The new Defense authorization bill nails down some longstanding issues

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From inflation adjustment to procurement leadtimes, the National Defense Authorization bill the Senate takes up today will address a few issues that have been nagging contractors for years. For highlights, the Federal Drive with Tom Temin talked with the President and CEO of the Professional Services Council, David Berteau.

Interview transcript:

Tom Temin: This NDAA is not the most groundbreaking we’ve seen in recent years, but it’s got a few things. Let’s talk about inflation adjustment. I know that’s a kind of pet peeve of yours, the lack thereof for a long time.

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David Berteau: It is, Tom, and the idea of needing legislation to allow the federal government to reimburse companies for the cost they’ve incurred over and above what they bid because they didn’t bid a contract with 9% inflation and 6% wage growth. And what we’ve seen is a variety of responses from the federal government ranging from [General Services Adminisitration] guidance that says it’s okay, subject to available appropriations and funds, it’s okay for a contracting officer or program to consider a request for adjustment. And then you have [Defense Department] guidance that says, yes, it’s okay. But only in very, very rare circumstances and only for fixed price contracts. And we see other agencies [the Department of Homeland Security], for example, that’s following the DoD guidance even though they haven’t actually put out guidance of their own. What the Defense Department has said, though, is that the guidance they’ve issued is as far as they can go under their existing authorities. So of course, if you need more authority, where do you go? You go to the U.S. Congress and put it in statute. There was an amendment submitted by Sen. [Kevin] Cramer (R-N.D.) that would have allowed DoD to exercise that authority. The final version of the of the language that’s in the final version of the NDAA — already passed the House, being considered by the Senate — is substantially more restrictive than the original amendment was put into place. So it’ll be very interesting to see whether this actually does anything at all. The core problem, though: Companies are facing increased costs, and a government that doesn’t really want to reimburse them for those. By the way, if you had bid three years ago, a contract that says I’m expecting 9% inflation and 6% real wage growth, I don’t think you would have won the bid. You hold the company accountable for an unrealistic future that nobody could have anticipated. Or if you had anticipated that you wouldn’t have won, that’s just unfair to the companies.

Tom Temin: And what’s also interesting is, as the armed forces have this pretty urgent need to restock their supplies, because of what has been sent to Ukraine, golly, that’s gonna be more expensive than they thought.

David Berteau: Exactly. In fact, you’ve even seen DoD officials, four star generals in charge of various material commands, have said, “Boy, the bids are coming in way higher than we anticipated.” Well, Tom, cost is cost, it has to be recovered one way or the other. It’s either eaten out of profit. And if you eat too much cost out of profit, you go out of business, or it has to be reimbursed by the government, particularly if it’s direct costs are caused by that. Here’s the problem, though: The agencies will say “Show us how much that cost is due to inflation.” And the thing is, Tom, you can’t tell what’s due to inflation, what’s due to supply chain hiccups, what’s due to wage growth that’s not caused by inflation but was caused by a tight labor market; you can’t segregate out various causes. All you know is the costs have gone up, they have to be reimbursed. If the government doesn’t help, that’s why you see legislation like this. We’ll see whether it actually changes anything.

Tom Temin: And the other question is PALT — this comes up from time to time: procurement administrative lead time, or procurement plus administrative lead time — how long it takes to get things done and awarded from the time there’s a requirement that is put out there. And they’re not exactly getting after PALT exactly, precisely. But they’re asking [the Government Accountability Office] to get after it.

David Berteau: Exactly. We’ve had two statutory changes, one in the fiscal year 18. So now five years ago. And the second in the fiscal year 19. National Defense Authorization Act.

Tom Temin: Is that long we’ve been talking about this?

David Berteau: We’ve been talking about it even before that, because it took a couple of years to get it into legislation, Tom, but it’s been a priority of PSCs for a long time. I remember companies know that the government continues to take longer and longer every year to solicit evaluate and award contracts. So what we finally got into statute is a requirement for the agencies to define PALT to measure it, and to make the results publicly available. We think they’ve done a reasonable job of defining and measuring; they’ve done a lousy job of making it publicly available. You gotta go on and search, contract by contract, basically, although you can batch them up to almost 300 at a time. But you know how many contracts there are? Three hundred at a time takes a while to get through the data. We’re pretty sure that that can be improved. And that’s partly why we’ve asked the Congress to ask GAO to look into this. But the real reason is not to know how bad off we are. The real reason is to give us the data to focus on improving it, and so this is like a preliminary step, but until we get the preliminary step right, it’s pretty hard to focus action on reducing procurement lead time and getting what you need faster. You mentioned replenishment for Ukraine. Well, if there’s ever a need for urgency, it’s now. But it’s not just a contract that’s the delay. Obviously the other things we talked about — supply chain issues, worker shortages, etc — also come into play here. But it’ll be great to get GAO to confirm what we know to be true. But we have trouble proving it.

Tom Temin: We’re speaking with David Berteau, he is president and CEO of the Professional Services Council. Right, the military services are always talking about acquisition at the speed of need, or at the speed of mission. But then there’s a little PALT that comes in. Meantime, we have seen now the statutory ban on Huawei and ZTE equipment for telecommunications; the NDAA extends that idea of banning Chinese product.

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David Berteau: It does. And it’s a very complicated provision kind of stuck in the back. By the way, this is the longest National Defense Authorization Act ever submitted for a vote. It’s over 4400 pages. It includes about 10 other bills, because of course, it’s the vehicle that will get those bills passed. Buried in one of those other bills is amendments to the section 889. We’ve talked about it on this show many times over the years. And it expands that ban from telecommunications equipment to — it doesn’t say the word China — but it’s Chinese semiconductors, products and services. Two big problems there, both of which were true for 889. Number one is if you can’t use those, what can you use? And of course, then that’s up to each individual company to find out because the government doesn’t provide a list of acceptable items, it only gives you a list of unacceptable items. And the second big question is, how can you certify that you don’t have it? Tom, I’m pretty sure that you and I in this conversation right now are using equipment that probably has what will be a banned semiconductor product in it.

Tom Temin: Yes, I don’t think you can go downstairs, open your automatic garage door, get in your car, drive to work, go up on the smart elevator, log onto your computer and make a smartphone call without probably interacting with several billion transistors.

David Berteau: Right. The statute, if it’s passed by the Senate and signed by the President, takes five years to implement. And of course, that’s about as long as it takes to bring these new semiconductor factories that are springing up, in part as a result of the CHIPS Act. So bringing bring that kind of capacity and capability back home is really important. It’s important for national security, it’s important for America. But it’s going to take a while. We’ve been through this before; we went through it 30 years ago with Sematech and it takes four or five years to build and get operating. And by the way, find the qualified workers and put into these kinds of chip factories, especially at the very high end. So it’s a five year implementation plan. But the first assessments and the first strategies are due in early next year. So we’re going to be watching very closely to see how well this is implemented. Obviously, from our perspective, none of our member companies want to support countries that would do us harm. We would love to have alternatives. But we also have to maintain the capability to deliver on the contracts that we have and the ones we’re going to bid and win in the future.

Tom Temin: Yeah, these are long cycles to build fabs and to redesign circuitry around certain products and so on. And like you say, they have to hurry up and study it and then wait five years to implement it. Xi Jinping will still be running China then right?

David Berteau: I believe he’s signed up for another five years. That’s right, it just happened. So one of the things that I think is important to keep in mind. As big as federal contracting is, it’s a blip in the global market when it comes to semiconductor products and services. And so we don’t drive the market from defense procurement and government contracts procurements. The market’s driven by the global commercial thing. What this provision tries to do is put a nudge in the direction of “don’t use these,” it’s still the rest of America is not banned at this stage of the game.

Tom Temin: All right. And meantime, let’s see today is the 13th. That leaves how many days until the CR expires?

David Berteau: Three days and one evening until midnight, and of course, Congress is coming up against the edge as they often do. There just seems to be general agreement on what the Defense number would be. And of course, these deals have two big numbers. One is what’s the Defense portion? The other is the appropriations in the aggregate for civilian agencies. The administration has proposed increases for civilian agencies. Congress hasn’t reached an agreement on that yet; we see progress and discussion. Tom, we’re only $20-something billion dollars apart out of a $1.7 trillion bill. One would think we could figure out how to do this. One of the grave concerns though is running out of time. This Congress goes out of business no later than January 3, when the new Congress comes in, and then everything has to start all over again. So we’re eagerly hoping that they can cut a deal. Get the appropriations done. If you put a CR into next year, it will be March, April, May. We may end up with a full CR for the year. Devastating impact not only on contractors but on the government itself.

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