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It seems you do lose rep with the other two factions when you achieve a challenge. I verified with screenshotting the progress bars before and after.
To me it seems like for every x amount of challenge rep reward you gain with one faction you lose 0.5*x with both other factions. E.g. doing 3 fuel challenges at once for VLF, VLF, and UICS the bar for UICS stood still and the bar for VLF went up by the amount the bar for IGC went down.
So since it's capped at 0 it seems like you need to decide which faction you're not going to level with challenges and let that one bottom out at 0 while you level the other two.
https://steamuserimages-a.akamaihd.net/ugc/2482127411164500601/72A37ECDE9E340B1941BD00CDF4802625A865920/?imw=5000&imh=5000&ima=fit&impolicy=Letterbox&imcolor=%23000000&letterbox=false