Thursday, September 28, 2006

DoD Contractors Beware of the RFID Exemption Cramdown

RFID Law Journal
Newsletter No. 19
September 28, 2006

Subsequent to its July, 2004 issuance of its official policy of implementing passive RFID standards, the Department of Defense has been abundantly clear on the point that RFID, along with usage of the Wide Area Workflow (“WAWF”), will quickly shift into the standard means of its doing business. Electronic invoicing is “here to stay.” At this point, the DoD is shifting its policy from one of incenting its suppliers with carrots (e.g., vendors receive faster payment when they elect to do business electronically; certain vendors qualify for reimbursement of IT purchases, etc.) to one of punishing them with sticks (e.g., vendor scorecards, fines, etc.) Unprepared vendors disregard these new standards at their own peril.

Certainly some vendors are approaching RFID on an one-off basis, especially where their DoD business constitutes a small percentage of their overall business. For example, vendors dealing with small, infrequent shipments are trying out pre-printed labels (and buying a RFID reader for verification purposes), but such solutions are typically not very scalable, as these vendors run into higher clerical costs associated with manually keying in and sending advance ship notice (i.e., an ASN) to the WAWF. Automated RFID solutions are clearly the preferable choice, especially for parties selling to the DoD in volume (or supplying to multiple organizations requiring RFID tagging, e.g., Wal-Mart and the DoD), but notwithstanding the obvious benefits (including, for many vendors, a positive ROI), many vendors are seeking to defer incurrence of the cost. Over the past year, one of the favored approaches to “adoption” among some DoD vendors has been obtaining deferrals/exemptions from their contracting officers. The Department of Defense has taken steps to shutdown this loophole in lockstep with its expansion of its passive RFID shipment regulations.

As mentioned in prior newsletters, the Department of Defense initiated interim changes to the RFID DFAR in May, 2006, noting that it was now in the second year of its three-year passive RFID policy rollout. Having wired 20+ DLA depots and distribution centers for RFID[1], the DoD is now requiring its suppliers (shipping into these affected depots) to use passive RFID tagging in their shipments under its interim RFID rule. Given that the universe of affected depots is essentially all the depots located in the Continental United States (i.e.,10x of the number of the depots affected in the period of November, 2005 through June, 2006) and that the number of affected classes has also doubled, the interim changes to the RFID DFARs[2] are now impacting a vastly larger group of suppliers than at this time last year. The DoD has established policies at the contracting officer level which will make it increasingly difficult for its suppliers to defer committing to its electronic payment system (i.e., use RFID and the WAWF).

Companies doing business in volume with the DoD are learning that seeking waivers from contracting officers is no loner a viable option. New policies shift the burden clearly onto the vendor in the case of an opt-out, making it clearly more desirable from an administrative perspective to deal with RFID-compliant contractors. A contracting officer (under Contracting & Production Policy Memo No. 06-20 and Memo No. 06-32), must satisfy, in pertinent part, the following five (5) pre-conditions before granting a waiver of RFID requirements:

1) If a contracting officer receives no RFID-compliant offer, then the lowest evaluated offeror must be engaged in negotiations with respect to compliance with the RFID requirement.
2) The contracting officer must indicate in the file the non-existence of a RFID-compliant offer.
3) In the case of a “sole source,” the contracting officer must document that no other sole source is available and indicate that such is the reason for the waiver.
4) The contracting officer must conclude that failure to grant the exemption would impair the DSCP’s ability to support its mission.
5) The non-complying vendor must agree to a “get well” date for mandatory compliance and potentially provide a lowered price.

The mandatory DFAR 252.211-7006 (RFID) must be included in the contracts, even if a waiver is granted. A case-specific justification must be specified in the file. The contracting officer must also document the waiver/exemption in a letter to the contractor, with inclusion in the letter of contractor’s commitment to a “get-well” date. Failure to “get well” (i.e., adopt RFID for shipping to the DoD) is now viewed as the basis for a breach of contract. If, as of the “get-well” date, there is non-compliance, the contracting officer must document it in the file, resulting in a potential negative performance rating for future business with the government. The contractor must supply the “get-well” plan to the contracting officer, and it’s included in the file, too. All contracting officers must maintain records of waivers and exemptions so that DLA HQ can track these statistics. And there is a monthly reporting system to monitor these statistics. In short, the DoD has laid out significant incentives for contracting officers to seek compliance from the suppliers and punish non-compliant vendors.

We’ve included links to CP No. 06-20, CP No. 06-32 and the current RFID notice found on the DLA’s bid board system as an additional resource for readers.

May 9, 2006
Contracting & Policy Production Memorandum No. 06-20
Interim Guidance on Waiver of Passive RFID Requirements

On July 17, 2006, the Contract & Policy Production Memorandum No. 06-32
(Subject: Radio Frequency Identification) was issued, incorporating CP Memo 06-20 into the DGPA. You can locate CP Memo 06-32 through the following link:

DLA Notice – Passive RFID

© 2006 – RFID Law Journal, LLC. All rights reserved.

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[1] The contracts specify completion of hardware and middleware deployment by the end of September, 2006.
[2] See e.g., DFAR 211.275-2 and DFAR 252.211-7006.


Blogger Mickey_Mouse said...

I have my labels pre-printed as it saves me a lot of time and hassle. And with the british labels company the prices are so reasonable it would be silly not to get them printed.

7:56 AM  

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