Is the carbon-emissions reporting rule for contractors setting companies up for failure?

Federal contracts are reacting to a couple of rules coming from the Biden administration. One requires them to report so-called greenhouse-gas emissions. Another lets lower-tier subcontracting count toward prime small-business goals. There are complications, though, as the Federal Drive with Tom Temin  to Stephanie Kostro, executive vice president for Policy at the Professional Services Council.

Interview transcript:

Stephanie Kostro
This is something that strikes very close to home for a lot of small businesses, and the prime contractors that partner with them, or use them as subcontractors. This proposed rule came out of the Small Business Administration, as a response to something that happened in the defense bill that was passed a couple years ago, in fiscal year 2020. And this was to mandate that prime contractors can apply credit for subcontracting with small businesses at lower tiers. One of the issues that we find an implementation of something like this, is that without privity of contract, prime contractors, they have contracts with their immediate subcontractors, but they don’t have contracts with the ones at lower tiers. And so it’s really hard to get information or data from someone you don’t have a contract with. And so we’ve highlighted several issues with this proposed rule. We are supportive of claiming credit for small business subcontracting, I think that helps the small business base, it helps encourage large businesses to work with small businesses. But there are some implementation concerns we have here.

Tom Temin
So in other words, if I build, I’m just making this up, a radio that goes inside an airplane and that subcontractor builds the case for the radio, it may go out and subcontract for the knobs on the front. And so I should get credit for the value of the knobs towards my prime dollars. But I don’t have privy to the contract for the knobs that my case sub makes with that knob maker, the lower-tier.

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Stephanie Kostro
That is a good example, I would say, the Biden-Harris administration has put a tremendous emphasis on utilization of small businesses. And whether those are, historically underserved communities or other kinds of set asides, just small businesses in general, are receiving a lot of love from the Biden-Harris administration. The problem that we face in a rule like this, is because the prime contractors don’t have insight into third tier, fourth tier, fifth tier suppliers or subs, and in many cases, those small businesses that are providing the knobs, in your example, might not be accustomed to tracking the kind of information the government wants, or certainly, they might be reluctant to hand it off to a company they don’t have a contract with. So there are some implementation hiccups in the proposal. And we are trying to work very closely with the Small Business Administration to help address those.

Tom Temin
Right, because there’s really no limit to how far deep you can go in the supply chain, or the string of contractors. And you probably get diminishing returns. Say, the knob maker has a subcontractor for the set screws on the knob, and I know that people are saying, are you kidding, radios all have touchscreens, they don’t have knobs anymore. But then the maker of the setscrew has someone he buys metal from, metal rod to make the setscrews.

Stephanie Kostro
Exactly. if somebody ever finds that metal, etc.

Tom Temin
Right. And the metal rod producer buys or and so forth. There’s no end to it.

Stephanie Kostro
There is also the question within this proposed rule of, how much information is enough? How much does the prime contractor have to substantiate the information it receives? Does it have to go out and certify or verify or otherwise, make sure that the information is correct. And so again, a lot of room for movement here. I would say, that this dates back to another defense bill back in 2014. And this is not the first go that the SBA has had at an issue like this. The fact that it’s 2023, and we’re talking about something that sort of originated back in 2014, shows how difficult this can be.

Tom Temin
Right. We’re speaking with Stephanie Kostro, executive vice president for policy at the Professional Services Council. Besides, there’s a little bit of play in there, anyhow, because most of the contractors and the government are exceeding the statutory small business goals anyway. So, how much you need to clawback the next point 5% or .025%, for the set screw on the knob, I guess. That’ll be our watchword here. And let’s get to the sort of the bigger gorilla in the room, and that is this greenhouse gas emissions. There’s a twist in here, with respect to the relationship with the government that makes it complicated. Tell us about that one.

Stephanie Kostro
So this is an issue also that the Biden-Harris administration takes very, very seriously and that is disclosure of greenhouse gas emissions, and having companies set targets for reducing greenhouse gas emissions. And all of this is towards an eye toward, either mitigating or at least preventing some element of climate change. That said, the administration is working with the Securities and Exchange Commission on commercial companies. This proposal came out, luckily, we got an extension, because there’s a lot to unpack here. We got an additional month to comment on it. And I think, industry use that and the public use that additional time really well. The wrinkle that you mentioned, is something that I’ve talked about with lawyers. And I would say that, PSC, Professional Services Council does not offer legal or accounting advice. That said, we highlight policy issues. And one of the policy issues that we come across here, is there’s something called scope three emissions. And scope three emissions, for a company, are those emissions from the end user and other, I’ll say, adjacent entities. Those who use your products, and I think the end of the day, the government for government contractors is that end user. There doesn’t seem to be sufficient or really, any at all information in this proposed rule, about how the government is going to report its greenhouse gas emissions to the contractor who is required to collect and disclose end user greenhouse gas emissions. So this is really, not necessarily, a do loop. But it is a complication where, you might have the Department of Defense or military service, needing to report its greenhouse gas emissions to a contractor who then has to report it back to the government. And depending on where you’re operating, depending on what you’re doing with the capabilities contractors providing, could actually provide national security information, that is then disclosed publicly. And so I think at the end of the day, the administration needs to give a lot of thought to how this reporting structure will work, and what the government’s role is in it.

Tom Temin
Sure. And notwithstanding the fact that you don’t have any control over a customer’s emissions, even if you could find out what they are. It’s gonna vary all over the place. In other words, if you sell services to the Capitol Hill power plant factory, I don’t know what burns there, but they still have smokestacks to create steam for the Capitol. That’s one thing. And if it’s just a agency that occupies half of a floor of a building, and it’s just people coming and going, that’s a whole different greenhouse gas deal. And there might be different reporting by the government itself, we just don’t know yet.

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Stephanie Kostro
I think that’s true. And I think also, if you think about how much of work goes overseas, so not just foreign military sales, who’s the end customer who’s the end user there, is the government of, name a country who receives military equipment, really going to report back to the contractor their greenhouse gas emissions? I mean, it really is something that deserves a lot of thought going forward. And I really hope that the recipient, it’s the [Federal Acquisition Regulatory (FAR)] council who receives these comments, take that into consideration. It’s a lot to wrap your head around. And I’m not entirely sure that there’s an easy way forward.

Tom Temin
Sure. And Lord help the contractor who sells fuel to the military burn pits, than he used to be wrapped up in CO2 gas for decades.

Stephanie Kostro
Science based targets, may look a little different for that company than others.

Tom Temin
Sure. And this week marks a year since the Russian invasion of Ukraine, and a lot of your member companies have been involved in helping the Ukraine effort. Maybe just a quick top line rundown there.

Stephanie Kostro
Yeah. So Feb. 24, is the anniversary date. And we always hesitate to call it an anniversary date, because it makes it seem like a happy occasion. But on Feb. 24. 2022, is when Russia invaded Ukraine, and we have post our members. Now, when you think about U.S. assistance to a country like Ukraine, a lot of times you’ll hear about HIMARS, javelins, etc, military equipment. Our member companies or services companies, and we wanted to really unpack what they’ve been doing, not only with the United States government, but for the benefit of the Ukrainian government and the Ukrainian people. And I like to give you a couple of examples. We’re releasing a compendium of examples of this, but the day that the invasion occurred, there was a member company that was literally talking to the Ukrainian government, signing a contract and moving all of the government’s critical data to the cloud so that the Russians couldn’t block it, or otherwise manipulate it. We had companies that use the State Department programs to deliver medical supplies, tactical equipment, [Personal protective equipment (PPE)], its logistics piece of it, not necessarily just the equipment. We had companies that were monitoring refugee needs and neighboring countries, whether they were Moldova, Poland, or elsewhere, studying and reporting on civic shifts in Ukrainian society. And a lot of times, in the last 12 months, we’ve been hearing how strong and resilient civil society is in Ukraine. You’ve got grassroots organizations popping up to move people to help people internal to Ukraine, and [Political Action Committee (PAC)] member companies have been on the forefront of that. And the last thing I wanted to mention is, we have the specter of Russia and its chokehold on Europe regarding energy. And we’ve seen that so often in the headlines, online about how they threatened to cut off supply. So we’ve had number companies, the services they provide through U.S. Agency for International Development, or to provide hot water power heat to the Ukrainian people through generators and repairing the infrastructure. So, as we mark this one-year occasion, of the Russian invasion, it’s amazing how much the Ukrainian people have been able to do. And I’m just so pleased with the support that U.S. companies have been able to provide to help them through it.

 

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