New Federal Contract Reporting Requirements Aimed at Protecting Supply Chains Through Detection of Counterfeit Parts

Federal contractors already subject to a myriad of reporting requirements should be prepared for yet another. Effective December 23, 2019, a new Federal Acquisition Regulation (“FAR”) provision entitled “Reporting of Nonconforming Items to the Government Industry Data Exchange Program” requires federal contractors and subcontractors to report to the Government-Industry Data Exchange Program (“GIDEP”) certain counterfeit or suspect counterfeit parts and certain major or critical nonconformances. The new FAR provision (48 C.F.R. § 46.317) and clause (FAR 52.246-26) applies to both civilian and defense contracts over the simplified acquisition threshold, currently $150,000.

Where did this rule come from?

The genesis of this rule arose out of Section 818 National Defense Authorization Act (“NDAA”) for Fiscal Year (FY) 2012 (Pub. L. 112-81, 10 U.S.C. § 2302 Note), which mandated the reporting of counterfeit and suspect counterfeit parts in furtherance of certain requirements of Office of Federal Procurement Policy (“OFPP”) Policy Letter 91-3, entitled “Reporting Nonconforming Products,” dated April 9, 1991.

In 2014, the Department of Defense (“DOD”), General Services Administration (“GSA”), and the National Aeronautics and Space Administration (“NASA”) published a proposed rule to implement certain sections of the NDAA for FY 2012, which initially had a narrow application—only DOD contractors covered by the Cost Accounting Standards who were producing electronic products would be covered. However, in recognition of the fact that counterfeit and nonconforming parts can impact the mission of all government agencies, the FAR Council extended the coverage outside of DOD to other agencies and other types of parts.

Prompted by, among other things, an April 2019 Presidential Memorandum on Combating Trafficking in Counterfeit and Pirated Goods, which further emphasized the threat posed by counterfeit goods to national security and public safety, DOD, GSA, and NASA issued a final rule in November 2019 amending the FAR to what will become the FAR 46.317 and 52.246-26.

What are counterfeit parts?

Counterfeit parts are otherwise known as parts that fail required product specification and testing in government contracts. These defective parts, when undetected, pose a safety risk to the end user, potentially resulting in loss of life or significant mission capabilities. In the acquisition of goods and services, the US government routinely requires contractors to maintain quality assurance controls at varying levels to ensure the safety and reliably of its products. Counterfeit parts that permeate the supply chain can have significant consequences particularly as it relates to national defense or critical national infrastructure

What is the Government-Industry Data Exchange Program?

GIDEP is a cooperative activity between government and industry participants seeking to reduce or eliminate expenditures of resources by sharing technical information essential during research, design, development, production, and operational phases of the life cycle of systems, facilities, and equipment. By reporting in GIDEP, contractors are able to share knowledge of counterfeit and critical nonconforming items. Such sharing of information provides better protections to supply chains in procurements that implicate national security, including high value, mission critical defense, space, or critical infrastructure systems.

What contracts are covered?

FAR 52.246-26, Reporting Nonconforming Items, is required in solicitations and contracts for acquisition by any agency, including the DOD, of (i) items that are subject to higher-level quality standards in accordance with the clause at FAR 52.246-11, Higher-Level Contract Quality Requirement and (ii) items that the contracting officer, in consultation with the requiring activity, determines to be critical items (see FAR 46.101) for which use of the clause is appropriate. The clause defines “critical items” as an item the failure of which is likely to result in hazardous or unsafe conditions for individuals using, maintaining, or depending upon the item or is likely to prevent performance of a vital agency mission.

In addition, FAR 52.246-26 is required in solicitations and contracts for electronic parts or end items, components, parts, or assemblies containing electronic parts, in acquisitions by, or for, the DOD, as provided in paragraph (c)(4) of section 818 of the NDAA for FY 2012 (Pub. L. 112-81) that exceeds the Simplified Acquisition Threshold (SAT); or Services, if the contractor will furnish, as part of the service, any items that meet the above-specified criteria.

What contracts are not covered?

FAR 52.246-26 is not to be included in solicitations and contracts when acquiring (1) commercial items (including commercially available off-the-shelf (COTS) items) or (2) medical devices that are subject to the Food and Drug Administration Reporting Requirements at 21 C.F.R. 803.

Flowdown Requirement

The prime contractor is required to flowdown the clause at FAR 52.246-26 in contracts that meet the requirements contained therein.

How do covered contractors comply with the FAR 52.246-26?

The primary mandate of FAR 52.246-26 requires contractors to provide written notification to the contracting officer within 60 days of becoming aware or having reason to suspect—for instance, through testing, record review, or notice from a third party (i.e. customer or seller)—that any end item, component, subassembly, part or material contained in supplies purchased by the contractor for delivery to, or for, the government is counterfeit or suspect counterfeit. The clause defines “counterfeit item” as

[a]n unlawful or unauthorized reproduction, substitution, or alteration that has been knowingly mismarked, misidentified, or otherwise misrepresented to be an authentic, unmodified item 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 items represented as new or the false identification of grade, serial number, lot number, date code, or performance characteristics.

On the other hand, a “suspect counterfeit item” is defined as an item for which credible evidence (including but not limited to, visual inspection or testing) provides reasonable doubt that the item is authentic. Upon learning of a counterfeit or suspect counterfeit item, the contractor must take steps to protect and retain the item until given instruction from the contracting officer.

In addition to notifying the contracting officer as outlined above, the clause requires the contractor to report directly to GIDEP within 60 days of becoming aware of or suspecting that an item it purchased is (1) counterfeit or suspect counterfeit or (2) a common item that has a major or critical nonconformance. The clause defines a “common item” as an item that has multiple applications versus a single or peculiar application. Meanwhile, “critical nonconformance” is defined as a nonconformance that is likely to result in hazardous or unsafe conditions for individuals using, maintaining, or depending upon the supplies or services or is likely to prevent performance of a vital agency mission. “Major nonconformance” is defined as a nonconformance, other than a critical nonconformance, that is likely to result in failure of the supplies or services or to materially reduce the usability of the supplies or services for their intended purpose.

The clause also requires contractors, as part of their quality control system, to regularly review reports from GIDEP (www.gidep.org) to avoid using or purchasing counterfeit, suspect counterfeit, or nonconforming items.

The clause contains an additional requirement for contracts with DOD involving electronic parts. Defense contractors must report directly to GIDEP where the end item, component, part or material contained electronic parts—examples of which include “an integrated circuit, a discrete electronic component (including, but not limited to, a transistor, capacitor, resister, or diode), or a circuit assembly”—that are counterfeit or suspect counterfeit electronic parts. Contractors who abide by such reporting requirements are therefore exempted from civil liability as long as their efforts to investigate the matter were reasonable.

Conclusion

The new FAR provision is sound in its intent—to provide better protection to the nation’s defense systems and critical infrastructure by adding new layers of oversight to supply chains. While the policy goals of protecting national security, as well as taxpayer dollars, are met, federal contractors are faced with yet another reporting requirement to add to an already long list. Both supply and construction contractors should carefully review the new requirements as it relates to the end products being delivered. Contractors need to further scrutinize their supply chains to identify vulnerabilities, especially as it relates to product testing and certification. As noted by the promulgating agencies, the new rule will most likely impact critical infrastructure across various agencies—Federal Aviation Administration air traffic control systems, Department of Agriculture food safety equipment, all national defense programs, Department of Transportation monitoring of transportation systems, Department of Energy monitoring of power generation and distribution networks, to name some examples. Contractors working in those spaces need be particularly mindful of these new reporting requirements. We will continue to monitor the practical impacts as the new rule takes effect.