Interview transcript:
Jared Serbu Stephanie, let’s start with this CMS issue, because as you and I were talking about a little bit off the air, this is certainly not the only case in which the invoicing staff at federal agencies has been furloughed, but let’s focus first on CMS. What impacts are you seeing there, and what’s it meant so far, if anything, in terms of delays?
Stephanie Kostro Well, Jared, thanks for having me. And this is an interesting area that you’re tackling here, first off. And that is to say, several weeks ago, many of our companies that work with Centers for Medicare and Medicaid Services highlighted to us that folks in charge of invoice processing, so those who can receive invoices, process, get them out all the way to payment, had been furloughed. Now, that wasn’t an entire surprise if you look at how this shutdown has impacted federal civilians and military personnel alike. The civilian side, they have seen lots of furloughs in contracting officers, in program offices, et cetera, folks that companies deal with on a daily basis. The invoicing piece is a new wrinkle, and I’ll say that because a lot of these contracts are funded by prior year funding, so fiscal year 25 appropriations, not dependent on fiscal 26, or fee-based for sources of income. Therefore, when you furlough the invoice processing people, that means the companies who are still doing essential services and providing essential work to the government and should have money to tap into to pay for their work are running into a brick wall, and this is causing a lot of pain among many of our companies.
Jared Serbu It’s such an important point to point out because there are a lot of these areas across the federal government where just because the government has shut down doesn’t mean the work is not still occurring. Healthcare is still taking place and people need to be paid for it. So in terms of what you’re seeing in terms of the impacts, have you started to hear anecdotes from your members about people being put in precarious situations by not being paid in a timely way?
Stephanie Kostro I have, Jared, and thanks for asking that, because I would note, hasten to add, based on my last comment here, the head of contracting agency over at CMS did send a note to all CMS contractors last week that said, hey, we’ve heard you and the furloughed employees in charge of invoicing will be back in the office on Monday, the 27th, so that is this week. And that’s great news, but of course invoices have backed up, that doesn’t mean everything is smooth sailing from here on out. Again, using fiscal year 25 appropriations and fee-based situations. That said, in that gap, because invoices were sent in, potentially even accepted for payment, but then not processed, some companies have claims for equitable adjustments for that time period for costs incurred as a direct result of the government’s inaction or delay. I would say CMS might get some leeway due to the shutdown is outside of their control, as it is for many of us outside of our control. But that catch-up process isn’t unreasonable. So I think we need a lot of flexibility and grace on both sides here to make sure that folks get paid in a timely way. And of course, we are talking about contracts that are not covered by a stop work order. If a company gets a stop-work order, the first thing they do is stop work, and then they start documenting any costs incurred. That said, some of these companies do need invoice payments because they are very labor intensive. They need to pass those payments onto their employees who need to pay their mortgages, feed their families, et cetera. Similar situation to all of the federal employees who are going without pay. Fortunately for federal employees, they do have a law on the books from 2019 that guarantees back pay. Contractors don’t have that. And so what we’re talking about here is not back pay, it’s actually payment for work performed and for reasonable invoices. I would also note, we are recommending that companies really track all additional projected costs for payroll retention or subcontractor payments, financing, overhead from delays, et cetera, that have resulted. And so what we’re trying to avoid here is, the clock starts ticking once an invoice is accepted by a federal agency, and that clock runs out according to the Prompt Payment Act. And if the government doesn’t make those payments on time, they start incurring fees or interest. And then they owe more to the contractors. Everybody wants to avoid that situation.
Jared Serbu I’m so glad you brought that up. I was just going to ask about that. Based on past shutdowns, are there any exceptions to the Prompt Payment Act by virtue of the government being shut down, or is the clock the clock basically no matter what as soon as the government accepts the invoice?
Stephanie Kostro So the key phrase here, Jared, is that an invoice has to be accepted for that clock to start ticking. And so what the government could do is just not accept that payment into the system. And therefore, the clock for the Prompt Payment Act doesn’t start. So it really is a small subset of contracts that I’m talking about and invoices that I am talking about, but they’re not zero. They are invoices out there that the clock has been ticking. They’re going to probably bust through that Prompt Payment Act window, and then costs will be incurred on the government’s behalf to pay the contractor the penalty it’s due.
Jared Serbu Got it. Let’s switch gears a little bit and talk about the big AI regulatory reform RFI that the Office of Science and Technology Policy has just put out. Tell us a little about what OSTP is actually proposing here and how it fits into so much executive order action on the topic of AI across the last couple administrations.
Stephanie Kostro There has been so much activity on AI and I think that’s because it was long overdue. You’ve got lots of agencies and departments interested in artificial intelligence and generative artificial intelligence. And this was a long anticipated RFI coming from the government saying, hey, where do we need help here? What regulations are causing delays and hindering advancement, both in the development and the deployment of artificial intelligence across the government? And so OSTP, this Office on Science and Technology Policy, is an office, obviously, in the White House. So this has the highest level of attention. As you mentioned, there are lots of executive orders in this as well. And so industry really welcomed this RFI that came out in late September. Comments were due yesterday, October 27th, and we submitted probably PSC’s longest set of comments in my memory. And I’ve been with PSC for four and a half years. It was quite detailed. Lots of companies had lots of input. And I’m happy to go over a few of the high points if you’d like.
Jared Serbu Yes, please.
Stephanie Kostro Sure, so just generally speaking, it’s fair to say that PSC and our member companies support the government’s two emphases. One emphasis is on fostering competition and innovation within the federal marketplace. And the second is sort of monopoly, maintaining U.S. leadership across the globe on artificial intelligence and other emerging tech. So when we look at those two emphasis, maintaining competition, and then also demonstrating U.S. leadership, we have to get rid of some of these arcane and archaic regulations that are really holding back the art of the possible here. So one of those is reasonable access to federal government data. As we all know, to train AI models and tools, you need access to data to let it know what right looks like. You feed it information and it crunches the numbers and it crunches the data and it does spit stuff out, but then you have to train that model to make sure that it’s giving you the kind of output that you would like. The second one, in addition to access to federal government data, is you have a very fragmented regulatory landscape. Every single state that I know of has some sort of law on the books regarding artificial intelligence. It seems a little bit like the federal government is playing catch up here. And I do think there is a really good role for the federal government to play in order to help responsible AI adoption, is to look at that patchwork of state privacy and AI laws and take a wide-ranging view on that. I would love to see a unified frontal framework for AI and data privacy that harmonizes or supersedes conflicting state laws. So that’s the second piece, the fragmented regulatory landscape. And the third one that I’d mentioned just offhand is there’s a lot of rigidity in procurement processes. Jared, you and I talk about this quite often. There’s not enough flexibilities, or flexibilities are on the books but contracting officers don’t want to use them because they’re either unfamiliar or there’s some risk to them involved in using some of these flexibilities. I think we need to get past that when it comes to AI. We need to look at how to create flexibility in procurement and how to make sure that we aren’t disincentivizing the sharing of data rights through licensing structures. So those would be the three I’d mention, access to federal government data, a unified federal framework for AI in terms of regulations, and then also, let’s take a look at procurement rigidity.
Jared Serbu And when it comes to that patchwork that you mentioned, when you think about the ideal scenario, does that look more like the federal government preempting those state-based standards, or coming up with something that’s just more specific to federal contractors, or both?
Stephanie Kostro So I think there is space for both in this. I mean, obviously PSC has 400 member companies. We are active in the government contracting space. That’s our federal marketplace. And so I would love to see first and foremost, compliance that is streamlined in order to accelerate responsible AI adoption and reinforce U.S. leadership and trustworthy AI development specific to federal procurement. That said, AI is throughout our economy at this point. It does run into privacy issues. And so if the federal government could take a look at reducing operational uncertainty, lowering compliance costs, not impeding innovation across the board, and that will mean when states are in conflict on AI and on privacy, which will supersede the other? And I think the federal government has a role to play in resolving those conflicts.
Jared Serbu Need to go to break in just a minute here, but want to make sure we mention the PSC Defense Conference coming up this week on Thursday. It’s always a great conference, but give us a minute or so on what you guys expect to tackle this year.
Stephanie Kostro I appreciate that, Jared. It’s tough to have a conference during a shutdown, but we are forging ahead. And indeed, we’re having several folks from Capitol Hill, not only members of Congress, but senior professional staff members come to talk about topics like aligning energy demand and investment for the future defense industrial base. So that’s not just small modular reactors, but also, how are we going to do electrification throughout the base structure at the Department of War or Department of Defense? We’re also talking about unlocking and implementing commercial solutions across our defense ecosystem and strengthening partnerships within the defense enterprise. So those are going to be some key topics. We’ll have keynotes from Congressman Rob Whitman, as well as the newest member of Congress from this area, who is James Walkinshaw here from Virginia. We’ll also hear from a member of Congress from Florida named Scott Franklin, and he’ll talk about that energy topic that I mentioned.
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