strategies when suspect counterfeit electronic parts 
are discovered. One respondent stated that DoD and NASA already have 
adopted the AS5553A standard for their own use. Another respondent 
recommended that AS5553A be used to delineate detection and avoidance 
system criteria by express reference to industry standards. A 
respondent noted that the use of a standard-based approach would be 
technology neutral and afford industry with a variety of choices that 
enable flexibility in implementation rather than imposing rigid and 
potentially harmful Government regulations. Using the available 
industry standards, according to another respondent, would consider 
source, traceability, part application, risk assessment, and testing 
requirements. Some of these respondents noted that current industry 
standards, e.g., AS5553A, require processes to prevent the 
reintroduction of counterfeit and suspect counterfeit parts back into 
the supply chain. If AS5553A were adopted, a respondent said, then 
contractors should be allowed to self-certify their compliance with the 
standard; upon such self-certification, a contractor should be 
considered to have an acceptable system for counterfeit part detection 
and avoidance, until determined otherwise.
    Other respondents focused on the ``secondary market,'' i.e., 
distributors and brokers, stating that these types of sources are 
necessary. These respondents recommended that covered contractors 
should be encouraged, if not required, to impose known industry 
standards, such as AS5553A, AS6081, or AS6171 on their secondary market 
sources and small business suppliers.
    A cautionary note was struck, however, by one respondent, which 
stated that industry standards on counterfeit parts currently vary and 
continue to evolve in response to industry advances, requirements, and 
applicable regulations, which might lead to the risk of procurements 
involving the same part specifying different standards. Another 
respondent recommended the use of industry standards, including IDEA-
STD-1010 as well as AS5553A and AS6081, but cautioned that there are 
still many artifacts and characteristics found under inspection that 
remain controversial. The respondent provided examples, such as 
``striations on the body of an electronic part due to normal shuffling 
within the product's protective carrier during transportation (or) 
authorized remarking of a part by the/an authorizing entity.''
    Response: DoD concurs that industry consensus standards could be 
used for the development and implementation of internal counterfeit 
parts detection and avoidance systems. It is Government policy to 
participate on industry standard writing bodies (see OMB Circular A-
119) and Government/industry conformity assessment initiatives (see 15 
CFR Part 287, Guidance on Federal Conformity Assessment Activities) and 
to adopt industry standards wherever practical. DoD will continue to be 
an active participant on industry counterfeit avoidance standard-
writing bodies. An additional system criterion is added to DFARS 
246.870-2(b) to require contractors to have a process for keeping 
continually informed of current counterfeiting information and trends. 
However, DoD agrees with the respondent noting that industry standards 
on counterfeit parts currently vary and continue to evolve. For this 
reason, DoD has not mandated the use of specific industry standards but 
left their use to the contractor, and DoD has not adopted the still-
changing definitions in industry standards.
9. Testing/IUID Use
    In this category, eight respondents submitted comments.
a. Testing
    Comments: To help make the determination of whether a part is 
``suspect counterfeit,'' and to mitigate the risk of inclusion of 
``counterfeit'' or ``suspect counterfeit'' electronic parts, one 
respondent recommended that ``parts acquired from brokers be tested as 
part of the acceptable counterfeit avoidance and detection system 
described by proposed DFARS 246.870-2, in alignment with the test 
requirements of the DoD-adopted SAE standard AS6081, `Fraudulent/
Counterfeit Electronic Parts: Avoidance, Detection, Mitigation, and 
Disposition--Independent Distribution,' currently invoked by the 
Defense Logistics Agency's Qualified Testing Suppliers List (QTSL) 
Program.'' Another respondent recommended testing of all items, parts, 
and components when they are received by the procuring entity.
    Response: DoD agrees with the respondent's recommendation to 
specify testing requirements when parts are procured from sources that 
present elevated risk. Appropriate text is added in the system criteria 
at DFARS 246.870-2(b) and the clause at DFARS 252.246-7007.
b. IUID Use
    Comments: Many respondents stated their belief that the detection 
and avoidance of counterfeit electronic parts is predicated on the 
successful implementation of Item Unique Identification (IUID) for each 
electronic part. Several of the respondents noted that considerable 
policy already exists in DoD that could be leveraged to assist with the 
identification of counterfeit

[[Page 26103]]

electronic parts. The respondents cited the required use of automatic 
identification technology (AIT) or automatic identification and data 
capture (AIDC) technologies, and some cited, in support, GAO report 
GAO-10-389, entitled ``DoD Should Leverage Ongoing Initiatives in 
Developing Its Program to Mitigate Risk of Counterfeit Parts.'' Two of 
these respondents referred to section 807, Sense of Congress on the 
Continuing Progress of the Department of Defense in Implementing its 
Item Unique Identification Initiative, of the NDAA for FY 2013. The 
Congress found that IUID ``has the potential for realizing significant 
cost savings and improving the management of defense equipment and 
supplier throughout their life cycle'' (section 807(a)(2)), as well as 
being able to ``help the Department combat the growing problem of 
counterfeit parts in the military supply chain'' (section 807(a)(3)). 
These respondents stated that requiring suppliers to assign IUIDs to 
electronic parts and register those parts in the DoD IUID Registry 
would better enable contractors to verify their sources as part of a 
contractor purchasing system review. The respondents noted that DoD has 
a policy that supports serialized item management for material 
maintenance (DoDI 4151.19), and another policy, at DoDI 8320.04, that 
requires any DoD serially managed items to be marked with an IUID-
compliant mark. Further, one of the respondents stated that DoD's IUID 
policy requires the use of the IUID Registry, which includes, along 
with the Unique Item Identifier, pedigree data. A major component of 
the pedigree data, according to the respondent, is the Enterprise 
Identifier (EID), which mostly corresponds to the original item 
manufacturer. For electronic parts where physical marking is not 
possible, two respondents said that technology exists and standards are 
evolving for electronic unique identification.
    Response: DoD concurs with the benefits of item unique 
identification (IUID) described by the respondents. DoDI 4140.67 
requires DoD component heads to ``(a)pply item unique identification 
(IUID) using unique item identifier (UII) for critical materiel 
identified as susceptible to counterfeiting to enable authoritative 
life-cycle traceability and authentication.'' For purposes of this 
final rule, DoD focused on the desired outcome of traceability without 
mandating the means to achieve the outcome.
    Currently, the clause at DFARS 252.211-7003, Item Identification 
and Valuation, requires an IUID for items with an acquisition cost of 
$5,000 or more. In an individual contract, the DoD may request 
assignment of an IUID for items with a lower acquisition cost, when 
identified by the requiring activity as critical materiel identified as 
susceptible to counterfeiting, serially managed, mission essential, or 
controlled inventory, or the requiring activity determines that 
permanent identification is required. IUID marking and registry is 
already required by the DFARS for electronic items that meet those 
criteria (see DFARS 211.274).
    A complete discussion of DoD's IUID system is found at http://www.acq.osd.mil/dpap/pdi/uid/data_submission.information.html. The 
registry, located on the Internet at https://www.bpn.gov/iuid, is an 
acquisition gateway to identify (a) what the item is; (b) how and when 
it was acquired; (c) the initial value of the item; (d) current custody 
(Government or contractor); and (e) how it is marked.
10. Reporting
    Comment: A respondent recommended revisions to DFARS 246.870-
2(b)(6) and the clause at 252.246-7007(c)(iv) to include specific 
reporting requirements consistent with the current reporting of 
possible violations of a contractor's code of business ethics and 
conduct (DFARS 203.1003(b)). The respondent's recommended change would 
revise the text as follows:
    ``The reporting and quarantining of counterfeit electronic parts 
and suspect counterfeit electronic parts, in writing, to the 
contracting officer and the Department of Defense Inspector General, in 
accordance with DFARS 203.1003(b), within 60 days of identifying the 
counterfeit or suspect counterfeit electronic parts.''
    Response: Not all counterfeit or suspect counterfeit parts are due 
to fraud, and, in any case, reporting of fraudulent activity to the DoD 
IG is already required by various DoD and Governmentwide clauses and 
provisions. FAR Case 2013-002, Enhanced Reporting of Nonconforming 
Parts, has been opened to further address reporting requirements. In 
that case, the requirements to report to the contracting officer and to 
the Government-Industry Data Exchange Program (GIDEP) will be clear, as 
is the existing requirement (at other parts of the FAR and DFARS) to 
report fraud to the IG. Although DoD recognizes the importance of the 
``mandatory disclosure'' rules, this may not be an appropriate use of 
them because it suggests a contractor has committed an ``ethical or 
code of conduct violation.''
    Comment: A respondent recommended adding, at DFARS 246.870-2(b)(6), 
to whom the occurrence (of a counterfeit or suspect counterfeit 
electronic part) must be reported and within what period of time it 
must be reported. The respondent wanted to know whether it would be 
acceptable to report to industry associations, law enforcement, or 
other organizations in other countries if the counterfeit was 
discovered outside the U.S.
    Response: In accordance with section 818, the reporting is intended 
to be made to GIDEP within 60 days, but these requirements are being 
addressed in a FAR case (2013-002, Expanded Reporting of Nonconforming 
Items) that had not been released for public comment at the time the 
public comment closed for this DFARS case. The FAR signatories intend 
for all such reports to be made to GIDEP, regardless of where the 
counterfeit was identified.
    Comment: A respondent noted that Congress was insistent on improved 
reporting by DoD and industry and said that it is through reporting 
that industry and Government inform each other of known risks and 
identified threats. The respondent acknowledged that a draft FAR case 
(2013-002) will address reporting, but the DFARS rule essentially 
ignored reporting. The respondent expressed concern about anecdotal 
evidence of lower reporting to the GIDEP since enactment of section 818 
and urged DoD to conduct a review of reporting frequency to GIDEP 
subsequent to December 13, 2011.
    Response: The frequency of reports made to GIDEP is outside the 
scope of this case.
11. Clauses
    Comment: A respondent recommended reversing the order of the words 
``detection'' and ``avoidance'' in the clause title of 252.246-7007 and 
in lines 3 and 5 of paragraph (b), so as to reflect the actual process, 
i.e., one cannot avoid what one has not detected.
    Response: DoD has made appropriate revisions to DFARS 246.870-2 and 
-3 and the clauses at 252.244-7001, its Alternate I, and 252.244-7007.
    Comment: One respondent recommended revising the prescription for 
the clause at FAR 52.246-7007 to add statutory references and 
references to the Code of Federal Regulations.
    Response: The clause prescription is revised to ensure the clarity 
of its applicability, but statutory references and references to the 
CFR generally are not included in clause prescriptions.

[[Page 26104]]

12. Obsolete Parts
    Comment: One respondent stated that the issue of obsolete parts 
must be addressed, possibly through a definition for ``obsolete part.'' 
Noting that electronic parts have life cycles far shorter than the 
defense and aerospace products utilizing them, the respondent said that 
it is incumbent on DoD to provide clear guidance so that contractors 
can develop supply chain processes to mitigate risks inherent with 
obsolete parts requisitioning.
    Response: The following definition of ``obsolete electronic part'' 
is added in the final rule: ``An electronic part that is no longer in 
production by the original manufacturer or an aftermarket manufacturer 
that has been provided express written authorization from the design 
activity or original manufacturer.'' Obsolescence control is a 
fundamental aspect of counterfeit prevention and should be addressed by 
the contractor in its counterfeit detection and avoidance system (see 
DFARS 246.870-2(b)(12) and paragraph (c)(12) of the clause at DFARS 
252.246-7007).
    Comments: Several respondents expressed concerns about obsolete 
parts. One respondent stated that the rule should address ``(a) known 
risks and challenges of DoD's continued use of obsolete and out-of-
production parts, (b) the vulnerability created by the continued demand 
for obsolete and out-of-production parts, (c) the increasing 
constraints on DoD's ability to support and fund ways to eliminate 
continued use of obsolete and out-of-production parts needed to (i) 
support fielded systems, and (ii) manufacture new orders to aged, 
legacy designs and specifications.'' This respondent recommended some 
mechanism for contractors to assess the bill of materials for products 
being supported, recommend alternatives, and expect direction from each 
DoD customer as to how to proceed.
    A respondent recommended that contractors be instructed to purchase 
directly from legally authorized sources. The respondent recognized, 
however, that there may be circumstances where a part is unavailable 
from any legally authorized source, including authorized aftermarket 
sources, and recommended that, after a contractor in good faith 
determines this to be the case, it should be permitted to purchase a 
part from a ``trusted supplier.'' Another respondent stated that DoD 
had not recognized the role parts brokers play in supplying obsolete 
parts for long life-cycle DoD systems when the original manufacturer 
has discontinued manufacturing a part long before a system is retired.
    Response: Parts obsolescence is a matter of concern because it can 
create vulnerabilities in the supply chain. DoD is adding a definition 
of ``obsolete electronic part'' in the final rule, and the system 
criteria at DFARS 246.870-2(b) and 252.246-7007(c)(12) are modified to 
address obsolete parts. Detailed guidance and mechanisms concerning 
supply chain processes to mitigate risks inherent with obsolete parts 
are outside the scope of this case. Guidance and mechanisms concerning 
obsolete parts mitigation are discussed collaboratively via the 
Government's Diminishing Manufacturing and Material Shortages (DMSMS) 
Program and its Knowledge Sharing Portal. See https://acc.dau.mil/dmsms.
13. Other Comments
    Comment: Recognizing that DoD was constrained by the terms of the 
legislation in drafting this rule, a respondent recommended that DoD 
push in the future for a legislative change that the respondent 
considered would give DoD and its contractors an opportunity to 
establish plans for addressing part obsolescence and balance the cost 
of design modifications to eliminate obsolete parts against the risk of 
purchasing obsolete parts from riskier sources of supply.
    Response: Legislative proposals are outside the scope of this case.
    Comment: A respondent noted that a large challenge will be to 
ensure adequate workforce training across the Federal Government.
    Response: The determination and provision of appropriate training 
for the DoD workforce is outside the scope of this rule and is being 
assessed by the Defense Acquisition University.
    Comments: Three respondents provided information about their 
products that they assert are proven and acceptable methods for 
detecting counterfeit parts and rapidly determining if a suspect part 
is, in fact, counterfeit.
    Response: DoD does not advocate for individual products.
    Comment: A respondent noted that a major rule is defined as one 
that is likely to result in (a) an annual effect on the economy of $100 
million or more, (b) a major increase in cost or prices for consumers, 
individual industries, Federal, State, or local government agencies, or 
geographic regions, or (c) significant adverse effects on competition, 
employment, investment, productivity, innovation, or on the ability of 
the U.S.-based firms to compete with foreign-based firms in domestic 
and export markets. Given the definition, the respondent suggested that 
DoD should reexamine whether this rule should be re-classified as a 
major rule because of the potential for understatement as a result of 
the flowdown requirement to all subtiers.
    Response: DoD has reassessed the cost impact of this rule and does 
not consider that it meets the criteria for classification as a major 
rule. The Office of Information and Regulatory Affairs also did not 
find this rule to be a major rule.
C. Other Changes
    The proposed rule contained a definition of ``counterfeit 
electronic part avoidance and detection system'' in the clause at DFARS 
252.246-7007. Because the revisions and extensive additions made in the 
final rule to the system criteria at DFARS 246.870-2(b) and the clause 
at DFARS 252.246-7007 effectively define this system more thoroughly 
than did the definition in the proposed rule, the definition has been 
removed from the clause in the final rule.

III. Executive Orders 12866 and 13563

    Executive Orders (E.O.s) 12866 and 13563 direct agencies to assess 
all costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). E.O. 
13563 emphasizes the importance of quantifying both costs and benefits, 
of reducing costs, of harmonizing rules, and of promoting flexibility. 
This is a significant regulatory action and, therefore, was subject to 
review under section 6(b) of E.O. 12866, Regulatory Planning and 
Review, dated September 30, 1993. This rule is not a major rule under 5 
U.S.C. 804.

IV. Regulatory Flexibility Act

    A final regulatory flexibility analysis has been prepared 
consistent with the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., 
and is summarized as follows:
    This final rule partially implements section 818 of the National 
Defense Authorization Act for Fiscal Year 2012 and implements section 
833 of the National Defense Authorization Act for Fiscal Year 2013 in 
DoD-wide regulations on contractors' requirements to identify, avoid, 
and report counterfeit and suspect counterfeit parts.
    No significant issues were raised by the public with regard to the 
initial regulatory flexibility analysis. However,

[[Page 26105]]

several respondents commented in favor of, or against, flowing down the 
counterfeit parts detection and avoidance system required of prime CAS-
covered contractors to small business suppliers. Small business 
subcontractors that supply electronic parts or assemblies containing 
electronic parts to CAS-covered prime contractors will incur some costs 
for complying with prime contractors' requirements.
    No comments were received from the Chief Counsel for Advocacy of 
the Small Business Administration.
    The rule does not apply to small entities as prime contractors. The 
requirements apply only to prime contractors that are subject to the 
Cost Accounting Standards (CAS) under 41 U.S.C. chapter 15, as 
implemented in regulations found at 48 CFR 9903.201-1. Prime contracts 
with small entities are exempt from CAS requirements.
    There is, however, the potential for an impact on small entities in 
the supply chain of a CAS-covered prime contractor, but only when the 
prime contractor is supplying electronic parts or assemblies containing 
electronic parts and the subcontractor is also supplying electronic 
parts or assemblies containing electronic parts. In that case, the 
prohibitions against counterfeit and suspect counterfeit electronic 
items and the requirements for systems to detect such parts flow down 
to all levels of the supply chain. There will, therefore, be some 
impact on small entities that supply electronic parts to DoD CAS-
covered prime contractors but no impact on small entities when they 
supply electronic parts directly to DoD.
    The rule uses the existing requirements for contractors' purchasing 
systems as the basis for the anti-counterfeiting compliance (see the 
clause at DFARS 252.244-7001, Contractor Purchasing System 
Administration, and its Alternate I).
    Suppliers, including small entities, will need to be able to trace 
the source of the electronic parts they are supplying to the original 
source if they are not the original manufacturer or current design 
activity, including an authorized aftermarket manufacturer.
    The economic impact on small entities has been minimized by--
    (a) Using the existing requirements (and contract clause) for 
contractors' purchasing systems, rather than creating separate, new 
systems; and
    (b) Restraining applicability only to small businesses that are 
subcontractors supplying electronic parts or assemblies containing 
electronic parts to CAS-covered prime contractors.
    Seven comments were received on the Regulatory Flexibility Act 
section during the public comment period:
    Comments: Several respondents concluded that, because small 
business suppliers are part of every CAS-covered contractor's supply 
chain, small businesses will be impacted by this rule, even though they 
would otherwise be exempted as prime contractors (not subject to CAS). 
Despite the different impact on small businesses as subcontractors/
suppliers versus small businesses as prime contractors, one of these 
respondents stated that it was important to make the clause at DFARS 
252.246-7007 a mandatory flowdown requirement for use in all 
subcontracts at every tier. However, a different respondent strongly 
recommended that the impact on small businesses should be minimized by 
clarifying the applicability of the cost allowability limitations to 
prime CAS-covered contractors and limiting the flowdown of counterfeit 
detection and avoidance requirements to subcontractors operating under 
CAS-covered subcontracts. A third respondent approached this subject by 
noting that, ``(a)nalytically, DoD should be just as concerned about 
the impact of a counterfeit from a small business as from a large 
contractor . . . (b)ut important socio-economic policies are served by 
small business participation requirements.'' This respondent favored 
flowdown to all subcontractors/suppliers but suggested that DoD fashion 
some sort of safety valve to address situations where the only sources 
of required parts refuse to accept flowdown and won't agree to conform 
to risk-mitigation requirements.
    Other respondents stated that the impact on small business 
subcontractors/suppliers would not be negligible because the flowdown 
of counterfeit detection and avoidance requirements will always have 
costs. The proposed rule would require all affected subcontractors, 
including small businesses, to incur substantial overhead costs to 
establish the necessary compliance systems, according to one 
respondent. Two other respondents stated that the impact on small 
entities would likely be significant, either due to the associated 
costs of detection and avoidance or the inability to compete without 
such capabilities.
    Response: DoD agrees with those respondents that deemed small 
businesses will be impacted as subcontractors. The requirement for 
flowdown is addressed in a previous section of this rule. However, 
affected subcontractors, including small businesses, will not 
necessarily incur substantial new overhead costs to establish necessary 
compliance systems, as suggested by some respondents. Most firms that 
produce or distribute electronic parts or assemblies containing 
electronic parts are well aware of their obligation not to furnish 
counterfeit electronic parts and have programs in place to protect 
themselves and their customers from the consequences of counterfeit 
parts. DoD's analysis of the impact of this rule on small businesses 
reflects this circumstance.

V. Paperwork Reduction Act

    This rule affects the information collection requirements in the 
provisions at DFARS subpart 244.3 and the clause at DFARS 252.244-7001, 
currently approved under OMB Control Number 0704-0253, entitled 
Purchasing Systems, in accordance with the Paperwork Reduction Act (44 
U.S.C. chapter 35). The current information collection estimates that 
90 respondents will submit one response annually, with 16 hours per 
response. We estimate that the additional information collection burden 
associated with the clause at 52.244-7001--Alternate, will be as much 
as five percent more than the existing burden. Therefore, the change to 
the current annual reporting burden for OMB Control Number 0704-0253 is 
estimated as follows:
    Respondents: 5.
    Responses per respondent: 1.
    Total annual responses: 5.
    Preparation hours per response: 16.
    Total hours: 80.
    One comment was received on the Paperwork Reduction Act section of 
the proposed rule:
    Comment: A respondent noted that the numbers submitted in the 
proposed rule estimated that DCMA would conduct 90 CPSRs annually and 
that, if these numbers were accurate, then DCMA would be unable to 
complete audits of all 1,200 CAS- and partial-CAS-covered contractors 
for a first-time audit of their counterfeit parts enhancements for over 
a decade. In addition, the respondent said, the DoD estimate did not 
factor in the cost and paperwork associated with the enhanced CPSRs for 
the other potentially impacted subcontractors, which it claimed could 
number in the tens of thousands.
    Response: A complete CPSR is not always necessary for all 
contractors. Further, DCMA continually assesses its oversight 
obligations and modifies its priorities and assignments as required.

[[Page 26106]]

List of Subjects in 48 CFR Parts 202, 231, 244, 246, and 252

    Government procurement.


Manuel Quinones,
Editor, Defense Acquisition Regulations System.

    Therefore, 48 CFR parts 202, 231, 244, 246, and 252 are amended as 
follows:

0
1. The authority citation for 48 CFR parts 202, 231, 244, 246, and 252 
continues to read as follows:

    Authority:  41 U.S.C. 1303 and 48 CFR chapter 1.

PART 202--DEFINITIONS OF WORDS AND TERMS

0
2. In section 202.101 add, in alphabetical order, the definitions 
``counterfeit electronic part,'' ``electronic part,'' ``obsolete 
electronic part,'' and ``suspect counterfeit electronic part'' to read 
as follows:


202.101  Definitions.

* * * * *
    Counterfeit electronic part means an unlawful or unauthorized 
reproduction, substitution, or alteration that has been knowingly 
mismarked, misidentified, or otherwise misrepresented to be an 
authentic, unmodified electronic part from the original manufacturer, 
or a source with the express written authority of the original 
manufacturer or current design activity, including an authorized 
aftermarket manufacturer. Unlawful or unauthorized substitution 
includes used electronic parts represented as new, or the false 
identification of grade, serial number, lot number, date code, or 
performance characteristics.
* * * * *
    Electronic part means an integrated circuit, a discrete electronic 
component (including, but not limited to, a transistor, capacitor, 
resistor, or diode), or a circuit assembly (section 818(f)(2) of Pub. 
L. 112-81). The term ``electronic part'' includes any embedded software 
or firmware.
* * * * *
    Obsolete electronic part means an electronic part that is no longer 
in production by the original manufacturer or an aftermarket 
manufacturer that has been provided express written authorization from 
the current design activity or original manufacturer.
* * * * *
    Suspect counterfeit electronic part means an electronic part for 
which credible evidence (including, but not limited to, visual 
inspection or testing) provides reasonable doubt that the electronic 
part is authentic.
* * * * *

PART 231--CONTRACT COST PRINCIPLES AND PROCEDURES

0
3. Add section 231.205-71 to read as follows:
    231.205-71 Cost of remedy for use or inclusion of counterfeit 
electronic parts and suspect counterfeit electronic parts.
    (a) Scope. This subsection implements the requirements of section 
818(c)(2), National Defense Authorization Act for Fiscal Year 2012 
(Pub. L. 112-81) and section 833, National Defense Authorization Act 
for Fiscal Year 2013 (Pub. L. 112-239).
    (b) The costs of counterfeit electronic parts or 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 unallowable, unless--
    (1) The contractor has an operational system to detect and avoid 
counterfeit parts and suspect counterfeit electronic parts that has 
been reviewed and approved by DoD pursuant to 244.303;
    (2) The counterfeit electronic parts or suspect counterfeit 
electronic parts are Government-furnished property as defined in FAR 
45.101; and
    (3) The contractor provides timely (i.e., within 60 days after the 
contractor becomes aware) notice to the Government.

PART 244--SUBCONTRACTING POLICIES AND PROCEDURES

0
4. In section 244.303, designate the text as paragraph (a) and add a 
new paragraph (b) to read as follows:


244.303  Extent of review.

* * * * *
    (b) Also review the adequacy of the contractor's counterfeit 
electronic part detection and avoidance system under clause 252.246-
7007, Contractor Counterfeit Electronic Part Detection and Avoidance 
System.

0
5. Revise section 244.305-71 to read as follows:


244.305-71  Contract clause.

    Use the Contractor Purchasing System Administration basic clause or 
its alternate as follows:
    (a) Use the clause at 252.244-7001, Contractor Purchasing System 
Administration--Basic, in solicitations and contracts containing the 
clause at FAR 52.244-2, Subcontracts.
    (b) Use the clause at 252.244-7001, Contractor Purchasing System 
Administration--Alternate I, in solicitations and contracts that 
contain the clause at 252.246-7007, Contractor Counterfeit Electronic 
Part Detection and Avoidance System, but do not contain FAR 52.244-2, 
Subcontracts.

PART 246--QUALITY ASSURANCE

0
6. Add subpart 246.8 to read as follows:
Subpart 246.8--Contractor Liability for Loss of or Damage to Property 
of the Government
Sec.
246.870 Contractors' counterfeit electronic part detection and 
avoidance systems.
246.870-1 Scope.
246.870-2 Policy.
246.870-3 Contract clause.

Subpart 246.8--Contractor Liability for Loss of or Damage to 
Property of the Government


246.870  Contractors' counterfeit electronic part detection and 
avoidance systems.


246.870-1  Scope.

    This section--
    (a) Implements section 818(c) of the National Defense Authorization 
Act for Fiscal Year 2012 (Pub. L. 112-81); and
    (b) Prescribes policy and procedures for preventing counterfeit 
electronic parts and suspect counterfeit electronic parts from entering 
the supply chain when procuring electronic parts or end items, 
components, parts, or assemblies that contain electronic parts.


246.870-2  Policy.

    (a) General. Contractors that are subject to the Cost Accounting 
Standards (CAS) and that supply electronic parts or products that 
include electronic parts and their subcontractors that supply 
electronic parts or products that include electronic parts, are 
required to establish and maintain an acceptable counterfeit electronic 
part detection and avoidance system. Failure to do so may result in 
disapproval of the purchasing system by the contracting officer and/or 
withholding of payments (see 252.244-7001, Contractor Purchasing System 
Administration).
    (b) System criteria. A counterfeit electronic part detection and 
avoidance system shall include risk-based policies and procedures that 
address, at a minimum, the following areas (see 252.246-7007, 
Contractor Counterfeit Electronic Part Detection and Avoidance System):
    (1) The training of personnel.
    (2) The inspection and testing of electronic parts, including 
criteria for acceptance and rejection.
    (3) Processes to abolish counterfeit parts proliferation.

[[Page 26107]]

    (4) Processes for maintaining electronic part traceability.
    (5) Use of suppliers that are the original manufacturer, sources 
with the express written authority of the original manufacturer or 
current design activity, including an authorized aftermarket 
manufacturer or suppliers that obtain parts exclusively from one or 
more of these sources.
    (6) The reporting and quarantining of counterfeit electronic parts 
and suspect counterfeit electronic parts.
    (7) Methodologies to identify suspect counterfeit electronic parts 
and to rapidly determine if a suspect counterfeit electronic part is, 
in fact, counterfeit.
    (8) Design, operation, and maintenance of systems to detect and 
avoid counterfeit electronic parts and suspect counterfeit electronic 
parts.
    (9) Flow down of counterfeit detection and avoidance requirements.
    (10) Process for keeping continually informed of current 
counterfeiting information and trends.
    (11) Process for screening the Government-Industry Data Exchange 
Program (GIDEP) reports and other credible sources of counterfeiting 
information.
    (12) Control of obsolete electronic parts.


246.870-3  Contract clause.

    (a) Except as provided in paragraph (b) of this section, use the 
clause at 252.246-7007, Contractor Counterfeit Electronic Part 
Detection and Avoidance System, in solicitations and contracts when 
procuring--
    (1) Electronic parts;
    (2) End items, components, parts, or assemblies containing 
electronic parts; or
    (3) Services where the contractor will supply electronic parts or 
components, parts, or assemblies containing electronic parts as part of 
the service.
    (b) Do not use the clause in solicitations and contracts that are 
set-aside for small business.

PART 252--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

0
7. Amend section 252.244-7001 by--
0
a. Revising the introductory text, clause title and date;
0
b. Revising paragraphs (c)(19), (20) and (21); and
0
c. Adding Alternate I.
    Revised text reads as follows:


252.244-7001  Contractor Purchasing System Administration.

    As prescribed in 244.305-71, use one of the following clauses:
    Basic. As prescribed in 244.305-71(a), use the following clause.

CONTRACTOR PURCHASING SYSTEM ADMINISTRATION--BASIC (MAY 2014)

* * * * *
    (c) * * *
    (19) Establish and maintain policies and procedures to ensure 
purchase orders and subcontracts contain mandatory and applicable 
flowdown clauses, as required by the FAR and DFARS, including terms 
and conditions required by the prime contract and any clauses 
required to carry out the requirements of the prime contract, 
including the requirements of 252.246-7007, Contractor Counterfeit 
Electronic Part Detection and Avoidance System, if applicable;
    (20) Provide for an organizational and administrative structure 
that ensures effective and efficient procurement of required quality 
materials and parts at the best value from responsible and reliable 
sources, including the requirements of 252.246-7007, Contractor 
Counterfeit Electronic Part Detection and Avoidance System, if 
applicable;
    (21) Establish and maintain selection processes to ensure the 
most responsive and responsible sources for furnishing required 
quality parts and materials and to promote competitive sourcing 
among dependable suppliers so that purchases are reasonably priced 
and from sources that meet contractor quality requirements, 
including the requirements of 252.246-7007, Contractor Counterfeit 
Electronic Part Detection and Avoidance System, and the item marking 
requirements of 252.211-7003, Item Unique Identification and 
Valuation, if applicable;
* * * * *
    Alternate I. As prescribed in 244.305-71(b), use the following 
clause, which amends paragraph (c) of the basic clause by deleting 
paragraphs (c)(1) through (c)(18) and (c)(22) through (c)(24), and 
revising and renumbering paragraphs (c)(19) through (c)(21) of the 
basic clause.

CONTRACTOR PURCHASING SYSTEM ADMINISTRATION--ALTERNATE I (MAY 2014)

    The following paragraphs (a) through (f) of this clause do not 
apply unless the Contractor is subject to the Cost Accounting 
Standards under 41 U.S.C. chapter 15, as implemented in regulations 
found at 48 CFR 9903.201-1.
    (a) Definitions. As used in this clause--
    Acceptable purchasing system means a purchasing system that 
complies with the system criteria in paragraph (c) of this clause.
    Purchasing system means the Contractor's system or systems for 
purchasing and subcontracting, including make-or-buy decisions, the 
selection of vendors, analysis of quoted prices, negotiation of 
prices with vendors, placing and administering of orders, and 
expediting delivery of materials.
    Significant deficiency means a shortcoming in the system that 
materially affects the ability of officials of the Department of 
Defense to rely upon information produced by the system that is 
needed for management purposes.
    (b) Acceptable purchasing system. The Contractor shall establish 
and maintain an acceptable purchasing system. Failure to maintain an 
acceptable purchasing system, as defined in this clause, may result 
in disapproval of the system by the Contracting Officer and/or 
withholding of payments.
    (c) System criteria. The Contractor's purchasing system shall--
    (1) Establish and maintain policies and procedures to ensure 
purchase orders and subcontracts contain mandatory and applicable 
flowdown clauses, as required by the FAR and DFARS, including terms 
and conditions required by the prime contract and any clauses 
required to carry out the requirements of the prime contract, 
including the requirements of 252.246-7007, Contractor Counterfeit 
Electronic Part Detection and Avoidance System;
    (2) Provide for an organizational and administrative structure 
that ensures effective and efficient procurement of required quality 
materials and parts at the best value from responsible and reliable 
sources, including the requirements of 252.246-7007, Contractor 
Counterfeit Electronic Part Detection and Avoidance System, and, if 
applicable, the item marking requirements of 252.211-7003, Item 
Unique Identification and Valuation; and
    (3) Establish and maintain selection processes to ensure the 
most responsive and responsible sources for furnishing required 
quality parts and materials and to promote competitive sourcing 
among dependable suppliers so that purchases are from sources that 
meet contractor quality requirements, including the requirements of 
252.246-7007, Contractor Counterfeit Electronic Part Detection and 
Avoidance System.
    (d) Significant deficiencies. (1) The Contracting Officer will 
provide notification of initial determination to the Contractor, in 
writing, of any significant deficiencies. The initial determination 
will describe the deficiency in sufficient detail to allow the 
Contractor to understand the deficiency.
    (2) The Contractor shall respond within 30 days to a written 
initial determination from the Contracting Officer that identifies 
significant deficiencies in the Contractor's purchasing system. If 
the Contractor disagrees with the initial determination, the 
Contractor shall state, in writing, its rationale for disagreeing.
    (3) The Contracting Officer will evaluate the Contractor's 
response and notify the Contractor, in writing, of the Contracting 
Officer's final determination concerning--
    (i) Remaining significant deficiencies;
    (ii) The adequacy of any proposed or completed corrective 
action; and
    (iii) System disapproval, if the Contracting Officer determines 
that one or more significant deficiencies remain.
    (e) If the Contractor receives the Contracting Officer's final 
determination of significant deficiencies, the Contractor shall, 
within 45 days of receipt of the final determination, either correct 
the significant deficiencies or submit an acceptable corrective 
action plan showing milestones and actions to eliminate the 
deficiencies.
    (f) Withholding payments. If the Contracting Officer makes a 
final

[[Page 26108]]

determination to disapprove the Contractor's purchasing system, and 
the contract includes the clause at 252.242-7005, Contractor 
Business Systems, the Contracting Officer will withhold payments in 
accordance with that clause.


(End of clause)

0
8. Add new section 252.246-7007 to read as follows:


252.246-7007  Contractor Counterfeit Electronic Part Detection and 
Avoidance System.

    As prescribed in 246.870-3, use the following clause:

CONTRACTOR COUNTERFEIT ELECTRONIC PART DETECTION AND AVOIDANCE SYSTEM 
(MAY 2014)

    The following paragraphs (a) through (e) of this clause do not 
apply unless the Contractor is subject to the Cost Accounting 
Standards under 41 U.S.C. chapter 15, as implemented in regulations 
found at 48 CFR 9903.201-1.
    (a) Definitions. As used in this clause--
    Counterfeit electronic part means an unlawful or unauthorized 
reproduction, substitution, or alteration that has been knowingly 
mismarked, misidentified, or otherwise misrepresented to be an 
authentic, unmodified electronic part from the original 
manufacturer, or a source with the express written authority of the 
original manufacturer or current design activity, including an 
authorized aftermarket manufacturer. Unlawful or unauthorized 
substitution includes used electronic parts represented as new, or 
the false identification of grade, serial number, lot number, date 
code, or performance characteristics.
    Electronic part means an integrated circuit, a discrete 
electronic component (including, but not limited to, a transistor, 
capacitor, resistor, or diode), or a circuit assembly (section 
818(f)(2) of Pub. L. 112-81). The term ``electronic part'' includes 
any embedded software or firmware.
    Obsolete electronic part means an electronic part that is no 
longer in production by the original manufacturer or an aftermarket 
manufacturer that has been provided express written authorization 
from the current design activity or original manufacturer.
    Suspect counterfeit electronic part means an electronic part for 
which credible evidence (including, but not limited to, visual 
inspection or testing) provides reasonable doubt that the electronic 
part is authentic.
    (b) Acceptable counterfeit electronic part detection and 
avoidance system. The Contractor shall establish and maintain an 
acceptable counterfeit electronic part detection and avoidance 
system. Failure to maintain an acceptable counterfeit electronic 
part detection and avoidance system, as defined in this clause, may 
result in disapproval of the purchasing system by the Contracting 
Officer and/or withholding of payments.
    (c) System criteria. A counterfeit electronic part detection and 
avoidance system shall include risk-based policies and procedures 
that address, at a minimum, the following areas:
    (1) The training of personnel.
    (2) The inspection and testing of electronic parts, including 
criteria for acceptance and rejection. Tests and inspections shall 
be performed in accordance with accepted Government- and industry-
recognized techniques. Selection of tests and inspections shall be 
based on minimizing risk to the Government. Determination of risk 
shall be based on the assessed probability of receiving a 
counterfeit electronic part; the probability that the inspection or 
test selected will detect a counterfeit electronic part; and the 
potential negative consequences of a counterfeit electronic part 
being installed (e.g., human safety, mission success) where such 
consequences are made known to the Contractor.
    (3) Processes to abolish counterfeit parts proliferation.
    (4) Processes for maintaining electronic part traceability 
(e.g., item unique identification) that enable tracking of the 
supply chain back to the original manufacturer, whether the 
electronic parts are supplied as discrete electronic parts or are 
contained in assemblies. This traceability process shall include 
certification and traceability documentation developed by 
manufacturers in accordance with Government and industry standards; 
clear identification of the name and location of supply chain 
intermediaries from the manufacturer to the direct source of the 
product for the seller; and where available, the manufacturer's 
batch identification for the electronic part(s), such as date codes, 
lot codes, or serial numbers. If IUID marking is selected as a 
traceability mechanism, its usage shall comply with the item marking 
requirements of 252.211-7003, Item Unique Identification and 
Valuation.
    (5) Use of suppliers that are the original manufacturer, or 
sources with the express written authority of the original 
manufacturer or current design activity, including an authorized 
aftermarket manufacturer or suppliers that obtain parts exclusively 
from one or more of these sources. When parts are not available from 
any of these sources, use of suppliers that meet applicable 
counterfeit detection and avoidance system criteria.
    (6) Reporting and quarantining of counterfeit electronic parts 
and suspect counterfeit electronic parts. Reporting is required to 
the Contracting Officer and to the Government-Industry Data Exchange 
Program (GIDEP) when the Contractor becomes aware of, or has reason 
to suspect that, any electronic part or end item, component, part, 
or assembly containing electronic parts purchased by the DoD, or 
purchased by a Contractor for delivery to, or on behalf of, the DoD, 
contains counterfeit electronic parts or suspect counterfeit 
electronic parts. Counterfeit electronic parts and suspect 
counterfeit electronic parts shall not be returned to the seller or 
otherwise returned to the supply chain until such time that the 
parts are determined to be authentic.
    (7) Methodologies to identify suspect counterfeit parts and to 
rapidly determine if a suspect counterfeit part is, in fact, 
counterfeit.
    (8) Design, operation, and maintenance of systems to detect and 
avoid counterfeit electronic parts and suspect counterfeit 
electronic parts. The Contractor may elect to use current 
Government- or industry-recognized standards to meet this 
requirement.
    (9) Flowdown of counterfeit detection and avoidance 
requirements, including applicable system criteria provided herein, 
to subcontractors at all levels in the supply chain that are 
responsible for buying or selling electronic parts or assemblies 
containing electronic parts, or for performing authentication 
testing.
    (10) Process for keeping continually informed of current 
counterfeiting information and trends, including detection and 
avoidance techniques contained in appropriate industry standards, 
and using such information and techniques for continuously upgrading 
internal processes.
    (11) Process for screening GIDEP reports and other credible 
sources of counterfeiting information to avoid the purchase or use 
of counterfeit electronic parts.
    (12) Control of obsolete electronic parts in order to maximize 
the availability and use of authentic, originally designed, and 
qualified electronic parts throughout the product's life cycle.
    (d) Government review and evaluation of the Contractor's 
policies and procedures will be accomplished as part of the 
evaluation of the Contractor's purchasing system in accordance with 
252.244-7001, Contractor Purchasing System Administration--Basic, or 
Contractor Purchasing System Administration--Alternate I.
    (e) The Contractor shall include the substance of this clause, 
including paragraphs (a) through (e), in subcontracts, including 
subcontracts for commercial items, for electronic parts or 
assemblies containing electronic parts.


(End of clause)
[FR Doc. 2014-10326 Filed 5-5-14; 8:45 am]
BILLING CODE 5001-06-P