On December 3, 2013, the Federal Acquisition Regulation (“FAR”) Council issued a proposed rule that would revise the FAR to require contractors to comply with higher-level quality standards in acquisitions where there is a high risk of counterfeits and the potential impact of counterfeits is significant.  78 Fed. Reg. 72620.  This new rule would be in addition to the electronic counterfeit parts detection and avoidance requirements set forth in the Department of Defense (“DOD”) May 16, 2013 proposed DOD FAR Supplement (“DFARS”) rule implementing Section 818 of the fiscal year 2012 National Defense Authorization Act (“Section 818”) (which we summarized here).  Notably, the proposed amendments to the FAR, which do not implement any aspect of Section 818, would expand the government’s counterfeit parts regime beyond electronic parts and to agencies other than DOD.  A copy of the proposed rule is available here.

As proposed, the new rule would require contracting officers to assess the risk of counterfeit parts during the procurement planning stage, both in terms of likelihood and potential impact of counterfeits, and where the perceived risk is high, impose higher-level quality standards in the solicitation and resultant contract.  According to the rule, higher-level quality standards may be appropriate in contracts for complex or critical items; contracts that require control of design, work operations, in-process controls, testing and inspection; or contracts that require attention to organization, planning, work instructions, documentation control and advanced metrology.  In such contracts, additional quality standards should be implemented through incorporation of a revised version of FAR 52.246-11, Higher-Level Contract Quality Requirement, which would no longer allow offerors to choose a standard, but instead would require the contracting officer to insert the applicable standard.

When the prime contract includes higher-level quality standards, the new rule would also require that contractors ensure that subcontractors meet these higher standards.  Contractor implementation of these quality standards would be assessed by the Defense Contract Management Agency as part of the contractor purchasing system review process.

The proposed rule provides two new examples of higher-level quality standards specific to counterfeit parts:  SAE Aerospace Standard 5553, “Fraudulent/Counterfeit Electronic Parts; Avoidance, Detection, Mitigation, and Disposition” (“AS5553”) and Aerospace Standard 6174, “Counterfeit Materiel; Assuring Acquisition of Authentic and Conforming Materiel” (“AS6174”).  Many of the requirements of AS5553 should be familiar to contractors, as DOD adopted it in August 2009 and AS5553 forms the basis of many aspects of Section 818, such as the preference for sourcing items from the original manufacturer or an authorized dealer.  AS6174, which was published in May 2012 and adopted by DOD on June 17, 2013, is intended to address counterfeit material other than electronic parts.  Like AS5553, AS6174 creates a preference for purchase from the original manufacturer and requires additional documentation and testing when items are sourced from non-authorized dealers.

Contractors should be aware that this proposed rule would create yet another purchasing system requirement, providing an additional basis for potential system disapprovals and government withholds.  In addition, the proposed rule provides little guidance to contracting officers or contractors on when it would be appropriate to impose higher-level quality standards.  For example, the rule does not identify the types of materials that, like electronic parts, are more likely to be counterfeit.  Instead, the rule would leave it to agencies to establish appropriate procedures, creating the potential for differing implementations at different agencies.

This rule is the second of three pending rules relating to counterfeit parts.  As noted above, DOD implemented portions of Section 818 in its May 16, 2013 proposed DFARS rule, entitled “Detection and Avoidance of Counterfeit Electronic Parts.”  Comments were submitted to this proposed DFARS rule on July 15, 2013 and, as of November 20, 2013, the Defense Acquisition Regulations Council has approved a draft final rule which currently is being processed and should be issued in the coming months.  The third rule, FAR Case 2013-002, “Expanded Reporting of Nonconforming Supplies,” is currently being drafted.  Contractors should expect these and additional regulatory and legislative changes to alter the counterfeit parts compliance landscape in 2014 and beyond.