Vol. 79 Tuesday, 

No. 87 May 6, 2014 

Part IV 

Department of Defense 

Defense Acquisition Regulations System 

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 


emcdonald on DSK67QTVN1PROD with RULES3
26092 Federal Register / Vol. 79, No. 87 / Tuesday, May 6, 2014 / Rules and Regulations 

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. 

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— 

Æ The definitions of ‘‘counterfeit 

part’’ and ‘‘suspect counterfeit part’’ are 

substantively revised and limited to 

electronic parts; 

Æ The definition of ‘‘legally 

authorized source’’ is deleted; and 

Æ 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 


emcdonald on DSK67QTVN1PROD with RULES3
Federal Register / Vol. 79, No. 87 / Tuesday, May 6, 2014 / Rules and Regulations 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 noncounterfeit 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 


emcdonald on DSK67QTVN1PROD with RULES3
26094 Federal Register / Vol. 79, No. 87 / Tuesday, May 6, 2014 / Rules and Regulations 

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 contractrequirements 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, originalmanufacturer 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-theshelf (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 


emcdonald on DSK67QTVN1PROD with RULES3
Federal Register / Vol. 79, No. 87 / Tuesday, May 6, 2014 / Rules and Regulations 26095 

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 manufacturerauthorized 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 


emcdonald on DSK67QTVN1PROD with RULES3
26096 Federal Register / Vol. 79, No. 87 / Tuesday, May 6, 2014 / Rules and Regulations 

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 


emcdonald on DSK67QTVN1PROD with RULES3
Federal Register / Vol. 79, No. 87 / Tuesday, May 6, 2014 / Rules and Regulations 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 


emcdonald on DSK67QTVN1PROD with RULES3
26098 Federal Register / Vol. 79, No. 87 / Tuesday, May 6, 2014 / Rules and Regulations 

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 CAScovered prime contractors. 

A respondent asked how the 

regulations would apply to contractors 

and subcontractors subject to modifiedCAS. 

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, 


emcdonald on DSK67QTVN1PROD with RULES3
Federal Register / Vol. 79, No. 87 / Tuesday, May 6, 2014 / Rules and Regulations 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 CAScoverage, 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.’’ 


emcdonald on DSK67QTVN1PROD with RULES3
26100 Federal Register / Vol. 79, No. 87 / Tuesday, May 6, 2014 / Rules and Regulations 

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 selfcertification 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 


emcdonald on DSK67QTVN1PROD with RULES3
Federal Register / Vol. 79, No. 87 / Tuesday, May 6, 2014 / Rules and Regulations 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 threepart 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 


emcdonald on DSK67QTVN1PROD with RULES3
26102 Federal Register / Vol. 79, No. 87 / Tuesday, May 6, 2014 / Rules and Regulations 

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 


emcdonald on DSK67QTVN1PROD with RULES3
Federal Register / Vol. 79, No. 87 / Tuesday, May 6, 2014 / Rules and Regulations 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 IUIDcompliant 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. 


emcdonald on DSK67QTVN1PROD with RULES3
26104 Federal Register / Vol. 79, No. 87 / Tuesday, May 6, 2014 / Rules and Regulations 

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 outof-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, 


emcdonald on DSK67QTVN1PROD with RULES3
Federal Register / Vol. 79, No. 87 / Tuesday, May 6, 2014 / Rules and Regulations 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 CAScovered 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 anticounterfeiting 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 CAScovered 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 partialCAS-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. 


emcdonald on DSK67QTVN1PROD with RULES3
26106 Federal Register / Vol. 79, No. 87 / Tuesday, May 6, 2014 / Rules and Regulations 

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: 

■ 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 

■ 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 

■ 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 

■ 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. 

■ 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 

■ 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. 


emcdonald on DSK67QTVN1PROD with RULES3
Federal Register / Vol. 79, No. 87 / Tuesday, May 6, 2014 / Rules and Regulations 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 setaside for small business. 

PART 252—SOLICITATION 

PROVISIONS AND CONTRACT 

CLAUSES 

■ 7. Amend section 252.244–7001 by— 

■ a. Revising the introductory text, 

clause title and date; 

■ b. Revising paragraphs (c)(19), (20) 

and (21); and 

■ 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 


emcdonald on DSK67QTVN1PROD with RULES3
26108 Federal Register / Vol. 79, No. 87 / Tuesday, May 6, 2014 / Rules and Regulations 

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) 

■ 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 industryrecognized 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 


emcdonald on DSK67QTVN1PROD with RULES3