What the 2023 fiscal budget will look like for contractors

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Now that they’ve had a week or so to digest it, contractors are starting to understand what the 2023 budget proposal by the Biden administration is starting to look like.  Federal Drive with Tom Temin   got one analysis from a man who has studied them for decades. The President and CEO of the Professional Services Council David Berteau.

Interview transcript:

Tom Temin: David I imagine in your days at the Pentagon, you helped prepare a budget or two?

David Berteau: We did, Tom, and none of them were for $800 billion, which is what the defense portion of the President’s proposed FY 2023 budget comes into play. There’s a lot we don’t know yet. First of all, because this is just the summary budget, the so called skinny budget, that’s not the size of the dollars, but the number of pages. And so there’s a lot of details not yet available. But what do we know one of the major takeaways for federal contracts? Well, first, it’s a $5 trillion budget. But the majority of that is entitlements, such as Social Security and Medicare, right? So it’s really only about $1.5, $1.6 trillion, that’s for government operations. This, by the way, is very unhelpfully called the discretionary part of the federal budget, as if national security were discretionary? And we could choose to have it or not? But what that word really means is Congress has to appropriate these funds, every year each and every year, right. So, as in the past, it’s roughly evenly divided between defense and civilian agencies. And for some cabinet departments and agencies, EPA, for example, there’s a double digit increase proposed over FY 2022. For others, defense, the increase is more modest by 5%. It varies by agency, if you will. Now, this is what the President has proposed to Congress, not what they’ve actually agreed to do yet, right. And then the third part, and then I’ll open up here is the matter of inflation. So every year, the White House builds assumptions about inflation into the President’s budget. And almost every year, they assume a level of inflation that’s lower than what’s probably actually going to happen. Why? Because if you assume a higher inflation, you cut into the actual buying power of the budget. So that’s at the proposal, and at the execution end, it’s going to cut into whatever actual inflation is, is going to be real, right? It’s not like an assumption anymore. But this one actually under assumes, we believe, so what on the surface looks like a 5% increase, for example, for defense could actually be a 2% decrease if you have 7%, inflation, and you’ve only got 4% inflation built into that into that budget.

Tom Temin: Well, there’s other issues, too, though, in DOD, with respect to DOD is that is they’re retiring more Navy ships than they’re building.

David Berteau: Right. Ultimately, you have to ask yourself, What are you sustaining in this budget, right? And what’s the end result of it now, with something like DOD, where shipbuilding takes years between the time you appropriate the funds and obligate them in a contract and the time you actually get the ship, there’s a big lag in terms of effect. The same is true, by the way, if you’re building up, and it’s certainly based on the recent events in Europe, and in the Pacific, we don’t want a smaller defense operation, we don’t want lesser defense capability across the board.

Tom Temin: Yeah, it doesn’t look like a budget in which the nation could swarm China, if needed to head off an invasion of Taiwan, just to make an example. That could happen now.

David Berteau: It could happen now. And you know, as Donald Rumsfeld famously said, you go to war not with the Army you want, but the army you have, right, and so what a budget is, is what you want for the future. And in the Pentagon, in particular, there’s a substantial increase in investments in research and development. That’s very important. And it’s important to stay ahead of China and other peer competitors, but it doesn’t produce results very quickly. On top of that, of course, you have the question of what’s Congress going to do with this proposal? You know, like last year, there’s no preset agreement on what the spending levels should be either for defense or civilian agencies. So they’re going to have to sort this out. And again, if we take fiscal year 2022, which is the first time in a decade that we didn’t have an agreement, the so called the old Budget Control Act Agreement, that lasted for 10 years, right? Well, we’re only three weeks since the President signed last year’s appropriation. And now we’re proposing next year’s appropriation. You know, in defense, for example, Congress added more than $30 billion to last year, and this new request acknowledges that and builds on it, but for other agencies, the President’s budget seems to ignore what Congress just passed. They didn’t get the money last year. So they asked for it again, this year.

Tom Temin: We’re speaking with David Berteau, President and CEO of the Professional Services Council, but for services vendors, it looks like they threw billions at almost everything standing up in the civilian side?

David Berteau: Well, that’s a great point. You know, there are some areas of focus in the budget in the proposed budget that really matter. There’s big increases proposed across the board for cybersecurity, for modernizing legacy systems, not Just IT, mitigating climate impacts, those increases kind of align with the administration’s priorities. And obviously companies pay attention to that, because where those priorities are, where the funding is going to be, that’s where the contract opportunities are going to be. They’re going to need the help and support of contractors to get that done. There’s other areas, though, where we really can’t tell what the administration is proposed, because the details aren’t public yet. One of those, for instance, is supply chain investments, right? The whole question of supply chain resilience, etc. Back in February, there were six reports issued by seven Cabinet departments calling for a lot of increases, we can’t tell yet what they’ve done to support those priorities whatsoever. And then finally, of course, what matters most for contracts and back to the agencies themselves, is, what the final numbers will be, and when will we see them keep in mind, it’s April where we’re already less than six months away from the start to fiscal year 2023. It’s almost a guarantee that we’ll start the year on a continuing resolution, it could last through December, it could go well into next calendar year, run under a series of CRs. So it may be a long time before we actually have the appropriation, and then they can turn those into solicitations and awards for contracts.

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Tom Temin: Well, yes and you also have the added factor that Congress has an election year and things are contentious, you might say on the political front, and therefore, they’re going to want to get out of Dodge as early as possible to get back to the home Hustings.

David Berteau: That’s true. It’s not impossible. In 2018, we actually ended up with agreement and full-year appropriations in advance for six Cabinet departments in a midterm election year. But that’s the only time that’s happened in the last 13 years. So it’s not likely to happen this year again.

Tom Temin: And while we have you maybe update us on a blacklisting rule, the fair play and safe workplaces that some corrections have been made there and what’s going on? How does that affect the industry?

David Berteau: Well, this is an old story, because it goes back to an executive order issued under the Obama administration that ultimately turned into a Federal Acquisition Regulation rule that basically took away the responsibility for labor law enforcement from the Office of Federal Contract Compliance Programs in the Labor Department, which has historically had that responsibility and statutorily still does, and put the responsibility for enforcing labor laws on individual contracting officers, as they made decisions about whether a company was responsible in the acquisition sense of the word and could be awarded the contract. This was promulgated through the FAR rule, it was suspended by a federal District Court injunction in 2016, and then ultimately was reversed under the Congressional Review Act in 2017 by the Congress, part of that Congressional Review Act requirement says the administration cannot propose a similar rule ever again. And so now we saw sneaked into a administrative update of the Agriculture Acquisition Regulation, the AGAR, which I’m sure you look at every morning, when you wake up, is there, are there, AGAR updates out there, a rejuvenation of this proposed rule, which would actually not only reinstate something that our view is the Congressional Review Act prevents you from reinstating, but would put the Agriculture Department in charge of federal labor law compliance, something that I don’t know when they just sitting around one morning saying we don’t have enough to do, why don’t we take over the entire federal government’s labor law compliance programs? PSE’s view is, first of all, this is a flawed approach. Secondly, we do believe that, in fact, labor laws should be followed, and our members do follow those labor laws. But we think that in fact, if you need better enforcement, you ought to put the resources into the organization that’s designed and structured and authorized to do this. So that’s what we put back in, by the way, it only provided for 30 days of comment period for a major rule change like this. We had asked for an extension, we did not get one, this is an issue you’ll hear more about later.

Tom Temin: I would have given labor law enforcement to you know, somewhere like, maybe, the Peace Corps or something, give them another task to do, but I guess agriculture looked good in somebody’s eyes.

David Berteau: It is a serious business, we do need to make sure that in fact, contractors comply with, in fact, contractors are always held to a higher standard even than the regular general public, and the vast majority of them comply with that and exceed that. Right. So do need something to catch the scofflaws that are in place there. But this is not the way to do it.

Tom Temin: And again, looking toward acquisition vehicles that might be able to fulfill some of the requirements should some form of the 2023 budget get passed, there’s a major Small Business Services acquisition deal that was engineered by the GSA to replace the Alliant Two, which didn’t work out very well. And now Polaris is already getting headwinds at the solicitation stage.

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David Berteau: That’s right. GSA, the General Services Administration, has been pursuing Polaris a new government wide acquisition contract for a long time. They finally issued the formal solicitation a couple Fridays ago the 25th of March. And it included a material change in terms of the way proposals could be structured, particularly in the joint venture area for small businesses. The whole contract is aimed at small businesses, and it has four pools and the material change that the GSA put into place really right before the solicitation was issued, had a very strange twist to it. You know, past performance matters a lot in government contracting. And for small businesses in particular, getting good past performance takes a while to build up and they jealously protect that. And they’re rightfully proud of their past performance, even though they’re small. But in this it allowed a joint venture of a large company as the mentor and a small company as the protege under any formal mentor protege program, to use past performance results only from the large business and not require any past performance results for the small business. Clearly, this has the potential to devalue the past performance of existing small businesses and increase the value of small businesses that have never done business with the federal government before. This puts a whole lot of things at risk, not the least of which is the ability of current small businesses to win any place on this pool going forward. A protest was filed last week with the GAO, we’re gonna have to see how that protest evolves, and whether or not the solicitation holds up.

Tom Temin: Well, I guess the rule is eternal, do what you’ll say you’ll do in the original solicitation, or withdraw it and start over.

David Berteau: Well, and we’ve been down this road before. There was a similar protest last year on the GWAC  put out by the National Institutes of Health and their NITAAC office called CIO-SP4. And they proposed a similar joint venture rule there. And that protest was filed and GAO sustained partially sustained that protest going forward. You really have to ask yourself, what is the government looking for here? Are they actually looking for better performance from small businesses in delivering the services and products that the government needs? Are they looking to bring in companies that have never done business with the federal government for, have no proven track record, and may or may not be able to actually perform if they were awarded a contract.

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

David Berteau: You’re welcome, Tom. Look forward to the next time.

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