POGO Study: Contractors Costing Government Twice as Much as In-House Workforce

By DANA LIEBELSON

The U.S. government's increasing reliance on contractors to do work traditionally done by federal employees is fueled by the belief that private industry can deliver services at a lower cost than in-house staff.

But a first-of-its-kind study released today by the Project On Government Oversight (POGO) busts that myth by showing that using contractors to perform services actually increases costs to taxpayers.

POGO’s new report is the first to compare the rate that contractors bill the federal government to the salaries and benefits of comparable federal employees. The study found that while federal government salaries are higher than private sector salaries, contractor billing rates average 83 percent more than what it would cost to do the work in-house.

The study comes at a crucial time, considering that Congress’ special “Super Committee” is looking for ways to cut $1.5 trillion from the federal deficit.

“We’re wasting tens of billions of dollars on a belief that it’s cheaper to have contractors doing the work, without any hard evidence. The government should operate on evidence, not belief” said Paul Chassy, a POGO Investigator.

POGO’s study compared 35 federal job classifications, covering more than 550 service activities. The occupations included everything from auditing and law enforcement to food inspection. The results surprised even POGO investigators, who for years had tracked a dramatic increase in the amount the government spends on contracts—from $200 billion in 2000 to well over $500 billion in 2011.

In 33 of the 35 job classifications POGO looked at, the average contractor billing rate was significantly steeper than the average compensation for federal employees. The two jobs where it was more cost-effective to hire contractors were groundskeeper and medical records technician.  So when the White House needs its lawn mowed, it shouldn’t hire in-house. Still, in every other case, it was cheaper for the government do the job itself.

In some occupations, the difference in price was so dramatic, any coupon-clipping soccer mom could easily have seen the government was getting ripped off. When the government hired a claims examiner for example, it paid the contractor nearly five times more than if it had gone with a federal employee.

“This is absolutely something taxpayers should be worried about. The government needs to be very careful about outsourcing work, especially work that is inherently governmental. It also costs so much more to privately contract,” says Janine Wedel, a professor at George Mason University who specializes in the privatization of public policy and corruption.

POGO has expressed concern that the federal government routinely enters long-term contracts—as long as 10 years in some cases. The POGO report points to a 2009 Federal Times article where 16 intelligence agencies urged Congress to remove caps on staffing at intelligence agencies. Because of these federal employee ceilings, the agencies had no choice but to hire contractors as semi-permanent staff, which most likely results in a higher bill for taxpayers.

“How can a government that spends $500 billion a year on private contractors not be able to answer the question of whether or not they’re saving money? Every private enterprise that I know of would be able to answer that question” Chassy said.

POGO’s investigation found that the federal government is failing taxpayers in two key ways: first, the government is doing a poor job of obtaining genuine market prices, and therefore it is missing the savings that come with outsourcing services. Secondly, the government is failing to determine how much money it saves or wastes by hiring contractors because it simply has no system to do so (the exceptions are the OMB’s A-76 process, which oversees competition between federal employees and the private sector on a small scale, and the Department of Defense's memorandum comparing the costs of service contracts.)

With these problems in mind, the report provides several solutions for stopping waste and salvaging taxpayer dollars. The report also highlights government actions that appear to be solutions—but actually contribute to the problem.

In regards to the latter, President Obama played the part of the Christmas Grinch last December, by signing into law a two-year freeze on federal employee salaries. Although this move was intended to save the government money (about $2 billion during fiscal 2011), policymakers failed to mandate a freeze on service contract awards or on service contractor billings rates, which can increase annually. The result of these kinds of pay freezes, according to the report, is that the gap between federal and contractor employee costs actually grows, increasing the cost to the government and taxpayers.

But enough of the bad news—POGO has compiled many recommendations for types of legislation Congress should introduce to help alleviate these problems. POGO suggests that Inspectors General at agencies that award $5 billion or more annually in contracts should be required to file an annual report on service contracts. Federal agencies should also be obligated to conduct pre and post award reviews to confirm that the cost of contracting is actually the cheapest route (imagine writing your neighbor a blank check to paint your house without checking his price, his hours and how long he’ll take to do the job—that’s what the government currently does.) POGO also recommends the Inspector General annually audit all the agency’s contracts to determine whether the billing rates reflect fair and reasonable market prices.

This kind of legislation isn’t as far-fetched as it may seem: Congress has recently indicated it’s taking contracting waste more seriously.  Early this month, the Commission on Wartime Contracting concluded its investigation into contracting waste in Afghanistan and Iraq. It found that conservatively, up to $60 billion dollars have been wasted through poor contracting decisions—essentially “confirming on an international scale what we’ve found domestically” Chassy said. At a press conference, the Commission urged Congress to take the Commission’s findings into account. Rep. John Tierney (D-MA) has already announced legislation that would create a permanent Inspector General for contingency operations.

For average-Joe taxpayers wondering what they can do about contractor waste, Chassy recommends that they write their congressmen or senators and let them know that they are aware contracting is costing too much money. Additionally, citizens should request the kind of recommendations that POGO has mentioned and vie for more cost analysis.

“We know that this study isn’t the end of the debate. Instead, the government should use it to take up a similar study and show that it’s either saving money, or admit to taxpayers that it’s spending more money on contractors—and here’s why,” said Scott Amey, General Counsel for POGO.

Dana Liebelson is POGO's Beth Daley Impact Fellow.

Flickr images from jzawodn and ~BostonBill~.

Follow @dliebelson

Comments

[NYVoter]

I posted this before but , just to make sure --Let’s look at Insourcing on a small scale. We are Government Catering/Food Service Contractors . We are a Woman owned local Small Business and focus on Military Contracts for Reserve/NG Units.
Most are small Contracts to feed between 20 to 500 Soldiers per Meal …some Contracts are 1 day, some 2 day ..others might last 1 or 2 weeks.
Our normal rate for a full Breakfast (Eggs/Bacon/Hash Browns/Pancakes/Toast/Pastries/ OJ /Coffee/Milk/Cereal /Fruit) runs from $4.00 to $4.50 PER SOLDIER –
Have you priced an Egg McMuffin lately ?
The Salvation Army’s calculated cost is $11.25 per Senior Meal http://www.mchenrytownship.com/golden_diners.htm
Back in 2006 , The Navy tried stopping Civilians from eating in the Gov subsidized Galley (Mess Hall) because of a 2005 Audit that proved the real cost of a ration (defined as a day’s meals – breakfast, lunch, and dinner) the Gov pays is $22.40, while the price charged to Civilian cash customers is only $9.05. http://www.flra.gov/fsip/finalact/06fs_075.html
…Since that Study was done 5 years ago , I’m sure the actual costs are much higher today.
We normally bid $18 to $20 per Soldier (per Day) for 3 FULL Meals –Given the layers of Bureaucracy involved (Admin costs) benefits/salaries/Food costs/Cleaning Supplies and Paper Goods , there is no way the Federal Gov can compete with our prices…OR the Quality/Value we provide our Soldiers.
POGO and the Media have been on an Anti-Contractor Crusade for years now . They forget that all contractors are not Multi Million Dollar Corporations with teams of Lawyers …Thousands of us are Small Business Owners that actually can AND DO provide a better service that ANY Federal Employee –we’ll work 18 and 20 hour days if we have to because our reputations and ability to bid on new Contracts depends on it …and we don’t get overtime. Would a Union or Federal Employee do that ?

Does POGO care about the Small Business Community ? ..Or do they side with the Unions ?

[NYVoter]

I appreciate your clarifying that BUT ..I still don’t understand why you are on this anti Contractor Crusade. I called POGO and spoke with one of your people about our situation over a Year ago – he was very interested and asked if I could Email everything I had over to him...I did. POGO never called me back (he had my number) , never commented on it or even mentioned how the Small Business Contractor is now paying the price for this “Crusade”. My information didn’t seem to fit the Agenda they were pushing so , you can understand why I felt POGO was siding with the Federal Employee Unions here.

[Bryan Rahija]

Hi NYVoter -- thank you for your comments. POGO does not accept money from unions, corporations, or anyone with a financial interest in the outcome of our investigations. Here's our contribution acceptance policy:

http://www.pogo.org/donate/contribution-acceptance-p.html

Hope this is helpful!

[NYVoter]

The study is Flawed --makes me wonder who paid for it , the Unions ? Here's the Truth - http://nevadanewsandviews.com/2011/09/15/afl-cio-struggles-with-reading-comprehension/

[Bettemae Johnson]

This is absolutely true and as a former government employee who was involved with multiple contracts and contractors, I should know. If you want specifics, consider the following a prime example:

When the government needs to make a procedural change such as those recently needed for TSA, they issue an order, i.e., from now on, we will do the following, etc.. When the government tells a contractor to make a necessary change, the reply is "give me a detailed statement of work defining the exact changes you want made and I will give you an estimate of just how much additional money you will have to pay me to get it done! NO extra money, no changes!" Most contractors double or triple the cost of a contract in just this manner, which is why they wanted the contract in the first place! And that doesn't include the $1000 toilet seats and $500 hammers, put into contract modifications by greedy contractors who know the military officer who signs the contract will not even bother to read the documents he is signing! I repeat, I speak from direct experience!

[Thor Wilthil]

A very informative article! This is the type of discussion that we have in Norway as well,in-house work or outsourcing.
To me this is very simple. In-house working is not set up to "make money" - private contractors are in the market in order to make money, otherwise they hadn't been interested!
The result is either higher cost for the government- or lower salaries and bad working-conditions for the contractors' employees....

[Lisa Stalin]

I found this article very informative and I must recommend this one to all of my friends. I am thinking to become a Government Contractor. Can you please give me your valuable suggestions to become a Government Contractor? I have read one article about How to become a Government Contractor at http://www.howtobecomeacontractor.net/How-to-Become-a-Government-Contractor.html Can you please tell me; license is mandatory to become a Government Contractor? Nice post. Keep going on. Thank You.

[TheBoosh]

The Gov never hires 'just a guy' to fill a slot - they are employees of corporations that have lobbied elected officials and high ranking Gov. employees to support their business interests.
These company's boards are comprised of connected donors; ex elected official; and ex gov employees all working a profit scheme to obtain taxpayer money. They have considerable clout when you add up 'non gov employment/payroll' statistics - which is huge leverage when used to cite potential 'unemployment' figures if the powers that be begin cracking down and just hire "regular' Gov. employees.

[drb48]

"The government should operate on evidence, not belief..."

That will only happen when the electorate does.

[AgreeWithMarvin]

Marvin Hadley said it best - this only compares costs, but does not discuss any productivity or Quality of Service. What about the hundreds, if not thousands, of federal workers who are "under investigation" for one reason or another, yet it is a "paid" absence? Or, the person who occupies a chair, knowing that they do not have to perform, because they are "protected" by the union? Certainly, there are absolutely decent, worthy government employees, but the issue with not being able to unload under-performing or non-performing federal workers is costing the taxpayer $_______? POGO should fill in that blank. In the private sector, one rarely gets away with this type of behavior, as noted recently in a DHS incident where both federal workers and government contractors were both complicit in hacking into accounts. The federal workers? They were placed on "paid leave," some for more than a year. The government contractors - some were fired within a few weeks of discovery. Don't believe me? Read this:
http://www.nextgov.com/nextgov/ng_20110912_7347.php?oref=mostread

'Nuf said.

[Tom Tresser]

Great work, POGO. We Chicagoans can tell you plenty about bad privatization deals! The Skyway Bridge that connects us to northern Indiana was dealt away to a Spanish-Australian combine for 95 years and they stand to make from 5 to 25 billion (depending on traffic flow and how high they kite the toll). Our parking meters were pawned to a MorganStanley (after they got bailout cash) parntership that includes the sheikdom of Abu Dhabi for 75 years. They will make a profit of $10 billion.

Stop selling off public assets to private interests! Stop letting sweetheart contracts to fat cat insiders. It just accelerates the transfer of wealth from the the many to the few.

We are fighting back here. Citizens are coming to together to fight privatization and to defend the commons. Visit us at http://www.publicassets.us and sign up to become a Public Defender.

[Dana Liebelson]

Charliek: A copy of the report can be found here. It includes all raw data and calculations:

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

[Serena1313]

I've written Kay Baily Hutchison, John Cornyn and Pete Sessions on several different occasions. Suffice to say, it was more than a little discouraging when I received generic form letters thanking me for contacting them in reply. I've spoken to a lot of people who have had the same experience with their Congress representatives and senators.

In that respect it is understandable why so many of us feel helpless & disgusted -- after all, 'there is nothing we can do to change it.' Otherwise I would write them again if I thought it would do any good, but given how unresponsive they have been in the past I doubt it would make a difference.

On second thought, I may go ahead and write anyhow.

[Marvin Hadley]

A worthy study of perennial interest. However, POGO appears to have dogged it. You admit all of the yawning omissions of overhead and other indirect cost elements of the government. On the government side, you naively accepted the annual billing rates that are, as you seem to suspect, often negotiated down under competitive pressure. Further, you have not dealt with productivity. Yes, I know that can be a wash if the contractor is simply a former Fed returning to her own job. But there are many kinds of contract support that are not butts-in-seats, Fed-type "work." The bulk of the $270 billion or so of Federal services contracts is not spent on butts-in-seats. These include lots of IT and engineering work, management improvement efforts, and a range of program management support that the government has never provided with Feds. So, despite POGO's laudable, Herculean efforts, there is good reason to lower the amplitude of the breathless conclusion, and even wonder if the study is directionally correct. Nonetheless, it is important to keep this flame alive, as the problem will not go away with one or another less-than-fully-credible report. It will only go away when the Federal unions and the contractor lobbyists and trade associations are overpowered by disgusted citizens and taxpayers who scream that "we won't take this anymore."

[Devil's Advocate]

As usual, POGO has a one-sided and biased view against contractors. Their report fails to factor in the costs of permanent tenure for government employees who can never be fired regardless of performance. They recommend the government develop employment at will--another ludicrous suggestions that is DOA on Capitol Hill. The report is just more useless blah blah blah from an ideological organization that is blind to all the facts. The only they they know how to do is marshal some of the facts and make short-sighted arguments. If POGO had their way, we'd all work for the government.

[CharlieK]

Where can I see your raw data?

Where is the definition of the cost to employ a federal employee? Do the POGO calculations include pension and tax contributions, training, expense reimbursement, Human Resource and management costs? Are costs of computers, supplies, tools, equipment and work space included?

Thank you.