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The procurement environment is a little confusing at the moment. Appropriations came through with only a half a year to obligate them. The 2023 budget schedule is foggy. And inflation overlays the buying power of every dollar. For what contractors are, or should be thinking about, the Federal Drive with Tom Temin turned to the executive vice president for policy at the Professional Services Council, Stephanie Kostro.

Interview transcript:

Tom Temin: Stephanie, what should contractors be doing now in this kind of sort this out for us?

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Stephanie Kostro: I wish I could say that having a continuing resolution situation is something new and different. But of course, we’ve had that, for the vast majority of the last decade. We’ve started the fiscal year under a continuing resolution and the constraints under CRs are well known. It’s no new starts no new programs, you can’t even retire old programs, you have to keep the status quo, as though you’re a frozen in time as of Sept. 30 of the previous year.

With six months gone of the new fiscal year, I can no longer call it the new fiscal year, I guess, FY 22. We finally have an omnibus appropriations that will cover the rest of the fiscal year. The issue for contractors comes with the fact that contracting officers within the government under a CR are often loath to obligate the funds that they have at their disposal, because they’re not quite sure if they’re going to be facing recurring continuing resolutions or when they’re ever going to get that we’ll call it a full year appropriation, but it’s the rest of the year appropriation. So you’ve seen a chilling effect under CRs, and now all of a sudden, there’ll be a mad scramble to obligate funds. You know, the fiscal year 22 ends on Sept. 30 of this year, that gives them roughly six and a half months to obligate all of this money that they’ve just been given, if it is one year money. And this is where I want to draw a distinction for you, Tom, and the listeners is that a lot of the money that has been appropriated is one year money in the Department of Defense, for example, that’s operations maintenance funding, other pieces of the budget of the Appropriations Act are multiple your money, whether it’s research, development, test, evaluation, or procurement, it’s not limited to the fiscal year. So really, the mad dash will be on that one year funding that was provided in DoD, that’s operations and maintenance.

And so when I talk to contractors and for PSC, specifically services, contractors, I talk to them about making sure that they’re keeping lines of communication open with their contracting officers, open with whatever department or agency they’re working with, to make sure that the operations and maintenance money is being obligated. Here’s the rub: right about now is when the comptroller at DoD, for example, starts to look around and trying to sweep up unobligated funds. The comptroller looks around, asks the services and the defense agencies at DoD, what have you not obligated? That usually comes out about May with a giant reprogramming sometimes as late as August, but oftentimes, somewhere between the May and August timeframe. And I really, really do worry about that one year money, about that operations and maintenance money. So that is what I’m watching.

Tom Temin: What about procurement accounts?

Stephanie Kostro: For the Department of Defense, it’s not one year money. In some cases, you know, when you look at RDT, near the research, development, test, and evaluation and procurement money at DoD, it’s two or three year money. And so it’s really O and M, some of the personnel costs. And remember, civilian pay is all within operations and maintenance. So when you’re looking at something like the Department of Defense, with the number of civilian employees they have, all of that is tied to the fiscal year in which is appropriated.

Tom Temin: So therefore, contractors should try to convince people to start programs now because if there’s, when there’s the next CR, at least they can continue with what they started in the stub of the prior year.

Stephanie Kostro: That is an excellent point, Tom. No one is, if you’re a betting person, you’re not betting that we’re going to start fiscal 23 with a full year appropriation, all indications are that we’ll start fiscal 23 with another continuing resolution, not only because that’s been the norm over the last decade or so, but also because we you know, we’re in a midterm election cycle, and people are going to try to get out of dodge, get out of D.C., go back to their district’s campaign. I suspect very strongly that we’ll start with a CR in 23. So the only time to start a new program is between now and Sept. 30.

Tom Temin: Great. We’re speaking with Stephanie Kostro, executive vice president for policy at the Professional Services Council. Inflation seems to overlay all of what’s going on now. How does that affect what you expect to happen between now and the end of the fiscal because things might have been bid. Now they’re going to be awarded perhaps unobligated, but the costs have gone up?

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Stephanie Kostro: That is an excellent point, Tom. You know, you mentioned procurement before and this is really where the rubber meets the road is is that it does reduce the buying power of the Department of Defense when you’ve got the inflation that we are currently experiencing. I spent a little bit of time in OSD, the Office of the Secretary of Defense in the comptroller’s shop. And I know that they do plan for inflation. For fiscal year 22, they planned for roughly 2.2% inflation and they’re facing 8%. So what that does is greatly reduce the buying power of the Department of Defense and also of the contractors.

The General Services Administration asked about a week and a half ago, asked the associations with which it works to pulse our members to find out where exactly are they feeling the impact of inflation on supply chains. GSA has something called economic price adjustments that they can use. But there are limits to that normally, in how many price adjustments you can ask for. Our membership, and we’ve got over 400 member companies, came back to us and said, you know, really where this is hurting us, yes, it’s the supply chain, things are taking longer to be delivered, and we can buy fewer of them with the current inflation. However, we’re really feeling the rub when it comes to our personnel, our labor, our workforce, because we can no longer pay them a pace with inflation. You know, what they used to be able to buy at the store, think of a gallon of milk, or you can think about a, you know, a gallon of gasoline, they can no longer afford what they could afford six months ago. And so how do contractors pay their people a living wage or keeping pace with inflation, and it’s tough. Those individuals are seeking employment elsewhere, higher paying jobs. And so, from a contractor’s perspective, inflation has all of these ripple on effects, reduced buying power, and then the workforce implications are tremendous.

Tom Temin: And somehow that seems to tie into the final rule on buy in America or made in America. That’s been the policy anyhow. But it does increase the percentages and so forth. Any real effect there for services contractors?

Stephanie Kostro: We at PSC have long talked to the executive branch of the administration, in particular about the cost of made in America. Now to go back previously, you know, I mentioned GSA, they have put a temporary moratorium on how many price adjustments you can ask. So that’s great news for folks who are looking for price adjustments in the GSA world. We are working with DoD, Department of Homeland Security and others to see what they’re doing for inflation. But the made in America piece, when it comes to products and goods, there are going to be increased costs. And it really is a balance. What does the administration seek in terms of the the impetus behind made in America and interestingly enough, the executive order is called ensuring the future is made in all of America by all of American workers. For the administration, I believe this really does come down to the workers. And so again, we’re looking at inflation, we’re looking at what it’s doing to the workforce, we’re looking at what we can pay them. And it really is an issue. I would caveat this, Tom, by saying services are excluded from the made in America, push here, right now it is products and goods. And we hope to keep that bright line distinction that when it comes to making the future, you know, the future is made in all of America by all of American workers, that we are working together with the administration to make sure this is done in a sensible way, fully cognizant that it’s going to be it’s going to cost more than the using the global market.

Tom Temin: And just a detailed question on this $800 million dollars that was approved by Congress signed by the president for aid to Ukraine, military items and so forth. Any effect on services contractors from this money?

Stephanie Kostro: Yes, I’m glad you asked that, Tom. You know, everyone in our community, we’ve been talking about the horrific developments that we’ve been seeing in Ukraine, what the Russian forces are doing the logistics challenges they run into where the Russian forces can’t feed or fuel up their forces that are in Ukraine. From a services contractors perspective, we are seeing, you know, obviously mentioned the 800 million in military aid to Ukraine, part of that will be sustainment services, and the like that will use services contractors. The other piece of it is what is the U.S. doing and what is NATO doing to mobilize their lines of communication so they can resupply any troops that you know, might be needed. I have seen job advertisements from services contractors for jobs in Poland that are sustainment or life support services. Life support, you know, in the DoD context is basically food, shelter, transportation, it’s not life support in the medical sense of although that may come into play as well. So services contractors are gearing up to help support U.S. NATO forces as decisions are made and so the forces are flowing, services contractors are flowing into the European command theater.

Tom Temin: Interesting. Stephanie Kostro is executive vice president of policy at the Professional Services Council. Thanks so much.

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Stephanie Kostro: Always a pleasure, Tom. Thank you.

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