How inflation has hit federal contractors

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Inflation has seeped into every area of the economy, both goods and labor. For federal contractors, operating under fixed-priced contractors, and for the Defense Department, the pressure is real. Now the National Defense Industrial Association has completed a detailed look at just how inflation has affected budgets. The Federal Drive with Tom Temin got the highlights from the association’s chairman, retired Marine Corps Maj. Gen. Arnold Punaro.

Tom Temin: Arnold, good to have you back.

Arnold Punaro: It’s a privilege to be with you.

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Tom Temin: You have found basically, that because of inflation, regardless of whatever adjustments are made, right now, for contracts, looking at the 2023 budget proposals, the sheet just doesn’t cover the bed.

Arnold Punaro: Tom, as you know well, and as your astute listeners know, we’re 10 days from the start of the new government budget year, and Congress has not passed one of the funding bills. And we’re likely to start under continuing resolution. And as you know, that traditionally is at last year’s level. And so if that happens, and I don’t think we’re going to see a government shutdown, but on the other hand, we have not had the kind of inflationary pressures that we’ve had in CRs since the late 70s and early 80s. And so we’re going to start the fiscal year in a deep, deep hole when it comes to national security and homeland security. Frankly, if we start the fiscal year at a CR, it will be the equivalent for DoD of a sequester level cut of close to 10% or $6 billion a month. If it runs two and a half months, $15 billion. There are people talking about it running into January; I think that would be a huge mistake, that’s $25 billion dollars. That’s serious money for the Department of Defense. And so not only do we have a near term problem when our enemies are on the warpath, but the longer term problem for inflation in FY23. To their great credit, the Department of Defense, got [the Office of Management and Budget] to give them an extra $20 billion in terms of the budget request, compared to FY22. Three of the four markups of defense bills have added $40 billion. So there’s going to be $60 billion over FY22. But none of that goes into effect, unless you pass the appropriation bills, which hasn’t happened. And there’s no hope of it happening until later in the year. So we are in a deep, deep hole when it comes to inflation in our Department of Defense.

Tom Temin: Yeah, between Congress and inflation, it’s kind of like a crab with two pinchers coming here at the Defense Department. And the inflation in your knowledge seems to be across the board, that is to say, labor, of course, but transportation and even things like ordinance, which are made out of chemicals and metals, and have to be transported. So it gets down to a pretty fine grain level then doesn’t it?

Arnold Punaro: That’s right. And DOD has a series of deflators or inflation estimates for every different category. It’s not one size fits all, and they feel inflation, they’ve already had to find $4 billion to cover the increased cost of fuel over what was budgeted as the world’s largest consumer of fuel on a day to day basis. But I mean, inflation hits the domestic agencies, for example, [the Department of Health and Human Services]. And the House-passed bill is $20 billion higher than FY22. If we start in the CR, they not only have the 10% inflation cut, but they don’t get access to the increased funding in the bill. So it’s not just the Department of Defense, it’s federal civil, it’s DoD. This is just no way. And again, everybody’s gotten kind of affirmed to basically for this is a 25th straight year, we’re going to start with a CR. But frankly, we haven’t had these kinds of inflationary pressures. And we haven’t had the world on fire like we have right now.

Tom Temin: Yeah, they say every so often, something happens to remind the younger generation to turn the lights off. And I guess we’re in that period right now. But in your view, to the extent of your knowledge, to have the DoD units that are affected, have they done the homework applying their indicators of inflation and so forth, such that if Congress says, “Okay, we’ll give you the extra money, but show us the justification,” Is the department prepared to do that, do you think?

Arnold Punaro: The good news is I believe they are because between Mike McCord the undersecretary Comptroller and Susanna Blume, who’s the head of the cost analysis and [program] evaluation (CAPE), these are two of the savviest smartest people when it comes to matters like this. But we’re not going to know the answer, frankly, until we get the FY24 five year program to see if they’ve repriced it for the inflation that’s already happened, and inflation that’s projected. And I think they’re working on that. But it’s a huge bill, and they’re going to have to get OMB to basically play ball with them. The Congress has added money the last two years to the budget request, and Congress’ role is they’ve got to pass their bills on time. So I do think internal to the department, they’re working this very, very hard. We’ve got to fix ’22 and ’23. But hopefully when we see the ’24 budget, it will be an acknowledgment of the reality that we’re all dealing with.

Tom Temin: We’re speaking with retired Marine Corps Maj. Gen. Arnold Punaro, who is at least for a few more days, chairman of the National Defense Industrial Association. You’re moving on from that slot, right, and getting back to your consulting?

Arnold Punaro: Well, that’s correct. I will stay on as chairman emeritus and chairman of the emerging technologies advisory board. The way it works at NDIA, you’re the vice chairman for two years, the chairman for two years, then you have two more years in a leadership position. This is my second tour doing both. So I’ll be turning the reins over to our terrific business leader, Michael Bayer, and I will be staying on supporting him.

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Tom Temin: Alright, so getting back to the Defense Department, you have put forth a figure that you think is needed for 2023. It’s a big figure, at least, compared to what we’ve been seeing. What is it and what needs to happen immediately, do you think?

Arnold Punaro: Basically, it’s $60 billion. Of which the administration in Mike McCord and Lord Austin got $20 billion more out of the OMB and the budget request. And the Congress basically has acknowledged the next $40 [billion]. And it’s in three of the four bills. So frankly, the numbers are there. And we just got to get the bills passed. And so hopefully in the final analysis, when they get back after the mid-year, and hopefully they will basically solve the appropriation process before calendar year ’23, that everybody knows the DoD number is going to have to come up, a lot of the domestic number is going to have to come up. The problem is right now the Congress is in its usual gridlock. And anybody that says they know exactly what’s going to happen after the mid-year… But the good news is between the administration’s increase, and the market and three of the four bills, we have the right numbers if they’ll only do their job.

Tom Temin: And what does the department and the different components need to do until some money does come through, that extra money or the CR?

Arnold Punaro: Well, NDIA, with our sister associations, [the Aerospace Industry Association] and the [Professional Services Council] — great leaders there in Eric Fanning and Dave Berteau — we’ve gone to the Appropriations leadership and said, ‘We think FY 22 ought to start at a higher level’ to take into account so that the various agencies can spend at a higher level and not take that sequester level cut. We also think they ought to allow for new starts and rate increases. So we’re hoping, and OMB actually in one of the anomalies that they’ve set up, they set up one to request that the department be allowed to spend in their operations and maintenance accounts at a much higher level than FY22. So between all of that, if they will acknowledge some of that in the CR, then we can buy ourselves a little breathing room until they finalize the bills after the mid year.

Tom Temin: It’s kind of ironic, in some sense, because there have been supplemental appropriations to the tune of a couple of billion dollars, if you add them all up, for acquiring items to send to Ukraine. The buying for Ukraine in that effort seems to be more powerful in terms of the dollars expended than what the department has for its own use.

Arnold Punaro: That’s right, and we actually need money to replenish the stocks that we’ve drawn down to send them to Ukraine. To show you how powerful $6 billion is, which is the hit DoD is going to take if we’re stuck at the per month at last year’s level, you can buy 4 million 155 millimeter artillery rounds, which would essentially put the Russian military back in the Stone Age. You could buy 35,000 [High Mobility Artillery Rocket System (HIMARS0] rockets which are needed. Or you could buy 18,500 Javelin missiles. This is real money and real capabilities that we need, that Ukraine needs, that our own military needs that we won’t get access to, if they don’t start the year on 1 October at a different rate of expenditure than a typical CR.

Tom Temin: It sounds like individual members understand this, but that organization just can’t act as a complete orchestra.

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Arnold Punaro: Tom, you hit the nail on the head. What I’ve said is the individual members are terrific. Don’t get me wrong. I have the greatest respect for the leaders, including the leaders of the appropriations process. If they would turn this over to [Reps.] Rosa DeLauro (D-Conn.) and Kay Granger (R-Texas), [Sens.] Dick Shelby (R-Ala.) and Pat Leahy (D-Vt.), they’d fix this in a heartbeat. But as an institution, Congress, I called a broken branch. They just basically as an institution don’t get their work done on a timely basis.

Tom Temin: Retired Marine Corps Maj. Gen. Arnold Punaro is chairman of the National Defense industrial Association. As always, thanks so much for joining me.

Arnold Punaro: Happy to do it.

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