The federal government continues to operate on the fictitious and unsubstantiated assumption that all federal services performed by contractors are provided as a cost-savings to the American taxpayer. POGO conducted an empirical study, soon to be published, that puts the lie to the government’s unsubstantiated assumption. We found that for a selected sample of job occupations/classifications, the federal government is paying a significant cost premium to have contractors perform services that federal employees are more than competent to perform. Recent legislative attempts to aid federal agency efforts to minimize these cost premiums have been a failure.
Spurred by concerns for increasing federal spending and an expanding federal debt, Congress passed legislation designed to enable it and federal administrators to get a better handle on the growing costs of procuring federal services from private contractors.
In recognition of the fact that the Department of Defense (DoD) accounts for approximately 50 percent of all federal service contracts, Congress passed the National Defense Authorization Act for Fiscal Year 2008 to require DoD to publish annual inventories of its service contracts. Congress enacted section 326(b) of this legislation to improve DoD’s ability to manage its service acquisitions. In January of this year, the Government Accounting Office (GAO) issued a report that was highly critical of the methodology employed in DoD’s initial service contract inventory.
On June 28, 2010, the DoD published its FY 2009 inventory of service contracts, a 9,118 page document. As we discuss below, its failure to provide any meaningful level of transparency causes its utility as a database for meaningful management decisions and analytical evaluations to be fundamentally flawed.
Section 743 of the FY 2010 Consolidated Appropriations Act, P.L. 111-117, extended the requirement of annual inventories of service contracts to federal civilian agencies. The legislation purports to generate a data collection system that would permit federal agencies to empirically test the proposition that privatization of federal services does not impose cost premiums. As required by section 743(e)(3) and (4), agencies are to identify contracts that have been poorly performed because of excessive costs or inferior quality and consider either insourcing the privatized services or employing an alternative acquisition approach for procuring those privatized services.
On November 5, 2010, the Office of Management and Budget (OMB) issued its guidance on what data are to be included in these inventories and the methodology to be employed in preparing them. While the guidance document references the legislative mandate to identify service contracts that result in “excessive cost,” it neither provides guidance on how to determine what constitutes an “excessive cost,” nor does it provide that inventories specify which inventoried contracts impose such “excessive costs.” One obvious definition of “excessive cost” would be a contractor billing rate for services that exceeds the cost of having a federal employee perform the required service. This comparison would be similar to the nature of public/private comparisons made pursuant to OMB’s A-76 guidance on outsourcing competitions. The OMB guidance on service contract inventories expressly asserts that these inventories are intended to aid federal agencies in their human capital planning by providing the data necessary for effectively balancing an agency’s mix of federal employees and contractors for any given program. It is difficult to comprehend how human capital planning can be conducted without factoring in the relative costs of having services performed by federal vs. contractor employees.
While the OMB guidance for civilian agencies reflects an improvement over the methodology employed in preparing the DoD’s inventory of service contracts, none of these inventories contain the reliable data elements that would allow analysts and administrators to address the critical comparisons that would inform and enable agencies in fulfilling the expressed objective of establishing an effective balance of federal employees and contractors for meeting mission goals.
|Until the federal government addresses head-on the perplexing problem of how to compare the cost of having a federal service function performed by federal employees with the cost of privatizing the performance of that function, the government will never know which service contracts save the government money and which ones impose excessive costs upon the taxpayer.|
The OMB guidance urges agencies to identify critical contracted functions where the agency may be at risk of overreliance on contractors, as well as contracts challenged by inadequate contract management support, a poor performance history, or a level of risk for poor contract performance. Unfortunately, OMB makes no provision for having the inventories identify which contracts an agency has identified as meeting these criteria.
More importantly, however, at no point are agencies directed to analyze and determine whether outsourcing the inventoried services were cost justified; indeed, the inventories contain no reliable data sets for making such determinations, either by a federal agency, the Congress, or an independent auditor or analyst. What would be required for such a cost justification evaluation to be conducted? At a minimum, the following data points would be required for each service contract:
- Identification of each service function to be performed under the contract;
- For each service function, identification of each job classification the contractor uses to identify employees assigned to perform that service function;
- The number of full time equivalents (FTEs) the contractors employed having each specified job classification;
- The billing rates for contract employees with each job classification identified for each service function;
- For each job classification employed under the contract, the full annual compensation (salary plus benefits) paid federal employees performing the same service function with the same job classification.
Neither current legislation nor OMB guidance mandates that inventories contain data elements 2 – 5, above. The current legislative and administration system of scrutinizing the mix of federal employee/contractor employee workforce is devoid of integrating any semblance of cost comparisons when engaging in the justification or critiquing the outsourcing of hundreds of billions of dollars in service functions each year.
The DoD inventory states, in relevant part, the price of a contract and the number of contractor FTEs employed to perform the contract. However, this information is woefully inadequate to even guesstimate whether the DoD had a valid cost justification for having the (unidentified) contractor perform the functions that might otherwise have been performed by federal employees. Some of the more obvious deficiencies that prevent any meaningful cost comparisons are:
- The contract price typically does not specify the direct labor costs incurred by the government for performance on the contract;
- While the inventory identifies “a” service function to be performed under the contract, there is no way to discern the various job titles/classifications utilized by the contractor to identify employees assigned to perform the service function, consequently there is no way to determine what portion of the total FTE is assigned to perform the work of any specific job classification; and
- The inventory fails to indicate whether the work being performed by contractor employees is of the type that could have been performed by a federal employees, and if so, under what job classification and at what (GS) level of experience.
Dividing the contract price by the number of FTEs for any contract provides a meaningless and misleading FTE billing rate for services performed under the contract; consequently, no comparison can be made with the typical cost the government would incur had it chosen to have the work conducted by federal employees.
The U.S. Army produced its own FY 2009 Inventory of Service Contracts, as well as an executive summary report containing an analysis of the data contained in the inventory. The Army’s inventory provides significantly more information than the DOD inventory. The inventory includes additional data elements such as:
- The services performed within task orders by location where the work was performed
- Weapons systems supported
- The total direct labor costs for all contracts performing the identified service
- The invoiced amount at the task order level
- The Army requiring activity or customer supported by the contractor at the unit level of organization
- Whether the contractor was furnished government equipment or worked on a government facility
The Army’s report shows that there is a significant range in costs for contracted services which vary by function, location where performed, type of contract (fixed price versus cost) and whether or not the contract is competitive or non-competitive. The direct labor costs for Special studies range from $120K to $365K per Full Time Equivalent on the high end. Salvage services range from $53K to $59.8K on the low end. Unfortunately it is not clear what the Army has done with this information from its report, as its primary focus seems to be to focus on identifying contracted functions involving inherently governmental functions. While the Army’s inventory reflects significant progress towards addressing the critical issue of cost justification, the inventory does not yet allow for the level of certitude in making government employee/contractor employee cost comparisons the public should expect in scrutinizing the cost consequences of outsourcing federal services on the grandiose scale currently practiced by federal agencies.
Until the federal government addresses head-on the perplexing problem of how to compare the cost of having a federal service function performed by federal employees with the cost of privatizing the performance of that function, the government will never know which service contracts save the government money and which ones impose excessive costs upon the taxpayer.
Similarly, until this perplexing problem is successfully addressed, government efforts to generate inventories of service contracts will continue to deceive interested parties into believing that its focus upon balancing the public/private mix is solving the problem of excessive government contract costs.
-- Paul Chassy, Ph.D., J.D.
Updated December 23, 2010
 Each job classification would be necessity have to be consonant with the occupational job classification system employed by the Federal Office of Personnel Management.
 Federal salaries, by job classification, are published by OPM on its Fedscope website. OMB has established that, for purposes of private-public competitions, federal employees are assigned a benefits package valued at 36.25 percent of base salary. See Office of Management and Budget, “Update to Civilian Position Full Fringe Benefit Cost Factor, Federal Pay Raise Assumptions, and Inflation Factors used in OMB Circular A-76, ‘Performance of Commercial Activities’,” M-08-13, March 11, 2008, p. 2.