Some highlights of provisions in this year’s NDAA that could affect contractors

As with every year, hundreds of amendments are introduced to both the Senate and House version of the National Defense Authorization Act. Obviously not all of them make it, but they are debated nonetheless. To find out what amendments those on the industry side are keyed in on, Federal News Network Executive producer Eric White spoke to David Berteau, president and CEO of the Professional Services Council on the Federal Drive with Tom Temin.

Interview Transcript: 

Eric White
All right. So we’ve got a list of amendments here that you’ve kind of described as some you are feeling good about, and some you aren’t feeling good about. We’ve had a lot of rough news over the past couple of weeks. Let’s start with the positive stuff. What is it about a few of the amendments that you are liking what you see?

David Berteau
Well, let me see, I actually got my amendments in the wrong order here. I have the negative on top, so let me move those quickly to the bottom here. You can tell where my mind is focused. We represent, obviously, government contractors at the Professional Services Council, and we do spend a lot of our time, Eric on fending off or improving bad ideas that are within the legislation. We don’t often brag about our success rate there, because all that really does is highlight those issues and gives them new life sometimes. But I appreciate the opportunity to go through some of these. So in particular, as we are looking at some of these provisions that are actually already in the Senate bills. So there’ll be, if and when this bill comes to the floor. You had your conversation with Loren Duggan broadcast yesterday, and he was reflecting we don’t know when or if that bill will come to the floor. Nonetheless, we do know that it will eventually become legislation. So what’s in it actually matters quite a bit.

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So if we look at some of these positive provisions, the first one is one that I think tackles a really tough issue. And that is, what kind of defense industry do we need for a real war with Economic mobilization across the economy. We’ve already seen from just the demands of providing munitions and support to Ukraine, that is drawn down our stocks, and the right to replenish those stocks under current production is way longer than the time to expand those munitions and fire them out of a howitzer somewhere. And so I think it’s a very, very legitimate question. What this legislation would do, though, is actually put mostly the requirements on DoD to figure out what they need and how much industry can provide it based upon today. And if industry can’t meet those needs, what would it take? The intriguing thing about it, though, is it doesn’t leave this entirely up to DoD. This is Section 850 of the current Senate Bill. And it requires DoD to consult with industry, it doesn’t specify who, says they’ll sign agreements with representatives industry to do that. Obviously, from a trade associations point of view, we’d like to see industry represented in part through the trade association. So you can get a much broader spectrum of companies come into play. A very worthy goal, whether or not this actually achieves it or not remains to be seen, of course, the timelines are remarkably short, as Congress is always expects the answer sooner than they can ask the question. So that’s the first one. And we kind of liked that one, because it’s got good intent, and it sets us off in the right direction.

Eric White
All right. And so another one that you all have highlighted as one of your favorites is the tracking of awards made through other transaction authority, which has grown exponentially over the years, because it seems as if procurement and acquisition executives just seem to like how it works. Is that the idea behind this, is that there is so much growth in there that folks got to know exactly how much money is being used through there.

David Berteau
I think that’s probably part of the motivation and incentive, one of the things that from our perspective, I remember companies find attractive here is, the basic reason why other transactions authority and agreements under the authority are so popular is because they allow the government, both DoD and there are many other agencies that have OTA authority in one shape or another. It allows the government to essentially bypass the constraints and strictures of the standard federal acquisition regulation. And one of our views at PSC from the beginning of the creation of this authority, and to some degree, it goes all the way back to the Space Act of the 1950s. But in recent years, it’s really grown. Our concern has been if you can fix this for some, why not fix it for all. And so what it does is in many ways, it becomes like a little steam release valve to take the pressure off of fixing the acquisition system for everybody. Nonetheless, it’s here to stay and it’s being used. And so we think having a better reporting system of what’s being used, and one of the results that you get out of this, particularly for DoD where they have the authority, first of all to use OTA, for prototypes. And then if the prototype is successful within a short period of time, about five years, then they have the authority to actually move forward into production. This is non competitive, whether you’re getting the best deal or not. I don’t know what you’re getting is the faster deal and a faster deal is not always the better deal. So we’re looking forward to this kind of report just to give us greater visibility into the system.

Eric White
And another one seems to carve out another chunk of exclusivity for some defense contractors without naming exactly who would have access to that. It would establish a pilot program for access to shared classified commercial infrastructure. What does that mean? And is that some sort of open source idea to speed things up for bigger contracts? What’s the idea behind that you think?

David Berteau
Well, the infrastructure referred to here is most likely secure classified information facilities, which we would call SCIFFS. One of the things that we learned when COVID hit is we don’t have enough SCIFF space, particularly, we didn’t have enough SCIFF space across the federal government, for everybody to sit with enough distance between them. And so we ended up with a great deal of challenges, both in staffing this, and as you can imagine, it’s pretty hard to work remotely when you have to be on a classified network, unless your home happens to have one in it, which is unlikely. So we learned early on that not only do we not have enough, it was over utilized or underutilized depending on where. So this makes us step in the right direction by opening it up, particularly for small businesses, which can’t really afford to invest in their own facility, but can’t do the work unless they have access to a facility. We would love to see it actually go beyond the pilot, because we think the need is clearly there, and the opportunity is clearly there. But I think that those who would say, I don’t really want anybody in my sciff but me, then this opens up the idea of let’s demonstrate the value and show that in fact, the negative impact is minimized or could be done away with all together. So we endorsed this pilot. There’s three kinds of pilots Eric in the federal government, one is the pilot that lets you punch so you don’t have to deal with the issue. The second is a pilot that will verify the outcome you know is already going to occur. The third is actually an open ended pilot that will collect the information evaluated, analyze it and produce some results. We’re hoping that this will be that third one that is not a predetermined outcomes, because we think the outcome will show that it’s a good idea to share sciff space across the federal government.

Eric White
We’re speaking with David Berteau, president and CEO of the Professional Services Council. All right, we got through the good stuff, let’s go to the bad stuff that you all are not happy with. One of them would be a requirement of contractors to provide yet more reasonable access to repair materials. This is obviously aimed at a certain amount of bigger contractors, that would have to give up some of what they might consider to be trade secrets. What do you all not liking about this?

David Berteau
Well, you got to start out it’s always an interesting thing, what exactly is the problem that the government’s trying to solve? So sometimes when we have a provision that we’re not crazy about, rather than say just do away with it, we say what would you need to do to actually make this worthwhile. So the problem apparently, the DoD is trying to solve here is, it’s expensive and time consuming to repair and maintain weapon systems. And I think there’s plenty of evidence of that. There’s a tautology that has been around for decades, and as data to support it, that 70% or more of the cost of any weapons system is after it’s fielded. And yet, all of the focus of cost and scheduling performance is at the front end in that 30% or less, that’s during the development and design and production. And so I think by focusing on the aftermarket, if you will, on how do you keep things going for a long time, then this is a legitimate objective to cover this. Unfortunately, the solution is a back end solution, which is just give us all your information so we can repair it ourselves. There’s a lot of demonstrated evidence that doesn’t save you time, and it doesn’t save you money. Among the most expensive people in the government are fully burden, which we don’t do fully burden cost of uniformed personnel out in the field doing this, they generally cost two to three times as much as any contractors would cost if you look at the fully burdened costs that would be consistent with what a contractor has to keep track of. And so I think the real question here is, how do you do a better job. Our solution to that, by the way, is pretty simple. Start awarding contracts based on lower lifecycle cost instead of pure production costs. But that’s a long ways away from reality. So we’ll be wrestling with this. You’re absolutely right, companies will not want to give up their proprietary information, their business competitive information, and particularly gave it free to the government because we’ve got plenty of evidence that you can’t trust the government to keep track of that, and to not let it out or use it to get a competitor against you. So we’ll continue working with the Congress on this one.

Eric White
Yeah. And then another area of the defense industry in particular that members of Congress are probably interested in is the amount of mergers and acquisitions on the defense industrial base, which report would have to be generated from this. There have been a lot of these, and there’s been a lot of talk about the lack of diversity and competition within the defense industrial base. What is your side or what is PSCs take on that?

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David Berteau
It’s become almost a truism in the government today and in the Defense Department, in particular, that there’s the following relationship between things. Number one, is we have way fewer prime contractors particularly in the major weapons system area than we had in the past. There’s a report cited, we’ve gone from 51 to five. Well, that 51 is back in the late 1970s, when we had a much more diverse set of government contractors across the board, it was also at the height of the Cold War. So it’s not really a comparison. And the five, by the way, was the end result in the mid 1990s. So all of this happened a generation plus ago, in terms of consolidation. The second piece, so the idea is, maybe there’s too much consolidation. The second piece is that increasing consolidation has reduced competition. And that’s probably true, there is a reduction in competition. But I would argue that much of the reduction in competition is not because there are fewer companies. But because DoD doesn’t buy enough to keep more than one company in business, when you gotta live for one contract. And that contract is going to be around for 15 or 20 years, it’s pretty hard to say another company should stay in business on what business space, you don’t know. And the third is that has somehow driven up prices, and there’s actually very little evidence to support that. You can selectively find evidence that will support it. But if you look at the overall picture, there’s very little correlation. And DoD actually admits that in the back pages of its own competition report from 2022, that there’s very little correlation between the number of competitors and the ultimate results in price. So in the end here, there’s a big belief that acquisitions and mergers are bad for DoD. I would note, by the way, that in the services industry where PSC has many of its member companies, there’s plenty of competition. So it’s not across the board, it tends to be more in the major indictments. So I think the solutions are not always apparent here. But clear identification of the problem becomes clear. We think a report like this is going to give us some illumination, but it may be slanted towards proving the case that mergers are bad, and that consolidation is bad. And that therefore it should be avoided at all costs. So we again, it may be the right problem with the wrong solution.

Eric White
And I mean, it also speaks to just the unique needs of the Defense Department have increased as well. There are just not that many folks out there or companies out there that can provide the DoD with what it needs in ever changing world and landscape.

David Berteau
Well, and you put your finger on something else there, which is all of the constraints and compliance requirements to do business with the government. They’re not in the commercial world, they’re not in much of the rest of the global marketplace, even for national security. They’re unique to America and unique to DoD. They may be important, they matter because it’s the taxpayers dollars, and you have to have a lot more visibility and responsibility and accountability. But they’re not for me, and they serve as a barrier to entry. If you want to do business with more companies that aren’t qualified, well, can they comply with the Treaty Negotiations act? Can they comply with all of the requirements that are 1900 pages in the Federal Acquisition Regulation, a few thousand more in the supplements. It’s not free, it’s not even easy to comply with all those. And in some cases, there are very significant civil and criminal penalties for failure to comply, which you won’t run into in the commercial sector. So all of that has to come into play as well.

Eric White
All right, and the last one, you spoke about barriers to entry, this one’s almost a barrier to exit, as they want to, yet again, increase the amount of time for senior DoD officials to work with contractors from two year hiatus to four year hiatus. I can obviously see the drawback from the industry side. What is the response to the carousel that has been created of folks working for the government for a handful of years and then going off and making very lucrative salaries with these defense companies that they’ve been doing business with for a good amount of years now?

David Berteau
Well, first of all, the basic premise is that it shouldn’t be reasonable, it shouldn’t be expected, it shouldn’t be desired, that individuals would go from industry to the government, and then back again. And I think the premise of that is actually fundamentally flawed, because in the end, one of the things that I learned when I first left the Defense Department and went to work in industry, is that I didn’t understand the industry side at all. I understood the government side, but I didn’t understand the industry side. I also found that there were plenty of people on the industry side that didn’t understand the government side. And if you’re going to have a partnership, and we rely on that partnership, to basically preserve America’s national security, as well as to deliver all the other missions and functions across the federal government into civilian agencies. If we want that partnership to thrive, if you want it to be successful, there has to be a better understanding. And the best way to get that understanding is actually to go in and out of government, in and out of industry, and maybe in other areas as well. I think that a careful monitoring of that is important, but an outright ban just on the basis of time doesn’t actually meet the needs of the federal government. In addition, it makes it much harder to recruit the talent that you need to go forward. Because as I went through the process, not only do you have to divest yourself of everything, you have to even say that you’re never going to go back to work or where you came from. I’ll give you one outrageous example of my post employment restrictions when I left DoD. I was told by the lawyers who govern that process for the government, that I could not give a speech, forget whether for money or not, I could not give a speech to an audience in which 30% or more of the attendees were employees of DoD. Eric, the problem here is how do you know before you get up on stage what the percentage of participants in the audience are in terms of being on the government payroll? Do you get up on the stage and say, raise your hand if you work for DoD? And then I’ll count you up and see how many people didn’t raise their hand and so 30% I have to leave the stage. That’s absurd. Well, the only solution to that is don’t ever give a speech, which I did for two years.

Eric White
As somebody who’s had to book those events, yes, I can attest to the difficulty of gauging who the actual audience will be. You do see what they’re trying to prevent here, which is obviously trying to prevent favoritism from acquisition officials with the wink and a nod of a promise of a career once you’re out of here kind of thing. If you helped me today, I’ll help you tomorrow. You had mentioned that a strict monitoring of that is necessary. But what do you do when the monitors themselves could be also open for this kind of favoritism that could be shown to them once they leave their posts?

David Berteau
I think that that one’s pretty easy. We have a lot of good monitoring systems today, including reporting by industry of who’s doing what and where. So a tightening up of the controls on specifics is far better than a blanket barrier to reentry as well. Because all you really do, you do two things. Number one is you essentially create a non compete clause for people who have spent their career in DoD. Once you leave DoD, and by the way, if you’re military, you’re going to be required to leave if you reach a certain age. We don’t want 70 year olds flying airplanes for DoD. I can kind of understand that. But what do you do with the accumulation of knowledge and the experience and expertise that you have available? How do you make it available to the federal government? I think you can do both. You can actually make sure that you gain the value of individual and collective wisdom and experience while still constraining the what you rightfully call is an improper use of access to gain favoritism.

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