The Biden administration has vowed to invoke the Defense Production Act (DPA) to increase domestic production of essential supplies needed to respond to the COVID-19 pandemic. In this Insight, we address key features of the DPA, guidance for companies that may receive a rated order, financing incentives offered by the DPA, and how we anticipate the Biden administration will use the DPA over the next year.
THE DEFENSE PRODUCTION ACT OF 1950
- The statute provides the president with “an array of authorities to shape national defense preparedness programs and to take appropriate steps to maintain and enhance the domestic industrial base.”
- It is now used to enhance and support domestic preparedness, for response and recovery from natural hazards, terrorist attacks, and other national emergencies.
- Under the DPA, the president may require companies to prioritize and accept contracts for materials and services as necessary to promote the national defense, incentivize the domestic industrial base to expand production and supply of critical materials and goods, and establish voluntary agreements with private industry. The president may delegate these authorities to department and agency heads.
RESPONDING TO RATED ORDERS
- Rated orders are prime contracts, subcontracts, and purchase orders in support of an approved program. They must include four elements:
- A priority rating
- Specific delivery quantities and date(s)
- Statement identifying governing Federal Priorities and Allocations System (FPAS) regulation
- Signature of the contracting officer, certifying the rated order
- There are two types of rated orders: DO- and DX-rated orders. DO-rated orders are urgent orders; DX-rated orders are critical orders that take priority over DO-rated orders. Rated order status flows through to the entire supply chain.
- Manufacturers must accept a rated order if they make or buy the item, normal terms of sale apply, and they can meet the required delivery dates. They should place rated orders with suppliers for the materials needed to fulfill that rated order, and they may not “discriminate” against rated orders in any manner.
- There are limited, mandatory and optional rejections spelled out in the DPA. If rejecting an order, companies must give reasons, in writing, for the rejection.
- Both government contractors and commercial suppliers can be required to comply with rated orders. The DPA generally does not apply to foreign suppliers.
- Willful violations of the DPA may be penalized. However, no person can be held liable for damages or penalties for acts or failures to act resulting directly or indirectly from compliance with a rule, regulation, or order issued pursuant to the DPA.
- The DPA also provides for incentives to build an industrial base – for example, through loans, grants, purchases, or purchase commitments. In addition to being used to address the COVID-19 pandemic, the DPA is being used to enhance national security, the industrial base, and onshoring.
- DPA Title III authorizes loans to private business enterprises that are designed to reduce current or projected shortfall of industrial resources, critical technology items, or materials essential for the national defense.
- Among the loan conditions, financial assistance may be extended only to the extent that it is not otherwise available from private sources on reasonable terms, during periods of national emergency declared by Congress or the president, and requires consideration of whether the prospective earning power of the loan applicant and the character and value of the security pledged provide a reasonable assurance of repayment of the loan in accordance with the terms of the loan.
- The Department of Defense and United States International Development Finance Corporation (DFC) are working together in order to identify the critical investments that the government wants to make and borrow expertise of the DFC in originating, underwriting and managing the loans. Companies approached about a loan would likely work with this joint cooperative endeavor.
BIDEN ADMINISTRATION’S EXPECTED USE OF THE DPA
- The Biden administration has publicly stated that it intends to use the DPA to combat the COVID-19 pandemic. In particular, the administration is likely to use the DPA to accelerate COVID-19-related supply chains.
- The administration has identified 12 categories of critical supplies that will accelerate the manufacture, delivery, and administration of COVID-19 vaccines.
- The six vaccine candidates being developed as part of Operation Warp Speed, as well as companies manufacturing COVID-19 therapeutics, have priority DPA ratings.
- On January 21, 2021, President Joe Biden signed an executive order that directs federal agencies to use all available legal authorities, including the DPA, to fill supply shortfalls that are critical to the COVID-19 pandemic response.
- President Biden is looking at the use of rated order and possible incentives under DPA Title III to expand the industrial base. Another part of the executive order is a long-term strategy to develop secure supply chains for other national security considerations, as it includes a requirement of the agencies to design, build, and sustain a long-term capability in the United States to manufacture supplies for future pandemics and biological threats.
These insights and more were shared during our webinar titled “The Defense Production Act and the New Administration” on February 4, 2021. Visit our Navigating the NEXT page for more COVID-19 news and thought leadership.