Occupational Education #1: The Cost of Contractor Accounting Services

By BRYAN RAHIJA

Looking for billions of dollars' worth of savings for taxpayers? Look no further than government service contracting. Last September, POGO released a report that found service contractors cost taxpayers nearly twice as much as federal employees who do the same work. With the final discussion of the mammoth defense budget bill looming in Congress and with the nation’s deficit crisis largely unresolved, we figured there’s no better time to take another look at data from the report.

Our report examined 35 different occupations. Over the next few days, we’ll offer a fresh look at ten of those occupations. Today’s occupation is accounting. Let's check out the numbers!

According to our report, accounting is one of the most expensive services to contract out to the private sector. The annual contractor billing rate for such services is $299,374, compared to a federal employee’s annual compensation (including benefits!) of $124,851 for comparable work. To put it another way, a federal employee costs taxpayers just four-tenths the cost of a contractor for accounting services.

Accounting services, of course, represent just one piece of the puzzle. In fiscal year 2011, the federal government spent $325.3 billion on all kinds of service contracts, according to USAspending.gov, of which the Pentagon doled out $198.6 billion.

The key takeaway here is that it's time for the government to start conducting meaningful comparisons of the costs of performing work in-house and contracting out to the private sector. The conventional wisdom that outsourcing is by default more cost effective simply doesn't hold water.

It doesn’t take a CPA to see that the government’s balance sheet on service contracts is out of whack. Check out our Bad Business report for more details on this problem and recommendations for how we can begin to fix it.

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Bryan Rahija is a contributor to POGO’s blog.

Follow @bryanrahija

Comments

[Ken Larson]

A-76 Anyone?

Circular A-76 and the Moratorium on DOD
Competitions: Background and Issues for
Congress
Valerie Bailey Grasso
Specialist in Defense Acquisition
January 17, 2012

"OMB Circular A-76 outlines a formal, complex, and often lengthy process for managing public private
competitions to perform functions for the federal government. A-76 states that, whenever
possible, and to achieve greater efficiency and productivity, the federal government should
conduct competitions between public agencies and the private sector to determine who should
perform the work.

Public debate over A-76 policy ignited in February 2007 as a result of a series of articles in the Washington Post on the conditions at the former Walter Reed Army Medical Center in
Washington, DC.

The articles led to several investigations, resignations of some senior Army officials, congressional hearings, and legislation passed by Congress to prohibit the conduct of A-76 competitions at military medical facilities.

Congress passed legislation in Public Law (P.L.)
110-181, the National Defense Authorization Act for Fiscal Year (FY) 2008 to suspend DOD public-private competitions under OMB Circular A-76.

Congress also passed legislation in P.L.111-8, the Omnibus Appropriations Act for FY2009, to halt the beginning of any new A-76 competitions throughout the rest of the federal government. The government-wide moratorium has continued to the present."

[Jack Lohman]

Yes, but government entities can't give campaign bribes and private corporations can!

[Mike]

Thank you for doing this. I spent the majority of my free time investigating social, economic and political issues this past winter for personal reasons. There exist many cliches and long-held believes that have no real factual basis for existing.

[Scott Amey]

The calculations for federal employees were OPM's average base salary plus a 36.25 percent full fringe benefit factor. That factor is comprised of 1) insurance and health benefits, 2) standard civilian retirement benefits, 3) Medicare benefits, and 4) miscellaneous fringe benefits. Government overhead was excluded on both sides. The government estimates another 12 percent overhead rate for federal employees pursuant to Circular A-76, but we don't know the government overhead rate to award, administer, and oversee contracts or the government's overhead rate for contractors working at federal facilities (we excluded contractor site billing rates as they were on average 15 percent higher than the rates they charge the government for work at government sites).

The Army testified before Senator McCaskill in March (http://www.hsgac.senate.gov/subcommittees/contracting-oversight/hearings/contractors-how-much-are-they-costing-the-government) that overhead and profit make up a large percentage of certain contract costs. That's a lot of money, especially when in those examples 40% to almost 90% of contractors work at government facilities and/or use government property and equipment.

[Bryan Rahija]

Gargantua,

Thank you for writing in!

As hjohnjag writes, the figure for full federal employee compensation DOES include benefits. In our report, we added the Office of Personnel Management's 36.25 benefit rate to the federal employees' salaries. This benefit rate includes:

-Insurance and health benefit
-Standard civilian retirement benefit
-Medicare benefit, and
-Other miscellaneous benefits.

There are more details behind the 36.25% figure in this OMB memo:

http://www.whitehouse.gov/sites/default/files/omb/memoranda/fy2008/m08-13.pdf

Also, it's not as if contractors dodge the cost of an organizational superstructure -- they also require oversight from agencies, Congress, and even Inspectors General.

As for productivity and the flexibility to personnel on and off projects, these are certainly part of the OVERALL picture, and there's no doubt that agencies should consider these factors when deciding on their personnel mixes. But have you seen any actual data behind this? So far I've only heard anecdotal evidence...the same sort of anecdotal evidence driving the conventional wisdom that the private sector is inherently cheaper. The scope of our study was limited to the COST of contractors -- something for which there was basically ZERO data before. There were definitely some factors that limit the accuracy of our report, which we detail in Appendix A: http://pogoarchives.org/m/co/igf/bad-business-all-appendices-2011.pdf

Our main point is that we need to stop drinking the kool-aid about contrators being more efficient by default and conduct an actual analysis of the costs (and benefits) of each component of the workforce. I encourage to check out our report in full!

http://www.pogo.org/pogo-files/reports/contract-oversight/bad-business/co-gp-20110913.html

[HJohnJag]

Gargantua, you make some valid comments, but did you READ the article?
""According to our report, accounting is one of the most expensive services to contract out to the private sector. The annual contractor billing rate for such services is $299,374, compared to a federal employee’s annual compensation (including benefits!) of $124,851 for comparable work.""

[Gargantua]

Bry:
I don't get it. Rather than apples-to-apples, this comparison is more like comparing a stick of butter to an eggplant.
Let me explicate: the contractor annual billing rate appears to include fringes, incl. pension, overhead, G&A and, of course, a small profit. The Fed comp. includes none of these weighty cost elements, and the overhead on Federal employees, if you think about it--and you can't get this from mere (lousy) Federal cost accounting--the "cost burden" on Feds is very large. It would include world-beating and expensive fringe and pensions, the weight of the huge organizational superstructures of a Fed department/agency, all the governmentwide agencies, even a slice of Congress for oversight. Further, the Fed has unparalleled job security; monetize that. Finally, you are silent on productivity. A fair comparison cannot be.
If all 35 occupations are compared on this woefully defective and misleading basis, the consumer of this "research" gets bupkus. POGO is capable of doing better, but resists doing that. I don't get that.