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

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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.


Flickr images from jzawodn and ~BostonBill~.

By: Dana Liebelson
Beth Daley Impact Fellow, POGO

dana liebelson At the time of publication, Dana Liebelson was POGO's Beth Daley Impact Fellow.

Topics: Contract Oversight

Related Content: Government Privatization

Authors: Dana Liebelson

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