Guess What? It Is Cheaper to Use Federal Government Employees Than Contractor Employees

Having looked at federal government contracting for 30 years, I have heard over and over again that government employees make too much money and that the service contractor employees are cheaper. The mantra has been repeated that the government workers are bad, ineffective and expensive and that the federal government would do better to hire service contractor workers to do more and more of the government's work. This belief that the “free market” will always do better than the government at any task has increased over the years until each president since Reagan has taken it as a given.

Even Bill Clinton pushed to shrink the federal employee workforce by “outsourcing” the work to supposedly cheaper contract workers to save money during his “reinventing government” effort. This craze to outsource as much of the federal government as possible hit its height during the second Bush administration. Saving money was always the reason given, but there was very little actual proof that this was true. The Obama administration had started to reverse this trend and began an effort to “insource” many of these jobs back into the government, especially in areas that were tasks that should be done by government because of the sensitivity of the tasks and possibility of corruption or conflict of interest. But the push to lower government spending has stymied this trend and threatens to push jobs back into service contractor employees as money for government workers dries up. The irony is that this practice is costing the government even more money.

The nonprofit group, Project on Government Oversight (POGO), has released a breakthrough analysis and report that blows away much of the outsourcing assumptions. The report shows that the federal government actually pays these service contractor employees much more than the federal government pays its own employees, and is substantially more than what employees in the private sector make. (In full disclosure, I founded and was the director of POGO for ten years and am currently on the Board of Directors.)

From the POGO report:

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.

I dabbled into investigating what government employees made in salary compared to workers in the private sector in the late 1970s, and groups like the Chamber of Commerce always claimed that federal workers made much more than their private counterparts. The problem with these analyses was that it was an apple to oranges comparison because government work is so different than private market work in a full-blown competitive climate, and the tasks, especially in areas like buying weapons, oversight of food and protecting airspace, had been uniquely government functions. POGO has created a unique and new way of comparing what is really being spent on private contractors compared to federal employees. The report shows that:

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….

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 report trumps the assumption that service contractors can do federal work cheaper than federal employees:

… 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.

Here are several areas where, over the years, I saw the problem of this assumption at work:

• When the Federal Emergency Management Agency (FEMA) was taken over by the Bush administration, there was a big push to outsource much of the work that usually was done by FEMA disaster specialists. FEMA's Directors, Joe Allbaugh, who was Bush's campaign manager, and Michael Brown of “heck of a job, Brownie” fame pushed much of the disaster work to favorite cronies. Allbaugh left the Bush administration in 2003 and set up a lobby group that represented companies like Iraq contractor KBR. He was involved in getting government contracts for his clients in the Iraq war and in the disaster relief during Hurricane Katrina. In the recent Solutions column on FEMA, Leo Bosner, a long time FEMA disaster specialist, recalls what happened during that administration:

  Contractors were continually being brought into FEMA to “observe” and “assist” with agency programs. Full-time FEMA staff were assigned to train and familiarize the contractors with the programs. Then, after his or her training was completed, a job would be advertised with work specifications tailored to the contractor, who would then be hired to supervise the FEMA employees who had provided the original training.
  

• Starting during the Reagan years, the Department of Defense (DoD) weapon procurement programs started to get more and more service contractor employees involved in the daily management of weapons programs. Over the course of many years, my sources inside the Pentagon would complain that consulting companies, known in the DoD as “Beltway Bandits,” went from doing tasks like feasibility studies in their office buildings that rimmed the highway known as the Beltway around Washington, DC, to actually working side by side with the civilian and military procurement managers in the Pentagon. This trend reached its peak during the second Bush administration, and my sources said sometimes it was hard to know who was a federal worker and who was a contract worker. This Bush administration was fanatic about outsourcing everything they could, often to pet Beltway Bandit contractors. Many of the service contractor employees were former DoD personnel who found that it was much more lucrative to work for a contractor than the government.
  
• I did a major investigation of service contractors working in Iraq and Afghanistan in the early stages of these wars, which led to a book that showed that the service contractors were brought in to replace troops in a way that had never been done before. The rational in the DoD was that these contractors were cheaper than recruiting more troops or starting a draft. However, these contractors, including the notorious KBR that provided logistics for the military, were paid outrageously high salaries that ran up the costs and overhead for these contractors. The DoD spent years telling the Congress that this was saving money, but they had no proof. In fact, the DoD could not even tell the Congress how many contractors they had in Iraq and Afghanistan or produce a list of contracts. Since then, it has been exposed that these service contractors charged exorbitant prices and the government paid them with little protest. While interviewing soldiers on their experiences with the contractors during these wars for my book, the majority of them were very bitter that they were working along side contractor employees that were making much more money than the troops for the same work, could leave anytime and were not made to take the same risk as the troops. Several soldiers cynically told me that if they were going to be forced to do several tours in Iraq or Afghanistan, they would finish their tours, not re-enlist and go to work for these contractors and make more money with much less risk.
  
• I also found while investigating private contractors in our current wars that there is a crazy trend of having contractors oversee contractors instead of the usual oversight of federal employees overseeing federal contracts. This reached a level of absurdity with KBR in Iraq. The Army has a service contractor named Serco doing oversight on the problematic KBR logistics contract in Iraq. A Defense Contract Audit Agency (DCAA) auditor told me that when she was in Iraq trying to get documents to check KBR's billings, she was told that she had to first go to the Defense Contract Management Agency (DCMA) staffer and tell him what source documents she wanted to review KBR's work, then the DCMA staffer would go to Serco and tell them what the DCAA staffer wanted. Serco would then go to KBR and look at the documents, decide what was important, review the documents and then write a summary of what the documents said. This summary would then be sent back to the DCMA staffer who would also review and edit the summary and then give the summary to the DCAA staffer. This staffer was a CPA. Can you imagine an auditor in any company agreeing to this type of audit and putting their name on it? Of course, the Serco employees were making much more than this DCAA employee. In other words, we were paying way too much to have a service contractor stymie a legitimate government auditor. This was not the only case of this type of contractor oversight abuse I discovered while investigating the oversight of contractors in these wars.

POGO's report showed some specifics of areas where there is a great discrepancy in what the government pays contractors:

The most egregious example of an outsourced occupational classification that resulted in excessive costs rather than cost savings is claims assistance and examining – administrative support positions that involve examining, reviewing, developing, adjusting, reconsidering or recommending authorization of claims by or against the federal government. To provide these services, on average, federal employees are fully compensated at $57,292 per year, private sector employees are fully compensated at $75,637 per year, and the average annual contractor billing rate is $276,598 per year. POGO found the government may therefore be paying contractors, on average, nearly 5 times what it pays government employees to perform the same services. Put another way, the government may be paying the contractor providing support services for claims assistance and examining more than it does federal judges or administrative law judges, who earn less than $200,000 per year. Contractors may be billing the government, on average, approximately3.66 times what private sector employees are compensated for performing similar services.

POGO offers many reforms in this report that really get into detail on how to change this trend. Based on my experience, I would put high priority in three areas:

First is to make the government finally look at the costs of these contractors in many areas and begin to switch the work back to the federal workforce when it is shown that contractors are costing the government more money.

Second is to take all contract oversight out of the hands of contractor employees, get them out of working shoulder to shoulder with federal employees in the Pentagon and other areas of the government and get the control and oversight of contracts back into the hands of government employees.

And most important, the federal government needs to not let the contractor charge overpriced labor costs for contractor employees that is higher than federal employees and often much higher than the open private market. This is a giant failing of the government and is especially bad in the Pentagon because of their cozy relationship with the contractors and the heavy reliance on specific contractors.

There has been a big problem for years on realistic and accurate pricing and costs in DoD and other government contracts. Just take a look at the breakdown of prices of spare parts in a previous Solutions column. I have been investigating this problem for years and plan to have a series of columns on how to lower the prices of our weapons and contractor services. If the DoD contracts were realistically priced, this could lead to major DoD budget cuts.

POGO's report has found a way to break open and give some empirical data to a problem that many have known about for years, but haven't been able to put the data together in a factual way. The POGO study is a start to trying to actually put numbers to this huge problem. This is a problem that is draining our resources across the government. From the POGO report:

Since 1999, the size of the federal employee workforce has remained relatively constant at about 2 million, while the contractor workforce has increased radically – from an estimated 4.4 million to 7.6 million in 2005. In other words, the federal contractor workforce dwarfs the federal employee workforce nearly four-fold.

My sources in the federal government have been telling me for years that there has been more and more cutting of federal contract managers and oversight personnel even though the federal budgets, especially the DoD, have been growing. This allows federal contractors to lead the government around by the nose and cost us billions of dollars. If both political parties are looking for areas in which to save money, this is a prime place to start. The demonization of all federal employees and the artificial praise of service contractor savings has led the public to believe much of the federal employees' work is wasteful. This hurts legitimate federal endeavors and needs to be exposed. POGO states it well:

Contractors make profits by providing services and that is a sound business practice. The federal government also provides services, but does so without making any profit. The critical question is not whether contractors are entitled to earn profits but whether the government is paying higher costs to contractors for comparable services that could be provided by federal employees.