Senate Subcommittee Considers True Cost of Service Contractors

The Senate Homeland Security Subcommittee on Contracting Oversight held a hearing on service contractors last Thursday. In the hearing, Chairman Claire McCaskill (D-MO) and Ranking Member Rob Portman (R-OH) questioned witnesses on cost information used by the government when deciding whether to hire contractors to perform services.

POGO General Counsel Scott Amey submitted written testimony to the Subcommittee. In it, he argued that the government must create a comprehensive cost analysis to allow agencies to make cost-effective decisions on a case-by-case basis and improve the data that is collected in service contract inventories:

The reality is that there are no generalizations that withstand scrutiny as to which market sector provides the optimal cost efficiency for any service area, no less all service areas. As a result, the federal government must, on a case-by-case basis, analyze whether it is more appropriate and cost efficient to employ government or contractor employees.

Senator McCaskill opened the hearing by highlighting the importance of an effective cost analysis model that compares contractors to private sector and federal employees (as opposed to just a comparison of the latter two). ­­­­­The government’s tendency to automatically turn to contractors, she stated, is a result of “assumptions and flawed studies to support those assumptions.” McCaskill argued for a comprehensive cost model that includes not only direct labor costs, but also all other costs associated with service contractors (including overhead costs, compensation, benefits, and other expenses). This kind of model would be ideal for evaluating service contracting. McCaskill pointed to one example where, in FY 2011, overhead / profit costs accounted for $6.7 billion of the $13 billion spent on “knowledge-based services.” Direct labor costs accounted for only $4.8 billion of that total.

Senator Portman followed up by acknowledging the need for serious data analysis, but also encouraged competition among contractors and discouraged the politicization of contracting oversight. He expressed concern that the Office of Management and Budget (OMB) has not provided sufficient guidance on contracting cost evaluations and stated that “agencies have been left on their own” to calculate contractor costs.

As for the witnesses, Jay Aronowitz, deputy assistant secretary at the Army’s Office of Force Management, Manpower and Resources, explained the utility of the Army’s current cost analysis model, the Contractor Manpower Reporting Application (CMRA). The CMRA, Aronowitz testified, is comprehensive (it includes invoice amounts, direct labor costs and hours, and many other miscellaneous costs) as well as effective. Aronowitz said that in CMRA’s first year (FY 2008 to FY 2009), the Army saved an average of 30percent through insourcing and reduced its contract services obligations from $51 billion in FY 2008 to $32 billion in FY 2009.

The Subcommittee had some bad news to report too. Although the Army has taken real strides to effectively analyze costs associated with contractors, McCaskill explained that the Department of Defense as a whole will not be able to produce some basic pieces of information, such as the total number of contractor employees, until 2016 (the Army reported 241,000 contractors in FY 2010). Considering this kind of information is vital to making contracting hiring decisions, it’s imperative that Congress push for a government-wide cost analysis model, as well as service contractor inventory reform.

The second witness, Debra Tomchek, the executive director of the Department of Homeland Security’s (DHS) Balanced Workforce Program Management Office, testified that DHS has taken strides to make better decisions when considering contractors. By using its own cost model, the DHS has been able to better identify which services to perform in-house and which to contract out. Tomchek said the DHS reduced the amount it spent on management support services by $160 million from FY 2010 to FY 2011 and attributed this change to DHS’s comprehensive analysis model.

The third witness, Chief Operating Officer Chuck Grimes of the Office of Personnel Management (OPM) said his agency is dedicated to helping other agencies with contracting, but seemed reluctant to back a government-wide model to aid agencies in making tough hiring decisions. He testified that comparing costs is too complicated because of factors that are difficult to measure, such as past performance of contractors and federal employees, degree of competition, and desired time period. Even though these factors may complicate decisions, they by no means justify the absence of an effective, comprehensive cost model that would allow government to, for the first time, accurately compare federal, private, and contractor employee costs side-by-side. Given its major role in government personnel decisions, OPM must back an effective government-wide cost model.

McCaskill wrapped up the hearing by once again stating her desire for agencies to employ effective, comprehensive cost models. She argued that as long as contractor costs continue to balloon and contractor executives and employees bill the government up to $700,000 a year for compensation, there is no reason to automatically assume contractors are inherently cheaper than federal employees. POGO agrees with Sen. McCaskill that agencies must evaluate federal and contractor prices on an individual basis in order to save taxpayer money.

“It’s not that [contractors] are the enemy,” McCaskill said. “It’s just that I don’t think our government has been very good about tracking the costs and making sure that we’re making the kind of analysis taxpayers have a right to expect… I’m not sure that we ever held contractors’ feet to the fire about what they were billing us.”

POGO is concerned by the government hiring of contractors without a comprehensive cost analysis. In September 2011, POGO released a major report, Bad Business: Billions of Taxpayer Dollars Wasted on Hiring Contractors, which found that each year, the government wastes billions of dollars on services performed by contractors that could have been completed for significantly less money by federal employees.

POGO is equally concerned that the government does not have in place a reliable and effective model for comparing total costs for contractors to federal and private sector counterparts. Instead, many agencies blindly assume that hiring contractors both saves government money and decreases the size of the government. POGO’s report found that neither is true; in most surveyed cases, contractors were more expensive and the size of the government’s total workforce continues to grow every year.

Ultimately, as POGO contended in its testimony, the government must create a model to comprehensively compare service costs between the private, public, and contracting sectors in order to effectively spend taxpayers’ money.