Counterfeit Electronics Rule Would Let Contractors Recover Costs

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By Andrew Clevenger

Aug. 29 — Contractors who follow government rules regarding counterfeit electronics will be able to recover the cost of finding and replacing them, according to a new finalized rule released Aug. 29 by the Defense Department (DOD).

Under the new rule, contractors that have a DOD-approved operational system to detect and avoid counterfeit electronic parts — and tell the government within 60 days of becoming aware of a suspect part — may recover the ensuing costs. Costs are also recoverable when the counterfeit part was supplied by a government-approved source under the finalized amendment to the Defense Federal Acquisitions Regulation Supplement (DFARS) set to be published Aug. 30 in the Federal Register.

The final rule should relieve pressure on top-tier defense contractors, who could be on the hook for tens or even hundreds of millions of dollars should a counterfeit electronic part pop up despite their best efforts under the old rule, Bob Metzger, a shareholder at Rogers Joseph O’Donnell, told Bloomberg BNA. It also benefits smaller companies, who will face less pressure from the larger integrators to pass down costs to the subcontractor that may have supplied the counterfeit electronics.

“The Defense Department has systems in place that it will be relying upon for many years, if not decades,” Metzger said. “The exposure to counterfeit parts arises when a part is no longer produced by the original source but is needed nonetheless.”

The final rule includes some significant changes from the proposed rule published by the DOD in March. Most notably, under the final rule, a contractor does not need to “discover” the counterfeit or suspect part, but only needs to “become aware of” it.

The change follows an Aug. 2 final rule on counterfeit electronics, which specified when a trusted supplier is not available, contractors are responsible for inspecting, testing and authenticating the parts themselves using industry standards and best practices.

Together, the rules encourage practices that reduce the risk of counterfeit electronics making their way into the supply chain, Metzger said.

“This shows serious effort on part of Department of Defense to coordinate among the different rulemaking activities that concern counterfeit electronics,” he said.

The risk of counterfeit electronics is reduced when contractors obtain parts from either the original manufacturer or an approved supplier. The new rule recognizes that that is not always possible, and provides explicit recognition that the safe harbor for companies extends to the procurement of electronic parts from other sources approved by contractor using methods of test, inspection and authentication based on industry standards, Metzger said.

To contact the reporter on this story: Andrew Clevenger in Washington at

To contact the editor responsible for this story: Seth Stern at

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