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Bloomberg - U.S. Buying Hospital Gowns From Manufacturers for Covid Needs

  • Eight of 15 primary awardees are first-time government contractors

  • Defense Department requires gowns to be made in U.S.

Several U.S. companies that won almost half a billion dollars in government contracts to make hospital gowns appear to have too few workers and not enough factory space to complete the job when the awards were made, according to a Bloomberg Law analysis. Their selection calls into question how closely the Defense Department examined these untested company’s abilities to fulfill the contracts. However, the Defense Department stands by its review. Many of the contractors have scaled up their staffing and factory space since they got the awards in September. Doctors and nurses are concerned about protecting themselves as the U.S. faces a winter surge in infections that could rival the worst days of a pandemic that already has killed 228,000 Americans. In the early months of Covid-19’s spread, personal protective equipment (PPE) shortages abounded in places with high caseloads, prompting the government to seek ways to bolster its reserve supply of emergency medical supplies. At least 52 contractors and subcontractors are making more than 88 million reusable and disposable isolation gowns for the Strategic National Stockpile, according to the Defense Department’s contracting unit, the Defense Logistics Agency (DLA). Initial deliveries from some contractors were due in mid-October, and the first orders are due by Feb. 25, according to the DLA. Public records show that one prime contractor that received a $1.6 million award to provide 128,000 gowns has a single employee headquartered in what appears to be a home in Dallas. That person didn’t respond to multiple requests for comment. Just eight of the 15 primary contractors answered Bloomberg Law’s requests for comment. They offered a variety of explanations for how they’re fulfilling their orders, including by securing help from nonprofits or money from friends and family members to scale up operations. Federal law sets strict conditions on Defense Department contracts: All military fabrics must be made entirely within the U.S. But much of textile industry has moved overseas, limiting the number of U.S.-based manufacturers that have experience fulfilling a contract of such a size. Much of the U.S.-based industry, including new PPE manufacturers, bid on the contract, according to Defense Department data. Some established contractors and textile manufacturers won awards, such as Dow Chemical Co., Shawmut Corp., and LA Brands LLC. Others were much newer. Health Supply US was established in March, and subcontractor QT Sewing Factory was incorporated in November 2019. At least 11 contractors and subcontractors began making protective gear only after the pandemic began, according to press releases and news reports. Of the 15 primary contractors, eight had never received a federal contract prior to 2020, according to federal government contracting records. The Defense Department hasn’t seen evidence that any of the awardees don’t have the financial capability to fulfill their obligations or that they’re using foreign-made materials, Defense Logistics Agency spokesperson Michelle McCaskill said in a statement to Bloomberg Law. “Some new entrants are still ramping up but none of the challenges they are experiencing are beyond what we would expect to see, and DLA maintains close communications with and oversight of the vendors.” Competitors in the industry are skeptical. Making 88 million gowns by the end of February takes “thousands and thousands of workers,” said Bill Amos, chief executive officer of Salem, Ore.-based apparel manufacturer NW Alpine Gear LLC, who unsuccessfully bid on an earlier version of the contract. “Ramping up from delivering zero to delivering hundreds of millions of gowns in three months is impossible,” he said. Members of Congress are also raising questions. “Some of those contracts have been to companies that have very little experience with producing that kind of equipment, that the standards have not always been up to par, and it’s created some real challenges,” Sen. Jeanne Shaheen (D-N.H.), said during a Senate Armed Services committee hearing Oct 1. Ellen Lord, undersecretary of defense for acquisition and sustainment, replied that the Defense Department “went through a very rigorous process” to award the contracts, and an interagency group spent an “enormous amount of time” making sure “that very stringent criteria were met and adhered to.” Lowest Bid The contracts were awarded to the manufacturers that quoted the lowest price and attested they could meet the requirements for making the gowns, according to the DLA. That procurement strategy didn’t take into account a company’s experience in federal contracting or in making gowns, according to former Navy contracting officer Jeff Cuskey. Not considering past performance “interjects significant contract schedule and performance risk,” he said. Cuskey is now an independent consultant and expert witness on defense contracting and procurement and widely known in the field. He represented one company that bid unsuccessfully on a gown contract. He said the Defense Department can deploy other strategies that take into account more factors than price, but it didn’t do so this time. The DLA’s use of the lowest price criteria for selecting contractors “had inherent risks given the critical application” of these gowns for health-care workers, he said. Wholesale costs for a U.S.-made reusable gowns typically range from $12 to $20 apiece, according to Brenna Schneider, chief executive officer of apparel manufacturer 99 Degrees Custom, who also unsuccessfully bid on the contract. Contract winners bid at the lower end of that price range. For example, New York Embroidery Studio said its reusable gowns would cost only $7.88 each. The other four reusable gown awardees charged $9.99 to $12.55 per gown. Michelle Feinberg, owner of New York Embroidery Studio, said her gowns “exceed the standard” set by the DLA. Shawmut CEO James Wyner, said his company’s gowns meet the standard. The other three reusable gown manufacturers didn’t respond to multiple requests for comment. Health Supply US modified its gown design by reducing the number of seams and cuts, among other factors, to lower the price, chief executive officer Chris Garcia said in an interview. Made in U.S. A consortium of six trade groups, led by the National Council of Textile Organizations, sent letters to the Defense Department raising concerns that some awardees may be using materials or labor from outside the U.S. In response, the Defense Department said the manufacturers self-certified that they are producing the gowns domestically. The department also is requiring awardees to submit invoices for all materials to confirm compliance, it said in an attestation to the Congressional Research Service obtained by Bloomberg Law. Four awardees also told Bloomberg Law their gowns were exclusively U.S.-made, including the supplies. The Defense Department is “being extremely thorough on this, more than I’ve ever seen,” Jason Maddox, CEO of California-incorporated and Texas-based Maddox Defense, said in an interview. Maddox Defense Inc. production facility in Spring, Texas. Contractors making hospital gowns needed to scale up manufacturing space to meet their obligations. Courtesy Jason Maddox, CEO of Maddox Defense Inc. Site Inspections At least 12 awardees weren’t visited by inspectors until after their contracts were finalized, according to executives at those companies. The DOD attestation confirmed all of the facilities were visited after the awards were made. “Site visits are not normally conducted as part of the selection process,” McCaskill, the DLA spokesperson, said. Feinberg and Maddox each confirmed separately to Bloomberg Law that Defense Department officials visited their company’s facilities before and after they got contracts. Defense Department officials conducted post-award site visits of all the places of performance to assess the production capability, compliance with domestic manufacturing requirements, quality, and employment procedures, McCaskill said. The Defense Department can opt for a special evaluation of potential contractors, called a pre-award survey, in which department specialists can review a company more closely—e.g., examining its financials. Specialists can also conduct on-site visits prior to making an award to review manufacturing, production, quality, and other aspects. Cuskey, the former Navy contracting officer, said for a contract of this nature, he would have required a pre-award survey for “every single prospective offerer with no past performance manufacturing isolation gowns.” All the potential contractors were “fully vetted” prior to their award, including financial and production capability, past performance, and references, McCaskill said. However, not all contractors received a pre-award site visit. Staffing, Financing The only publicly available data on many of the contract awardees is from the commercial credit analytics firm Dun & Bradstreet, which is how the Defense Department got its financial information during the selection process, according to its report to the Congressional Research Service. Dun & Bradstreet shows just four of the 15 primary contractors have 100 employees or more. An awardee assigned to make 700,000 reusable gowns—the median number for the contracts—would need at least two work shifts of 83 workers each for five days a week for five months, Amos estimated. Schneider put that worker number at 71. To fulfill the median order for disposable gowns (6.25 million), the workers needed for each shift ranges from 164 to 194, they said. Maddox Defense, which is listed as having 15 employees on Dun & Bradstreet, has hired about 380 staff for its Spring, Texas factory since May, said CEO Maddox. Financing is also a challenge. A reusable gown operation the size of these government contracts would require a company to have somewhere between $1.3 million to almost $5 million on hand for payroll, management, benefits, and materials, Amos and Schneider estimated. For disposable gowns, Amos said a company would need at least $2.88 million for payroll and other fixed costs. Schneider said payroll alone would be $1.7 million for packers, supervisors, and mechanics. Materials would cost an additional $2.2 million each month. On top of that, Schneider said it costs a little over $4 million just to buy the needed amounts of welding, cutting, and packing machines. Some contractors already have these machines, but newer companies like Health Supply US don’t. Health Supply US funded its operation, at over $1 million, from friends and family, and used its profits from acting as a distributor earlier in the pandemic, CEO Garcia said. Only eight primary contractors have past-year revenue of at least $1.3 million, according to Dun & Bradstreet. Only two awardees have a credit recommendation above $1.3 million—Dow, a giant with 21,000 employees and an annual revenue of $62.48 billion, and Shawmut, with 700 employees and a revenue of $178.2 million, according to Dun & Bradstreet. Shawmut CEO Wyner said the company’s revenue is higher than that but not publicly disclosed. Dow also differs from Dun & Bradstreet numbers, saying it had 36,500 employees globally and annual revenue of $43 billion at the end of 2019. According to the Treasury Department, six primary contractors received loans through the Paycheck Protection Program, which was designed to provide a financial lifeline to companies struggling during the pandemic. Several contractors told the government they have additional funding, including higher lines of credit and investors, to fund the gown operations, according to the Defense Department attestation. Ramping Up Twelve of the primary contractors added or changed their places of manufacturing after their contracts were awarded, according to contract amendments. Some companies are getting creative adding capacity. Peter Berzin, chief executive officer of Franklin, Mass.-based Contollo Mass Manufacturing, a subcontractor for primary awardee Unifire Inc., said his company reopened a factory shuttered in 2015, used a die cutting machine that was still there, hired back some of the former workers, and received a $1.8 million grant from Massachusetts. Maddox Defense said it secured an additional 300,000 square feet of space in Houston, Texas, but hasn’t needed it so far. Sophia Suh, CEO of Brooklyn-based S By S Studio, said in an interview her company’s initial facility in New York was too small to make the 250,000 disposable gowns required under her contract, so she moved to a 5,000 square foot facility in Brooklyn at the end of September. The contractors have encountered some hiccups. Suh said she initially struggled to get a business loan, even after she received the award, but she was able to get financial assistance from a local nonprofit. Health Supply US has been unable to start manufacturing in its Garland, N.C., factory because it is owned by Brooks Brothers, which filed for bankruptcy in September, Garcia said. That factory would have over 100 workers, but Garcia said his company’s ability to meet the federal government’s needs doesn’t hinge on that factory opening and that it has already delivered the first shipment. To contact the reporter on this story: Shira Stein in Washington at sstein@bloomberglaw.com To contact the editor responsible for this story: Fawn Johnson at fjohnson@bloombergindustry.com Stephen Merelman (Bloomberg), Flynn McRoberts (Bloomberg)

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