On August 30, 2016, the DoD issued a final rule amending the DFARS to implement §885(a) of the FY 2016 NDAA, which expands the safe harbor for allowability of costs of counterfeit or suspect counterfeit electronic parts and any related rework or corrective action. The rule affirms that costs of counterfeit electronic parts, suspect counterfeit electronic parts and rework or corrective action are generally unallowable, but provides that such costs may be allowable if four criteria are met: (i) The contractor has an operational system to detect and avoid counterfeit electronic parts that has been reviewed and approved by the DoD; (ii) the counterfeit electronic parts were provided to the contractor as government property in accordance with DFARS 252.246-7008 (i.e., from an original manufacturer, authorized supplier, supplier that sources parts exclusively from an original manufacturer or an authorized supplier, or a “contractor-approved supplier”); (iii) the contractor discovers the counterfeit electronic parts through inspection and testing, a Government Industry Data Exchange Program (GIDEP) alert or other means; and (iv) the contractor provides the contracting officer and GIDEP written notice within 60 days.

In softening the DoD’s heretofore rigid stance on the allowability of costs where contractors unknowingly purchase counterfeit or suspect counterfeit electronic parts, the new rule is consistent with the DoD’s recent clarification that contractors’ costs of implementing counterfeit electronic parts detection and avoidance systems are generally allowable. See Defense Federal Acquisition Regulation Supplement: Detection and Avoidance of Counterfeit Electronic Parts – Further Implementation (DFARS Case 2014-D005, 81 Fed. Reg. 50,635). However, the safe harbor may currently have limited applicability because costs are only allowable when a contractor has an approved system, and the DoD has been slow to approve contractor systems to date. The rule became effective on August 30, 3016. (81 Fed. Reg. 59,510, 8/30/16)