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The President has declared a national emergency and has begun mobilization of forces in support of a response to the recent terrorist attacks on this country. Our clients can expect to face many challenges in the months to come as the evolving requirements of the government are passed on to them. This McKenna & Cuneo Information Alert is intended to summarize some of the legal authorities that may come into play.
Other than defense procurement generally, the industry sectors that can expect to be affected by the mobilization and increased domestic security concerns can be difficult to predict. However, we expect that many of our clients, particularly commercial item vendors, will experience unaccustomed procurement demands.
I. Emergency Supplemental Appropriations ActAn almost-immediate consequence of the mobilization was Congressional appropriation of $40 billion in funding to address such issues as 1) the mitigation of and response to the attacks, 2) the ability to counter, investigate, or prosecute domestic or international terrorism, 3) the increase of transportation security, 4) the repair of public facilities and transportation systems damaged by the attacks, and 5) the protection of national security. The President has already released the first $5.1 billion of these funds. The overwhelming majority of this first release went to the Department of Defense and the Federal Emergency Management Agency. The remainder of the first release went to other government agencies including the Department of Transportation, the Department of Health and Human Services, the Small Business Administration, the Department of Labor, the General Services Administration, and the Department of the Interior. The President is expected to release additional funding within the next week. The distribution of the emergency appropriation will almost certainly result in an increase in government contracting activity.
A more detailed discussion of the current status of the emergency appropriations can be found on our website, www.mckennacuneo.com.
II. extensions or expansion of existing contractsAlready the government has begun the process of prioritizing contracting activities and adopting alternative measures to keep supplies moving and avoid disruptions. Defense contractors may be faced with actions by the government to extend the terms of contracts under the various options clauses, including the Option to Extend Services clause under FAR 52.217-8 and term of contract FAR 52.217-9. This already has occurred in the foodservice field, where many pending procurements have been cancelled and existing agreements extended by DOD.
Requirements and IDIQ contracts for goods related to response efforts may see unexpected volume growth. Not only will there be more military personnel to feed, there will be more vehicle and housing needs, more uniforms to sew and clean and more medical supplies to ship.
Simplified procurement vehicles such as the Federal Supply Schedules and government-wide acquisition contracts can expect volume increases as well.
III. SPECIAL CONTRACTING AUTHORITYThe Feed and Forage Act, 41 U.S.C. § 11, authorizes DOD to incur obligations and expend funds without appropriations for specified categories of requirements: clothing, subsistence, forage, fuel, quarters, transportation and medical and hospital supplies, in the event of a national emergency. As noted above, a national emergency has been declared. This Act requires notice to Congress, which was provided on September 21, 2001. Operating as an exception to the Anti-Deficiency Act, this Act allows DOD to enter into enforceable contracts in advance of appropriations.
IV. exceptions to the Competition In Contracting ActAlthough the Competition in Contracting Act ("CICA"), 10 U.S.C. § 2304 et seq., requires every Federal procuring agency to seek "full and open" competition whenever possible, there are exceptions to this requirement, two of which are particularly relevant now as the Administration decides how to respond to the terrorist attacks. These are the "unusual and compelling" exception and the "national security" exception.
In order for the government to use the "unusual and compelling" exception to CICA, the justification and approval must clearly identify the harm to the government if full and open competition is used. FAR 6.302-2. Under the "national security" exception, the contracting officer must identify, in general terms, why national security would be harmed through competition. FAR 6.302-6. While there are certain limitations on the use of these exceptions, it is probable that government contractors will be offered procurements on these bases, perhaps on an expedited basis, and will need to respond accordingly.
It is important to keep in mind that the use of sole source exceptions does not exempt procurements from other applicable laws. Thus despite the rushed nature of such procurements contractors may be asked to submit representations and certifications about their proposals, or cost or pricing data, and that the rushed nature of such procurements may increase the risk of errors and omissions. Careful attention to communications with the government therefore remain important.
V. invocation of the defense production actWe expect that the government will once again take advantage of the ability to issue rated orders pursuant to the Defense Production Act ("DPA"), 50 U.S.C. app. §§ 2061-2171. Although ready to expire on September 30, a reauthorization bill, has been passed by the Congress and will be signed presently by the President.
The DPA allows the government to require any U.S. entity to accept and give priority to contracts or orders deemed "necessary or appropriate to promote the national defense." 50 U.S.C. app. § 2071. The DPA authority extends to any and all goods and services and does not require a pre-existing government contract in order to be exercised. Thus, a wide range of businesses potentially could be affected by invocation of the DPA.
The regulations that implement the DPA provide for two levels of rating priority, "DO" (lower priority) and "DX" (higher priority). With limited exceptions, persons who receive rated orders must accept and perform them without regard to any other rated or unrated orders they have accepted. 15 C.F.R. § 700.13. While cooperative implementation is preferred, the DPA provides for civil and criminal penalties for noncompliance. By its nature the statute also can cause commercial disputes, but it does provide some protection for the disruption of other business that often results from the receipt of rated orders.
VI. public law no. 85-804 and the award ofThe government may obtain needed resources by issuing contracts even though the exigencies of the situation may prevent proper adherence to contracting rules, which in ordinary times might make the contracts unenforceable. The government also may drastically alter existing contract vehicles, although such use may exceed the original expectations of the parties and thus alter the basis upon which the contract was negotiated or awarded. Out-of-scope modifications of existing U.S. Government contracts is of course frowned upon, but past experience has shown us that in an emergency any vehicle will do, and the remedies will be left for later. One law that authorizes and promises redress for the use of such nonstandard procurement practices is Public Law 85-804.
Public Law No. 85-804 provides certain federal agencies with the authority to award extraordinary contractual relief in matters relating to the national defense. See 50 U.S.C. §§ 1431-34. This extraordinary relief can include the modification of contracts without consideration, the formalization of informal agreements, and indemnification agreements without the support of current appropriations. See FAR 50.203(d), 50.302-3. Although often a post hoc form of relief, this law has seen much use in the past in times of emergency when major procurement programs were needed. In fact this law authorizes the government to enter into and amend contracts without regard to the laws and regulations governing the making, performing or amending of contracts.
VII. impact on the shipping and airline industriesThe need to transport supplies and personnel in support of military operations in the Middle East may lead to the invocation of statutory and contractual authorities affecting both U.S. Flag Carriers and shippers -- much like what occurred during Operation Desert Storm early in the last decade. Almost all U.S. Flag carriers are signatories to Voluntary Intermodal Sealift Agreements ("VISAs") for war contingencies. VISAs provide for the allocation of U.S. carrier ships to move supplies by sea and land to support defense operations anywhere in the world. VISA signatories are already on contract for these contingencies. The same can be said of air carriers under the Civil Reserve Air Fleet ("CRAF") Program for air shipments of goods to war zones.
In addition to carriers, suppliers shipping defense support goods under contract with the government to designated locations also can be affected. Suppliers must consider the costs associated with the carriage and shipment of goods in time of conflict when shipping resources may become scarce and shipping itself riskier, and therefore must address the cost of war risk insurance and who will bear the cost of such insurance.
For further assistance in understanding these laws and related issues and implications, please contact any member of the Contracts and Technology Department of McKenna & Cuneo:
DISTRICT OF COLUMBIA: 202-496-7500
LOS ANGELES: 213-688-1000
SAN DIEGO: 619-595-5400
DENVER: 303-634-4000
or visit our website at www.mckennacuneo.com to find an office and attorney to help you.
For more information, please contact:
| Alison L. Doyle - | Washington, D.C. - (202-496-7500) |
| E. Sanderson Hoe - | Washington, D.C. - (202-496-7500) |