Every manufacturing contract, including construction contracts, with the government contains a myriad of terms and conditions and other requirements, including the numerous provisions set forth in the Federal Acquisition Regulation (FAR) that are often incorporated expressly or by reference into the contract.  Understandably, contractors focus on the contract’s specifications, schedule, terms for payment, and certifications of compliance with various contractual and regulatory requirements.  But, while these items are undoubtedly central and must be closely monitored, contractors should also review whether their supply chains are subject to the Defense Priority Allocation System (DPAS) for rated orders.  The DPAS is an ordering regime by which the government can direct (or redirect) suppliers to prioritize their delivery of materials and supplies to, and across, various government projects and contracts, even if doing so would disrupt the schedule under another contract, such as your contract.  So, how does this system work, what does it mean for you, and what might you be able to do, and should do, in the event you encounter a DPAS-rated order in your supply chain?

Take this not uncommon situation for example.  A prudent contractor has entered into a contract with the Corps of Engineers (COE) to build a new runway at Air Force Base Alpha.  The contract incorporates the FAR’s contract terms.  Being a prudent contractor, materials were timely ordered, delivery dates confirmed, project schedule and sequencing double checked; orderly and efficient construction commences.  All is good in the world.

However, two weeks before delivery of materials needed to meet completion in the time specified in the contract, a supplier writes the prudent contractor and says: “Unfortunately, the materials ordered cannot be delivered per the agreed schedule.  Materials are being diverted to the Fort Omega construction project.  So sorry.  We will deliver the materials ordered in three or four months.”  Prudent contractor advises the COE of this development, contacts every other supplier of the materials needed, but is unable to secure materials in time to meet the contract milestone.

Prudent contractor comes to learn that the Fort Omega project has been designated with a Defense Priority Allocation System rating.  The Fort Omega project has a “DO” rating.   This means that the supplier that received the rated orders must “give them preferential treatment as required by this part.”  15 C.F.R. § 700.3

In the meantime, the Contracting Officer on the AFB Alpha project has sent a notice to cure default to prudent contractor due to the lack of materials needed to timely complete the project.  The supplier tells prudent contractor that he ordered the materials first, but unfortunately, “Scheduling conflicts with previously accepted lower rated or unrated orders are not sufficient reason for rejection under this section.”  15 C.F.R. § 700.13(b)(1).  The supplier explains that rated orders for rated projects are a matter of national security, and therefore, under the law, and the public policy favoring national security, there is nothing supplier can do.

Not knowing where to turn, prudent contractor calls his attorney, who explains that “Although the operation of the DPAS may give rise to excusable delay in an appropriate case, the DPAS regulations require performance of a lower priority contract to be deferred only if ‘required delivery dates [for the higher rated contract] cannot otherwise be met.’”  DCX, Inc. v. Perry, 79 F.3d 132, 134 (Fed. Cir. 1996).

Additional information gathering confirms that:  supplier is the only person from whom materials can be timely procured for the Omega project; and the dilatory contractor on the Omega project ordered materials three months after prudent contractor, and barely in time to meet the Omega project schedule.  Prudent contractor gathers all the information on delivery dates for replacement materials, calculates the costs, calculates a new completion date, and prepares this analysis for the Contracting Officer.  Prudent contractor also gently reminds Contracting Officer that, under FAR, contractors shall not be “terminated nor . . . charged with damages” if “the delay in completing the work arises from unforeseeable causes beyond the control and without the fault or negligence of the Contractor;” which include “(ii) acts of the Government in either its sovereign or contractual capacity, (iii) acts of another Contractor in the performance of a contract with the Government.”  48 C.F.R. 52.249-10(b)(1).  Because it was proactive and diligent, prudent contractor and the Contracting Officer are able to agree to a fair extension of time to complete the Alpha project.

This example is not uncommon and provides several, valuable takeaways.  When encountering unforeseen impacts due to another project’s DPAS rating, the contractor should determine contingencies quickly, calculate the time and cost impacts, keep records of timely orders of materials, and present the information in a clear and timely manner to the Contracting Officer.  By taking reasonable action, the contractor may be able to prevent an unfair, and surprise, default when the events are beyond its control.  In addition, to the extent possible, the contractor, in conducting its diligence to bid on the contract, should evaluate the depth of its supply chain so that reasonable alternative suppliers may be identified and engaged in the event the first supplier is unable to provide materials in a timely manner due to a DPAS-rated order.