The Defense Production Act

What is the Defense Production Act [DPA]? More accurately, what is The Defense Production Act, as Amended, 50 U.S.C. §4501 et seq., Current through P.L. 115-232, enacted August 13, 20-18? It is 70 year old legislation that has its origins in World War II, and gives the President a broad array of authorities [economic and other] to ensure the industrial base of the United States is engaged in supporting national defense priorities. The following article is a very brief summary of the DPA’s history and implementation.

In 1942, FDR sought [and was granted] from Congress what is known as the Second War Powers Act which, subsequent to the First War Powers Act. It gave his administration sweeping powers to requisition supplies, services, and property; and force entire industries to produce solely for the defense effort of the United States. Following World War II and with the Korean War on the horizon, Congress passed the Defense Production Act of 1950 [see Pub.L. 81-774]. It too, provided the administration with broad powers to induce industry to produce for the national defense effort, and established what is known today [within USG and the industry] as the Defense Priorities and Allocation System [DPAS]. The first major test of the Truman administration’s over-reach in the use of the DPA was as a result of his announced nationalization of steel production facilities in an effort to truncate labor unrest. The move would have kept the current management in place to operate under federal direction. He thought this a better solution than invoking the Taft-Hartley Act. The catalyst was organized labor’s opposition to the the administration’s Wage Stabilization Board [WSB] ruling that appeared to hold their wages below inflation and did nothing to address excess corporate profits. [The WSB was one of two sub-boards to the Economic Stabilization Agency (ESA). ESA was established by Executive Order 10161 to coordinate and supervise wage and price controls.] Much of organized labor felt that during World War II the National Wage Labor Board had also held wages below inflation while not addressing corporate profits and they were having none of it in 1951. As a result, the 1952 steel strike ensued.

The Supreme Court heard oral arguments with regard to the matter on May 12, 1952. The question before the Court was, did the President as Commander-in-Chief have authority to issue an executive order to seize the steel production facilities in order to keep labor disputes from stopping production? The answer was no. In a 6-3 decision the Court ruled that the President’s power, if any, to issue an order must stem from either act of Congress or from the Constitution itself. There is no power that expressly allows the President to seize property, in the sense of production facilities.

Since its inception in 1950, the DPA has been reauthorized at least 50 times. Its current incarnation [https://www.fema.gov/media-library-data/1583170516466-d519026f6d0fcd35b0581d9418e67bef/Defense_Production_Act_2018.pdf] was renewed in August 2018. The intent of the DPA [specifically Title III] is to provide “… the President broad authority to ensure the timely availability of essential domestic industrial resources to support national defense and homeland security requirements through the use of highly tailored economic incentives. Specifically, the Act is designed to create, maintain, protect, expand, or restore domestic industrial base capabilities.” It is legislation that broadly describes the ‘who and what’ and only superficially, the ‘how.’ That is left to the Defense Priorities and Allocations System [DPAS], which is described briefly later in this article. 

While the construct of the legislation advertises seven Titles, in actuality Titles II, IV, V, and VI are in a ‘repealed’ status. Titles I, III, and VII deal with the relevant policy statements. The seven pages of Title 1 speak to the authorities granted to the President [or his designees], Title III deals with the expansion of production and supply, and is 11 pages. Title VII is 62 pages and deals with the ubiquitous ‘General Provisions.’ Of significance within the document is the care taken to ensure small businesses are included and to a degree, protected during the exercise of the DPA.

The DPA itself deals specifically with subjects such as the higher level designation of critical materials, USG loans to private enterprises, the Defense Production Act fund, and reinforced scrutiny on merger and acquisition activity [specifically prohibiting the purchase of United States defense contractors by entities controlled by foreign governments, and of course the foreign governments themselves. This is supplemental to the regulatory and executive review already required of proposed mergers and acquisitions.] Additionally the DPA includes inter alia, the structure for oversight, control, reporting, the jurisdiction of courts, venue and process, and penalties for willful violation. As well, it describes indemnification of liability for compliance with invalid regulations and discrimination against orders or contracts affected by priorities or allocations.

The purpose of DPAS is to support military, energy, homeland security, emergency preparedness, and critical infrastructure requirements. It is used to prioritize ‘national defense’ related contracts and orders throughout the U. S. supply chain in order to support the above. ‘National defense’ is defined in the DPA, Title VII, §702(14) as “…programs for military and energy production or construction, military or critical infrastructure assistance to any foreign nation, homeland security, stockpiling, space, and any directly related activity. Such term includes emergency preparedness activities conducted pursuant to title VI of The Robert T. Stafford Disaster Relief and Emergency Assistance Act [42 U.S.C. §5195 et seq.] and critical infrastructure protection and restoration.”

Title I of the DPA [as amended] authorizes the President to require preferential acceptance and performance of contracts or orders (other than contracts of employment) supporting certain approved national defense and energy programs, and to allocate materials, services, and facilities in such a manner as to promote these approved programs. This is accomplished through the DPAS program. By Executive Order 13603, the Department of Commerce is delegated authority to implement the priorities and allocations for industrial resources. The administration of DPAS is accomplished through a subordinate organization known as the Bureau of Industry and Security (BIS). The execution of the DPAS is through the DPAS regulation which is contained in 15 CFR subchapter A. 

Simply, all contracts, subcontracts, or purchase orders in support of an authorized program are assigned a priority rating. Important to note that authorized programs also have identification symbols which are found in schedule 1 to 15 CFR §700.11. In descending order of precedence the ratings are DX, DO, and non-rated. DX is assigned to those programs with the highest national priority. DO to the next, and lastly is the non-rated order. The ratings are assigned pursuant to direction found in DoD Directive 4400.1-M. Thus, a ‘rated order’ is a prime contract, a subcontract or a purchase order in support of an approved program issued in accordance with the provisions of 15 CFR §700. 

There are 4 elements that need to be included on the rated order. They are 1) the priority rating [e.g. DOA1, DXA3]; 2) a definite and explicit required delivery date; 3) either a manual or electronic signature; and 4) the statement to the effect that “This is a rated order certified for national defense use, and you are required to follow all provisions of the Defense Priorities and Allocations System regulation (15 CFR §700)/(FAR 52.211-15)”.

When must a contractor accept a rated order? The basic provisions articulated below outline the requirement for a contractor with respect to rated orders.

1. Mandatory Acceptance and Rejection of Rated Orders.

A contractor, subcontractor, or supplier shall accept every rated order received. Normal conditions include when:

- They make or buy the item.

- Normal terms of sale apply.

- When they can meet delivery dates required the contract.

Exceptions requiring mandatory and optional rejection are found in 15 CFR §700.13(b) and (c).

A rated order will be accepted or rejected, in writing, within 10 working days for DX rated orders and 15 working days for DO rated orders. Special requirements apply for emergency preparedness rated orders.

2. Mandatory Extension.

Prime Contractors are responsible for extending the received contract rating to their entire product supply chain to the lowest level in order to obtain items needed to fill rated orders or to obtain replacements of inventoried items. This means subcontracting (procurement) organizations need to ensure that all pertinent terms and conditions, as well as all pertinent clauses are flowed through the entirety of their supply chains.

3. Priority Scheduling.

Operations, including the acquisition of all needed production items, will be scheduled to satisfy the delivery requirements of each rated order. In the event there is competition for materials and or resources for equally rated contracts, the contractor will notify the buying activities involved. It is the responsibility of the buying activity to resolve any scheduling conflicts with the contractor and provide the contract modifications required.

4. Customer Notification Requirements.

If a person or contractor has accepted a rated order and subsequently finds that shipment or performance will be delayed, the person or contractor must notify the customer immediately, give the reasons for the delay, and advise the customer of a new shipment or performance date. If notification is given verbally, written (hard copy) or electronic confirmation must be provided within one working day of the verbal notice.

The Defense Contract Management Agency (DCMA) is the primary point of intersection between defense contractors and the Department of Defense relative to DPAS issues. DCMA often has contracts delegated to it for management by other government agencies. Consequently, they often are the primary DPAS interface for those contracts as well.

In summary, the DPA is an often amended, frequently reauthorized piece of legislation that provides the President with tools to ensure that national defense priorities are being adequately supported by the U. S. supply chain. A significant enabler of the DPA is the DPAS program. DPAS is the vehicle through which USG contracts, sub-contracts, and purchase orders are prioritized or rated. These ratings inform contractors what the priority of their USG awards are relative to the entirety of their production or work. The DPA and DPAS program have served the nation well for decades, and should continue to do so into the future.

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