[Federal Register Volume 83, Number 87 (Friday, May 4, 2018)]
[Rules and Regulations]
[Pages 19641-19645]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-09491]


-----------------------------------------------------------------------

DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Parts 212, 246, and 252

[Docket DARS-2016-0014]
RIN 0750-AI92


Defense Federal Acquisition Regulation Supplement: Amendments 
Related to Sources of Electronic Parts (DFARS Case 2016-D013)

AGENCY: Defense Acquisition Regulations System, Department of Defense 
(DoD).

ACTION: Final rule.

-----------------------------------------------------------------------

[[Page 19642]]

SUMMARY: DoD is issuing a final rule amending the Defense Federal 
Acquisition Regulation Supplement (DFARS) to implement a section of the 
National Defense Authorization Act for Fiscal Year 2016 that makes 
contractors and subcontractors subject to approval (as well as review 
and audit) by appropriate DoD officials when identifying a contractor-
approved supplier of electronic parts.

DATES: Effective May 4, 2018.

FOR FURTHER INFORMATION CONTACT: Ms. Amy G. Williams, telephone 571-
372-6106.

SUPPLEMENTARY INFORMATION:

I. Background

    DoD published a proposed rule in the Federal Register at 81 FR 
50680 on August 2, 2016, to implement section 885(b) of the National 
Defense Authorization Act (NDAA) for Fiscal Year (FY) 2016 (Pub. L. 
114-92), which amends section 818(c)(3)(D)(iii) of the NDAA for FY 2012 
(Pub. L. 112-81). Section 885(b) provides that contractors and 
subcontractors are subject to approval (as well as review and audit) by 
appropriate DoD officials when identifying a contractor-approved 
supplier of electronic parts. Four respondents submitted public 
comments on the proposed rule.

II. Discussion and Analysis

    DoD reviewed the public comments in the formulation of the final 
rule. A discussion of the comments and the changes made to the rule as 
a result of those comments are provided as follows:

A. Significant Changes From the Proposed Rule

    The final rule clarifies at DFARS 246.870-2(a)(1)(ii)(C) and 
252.246-7008(b)(2)(iii) that the review, audit, and approval of 
contractor-approved suppliers by the Government will generally be in 
conjunction with a contractor purchasing system review (CPSR) or other 
surveillance of purchasing practices by the contract administration 
office, unless the Government has credible evidence that a contractor-
approved supplier has provided counterfeit parts.

B. Analysis of Public Comments

    The respondents shared concerns about the details of how, what, 
when, and by whom the Government approval (or disapproval) of 
contractor-approved suppliers would be conducted. There was also 
concern about the impact of disapproval, how the notification would 
occur, and the extent of flow-down to subcontracts.
1. Mandatory or discretionary?
    Comment: Several respondents commented on whether the review, 
audit, and approval are mandatory or discretionary. One respondent 
stated that the rule is silent as to whether the review, audit, and 
approval will take place. Another respondent noted that it appears that 
contractor selection of contractor-approved suppliers can be subject to 
(emphasis added) review, audit, and approval by the contracting 
officer, implying that such processes are optional and not mandatory 
actions, whether that function is conducted on individual transactions 
or through a CPSR or other surveillance of purchasing practices. Yet 
another respondent questioned the criteria for deciding when to review, 
audit, and approve suppliers that have been approved by the contractor.
    Response: It is not mandatory that the Government review, audit, 
and approve contractor-approved suppliers. The final rule has been 
amended at DFARS 246.870-2(a)(1)(ii)(C) and 252.246-7008(b)(2)(iii) to 
clarify that such review, audit, and approval will generally be in 
conjunction with a CPSR by the contract administration office, or if 
the Government obtains credible evidence that a contractor-approved 
supplier has provided counterfeit parts.
2. What is being reviewed and audited and how?
    Comment: One respondent noted that separate regulations address 
contractor purchasing system criteria and recommended that the audits 
conducted under the proposed DFARS rule providing for Government 
review, audit, and approval be limited to confirming that the 
contractor's process for selecting suppliers is based on appropriate 
industry standards and processes for counterfeit prevention. The 
respondent further recommended that DoD clarify that the Government 
would not impose additional requirements based on internal DoD 
standards for identifying trusted electronic parts suppliers. Another 
respondent stated that it was unclear if the proposed DFARS contracting 
officer approval function applied to the process used by contractors to 
approve electronic parts suppliers for parts out of production or if 
DoD intended to reserve the right to review, audit, and approve the 
selection of each part delivered by a contractor-approved supplier on 
each contract transaction. The same respondent commented that industry 
comments on DFARS case 2014-D005 speculated that the review and audit 
of the contractor selection process for contractor-approved suppliers 
by DoD officials might be satisfied through the CPSR process.
    Response: The Government's review, audit, and approval of 
contractor-approved suppliers of electronic parts generally will be 
conducted during the CPSR or other surveillance of purchasing practices 
to verify that the contractor is using established counterfeit 
prevention industry standards and processes (including inspection, 
testing, and authentication), such as the DoD-adopted standards at 
https://assist.dla.mil, to select their suppliers, as required by DFARS 
clause 252.246-7008(b)(2)(i).
    The contractor's authorization to identify and purchase electronic 
parts from their own contractor-approved suppliers and DoD's authority 
to review, audit, and approve those contractor-approved suppliers 
relates only to those suppliers of electronic parts that are not in 
production by the original manufacturer or an authorized aftermarket 
manufacturer and that are not currently available in stock from the 
original manufacturer, their authorized suppliers, or suppliers that 
obtain such parts exclusively from the original manufacturers of the 
parts or their authorized suppliers (see DFARS 246.870-2(a)(1)(ii)(C) 
and 252.246-7008(b)(2)(iii)). The rule grants the authority for the 
Government to review, audit, and approve or disapprove contractor-
approved suppliers of electronic parts outside of a CPSR or other 
surveillance of purchasing practices by the contract administration 
office if there is credible evidence that a contractor-approved 
supplier has provided counterfeit electronic parts. As the basis of its 
review, audit, and approval, the Government generally intends to use 
established counterfeit prevention industry standards and processes.
3. Timing
    Comment: All respondents had concern about the timing of the 
review, audit, and approval of contractor-approved suppliers. The 
respondents are concerned that the rule does not specify when the 
review, audit, and approval of contractor-approved suppliers should 
occur. According to the respondents, the contracting officer is able to 
review and approve electronic parts suppliers any time from contract 
award until closeout. If the contracting officer disapproves a supplier 
after the fact, this would likely cause significant cost increases and 
schedule delays. The respondents recommended that the

[[Page 19643]]

contracting officer should establish schedules for these reviews and, 
to the maximum extent practicable, review and approve a contractor's 
electronic parts suppliers at the time of contract award or as early as 
possible during contract performance.
    One respondent requested that a contracting officer's disapproval 
of a contractor-approved source should constitute a contract change 
that qualifies for equitable adjustment in the contract price, the 
delivery schedule, or both, pursuant to the Changes clause at FAR 
52.243-1.
    Response: DoD's authority to review, audit, and approve contractor-
approved suppliers relates only to those suppliers of electronic parts 
that are not in production by the original manufacturer or an 
authorized aftermarket manufacturer and that are not currently 
available in stock from the original manufacturer, their authorized 
suppliers, or suppliers that obtain such parts exclusively from the 
original manufacturers of the parts or their authorized suppliers (see 
DFARS 246.870-2(a)(1)(ii)(C) and 252.246-7008(b)(2)(iii)). DoD relies 
primarily on the contractor to use established counterfeit prevention 
industry standards and processes (including inspection, testing, and 
authentication), such as the DoD-adopted standards at https://assist.dla.mil, as required by DFARS clause 252.246-7008(b)(2)(i). 
However, DoD also has the authority to review an individual supplier. 
DoD generally intends to exercise its right to review, audit, and 
approve contractor-approved suppliers in conjunction with a periodic 
CPSR (see FAR subpart 44.3, DFARS subpart 244.3, and DFARS 252.246-
7007(d)) or other surveillance of purchasing practices, or if there is 
credible evidence that a contractor-approved supplier has supplied 
electronic counterfeit parts. DoD shares the desire of the contractors 
to avoid significant schedule delays, cost increases, and resultant 
impairment of operational readiness.
    The contracting officer's disapproval of a contractor-approved 
source does not constitute a contract change that qualifies for 
equitable adjustment in the contract price, the delivery schedule, or 
both, pursuant to the Changes clause at FAR 52.243-1. The contract 
clause already provides that the contractor selection of a contractor-
approved supplier is subject to review, audit, and approval by the 
Government, and therefore such review, audit, and approval or 
disapproval by the Government does not constitute a change to the 
contract.
4. Is it the procurement contracting officer or the administrative 
contracting officer who approves contractor-approved suppliers?
    Comment: One respondent was concerned whether it would be the 
procurement contracting officer or the administrative contracting 
officer who would approve contractor-approved suppliers. The respondent 
was concerned about potential overlap in authority. The respondent 
recommended that a contractor be able to cite to a prior approval, if 
another contracting officer seeks approval rights. The respondent also 
questioned how a procurement contracting officer would obtain the 
quality assurance expertise needed to conduct a review, audit, and 
approval of contractor-approved electronic parts suppliers.
    Response: For a specific contract, the procurement contracting 
officer always has final approval authority, and may delegate certain 
functions to the administrative contracting officer. The contracting 
officer relies on the assistance of DoD quality experts, who make 
recommendations to the contracting officer. The FAR specifies that it 
is the administrative contracting officer who determines the need for a 
CPSR. The cognizant administrative contracting officer is responsible 
for granting, withholding, or withdrawing approval of a contractor's 
purchasing system.
5. Impact of Approval or Disapproval
a. Effect of an Approved or Disapproved Supplier on Other Contracts
    Comment: Most respondents questioned whether approval or 
disapproval of a specific supplier would impact other contracts. The 
respondents were also concerned about the scenario in which contracting 
officers disagree on the approval of a supplier on different programs. 
According to one respondent, both the revised policy and the contract 
clause focus on the review, audit, and approval of a specific supplier 
by the contracting officer on a specific contract. However, the 
respondent notes that a prime contractor may select a specific supplier 
and use electronic parts sourced from that supplier across a wide 
variety of end items and contracts. Several respondents recommended 
that the approval of one procurement contracting officer should be 
binding across all contracts where the electronic parts supplier is 
used, and also recommended a mechanism to communicate such approval or 
disapproval of a supplier across all contracts and subcontracts where 
the supplier is utilized.
    Response: If the contractor is covered by the cost accounting 
standards, the contractor's counterfeit electronic part detection and 
avoidance system under DFARS 252.246-7007 is part of the contractor's 
purchasing system. Any deficiencies in the contractor's purchasing 
system will impact the contractor across all Government contracts. If a 
contractor-approved supplier is not acceptable to the Government, the 
reasons for that unacceptability should be entered in the Government-
Industry Data Exchange Program (GIDEP) when appropriate and may lead to 
suspension or debarment of that contractor-approved supplier, in 
accordance with FAR subpart 9.4. The list of all entities suspended, 
debarred, or proposed for debarment is publicly available in the System 
for Award Management (SAM) database. Procurement contracting officers 
dealing with common issues at the same contractor would generally 
coordinate with each other and with the cognizant administrative 
contracting officer. While each contracting officer retains ultimate 
authority for decisions with regard to a particular contract, the 
contracting officer would be likely to respect the decision of another 
prior contracting office unless new facts were available. Furthermore, 
regardless of Government approval or disapproval of a contractor-
approved supplier, the contractor is responsible for the authenticity 
of parts provided by a contractor-approved supplier.
b. Approved Purchasing System
    Comment: One respondent recommended that if a contractor has an 
approved purchasing system before DoD publishes the ensuing final rule, 
the prior approval should remain in effect until the next review of the 
contractor's purchasing system.
    Response: That is generally the case. However, if due to changing 
CPSR thresholds or other circumstances, the requirement for a CPSR is 
no longer applicable to the contractor, then the approval would remain 
in effect for 3 years, after which time the status would be ``not 
applicable.''
    However, whether the approval of the contractor purchasing system 
is relevant with regard to this case would depend on whether, at the 
time of prior approval, the system contained the operational system to 
detect and avoid counterfeit electronic parts and suspect counterfeit 
electronic parts, as required by DFARS clause 252.247-7007.

[[Page 19644]]

c. Interference With Award and Performance
    Comment: One respondent stated that in no case should the review, 
audit, and approval process interfere with an award or subsequent 
performance, except in cases where a contractor-approved supplier 
reasonably creates heightened preaward risk of inserting a counterfeit 
electronic part in the supply chain or a counterfeit part is discovered 
prior to award.
    Response: It is not in the interest of DoD to interfere with the 
award or performance of DoD contracts except in cases where the risk of 
counterfeit parts is sufficiently high to counterbalance the negative 
impact on timely fulfillment of DoD requirements.
d. Impact on ``Safe Harbor''
    Comment: According to one respondent, it is unclear what happens to 
the safe harbor at DFARS 231.205-71 in the event that a contracting 
officer does not review, audit, or approve any contractor-approved 
suppliers whatsoever or until after a counterfeit or suspect 
counterfeit electronic part inadvertently escapes in the DoD supply 
chain. One condition of the safe harbor is to obtain parts per the 
clause at DFARS 252.246-7008; if the contractor complies with the 
clause in its entirety and the contracting officer does not attempt to 
review, audit, or approve any contractor-approved supplier selection, 
industry understands the new rule to indicate that if a contracting 
officer does not review, audit, and approve, or to give subsequent 
notice disapproving the use of a contractor-approved supplier, does not 
obviate the safe harbor, even where a counterfeit electronic part from 
a contractor-approved supplier may be discovered in the supply chain at 
a later date.
    Response: Whether DoD exercises its authority to review, audit, and 
approve contractor-approved suppliers has no impact on the 
applicability of the safe harbor provisions at DFARS 231.205-71, except 
to the extent that the contractor must have an operational system to 
detect and avoid counterfeit electronic parts and suspect counterfeit 
electronic parts that has been reviewed and approved by DoD, which is 
one of the required criteria for the safe harbor.
6. Notification
    Comment: One respondent requested that DoD should clarify what 
constitutes notice from DoD to discontinue acquisition of parts from a 
specific contractor-approved supplier. The respondent recommended that 
DoD should provide guidance on a standard notice format and provide for 
a centralized DoD capability to provide timely notice to contractors 
and subcontractors about any contract-approved suppliers who are 
disapproved or where specific electronic parts are disapproved or found 
to be counterfeit. The respondent did not believe that any of the 
existing disclosure models, such as GIDEP or Electronic Resellers 
Association International (ERAI), can be scaled to act as notice 
provider on parts escapes, nor that they are designed to perform such 
notice duties.
    Response: If a problem is identified in the course of a CPSR, the 
contractor will be notified in the standard means of communication 
consistent with FAR subpart 44.3 and DFARS subpart 244.3.
    The contracting officer will provide written notice to the prime 
contractor if a contractor-approved supplier is not acceptable to the 
Government. In addition, that information should be entered in GIDEP 
when appropriate. If the contractor-approved supplier is found to have 
provided counterfeit parts, that may lead to suspension or debarment of 
that contractor-approved supplier, in accordance with FAR subpart 9.4. 
The list of all entities suspended, debarred, or proposed for debarment 
is publicly available in the SAM database.
7. Subcontracts
    Comment: One respondent commented that DoD may not have the 
resources to review, audit, and approve the counterfeit-prevention 
selection process implemented by each entity in the supply chain for a 
given program and recommended that DoD adopt a more limited or flexible 
approach to flowdown of the proposed clause.
    Response: The flowdown requirement to subcontractors using 
contractor-approved suppliers of electronic parts is required by the 
statute. However, as previously stated, it is not the intent of DoD to 
review, audit, and approve the counterfeit prevention selection process 
by each entity in the supply chain, but on a selective basis, as 
determined necessary by DoD.

III. Applicability to Contracts at or Below the Simplified Acquisition 
Threshold and for Commercial Items, Including Commercially Available 
Off-the-Shelf Items

    This rule does not add any new provisions or clauses to implement 
section 885(b) of the NDAA for FY 2016, which amends section 818 of the 
NDAA for FY 2012. It revises an existing clause at DFARS 252.246-7008, 
Sources of Electronic Parts, which applies to acquisitions at or below 
the SAT and to contracts and subcontracts for the acquisition of 
commercial items (including COTS items). A determination and findings 
was signed under DFARS Case 2014-D005 on May 26, 2016, by the Director, 
Defense Procurement and Acquisition Policy, to justify the application 
of section 818(c) of the NDAA for FY 2012, as amended, to acquisitions 
at or below the SAT and to contracts and subcontracts for the 
acquisition of commercial items (including COTS items).

IV. Executive Orders 12866 and 13563

    Executive Orders (E.O.s) 12866 and 13563 direct agencies to assess 
all costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). E.O. 
13563 emphasizes the importance of quantifying both costs and benefits, 
of reducing costs, of harmonizing rules, and of promoting flexibility. 
This is not a significant regulatory action and, therefore, was not 
subject to review under section 6(b) of E.O. 12866, Regulatory Planning 
and Review, dated September 30, 1993. This rule is not a major rule 
under 5 U.S.C. 804.

V. Executive Order 13771

    This rule is not subject to E.O. 13771, Reducing Regulation and 
Controlling Regulatory Costs, because this rule is not a significant 
regulatory action under E.O. 12866.

VI. Regulatory Flexibility Act

    A final regulatory flexibility analysis (FRFA) has been prepared 
consistent with the Regulatory Flexibility Act, 5 U.S.C. 601, et seq. 
The FRFA is summarized as follows:
    This rule implements section 885(b) of the National Defense 
Authorization Act (NDAA) for Fiscal Year (FY) 2016 (Pub. L. 114-92), 
which amended section 818 of the NDAA for FY 2012. The objective of 
this rule is to provide to DoD the authority to approve contractor-
approved suppliers of electronic parts, in accordance with section 
885(b) of the NDAA for FY 2016.
    There were no significant issues raised by the public in response 
to the initial regulatory flexibility analysis.
    The review, audit, and approval of a contractor-approved source 
generally occurs in conjunction with a contractor purchasing system 
review (CPSR) or other surveillance of purchasing practices by the 
contract administration

[[Page 19645]]

office. The Defense Contract Management Agency (DCMA) performs 
approximately 128 CPSRs per year. In addition, the contract 
administration office validates about 256 purchasing systems per year. 
There is also a quality management system audit of the purchasing 
system, which is performed on a risk-based basis at least once every 
three years. There are approximately 3,292 higher-level quality 
contractors, resulting in 1,097 possible reviews per year. Adding the 
purchasing system reviews and the quality management system audits 
totals 1,481 reviews (128 + 256 + 1097). However, DCMA estimates that 
it is likely that contractors using ``contractor-approved'' sources, 
would be limited to 10 percent or less of the contractors subject to 
these audits and reviews, i.e. not more than 148 contractors. DCMA 
further estimates that of those using ``contractor-approved'' sources, 
not more than 15 (10 percent) per year would result in issues or 
disapprovals by the Government.
    This rule does not impose any reporting, recordkeeping, or other 
compliance requirements other than being subject to approval by DoD if 
the contractor or subcontractor identifies a contractor-approved 
supplier of electronic parts and the Government selects the contractor 
for review and audit. Since contractor selection of contractor-approved 
sources was already subject of review and audit, addition of ``and 
approval'' does not change much, because if the Government reviewed and 
audited a source and found a serious problem, the Government would 
require corrective action to prevent entry of such electronic parts 
into the supply chain. Furthermore, the contractor may proceed with the 
acquisition of electronic parts from a contractor-approved supplier 
unless otherwise notified by DoD.
    DoD was unable to identify any significant alternatives that would 
reduce the economic impact on small entities and still fulfill the 
requirements of the statute. However, DoD does not expect this rule to 
have any significant economic impact on small entities, because it does 
not impose any new requirements on contractors or subcontractors. 
Contractors may proceed with the acquisition of electronic parts from a 
contractor-approved supplier unless otherwise notified by DoD.

VII. Paperwork Reduction Act

    The rule does not contain any information collection requirements 
that require the approval of the Office of Management and Budget under 
the Paperwork Reduction Act (44 U.S.C. chapter 35).

List of Subjects in 48 CFR Parts 212, 246, and 252

    Government procurement.

Amy G. Williams,
Deputy, Defense Acquisition Regulations System.

    Therefore, 48 CFR parts 212, 246, and 252 are amended as follows:

0
1. The authority citation for parts 212, 246, and 252 continues to read 
as follows:

    Authority: 41 U.S.C. 1303 and 48 CFR chapter 1.

PART 212--ACQUISITION OF COMMERCIAL ITEMS


212.301  [Amended]

0
2. In section 212.301, amend paragraph (f)(xix)(C) by removing ``(Pub. 
L. 113-291)'' and adding ``(Pub. L. 113-291 and section 885 of the 
National Defense Authorization Act for Fiscal Year 2016 (Pub. L. 114-
92))'' in its place.

PART 246--QUALITY ASSURANCE


246.870-0  [Amended]

0
3. Amend section 246.870-0, by removing ``(Pub. L. 113-291)'' and 
adding ``(Pub. L. 113-291 and section 885 of the National Defense 
Authorization Act for Fiscal Year 2016 (Pub. L. 114-92))'' in its 
place.

0
4. In section 246.870-2, revise paragraph (a)(1)(ii)(C) to read as 
follows:


246.870-2  Policy.

    (a) * * *
    (1) * * *
    (ii) * * *
    (C) The selection of such contractor-approved suppliers is subject 
to review, audit, and approval by the Government, generally in 
conjunction with a contractor purchasing system review or other 
surveillance of purchasing practices by the contract administration 
office, or if the Government obtains credible evidence that a 
contractor-approved supplier has provided counterfeit parts. The 
contractor may proceed with the acquisition of electronic parts from a 
contractor-approved supplier unless otherwise notified by DoD.
* * * * *

PART 252--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

0
5. Amend section 252.246-7008 by--
0
a. Removing the clause date ``(DEC 2017)'' and adding ``(MAY 2018)'' in 
its place;
0
b. In paragraph (b) introductory text, removing ``(Pub. L. 113-291)'' 
and adding ``(Pub. L. 113-291 and section 885 of the National Defense 
Authorization Act for Fiscal Year 2016 (Pub. L. 114-92))'' in its 
place; and
0
c. Revising paragraph (b)(2)(iii).
    The revision reads as follows:


252.246-7008  Sources of Electronic Parts.

* * * * *
    (b) * * *
    (2) * * *
    (iii) The Contractor's selection of such contractor-approved 
suppliers is subject to review, audit, and approval by the Government, 
generally in conjunction with a contractor purchasing system review or 
other surveillance of purchasing practices by the contract 
administration office, or if the Government obtains credible evidence 
that a contractor-approved supplier has provided counterfeit parts. The 
Contractor may proceed with the acquisition of electronic parts from a 
contractor-approved supplier unless otherwise notified by DoD; or
* * * * *
[FR Doc. 2018-09491 Filed 5-3-18; 8:45 am]
 BILLING CODE 5001-06-P