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Supply Chain Impact of President Trump’s Executive Order Under the Defense Production Act

March 21, 2020

On March 18, 2020, in response to bipartisan calls from Congress and governors across the US, President Trump issued an executive order finding that health and medical resources needed to respond to the spread of COVID-19 meet the criteria under the Defense Production Act (DPA) to be given priority for purposes of supporting the national defense. The order identifies personal protective equipment (PPE) and ventilators as specific types of health and medical resources that will now be given priority. Examples of PPE the order is likely to cover include masks, goggles, gowns and gloves. Other health and medical resources, such as diagnostic test supplies, may soon be added to the list as the executive order delegates authority to the Secretary of Health and Human Services (HHS) to identify additional specific health and medical resources that meet applicable criteria under the DPA.

Because ongoing US production of essential health and medical resources is already addressing shortfalls related to the domestic impact of the COVID-19 pandemic, some experts, including at the Center for Strategic and International Studies, believe that the President’s invocation of the DPA may be used principally to provide financial incentives for increased and expanded production efforts. Moreover, soon after issuing the order, President Trump shared via social media that he, “only signed the [the order] … should we need to invoke it in a worst case scenario in the future.” In response, expressing the collective sense of urgency of state governments throughout the US, in a March 19, 2020, memorandum to the President and Vice President Mike Pence, the National Governors Association included in its list of top state priorities in response to the COVID-19 outbreak, “guidance on implementation of [the] Defense Production Act to include what health and medical resources Secretary of Health and Human Services Azar is prioritizing under his new authority.”

This advisory provides an overview of the DPA and what this executive order could mean for government contractors and their supply chains.

As discussed in our prior advisory, the DPA provides the President and delegated federal agencies the authority to essentially force private companies to prioritize orders rated for national defense. Rated orders may cover not only the manufacture and delivery of goods, but may also apply to services. What this means, in practice, is that companies must put the federal government’s orders at the front of the line to ensure timely delivery under a rated order. Companies receiving a rated order must also place rated orders with their suppliers (with limited exceptions) to meet delivery requirements, which means that entire supply chains may soon be subject to rated order requirements.

Many DoD contractors and subcontractors are already very familiar with the Defense Priorities and Allocation System (DPAS), as implemented by regulations issued by the Department of Commerce. 15 C.F.R. 700 et seq. Companies may be less familiar with the Health Resources Priorities and Allocations System, as implemented by the Department of Health and Human Services. 45 C.F.R. 101 et seq. The President’s recent executive order very likely will mean that private companies that have either never done business with the federal government or have done so on more routine “commercial item” basis may suddenly be faced with rated orders. Rated orders must be accepted or rejected in writing within specified periods of time. Moreover, the bases for rejection are specific and narrow. Ultimately, willful refusal to comply with a rated order can subject private companies and individuals to a variety risks, including potential criminal charges.

Companies with products and services that may fall within the scope of health and medical resources should immediately familiarize themselves with the DPA, its implementing regulations, and any nationwide priorities and regulations that may be established by the HHS Secretary. Given the pace of the pandemic and the changes and disruptions to the supply chain that are already being observed, another key consideration is how the DPA and the national security needs that it seeks to address in operation collide with state and local police power. Specifically, contractors and/or their suppliers are very likely located in places where workers have been encouraged or directed to work from home, among other social distancing practices that have been recommended or mandated. Similarly, business operations have likely been impacted by travel restrictions, significantly limited airline schedules, and regulations in foreign jurisdictions limiting the export of materials required to produce the health and medical resources necessary to combat COVID-19 that are in short supply in the US. In the most extreme cases, some local or state jurisdictions have issued orders for their residents to “shelter in place.”

California issued such an order, effective Thursday, March 19. In the face of these challenges, accepting and performing a rated order (or any other order) may well prove impossible. State and local officials and the federal government are working to provide clarity that the DPA allows continued performance by contractors and their employees not withstanding local orders limiting or closing businesses. While this is developing by the hour, the Department of Homeland Security issued guidance confirming that contractors performing defense or health related contracts are part of the nation’s “critical infrastructure.”

From a supply chain perspective, companies receiving rated orders must recognize that orders they place to support performance of a rated order must also be issued as a rated order, unless exceptions apply. Issuing a rated order properly requires:

  • Specifying the appropriate rating on the order, including special language in the order so that the supplier is notified of its obligations;
  • Obtaining timely written acceptance or rejection;
  • Identifying a specific delivery date for items being ordered; and
  • Obtaining timely acceptance or rejection of any changes made to the order, which amounts to a new rated order.

Any company combining rated items and un-rated items in the same order must separately designate those times. Further, a company does not need to issue an order as rated if it is under certain dollar thresholds, unless the company cannot ensure timely delivery without using the rating.

The issuance of rated orders for certain medical technologies may also have a wider impact in the overall supply chain that affects other contractors. This may include electronic components that are common to a variety of products, including medical devices. In addition, we have seen examples, such as in the UK, where the general manufacturing industry is being drafted to transition to medical device manufacturing. The UK Government, for example, asked both Rolls-Royce and Ford to transition to manufacturing ventilators. Similar realignment of the industrial base both in the US and abroad could have far reaching consequences for the overall supply chain for a variety of goods and services.

If entities receiving rated orders encounter problems, there are procedures to follow to secure what is known as special priorities assistance. There are also avenues to appeal the rating applied to orders and the rating itself.

Ultimately, the discussion above highlights the complexity and risk associated with the DPA and DPAS that private companies with no prior background in the area will soon be facing. The best way to deal with these extraordinary circumstances effectively is to be proactive and to secure assistance from knowledgeable counsel, where and when appropriate.

Stay up-to-date with all of our insights and guidance by visiting our US COVID-19 hub here.

Supply Chain Impact of President Trump’s Executive Order Under the Defense Production Act

Voluntary vs. Involuntary Stop Work: What contractors should consider as the COVID-19 pandemic evolves

March 17, 2020

The COVID-19 public health emergency that has been unfolding over the past weeks and months is predicted to get far worse before it gets better. On Friday March 13, 2020, the President declared a national emergency to combat the virus and we have seen unprecedented cancellations relating to international travel, sporting events and large public gatherings. There also have been employer-issued mandates that employees work from home. As part of our on-going series, this advisory addresses some of the issues government contractors should carefully consider in connection with interruptions to their contract work.

Indeed, as the pandemic evolves, there is increased potential that government contractor operations will be impacted in a variety of ways, some of which may be more likely than others. Under these circumstances, contractors should be proactively identifying and considering likely impacts and how best to position themselves to mitigate those impacts. For example, contractors may encounter circumstances where they conclude they must temporarily cease operations or direct their non-essential personnel to work remotely. Or they may be having difficulty securing material or other resources due to impacts in the supply chain. While all of these impacts on work trace back to COVID-19, there are likely intervening causes that, depending on relevant contract terms, may provide avenues for the contractor to excuse nonperformance and avoid default or, alternatively, seek recovery from the government for impacts associated with stopped or delayed work.

First, it will be important to distinguish between a contractor’s voluntary work stoppages and involuntary work stoppages.  Our prior advisory noted that if a contractor is temporarily unable to continue contract performance, i.e., is involuntarily delayed or impacted due to the pandemic, it is likely that force majeure principles would operate to excuse non-performance and prevent a government default termination. On the other hand, if it is proven that the contractor voluntarily or unreasonably stopped work or failed to perform, the contractor may risk default termination. Depending on the circumstances, there may also be an order or direction from the government to change or stop work, which may provide an avenue for the contractor to secure an equitable adjustment to compensate for delays and cost impacts. Accordingly, it will be critical to understand, anticipate and distinguish between situations where a delay or disruption could create a risk of default, and situations where a delay or disruption is justified and excusable, or is the government’s responsibility.

Second, contractors should be thinking ahead about what they could or would do if they experience difficulties performing their government contracts as a result of COVID-19. The magnitude of the impacts and delays contractors may experience, of course, will depend upon the nature of their work and their particular circumstances. Similar to what occurs during a shutdown period, any work that is dependent upon government action may be delayed, including the issuance of new work or task orders, technical direction, first-article acceptance, approvals to test, acceptance inspections, and payments. In addition, in instances where contractors are performing at government facilities, contractors’ employees may have limited or no access to these facilities.

To the extent that a contractor suffers any adverse impacts due to COVID-19, it may be able to recover costs associated with these impacts pursuant to its contract terms. See, e.g., FAR 52.242-14, Suspension of Work; FAR 52.242-15, Stop-Work Order; FAR 52.242-17, Government Delay of Work; FAR 52.243-1, Changes – Fixed-Price. Importantly, unlike government shutdown circumstances, establishing that performance interruptions were caused by the government, through a contractual order, will be important. It is possible, however, that government contracting officers will avoid issuing a written order for the contractor to stop work. In this regard, issues of authority will be important to consider. In the event that the federal government issues an order that impacts contract performance, contractors should make every effort to obtain direction in writing from their contracting officer. 

In instances where contractors are performing cost reimbursable contracts, even if the Stop Work clause is not incorporated into the contracts, any additional costs attributable to disruption in work due to COVID-19 likely are recoverable as allowable costs of performance. If the disruption significantly increases costs or the level of effort required, contractors may seek an adjustment to the contract’s estimated costs and/or fee pursuant to the Changes clause, FAR 52.243-2.

Where no stop-work order is issued and contractors continue performing their fixed-price contracts, but have been hindered by COVID-19, recovery of any increased costs is less certain because the government likely would assert that the COVID-19 public health emergency is entirely outside of its control. Additionally, where the President or federal health officials issue orders that adversely affect contract performance, the government likely will take the position that such action constitutes a sovereign act that precludes recovery.

Determining who is responsible for the costs and delays resulting from COVID-19 ultimately depends on the facts and circumstances, as well as relevant contract provisions. Nevertheless, similar to those best practices applicable in a government shutdown, contractors can best position themselves for recovery by adhering to the following guidance:

  • Document any cost impacts and performance delays that result from government contractual action. There is risk that a government direction resulting from, or in reaction to, other government orders regarding COVID-19 could be viewed as a sovereign act, precluding any contractual recovery. To mitigate this risk, ensure that you have received, or will receive, a stop-work notice or some other contractual direction and that this direction is maintained in the contract file. If no written guidance is issued, consider asking the contracting officer to do so as appropriate.
  • Costs resulting from COVID-19 disruptions may be recoverable depending on the contract type. When contractual direction exists, costs reasonably incurred as a result of the government order may be recovered through the stop-work order, or the contract’s suspension of work, government delay of work, or changes clauses, so long as the impacts and delays arise during a period where the contract is funded.
  • Schedule impacts from a government-ordered stop-work order should be addressed through extensions to the period of performance. Schedule impacts resulting from a government order also likely are addressable through the stop-work order, suspension of work, government delay of work, or changes clauses.
  • Contractors should mitigate the impact to contracts. While contractors may be entitled to recover costs and/or receive schedule adjustments to address the impact of a government- ordered stop-work, contractors are responsible for taking reasonable actions to reduce the cost and/or schedule impact. These actions may include examining the feasibility of workarounds, diverting employees to commercial efforts (if possible), and potentially furloughing employees. If a contractor fails to take mitigation steps, the government may assert that the contractor acted unreasonably and may attempt to reduce the total costs and/or length of the extension provided to address the impact of the stop-work.
  • Cost and schedule impacts should be carefully tracked. To recover increased costs or receive a schedule adjustment, contractors must be able to demonstrate that the cost or schedule impact occurred and tie the impact to the government’s contractual order or fault. Employees that are prevented from performing work, therefore, should provide detailed time entries and record their labor costs in segregated accounts to demonstrate the labor cost impact of the disrupted period. Other cost impacts, such as costs associated with rescheduling work or redirecting employees to perform commercial work (if possible), should be similarly documented. Likewise, any schedule impact should be fully documented and demonstrated through a critical path or similar schedule analysis.
  • Take appropriate actions with respect to subcontractors. If a stop-work order is issued by the government, then contractors should immediately issue similar stop-work orders to any affected subcontractors. If no stop-work order is issued by the government, managing subcontractors becomes more complicated.
  • Contractors performing work as subcontractors on government prime contracts should seek clarity and instructions from their prime contractor customers regarding any potential impacts COVID-19 may have on performance. To the extent that any subcontracts are stopped or suspended , consistent with the guidance above, subcontractors should ensure that they mitigate any resulting costs or schedule impacts, identify and accumulate any resulting costs, and seek contract direction from their prime contractor customers as appropriate.
  • To the extent possible, communicate with the contracting officer. Consider requesting guidance on whether a contracting activity is an essential activity or service that must continue, regardless of any orders regarding COVID-19.

The rippling impacts and effects of this unprecedented modern public health emergency likely will be with us for some significant amount of time. As always, contractors must be proactive in order to best position themselves to maximize any cost recoveries and/or contract extensions necessary to address the impact of COVID-19, including documenting, on a contract-by-contract basis, why certain actions taken were reasonable.

Stay up-to-date with all of our insights and guidance by visiting our US COVID-19 hub here

Voluntary vs. Involuntary Stop Work: What contractors should consider as the COVID-19 pandemic evolves

COVID-19 – Addressing the Risks of Disease Delays and Disruptions Under Federal Contracts

Dentons has formed a COVID-19 Client Special Situations Team that stands ready to assist contractors in addressing the full range of issues that may arise in connection with the COVID-19 outbreak. Over the next several weeks, we will provide updates regarding the various aspects in which the contracting community may be affected. This advisory focuses on what contractors must show to support excusable delay. Future advisories will focus on other contracting-related facets of the COVID-19 issue. Among the issues that may be addressed are managing supply-chain risks; the government’s issuance of stop-work or suspension-of-work orders; the government’s use of the Defense Production Act and its related authorities to acquire goods and services that may be necessary to combat COVID-19; and how to seek schedule and compensatory relief in the event the government is unable to support contracting activities, such as performing delivery inspections and providing access to facilities and government furnished equipment.

The COVID-19 outbreak is disrupting business around the world. The disruption stems from sick personnel unable to report to work, declines in the capital markets, and actions taken by governments and companies alike directing workers to stay home or ordering the closure of manufacturing plants or offices until the disease is under control.  Yesterday, U.S. financial markets triggered a “circuit-breaker” that required a short suspension of trading and the Italian government ordered a quarantine of its northern provinces. As this client advisory is being drafted, the United States is facing reports of virus outbreaks in different locations around the country, including states of emergency in several U.S. States. The continued spread of COVID-19 could affect performance of federal contracts in various ways. Contractors could experience unexpectedly high levels of claimed sick leave or absenteeism, government-imposed or voluntary quarantines, cancelled travel, supply chain interruptions, and a number of other significant performance obstacles leading to dramatically reduced productivity and increased performance costs.

For many decades federal contracting regulations have recognized “epidemics” and ”quarantine restrictions” as force majeure bases for excused performance. FAR 52.249-8(c), Default (fixed price supply contracts) (“[the] Contractor shall not be liable for any excess costs if the failure to perform the contract arises from causes beyond the control and without the fault or negligence of the Contractor” and citing among those causes “epidemics” and “quarantine restrictions”); FAR 52.212-4(f) (same for commercial item contracts); see also Clause 11, Default, Procurement Division Contract Terms No. 1, CCH War Law Services (1945) (same). A key point before relying on these “safe harbors” in the Default context is to remember that they are not a per se defense to nonperformance. The existence of an “epidemic” or imposition of a “quarantine restriction” does not necessarily mean performance is excused in the absence of showing causation and a lack of fault or negligence by the contractor (as well as other standard factors such as the amount of delay attributed to the specific cause).

Case law interpreting these specific bases for excusable delay have focused on the clause’s language and the requirement that there must be causation between an “epidemic” or “quarantine restriction” and nonperformance. In certain cases, that causation was proven. See, e.g., Big State Garment Co., ASBCA No. 337, 4 CCF ¶ 60,946 (1950) (contract performance extension granted due to employees’ need to recover from typhoid injection). However, in the majority of cases addressing these issues, contractors have failed to show excusable delay. In Ace Electrical Associates, Inc., the Armed Services Board of Contract Appeals (ASBCA) confronted a contractor’s contention that nonperformance was due to the excusable delay of a flu epidemic that had “passed through its plant causing a 30% to 40% rate of absenteeism over a period several weeks.” ASBCA No. 11781, 67-2 BCA ¶ 6,456. The board rejected the contractor’s position, explaining “[i]llness occasioned by the onset of a flu epidemic is in general an excusable delay provided it can be shown that performance was in fact delayed by reason of such epidemic. It is incumbent upon [the contractor] to establish not only the existence of an excusable delay as well as the actual extent of delay so caused.” Id. The Board concluded that the contractor had failed to present that evidence.  See id.; see also Crawford Dev. and Mfg. Co., ASBCA No. 17565, 74-2 BCA ¶ 10,660 (appeal for excusable delay based on absence of several key employees due to flu-induced illness denied where contractor failed to show epidemic in surrounding community resulted in absence of a sufficient number of employees to cause delay). 

The Default clause for fixed-price supply contracts emphasizes not once, but twice, that “the failure to perform must be beyond the control and without the fault or negligence of the Contractor.” FAR 52.249-8(c). Whether stated in the relevant clause or not, this element of proof generally is accepted as a predicate to showing excusable delay. In the context of an asserted excusable delay due to an epidemic, the Government Printing Office Board of Contract Appeals (GPOBCA) emphasized that the contractor’s burden in such situations is to show that it took every reasonable precaution to avoid foreseeable causes for delay and to minimize their effect. Asa L. Shipman’s Sons, Ltd., GPOBCA No. 06-95, 1995 WL 818784 (Aug. 29, 1995). In the context of the COVID-19 virus, and its present level of outbreak in the US, contractors should be examining and implementing today precautionary measures to ensure the ability to perform in the future. In Yarling, the Agriculture Board of Contract Appeals (AGBCA) noted that the government had been amenable to the contractor entering into a subcontract arrangement or novation to ensure continued performance. AGBCA No. 382, 75-2 BCA ¶ 11,540. The board denied the appeal because the contractor had options—such as subcontracting or novation—to continue performance even in the face of an epidemic. It makes sense to consider (and document) advance planning on ideas to deal with COVID-19 related performance delays. Even if those ideas are ultimately unsuccessful in ensuring continued timely performance, the record of a contractor’s reasonable efforts to prepare for a COVID-19-related disruption will support later entitlement to schedule relief in the context of default.

Epidemics and quarantine restrictions are longstanding bases for excused performance. However, contractors must be mindful of equally longstanding requirements to show that (i) any asserted delay in performance was, in fact, caused by the asserted epidemic or quarantine restriction; and (ii) the delay was beyond the control and without the fault or negligence of the contractor (and any relevant subcontractors). Contractors will not know in advance the facts on the first prong of these requirements, but as to the second prong, contractors may be well-served to set in motion contingency planning to meet performance requirements. This could include setting up alternative supply chain arrangements, tasking human resource departments with identifying alternative staffing plans and taking steps in operations to mitigate the effect of a COVID-19 outbreak in manufacturing facilities and offices. Being proactive today will help the contractor make the requisite showing later that it took reasonable precautions to meet performance deadlines in the event COVID-19 asserts itself as a disruptive epidemic in the coming weeks and months.

COVID-19 – Addressing the Risks of Disease Delays and Disruptions Under Federal Contracts

The Most Important Contract Disputes Decisions of 2019

In the attached article, we summarize and discuss the impacts of disputes decisions that are likely to have sustained impacts on contractors and the Government alike into the foreseeable future in connection with our “Feature Comment: The Most Important Contract Disputes Decisions of 2019,” in The Government Contractor (Vol. 62, No. 5).

The Most Important Contract Disputes Decisions of 2019