DoD's New Anti-Counterfeit Rules Are Confusing Defense Contractors

Many contractors admit they will be unable to immediately comply with a rule, taking effect by March 2014, that would require contractors to either develop a new system for detecting counterfeit electronic parts or forego payment.

The Pentagon is under pressure to address congressional concerns about the risk of weapons systems failing if adversaries or sloppy suppliers slip in unauthorized components. That's because the deadline for carrying out a 2011 defense authorization law  calling for anti-counterfeit regulations was almost two years ago.

But the military sector is unprepared for all the pending requirements, partly because the Defense Department has not offered an explanation for what an acceptable system must do. Industry members told Pentagon officials as much earlier this summer during meetings and in written comments on a draft rule. Officials say they are reviewing company concerns but still plan to release the mandates during the first quarter of calendar year 2014.

"The rule will take effect when the final rule is published," Defense spokesman Mark Wright said in an email on Thursday.

It was more than a year ago that a Senate Armed Services Committee two-year investigation uncovered in excess of 1 million suspect electronic parts in the Pentagon supply chain. The suspected bogus components were found in mission computers for a Terminal High Altitude Area Defense missile, military aircraft and other key systems. The infractions were traced to China more than 70 percent of the time. 

The contracting community agrees that equipping warfighters with counterfeit electronics is a real concern, said Alan Chvotkin, counsel at the Professional Services Council, an industry group. But the Pentagon should consider delaying enforcement of the rules, he said.

"Whatever they adopt as a regulation, my guess is there will be very few companies that will be able to comply from day one," Chvotkin said.

Approximately 400 to 1,200 prime contractors covered by the rule will have to change their existing purchasing system -- a mix of computer applications and manual procedures required to do business with the government that document purchases from a chain of suppliers.

"We cannot build a system based on the nine little bullet points here [in the draft] and hope that DoD will approve" the system, said Steve Charles, co-founder and executive vice president of government supplier immixGroup. "There is no criteria on what would be an approved system. And this is going to hold up a prime contractor's payments? We need more detail . . . Building a computer system takes a lot of detail."

Some examples of the bullet points: "The training of personnel" and "Processes to abolish counterfeit parts proliferation." He described the attributes as “pretty broad.”

Another industry concern is that an error in the counterfeit system could disrupt the entire purchasing system, since the two processes would be interconnected. 

"We are injecting into this mature system an unknown," said Trey Hodgkins, a senior vice president with TechAmerica, a trade association. "You're going to have kinks." 

Members of the Council of Defense and Space Industry Associations have asked officials for the option of building a separate, standalone anti-counterfeit system. Or else, as association officials said in July comments, "this could literally stop a major contractor in its tracks even if the counterfeit intrusion had nothing to do with purchasing practices and controls.”

Right now, Pentagon officials are evaluating industry’s uneasiness about the system requirements, Wright said, adding the criteria and rationale will be released with the final rule. 

He added, "Capitol Hill is aware of the status of DoD efforts to implement" the law and aware of "the fact that this is a multi-pronged effort" involving several other pending rules related to unauthorized equipment in the supply chain.

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