5 hot-button issues for federal contractors

In September, most contractors savor the impending buying spree at the end of the government's fiscal year. But this year, contractors are distracted by nagging policy issues that neither the Bush administration nor Congress has been able to resolve — at least not to the industry's satisfaction.

Companies are concerned about a proposal that could change how prime contractors handle subcontractor fees. They are fighting a government effort to re-establish post-award audits. And the suggested changes to the Office of Management and Budget's Circular A-76 on competitive sourcing have created unease and bewilderment among some vendors.

None of those issues are showstoppers. As one source pointed out, government information technology spending continues to grow and is a source of revenue that few businesses can afford to abandon. But it's harder to be involved "when you've got the flea on the tail of the dog wagging the rest of the business," said Olga Grkavac, executive vice president of the Enterprise Solutions Division of the IT Association of America.

Here are the key policy issues bugging people.

Time-and-materials contracts

Sen. Carl Levin (D-Mich.), the ranking Democrat on the Senate Armed Services Committee, has proposed an amendment to the fiscal 2006 Defense Authorization bill that would limit the amount of money prime contractors could bill the government for work done by subcontractors.

Levin's amendment follows statements last year from the Defense Contract Audit Agency saying that auditors and contractors did not know which rates to use to reimburse prime contractors for work done by subcontractors under the terms of General Services Administration schedule contracts.

The agency issued auditing guidelines that limit the amount prime contractors could charge for subcontractors' work, and the Federal Acquisition Regulation (FAR) Council may soon issue a rule on time-and-materials contracts.

The Levin amendment would place stricter limitations on prime contractors by forcing them to charge only the subcontractors' rates without additions for risk or the administrative effort needed to manage the subcontractor.

Grkavac said Levin apparently believes the way prime contractors handle subcontractors and their fees is a "bait and switch" operation. She said old rules governing time-and- materials contracts don't fit well in a service-oriented environment.

"In the end, it's really a philosophical difference on how a prime acts as a contractor and provides a total service," she said. "Government views these [subcontractor rates] as part of profits, but contractors view them as costs."

The squabble could hurt subcontractors and small businesses, said Larry Allen, executive vice president of the Coalition for Government Procurement.

"If they go from [subcontracting] being a managed cost to a dollar-loser, then they'll do it less," he said. "A lot of large primes can do this kind of work in-house, and they'll be more inclined to do that rather than sub it out."

The potential changes in time-and-materials rates are a major issue for everyone in the IT services business, Grkavac said.

GSA post-award audits

A GSA proposal to re-establish post-award audits surprised many government vendors. Industry executives said they believed that the Clinger-Cohen Act of 1996 had eliminated that practice by removing post-award audits on GSA schedule contracts from the FAR. "But it wasn't prohibited, and we believe that was a mistake in wording since [prohibition] was clearly Congress' intent," Grkavac said.

In a February report, the Government Accountability Office warned that GSA could not assure agencies that they received fair and reasonable prices on schedule contracts. GAO partly blamed the significant reduction in pre- and post-award audits since 1997.

In March, GSA reacted by issuing a request for comments on a proposed rule change to its approach on post-award audits. In July, Emily Murphy, GSA's chief acquisition officer, told a Senate panel that the agency was establishing an internal working group in the Office of Inspector General to study improvements to the audit process.

Industry pushed to end those audits because they required a chunk of companies' resources. Many will consider the possible return of post-award audits as a strategic concern, Allen said. If the audits return, he said, they could drive some of the larger contractors away from the government market.

The issue is extremely problematic, said Ken Salaets, director of government relations at the IT Industry Council, adding that GAO and GSA may have grounds for their concerns.

"There's always turnover in the contracting ranks and that leads to less appreciation of what it takes to do business with the government, and then things can get sloppy," he said. "But I don't think 'gotcha' should be the contracting policy of government."

A-76 and competitive sourcing

In 2003 when OMB announced changes to Circular A-76 that would boost competitive sourcing for contracts that had traditionally been the sole purview of agency employees, the Bush administration hailed it as a big step forward for the President's Management Agenda.

But after the Federal Aviation Administration awarded a 10-year, $1.9 billion flight services contract in May to Lockheed Martin for general flight services — work previously performed by 2,500 FAA employees — those changes came under attack from federal employee unions and their congressional supporters.

Amendments offered to various appropriations bills in the House and Senate would prevent agencies from running public/ private job competitions using Circular A-76 and bar the FAA from transferring the flight service jobs to Lockheed Martin.

"The amendments are surprising because, though unions say the A-76 changes are unfair to government employees, they continue to win the majority of these public/private competitions," Grkavac said.

Stan Soloway, president of the Professional Services Council, said that showed that the Bush administration has failed to lead the push for A-76 competitive-sourcing reforms. As a result, industry has already largely walked away from A-76. If the amendments to the bill pass, "that's the end of A-76," he said.

Some say that won't happen. "The unions have gone regularly to their allies in Congress about A-76, and those allies just as regularly have added riders to bills," said Carl DeMaio, president of the Performance Institute. "The president issues a veto threat and the riders get taken off in conference. And that's what I fully expect will happen this time."

The Buy American and Trade Agreements acts

The Buy American and Trade Agreements acts require government contracting officers to restrict their purchases to products made in America, manufactured using substantial American content and labor, or produced by non-American signatories to the Government Procurement Code.

Although those acts are not a new problem for the contracting industry, they are especially restrictive in an era of expanding globalization. The hardest hit IT companies are the ones that outsource product components worldwide and those that are increasingly moving their manufacturing facilities outside the United States.

"They continue to be a major headache for government contractors, and we are continually pushing Congress to make changes to legislation, but we don't feel [their effects on industry] are properly understood," Grkavac said.

Both acts are expensive for IT companies because they must set up complicated tracking mechanisms to demonstrate compliance, Salaets said.

"On top of that, the [Buy American Act] keeps getting inserted into other laws that concern the industry, so it continues to be a barrier to trade for us," he said. "But the [Trade Agreements Act] is much more than a nuisance because it actually prevents companies from selling the best technology available to government, so it's a problem for agencies also."

However, the IT Industry Council and others are working loosely with agencies of record, he said, and are confident the concerns will be addressed.

IT spending cuts

Although IT programs such as e-government initiatives receive much rhetoric, Congress has not provided much money for them. This year's deep funding cuts and other restrictions have been especially surprising, Grkavac said.

In many cases, the rationale for cuts has been the most disturbing aspect. "In the case of the Department of Transportation, for example, they needed funds for Amtrak so they took money from IT across the board and eliminated [DOT's] CIO and all the staff," she said.

Although that plan might not happen, she added, Congress has indicated that it doesn't support or recognize IT programs as much as vendors would like it to. The IT industry has to be more proactive in getting its message across."It's almost like they're turning the clock back" on IT, she said.

Soloway said the government does not fully understand the direct link between Congress' proposals and their effect on IT programs. "There are functional and operational impacts [on government] even if they are not immediately seen," he said. "And there are some cases where we clearly do still need to be making progress, even with the budget crunch Congress is in."