New Cost Principle Proposed for the DoD FAR Supplement

It has been a number of years since we've seen a new cost principle added to the Federal Acquisition Regulations. There have been many modifications to existing regulations but no new ones in at least 15 years. That is about to change. The Department of Defense (DoD) has just published a proposal to amend its FAR Supplement (the DFARS) to limit cost recovery when counterfeit electronic parts are incorporated into products the Government buys.

This provision/limitation was pretty much forced on DoD because it was included in the Fiscal Year 2016 National Defense Authorization Act. Counterfeit electronic parts have become a big deal in Government acquisition, primarily because of quality control issues. If a million dollar missile goes off course because of faulty electronic parts, you've wasted a million dollars and hit something you were not targeting.

Specifically, the new proposal provides that the costs of counterfeit electronic parts or suspect counterfeit parts and the cost of rework or corrective action that may be required to remedy the use or inclusion of such parts may be allowable if:

1. The counterfeit electronic parts or suspect counterfeit electronic parts were obtained by the contractor in accordance with applicable regulations.
2. The contractor discovers the counterfeit electronic parts or suspect counterfeit electronic parts, and
3. The contractor provides timely notice to the Government. Timely is defined as within 60 days after the contractor becomes aware of the counterfeit parts.

The applicable regulations mentioned in Item 1 above generally relate to buying from trusted suppliers. Contractors are required to obtain electronic parts that are in production or currently available in stock from the original manufacturers of the parts or their authorized dealers or from trusted suppliers who obtain such parts exclusively from the original manufacturers of the parts or their authorized dealers. If the pars are not in production, contractors must obtain the parts from trusted suppliers.

If all three conditions stated above are not met, the cost of rework and corrective action are not allowable.

This new cost principle will appear as DFARS 231.205-71.