New Cost Principle added to DFARS - Counterfeit Electronic Parts

The Department of Defense has amended its FAR (Federal Acquisition Regulations) Supplement (DFARS) to address the cost of remedying the use or inclusion of counterfeit electronic parts. The new rule also addresses contractor responsibilities for detecting and avoiding the use or inclusion of such parts or suspected counterfeit parts, the use of trusted suppliers, and requirements for contractors to report counterfeit parts. Failure to detect and avoid could render a contractor's purchasing system inadequate and subject the contractor to billing withholds. Today we will address the cost principle aspects of the new rule. Tomorrow we will look at the purchasing system requirements of the new rule.

The new DFARS cost principle is located at DFARS 231.205-71 and is entitled: Cost of remedy for use or inclusion of counterfeit electronic parts and suspect counterfeit electronic parts. It states, in part:

(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 244-3303;
     (2) The counterfeit electronic parts or suspect counterfeit electronic parts are Government-furnished property as defined in FAR 45.1010; and
     (3) The contractor provides timely (i.e., within 60 days after the contractor becomes aware) notice to the Government.

Note the construct of this requirement; it is (1), (2), and (3), not (1), (2), or (3). That means in order for the cost of counterfeit parts and rework or corrective action required to remedy the use of such parts, all three conditions must exist.

Perhaps the most significant requirement among the foregoing is the requirement to have an "operational system" to detect and avoid counterfeit parts that has been reviewed and approved by DoD. We will discuss the basic requirements of an "operational system" tomorrow.