Infotech and the law: Contractors worry about UID requirements added costs

Eliza Nagle

The Defense Department released April 22 its long-awaited Unique Item Identification and Valuation final rule.

Although an interim UID rule had let the Pentagon apply the requirements to solicitations issued on or after Jan. 1, 2004, the final rule offers few of the concessions that industry had requested to reduce the rule's scope and impact.

The UID requirements are the Defense Department's response to criticisms that the agency lacked reliable information for reporting, tracking and verifying the property it owned.

The purpose of the UID system is to track each piece of equipment or "item," which the rule defines as a single hardware article or unit formed by a grouping of subassemblies or components.

The UID rule requires contractors to mark items that have an acquisition cost of $5,000 or more with a unique identifier, such as a serial number that is globally unique.

The department may specify that certain other items having an acquisition cost of less than $5,000 be marked. The rule also requires contractors to report the item's value at the time of delivery to the Defense Department.

The final rule is the culmination of many years of effort by Pentagon officials to establish a UID policy. Although that effort included numerous discussions with industry, many contractors remain concerned about the rule's scope and impact. UID requirements affect only those contractors that supply items to the Defense Department, but they could have a significant impact on those contractors.

For example, the UID requirement comes with a cost that could negatively affect commercial item contractors and small businesses.

As stated in one comment to the final rule, for commercial companies to continue to do business with the Defense Department, many will need either to establish separate assembly lines or overhaul and convert existing systems to meet the UID requirements. Either approach would be expensive to implement and could prevent contractors from doing business with the Pentagon.

In response to this concern, the Defense Department stated that the UID requirements were a "strategic imperative" and, because the Pentagon acquires many items from commercial suppliers, those items could not be excluded from coverage.

The Defense Department also refused to exempt General Services Administration Federal Supply Schedule "items" from UID requirements.

As a compromise, the Defense Department created an exception for commercial items when it is "more cost-effective" for the government to mark the item after delivery. The Defense Department offered this same concession in response to concerns that small businesses would be severely affected by the new requirements.

This small exemption in practice may do little to alleviate the economic impact on contractors. It is unclear what the Defense Department will consider to be more cost effective.

Moreover, the procedure to obtain the exception is somewhat burdensome. It requires either the component acquisition executive or the head of the contracting activity to execute a determination and findings.

As a result, it appears unlikely that the Defense Department will routinely issue these determination and findings. Consequently, the exception the Defense Department offers for commercial items may have little practical effect.

What's more, UIDs are merely the Defense Department's first step in creating its system to track and account for inventory. The Pentagon next moves to radio frequency identification for tagging cases, pallets and item packaging. Although the RFID implementation schedule is not as aggressive as the UID schedule, RFIDs soon will be another requirement that many contractors must shoulder.

Eliza Nagle is an associate in the Government Contracts practice of DLA Piper Rudnick Gray Cary LLP in Washington. Her e-mail address is eliza.nagle@dlapiper.com.

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