The BDO GovCon Week Ahead - June 2020

The BDO GovCon Week Ahead - June 2020

June 29, 2020

2021 National Defense Authorization Act Making Progress in Senate: The 2021 National Defense Authorization Act (NDAA) is making its way through Congressional committees toward eventual passage. Recently, the Senate Armed Services Committee (SASC) held hearings on the Pentagon’s ability to hire and retain key talent in high-wage, critical fields like healthcare and technology. Government agencies have typically been at a disadvantage when retaining talent because the private sector often offers better wages and benefits. The cycle of government employee to government contractor is often rapid, and rarely favors consistency within the government ranks. SASC seeks to modify the private sector’s advantage by offering higher salary caps on certain key government employee positions. Government contractors should be aware of this and should prepare their future rate schedules accordingly. The 2021 NDAA bill is now available. 

Crumbling Infrastructure May Not Be Addressed Due to Low Tax Revenues: Architecture, construction, and picks and shovels firms that had forecasted strong FY20 growth have felt the negative effects of COVID-19 this year. Cities, municipalities, and states will likely feel those negative impacts into 2021 due to significantly lower tax revenues to pay for projects. Whether Congress will address state and local infrastructure needs remains to be seen, but in the interim, mayors and governors are hedging their budgets to reflect lower tax receipts. Contractors that can provide products and services to create a public-private partnership (PPP) are at an advantage if the PPP creates a shared revenue stream for the government and the contractor. Can your business model be modified to a PPP so you can have an advantage?

July Ushers in Federal Fiscal Q4: Traditionally, federal government agencies purchase the most products and services from contractors during the fourth quarter of the federal fiscal year. 2020 is not a traditional year, despite being the first of a two-year Congressionally approved budget. Several stimuli, unique COVID-19 spending measures, and an increased focus on the Other Transactional Authority) are just a few examples of the uneven cadence of this fiscal year’s spend. Would-be government contractors are encouraged to visit The Spending Explorer to determine which agencies purchase the type of goods and services they supply, how much, and how often.

June 22, 2020

EXIM Bank Increases Government Contractor Export Sales: On June 11, 2020, the Export Import Bank (EXIM) voted unanimously to notify Congress that it would extend nearly $1 billion in loan guarantees to U.S.-based manufacturers, specifically Boeing and CFM International / General Electric Corporation. These loan guarantees facilitate the purchase of U.S.-manufactured goods by foreign countries, offering a distinct advantage to American government contractors versus not only foreign competitors, but the indigenous manufacturers of the countries to which the U.S.seeks to sell goods. When the supply chains are initiated on these $1 billion in purchases, EXIM estimates Boeing will create or sustain over 14,000 U.S. jobs in Indiana, North Carolina, and Ohio. EXIM does not compete with private sector lenders but provides financing products that fill the gaps in trade financing, assuming country and credit risks that the private sector is unable or unwilling to accept. EXIM also helps to level the playing field for U.S. government contractors by matching the financing that other governments provide to their exporters.

Both proposed transactions are anticipated to generate millions of dollars in fees paid to EXIM. Since its inception 83 years ago, EXIM has generated more than $400 billion for the U.S. Treasury for repayment of U.S. debt.

USMCA Goes into Effect July 1, 2020: The United States-Mexico-Canada Trade Agreement (USMCA) goes into effect on July 1, 2020. Government contractors are encouraged to familiarize themselves with the nuances of this law that replaces the North American Free Trade Agreement (NAFTA). Some key aspects and how they affect government contractors are outlined below:

  1. USMCA encourages U.S. manufacturing and regional economic growth by requiring that 75 percent of auto content be made in North America. Considering the General Services Administration owns and operates over 300,000 passenger and light truck vehicles, this will have a positive impact on and truck manufacturers, as well as their North American supply chains.

  2. USMCA requires that sewing thread, pocketing fabric, narrow elastic bands, and coated fabric, when incorporated in most apparel and other finished products, be made in the country for those finished products to qualify for trade benefits. This may present some future obstacles for some federal agency purchasing departments considering the tens of billions of dollars spent on personal protection equipment (PPE) so far from China. U.S., Mexican, and Canadian PPE manufacturers may soon have a regulatory upper hand.

  3. The investment chapter of USMCA restricts access to international arbitration for most U.S.companies investing in Mexico. Contrary to NAFTA, the USMCA distinguishes between two types of investors: investors with covered government contracts and those without them. The former will still have unrestricted access to arbitration, like the one that NAFTA offers. The latter will only be able to start arbitration proceedings under limited circumstances.

A full review of all of the effects of USMCA on the government contracting vertical is now available. 

MBDA Seeks 2020 MED Week Nominations for Minority Owned Business Leadership: The U.S. Department of Commerce, Minority Business Development Agency (MBDA) is seeking nominations for the 2020 National Minority Enterprise Development (MED) Week Awards. These annual awards are designed to honor businesses, organizations, and individuals that have demonstrated leadership and commitment in advancing the minority business community and the Nation’s economy. The MBDA is the only federal agency solely dedicated to fostering the growth and global competitiveness of U.S. minority business enterprises. MBDA programs are focused on economic empowerment and leading minority business enterprises through business transformation. For 50 years, MBDA has helped minority-owned firms gain access to capital, contracts, build scale and capacity, and expand into new markets.

Defense Department Mulls a Year-long Reprieve for Chinese Tech Contractors: Section 889 of the National Defense Authorization Act of 2019 generally states that Chinese-origin technology products at Department of Defense (DoD) facilities and within their government suppliers must be replaced by August 13. However, it is that legislative generality that has caused Ellen Lord, DoD’s Undersecretary for Acquisition and Sustainment, to declare that up to an additional year may be necessary to fulfill its obligations under the law.

June 15, 2020

IT Modernization–Congress Wants Answers: On Wednesday of last week, Congresswoman Maggie Hassan (D-NH) sent letters to 10 federal agencies asking each CIO to answer six questions about the current status of their IT modernization efforts. According to Nextgov “In the letters, Hassan pointed out that, in fiscal 2019, the federal government spent nearly one-third of the $87 billion allocated for IT—or $29 billion—on maintaining legacy systems, based on figures submitted to the Office of Management and Budget using the Technology Business Management framework. ”A 51-year-old COBOL system used by IRS costs an average of $15.9 million to operate and maintain–and due to the antiquated nature of the system finding active COBOL programmers becomes a more difficult task every passing day. Sen. Hassan wants agencies to think and budget ahead, use FEDRAMP-approved enterprise cloud software, and invest in proven new technology for the 21st Century.

On June 4, BDO released its 2020 Digital Transformation Survey, and it indicated 100 percent of commercial respondents are currently implementing a digital transformation strategy, or are in the process of developing one. Considering that Congress has passed numerous laws mandating that federal agencies do the same (see the Federal IT Acquisition Reform Act of 2014 and the Modernization of Government Technology Act of 2017 to name two), federal CIOs should presumably be committed to IT modernization at the same 100 percent response rate. If they are not, it is well past time to upgrade systems for efficiency, cyber security, and operational cost containment.

Small Business Government Contracting Represents America: The federal government and its procurement teams are bound by the Small Business Administration’s (SBA’s) contracting and sub-contracting goals and thus are compelled to award contracts to capable, fairly priced small businesses.

Curious to know more about the universe of small business government contractors? Here they are by the numbers thanks to our enterprise software partner,

June 8, 2020

Corporate Site Selection: Site selection is a growing area of importance within BDO, especially regarding government contractors (and future government contractors) seeking to onshore or reshore in the wake of COVID-19. Companies choosing to manufacture their goods in the U.S.and sell to government agencies could benefit from the additional scrutiny the government is paying to Chinese manufacturers. Recently, a Department of Homeland Security (DHS) request for proposal (RFP) for hundreds of millions of units of Personal Protective Equipment (PPE) offered preference to contractors able to demonstrate Berry Amendment compliance–one of several laws that spur agencies to purchase goods manufactured in the U.S.over those made in another country. Other incentives include the Buy American Act of 1933 and Buy American Act of 1983. PPE, semiconductors, processed food, prescription drugs, and furniture have all been mentioned in the last several weeks as sectors where entrepreneurs could make a significant impact by manufacturing in the U.S.

So what should companies think about when they are considering site selection for a an onshored business? While the standard aspects of location (i.e. close to main roads, talent pool, and accessibility) are important, companies should also consider the following five questions:

  1. Does the Congressional delegation from that district and/or state have the ability and tenure to help guide legislation in your favor?
  2. Do nearby universities have a robust technology transfer system in order to facilitate your next product developments?
  3. Will locating in a HUBZone or Opportunity Zone offer an advantage to your government contracting pursuits?
  4. What is the comparative regulatory burden of one state versus another?
  5. Does your headquarters’ proximity to a government customer matter?

Public Schools’ Online Learning Kick Start: Summer is coming,and beleaguered school districts are pleased to have a break from the scheduling madness caused by COVID-19. One of the nation’s largest school districts, Fairfax County, Virginia, had technical issues and cancelled the school year early because they failed to adequately update their distance learning software. This could have easily been avoided had the County been diligent about its contract terms with Blackboard.

Look for county school boards to play a difficult role between recognizing decreased tax revenue / county budgets and implementing much-needed distance learning software for K-12 within a very brief window. Watch for state, local, and educational contract aggregators like NASPO to be exceedingly busy processing technology-related RFPs this summer.

Semiconductor Industry the Next Huawei / ZTE-like Battleground? The Semiconductor Industry Association (SIA) has recently implemented a significant Capitol Hill lobbying effort in order to increase federal funding to keep America’s manufacturing lead in this increasingly competitive sector, according to the Wall Street Journal. The SIA seeks $37 billion in chip factory construction subsidies and grant funding (likely SBIR and STTR boosts) in order to sharply increase the domestic research and development of new technologies. Promoting STEM education investment is another key part of their legislative strategy.

This occurs while at the same time President Trump is pressuring China to both minimize their manufacturing R&D and production pace. Global manufactures are facing a key strategic decision–keep manufacturing in China or consider other less politically charged environments, perhaps with similar cost benefits.

The SIA may inspire other trade associations to promote similar appropriations measures in the post COVID-19 economy, and could branch into semiconductors also.

June 1, 2020

The Power of a Well-Fortified Balance Sheet After COVID-19: The mergers and acquisitions market continues to deal with the ramifications of COVID-19 on the economy. According to analysts at Dealogic, the value of M&A activity in the first quarter of 2020 was significantly lower than the last quarter of 2019, down 35 percent globally and 39 percent in the U.S. It was the worst first quarter for M&A since 2016, Refinitiv’s data shows, as the total number of deals declined 13 percent from a year ago.

However, the government contracting market is unique. Arecent story in Washington Technology Magazine highlighted large government contractor’s interest in maintaining growth via acquisition, but at a more measured pace, evaluating companies at more sane multiples, all while not depleting the balance sheet on incongruous corporate addition(s). As we emerge from the COVID-19 pandemic, what will happen to small and mid-sized government contractors that didn’t maintain a healthy balance sheet, but do have excellent contracting vehicles, past performance, and cash flowing long-term contracts? Likely, they will be pursued for purchase by medium and large primes seeking acquisitive grow that a discount. It is also likely that there will be continued growth, perhaps even faster than its first four years, in the All Small Mentor Protégé Program as medium-sized primes shrewdly invest in Proteges with the long game in mind.

Where Will Space Force be Headquartered? Site selection is a growing skill of BDO. Elvis Oxley, Managing Director of ISSG, shared his insights on the future headquarters of the newest branch of the United States Air Force (USAF), known as Space Force:

“As with all sound real estate decisions, the three most important site selection criteria are location, location, and location,” said Oxley. “With Space Force, additional factors will be in play, such as politics, access to trained and cleared manpower, infrastructure, and local prime contractor support. The USAF will likely consider its four largest and/or most active bases that are already well suited to meet the aforementioned criteria –Elgin (Destin, Florida), Wright Patterson (Dayton, Ohio), Edwards, (Kern County, California), and the USAF Academy (Colorado Springs, Colorado). Which swing state electorate could swing more in favor of our current Commander in Chief upon selection? That eliminates California from the running, and potentially Colorado. Florida’s Elgin AFB is an attractive setting, and it could draw its talent from bustling DoD hubs like Huntsville, Alabama and NASA’s Space Coast, also in Florida. Ohio’s Wright Patterson AFB hosts the Air Force Research Lab as well as NASA–two useful components for Space Force’s development and collaboration. Both Florida and Ohio are key swing state battlegrounds, so we’ll see who wins out.”