As the second quarter of 2024 begins, there is a lot on the horizon for those who do business with the government: New regulations and laws and even the revival of a long time argument. To discuss those matters, Federal News Network’s Eric White welcomed David Berteau, President and CEO of the Professional Services Council on the Federal Drive with Tom Temin.

Interview Transcript: 

Eric White Absolutely. So, a lot of stuff to talk about. Let’s first go over an issue, a longstanding issue with the Professional Services Council that has sort of come back to light after some new research has been revealed. And that has to do with the ability of companies to expense their R&D expenditures. What can you tell me about where things currently stand?

David Berteau Well, first of all, let’s look at the big picture. Right. So, this was that R&D tax credit was one of the issues in the 2017 tax bill. And it basically allowed companies not just government contractors but all taxpaying companies in America, the opportunity to expense 100% of certain R&D expenditures in the year in which they were executed, which is obviously a big tax savings, right? That provision expired a couple of years ago and has not yet been renewed. And now there’s a bill that has passed the House. It’s a tax bill with a whole bunch of other provisions in it, but it also covers the R&D tax credit that would reinstate that, that credit at 100% level. Going forward, it matters to government contractors for some unique reasons that are probably lost in the big debate over the tax bill in general. And from a congressional point of view, while it’s passed the House by substantial bipartisan majority, and it’s been through a second reading in the Senate. So, the bill is alive and could be brought to the floor anytime. It has not yet been brought to the floor. And there’s some discussions about whether it be committee hearings and some other things go on in the Senate to move forward there, where PSC comes into play and where our members have the most at stake here is on the government contracting side. And there’s a unique aspect to this. And we’ll be, have a letter up to the hill on this which we will provide you a copy of, so you can put a link to it on your, on your website there that for companies that are bidding on government contracts, if you as a company as part of your proposal, maybe in advance of a solicitation or after the solicitation has been issued while you’re developing that proposal, usually given the short time line to turn around a response to a solicitation, you’d have to be doing this ahead of time. You can actually invest your own research and development, not in a new product, but in a new system, a new process, a new application of technology in a way that would save the government time and money and achieve its missions and accomplishments. And then that can be part of your bid. And the government doesn’t, from a contracting point of view, doesn’t have to pay you for that. This is essentially paid for by the R&D tax credit. So, there’s a huge government benefit to having this tax credit in place in the services side of the industry. And many of our member companies use this to great advantage while the provision was in place. Obviously, if you can only write off 20% of it, which is what it is now, you don’t have nearly the freedom of movement to invest in something that you don’t know if the government’s going to buy, but from which they would particularly benefit.

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Eric White What adjustments have contractors had had to make over the past couple of years with that tax credit expiring?

David Berteau Well, the year it expired in 2022, companies were still implementing it on the assumption that it would be renewed. And when it was not, what we had was a number of companies, you had to write a pretty substantial check to the Internal Revenue Service, because of taxes that they owed. After the provision expired for expenses they had already incurred. Once you incur those expenses and write that kind of a check, in some cases, we had companies writing checks of over $1 billion to cover the tax impact of this. And it’s going to dramatically diminish your enthusiasm for continuing that exercise until, in fact, the tax law has changed. So, I think that essentially the government is no longer getting the benefit of this kind of investment in advance of a proposal.

Eric White We’re speaking with David Berteau, president, and CEO of the Professional Services Council. All right. So, Congress is warning about that. They’ve got a little bit of a bigger to do list having to do with some world events funding for Ukraine and Israel and foreign aid. What could contractors see if Congress is able to come to some sort of agreement on how much money those two allied nations should receive from the U.S.?

David Berteau Well, there’s three aspects that come into play with respect of for really with respect to government contractors. The president submitted a supplemental proposal, had four basic elements in it. It or five really as a fifth was added, there’s Ukraine funding in there for support for Ukraine. There’s some support for Taiwan. There was support for Israel, that was included in the original president’s proposal. And there was actually some supplemental involving, emergency disaster relief. Right. That’s largely by the wayside. Now. There is, although there’s a new disaster, the Key Bridge in Baltimore, that while there hasn’t been as a proposal submitted, there’s certainly a possibility of adding it to that kind of a vehicle. There’s now about $3.1 billion in the administration request for the submarine industrial base. You may have seen recent. A report that the DoD had done. The Navy had done a 45-day sprint of an assessment of their shipbuilding, and they found that ship deliveries were much further behind schedule than had been previously reported. I don’t know whether they knew about it or not, but they weren’t acknowledging and publicly. But the submarine industrial base is a particular one where a lot of effort has been being placed. The new agreement with Australia and the UK, the Aukus agreement, right, Australia, US, and UK agreement to bring Australia into the nuclear submarine business, which really complicates Chinese thinking as much as it does help any. Any particular country does need more capability in the US. And so, I think that’s a piece of it there. Obviously, the events over the weekend with the attacks on Israel complicates things a lot, and we don’t know what Congress is going to do here. What we’re focusing on, though, is those areas where in fact the requirement is stable, the funding levels are clearly there, and the absence of providing that funding can have deleterious consequences for our foreign relations, both in Ukraine and with respect to China and the Pacific, as well as the submarine industrial base. So, we’re looking at what we can do at PSC to support the early enactment. It’s already late, but anything now as earlier than later, right. Early enactment of, of that supplemental legislation. There’s a lot of funding in there that, would flow to our government, contractor members. And I think this is a key point. A lot of people are looking at this as a gift to another country. The vast majority of these dollars are going to be spent in America, go into companies, pay workers here, pay taxes here. R&D tax credit tax is included, as we talked about earlier. And so, I think that’s the issue that really needs to be looked at. And Tom is not on our side here.

Eric White Up for congressional discussion as well, is a bill that would potentially give contractors more autonomy over who they could hire for said government contracts. And that’s Nancy Mason’s Access Act. I imagine that the PSC has something to say about that, David.

David Berteau One of the real problems that we have in in government contracting today, in fact, it’s problem across America, is something that we have more vacant jobs in this country than we have people looking for work. Right. And so, by definition, when that’s the case, you’re going to have work not being done because jobs aren’t going to be filled. This is particularly powerful in the government contracting business, where you bid work based upon being able to fully provide the employees necessary to do that. Eric, I every time I meet with member companies, any kind of a group and I did it twice last week and I say, raise your hand if you have all the workers you need. And in the last four years that I’ve been asking this question, not a single hand has ever gone up. My, this is a real problem in the government business. And it’s not just the lack of revenue. It’s work that’s not being done. It’s important work. Right. So, one of the barriers to this is, in fact, many contracts have a labor category requirement, degree, years of experience, etc., which may or may not bear a direct relationship to a person’s ability to do the work, but it is necessary to comply with the contract. So, what, Congresswoman Mason’s bill would do, and others have proposed similar legislation is it would essentially put a burden on contracting officers of justifying that requirement before they could put it in. This is a bit of a challenge, so I’ll be glad to go into that a little bit.

Eric White Yes, please do tell.

David Berteau So, you know, if you’re not going to have a labor category requirement that says you need a college degree, you need five years of experience in whatever field it is, and you can’t replace something with nothing. You actually have to have some other basis for your government to be able to evaluate competing proposals and figure out which company is going to offer the best deal for the government in terms of being able to get the work done at a fair and reasonable price, that would require you to have some other mechanism for that. So, degrees matter in some fields, obviously, you know, doctors, lawyers, architects you’d like to have a degree and years of experience. But in cybersecurity, for example, you can pick up the skills to be a very excellent cybersecurity practitioner without any college degree whatsoever. In fact, in some cases, you probably the younger you are, the more current you are in this sort of thing. So, but how do you verify that in a proposal? How does the government evaluate that? How do you manage that in contract administration? This is one of the tougher questions that comes into play. So, as we provide comments to Congress on ways it maces bill and others as well, it’s going to be a question of yeah, the paper ceiling, as some call it, may be something that we need to make some changes to. And I really think that, in light of the fact that we don’t have enough workers and we need more workers, there’s hundreds and thousands of vacant cybersecurity jobs, for instance. We need all the people we can get in this business. How do we manage this in such a way that we replace those degree requirements and those years of experience with another mechanism that would give us some confidence that, in fact, the government was picking people who could do the work.

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