GOVERNMENT POLICY

June 2006

Defense Production Act Speeds Up Wartime Purchases

By Stuart B. Nibley

One procurement tool that the government is using vigorously to accelerate its response to recent terrorist threats has been available since 1950 — the little-known Defense Production Act.

This law, known as DPA for short, and the regulations that implement it, the Defense Priorities and Allocation System, or DPAS, authorize the president to:

• Require performance under government-placed contracts or orders deemed necessary or appropriate to promote the national defense.

• Allocate materials, services and facilities as necessary.

• Control the distribution of scarce and critical materials.

The DPA’s fundamental purpose is to allow the federal government to jump to the front of a contractor’s production line or service orders during emergencies.

It is the mandatory nature of the DPA that gives the act its teeth. Although the program is administered by the Commerce Department’s Office of Strategic Industries and Economic Security, it is used most frequently by the Defense Department.

Under the DPA, a federal agency unilaterally can place a contract with a particular contractor or direct a change to an existing federal contract. Such contractual actions are known as “rated orders.”

The Pentagon can place rated orders with any domestic individual, corporation, partnership, association or other organized group of persons, as well as state and local governments and agencies. A recipient must give a rated order preferential treatment over any other business.

Similarly, a prime contractor is required to use rated orders with its suppliers in order to fill a rated order it has received from the government. Therefore, even companies and suppliers that have never performed government contracts previously and may have no desire to do so must accept rated orders. Failure to comply can result in civil and criminal sanctions.

It takes little imagination to understand how the DPA system can cause problems for companies that have never contracted with the federal government. Many businesses steer clear of the government in order to avoid the web of compliance-related issues that attends the execution of all but the smallest contracts.

Any company can be compelled to perform a rated order (provided the product or service sought by the order is not wholly foreign to the firm’s product line). With such performance comes a host of tedious obligations that some companies seek to avoid.

For example, the DPA imposes relatively burdensome record-keeping requirements. Contractors are required to maintain accurate and complete records of each rated order transaction.

The DPAS, for its part, authorizes the Commerce Department to conduct audits and investigations by examination of books, records, documents, other writings and information to ensure that the provisions of the DPA and related statutes have been followed.

Similarly, DPAS does not exempt non-government contractors that receive rated orders from many of the tricky statutory and regulatory requirements with which traditional government contractors routinely struggle, such as those imposed by the Truth In Negotiations Act or the Cost Accounting Standards. Each of these regulations, however, permit agency heads to waive requirements in certain instances, such as those involving national security.

In most instances, both government contractors and non-government contractors are quite pleased to receive rated orders. After all, receipt of a rated order means more guaranteed business on an accelerated basis. But even long-standing government contractors often find the nuances of the DPAS scheme to be highly leveraged in favor of the government.

One of the more obvious and pervasive problems with the rated order system is the disruption the system can cause to a contractor’s delivery schedule and relationships with valued customers.

Contractors can be forced to defer work and deliveries for other customers in favor of the government. At best, this can cause considerable delays and disruptions for the non-government customers. At worst, the contractor can lose those customers.

While the DPA insulates prime contractors from liability to subcontractors for excess costs incurred as a result of performing rated orders, it also prevents prime contractors from recovering such damages from the government. Moreover, while the DPA prevents the government from forcing a prime contractor to provide a product for an unreasonably low price, it prohibits contractors from charging above-market prices. The regulations provide essentially no guidance regarding what constitutes a “comparable unrated order” or a “fair market” price.

Contractors also sometimes face the dilemma of attempting to perform multiple rated orders for the same item for different agencies. In such instances, the contractor is faced with the conundrum of attempting to decide which agency will receive delivery first.

The regulations offer some, although slight, guidance in this regard. Of greater assistance are employees of the Department of Commerce’s Office of Strategic Industries and Economic Security, who attempt to help contractors deal with agency or subcontractor conflicts.

A thorny subcontractor issue arises from the DPA’s limited jurisdiction. The DPA is a U.S. law and may not be enforced beyond the boundaries of the United States. Thus, a prime contractor that receives a rated order cannot force a foreign subcontractor, even an essential one, to accept and perform such an order. However, the Defense and Commerce Departments often can enlist the services of the foreign subcontractor’s government to convince the recalcitrant to accept the rated order.

In most instances, both government and contractor are pleased that the DPA arms the government with the tools it needs to accelerate the purchase of products and services for the nation’s security. However, the DPA was conceived and enacted as an extraordinary war-time remedy, not a day-to-day tool to be used in place of standard peacetime procurement rules.

The DPA is laced with provisions and omissions that leave gaps in the traditional relationship between the government and its contractors. Patriotic contractors will embrace the opportunity to assist the federal government. However, in doing so, they also must remain contractually agile and ever vigilant in guarding their legal rights.

Stuart B. Nibley is a partner in the firm of Thelen Reid & Priest LLP, Washington, DC and is a member of NDIA’s Procurement Division.

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