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DoD’s Workforce Cost Formula Stirs Debate

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For the past five years a host of divergent groups, including the Project On Government Oversight, Congress, Department of Defense (DoD), Government Accountability Office (GAO), and American Federation of Government Employees (AFGE), have decried DoD’s over-reliance on service contractors. In an effort to better evaluate the financial cost of hiring contractors, DoD instituted cost-comparison models that were designed to assess which sector of the Pentagon’s workforce could most cost-effectively provide needed services. Those models have been the subject of a government review, and much debated by AFGE and the Professional Services Council (PSC), the association that advocates on behalf of service contractors, but DoD isn’t any closer to making improved workforce decisions.

Last year, in an effort to obtain an independent and unbiased assessment of DoD’s cost-comparison models, Congress instructed the GAO to determine whether DoD’s workforce costing methodology is accurate. On July 3, 2013, the DoD replaced Directive-type Memorandum (DTM) 09-007 with Department of Defense Instruction (DoDI) 7041.04.

The GAO report, released in September 2013, reviewed each of the cost elements contained in the most recent version of DTM 09-007 and DoDI 7041.04 and compared them to best practices in other federal cost estimating systems. The GAO report highlighted DoD’s failure to accurately estimate the fully loaded costs for each sector of its workforce. Of equal importance, the report documented DoD’s total failure to implement an administrative system committed to ensuring that: (1) there is a uniform Department-wide cost comparison model; (2) there is a system for informing all affected components and personnel of what their responsibilities are as they relate to DoDI 7041.04 and how they can effectively access any and all information and data essential to their implementation of those responsibilities; (3) all components are monitored to ensure that the cost comparison model is appropriately implemented and utilized in every instance mandated by DoDI 7041.04; and (4) all DoD decision-makers comply with applicable statutes, regulations, and DoD directives relating to ensuring that workforce-mix decisions are cost effective.

On October 17, 2013, POGO sent a letter to Secretary of Defense Chuck Hagel about the GAO report. The letter highlighted how important it is that the DoD have in place: (1) an administrative system capable of ensuring that these cost comparison models are appropriately applied by decision-makers throughout the DoD whenever consideration of cost is a factor, and (2) administrators and decision-makers who are both competent and committed to ensuring that these cost comparison models are appropriately implemented and utilized. DoD responded to POGO’s letter stating, “[t]he Department will integrate many of the improvements recommended by the GAO report as it continues to refined and improve its processes and workforce cost estimates.”

On October 29, 2013, AFGE praised the GAO’s report for finding that DoD’s current cost-comparison methodology reflects improvements for estimating and comparing the full cost to the taxpayer of work performed by each sector of the DoD’s workforce. This triggered a response from the PSC on November 10, 2013, that lambasted AFGE’s assertion that federal employees cost less than contractors, claiming the assertion to be both “wrong and illogical.” PSC went on to assert that “the objective data lead[s] one to a different conclusion about relative costs.”

Yet, PSC’s own assertion is just the latest in a long line of unsubstantiated pro-industry claims regarding the “fact” that contractors’ comparative cost efficiency is supported by “objective data.” PSC’s asserted “fact” is no more than a myth. PSC is light on the data and examples that show service contractors cost less than services performed by civilian employees. There is good reason for that—there is very little evidence to support such a claim. POGO has highlighted a few instances in which contractors cost less, but such situations are often limited to short-term hiring or contingency operations when contractors need unskilled labor from other countries.

PSC also made an overly broad assertion that AFGE “fundamentally misinterpreted the Government Accountability Office’s report on the new Defense Department instruction that will guide future cost comparisons.” PSC’s support for its assertion focuses on the narrow issue of whether the Department’s instructions provide an accurate overhead calculation for in-house costs. While AFGE claims the estimated 12 percent overhead factor is significantly greater than a strict accounting would justify, PSC counterclaims that the estimated overhead factor is significantly smaller than a strict accounting would justify. What is most germane are two indisputable facts: (1) GAO has repeatedly reported that there is no consensus on what a valid estimation of government overhead costs are and that the 12 percent estimate is purely arbitrary; and (2) the task of calculating the valid overhead costs of performing service activities in-house is immensely complex and involves difficult policy trade-offs if the transactional cost of calculating such overhead costs is to be kept to an acceptable level. Something has got to give so that government overhead can be factored in appropriately.

PSC also denounced AFGE’s assertion that “there is a significant pay gap between the public and private sectors, particularly for highly sought after technical skills.” (That is funny since PSC has been claiming that contractor compensation should be more than what the President earns so that it has access to highly skilled employees, but that is a story for a different day.) Pay gap issues have been debated for years, and POGO did its best to lay that debate to rest by conducting an empirical study on the issue. We found that the critical issue isn’t whether private sector employees earn more or less than government employees, but rather whether the government expends unjustifiably higher rates for contractor employees than it does for civilian employees to perform comparable services. POGO’s study found that, in the case of certain highly skilled jobs, the government expends from 75 to 150 percent more on contractors than it would have were civilian employees to perform those same services. Additional DoD figures show that DoD expends between 2.35 and 3.53 times more of its funding on service contracts than on its civilian workforce, despite the fact that there are fewer contractors than civilian personnel. Additionally, POGO conducted an analysis of DoD workforce spending and personnel, and we found that DoD pays contractors nearly three times what it would cost for federal employees to perform the work.

One main reason for spending more on contractors is the overhead and profit rates that the government is charged. DoD has data establishing that overhead and profit account for over 50 percent of contract expenditures. That percentage is disconcerting considering the fact that roughly 70 percent of the work is performed on government property and often the contractors are using government equipment. Simply stated, services now outpace spending on goods, and contractors are working alongside federal employees. We need to make sure that taxpayers aren’t paying a huge premium for those services.

At this point in the debate, POGO agrees with PSC’s assertion: “Get the analyses right and let the chips fall where they may.” DoD and all federal agencies have to ensure that all costs are being considered before making any decisions to insource or outsource government work, and those decisions have to be based on accurate costs.

By: Paul Chassy, Ph.D., J.D.
Investigator, POGO

Paul Chassy, Ph.D., J.D., Investigator Paul Chassy is an investigator for the Project On Government Oversight. Paul has focused his work on the cost of service contractors compared with the cost of federal employees.

Topics: Contract Oversight

Related Content: Contractor Accountability, Inherently Governmental Functions, Federal Acquisition, Government Privatization, Transparency in Contracting

Authors: Paul Chassy, Ph.D., J.D.

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