Even as Congress takes up spending bills for a fiscal year already half over, budget watchers are preparing for release of the administration’s 2025 wish list. In theory, it is a month late, but a few facts have already leaked out. Contractors are among those most concerned, as the Federal Drive with Tom Temin heard from the President and CEO of the Professional Services Council, David Berteau.

Interview Transcript: 

And this is quite the theatrical week too, isn’t it, David? With all the votes in the president’s budget. Maybe we have the State of the Union crazy stuff.

David Berteau It’s everything is moving all at once here, Tom, and across multiple layers. Right. Because, the agencies are still spending their FY 23 money, or at least their spending at the FY 23 level under the CRs that keep getting renewed. We’re not seeing, by the way, a lot of new contracts being issued because with a CR of two weeks at a time or three weeks at a time, you don’t really have much forward looking in that regard. So, there’s really a lot of interest in what’s in this FY 25 budget. The administration has said they’re going to put out, it’s what they call the skinny budget. It’s not skinny in terms of dollars, but it’s skinny in terms of pages. Right. When you when you print it out, skinny.

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Tom Temin In terms of detail.

David Berteau In detail. Right. That’ll be that’ll be released a week from today, March 11th or next week or early next week. And we’re eager to see what’s coming out. And you’re already getting some leaks out of this. Right. But some of the big questions are really not the individual programs. But what’s the overall approach being taken in this budget? Right. Because the look, when you when you put a budget together for the following year, you always want to have some idea of what the starting point is, and the starting point is the current year. Well, the current year we don’t have yet. It’s fiscal year 24. We’ve got six bills introduced just, Sunday night, or released Sunday night so we can see what those spending levels are. And those spending levels for most of those agencies are flat. That is exactly what FY 23 was for the most part, not even with inflation built in. Or there’s reductions in EPA and FBI and Justice Department, some of the other agencies. We don’t know what’s in the next six bills, because that will come out for another week or two. So that’s your starting point to begin with. So, contractors are very worried about is there a realistic starting point or is there some pie in the sky assumption that the president’s original budget request for FY 24, which was huge increases over FY 23, but they’re not getting that money except for defense. What does all that what’s in the baseline?

Tom Temin Well, we don’t know at this point because the skinny budget, when it does come out, as you say, won’t have all of that detail. But in the meantime, the question contractors would be most concerned about even beyond 2025 is what’s going to happen in 2024 fiscally? Because, right, the bills could pass, but the fiscal year is halfway over.

David Berteau It is halfway over. And one of the one of the things appropriators always look at when they receive the new budget is their unobligated balances from prior years that they can decrement the request and to offset those? Well, when you don’t even get your appropriations until halfway through the fiscal year, you’re almost inevitably going to have one of two things either a mad rush to obligate the money at the last minute, or some unobligated funds will be expiring. And it’s not that the work isn’t there to be done, the work is there to be done, and the contractors are ready to do it. But the agencies have to get that work out the door, have to get it solicited, evaluated and awarded. So, two other big things. So, I think we’re watching in terms of watching the FY 25 budget. It’s not only the spending levels by agency, it’s what are the assumptions inside those spending levels. Right. So, in FY 24, for example, the administration proposed and has already implemented in advance of the appropriations, a 5.2% pay raise for federal civilians and for military uniformed personnel. Those pay raises may be well deserved, and they barely keep up with inflation, right? That was, by the way, no similar increase in pay for contractors. And in fact, in many cases, they’re trapped in contracts with an escalation clause of maybe 1% or 1.5%, even though wages are up quite a bit more than that. The second thing they’ll be looking for in FY 25 is what is the inflation estimate? So, you know, the administration in FY 24 assumed a 2.4% inflation. I’m not an inflation expert, but I don’t think anything is down to 2.4% annual rate yet. So, we’re inflation is still above that. Right. And so that means both of those things, the increase in pay without necessarily the money to go with it. And the assumption about a lower inflation when it’s actually higher, both of those eat into the potential dollars for government contracts to get that important work done.

Tom Temin We’re speaking with David Berteau, president, and CEO of the Professional Services Council. And there’s a related issue, I guess, with respect to whether anyone wants to do business with the government. And that is the layering on of requirements and compliance directives coming from a variety of agencies. You’ve outlined a whole list of them that just add drag to doing business with the government at a time when the industrial base is shrinking for the Defense Department, and small business participation is also shrinking in terms of the numbers of companies doing business with the government.

David Berteau Yeah, there are several dynamics here, and they all point to complications rather than, than moving forward with alacrity here. The burden of compliance is, of course, an inherent element of government contracting. You have taxpayer dollars being spent, and you want to have visibility into how those dollars being spent and whether the companies are behaving properly at the receiving end. But in the end, compliance is a necessary enabler in order to be able to win and perform contracts. But it’s not the point of the contract. The point of the contract is actually to get work done, whether it’s to deliver products or to provide services for the government to move forward and get its missions and functions accomplished. Right. And so, compliance is an underpinning of that. But it isn’t the goal. But you wouldn’t know that from the dynamics going on in the in the regulatory process. And I think there’s three pieces of here that are really relevant. Number one is to us these proposed rules and interim rules that get issued, whether it’s acquisition regulations or whether it’s from the Securities and Exchange Commission or the Federal Trade Commission or the National Labor Relations Board, or the Insurance Division of the Treasury Department, and on and on and on. Right. It doesn’t appear to be integrated in any way, shape or form, but to achieve the objectives, it’s just I mean, there are objectives being achieved here, but they’re not output from the contracts. So that’s the most important element of it here. I could give some examples.

Tom Temin Yeah. There’s a couple of examples. Of course, we’ve talked about the CMMC proposed D-FARs rule. And you know that’s going to come whether or not people commented comment on it or not. They’ve gotten a lot of comments, but that’s coming. But then there’s also DHS has its separate cyber rule. So, you’ve got, you know, a symphony of just cyber security rules.

David Berteau Right. And companies that only do business with one agency may only have to worry about that agency’s rules. But there are plenty of member companies of PSC that do business with DoD, that do business with DHS, that do business with all the other federal agencies. That’s one of the things we do is cover the entire federal government. So, we asked the DHS, for example, when they put out their final rule, how can you put out a rule when we’re still waiting on the National Institutes of Standards and Technology, the NIST standards, the update of 871 Rev three. You’ve talked about it a number of times on your show, and it’s really quite an elaborate undertaking, but it’s not done yet. Right. And so how can you put out a rule when you don’t even know what that is? The CMMC took that into account by saying you’re going to comply with whatever the rule is. Well, that could be one thing at one time in the contract and another thing later on. So, integrating these becomes really, really critical. The other piece that I think is really hard to comprehend here is those companies that do business with multiple agencies. Now we’ll have multiple rules to comply with those who do business with an agency that has no cybersecurity rules other than the NIST standard, probably doesn’t have the same cost that they’re going to incur. So, you run into a situation, Tom, where compliance may make some companies noncompetitive against other companies who don’t have to comply. That does not make any sense. And it certainly doesn’t contribute to cybersecurity.

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Tom Temin Yes. And the sad fact is that a lot of that apparatus stems not from people on the contracting front lines, because I don’t think contracting officers necessarily, as a group, are pushing for all of this. It comes at the political level.

David Berteau Three things that we certainly agree on. Number one is we have a threat, a cybersecurity threat all across America and around the world. And that threat is growing, right. And I think it’s pretty clear that what we’re doing now is not enough, because we’re not we’re not keeping up with the threat. So, the big question is, do these kinds of rules actually contribute to keeping up? Do they get you ahead of the of the threat? Our comments that we submitted and you’re right there, I think there were over 300 sets of comments submitted. So, it would take a while for, DoD to adjudicate those comments and put out the final rule. But our comments focus a lot on the need to keep up. Right. You really have to pay attention to, is this actually going to increase the security of the nation across the board? There’s also a big question, by the way, how secure are the government systems which have to comply with different standards?

Tom Temin Well, we haven’t solved anything though.

David Berteau But I do think it’s important, though, to recognize that it is a serious problem, that we do need to tackle it. And, you know, every step in the right direction is a good, positive step. The question is, how does the government do a better job of integrating it across all of their regimes so that we have a set of rules and regulations that actually get us where we need to go?

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