Interview transcript:

Terry Gerton I want to start with Secretary Hegseth’s Arsenal of Freedom tour. He’s taking his pitch on the road and recently spoke at the Lockheed Martin Air Force plant in Fort Worth, Texas. I know you’ve been following this, the developments in defense procurement for quite a while. What are you hearing at this point?

Stephanie Kostro So Terry, this “Arsenal of Freedom” is a month-long tour, and it really is Secretary Hegseth going around to various places. He started out in Newport News, here in Virginia, talking with shipbuilders about what it means to be part of the team, right? Being part of the arsenal of freedom and in making things faster, more efficiently, etc. He then went out to California and spoke with folks, and then most recently, just last week in Texas, visiting Lockheed Martin as you mentioned, but also SpaceX. And so talking to folks about, what does it mean to be part of the arsenal of freedom? This is building on his November 7th Arsenal of Freedom speech that he gave here at Fort McNair in the D.C. area. And it is really about reviving this team mentality of, “we are in this together.” Against that backdrop, of course, we have recent activity in acquisition transformation, but also an executive order that came out earlier this month about limiting executive compensation for defense contractors, limiting dividends and also share repurchases or stock buybacks. And so this is a very interesting time to be in the defense industry.

Terry Gerton Stephanie, with all of the changes in the FAR and the DFAR and now the Defense Appropriation Act that’s in law, do you think that DoD has the policy tools it needs and wants to accomplish its transformation?

Stephanie Kostro There are two elements of the answer here. One is, with the fiscal year 2026 National Defense Authorization Act, which was just signed into law last month, they received a lot of new authorities, a lot of a sense from Congress about the ways in which this should be tackled. There is language there about technical data rights and intellectual property. There were things in there about how to define a nontraditional defense company, etc. But I don’t think that was sufficient; we still have work to do. And so does the department have all of the authorities and resources it needs to move forward? I think we’re going to see a lot of legislative proposals come out of the department for this next round of the NDAA, the fiscal year ’27 NDAA. And I think we’ll see things about acquisition workforce. We’re going to see things about working outside of the Federal Acquisition Regulation way of doing contracts. That is code for things like Other Transaction Authority or commercial solutions openings, etc. I don’t think they have everything they need. Part of the Arsenal of Freedom tour and the rollout of this acquisition transformation is to look at how the department can buy things more effectively and more efficiently. That’s time, not having cost overruns, etc. And so all of this is sort of coming together, in a way, to ultimately really transform the way the department buys. And I’m very excited to be part of this.

Terry Gerton Having the rules and authorities is only one piece. What’s your sense of whether the acquisition culture and workforce are aligned to actually accomplish the goals?

Stephanie Kostro Culture is the hardest element of any kind of transformation, right? I do think they’re trying to empower contracting officers and other key members of the acquisition workforce, program managers, contracting officer representatives, etc. This is a longer-term issue, and I think they are trying to tackle it through training programs, etc., letting folks know tools are at their disposal and giving them the authority to go ahead and use those tools. Now, folks don’t get into acquisition within the civil service because they’re risk-loving. A lot of times they get into it because they want to do things very smartly, very efficiently and oftentimes they look back on precedent to see how things were done before. Layer over that, Terry, the fact that we lost a lot of contracting personnel through deferred resignation programs, voluntary early retirement programs and reductions in force. So we are trying to rebuild the workforce in numbers as well as in training. I don’t think they’re there yet; I do think there’s a path to get them there. I’m eager for industry to work with the Department of War and others about how to train effectively and to let industry folks sit in the same training as the government folks, so everyone’s hearing the same thing.

Terry Gerton Stephanie, before we leave this topic, you touched on the executive order about defense contractors and compensation and buybacks. There’s a lot of unknowns still in how that will play out, but what are you hearing from your members?

Stephanie Kostro Our members were very eager to hear how the Professional Services Council would summarize that EO. So we did put out — based on the fact sheet from the White House, based from some interactions we’ve had with administration officials — our interpretation of it. That said, we’ve also asked our member companies, and we have 400 member companies and the majority of them do business with the Department of War and the intelligence community, “hey, what questions for clarification would you like us to ask?” And that list is growing. It is very long. It’s things like, is this really just for publicly traded companies? What about privately owned, or S corps and LLCs? The reason I mentioned that, Terry, is S corps and LLCs will often pay out a dividend to an executive at the company so that executive can pay taxes. They pay out of dividend, so it’s not only a dividend payment, it’s executive compensation, but it’s really just to go ahead and pay federal taxes. What do people do in that regard? How do they explain this? If they have a parent company that is overseas in Europe or elsewhere, how do they explain this executive order to those folks? And that executive compensation, there’s a limit if the company is underperforming, and all of this is predicated on the company’s underperforming — either cost overruns or schedule overruns. How do they explain this to folks? And is it really just about government contracts, or what if you’re a commercial and a government company and your executive compensation is based usually on both elements, commercial and government? So how do you go ahead and limit compensation there? This is a fascinating area to be engaged with the government on. We are all learning this together.

Terry Gerton As Secretary Hegseth tries to walk this tightrope between encouraging defense contractors to be on the team and work with us, and at the same time kind of tightening the screws on enforcement and compensation, the president has said he wants to spend $1.5 trillion on defense next year. That’s a lot of money. How is that going to get spent, do you think?

Stephanie Kostro Oh, it is an eye-catching number, right? $1.5 trillion when we are roughly $1 trillion now are just under, and it is a huge increase. Now, we’ve had large increases in the defense budget in other times in U.S. history. In the early 1950s with the Korean War, the Reagan buildup that some of us remember from the ’80s. Some of us who are listening may not remember it. They may not have been born yet, and that’s okay too. You know, there is some precedent for huge increases in the defense spend. The question here becomes, if the department and the military services are going for commercial-first mentality to prioritize speed of award and innovation, etc., they certainly can spend that money throughout the defense ecosystem. The question that we have is really, what is the organizing construct for this? What would we be spending the money on? Would it be shipbuilding, combat aircraft, the logistics piece, which always tends to be an issue? We also know operations and maintenance accounts are sometimes used and reprogrammed away if they’re not spent by a certain time, because it’s one-year money at the department, it gets reprogramed away. It’s going to be an interesting mathematical problem to tackle. In addition, I would mention, we had the reconciliation bill, the One Big, Beautiful Bill Act that passed and was signed into law last July. That infused a bunch of cash into both the Department of Defense and the Department of Homeland Security. I understand some of that money hasn’t been apportioned and provided to the departments yet, but we are now at this point in January of 2026 talking about, what would a reconciliation bill look like for 2026? Congress can pass one per fiscal year. The one that was passed last July was the one for fiscal ’25. What happens this year? There are a lot of different mechanisms to get that money through Congress and over to the government to apportion to the department.

Terry Gerton Well, speaking of 2026 appropriations, it looks like Homeland Security and Defense will be two of the last bills out, hopefully before the end of this month. What are you hearing from folks on the Hill?

Stephanie Kostro I’m hearing that they’re trying really, really hard to avert a shutdown. And I think we’re going to get there. I’m not a betting person, Terry, you know, I’ve talked about that in the past. And I’m not in this case, either. The chance for a shutdown is never zero. That said, the experience that we all had back in October and November last year would indicate that there really is no appetite for a shutdown this year. The National Defense Appropriations Act and the DHS [bill] I think are probably the last because they want to get everything done before they tackle those. Those are the two departments that received the lion’s share of the money from the reconciliation bill, One Big Beautiful Bill Act last year, and they are looking to get more money in a reconciliation bill this year. So I’m not surprised to hear that those are last, but I actually don’t think that indicates that they’re very far apart on the numbers.

Terry Gerton And on those two departments, PSC is sponsoring a trip in January to the border to do some on-site research. Tell us about that plan.

Stephanie Kostro I am so excited about this. PSC has not typically done this. I do know other entities have done this, I used to be at a think tank where we would do things like this. We are bringing almost 30 different companies out to California next week, Jan. 28 and 29, to do a behind-the-scenes access with the Customs and Border Protection folks who are out there. And the ports of LA and Long Beach, the ports at entry, the land ones over at San Ysidro and Otay Mesa, really talking with folks on the ground there about what their requirements are. This is really focused on technology. How do we use technology and the art of the possible to protect our borders? Now, I would hasten to add, Terry, border security is not a partisan issue in many, many ways. The Biden administration, the Obama administration, the previous Trump administration all focused on border issues in different ways. Our companies really want to mention to folks on the ground, here is technology that you may not have experience with that is up-and-coming. How can we leverage it to better secure our borders? Talking about cargo screening, etc. I think this is a really good opportunity for companies to sit down with folks who are in the field and hear about what they need.

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Interview transcript:

Terry Gerton We are in our first full week of January, and we’ve started it with big news over the weekend, the capture of Nicolas Maduro in Venezuela. What impact does that have on the government contracting community? Tell us what you’re hearing.

Stephanie Kostro We have started 2026 with a bit of a surprise for some of us, right? And in terms of contractors, you know, contractors have long been involved in U.S. engagements around the world. This is no different. And so as we move forward, whether it’s military operations or if it’s critical infrastructure protection for oil and gas lines in Venezuela, etc., depending on where the White House wants to go with this plan they have, contractors will be certainly a part of that. We’ve heard in the news media about the president talking to oil and gas companies. I would also say government contractors have a role to play in what’s coming up, and I hope that we can collaborate and cooperate with the White House, with the agencies involved, to make sure that contractors’ voices are being heard and that we’re being used effectively.

Terry Gerton We’re certainly going to hear more about that over the next few days as the operation unfolds, but let’s change topics a little bit; still looking forward to what you’re hearing in 2026. The Revolutionary FAR Overhaul was a big topic in 2025 and now it’s playing out in practice. What are you seeing in the Department of Defense’s class deviations?

Stephanie Kostro Well, we were seeing a lot of activity, Terry, over the holidays. To go back a little bit into the Revolutionary FAR Overhaul, which is this massive rewrite of the Federal Acquisition Regulations, we saw lots of class deviations released from the FAR Council last year, and there was direction from the president as part of this overhaul to undertake a rewrite of all the supplements of the FAR. And every agency has its own supplemental documentation regarding the acquisition regulations. The Department of Defense/Department of War, they have one of the largest supplements, if not the largest supplement, so undertaking a rewrite of that documentation is a massive effort as well. In mid-December, on December 19th, we saw coming out of the department 31 separate class deviations that would take effect on February 1st, which is not too far away, and they’ll guide contract writing until the formal rulemaking process can catch up. This was a large tranche of Phase 1 class deviations. We were unpacking the 31 pieces of language as we speak. In addition to the actual changes to the DFARS language are changes to non-statutory policies and procedures that are found in what’s called at the department procedures, guidance, and information, or PGI. This is the supplemental body of work to the supplement itself. As we go through all of these documents, it’s really important for contractors to look at them carefully, figure out how they’ll impact their work, their business, and the mission of the agency that they’re supporting, and to give feedback to the Department of Defense/Department of War regarding how these are going to play out.

Terry Gerton What are you seeing in the first 31? What stands out to you, at least in the initial look?

Stephanie Kostro There are several that do stand out to me. We’ve had this conversation before about this push in the government to go towards commercial products and commercial services. When you think about the Department of Defense, you think a lot of the very bespoke, military-focused products and services or solutions. But they do actually acquire lots and lots of commercial services and commercial products. And we heard this in the November 7th Arsenal of Freedom speech from Secretary Hegseth, about this need to incorporate more commercial components to what the department is acquiring. When I looked at the class deviations, I saw some of the subparts on applicability of certain laws for commercial products, commercial services and commercially available off-the-shelf items. I also saw a lot of activity there on simplified acquisition procedure, so they’ve retained rapid contracting for combatant commanders, authority within the DFARS, and some other special contracting methods. So this is really reflective of what we’ve seen in the FAR Overhaul, but more specific to the service members and the warfighters.

Terry Gerton I’m speaking with Stephanie Kostro. She’s president of the Professional Services Council. Stephanie, there are contractors who work across agencies. How are they keeping track of all these deviations if every agency has their own new rule book?

Stephanie Kostro It is such a challenge to think through. You’ve got the FAR, which is what governs so much of acquisition within the federal space, but every single agency does have its own supplement. They’re trying to make sure that they’re aligned, or at least not misaligned. That said, it is a challenge for your run-of-the-mill contractor, particularly for small businesses who don’t necessarily have the resources or the knowledge base to go, hey, this is tweaked in this way, but that other agency is tweaking it in a different way, and that’s what it means for my business. I understand that there will be training opportunities that the government’s putting together, not just for government employees and the contracting officer and the acquisition corps, but also for contractors. And I’m encouraged that it will be coursework that both the contracting officers in the government and the contacting folks outside the government can take together and understand what is going on. But you’ve put your finger on one of the major complications that we’re facing, which is, okay, the FAR is being changed, but all of the agencies are going to interpret changes differently for their own purposes, and what does that mean for industry?

Terry Gerton And you mentioned that the new DFARs deviations go into effect 1 February. Do contractors have an opportunity right now to provide feedback or is this a done deal?

Stephanie Kostro So the class deviations are out. We do have a line of communication open to folks at the department to say, hey, you know, this could be an unintended consequence of this particular phraseology or language, etc. They will take effect February 1st. I believe that they’re open to modifying them before the actual rulemaking process starts. And we’re hoping that as a trade association — PSC, we have 400 member companies — we’ll go out to them and say, hey, what is a burr under the saddle or what is real sticking point for you here? And we’ll convey that, or they can convey it themselves. There seems to be an openness to receiving that feedback, but again, not sure what they’ll do with it, particularly as different supplements from different agencies may be misaligned. And so again, it’s very complicated. I think we’ll be playing this out through all of 2026.

Terry Gerton Well, speaking of complications and burrs under the saddle, also over the holidays there was a leak of a draft executive order that might limit buybacks, dividends, and executive compensation for military and defense contractors. What are you hearing about that?

Stephanie Kostro So it’s been fairly quiet on that since last you and I talked Terry. There was an executive order, as you mentioned, in draft form that was being discussed in the media. We still haven’t seen the language, we haven’t heard much more about meeting with decision-makers about that. We are very hopeful that when language does come out or is shared, or if these conversations happen, that the White House and others will be open to contractor feedback regarding how this impacts industry. I would mention, PSC, we often highlight, as I did earlier in this discussion, we have 400 member companies. Collectively, our companies, between commercial and government contracts, contribute $1 trillion to the U.S. economy. And that’s just our 400 member companies. So we are a big player in the national economy between commercial and government contracts. So as we have these discussions, I hope that concerns will be taken under advisement.

Terry Gerton Even the leak of this executive order had immediate impact in the stock market. What are you hearing from your member companies about the potentially negative effects of these requirements?

Stephanie Kostro These new requirements, as I understand — again, haven’t seen the language — but as I understand they’ve been drafted, would have impacts on shareholders, would have impacts on the broader economy. Already the rumor of it had an impact on some share prices. I really hope that as we work together — we’ve had a long history of public private partnership and of collaboration with the government — and again, we are here to help with federal missions and making sure the taxpayers in America get what they’re paying for in terms of mission success, whether it’s Internal Revenue Service or Department of Defense/Department of War or Homeland Security, border security, etc. But these companies need to remain viable. They need to be able to pay their workers, able to do the work themselves. That is the conversation that we want to have about the longer-term impacts of some of these potential actions. And I hope, again, that the government will take that under advisement.

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Interview transcript:

Terry Gerton I want to start by taking a look back. You took over at PSC this spring. What has been the most surprising thing you’ve encountered in your first year on the job?

Jim Carroll It’s hard not to look back on the first year and think of the disruption caused by the record-breaking shutdown as being something very, honestly, traumatic. The fallout from DOGE and the impact that has had — those two things stand out as the biggest opportunities and challenges to overcome. Certainly the shutdown and the duration of it was a surprise. I think everyone sort of expected two weeks out, or three weeks out, that it was going to happen, but the fact that it lasted so long. The wonderful surprise really has been the dedication of the companies that are members of PSC to fulfill the mission. I’ve spent my entire career in the government, with one stint in the private sector. Being able to work with these member companies, they truly feel that they are doing the best work for and on behalf of the country. The significance and seriousness with how they approach their job has been just a wonderful affirmation of the work that they’re doing.

Terry Gerton So Jim, coming off of that, one of the things that happened just before the Senate left town was the confirmation of 97 more political appointees. You’ve said this is really important to PSC and industry. Walk us through what you’re watching in terms of political confirmations.

Jim Carroll At the beginning of the administration, we did see members of the cabinet and the deputies confirmed very quickly and getting them through the process. Since then, it’s been bogged down getting these assistant secretaries and a few deputy secretaries confirmed. What that means with getting 100 more people on the job is what you would expect: They’re on the job, they are going to be the decision-makers. We’re excited because we believe that things are going to start moving a lot faster. And we sincerely appreciate the willingness of those people that were willing to serve in an acting capacity. But those people have some constraints on how they move, what decisions they can make; now getting the new political appointees in, it means that they’re really going to start moving faster. We’re hoping to be able to see more long-range and not just some of the short-term things, so we’re excited about that. We think it’s in the best interest of everyone to get these folks onboarded and get them moving. We are certainly going to take advantage of that and be coming to them to tell them exactly how these things impact the industry — and therefore impact the country.

Terry Gerton I’m speaking with Jim Carroll. He’s the CEO of the Professional Services Council. Jim, you mentioned up front the surprise around the government shutdown. Hopefully we won’t have another here at the end of January. But what, then, are the contractors in your community expecting in terms of procurement momentum? Is it going to pick up from what we’ve seen?

Jim Carroll Yes, we absolutely believe that. And I am not as worried about the shutdown of the end of January as I was back in the fall. Hopefully you feel the same way, Terry. I don’t think either side won. I think both sides lost during that shutdown. I’m hoping, and we’re certainly telling people, that that is the situation. With the these people on board, there’ll be renewed excitement. They are eager to get the job done. A lot of them have been waiting, really, a year since they were announced by the president, so they’re going to be incredibly motivated to work and to get decisions made, to get acquisitions going and really sort of set the policy for working with industry. We’ve heard from some of them already. We’re looking forward to meeting with some of them as they get settled in and find their office. We will be meeting with them and making sure that they understand the broad significance of what they’re doing and letting them know we’re a willing partner to achieve those objectives.

Terry Gerton Jim, one of the big challenges for the government contractors in 2025 was just the delay in terms of invoices, the disruption in contracts, terminations. Are you expecting that these backlogged invoices and stalled new awards and recompetes are going to pick up speed?

Jim Carroll Yes. We went in with some of our members to meet with the Chief of Staff, Susie Wiles, and the White House counsel. We told them — and this was while the shutdown was ongoing — that we needed, once it ended, to be able to move on these. We have followed up with the White house leading up to Christmas. The Chief of Staff, Susie Wiles, was very receptive to it and was, we believe, to be really on message with this. We talked about the communication and how to best achieve it through the departments and agencies. So we’re optimistic that these invoices will be paid. Because this is work that has been done, and for these companies, for the most part, they have been paying their employees. Some, sadly, had to put folks on the bench and furlough people temporarily. But a lot of them kept working, did what they needed to do, and now there’s cash flow issues for some of these companies. That’s what we’re pressing on to the White House. That is what we’re talking about with the members of the cabinet on some of the issues, is to get these invoices paid and get these companies up and running fully.

Terry Gerton Well, speaking of paying one of the few agencies that has a significant appropriation is Department of Defense. You’ve got a lot of your constituents, your member organizations, in the defense sector. What’s driving the agenda for defense in 2026?

Jim Carroll Certainly the meeting that the president announced with the top defense contractors, who are members of PSC, is that they do want to contain costs. What we’re doing now is explaining that they are containing costs and it’s just like anything. Change orders — if you’re building a home and submit a bunch of change orders while the contractor is building your house, that costs extra money. So we’re explaining the same thing is happening with government contracts. That the procurement process can be streamlined, there can be a focus more on deliverables as opposed to some of the issues of the contract that have no impact. We’re seeing some of those smaller things, companies were going to certain sections within the Department of War and saying, hey, we have a new way to do things, we can do this in a more efficient way and deliver results faster. We’re going to use, maybe it’s AI which obviously is going to be a continuing a big issue in ’26, and we can reduce the number of people that we have in seats by 20% or 30%. And the department would say, no, we contracted for 90 or 100 people and we want 90 and 100 people sitting in seats — without really focusing that we can deliver better, faster, cheaper results if we amend the contract. So it’s some of that we think we’re going to be able to overcome because Secretary Hegseth and the White House have been so focused on getting the results, that if we can work together with these new folks that have been confirmed, these new 97 people  — not all of them in the [DoW], some are in the [DoW], some are in other key departments where we work — we really are optimistic that things are going to move much faster in ’26.

Terry Gerton Well, it sounds like with all of the new appointees, and perhaps some stability in terms of funding, that you’re hoping that 2026 is a more predictable year for government contractors. What exactly is PSC going to be focused on as you look into the new year?

Jim Carroll What we’re doing is focusing on meeting with not only the people that are just confirmed, as I said, a lot of these assistant secretaries. But now that things are a little more predictable, we’re going in, and we bring our members with us. It is important that our CEOs, our significant C-suite executives are with us when we’re going in to meet with members of the cabinet. And truly, we’re setting up meetings with secretaries and other key decision-makers so they can hear from us — and when I say “us,” I’m talking about the industry — about how to achieve the results that they want in 2026. That’s one of the things that we’re doing, now that there are more people in place, now that they want direction and want results, we are going in with our members and we are absolutely going to be leaning into explaining to them the best ways we can help drive the objectives that they want.

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