The government is changing some key rules that shape the federal contracting marketplace

Guest:	Stephanie Kostro
Title:	President of the Professional Services Council
Summary:	Two recent developments are drawing attention across the contracting community: proposed changes to small-business size standards and new supply-chain transparency requirements from the Defense Department.

The Federal Drive with Terry Gerton provides expert insights on current events in the federal community. Read more interviews to keep up with daily news and analysis that affect the federal workforce. Reach out to Terry and the Federal Drive producers with feedback and story ideas at FederalDrive@federalnewsnetwork.com.

Interview transcript

Terry Gerton There’s a couple of new memos out that I would love to dig into from your perspective. Let’s start with the SBA, their proposed size standard changes for small businesses. This has generated a lot of raised eyebrows, a lot attention. What is the conversation you’re hearing from the contracting community?

Stephanie Kostro Terry, it’s been, I hate using the word unprecedented because in the last six years, that word has been used way too frequently, but I would say that the proposed rule that came out from the Small Business Administration on their revised methodology for determining who is small and their proposed size standards has really reverberated around industry and not just among small companies. I’ve had in-depth conversations with midsize companies that used to be small or that are on the smaller side within the large framework. And then obviously large companies too have have something to say about the proposed rule that was dropped. So just to orient your audience, you know, these publications came out on a Friday with comments due back to the SBA on September 21st. And again, there’s one document that talks about the revised methodology, which we went just went through that two years ago in 2024 SBA periodically does this revision and then the proposed rule, which is really what is getting the lion’s share of the chatter, so to speak, over the last couple of weeks. And that’s been about the proposed size standards. Now, what the SBA is proposing to do in this rule is to change the structure and the scale of the size standards, and I’ll give you a couple of examples. Currently, according to the SBA’s own documentation within the rule, they are going to take about a thousand industries, all that have their NAICS codes, N-A-I-C-S codes and collapse them down to 338 categories of companies that we’re talking about. And more to the point of what we are looking at is What how is it calculating what is a small company? And it really is looking at national industry size. It’s looking at the number of geographic markets and it’s looking a net import adjustment. So as a result, in terms of receipts, a small company in say for example a computer systems and design category, a small company was anyone who had annual government receipts of $34 million or less. The new proposed size standard is a company that has $531 million in annual receipts or less. So obviously that expands the market quite a bit in what is considered a small company. Now a company has an excess of a $500 million contract is now considered a small company

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Terry Gerton Stephanie, when your members look at those changes, do they see them as opportunities or do they them as challenges?

Stephanie Kostro Well, you know, Terry, that our membership covers everybody from literal mom and pop shops all the way up to the largest of the large defense contractors. And so to accurately accurately represent government services and technology contractors, PSC is in an interesting position. We don’t just represent small companies, we represent large companies. And so when we talk about a PSC position on this, we have two kind of foundational elements. One is, does this proposed rule allow the government to access more companies faster, get their capabilities and capacities under contract faster? And two, does it help the vitality of the industrial base? Are we attracting new entrants? Are we keeping the folks who are currently in government contracts? And so we are looking at this proposed rules through that lens. Small companies are, some of them are seeing opportunity. A lot of them saying, you know, hey, now somebody I don’t consider small who can achieve economies of scale, who are much larger than us, can move around people a lot more agilely than us. I’m not gonna farewell in competition with that larger company that is now considered small. So a lot of the small companies feel that way. Mid-sized companies that are in that space that are now considered, would be considered small companies, really do see a lot opportunity. One area that we are exploring is how does the investment market feel about this proposed rule? Are we going to see an infusion of private capital? Are we gonna see an effusion from venture capital, private equity, et cetera? And so that is sort of what we are going to be asking as one of our considerations before we submit comments on September 21st.

Terry Gerton Stephanie Kostro is president of the Professional Services Council. Stephanie, as this memo, if it were to be implemented as is, certainly would ultimately determine who gets access to certain contracting vehicles and opportunities. But let’s switch from this market-shaping memo to another from the Department of Defense really tracking what the government wants to know about its suppliers. What’s been the industry reaction to DoD’s push for greater cost and pricing visibility?

Stephanie Kostro You’re talking about, there is an August 18th memorandum that was signed out by the deputy secretary of war, Stephen Feinberg, and that is about, it’s called supplier cost and pricing transparency. But it is about getting into the cost constructs of not just prime contractors, but throughout the supply chain. Now, this has long been a desire of the Department of War/Defense, you know, the Pentagon, we’ll just say the Pentagon, has been looking to get this kind of information and supply chain visibility. One of the challenges that they face is that the department itself, when it signs a contract, has privity of contract with that prime contractor, but doesn’t have insight into all of the tiers of subcontractors. So that’s really, I believe, what this memo is trying to get at. The thing is, the prime contractor doesn’t necessarily have insight into those sub-tiers as well. They have contracts with their first tier, but not beyond that further down into the supply chain. So this is a very, very interesting memo. It will be difficult to implement. And I think it really will. You know, I’m going to put this delicately, Terry. I every month get a notice, because my information as a government employee was hacked years ago as part of that OPM hack that a lot of people in the national capital region were affected by, I would say with some certainty that the federal government doesn’t have a great record of keeping confidential information confidential, pricing and cost information really is sort of the secret sauce of cost competitiveness within industry. And if there are not safeguards in place to protect that information adequately, there is a real fear that competitors or adversaries might get that information about supply chains, about costs, et cetera. And that’s a real concern that I don’t think is addressed in the memo. And so as we move forward, that is certainly going to be a line of thought. It may have a chilling effect on who is willing to do business with the government. And in an era where the government is trying to access commercial companies that have not worked with the government in the past as a contractor, I can’t see a lot of commercial companies agreeing to give all of their cost and pricing data to the government.

Terry Gerton Tell me more about what you just said there, how commercial companies are responding to this because in context, the Department of Defense has said it wants faster acquisition, it wants more companies involved, it wants simpler processes, less bureaucracy, and then it drops this memo, which seems to create a huge reporting regime. Help us put that in context. How are you thinking about it?

Stephanie Kostro So it is interesting with, you know, we’re talking about a lot of messy topics today, Terry. You know, in the past, you and I have also talked about sort of the federal acquisition regulation overhaul and all of that. So obviously, there are requirements in statute for cost reporting. Truth in Negotiations Act, for example, TINA, you $10 million and above, you know. There are certain requirements you have to have a cost and accounting standards, etc. I would say, you know, when the government is trying to do commercial first and trying to access the breadth and depth of the U.S. economy and what our engine of industry has to offer, not just traditional government contractors, but the broader economy, they are not used to the reporting requirements that are required, that are statutory or that are being driven by things like this memo. This will be a huge compliance burden for companies that may then turn around and say, I don’t want to do business with the government. The juice isn’t worth the squeeze. This is too hard. They’re going to walk away. That’s especially a challenge when, you know, for some companies, the U.S. government is their principal, sometimes only, customer. If you’re trying to access commercial companies where the world is their customer, why do they need to work with the U.S. government? What are the enticements there? And this, I think, is at odds with that commercial first push. I’m happy to be wrong. I am happy to have discussions with department officials who feel differently, but on face value. And from conversations I’m having, this is a difficult one.

Terry Gerton So both of these efforts really get after the contractor industrial base. When you take them together, do you take a message about where the federal government writ large might be heading with its request for private sector vendors?

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Stephanie Kostro I do take, well, there are indications, Terry, of where the government seems to be heading. When Secretary Hegseth gave his arsenal of freedom speech last November, a lot of us were really hopeful and remain hopeful today about the Pentagon’s focus on innovation and access to commercial technology and innovation that is funded by the private sector. So not necessarily using the Department of War’s R&D funding, but really what is going out there in Silicon Valley and elsewhere that they can access. Things like the SBA proposed rule and this Feinberg memo from mid August really do make me wonder if they’re looking at the whole picture and what information can we as industry, contracting industry, share with them to help them get a clearer picture of what the long-term implications might be. And we have really good relationships with the industrial based policy office at the Pentagon and within the military services and the defense agencies, et cetera. But, you know, I think having conversations with folks who are putting out memos like this and saying, hey, here are the not just the second order effects, but the third, fourth, fifth order effects and how industry might respond and how to adjust course as we go. I think those are healthy conversations that we very much need to have.

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