Defense Production Act: Government Contractor Cheat Sheet

Merle M. DeLancey Jr.

On March 18, 2020, by Executive Order (“E.O.”), President Trump invoked the Defense Production Act of 1950 (“DPA”). The E.O. delegates DPA authority to the Secretary of the Department of Health and Human Services with respect to “all health and medical resources needed to respond to the spread of COVID-19 within the United States.” This means that the performance of rated contracts and orders (i.e., certain contracts and orders in support of programs covered by the DPA, as explained below) must be prioritized over competing commercial or non-rated governmental obligations—even if doing so could result in a breach of other obligations.

Set forth below is a checklist for contractors that have received (or believe they may receive) a rated order from a federal government agency:

1. Memorialize Standard Operating Procedures (“SOP”)

Effectively managing rated orders requires careful attention, particularly given the operational disruptions from coronavirus COVID-19. A company should consider establishing (or updating) SOPs for rated orders covering the following:

      • Designating a Point of Contact (“POC”) Responsible for Rated Orders. Publicize the POC within the company so that management and employees (e.g., C-Suite, Sales, and Marketing) who do not normally handle government contracting matters know who to contact.
      • Establish a Process to Communicate with Subcontractors. A prime contractor in receipt of a rated order stands in the shoes of the federal government and is required to notify applicable subcontractors of compliance with the rated order. Consider notifying subcontractors of the possibility of receiving a rated order and provide background on the DPA so they are not caught by surprise.
      • Establish a Commercial Customer Communications Plan. Because a rated order can delay or interfere with performance of commercial contracts, consider keeping commercial customers aware of potential impacts in the event that the government issues a rated order.
      • Frequent Communication with Contracting Officers. If the company believes it might receive a rated order, establish clear lines of communication with your Contracting Officers. Provide or re-confirm contact information for the company’s POC for rated orders.

2. Initial Assessment of a Rated Order

Upon receipt of a rated order, a contractor should first assess the validity of the Order. To be a rated order, a contract or order must be in writing and include four elements:

      • A priority rating (e.g., DX-__ or DO-__;
      • Specific delivery quantities and dates;
      • A statement that identifies the governing federal regulation; and
      • The signature of a contracting officer, certifying the rated order.

3. Acceptance/Rejection of a Rated Order:

      • A Contractor Must Accept a Rated Order if:
        • the ordered item or service is normally sold by that business; and
        • the business can satisfy the delivery terms;
      • A Contractor May Reject a Rated Order:
        • If the agency official placing the rated order is unwilling or unable to meet regularly established terms of sale or payment;
        • If the rated order is for an item not supplied or for a service not performed; or
        • If the rated order is for an item produced, acquired, or provided only for the contractor’s own use for which no orders have been filled for two years prior to the date of receipt of the rated order.
      • Rejecting a Rated Order Because Unable to Satisfy Delivery Requirement
        • A company must reject a rated order if it is unable to satisfy the delivery date requirement. Scheduling conflicts do not constitute an inability to fill the order, unless with another, higher- or identically rated contract or order. In such cases, the company must offer to fill an order on the earliest acceptable date.

4. Enforcement and Liability Protection

A contractor is prohibited from discriminating against the government in any way, for example by charging higher prices or by imposing different terms and conditions than for comparable unrated orders. Section 103 of the DPA (50 U.S.C. § 4513) also provides potential criminal penalties for any person who willfully fails to comply with the Act.

The DPA and applicable regulations provide that a contractor cannot be held liable for damages or penalties for any act or failure to act resulting directly or indirectly from compliance with a rated order. See Section 707 of the DPA (50 U.S.C. § 4557). Thus, while the DPA does not provide for contractor indemnification or immunity from actions, a contractor cannot be held liable for damages under a commercial contract or an unrated or lower rated government contract for breach because the contractor was performing a rated order.

As COVID-19 issues permeate virtually all aspects of commerce nationally and internationally, we stand ready to help. Blank Rome’s Coronavirus (“COVID-19”) Task Force includes interdisciplinary resources across every business sector from insurance recovery to HR.