On Nov. 21, 2019, more than five years after it was first proposed, the Federal Acquisition Regulatory (FAR) Council finalized an interim rule that required defense contractors to report counterfeit electronic parts in their supply chains. The final rule expands the reporting requirements to all federal contractors providing electronic parts, and items contracting officers designate as “critical” (under a new definition in FAR 46.101), or items that require higher-level quality standards (pursuant to FAR 52.246-11). Examples of those items include items used in air traffic control systems, the power grid, satellites and food safety inspections, where national security or public safety are at risk. The rule, located at FAR 52.246-26, Reporting Nonconforming Items, not only requires impacted contractors to screen the Government-Industry Data Exchange Program database to avoid the use and delivery of counterfeit or suspect counterfeit items, but also to submit a report to the database within 60 days of becoming aware of or suspecting counterfeit parts in their supply chains. The rule took effect on Dec. 21, 2019.

There are several key exceptions to the applicability of the rule. The rule does not apply to contracts or subcontracts for commercial items or to acquisitions valued below the Simplified Acquisition Threshold (currently $250,000). Additionally, the rule does not apply to acquisitions for medical devices currently subject to Food and Drug Administration reporting requirements at 21 CFR 803, items subject to ongoing criminal investigations, nonconforming items (when it can be confirmed that the organization where the defect was generated has not sent the item to more than one customer) or foreign companies with no place of business in the U.S.

Contractors must flow down FAR 52.246-26 in subcontracts for (1) items subject to higher-level quality standards in accordance with the clause at FAR 52.246-11, Higher-Level Contract Quality Requirement; (2) items the contractor determines to be “critical items” for which use of the clause is appropriate; (3) electronic parts or end items, components, parts or materials containing electronic parts, if the subcontract exceeds $250,000 and the prime contract is by or for the Department of Defense; or (4) the acquisition of services, if the services provided by the subcontractor will include furnishing any items that meet the criteria specified in the clause.

Several questions remain in the wake of the final rule publication. For example, it is not clear what nonconformances should be considered “critical” or “major” and therefore require reporting to the database. Further, with respect to the flow down of FAR 52.246-11 to subcontractors and suppliers, it is unclear how contractors should determine what items are “critical items” requiring the flow down of the clause.

On a positive note, since this rule was pending for five years, the FAR Council had ample time to take public comments into account. The final rule expanded the reporting deadline from 30 days to 60 days. It also exempted classes of items in response to the comments to make the rule applicable to only those listed above, in contrast to the proposed rule which included those items.

The rule publication can be found at 84 FR 64680-02.