Are Those Real Parts? Government Contractors Must Comply With New Inspection and Reporting Requirements Created by NDAA 2012 for Counterfeit Electronic Parts

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The recently enacted National Defense Authorization Act (“NDAA”) of 2012 establishes a host of new requirements for government contractors regarding detection and avoidance of counterfeit electronic parts. These new requirements will apply to any contractor who is subject to cost accounting standards and supplies products or weapons systems with electronic parts to the Department of Defense (“DoD”). Contractors who fail to follow these new requirements risk suspension, debarment and potential civil and criminal liability.

The NDAA 2012 requires the Secretary of Defense to first assess DoD acquisition policies and systems for how they detect and avoid counterfeit electronic parts. Then, no later than June 28, 2012, the Secretary is to implement a risk-based policy to minimize the impact of counterfeit electronic parts, which includes ensuring the traceability of parts, inspecting and testing of parts, and taking corrective action to recover costs for replacing counterfeit electronic parts from contractors. At that time, the Secretary is also to issue guidance on remedial actions for DoD to take – including consideration of suspension and debarment – against contractors who have failed to detect or avoid counterfeit electronic parts or who have “failed to exercise due diligence in the detection and avoidance” of counterfeit electronic parts.

The NDAA 2012 also requires the Secretary, no later than September 26, 2012, to revise the DFARS to address the detection and avoidance of counterfeit electronic parts. These regulations will shift the burden of detecting counterfeit electronic parts to the contractors. In particular, the new regulations will make contractors responsible for detecting and avoiding the use of counterfeit electronic parts, as well as for any rework or corrective action that may be required to remedy the use or inclusion of such parts. The cost for detecting and avoiding counterfeit electronic parts and the cost of any rework or corrective action required because of counterfeit electronic parts will not be an allowable cost.

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