White House breaks the rules on rulemaking for contractors

Contractors are questioning how the White House could ask for compliance with a procurement rule that is not even formally proposed yet. Last week, a guidance memo came out, having to do with small business participation in government-wide acquisition contract. The action raises a lot of questions. For more, the Federal Drive with Tom Temin spoke with the President and CEO of the Professional Services Council, David Berteau.

Interview Transcript: 

Tom Temin And, David, this one did seem like a little bit of a reach the rule of 12 for GWACs. But go ahead and start doing it. But we haven’t formally come out with a rule making it.

David Berteau You’ve touched on so many potential implications in that very short opening sentence there, Tom. You know, for one thing, this memorandum, it caught me very much by surprise. And for something of this magnitude and scope, and particularly with this kind of direction of start now, even though we haven’t begun writing the proposed changes to the regulations yet, it’s really got a lot of disturbing elements. It’s not that there’s a lack of an understanding of the goal. I mean, it says they want to help agencies promote both a diverse federal supplier base, which is defined in a lot of different ways, and advanced contract stewardship. So, let’s take care of the taxpayers’ dollars, like by using these multiple award contracts. Those are noble goals and not the only goals. So in fact, one of the goals that’s not mentioned anywhere in this seven page memo is are you getting the results you need from the contracts you award? So it’s not just the front end, but it’s actually the back end of the agencies getting the support for their missions and functions. But there’s a lot of other question to get raised here. I’ll be happy to go over a couple of them.

Tom Temin Well, this imposed the rule of two for small businesses in GWACs that are not necessarily set aside for small business. So it seems like a kind of changing the rules for all contractors that one places on these particular government wide acquisition contracts.

David Berteau Well, and there are competing incentives or objectives here. Right. So if you increase the application of the rule of two, which at its core says if the contracting officer believes that there will be two qualified small business bidders of roughly equal characteristics, right, that you can basically freeze the contract at that point as a solicitation at that point and just pick between those two. They haven’t even submitted yet. You’re making your decision before you’ve even seen the submission. Do you have reasonable belief that they would do that right? There are two problems with that. Number one is it immediately freezes out everybody else because there’s frequently way more than two who would love to compete for this, and probably to the government’s benefit if you did. The second thing, though, and I think the more insidious consequence is it pretty much locks in only those people who are already in the business of they’re on this multiple award contract. Their core business is government contracting. So all this push that you’ve heard in the administration, and you heard it just last week at a big conference of outside investors, you know, we want more innovators. We want more nontraditional suppliers. We want more small businesses who bring the innovation. Rule of two pretty much locks those people out, because you’re not going to be the first or second in if you’re not already in the game.

Tom Temin And this also goes along with, you know, maybe in the flip side, if they’re trying to encourage more people to come in, but at the same time they impose just endless reporting and compliance regulations on your labor practices, whether you have a gas stove in the company kitchen, all of these things that I would think people that are new to the federal contracting field would say, this ain’t worth it. All this work.

David Berteau There’s even a line in this memorandum. And then we’ll get to some other things that illuminate what you just said there. But you know that, in fact, companies may find it easier to compete for work under their, quote, reduced administrative burden and simpler evaluation procedures than they do just pursuing competition in the open market. There are very few companies that say it’s easier and faster to do business through the federal government than it is in the commercial marketplace.

Tom Temin Right. And then there’s also the issue of whether the administrative practices, rules and laws permit an agency to impose compliance on a rule that’s not even proposed yet, let alone out in the proposed state.

David Berteau This may be the most gravely concerning line in the entire seven pages. OFPP, that’s the Office of Federal Procurement Policy that issued the memorandum encourages early agency adoption of these management steps, even though in the prior paragraph it says, you know, the Small Business Administration and the agency members of the Federal Acquisition Regulations Council, the FAR Council, have begun developing proposed regulatory amendments to address these actions. We don’t know what those proposed amendments are going to say. We haven’t had an opportunity to review them and comment on them. The government had not had an opportunity to adjudicate and incorporate those comments, which often make the regulations better. And yet there are agencies that are being encouraged to begin immediately adopting these management steps. This is confusion of the highest order, and it really does violate the basic elements of the Administrative Procedure Act, in our view.

Tom Temin We’re speaking with David Berteau, president, and CEO of the Professional Services Council. And on that dramatic note, I want to switch gears here and get to the tax bill that has cleared the House. And it has an R&D tax credit change that a lot of companies welcome. In your view it also makes things better for the government.

David Berteau It does. You know that this bill, which was negotiated both between the House and the Senate. So, it now goes to the Senate. We’ll see what happens on the Senate side. There may be hearings, etc., but it’s a basic trade off of some business-related tax benefits, with some enhancements in credits for lower income families with children. And that’s a trade that’s been discussed for a couple of years now. But it’s often seen that this, particularly this research and development tax credit, is just for the benefit of commercial companies. There’s a huge hidden benefit for the federal government here, Tom, because a company that’s doing business with the government, if it can write off its research and development in the year it incurs those costs, can actually do that research before they have a contract as part of, in fact, the development of a way to respond to a solicitation to improve the systems and processes that the government would have. This is free benefits to the government in advance of a contract, but it goes away if, in fact, you can only write off 20% of that cost in the year up. So, we strongly endorse this and we endorse not as a partisan bill or a business bill, but as a bill that, at its core, has a real benefit for every single agency in the federal government.

Tom Temin Which means it probably doesn’t stand a snowball’s chance in hell of actually passing. But.

David Berteau Well, one of the things that happened when the provision expired back a couple of years ago and we went back to only 20% per year, is companies had spent the money, put the bid in. It was part of their bid; it was being evaluated. And now all of a sudden, the entire cost basis of their proposal is thrown into a coquette. So that caused a lot of disruption and concern. And we had companies just in the services business. This is not just manufacturing who were writing off hundreds of billions of dollars of losses associated with this. So, we’d really like to see this restored. And we do think every agency in the government beginning that drive for innovation, that drive for system and process improvement, this helps in that regard. So, we strongly support this bill.

Tom Temin Yeah. And this sudden change then can really change a company’s balance sheet as well as its activities.

David Berteau It can. It changes the balance sheets. It changes evaluations. It changes your ability actually to bid and win the contracts. Because now you may not have the cost basis that you need to have to be able to win.

Tom Temin And I also wanted to ask you your take on the proposed rule that contractors would have pay bands for job openings, and there’s this whole new approach coming to pay, and they’re telling agencies you can’t look at someone’s pay history in hiring them. And there’s a lot going on for contractors too with pay. And what’s your take here?

David Berteau This one is following the procedures in the Administrative Procedure Act. So, you know, it was in the Federal Register notice last Tuesday. And it is a proposed rule for what they call pay equity and transparency in federal contracting. It has a number of flaws associated with it, not the least of which is that the justification is that this will save contractors time and money and help them hire the right person. By the way, I would note that last Friday’s jobs report says we’re continuing to have a very tight labor market. You know, there’s still more jobs open than there are people looking for work. And that’s especially true in the government contracting business. And so sometimes hiring anybody at all is a real challenge in that regard. So, we think it’ll cost more, but we really think the real constraint is that the contracts will probably limit what contractors can pay. They already do. Right. So, every contract has bands of pay built into it. So many years of experience, so much degree and series. And this is what you’re going to get to charge for it. You win the contract not by bidding high but by bidding low. I think if the government really wants contractors to pay more, they need to start awarding contracts to companies that are paying people a much fairer and decent wage. That’s not what they’re doing.

Tom Temin Yes, some ways it would almost force the GS system on federal contractors, and that what you’re doing for a contractor is within this band. And that’s the way life is.

David Berteau Well, there are some states, of course, that have some version of this already. And the District of Columbia, just to put a law passed, I think, back on the 12th of January. So, it’s still technically inside it’s 30 day congressional review process, but I don’t see any sign that Congress is going to reject it. But whenever you start doing this, two things will happen. Number one is you’re going to have to put a band in place, even though that actually might reduce your ability to hire the person you need. The other thing of course is who is going to say, oh I’d love to start at the low end of the pay band.

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