Defense

Five things contractors need to know about the Defense authorization bill

It looks like Congress has managed to get the National Defense Authorization law done before December 31. As always, the bill is chock full of items federal con...

Tom Temin@tteminWFED

December 12, 2023 2:12 pm

9 min read

It looks like Congress has managed to get the National Defense Authorization law done before December 31. As always, the bill is chock full of items federal contractors should pay attention to. For five of them, the Federal Drive with Tom Temin turned to President and CEO of the Professional Services Council David Berteau.

Interview transcript:

Tom Temin And let’s begin, David, by saying this has been as close to the wire as I think Congress has come.

David Berteau We came close a few times before, but Tom, it’s sixty years in a row that we’ve passed the National Defense Authorization Act. And so it has two factors. One is it’s essential for defense. But the second is because it’s one of the few bills that you think will pass. It has a magnetic attraction for other legislation which may or may not actually matter to DoD, but matters to Congress. So it’s got a lot in it.

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Tom Temin Right? And so we are usually concerned with the 800 series of provisions. That’s where they put procurement. And the first one you have pointed out is preventing conflicts of interest for entities that provide certain consulting services for the Department of Defense. That’s the title of it. What’s in there that we need to know about?

David Berteau Well, first of all, consulting services is defined differently in the statute than it is in regulation. And so that’s a big question of what constitutes consulting services. And the bill’s not abundantly clear there. So that’ll have to be worked out in the implementation. But the basic idea is DoD should not be doing business with companies that are also doing business with China, with Russia, with individuals who are on the watch list, the terrorist watch list, and other entities. That’s kind of a good idea. The question is how do you implement it in such a way that it actually hurts them more than it hurts us? And so there were earlier provisions that were proposed that clearly would have ended up hurting both DoD and government contractors more than it hurt China. But now I think it’s been revised and PSC certainly helped helped along those lines to something that is probably manageable. First of all, you don’t want to do business with somebody who’s also doing business with China. But companies are big and they may have multiple entities across the board that aren’t doing business with DoD. So it’s possible under this provision to have a mitigation plan that says nobody working on the DoD work will be working on the China or the Russia or the other entity work as well. That’s a reasonable thing. And then if all else fails, there’s a waiver provision so that DoD can, in fact, get what it needs. We are pretty comfortable with this final outcome.

Tom Temin Right. And there are companies that have European origins, for example, that work for federal entities, including Defense, that have that provision where they have a separate board of directors and a firewall between them and the European or Canadian entity that would keep them working for the government. Even if the European part, say, is doing business with Russia.

David Berteau That’s exactly the case. And you could end up with that being part of the mitigation plan. In addition, Tom, it’s important to recognize that if you ban U.S. companies from doing business, that doesn’t necessarily mean the business won’t get done. It’ll just get done by another company in another country. So China ends up better off and we end up worse off. That’s not necessarily a good thing. So this is a reasonable outcome for everybody.

Tom Temin All right. And then there’s Section 824 modification and extension of temporary authority to modify certain contracts and options based on — here it comes — the impacts of inflation. That is, can they shell out more if the contractor is experiencing inflation?

David Berteau Well, this has been a problem, obviously, for the last couple of years when inflation rates hit 8% or 9% last year. Companies are saying, ‘hey, we bid based upon 0.25% Fed rate and inflation that was in the low ones and twos. And now we’re having to perform.’ It’s not only the impact of inflation, there’s an added impact from the cost of workers. Right? Because we’re still in America. We have one and a half vacant jobs for every person looking for work. So it’s kind of a seller’s market, right? You’ve seen this across the board. No company — by the way, I do this every meeting we have with PSC members — I say raise your hand if you have all the workers you need. I have yet to see a hand go up. Tom, I mean, this is a very competitive environment. So costs have gone up, whether it’s directly from inflation or whether it’s indirectly from the shortage of workers. And that wasn’t in your bid. And so the tendency for the government to say, ‘hey, you bid it, you perform it, you suck it up.’ Well, eventually there is no up to suck here. And you’ve got to.

Tom Temin Love to patent that phrase: “There’s no up to suck here.”

David Berteau No up to suck anymore. So there’s a provision that was in last year’s bill. Technically, the provision requires a separate appropriation, which hasn’t happened yet and may not happen. That’s a subject of another conversation on this show. But what we found was that just the existence of the authority made it possible for programs, if they wanted to accommodate the increased costs that the company had as part of the deliverables within available funds, it gave them the flexibility to do so. So we’re really pleased to see this provision back in the bill this year.

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Tom Temin We were speaking with David Berteau, CEO and president of the Professional Services Council. And there’s still one other, a pilot program, and this is under Section 874 to incentivize progress payments. So that’s again, not a full blown program, but they’re going to try out something here.

David Berteau They’re going to try it out. So basically the idea is that because a company can’t get reimbursed for the interest costs on loans and it has to finance its work before that, it delivers the products or the end results to the government. The government sometimes issues progress payments. You’ve made 80% of the progress. So you get a certain percentage of the costs you’ve had up to that point reimbursed along the way. But periodically, DoD will try to tie those progress payments to something other than progress; that is, other than delivering on the contract, like maybe the eligibility of your business systems, or your cost proposals being accurate, etc., or being complete. And those are what I would call input measures. So we’ve resisted at PSC the idea of tying progress payments to input. We want to tie progress payments to progress on the actual performance of the work, right? So the bill previously proposed something that would essentially allow contractors to make more in progress payments if they had more of those inputs lined up. We objected to that and said, ‘no, it’s fine to increase progress payments, but do it based upon actual results.’ This pilot program actually has some preambles it needs to set out. It’s based on criteria that DoD hasn’t yet developed and they’re going to have to develop. So it’ll be a while before we see the pilot. But it’s certainly better than tying everything to inputs rather than results.

Tom Temin And given DoD’s movement on some of these provisions and vendors, pilot programs, new rules, it could be four or five years, realistically.

David Berteau We have seen pilots come and go, not on my list here, but we’ve had a pilot — presumably they let losers pay in the event of a frivolous protest. That pilot never got off the ground, in part because nobody could figure out who pays what and have that be consistently applied without it automatically inflating costs that you would know you get reimbursed for. Now, there was an attempt to try to do that again. Everyone agrees that protests need to be managed, right? And they can get in the way of successful performance. But they’re also, Tom, the best way we have of holding the government accountable for following its own procedures. And so there’s a balance off that needs to be played out there.

Tom Temin Right. And so that provision did not make it in. That was in the House provision. The loser pays for frivolous protests, but not in there.

David Berteau Right. But we have agreed with the committee staff that we’ll bring some ideas to them before they start marking up the FY25 bill — imagine that: we’re a quarter of the way through the century here — before they start marking up the FY25 bill next spring.

Tom Temin Okay. It’s the Roaring 20s in some ways, more than one. And then a final provision that did not get in there: Senate section 868 — tech data rights. And what was proposed and what did not make it on that one?

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David Berteau The proposal — and it may well have come from the Defense Department itself — but the proposal in the Senate bill was that would give the Pentagon broad authority to essentially grab technical data and intellectual property from companies in a time of conflict or contingency operation without really specifying exactly what the need for that would be. And so this seemed like a problem that was not well enough to find that you knew this solution was mandated. And how would you bound the application of it? The Pentagon could — there’s always a contingency operation going somewhere. It might even be hurricane response. Or a fire response. And so those are the kinds of things that we thought needed a lot more clarification. So this is another area for discussion as we go into FY25. You certainly want DoD to be able to get what it needs in time of conflict. So that’s not an issue. So it’s a question that we’ll tackle in next year’s bill.

Tom Temin David Berto is president and CEO of the Professional Services Council. As always, thanks so much.

David Berteau Thanks, Tom. We’ll see you on the other side of legislation.