Rep. Maurice Hinchey (D-NY).
By SUZANNE DERSHOWITZ
On March 26, Representative Maurice Hinchey (D-NY) and 130 other House Members sent a letter to Secretary of Defense Leon Panetta, criticizing the Pentagon's growing reliance on private contractors. This is an unusually large number of signatories to one letter, demonstrating significant congressional support. The Representatives targeted the Department of Defense's (DoD) "Efficiency Initiative," which claims to cut costs by, among other things, capping the civilian workforce at 2010 levels, but imposes no comparable constraints on private contractors. The letter argues that outsourcing civilian jobs to service contractors may actually be costing the federal government more while providing less accountability to the public (see just how much more the Pentagon is spending on contractors on slide 6 of this presentation).
POGO agrees wholeheartedly.
The Representatives’ recommendations echo POGO’s findings in Bad Business: Billions of Taxpayer Dollars Wasted on Hiring Contractors, a report released last September that found that on average, service contractors cost taxpayers nearly twice as much as in-house employees for comparable work. Rep. Hinchey and the other 130 cosigners offered six recommendations to Secretary Panetta. Here's POGO's take on several of the recommendations.
Cap Spending on Service Contractors
Hinchey and the other signatories’ first recommendation is to remove the cap that limits the DoD civilian workforce to FY 2010 levels. If the DoD insists on capping the civilian workforce at FY 2010 levels, the Reps. wrote, it should implement a similar cap for service contract spending levels. POGO agrees that if the government is cutting civilian personnel, contractors should not be exempt from those reductions. It is not fiscally responsible to cut public servants and then hire contractors that may be more costly. It’s also important to note that 2010 was a record year for service contractor costs at DoD (see page 8)—using such a high water mark as a cap may not go far enough to rein in government spending on service contracting.
Conduct True Cost Comparisons
The signatories also recommended that the government conduct cost comparisons when making outsourcing decisions. Citing existing law, the letter states, “DoD cannot convert a function last performed by civilian employees to contractor performance without conducting a formal cost comparison.” The Reps. wrote that they were pleased that DoD issued guidance in December to enhance compliance with these requirements and urged Panetta to place a high priority on implementing these reforms.
POGO strongly supports this recommendation. Implementing true comparative cost modeling was a crucial recommendation in POGO’s Bad Business report, and we highlighted it again in written testimony for the recent Senate Subcommittee on Contracting Oversight hearing on service contracting. The problem with current government cost comparisons is threefold.
First, the government often doesn’t even evaluate the cost of contractors—it only compares compensation of federal and private sector employees. We have demonstrated why public vs. private compensation comparisons are useless when it comes to true cost comparability. And last month, Senator Claire McCaskill (D-MO) opened the hearing by reiterating the importance of an effective cost analysis model that compares contractors to private sector and federal employees (as opposed to just a comparison of the latter two).
Second, government cost comparisons don’t account for the total price tag of contractors from hiring through the full duration of the contract. Rather than just accounting for contractor billing rates, a true comparison would include factors like overhead (especially for contractors who work in government facilities), other administrative costs, and tax revenues (in terms of the different consequences of hiring public and private workers). Intangible costs such as flexibility, quality, and service experience should also be considered in these calculations.
Third, government cost comparisons include arbitrary figures, such as the standardized 12 percent overhead rate applied to all in-house cost estimates. When examining the 12 percent overhead rate, which is used regardless of the type or location of activity, the Government Accountability Office (GAO) found that the measure lacks an analytical basis. It is only logical that government overhead costs for training Marines in Virginia differ dramatically from overhead costs for training professionals who decipher code at the National Security Agency center in Georgia.
To assess the hidden costs of the growing “shadow government,” we need a standardized model for comparative cost analyses across agencies.
Improve Contractor Inventories
The Hinchey letter also highlights the importance of enhancing our understanding of the real size of the service contractor workforce through better service contract inventories. The Reps urge the Department to use an inventory that “allows for the identification and control of costs, including identifying and preventing over-execution spending, as well as distinguishing base spending from Overseas Contingency Operations (OCO) spending.”
POGO has repeatedly called for better service contract inventories, and we support this recommendation. The current structure of service contract inventories is insufficient, and a great deal remains unknown about the true size and cost of the contractor workforce. POGO’s assessment of these inventories is that they are not worth the paper they are printed on. For example, DoD’s 2011 Inventory of Service Contracts is approximately 9,000 pages of raw data—but it lacks even basic information on how many people are working on any given contract.
Congress should amend the laws governing service contract inventories to mandate a full and comprehensive account of the size of each agency's contractor workforce. POGO recommends the government create inventories that include more meaningful information, such as the duration of the contract, the number of subcontractors, the direct labor hours worked, the hourly/annual billing rates for such personnel, and the justification for contracting those services. These agency inventories should also include data about all tiers of contractors, with specific breakdowns of the services they provide. Furthermore, they should show the billing rates the government pays, as well as the costs it incurs. This information will help decision-makers weigh costs before spending taxpayer dollars.
POGO is not alone when it comes to advocating for improved contract service inventories. Just this month, the GAO issued a report on DoD’s inventory of contracted services. GAO found that the value, accuracy, and completeness of inventory data was limited (especially since DoD does not collect full contractor manpower data) and concluded that further actions are needed to improve accountability.
In February, the Department of Defense issued a request for public comment about whether it would be useful to collect more contractor workforce information on the number and value of direct labor hours. As expected, the contracting industry opposes the plan, claiming that collecting information on direct labor hours would be costly and “premature,” because the Department has not developed any contractual requirement forcing them to do so. Under industry logic, because “complete” reporting compliance is not expected until 2014, the Department should submit a “properly researched and more timely information collection request for initiation, if at all, in FY 2013.” The fact of the matter is that this information would be immensely valuable, and would allow the government to better determine if contractors are more cost efficient than federal employees. There’s no better time than now to begin collecting this information.
Stop Privatization of Inherently Governmental Work
Last but not least, the Hinchey letter recommends that the Pentagon not privatize work that is inherently governmental, and reduce its reliance on contractors for work closely associated with inherently governmental functions. Inherently governmental functions are core government tasks that no one but government employees should perform. Examples include: conducting criminal investigations, commanding military forces, determining agency policy, and, as clarified last year, engaging in combat or security operations when there is a significant potential for combat.
We support Hinchey and his colleagues’ call for DoD to renew their commitment to limiting contracts for work closely associated with inherently governmental functions. GAO’s April report on DoD inventories of contracted services found that the Army and Air Force have failed to resolve known instances of contractors performing inherently governmental functions. According to the report, even when inventory reviews reveal the problem, there is no adequate guidance that provides clear lines of responsibility for addressing it. Further, Army officials cited difficulty in hiring DoD civilians due to DoD’s decision to cap the civilian workforce at FY 2010 levels.
According to a 2011 DoD report, of the nearly 17,000 civilian positions the Pentagon insourced in FY 2010, nine percent were insourced because they involved inherently governmental functions. But at the end of FY 2010, DoD largely stopped insourcing. Insourcing is a sound way to not only save taxpayer dollars, but also ensure that only federal employees are performing those vital functions.
Two Myths of Service Contracting
Why has government reliance on service contractors kept growing (largely unchecked) even in the face of this enormous waste? In large part, it has to two with two myths of service contracting. The first myth involves the notion that when the federal government outsources work to contractors, contractor employees are not part of “big government,” although many are retired federal employees, paid with tax dollars, working inside government offices, and/or performing government missions. According to federal employment statistics, the number of contractor employees in the federal workforce is estimated to be over 7 million, nearly four times the size of the federal employee workforce. Sounds like big government to me.
The second myth is that the private sector is always more cost efficient, more innovative, and more flexible than the government. In fact, long-term service contracts remove government flexibility and result in cost inefficiencies rather than savings over the lifetime of the contract. Bad Business documents just how expensive service contracting has become–over $320 billion each year.
While Hinchey’s letter is not bipartisan, some of the recommendations and sentiments espoused are. Both Senators Ron Johnson (R-WI) and Tom Coburn (R-OK) have recommended the government cut the service contracting workforce by 15 percent, a move that would save the government billions over the next ten years. Senators Barbara Boxer (D-CA) and Chuck Grassley (R-IA) introduced the bipartisan Common-Sense Contractor Compensation Act (S. 2198) in March to lower the cap on taxpayer-funded reimbursements for contractor executive pay. Representatives from both sides of the aisle also came together to combat human trafficking by U.S. contractors in Iraq and Afghanistan. Reining in government spending on costly service contractors is clearly an issue that demands action across party lines.
We applaud Representative Hinchey and the 130 other Members who are dispelling the myths of service contracting and demanding accountability. Slashing the civilian workforce while continuing to ramp up the use of expensive service contractors will lead to waste and mismanagement. POGO supports conducting true cost model comparisons, improving service contract inventories, and insourcing inherently governmental work—important steps to ensure taxpayers are getting the most bang for their buck.
Suzanne Dershowitz is POGO's public policy fellow.
Image via foreverdigital.