Outsourcing Savings - Myth BUSTED!

By SCOTT AMEY

On September 13^th, POGO released Bad Business: Billions of Taxpayer Dollars Wasted on Hiring Contractors.  The report compares the cost of outsourcing work to contractors with the cost of using federal employees. For years, federal agencies have assumed that outsourcing work to contractors would reap the benefits of private sector efficiencies and save taxpayer dollars. Policy makers have debated the size of the government and whether federal employees are overpaid, often relying on studies that simply compare federal and private sector salaries.

However, those analyses have not recognized that the cost of outsourcing is not what the employees of contractors are paid by their employers, but rather the amount that the government pays to the employing private sector contractors. As a result, previous analyses did not reflect the fact that actual government contractor billing rates for federal service contractors are significantly higher than the full costs (salary and fringe benefits) of hiring federal employees.  Rather than relying on data to compare federal and private sector pay, POGO’s analysis took a closer look at the actual amounts paid by government agencies when they contract with federal service contractors. 

POGO found that taxpayers are likely paying a cost premium for outsourcing services to contractors, as compared with having federal employees performing the work. We hope that our study alters the current debate and that it forces members of Congress and the public to ask for data proving that using contractors saves money. Given the nation’s ongoing economic problems, this analysis has become even more necessary because approximately one-quarter of all discretionary spending now goes to service contractors – that is $320 billion a year in service contract spending.

POGO is not alone in finding that contractors can be more expensive than federal employees. Recently, the Commission on Wartime Contracting (CWC) and the Defense Department issued reports that largely support our findings. The CWC found (see p. 226) that money could be saved in certain high-skill positions if the work was performed by federal civilian personnel. And, despite DoD’s recent flip-flopping on insourcing, last week it released a report finding that 50 percent (see p. 5; full report) of its FY 2010 insourcing was conducted because the work could be “more cost effectively delivered by civilian personnel of the Department.”

There has been some confusion about our inclusion of private sector compensation figures. Those figures are not intended to represent what any specific government contractor pays its employees. In fact, for the GSA schedule rates examined, we don’t know what any contractor employee makes in salary and benefits (although one commenter stated it was typically about 1/3 of the billing rate). Simply stated, in far too many instances in government contracting, including under GSA schedule contracts, the transparency that supports the prices paid to contractors (to include salary, benefits, overhead, and general and  administrative costs, as well as profit) is simply absent. And, that’s the way contractors like it.

The inclusion of private sector compensation data simply was meant to show that the federal government is paying its contractors, on an annualized basis, at rates that are significantly higher than either average public or private sector compensation rates.  Our goal was to get people to end the typically misleading and inaccurate comparisons that look at public vs. private sector compensation – and focus instead on what the government is actually paying when it outsources work.

Since we released our report, there have been a number of mischaracterizations made by the contractor industry of our work. Below are a few of them, along with our responses: 

○ Industry Complaint: POGO unfairly used contractor loaded rates--rates that include salaries, benefits, administrative costs, profits, etc. 

• POGO Response: We would love to see contractor cost or pricing data. If they would lay those cards on the table that would be wonderful. Unfortunately, the last seventeen years of so-called “acquisition reform” having been primarily about keeping important data away from government contract negotiators–data that would lead to better negotiation outcomes and more informed contract pricing. If rates are so much lower, as claimed by the Professional Services Council, than GSA should list both the ceiling prices and the actual prices negotiated to ensure that all government agencies are aware of current sales trends. But, what matters for the purposes of the current POGO report, is the cost to the government to contract with the company(ies) for the services studied. And that’s what we analyzed.

○ Industry Complaint: POGO’s analysis was flawed because it did not include all government overhead and lifecycle costs for federal employees.

• POGO Response: All additional overhead was excluded, including the government’s overhead rate to award, administer, and oversee contractors which would be in addition to the billing rates paid by agencies. If we added the government’s overhead costs for federal employees, we would need to do the same for situations when the government used contractors to perform the work. Even assuming POGO had added the standard OMB A-76 12% “overhead” rate, this would not have changed the results of the study.   Incidentally, we intentionally only used billing rates for contractors operating out of federal government facilities to more closely keep our comparison apples – to apples.

○ Industry Complaint: POGO did not include pension costs.

• POGO’s response: Yes, we did.  We added OPM’s and BLS’s full fringe benefit and pension percentages. In fact, all personnel related fringe benefits were included in the government compensation data.

○ Industry Complaint: POGO is not considering the short-term nature of many government contracts.

• POGO’s response: That’s because that isn’t generally true anymore. In fact, many GSA schedule contracts extend for multiple years and cost taxpayers millions of dollars. Furthermore, POGO pointed out in our report that the government should more fully exercise its existing authority to hire temporary federal employees (5 CFR Part 316 for competitive service and at 5 CFR part 213 for excepted service appointments). Moreover, the “short-term” argument is a red herring.  Even if true, it still does not justify the yearly cost of outsourcing billions of hours of work to contractors.  All those hours worked by contractors can be translated into personnel FTEs, and it is those FTEs that matter, because that it what is being paid for on a gross basis, not some specific piece of work that may be relatively short term in nature.

○ Industry Complaint: POGO ignored superior contractor education, experience, and skills.

• POGO’s response: We would dispute this characterization as would the statistics available from the U.S. Office of Personnel Management, which seem to support the conclusion that the typical federal employee is better educated and has more experience than his/her non-Federal counterpart. Also, given that so many government contractor employees are actually retired federal employees, this argument has a number of obvious weaknesses.

○ Industry Complaint: POGO’s analysis is based on averages and improper costing models that have been criticized by the Center for Strategic and International Studies (CSIS).

• POGO’s response: While CSIS and the contractor industry claim cost models outlined under Circular A-76  are flawed because it favors government employees, federal employee unions claim that the A-76 model favors contractors. We take some comfort that both sides believe that cost model favors the other. POGO will work with Congress and the Office of Management and Budget to create a system that fairly and accurately reflects all government costs. Furthermore, POGO’s report also incorporated cost comparison models used by DoD (DTM-09-007), which also use averages.

○ Industry Complaint: POGO did not mention outcomes.

• POGO’s Response: In fact, we cite a few government studies that explain how outcomes and performance should always be a factor in deciding to insource or outsource—that’s called accountability! Here’s one insider’s story ...)

POGO received one call from a government official who reminded us that hiring 10 contractor employees to work for three months might require the agencies and Congress to reevaluate staffing restrictions. Who knows - in the long run, a government employee, or two, might work fewer hours and cost taxpayers a lot less money than those 10 contractor employees.

Another government official emailed me stating that it is time for contractors (and I think GSA too!) to “’fess up that the GSA schedule prices are outrageously high!”

Scott Amey is POGO's General Counsel

Comments

[Amazed]

Having been in and out of government for half my life, it has been my observation that private industry is far superior to government in terms of productivity, creativity, business acumen, profitability and any other meaningful measurement. While there are some very dedicated and hard working government employees, they also have their share of individuals that wouldn't last a day in the private sector. If insourcing will save so much money over the excess billions paid to companies, how come government is reluctant to pay Americans the same wage as their private sector counterparts? Who exactly is benefiting from insourcing? The small companies that will fold? The contractors forced to accept a lower wage? The taxpayer that will be required to fund the salaries AND burden rate AND pension of the unhappy employee? Sounds like a lose-lose situation to me...

[Scott Amey]

NYVOTER,

Please read the entire report and the recommendations. The report doesn't recommend insourcing every job performed by contractors. The report cites examples where contractors are more cost efficient than federal employees. The report attacks the premise that outsourcing always saves money, and urges policymakers to ensure there are savings or other justifiable reasons before turning to contractors. Uncle Sam owes it to taxpayers to make the government more cost effective, which is why Congress is finding ways to cut government spending. Service contracting has to be part of that equation.

[NYVoter]

Federal Insourcing is cheaper ? Read this - " The Office of Personnel Management recently decided to "insource" its Monster-hosted job board, USAJobs. Insourcing is a term of art for "having people on our payroll do it." OPM's mystifying explanation? To have USAJobs be "by government, for government."

To do this, they hired 19 programmers. This is more developers than were used to start up Google, Craigslist, eBay, or Facebook. OPM took the Monster screens, screen-by-screen, and rewrote the code behind each screen. After two years, they have arrived at a product that looks exactly like the Monster version -- albeit with less functionality than the Monster version -- and spent a whopping $20 million on this copycat product.

Each year, OPM taxes every other federal agency to generate the princely sum of $13 to $15 million to use this website to post jobs. With the cost of insourcing USAJobs, OPM is now raising the tax on job postings a whopping 19 percent and no statutory or regulatory base exists to support the original tax or its increase." (guess who pays for all of that ? - WE DO)
Hiring Contractors is actually cheaper than insourcing the work.

http://www.huffingtonpost.com/linda-e-brooks-rix/low-and-slow-the-process-_b_974571.html

[NYVoter]

Hi Scott ..the problem with these Blanket Attacks on Contractors is, the Public doesn’t understand how complex and FLAWED the system. They read the articles about KBR or Boeing and assume that ALL Contractors are “Evil” and out to defraud the Government. I see AND HEAR it all the time – “Oh , you’re a Contractor ? You must make Millions !!” They have no idea that when it comes to Food Service , they actually have limits on what they will pay (per Meal) according to regions. So , you can “Bid” as high as you like –but if you’re over their allowable limit , your “Bid” will be disqualified and you won’t get the work.
The Real Fault/Problem is with the Government Contracting Officers and the rules . For the last 10 years we’ve been a Military Vendor and NOT ONCE has ONE Contracting Officer from the USP&FO ever come to evaluate our service. I’ve had CO’s tell me that they manage Millions of Dollars and Food Service Contracts are a pain in the neck for them , they are the smallest amount and end up giving them the most grief. That’s why they always take the easy way out and hire the lowest bidder –they never look at Past Performance or Best Value --they just want to assign it to get it over with.
The Soldier ends up with a Plate of “who cares” for Dinner ..and EVERYONE gets to Blame all the Contractors.
If you hired a sub standard Contractor to put a Roof on your House ..and it leaked within a few days ..who’d be at fault ? The Contractor ? Or YOU because you tried to save a few bucks and didn’t care that the Roofer had a bad reputation.
The bottom line here is …there are thousands of GREAT Hard working Small Businesses out there that rely on Government Contracts but are now losing ALL of their work (we’ve lost 90%) because of this new Insourcing Policy Obama has been pushing. Contractors have become easy Targets now because of the problems in Iraq and Afghanistan --but if the smaller Contractors keep bearing the brunt of these attacks , the Taxpayer will ultimately pay the price.

[Scott Amey]

NYVOTER,

Have we talked in the the past? POGO certainly isn't trying to take business away from you or other contractors that offer services at fair and reasonable prices. The point of the report is to urge the government to make improved decisions about whether an in-house employee or contractor can perform work more cost efficiently. How long would I work for you if I hired servers who cost $20 per hour rather than $10 per hour, if that is the going rate? Based on your low prices, I would imagine that my doing so would jeopardize your business and put me on the street.

POGO's report highlights the need to outsource work when it is in the best interest of the government and taxpayers -- and cost has to be part of that discussion. It sounds like you are providing a great service at a fair price and therefore should receive a lot of federal business. Unfortunately, there are other contractors who try to take advantage of the government, and the government itself isn't always a careful consumer, which can lead to waste, fraud, and abuse.

[Scott Amey]

NYVOTER,

Have we talked in the the past? POGO certainly isn't trying to take business away from you or other contractors that offer services at fair and reasonable prices. The point of the report is to urge the government to make improved decisions about whether an in-house employee or contractor can perform work more cost efficiently. How long would I work for you if I hired servers who cost $20 per hour rather than $10 per hour, if that is the going rate? Based on your low prices, I would imagine that my doing so would jeopardize your business and put me on the street.

POGO's report highlights the need to outsource work when it is in the best interest of the government and taxpayers -- and cost has to be part of that discussion. It sounds like you are providing a great service at a fair price and therefore should receive a lot of federal business. Unfortunately, there are other contractors who try to take advantage of the government, and the government itself isn't always a careful consumer, which can lead to waste, fraud, and abuse.

[NYVoter]

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 . Would a Federal Employee do that ?
Looks like POGO doesn’t care about the Small Business Community and the smaller Contractors ..POGO sides with the Unions.

[Dfens]

The government should only be allowed to participate in contracts that allow them to pay for results instead of process. This is basically the same problem we are having with the defense industry played over and over again. Capitalism does work. It can either work for you or against you. If you pay a contractor for process, you get lots of process, but little in the way of results. If you pay for results, then they will get the process in place that gives them the best results. If there is no good metric for establishing what "good results" are, then it should not be contracted to private industry. It is just good sense. It is not rocket science.

[NYVoter]

If the Gov Contracting Officials ACTUALLY did their Jobs and hired the right Contractors …Contractors are a lot Cheaper than Federal (Union) Employees. The Pogo report was probably paid for by the Unions ..it’s wrong and here’s the proof – http://nevadanewsandviews.com/2011/09/15/afl-cio-struggles-with-reading-comprehension/

[Emile Zola]

Sane people could expect honesty from a true democracy, but not from one, like ours, that is more tyranny, corruption and manipulated by every cook in congress, the courts and the presidency than a true democracy. How can there be oversight when the fox is in charge of the henhouse? As Perry Como used to croon: It's impossible. A nation that allows cowards to appear as "warriors", racism as "Christianity" and "compassion" as killings, might be a DINO, but a true democracy? Never.
More money was stolen by Halliburton and Blackwater, and to add salt to injury, they are still in the raiding tax payers pockets than Medicare, Medicaid ever could, but when all our government is purchased, seale4d and delivered by special interests, what else could we expect. We have become so accustomed to terror that our "brave soldiers, airmen, marines and sailors" see a "terrorist" behind a religion, behind every "illegal" that were here even before the genociders were thinking to come to these shores. You can expect apples from an apple tree, ergo, corruption, killings, extra-judicial killings, black boxes, torture a la 24/7 is what we can expect from now on. So no matter how malfeasances are published, our government is never going to change, ever. We might as well fasten our seat belts because, from now on, this nation, America, will never again be the beautiful, but the epitome of evil. America, the beautiful, R.I.P.

[A. D. Jackson]

A lot of it began under Ronald Reagan who said that govt. was inefficient- true- and private industry could do things better and cheaper. This may have been true in theory, but Ronnie forgot that private industry all to often is in it to make money, and not to serve the taxpayers or do things efficiently. When Indiana privatized the Tollroad, the first thing that happened was tolls going up with fewer attendants to assist motorists.

[Niko Borosky]

Scott: you complain too much. It is plain that you admit the glaring, gaping omissions of overhead costs. If you were more attuned to A-76, you would know what a crock the 12 percent is. The government--which has the audits for all firms that no one else has--knows damn well that OH is several times the 12 percent for contractors. When it comes to getting budgets through Congress, the way that books are kept, and the way that the Executive Branch connives, the govt does not want to reveal what the true cost of government emps is.
And you should know the billing rates you used are a crock to use for the full cost level of all contractor positions. Someone with your knowledge should know they do not reflect the prices in most contracts. But you use them anyway. So, you are trying to ride a ballyhoo to success, knowing full well that your study is galactically flawed. POGO could do better, but it is clear from your defensive crouch that you have no intent of doing so.