Uncle Sam’s Strong Arm: Contracting Under the Defense Production Act

The COVID-19 pandemic threatens to stretch Americans’ medical resources incredibly thin. From disposable face masks to respirators, there is real concern that current supplies will be insufficient to treat the anticipated influx of COVID-19 patients. To address this problem, many have pointed to the Defense Production Act as a way to increase production of this essential equipment. This is largely because the Defense Production Act substantially modifies some of the core government contracting principals articulated in the FAR.

From a legal standpoint the Defense Production Act provides some extraordinary powers to the President to increase domestic production in time of crisis, powers that drastically differ from the procedures of the FAR. Importantly, these changes would only impact procurements conducted directly under Defense Production Act authority. For those businesses subject to its provisions, though, the differences could be quite stark.

Chief among the extraordinary powers found in the Defense Production Act is compulsory contracting. Indeed, the President may “require acceptance and performance of such contracts or orders in preference to other contracts or orders by any person he finds to be capable of their performance[.]” 50 U.S.C. § 4511(a). This sweeping power means that businesses not traditionally involved in the federal contracting could find themselves very much a part of it, and in short order.

Compulsory contracting is a substantial deviation from the FAR’s traditional procurement process. Under the FAR, the government typically publicizes contract solicitations to increase competition and broaden industry participation. FAR 5.002. Indeed, competition among offerors is a hallmark of the traditional federal government contracting process. FAR 6.101. Importantly, the competitive proposal process relies on businesses responding to a solicitation. If a contractor does not wish to do business with the federal government, it does not need to submit a proposal. The FAR’s optional participation stands in stark contrast to the Defense Production Act, which compels capable contractors to both accept and perform contracts.

Next, the Defense Production Act further compels contractors to prioritize contracts issued under the Act over all other contracts. Specifically, the President may “require that performance under contracts or orders (other than contracts of employment) which he deems necessary or appropriate to promote the national defense shall take priority over performance under any other contract or order[.]” 50 U.S.C. § 4511(a).

The Defense Production Act’s compulsory prioritization is another substantial deviation from the traditional federal contract. While any contract with the federal government will obligate performance, the FAR does not require that the government’s contract be prioritized. As long as performance meets the expectations stated in the Contract, federal contractors are free to prioritize projects as they see fit. There’s no such flexibility for procurements initiated under the Defense Production Act.

To facilitate the production of essential materials under the Defense Production Act, the President may also place unique restrictions on performance. For example, the President may “restrict[] contract solicitations to reliable sources[,]” or “restrict[] contract solicitations to domestic sources pursuant.” 50 U.S.C § 4517(b)(2). Thus, the President can also limit the field of potential suppliers substantially.

This is yet another significant departure from the FAR, which generally requires that “contracting officers shall promote and provide for full and open competition in soliciting offers and awarding Government contracts.” FAR 6.101(a). While agencies may exclude sources from competition under the FAR, any such exclusion would require a written justification for the action. FAR 6.202. Consequently, exclusions happen with less frequency.

So with the power to restrict the sources of production, what opportunities are there for small businesses to participate? Under the Defense Production Act, small business participation remains a cogent consideration. As the Act explains:

The President shall accord a strong preference for small business concerns which are subcontractors or suppliers, and, to the maximum extent practicable, to such small business concerns located in areas of high unemployment or areas that have demonstrated a continuing pattern of economic decline, as identified by the Secretary of Labor.

50 U.S.C. § 4518(a). To that end, a small business can receive a “strong preference” for award in situations where a small business’s proposal:

(A) has the support of the department or agency which will provide the guarantee;

(B) reflects that the small business concern has made arrangements to obtain qualified outside assistance to support the effective utilization of the advanced manufacturing equipment being proposed for installation; and

(C) meets the [other requirements] of this title.

50 U.S.C. § 4518(b)(2). As such, the Defense Production Act does not leave small businesses high and dry. To the contrary, there are specific mechanisms to provide preferential treatment for small businesses, particularly when the small business supplier has the support of an agency.

Nevertheless, the Defense Production Act’s small business preference does differ from the traditional FAR set-aside model. As many SmallGovCon readers are likely aware, the typical method for encouraging small business participation is in the form of small business set-aside opportunities, which limit participation to small businesses. FAR 6.203. Set-asides typically occur when there is a reasonable expectation that two or more small businesses will submit responses at reasonable prices. FAR 19.502-2. The Defense Production Act, however, contains no set-aside procedure. Instead it merely establishes a “strong preference” for small business participation.

Ultimately, the Defense Production Act upends some or the core expectations of federal contracting, including voluntary participation, full and open competition, and work independence. These extraordinary powers are designed to provide necessary industrial capacity when the country needs it most. How these powers will manifest, however, remains to be seen. The Defense Production Act is not frequently invoked, and substantial questions remain regarding its implementation in response to the COVID-19 pandemic.

As a final note, the Defense Production Act also expressly prohibits the hoarding “in excess of the reasonable demands of business, personal, or home consumption” any materials that he President deems “scarce” materials. 50 U.S.C. § 4512.

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