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It’s that time of year when activity on Capitol Hill usually falls into a lull. But this year’s the rare occurrence when big legislative activity is happening in August. The Senate passed a huge reconciliation bill over the weekend; the House is expected to do the same later this week. Meanwhile both houses have a lot of work waiting for them to reconcile their versions of the annual appropriations and authorization bills. To talk about at least some of those moving pieces, Federal News Network Deputy Editor Jared Serbu was joined by David Berteau, president of the Professional Services Council on the Federal Drive with Tom Temin.

Interview transcript:

Jared Serbu: All right, David, quite a bit to get to today. Let’s start with the news, which is it looks like the Inflation Reduction Act or the reconciliation bill is headed to probably the president at some point late this week. Let’s talk about it from a contractor point of view, what does it hold for contractors? What’s it missing from your point of view?

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David Berteau: Thanks, Jared. And you’re right. The bill, of course, very comprehensive covers a lot of territory. There’s not much in there specifically, that will directly benefit government contractors, or perhaps more importantly, that will require government contractors from day one in order to implement it successfully. But there are a number of provisions in the bill or a number of issues in the bill that will in fact, create both opportunities for contractor support. We can talk, for instance, about the beefing up of the IRS, which in the eyes of many of us who are honest taxpayers is long overdue, so that they increase the number of honest taxpayers. It’s going to be very hard for the IRS to expand its capability as rapidly as the bill envisions, I think the opportunity for contractor support the need for good contractor support is really quite imperative there. Other areas, for instance, a lot of the climate action will require good execution and implementation by the government. And again, this would benefit from well written contract solicitations and good bids to perform the work necessary to support the government across the board there.

Jared Serbu: You’ve watched budgets be executed both inside and outside of government for a long time. What does it take to actually execute a budget increase of this magnitude? It’s just it’s really striking for IRS that it’s about 50% of their budget being increased in one single year, just starting next year?

David Berteau: It really is. It really is unusual. I mean, we are, we’re in August, right. So the fiscal year is almost over. So the real question becomes the period of availability of the funding, how long will that funding be available before it expires unobligated? Right, and I have not looked at the language of the bill to determine that yet. But the real question, there are two real questions here. One is, how quickly does [the Office of Management and Budget] release the funds to the agencies and how quickly do the agencies flow it down? And the extent to which the contracting officials and the program officials in the agencies are already working on the requirements that would turn into solicitations and then proposals and evaluation and award? Typically, this is months and months in process. And so you know, given the whipsawed nature of the elements of the Inflation Reduction Act, right, it was on again, off again on again off again, over the course of the past, we’ve got almost a year now. It’s unlikely the agencies are as well prepared as we would like them to be to move forward on those requirements in those solicitations. And so, of course, what we would urge the agencies to do is, don’t wait for the money to show up, start working now on those and get those solicitations out, get those requirements solidified. Focus on results, that is what you’re going to get as a result of the contract. Rather than just inputs of buying labor categories and labor hours.

Jared Serbu: Let’s pivot to another big piece of legislation, which would be the annual National Defense Authorization Act. And a big provision on the House side that’s gotten a lot of attention would be the proposed ban on re-implementing something like Schedule F. Just to remind some of our listeners who might not remember that was implemented toward the end of the Trump administration and criticized as essentially an attempt to politicize the civil service. PSC have a view on this?

David Berteau: Right. So Schedule F would essentially create out of a lot of senior decision makers in the career civil service at-will employees that can be terminated without cause and replaced by people who wouldn’t necessarily have to go through the civil service requirements necessary to do that. Obviously, from PSC’s point of view, government contractors have a strong vested interest in a federal workforce at the program level, at the contracting officer level, even at the auditor level, that are skilled and capable and experienced and know what they’re doing. And so the idea of essentially politicizing that workforce is one that would not bode well for good contracting and good government across the board. So PSC would support a civil service, that implementation as it is now, obviously, we need better people. We need more of them, but you’re not gonna get there by making at-will employment be the rule and rather than civil service protections that you have in place now. So PSC supports this provision in the House bill, and we will support efforts by the Senate to included in the final NDAA.

Jared Serbu: And then I wanted to also ask you about a provision on the Senate side, which would create what they’re calling a pilot program to tie progress payments essentially to what the bill calls DoD’s, well, contractors responsiveness to DoD’s goals for “effectiveness, efficiency and increasing small business contract opportunities.” Unfortunately, the report language doesn’t really talk much about what the Senate’s actually trying to achieve here. So we don’t know what problem they see with the progress payment system as it is. But how does PSC see this?

David Berteau: So this is not the first time we’ve been at this game, right? And, actually, it’s always useful to look at what happened last time, we looked at reducing progress payments to 50% and tying them to successful results from a DoD perspective. This was a 2018 proposal for changing the Defense Federal Acquisition Regulation Supplement the DFARS, that would have restricted progress payments to 50%, you could earn back more than 50% based upon meeting certain performance goals. But what DoD defined as performance at that time, had nothing to do with meeting military needs. It had to do with whether or not you had business systems that were certified. Whether or not your cost elements of your proposal were adequate and accurate. Things that in essence, should be part of the evaluation process in the contracting, not something that is already predetermined after the contract is signed, and you’re hinging progress payments on it. If this were to be implemented, it would certainly have to be implemented in a way that focused on results with meaning to the warfighter, not business systems or cost proposals.

Jared Serbu: Yeah, and the Senate language as written sure does look like it has some wiggle room for DoD to implement the program as it wanted to. But can you envision a progress payment restriction program that actually did accomplish some worthwhile goals here and created positive incentives for contractors to perform well?

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David Berteau: Well, Jared, I’ve been involved in increases and decreases in progress payments for almost half a century now in DoD. And in almost every case, increase progress payments produces tremendous results not only in terms of investing, giving companies the money to invest and delivering on the capability it’s been contracted for, but also the ability to flow that down to the subcontract. The most recent case, of course, was at the beginning of the pandemic, when progress payments were increased to 95% for small businesses and 90% for large businesses. And in the GAO study, you know, almost 80% of the contracting companies who responded to the GAO survey, were flowing down more than 100% of that increase in progress payments to small businesses. This will be the worst possible time to reverse that without any justification or analysis. Plus DoD has underway, a contract financing study, right? This was suggested by the GAO back in 2019. It took them three years to get started on this to the point where they actually requested input from industry back in June. PSC provided input on behalf of our members in July, we need to see where DoD is going with that effort. That would give you the analytical basis to underpin any change in progress payments. I would also finally note that the last time an analysis was done by DoD was in 1984, with the Defense Finance and Investment Review, which turned into the DFAIR report issued in 1985. That’s a long time ago and the financial marketplace and the contractor marketplace has changed dramatically in the 37 years since that report was issued. It’s time to take this slowly and consider it and in the meantime, keep progress payments where they are.

Jared Serbu: Let me take one more run at progress payments, because I kind of mangled the question the last time around. Really what I’m wondering is, is there a sensible way that you can think of to structure progress payments, in a way where there are contingent on performance in some way? Could you do it in a way that really did create the right incentives for companies?

David Berteau: It depends on what you’re doing the progress payments for, right. And so ultimately, the biggest challenge DoD has in doing that is determining exactly what it needs and when it needs it. So typically, delivery schedules and the content of programs is a matter of negotiation. DoD has goals, but of course, their goals are unachievable, because they would like to have more than as physically or materially possible today. So it oftentimes is a negotiation settlement that I think for DoD to set clear objectives, and to actually fund the work necessary to achieve those objectives would require a lot more upfront work and contracts than we see today. That would reward performance. There’s a second piece of this, though, Jared, so you know, 50% of government contracts out of DoD are for services, not products, and progress payments don’t apply to services, in part because we don’t have a good, oftentimes, don’t have a good description of what results we want. Progress payments are an easy way to keep the money going without necessarily having to pin it to results. The problem isn’t that contractors can’t meet those results. They said DoD can’t define the results they want, and whether or not they can fund the efforts to do that. That would be the fair way to go at this.

Jared Serbu: All right. David Berteau, president of the Professional Services Council always appreciate you sharing your insights, David.

David Berteau: Thank you, Jared. I look forward to the next time.

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