Leverage Canada's Defence Industry to Strengthen Supply Chain

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In February 2021, the United States and Canada jointly issued the “Roadmap for a Renewed U.S.-Canada Partnership,” strengthening bilateral supply chain security and reinforcing the profoundly interconnected and beneficial economic relationship between the two countries.

One key aspect of the roadmap is defense. The two nations have a long history of defense procurement cooperation. Dating back to World War II, defense cooperation between the two nations has progressed significantly, fostering a seamless collaboration and coordination that bolsters regional security in North America and extending its positive impact globally.

In 1956, the U.S. Defense Department and Canada signed the Defense Production Sharing Agreement to reduce barriers and create an even playing field for U.S. and Canadian defense industry stakeholders. What has developed is an integrated supply chain in defense of North America that supports shared defense and security objectives.

The agreement supports these objectives by providing opportunities for Canadian suppliers to compete on U.S. contracts, thereby expanding the Defense Department’s supply base. It works similarly to the U.S. Foreign Military Sales program, utilizing government-to-government agreements. Complementing legislation such as the Defense Federal Acquisition Regulation Supplement 225.870 provides guidance on how to contract with Canadian contractors.

When the department issues solicitations, a Canadian contractor can bid on the same terms as a U.S. defense contractor since they are deemed domestic entities. However, interpreting “domestic” to include Canada is a little-known fact that may be a surprise to both contracting officers and Canadian industry.

With the rise of an integrated global supply chain and the inherent risks that have become newsworthy, such as COVID-19, and the 2020-2021 backup at the Port of Los Angeles, the agreement has become even more important.

With Canada included as part of the U.S. defense industrial base, two established trade and security partners have the opportunity to carry out a common approach to modernizing defense and confronting global challenges.

DFARS 225.870 outlines the approach when contracting with Canada and kicks in when department contracts exceed $250,000.

Under specific circumstances, the Defense Department has provisions that allow for direct contracting with Canadian contractors. These exceptions apply in cases involving negotiated acquisitions for experimental, developmental or research work. Furthermore, they also cover acquisitions deemed of unusual or compelling urgency, acquisitions at or below the simplified acquisition threshold and acquisitions made by U.S. activities situated in Canada.

When the requirement exceeds the $250,000 threshold, the DFARS states that contracts shall be made through the Canadian Commercial Corporation, the Canadian government’s designated contracting authority.

It makes clear the “government of Canada guarantees to the U.S. government all commitments, obligations and covenants of the Canadian Commercial Corporation under any contract or order issued to the corporation by any contracting office of the U.S. government.”

The sequence of events, whether on a sole source or competitive contract, is for the Canadian contractor to prepare the bid response, submit it to the U.S. contracting officer and identify the Canadian Commercial Corporation as the government partner.

Through the Canadian Commercial Corporation, the Canadian government will then confirm this with the U.S. contracting officer by issuing an endorsement letter, thus initiating the government-to-government channel. When combined with the supplier’s offer, this constitutes the government’s offer.

The letter may include some exceptions that would apply to the procurement, such as a waiver of requirements for submission of cost or pricing data, a request for a duty-free certificate and attestation to fair and reasonable costs for sole source requirements.

Deciding a fair and reasonable price is fundamental to the contracting process. Under the Defense Production Sharing Agreement, the approach to fair and reasonable is that both countries make determinations and findings according to their own accounting standards.

While both countries’ fair and reasonable methods differ, the objective outcome is to ensure that the price would be no higher than what each government would pay for itself. This aspect of the government’s assessment is most often applied in a sole source setting since, during a competitive process, the competitor’s offer establishes the range.

While not included in the letter, there is recognition that the Buy America Act does not apply because the Defense Department has assessed the act as incompatible with its commitment under various international agreements including the Defense Production Sharing Agreement.

Canada is specifically listed as a qualified country to which the Buy America Act exception applies. See DFARS 225-872-1. At the end of the solicitation process, if the Canadian government’s offer is accepted, the U.S. contracting officer issues the contract to the CCC and specifies the Canadian contractor as the subcontractor.

While CCC is the government’s authority, the governance of these contracts is assumed by a broad range of federal authorities including the Canadian Department of National Defence and Public Services and Procurement Canada. This approach is similar to the U.S. Foreign Military Sales program that leverages government stakeholders to meet national security objectives.

The Department of State has described the U.S. defense arrangements with Canada as the most comprehensive compared to any other country. Furthermore, the Canadian defense industrial base has acknowledged the nation’s unique distinction within the Defense Federal Acquisition Regulation Supplement.

Canada, the sole country specified in the DFARS, provides a significant advantage to the United States in acquiring goods and services that can be delivered in accelerated time due to the shared border, where exports and imports operate seamlessly. This privileged status reinforces the strong bond between the nations and streamlines defense procurement processes. Incorporating Canadian suppliers into the defense supply chain adds diversity and enhances the opportunities for innovative Canadian solutions that could benefit both countries. ND

Suzanne Wilkinson is a defense acquisition professional and a recent graduate of the University of Dayton School of Law Government Contracting Program.

Topics: Industrial Base