Federal contractors never expected Congress to get a full-year appropriation done last week. So they’re generally pleased about the avoidance of a government shutdown. That gives the government 11 weeks to deal with other lingering procurement issues. Stephanie Kostro, executive vice president for policy at the Professional Services Council, joined the Federal Drive with Tom Temin for more.

Interview transcript:

Tom Temin: And short of an appropriation, a continuing resolution, at least the money is still flowing for what most contractors are working on, fair to say?

Stephanie Kostro: It is fair to say that Tom and thanks so much for having me. Continuing resolutions are more the rule than the exception, right? I think the last time that we had full year appropriations passed on time was fiscal year 1997. So this is Groundhog Day a bit for contractors, right. Particularly in the last few years, we’ve seen CRS extend into the springtime, whether it’s February, March more likely or even April. And so this is not unexpected. We were happy to see that the congressional leadership could avoid a shutdown. So I think the 11th hour, last minute, even the Senate passing the bill after the midnight deadline was a little bit of high drama, but we’re happy to see it. That said, not having a full year appropriation does hurt our contracting and our defense industrial base across the board. I’ll give you a couple of examples of where it actually really matters. And this is something that PSC has been talking to both congressional leaders and executive branch leaders about. One example is how quickly we can replenish our nation’s armament stockpile. So you may remember Tom that we drew down a lot of our stocks in support of the Ukrainian government, armed forces and people and also in the Middle East. And so passing full year appropriations would help make funds available for mass procurement of dozens of programs that will deliver replacement weapons up to a year and a half sooner. And so I just wanted to give you a little bit of context and an example of why it’s important to have full year appropriations. The other example that PSC often gives is speeding up the modernization of legacy IT systems. Now, this sounds really boring and esoteric, and nobody wants to talk about IT, but at the end of the day, our government functions on an IT backbone that is essential for the delivery of services for the American people. Individuals associated with the proposed Commission on Government Efficiency will quickly learn what Congress already knows. Cost effectiveness will require access to and integration of federal government data and information. And enacting full appropriations as soon as possible will help do that. Advancing that IT modernization by at least a year. So there are real world implications for contractors of not having full year appropriations.

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Tom Temin: Right. Technically, agencies are unable to launch new programs under a CR and who knows what’s really in that CR There’s all kinds of jazz they throw in. But for the most part, if someone decided we need to modernize the system for better customer experience or to prevent fraud, they couldn’t launch that project until there’s appropriations. And then you’ve only got half a year to figure it out.

Stephanie Kostro: Well, that’s very true, Tom in terms of you cannot start new programs and also unless there is an anomaly written into the continuing resolution, you can’t end an existing program. But even if you have an existing program, you’re getting the money. If you’re an agency, OMB is giving you your apportionment piecemeal. They’re giving it on a daily basis or per day basis. They’re not giving you all of the money that you might expect. So it is shifting procurement timelines. So even if you have an existing program, you cannot follow an acquisition approach. Perhaps that you laid out over the course of a few years because you’re getting the money in dribs and drabs.

Tom Temin: Right. Agencies are afraid of getting out in front of their appropriations that they have for annual deficiency purposes. And that leaves contractors wondering what types of investment manpower they should commit to a particular project. If it’s all going to come to a stop and start and stop and start situation.

Stephanie Kostro: Yeah, that’s exactly right. The stop and start situation. And then you add on to the additional layer of this DOGE concept, right. The Department of Government Efficiency, which will actually be some sort of commission, and then it really puts their programs at risk. Will their programs, because they’re not fully funded, not demonstrate the real return on value and therefore be on the chopping block for the DOGE? And so as we move forward, this is a fits and starts way to run the government again. CRS are nothing new. Again, going back to the last time we had full year appropriations for everybody, fiscal year 1997 was actually back in 1996. It’s been decades, right. So I am not saying I’m walking into this fully clear-eyed that this is not a new situation, but we’re adding on layers of complexity here.

Tom Temin: We’re speaking with Stephanie Kostro. She’s executive vice president for policy at the Professional Services Council. And because there is not a shutdown, that means all of the policy and regulatory types of people are at work. They are the ones that would have gone home. And therefore the SBA Rule of Two, which has been kind of something industry has been watching carefully, had a new deadline.

Stephanie Kostro: Thanks for mentioning it, Tom. Back in January of 2024, the White House Office of Federal Procurement Policy put out a memo about expanding this Rule of Two issue for small businesses to access multiple award contracts. What is the Rule of Two? It’s basically saying that if you have two viable small businesses that can meet cost delivery performance that are going to put in for a particular piece of work, then that work has to be set aside for small business. That has not been the rules of the road for multiple award contracts in the way it has in other parts of the federal acquisition regulations. So the Small Business Administration rule would extend this Rule of Two into, I’ll call them, MACs, the multiple award contracts. We have a broad member base here at PSC. We have over 400 members. More than half of them are small businesses. And so we have to carefully thread the needle here as a trade association to say everybody does recognize that the industrial base is shrinking and that we need to support small businesses, support the innovations that come from small and mid-sized companies as well as large companies, to be honest. But we did have quite a few comments on this proposed rule put out by SBA. That proposed rule built on that earlier mentioned OFPP memo.

Tom Temin: And what’s your opinion of it? Should this happen, I guess?

Stephanie Kostro: So we had a lot of questions about the analysis underpinning the rationale for this rule. And so some of our member recommendations that we incorporated into our comments this week are things like SBA conducting and public sharing a deep dive analysis into the industrial base impact of this rule. One additional area that is of high concern for us is that it does create quite a bit of a work burden on federal employees because you have to start reading through determinations and rationales for set asides and rationales for not putting stuff away as a set aside. And so is the government staff to do all of this additional work, this documentation requirement that’s written into this rule. So we have questions like that. We have questions on what happens for procurement delays in terms of does this require additional market research? And again, that determination and rationale, a review by federal employees. And so we are very supportive of our small business industrial base. We have seen in recent years that it is shrinking that more contracts are going to fewer numbers of companies. That is something that we need to reverse. And I think we have some very, very capable small businesses out there that can and should do this work. We just want to make sure that the process is rigorous enough to make sure that we are not catapulting some of these small businesses into other than small categories where they can no longer compete. I’ll give you an example, Tom. If you gave a small business a $100 million contract, they can perform really well. And all of a sudden in the future they are no longer considered small because they had past performance that said, they had a large contract, right. So as you move forward through this process, there are things like that we need to make sure that we protect the small business space while also nurturing it.

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Tom Temin: Well, there’s also the issue that if small and large businesses are on the same multiple award contract, then you could maybe drawing this conclusion to the absurd. But if there are two of them that can do every single task order that might come by that vehicle, then large businesses would never get a deal. It would always go to the small business components.

Stephanie Kostro: We do have those member companies who feel that way. And so obviously our PSC comments do reflect the full breadth of PSC member input. That said as we move forward, there have been really fruitful partnerships between large businesses and small businesses. And I think we’ve seen a lot of movement in the joint venture and the teaming arrangement space this year here in calendar 24. And I think we will continue to see companies partner where it makes sense going forward.

Tom Temin: And something that kind of went by as a political gambit, but the idea of not including that debt limit alteration that the president-elect wanted, the debt limit matters to contractors too. That’s something to watch also, isn’t it?

Stephanie Kostro: It is. The debt limit has often in the past been tied to a particular number in terms of the U.S. national debt. This time around, it was tied to a date. So it does expire here in early January. And one of the issues that Congress will have to take up as soon as it gets back is the fact that the debt limit will expire here on Jan. 1 into the second. So one thing that happens in the executive branch when that when that occurs, when that breach happens, is that the U.S. Treasury begins with what we call extraordinary measures. And that means it starts tightening its belt. It starts looking at where it can slow parts of payments on the debt, etc., what contracts and whatnot can be slowed in order to make the government function longer under these extraordinary measures. We have seen extraordinary measures put in place this last time around when we breached the debt ceiling and they last a few months, given the pace of our economic recovery or whatever you might call it what we’re going through right now, those are short term measures might actually last a shorter amount of time this go round because we dipped into that well last time. So as we move forward, contractors will be watching what’s happening with the pace of their payments, what’s happening with how the government is treating contractors. One thing I will highlight, and it’s something that we talked to the executive branch quite a bit about is that breaching the debt limit and going into default is not the same as a government shutdown. A lot of times you say it’s money, the spigot is turned off, it must be the same thing. And it’s not because we at PSC feel very strongly that the government should make every effort to continue to make payments to contractors on time to demonstrate the strength of the U.S. economy to the world. And so in a shutdown situation, appropriations are shut off and we just simply don’t have the funds to pay contractors. It’s different in a default scenario. And we think it’s very important for the U.S. government to continue to show the strength of our economy by paying its contractors.

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