Dennis Thompson |
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Finding Opportunity in the Defense Production Act

March 31, 2020
The requirements are high—and the benefits can be, too.

The Defense Production Act (DPA) is a tool for the United States federal government to prioritize manufacture of equipment, technologies, tools and materials required and ensure their availability and delivery. The DPA  was passed as the nation entered the Korean War, but has been used a number of times over the past 20 years to place prioritized orders that manufacturers are incented to fulfill quickly, and even provide capital financing necessary to rapidly ramp up productive capacity.

I recall how, while I was serving as major in the United States Air Force, the DPA was used to help us quickly scale up our reconnaissance fleet, which was seeing a lot of action in Afghanistan and Iraq. We had been making heavy use of the General Atomics Predator unmanned drone, which itself was subject to priority orders under DPA. General Atomics was only able to manufacture so many, and we needed to build out the surveillance and reconnaissance fleet. General Atomics was required to license the sensor array technology for the Predator drone to the government and other vendors. Problem solved.

Critical materiel is made more widely available – from more companies if they are up to it So not only can the DPA make more critical materiel available faster, but it can democratize participation in defense projects across other vendors. In the above case, the Air Force Research Laboratory, which executes the DPA Title III program, partnered with Lockheed Martin, Northrop Grumman and Raytheon. The partnership began leveraging General Atomics’ technology on other aircraft, including early tests on an Air Force Special Operations Command MC-130P and a King Air 218.

Participating in prioritized orders through the DPA can be challenging because it requires significant logistical capabilities, first of all to complete the project-based work, and then to document you are satisfying orders to the terms of the federal government. But the DPA, when it is used to meet emergent needs as we now face, can introduce new vendors into the DoD supply chain and often inject new intellectual property and product opportunities into these businesses.

  • The DPA has also been used a number of times recently:
  • To speed to market protective devices against improvised exploding devices (IEDs) in 2006
  • For mine-resistant ambush protected vehicles (MRAPs) in 2007
  • In 2008, to increase production of intelligence, surveillance and reconnaissance technology
  • To provide night vision technology for use in Afghanistan in 2010
  • For submarine environmental control refurbishment in 2012
  • In 2013, the Army requested DPA on behalf of a supplier of 120mm Enhanced Mortar Targeting Systems (EMTAS).

Embraces many critical situations, not just defense All of these examples are for military and defense systems, but the application of the DPA was expanded in 2003 to make it applicable to “critical infrastructure protection and restoration.” It has since been used in the wake of floods, earthquakes and hurricanes.

In situations where required for the defense of the homeland in numerous circumstances, the DPA currently gives the President of the United States power to:

  • Require people and businesses to prioritize and accept contracts for materials and services as necessary to promote the national defense.
  • Incentivize the domestic industrial base to expand the production and supply of critical materials and goods. Authorized incentives include loans, loan guarantees, direct purchases and purchase commitments, and the authority to procure and install equipment in private industrial facilities.

What is required of manufacturers? Manufacturers completing work under the DPA as noted can not only get involved in government programs they had not had access to before, but receive help with capital expenditures and operating expenditures. They must be mindful, though, of the priority ratings attached to each of these contracts. The Defense Priorities and Allocations System (DPAS) is a ranking system used in the supply chain for these critical projects.

Each DPAS order will have a rating (DX or DO) and required delivery date. On these orders, manufacturers must comply with the various provisions of the DPAS, found in 15 CFR Part 700.

Of the priority ratings, DX is the highest and requires presidential approval. The secretary of defense, meanwhile, must approve the DO rating. Usually though, DPAS functions more like a classification system, with, for instance, A1 for aircraft, A3 for ships and other designations that do not really affect priority but rather describe where the materiel resides.

Whether you are a primary contractor working directly for a branch of the military, a subcontractor working for a prime, or a second or third tier contractor or vendor, there are four main provisions of DPAS that require your attention.

  • Mandatory Acceptance, which means a contractor, subcontractor or supplier shall accept a rated order when they make the item, normal terms of sale apply and they can meet the delivery dates.
  • Mandatory Extension, which means a manufacturer or contractor must communicate the DPAS rating to their suppliers.
  • Priority Scheduling, so activities including the acquisition of all needed production items can satisfy the delivery requirements of each rated order.
  • Customer Notification, which requires a rated order be accepted or rejected, in writing, within 15 working days for DO-rated orders and 10 days for DX-rated orders.

Timeliness critical DPAS has implications for both capital acquisition and support of assets once they are deployed. And the government does measure how responsive a vendor is when they receive rated orders. This can also represent an opportunity for vendors who can ensure and then document that they are responding quickly to orders and meeting delivery requirements.

The more rapidly and reliably your company completes this task, the more favorably the Defense Contract Management Agency (DCMA), which is responsible for making sure the rating system is followed, will look upon you. DCMA actually has a grading system, and as vendors and contractors perform well, are responsive and accurate in following the DPAS rating requirements, those vendors receive preferential treatment for future opportunities based on the grading structure.

Currently, most companies serving the defense sector only have a minimal ability to actively manage deliverables. The exception to this rule would be a major original equipment manufacturer (OEM) or tier-one defense contractor. These companies are often large enough and have sophisticated enough systems to track parts, availability and deliverability on a very granular level, at least within their own organization. The OEM’s middle-market vendors may struggle with this level of documentation. Many DPAS orders also involve mission-critical equipment, requiring a serialized structure for every bolt, nut and component along with a record of the provenance and origins of materials, parts and purchased components.

Companies accepting DPAS rated orders for the first time will need to gear up for these requirements, but this can have the additional benefit of improving their systems and processes and making them more competitive on private sector, non-rated orders.

Before pursuing work under DPA, a manufacturer should think carefully about whether or not they have or can invest in the rigorous processes and systems required to meet the timeline for deliverables and ensure they are at least accepting or declining orders in a timely fashion. There will be very little middle ground—your organization should either commit to and aggressively participate in DPAS or sit on the sidelines. The program relies on both the carrot-to-incent program compliance as well as a stick to dissuade vendors from under-delivering. The maximum penalty provided by the Defense Production Act is a $10,000 fine, or one year in prison, or both.

The opportunity this program presents is real and substantive, but so are the penalties for non-performance—both financial and in terms of your company’s ability to compete for future government contracts.

Matt Medley is senior product manager, IFS.

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