Bad Business: Billions of Taxpayer Dollars Wasted on Hiring Contractors
September 13, 2011 LINK
Service contract award dollars have dramatically increased in recent years based on the assumption that shifting work to the private sector saves taxpayer dollars. POGO’s report compares total annual compensation for federal and private sector employees with federal contractor billing rates in order to determine whether the current costs of federal service contracting serves the public interest. Previous analyses have only focused on employee salaries and compensation and not federal contractor billing rates. POGO’s study shows that the federal government approves service contract billing rates that, on average, pay contractors 1.83 times more than the government pays federal employees in total compensation, and more than 2 times the full compensation paid in the private sector for comparable services. Given that one-quarter of all discretionary spending now goes to service contractors, a reassessment of the total federal work force, with a focus on contractor billing rates, could save taxpayers billions of dollars annually.
Table of Contents
Executive Summary
Introduction
Background
Summary of Methodology
POGO’s Cost Analysis
Table 1:Cost Analyses
Government Cost Studies
Contingency Operations
Domestic Security Work
Security Work Abroad
Contractors Overseeing Contracts
Air Force Logistics
Army Operations Research
Army Corps of Engineers
Protesting West PointOutsourcing
IRS Contractors Tax Public
TSA’s Screening Partnership Program
Cautionary Notes Relating to Other Cost Analyses
Savings Risked by Long-Term Contracts and Federal Employment Restrictions
Need for a Special Pool of Part-Time and Full-Time FederalEmployees
Recommendations
Endnotes
Acronyms And Glossary
Appendices
Appendix A: Methodology
Appendix B: Occupational Salaries and Compensation for Federal and Private Sector Employees, and Contractor Billing Rates
Appendix C: Descriptions of OPM, SOC, and GSA Job and Service Titles and Codes
Appendix D: GSA Contract Billing Rates
Appendix E: Commission on Wartime Contracting in Iraq and Afghanistan, Appendix F of Final Report to Congress
Follow the link to view a pdf of all Appendices (please note this is a large document and may have a long download time)
Job Summary Pages
Executive Summary
Based on the current public debate regarding the salary comparisons of federal and private sector employees, the Project On Government Oversight (POGO)[1] decided to take on the task of doing what others have not—comparing total annual compensation for federal and private sector employees with federal contractor billing rates in order to determine whether the current costs of federal service contracting serves the public interest.
The current debate over pay differentials largely relies on the theory that the government pays private sector compensation rates when it outsources services. This report proves otherwise: in fact, it shows that the government actually pays service contractors at rates far exceeding the cost of employing federal employees to perform comparable functions.
POGO’s study analyzed the total compensation paid to federal and private sector employees, and annual billing rates for contractor employees across 35 occupational classifications covering over 550 service activities. Our findings were shocking—POGO estimates the government pays billions more annually in taxpayer dollars to hire contractors than it would to hire federal employees to perform comparable services. Specifically, POGO’s study shows that the federal government approves service contract billing rates—deemed fair and reasonable—that pay contractors 1.83 times more than the government pays federal employees in total compensation, and more than 2 times the total compensation paid in the private sector for comparable services.
Additional key findings include:
- Federal government employees were less expensive than contractors in 33 of the 35 occupational classifications POGO reviewed.
- In one instance, contractor billing rates were nearly 5 times more than the full compensation paid to federal employees performing comparable services.
- Private sector compensation was lower than contractor billing rates in all 35 occupational classifications we reviewed.
- The federal government has failed to determine how much money it saves or wastes by outsourcing, insourcing, or retaining services, and has no system for doing so.
POGO’s investigation highlights two basic facts about outsourcing government work to contractors. First, comparing federal to private sector compensation reveals nothing about what it actually costs the government to outsource services. The only analysis that will shed light on the true costs of government is that of contractor billing rates and the full cost of employing federal employees to perform comparable work. The Commission on Wartime Contracting in Iraq and Afghanistan recently completed a fundamental study of costs, and found that, in certain contingency operations, although savings resulted from hiring local or third-country nationals, military and civilian employees cost less than hiring American contractors.
Second, the federal government is not doing a good job of obtaining genuine market prices, and therefore the savings often promised in connection with outsourcing services are not being realized. The argument for outsourcing services is that, by outsourcing services on which the government holds a monopoly, free market competition will result in efficiencies and save taxpayer dollars. But our study showed that using contractors to perform services may actually increase rather than decrease costs to the taxpayers.
POGO found several failures in government procurement, employment, and data systems that limit the government’s and the public’s abilities to assess and correct excessive costs resulting from insourcing or outsourcing federal services. Failures included the lack of standards for calculating cost estimates and justifying insourcing or outsourcing decisions; the lack of data related to negotiated service contract billing rates; not publishing government information about the number of actual contractor employees holding a specific occupational position under any given contract; and that there is no universal job classification system.
For decades there have been increasing political pressures to reduce the size of the federal government. In response the government has awarded service contracts, resulting in an expanding “shadow government” that costs hundreds of billions of dollars annually. The focus on comparing federal and private sector salaries needs to shift because they have nothing to do with what the government actually pays for services. Instead, the focus properly belongs on analyzing the full costs of paying contractors to perform federal services. Given the nation’s ongoing economic problems, this analysis has become even more relevant—approximately one-quarter of all discretionary spending now goes to service contractors.
POGO’s recommendations include:
- Congress should require all federal agencies, when awarding service contracts, to use service coding systems that are consistent with OPM’s job classification system. Congress should also require the collection, reporting, and oversight of life-cycle costs associated with government services performed by federal employees or contractors.
- Congress should pass legislation requiring greater transparency and improved pricing on GSA Schedule service contracts.
- Congress should strengthen the FAIR Act to enhance service contract reporting.`
- Congress should remove full-time equivalents ceilings, and decrease the maximum benchmark compensation amount applicable to contractor employees.
- Agencies should use their existing authorities to hire federal employees for short-term projects.
Introduction
There is no doubt that contractors play a substantial role in supporting government operations, missions, programs, and projects domestically and abroad. For many years the federal government has increasingly relied on contractors to perform government functions. This shift to outsourcing[2] followed the call to reduce the size of the federal employee workforce, even as the U.S. population and demand for government services grew.[3] Now, in some federal offices contractor employees outnumber federal employees.[4] Unfortunately, the government has turned to contractors without an eye toward cost savings.[5]
Since 1999, the size of the federal employee workforce has remained relatively constant at about 2 million,[6] while the contractor workforce has increased radically—from an estimated 4.4 million to 7.6 million in 2005.[7] In other words, the federal contractor workforce dwarfs the federal employee workforce nearly four-fold.
There is currently no way to quantify the actual number of contractor employees who perform government functions at a particular department or agency at any given time.[8] Because the federal government does not keep timely and accurate statistics of the actual size of its contractor workforce, Congress mandated that civilian agencies and the Department of Defense (DoD) keep such records.[9] However, as there is no consistency in the methodologies employed by the various agencies, data from these inventories are unreliable and do not provide a complete picture of jobs, functions, or activities being provided by service contractors. In addition, even with the changes, the inventories still fail to provide timely and accurate data on contractor employees or cost information that would be helpful when comparing federal with contractor employees.[10] Improvements are forthcoming—a proposed regulation will require annual disclosures of inventories for service contracts that will include a description of the services, how those services will achieve agency objectives, the total dollar amount obligated and invoiced for services under the contract, and additional contract-related information.[11]
This is important because the federal government currently spends over $320 billion on service contracts each year.[12] Often, those expenditures rest on the claim that the private sector can provide services at substantial cost savings to the government and taxpayers[13] because of the free market’s ability to conduct business more cost-effectively than the government.[14]
POGO’s study tested the accuracy of the cost-savings claim. A few other studies have compared specific jobs and the associated costs, but POGO has gone one step further by looking at a larger sampling of comparable jobs and their costs when they are performed by government, private sector, and contractor employees.[15]
POGO’s investigation into the costs of outsourcing seems particularly timely in light of recent efforts to reduce government spending and considering that government spending on services now eclipses its spending on goods.[16] If POGO’s recommendations are implemented, government officials, both legislative and executive, will be better informed in deciding when insourcing or outsourcing services is cost-justified. They also will be better informed when debating what legislative or regulatory reforms to institute to eliminate billions of dollars in waste each year.[17]
Background
Reducing the size of the federal employee workforce and increasing budgetary savings have been pet projects of policymakers for decades.[18] Yet it wasn’t until the 1950s during the Eisenhower administration that there emerged a formalized policy favoring the outsourcing of federal services if it could be shown that those services were commercially available at a cost savings to the taxpayer.[19]
In 1966, the Office of Management and Budget (OMB) incorporated this policy in its Circular A-76, an administrative vehicle for handling personnel needs by competing agency work between government offices and contractors.[20] OMB has supplemented the A-76 Circular with a handbook that includes procedures for determining which government jobs should remain in-house, and which could be transferred to contractors by either cost comparison[21] generally depending on which bid was more cost-efficient[22] or by direct conversion.[23] As part of the public-private competition process, the government identifies the work, prepares an in-house cost estimate (which can include a mix of federal and contractor employees), and compares the agency’s bid to the best offer from contractors.[24]
Both political parties have taken issue with the proper size of the federal civilian workforce and the proper balance between government employees and contractor employees.[25] In the 1980s, the Reagan administration was a strong advocate for a smaller government. In its attempt to shrink the size of government, the administration frequently clashed with Congress over whether the government or private industry should perform certain functions.[26]
When President Reagan was sworn into office in 1981, he declared, “In this present crisis, government is not the solution to our problem; government is the problem,”[27] and his administration began pushing agencies to outsource commercial functions.[28]
When President Clinton took office in 1993, he also took up the mantle of “small government,” promising to reduce the federal workforce by 300,000 employees.[29] The Clinton administration instituted the “reinventing government” initiative and oversaw the implementation of the Federal Activities Inventory Reform (FAIR) Act[30] with the goal of increasing the outsourcing of commercial functions. The FAIR Act was originally introduced as the Freedom from Government Competition Act, which would have prohibited agencies from engaging in any activity producing goods or services that could be provided by the private sector.[31]
The George W. Bush administration continued the Clinton administration’s pro-outsourcing agenda. In his President’s Management Agenda, President Bush announced early in his first term his intention of making the federal government more “market-based.”[32] The Bush administration also “proposed amending OMB Circular A-76 so that all functions were presumed to be commercial unless agencies justified why they were inherently governmental.”[33] The Bush administration employed contractors in the military and reconstruction operations in Iraq[34] and Afghanistan,[35] and in the cleanup efforts after Hurricanes Katrina and Rita in the Gulf region.[36] In May 2003, the Bush administration revised OMB Circular A-76 to emphasize competition of services with “streamlined cost comparisons.”[37]
In 2002, the Commercial Activities Panel[38] concluded that A-76 competitions had achieved significant savings and efficiencies for the government.[39] The panel “strongly supported a continued emphasis on competition as a means to improve economy, efficiency, and effectiveness of the government.”[40]
Six years later in May 2008, OMB reported that from FY 2003 through FY 2007 the federal government conducted 1,375 A-76 competitions, which, at the time of the report, resulted in accrued actual savings of $1.88 billion.[41] OMB projected that, over the long run, there would be $7.2 billion in total savings.[42] In the majority of cases, the savings did not result from outsourcing to contractors, but rather from keeping the work in-house. In fact, 83 percent of the competitions were won by federal employees (as a percentage of total FTEs competed).[43] Consequently, the vast majority of projected savings might not be a function of private sector efficiencies, but may instead have been due to the government’s structural reengineering of the federal employee workforce.[44] In many instances, government agencies cut their workforces through measures “including buyouts, early retirements, [and] reassignment to priority programs within the agency or at another agency.”[45]
Despite the cost savings associated with the A-76 process, it has been criticized by both government officials and contractor trade groups for a number of reasons. For instance, both sides claim the process favors the other side.[46] Additionally, some agencies have been criticized for their inability to effectively administer the competitions and document the actual savings achieved.[47] Other criticisms include the fact that, generally speaking, the A-76 process only provides a small look into overall outsourcing activities and that it is a political vehicle to place government services in the hands of contractors.[48]
The Obama administration’s policy on the issue of outsourcing has fluctuated. President Obama issued a March 4, 2009, memo on government contracting that expressed concerns about federal contract spending, including the level of competition, the use of risky contracts, and the need to protect functions that should be performed by federal employees.[49] The President directed OMB to develop and issue government-wide guidance to assist agencies in reviewing “existing contracts in order to identify contracts that are wasteful, inefficient, or not otherwise likely to meet the agency’s needs, and to formulate appropriate corrective action in a timely manner.”[50] As a result, agencies received guidance to improve the insourcing process and better manage the multi-sector workforce.[51]
The insourcing effort was short-lived and, despite the concerns about government contracting President Obama expressed in his March 2009 memo, the administration appears to have backed away from that policy.[52] Specifically, President Obama signed into law a two-year freeze on federal employee salaries,[53] which could have the effect of harming the government’s ability to hire and retain federal employees and thus increase the need for contractors.[54] In addition, the government has temporarily banned new A-76 competitions at DoD,[55] and has made little effort to identify and eliminate any excessive costs of outsourcing the over $320 billion in services contracts awarded each year while this ban is in effect.[56] In fact, only one federal agency has taken any meaningful steps to rein in contractors during this period of time. The Department of Energy (which is uniquely positioned because of its significant contractor workforce) has taken the unprecedented move of freezing contractor employees’ salaries.[57] Although this is a good move, other agencies may be less effective in controlling excessive contract prices.[58] Generally, most contracts include annual escalation clauses or increased rates for each option year of the contract—and, in some instances, those contracts include options for nine years or more.[59]
The 112th Congress is even taking steps to promote the government’s hiring of contractors, no matter the cost. The House version of the FY 2012 Defense Authorization bill includes a “sense of Congress” provision that states that insourcing should only occur when it involves inherently governmental functions.[60]
No matter the reasons for shifts in policies, the fact remains that the overall size of the blended federal workforce and the dollars spent on service contracts have dramatically increased. As budgets decrease, federal employee total compensation will receive increased scrutiny despite policymakers not having all the facts.[61]
Summary of Methodology [62]
POGO reviewed 35 occupational classifications for this study. We employed two critical selection criteria: (1) whether the occupational classifications involved a “special interest function,”[63] and (2) whether the occupational classification had been converted to a “commercial” function for the purposes of a FAIR Act inventory or subject to outsourcing pursuant to Circular A-76.[64] POGO analyzed classification systems from the Office of Personnel Management’s (OPM) General Schedule (GS) and Job Grading Standards for Trades, Craft, and Labor Positions (WG) series (which we refer to throughout the report as GS series),[65] Bureau of Labor Statistics’ (BLS) Standard Occupational Classification (SOC) system, and General Services Administration’s (GSA) service activities as classified in its Special Item Number (SIN) system to establish comparable occupational services. (Appendix C) POGO then identified appropriate data tables published by each agency that allowed POGO to determine and compare the average rate of full annual compensation paid to federal and private sector employees with the average annual billing rates for contractor employees performing comparable services at government sites. (Appendices B and D) Because the contractor billing rates published by GSA include not only salaries but also other costs including benefits contractors provide their employees,[66] POGO added OPM’s 36.25 percent benefit rate to federal employee salaries[67] and BLS’s 33.5 percent loading to private sector employee salaries to reflect the full fringe benefit package paid to full-time employees in service-providing organizations that employ 500 or more workers.[68] All supporting data for this study are found in Table 1 and Appendices B through D.[69]
POGO is aware that its methodology does not incorporate some governmental cost factors: i.e., non-directly associated overhead (e.g., executive management and administration, information technology, and legal support), material and supplies (e.g., insurance and maintenance), or facilities (e.g., depreciation, rent, insurance, maintenance and repair, utilities, capital improvements).[70] However, given the fact that POGO relied exclusively on GSA’s listed contractor billing rates for performance at government sites, many of those cost factors would essentially be canceled out.[71] In fact, when contractors perform work at contractor sites, POGO found that contractor billing rates were, on average, 15 percent higher than rates for work performed at government sites. In addition, POGO did not include in its comparative analysis additional costs that the government incurs as a result of outsourcing services to contractors. Those costs would only add to the costs associated with outsourcing documented in this report.
POGO made every effort to ensure that its study is as accurate as possible. However, there are a number of factors that potentially limit the accuracy of POGO’s findings. For instance, over the course of our investigation, we discovered some disturbing limitations to the federal databases available to us. The most critical limitations are that: 1) the government’s coding, classification, and data collection systems are inconsistent and do not allow for reliable cost analyses[72]; 2) government websites do not provide access to agency documents that detail cost estimates and the justifications for outsourcing decisions; 3) the government does not publish information on the number of actual contractor employees holding a specific occupational position under any given contract; 4) the government only lists the ceiling prices that it can be billed by contractors for the specific occupational positions—the government is at liberty to negotiate prices that are lower than those listed, but it does not publish those negotiated rates (however, based on POGO’s review of GSA contracts, and anecdotal evidence, the government tends to pay the listed billing rates rather than negotiating lower rates[73]); and 5) government websites do not disclose what the expected cost savings for service contracts are, nor the actual savings (or lack of savings) that result from those contracts. These shortcomings prevent government officials, as well as the public, from accurately assessing outsourcing costs. There are other factors that may limit the accuracy of POGO’s findings, and we detail those in the full methodology in Appendix A.
POGO’s Cost Analysis
POGO’s study evaluates whether the current practice of outsourcing federal services to contractors is actually cost beneficial.[74] To do this, POGO compared the average of GSA’s listed annual contractor billing rates (which we refer to throughout the report as “average annual contractor billing rates”)[75] with the full costs of federal employee annual compensation for comparable services. POGO also compared federal employee full annual compensation with private sector employee full annual compensation, as well as average annual contractor billing rates with private sector employee full annual compensation, in order to evaluate the validity of the current private-sector versus federal-employee debate. These three comparisons are set forth below in Table 1.
