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The House Armed Services committee spent time last week marking up the defense authorization bill for 2023. As always, the NDAA has a lot to say about procurement and contractors. But it doesn’t say anything about whether they’re compensated for inflation. Joining the Federal Drive with Tom Temin with what the services contractor community is watching closely, Professional Services Council president David Berteau.

Interview transcript:

Tom Temin: David, do you listened in on this, and what do you see going on here with respect to contractors?

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David Berteau: Yeah, Tom, there was a welcome change, you know, the entire House Armed Services Committee markup was done live on the web starting at 10 a.m. Last Thursday and lasting until midnight or later, I didn’t stay up all the way to the end, I confess, but we got to see hundreds of amendments disposed of the final bill, we’re waiting to see the actual language of the final bill. But it did add, you know, $37 billion to the DoD (Department of Defense) request. This is a little bit short of what the Senate added, they added 45 billion, but we haven’t seen the Senate’s language yet, either. They just put out a little bit of a press release that touted a couple of items. The big issue for companies, though, is how does this help them address the inflation that they’re experiencing today, particularly workforce inflation, the extra cost of workers, not only to recruit them, but to retain them?

Tom Temin: Right. And so contracts that might be ongoing, that have certain labor and rates built into them. You’d be stuck if those rates continue, but the labor costs are going up?

David Berteau: Right? Well, look, we’re living in fiscal year 22. Right now. Right? So the legislation is for FY 23, which doesn’t start until Oct. 1. And as we expect, won’t actually start until sometime well after that, because we’ll be under a continuing resolution for a while. This year’s budget FY 22, assumed an inflation rate of about 2.2%. It’s actually as we know, 8.6% or higher in many cases for government employees and government contractors. Well, that’s a difference of, you know, $50 billion right there across the board for the Defense Department. None of that is addressed in the NDAA. There’s a 4% assumption of inflation for FY 23, which is, again, is about $30 billion short, if you assume that today’s inflation goes on forward. They attempted to address that, but only in a couple of areas.

Tom Temin: All right. And what about procurement? I mean, so you’ll go broke trying to fulfill contracts on fixed prices that we can pretty much assume but often the NDAA has procurement provisions. What do you see shaping up here this time?

David Berteau: It does in some of the procurement provisions. Of course, you know, we watch these very closely. A number of amendments were proposed that could add some value to this. A couple more proposed that would not. One that we were particularly pleased to see go down to defeat was a proposal to interfere with the e-commerce pilot project. You may remember a few years ago, the FY 18 National Defense Authorization Act created an e-commerce portal pilot project under the General Services Administration. And ultimately, GSA awarded contracts to three companies. And it’s a three year pilot. This is a real pilot, unlike some pilots, which are just designed to take care of an issue and put it on the shelf after the pilot is done. It’s a real pilot to see if we can have the government buy off the internet the same way you and I do every day. Well, not every day. But every day we buy, we buy something there, right? And this is now two years into it. This amendment would have kicked one of the current contractors off the contract. This is a major precedent, it would set up the Congress interfering legislatively in an ongoing contract by essentially forcing a termination for convenience by the government without any rationale or cause other than the fact that Congress decided it was time to do that.

Tom Temin: Which one did they want to get rid of?

David Berteau: They didn’t specify the name of the company. What the amendment did is it said, no company can be on this contract if their market cap, their actual stock value times the number of shares outstanding, is more than $600 billion. Well, there’s only one company of the three on the contract that meets that test, right? The three companies on this contract were Fisher Scientific, Home Depot and Amazon. And you can do the arithmetic in your head as to which one meets that test. So the amendment did not specify by name. But it’s not so much the company involved as it is the precedent that this would set if Congress interfering in an existing contract. The whole federal procurement system depends upon the integrity of the process. And the ability of contracting officers to exercise their want in the interest of the federal government and particularly something that’s already two years in of a three year contract made no sense whatsoever. So we were really pleased to see this go down to defeat in a roll call vote in the committee markup.

Tom Temin: Interesting somebody had it in for that company, I guess.

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David Berteau: Well, it’s not the first time this has been proposed. It’s been brought up as amendments on the floor. It’s been brought up as separate bills, etc. So we continue to watch this sort of thing. And again, it’s not about the individual contractor company, it’s about the precedent that it sets for the government.

Tom Temin: We’re speaking with David Berteau. He’s president and CEO of the Professional Services Council. Well, that aside, then it gets us back to inflation as biggest concern going into next year and the dollars available. What do you think can be done to address this issue?

David Berteau: Well, this is not something really Congress can address, although there is the potential of a supplemental for FY 22 for inflation. But all the Congress can do is actually put money in specific line items and the NDAA did that put about $3 billion, $3.5 billion for fuel inflation, we all know about fuel inflation every time we put gas in our vehicles, right. And, military construction projects’ inflation, but this doesn’t address the contractors’ cost, particularly cost of workforce. What could be done, and what you’re seeing being done, is some agencies are opening the aperture for a request for an equitable adjustment, subject to the available funding, right. So no more money needed, just what funding is out there today. Other agencies are making it very hard for companies to submit such requests, what we probably need is a government wide set of guidance that says, if you’ve got the money, open up the door, let the contractor submit their requests, and adjudicate them positively so that the companies can stay in business. This is particularly true for small and mid-sized businesses that don’t have the resources necessary to ride this out for how long? How long will inflation keep going? I don’t know, do you?

Tom Temin: I wish I did, I would bet on it. But the issue of contractor labor costs, do contractors sometimes have the capability or the flexibility or the rights under the contract to reduce staffing for a given contract so that the costs remain stable. But there might be fewer people?

David Berteau: You’ve hit on something really key there, because ultimately, you can’t perform above the funding that’s there. And if your costs increase, and then somewhere along the way, you just have to fail to meet the requirements. That’s not in the company’s interest. That’s not in the government’s interest. That’s not in America’s interest. And so making adjustments to be able to cover those costs will be particularly useful here. I think, though, that there’s also the possibility that you could see some encouragement coming out of the Congress on this. But we haven’t seen any language along those lines, yet. There was one other bill, one other amendment put into place that could have major implications there. And that has to do with O&M, operation and maintenance accounts and readiness.

Tom Temin: And what do you see in the bill with respect to those accounts?

David Berteau: So it requires DoD to submit to Congress starting next year’s budget, right? Information about the operation and maintenance funding. And this is a particular line of funding that is one year money, that they need to keep weapons systems ready going forward. It’s kind of surprising that DoD doesn’t do this already. But I found when I was in the Pentagon as the assistant secretary for logistics, that it was very difficult to get those kinds of estimates going forward. So you know what you have for one year, but you don’t know whether you have the money in the out years for that as well. So this would be a huge step in the right direction. One of the lessons from Ukraine is how hard it is to support your forces once a war is underway. And it’s important for the U.S. to make sure we’ve got the funding necessary to do that going forward.

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Tom Temin: When they say operations and maintenance, they don’t just mean facilities, they mean also operations, as in warfare operations?

David Berteau: It is, this is flying hours, this is steaming hours for ships, this is tank miles. This is both for practice and for supporting forces in operations.

Tom Temin: So it has to do with continuity, basically?

David Berteau: It has to do with continuity, it has to do with demonstrating to any potential adversary that we’re perfectly capable of supporting our forces in a combat environment, unlike some in Ukraine today.

Tom Temin: And just a final question, what are your members saying about the issue of retaining employees now, because you hear a lot of companies, different industries, where people say, well, unless I get what I want, with respect to telework, and this and that I’m out of here. And there’s this sort of employees in the driver’s seat situation we have now in a lot of industries.

David Berteau: It’s probably the number one issue that our member companies are facing, Tom, you know, we’ve got 11.5 million job vacancies in America today and only 6 million people looking for. That says it’s a seller’s market, right. And that’s true even in the federal government and for contractors where we’ve got way more job openings than we have individuals. And they kind of get to name their own tune right now. Right? You drive by offices, you go to federal offices, you don’t see a lot of people going into the offices yet, in many cases. And so it’s a real tough challenge in three ways. Number one, it’s hard to recruit. Number two, when you lose somebody, then all the others are saying, wow, he just got a big raise by going to work for another company, not a contractor. What are you going to give me so that I don’t go do the same thing? And then it’s a question of training and investing in that workforce for the future as well. It’s a triple challenge across the board. We really need addressing of this by both the executive branch and the Congress.

Tom Temin: David Berteau is President and CEO of the Professional Services Council. As always, thanks so much.

David Berteau: Thank you, Tom. Look forward to continuing this conversation down the road.

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