A proposed rule issued June 10 would extend pervasive requirements for reporting counterfeit,  suspect, and nonconforming items to all contractors, as well as their subcontractors and suppliers doing business with any U.S. Government department or agency. Unlike the earlier counterfeit electronic parts interim rule issued by the DoD on May 6, 2014, the new proposed rule (also issued pursuant to section 818 of the FY 2012 NDAA) applies Government-wide and is not limited to electronic parts, but rather applies to counterfeit, suspect, and non-conforming items of all types. In addition, the requirements must be flowed down to subcontractors and suppliers at every tier of the supply chain. (The discussion below assumes that flow down.)

The proposed rule assumes that the contractor has an inspection system or quality program that is sufficient to avoid and detect the delivery to, or the use by or for, the Government of items that are “counterfeit,” “suspect,” or contain a “critical” or “major” nonconformance. It imposes two requirements on contractors. First, the rule requires that a contractor screen the Government Industry Data Exchange Program (GIDEP) reports to avoid delivery to or use by/for the Government. Second, it requires that contractors report to GIDEP and to the Government’s Contracting Officer (CO) when the contractor becomes aware of a counterfeit, suspect, or non-conforming item. Reports to the CO must be submitted in writing within 30 days of the contractor becoming aware of a counterfeit or suspect item. Items reported to the CO must be retained until the CO directs disposition. The contractor also must report to GIDEP within 60 days of becoming aware of:

(i)  a counterfeit or suspect item; or

(ii) an item that contains a major or critical nonconformance that is also a “common” item and constitutes a “quality escape” that results in the release of such items to more than one customer.

The proposed rule is intended to build on the contractor inspection systems already required by the FAR. But contractors’ existing systems are likely to require enhancement due to the new definitions and requirements to be imposed by the rule.

The rule says nothing about reporting in connection with the Mandatory Disclosure Rule, which requires a report to the CO and the agency Inspector General if the contractor has “credible evidence” of a false claim.

Even more than the DoD rule, this proposal will impose onerous compliance requirements and potential liabilities on commercial entities throughout the economy who do not view themselves as Government suppliers—and indeed, may not be aware that their products have ended up in a Government contractor’s supply chain. Failure to comply with the new rule potentially would expose such entities to substantial risks for costs, penalties and damages.

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