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A new rule increasing the U.S.-made content in what the government buys is on the way. The Federal Acquisition Regulation Council published it yesterday. It increases the minimum U.S. content from 55% to 60%, and eventually to 75%. But, the rule has several exceptions. The Federal Drive with Tom Temin got analysis from the president and CEO of the Professional Services Council, David Berteau.
Tom Temin: David, it’s not like we didn’t know this rule was coming in the first place, did we?
David Berteau: No, that’s true. This is in response to Executive Order 14005, which was issued very early in the administration, right after Inauguration Day. And they did publish an opportunity for us to comment. PSC commented, along with the Council of Defense and Space Industry Associations. In fact, they had 70 comments all told, and then they disposed of those comments.
You’re right, it increases domestic content requirements pretty dramatically from 55 to 75%, over the course of about seven years, but it also has options if contractors can’t meet those requirements, they have a fallback option. It doesn’t fall back below the 55%, but there are some accommodations, of course, the problem is to get those accommodations, you have to go through the senior procurement official of the agency. And they have to then coordinate with the MIAO, the Made in America Office before they can do that. This will probably have a pretty limiting effect on the number of fallback options there. But two big things that would affect companies that I think were deferred, one was the reporting requirement, which was actually quite burdensome, because you didn’t really know what you’d have to be reporting on, or how that would be used. And the second is the price preference that the government would be willing to spend for an increase in made in America content. Both of those concerns were deferred until another action, which would be the publishing of the critical items and critical components list that might be subject to the specifics of the rule. So we’re gonna have to wait one more round, see what that is, and then be prepared to comment on that as well. In the meantime, the clause will probably begin to take effect. It’s just that the big questions reporting and price preference won’t be available. So it’s gonna be hard to award contracts under this.
Tom Temin: Well I think that office of exceptions, or whatever they call it in the government is going to be busy, because when you look at electronic assemblies, and subsystems and systems, which sometimes services contractors deliver to the government as a way of just making sure that what they develop can run. Those subsystems, it’s very hard to get 55% U.S. content, because for the most part, the boards and all of the components may be the high end, semiconductors are still made here. But most of that is all foreign content.
David Berteau: It is and when you get into systems, and you saw this with the telecommunications system, the Huawei and ZTE ban under Section 889. That was put into place a couple of summers ago. It’s hard for individual companies to do the research necessary to say this one won’t work, but this one’s OK. I think and many of our members believe the government should have an affirmative responsibility, if they’re going to require us to be able to use the right parts and equipment, whether it’s telecommunications, software, etc. Give us a list of what complies, rather than have every company have to make this determination on their own. And then of course, the last thing is that this whole made in America focus on components is important, but there’s also a labor side to this as well. What you’re looking for is the kind of good paying jobs that support the federal government through contractors, and as a goal, and there’s no way that you have made in America requirements for the workers, even though clearly you would have a preference for workers necessary to be able to do that. So contract by contract is not good enough for that.
Tom Temin: Interesting. Well, one thing we can say, there won’t be any Russian content in anything, if there ever was any, which I doubt, for sure that’s closed off.
David Berteau: Assuming we can figure out where it is. There won’t be any.
Tom Temin: Big assumption. We’re speaking with David Berteau, president and CEO of the Professional Services Council, and the return to work closer to home is happening now. And there was a big COVID plan. What was it? Almost 100 pages. And you said some things were missing in there?
David Berteau: Well, the president announced in his State of the Union, and that’s, you know, we could go Tuesday, tonight that the federal government be returning to Office dramatically. Most workers will be back in the office by April, he said. Well, we’ve been talking with the agencies before and after that, and there’s no agency plans for that. In fact, some agencies have told us their guidance right now is keep teleworking, maximum teleworking until September, which is not April, by my calendar anyway. And so I think also there’s a strong focus from the president’s comments on external interface with the public, which is really important, right, but the internal operations which should where contractors operate, we need that return to office clarity as well. And it’s not just agency by agency. It’s facility by facility because the guidance right now of what requirements you have to have before you can come into a building, or even if you can come into a building is not determined across the agency. It’s determined by the door you go in, right? Do you have to have a vaccine? Do you have to have a test? Do you have to wear a mask? All these things are not determined from the top down. They’re determined from the bottom up. Contractors are in the dark on this. So what do we turn to we turn to the 90+ page new COVID response plan that the administration put out on the same day, essentially. And it you know, that says, OK, keep vaccinating, keep testing, keep investing in treatments. OK, that’s fine. But the far clause governing contractors, even though it’s enjoined by the courts, is still in play. Right? And it could be that it’s under appeal, it could be reversed or modified at any point in time. Lot of confusion here. A lot inconsistency. Contractors need clarification in PSC on behalf of our members is asking for it.
Tom Temin: And if you talk to a lot of people in the let’s say services and say the IT end of government itself, I’ve talked to a few in recent weeks, many of them say no, I really don’t plan on going back. And I’ve known a couple that have signed agreements for permanent telework, people in fairly responsible jobs. So I’m not sure how much I think, like you say they’re talking about the people that may interact with the public in-person would be returning.
David Berteau: It’s important, obviously, that you know, security offices be open, you can’t do Medicare without going to so security offices, IRS, help desk, etc. I’ve met over the weekend with a number of senior government officials and asked them, how many of your workers are excited about coming back to the office? And it’s a mixed result. I think the great resignation may not be over yet, when it comes to either federal employees. Most of our member companies are already moving people back into the offices. It’s the government facilities where the issues come up.
Look, in the end, Tom, we have to have a balance of health and safety of the workplace in the workforce, with having the workforce necessary to do the work. Either the contracts you already have in place, or the ones that you’re bidding on and hope to be able to win and perform as well. That balance point is not really clearly addressed in either the government’s guidance or in the COVID plan.
Tom Temin: Well, if you do go back to the office one way or the other, don’t eat the peanut butter crackers you left there before the pandemic, especially if they have blue fuzz.
David Berteau: I found some tea bags that had been there for two years. And I’ve had to research do they lose their caffeine by sitting there? And the answer is yes, they do. So don’t expect one tea bag to carry you through the morning.
Tom Temin: Again, especially if it has green fuzz on it and probably don’t want to put it in a tea anyway. And just while we have you, David, what are contractors saying about Ukraine? I mean, this is not a direct effect on services contractors except in or is it?
David Berteau: Well, as it turns out, Tom, actually, you know, the only death I know of involved in U.S. operations in Ukraine is a contractor employee, and it was on the Agency for International Development side of the house. You know, not on the military side of the house. The government doesn’t report on those, and we’re certainly not going to talk about it either. It’s a private issue between the contractor and the person in their family. But it is a reminder that in fact, contractors are on the front line just as much as federal civilians and military personnel are as well.
But the big issue out of Ukraine, of course, the two things: one is the supply chain impact. And we’re already seeing for instance metals for semiconductors come out of Ukraine and Russia. They’re big suppliers of palladium, and xenon, and neon. And those are already addressed in those supply chain messages that the agency sent to DoD that same day Russia invaded, but they’re not accommodated in those plans. So how are you going to increase our supply chain availability? The other impact, I think, is on wage inflation and on inflation overall. Oil hitting $100+ a barrel, $140 a barrel, we may cut off oil or Russian oil in the U.S., that’s going to continue to be up there. It’s possible to see those costs flowing through, but it also has a wage inflation impact. And frankly, the feds have not figured out how to accommodate wage growth in contractors today. And then the final lesson is probably logistics, which if we have a minute I’ll touch on.
Tom Temin: Well take a minute. Sure.
David Berteau: We’ve already seen the stories of Russians invaded, tanks are running out of fuel, trucks are running out of fuel, they can’t get food to their troops, etc. This is a home game right across their border. If the Russians didn’t plan for how you’re going to sustain your forces once they’re deployed, it asks a question then of how well is the U.S. prepared to sustain our forces? Because we don’t want home games, we want away games where you’ve got a lot longer logistics trails. I think it really puts a premium on the U.S. government taking a hard look at its own plans and capability for sustaining forces that are forward deployed as an element of deterrence because if you know you can sustain them, people aren’t going to test them.
Tom Temin: Well, it’s probably fair to say that our military leadership is watching minute by minute what is going on in Russia and Ukraine. And probably they’ve seen maybe a good solid reminder of that very fact.
David Berteau: Right. It’s lessons learned not only of how they fight, but of how we need to be prepared to fight as well. Because in the end, as many presidents have said, the best way to prevent a war is to be ready to win one.
Tom Temin: David Berteau is president and CEO of the Professional Services Council. As always, thanks so much.