Study Shows Private Contractors Usually Cost More than Public Employees
Conventional wisdom in Washington dictates that the private sector can always provide services at a lower cost than the federal government. A new study from the Project On Government Oversight (POGO), however, turns conventional wisdom on its head, demonstrating that the government rarely reaps the purported benefits of lower costs through the outsourcing of service work. In fact, POGO found that, on average, the government pays service contractors more than 1.8 times the amount it pays federal employees with the same education, doing the same job and performing similar tasks.
From the beginning of the Republic, politicians have debated about the size of government. As the federal government became a larger, more expansive social welfare institution, President Dwight Eisenhower became the first modern president to establish a policy of outsourcing federal services if a commercial equivalent was available for less.
In the 1980s, President Ronald Reagan, guided by his conservative ideology, expanded the outsourcing of government services. The approach reached its zenith with the "yellow pages test," prescribing that the government contract out any service found in the phone book. Since the Reagan administration, Republican and Democratic presidents alike have promised to reduce duplication and inefficiencies in government, which is often code for reducing the size of the federal workforce.
As the total U.S. population has grown, the number of federal civilian workers as a share of the population has declined. However, since work still needs to be done, the government has turned to contractors to perform public work, creating an expensive and expanding "shadow government." POGO notes that the size of the federal workforce has remained relatively constant over the last decade at about 2.5 million, but "the contractor workforce has increased ... from an estimated 4.4 million to 7.6 million in 2005." Additionally, the government now spends over $320 billion on service contracts annually, representing roughly one-quarter of all discretionary spending.
Conservatives have argued that "privatizing" public sector work will save costs because of the "overgenerous" pay and "lavish" benefits of public employees. This argument, as POGO indicates, relies "on the theory that the government pays [prevailing] private sector compensation rates when it outsources services."
As POGO's study reveals, this is rarely the case. Rather, service contractors charge more than twice the going private sector compensation rate for comparable tasks; to be more specific, private contractors are, on average, paid more than 1.8 times the amount the federal government pays its own employees to perform similar functions.
POGO's study examined 35 different occupational classifications and compared the "full costs of federal employee annual compensation" with the "average annual contractor billing rates" for those tasks. In 33 out of the 35 classifications, service contractors charged more than it would cost for the federal government to perform the task in-house; in the most egregious examples, service contractors charged more than three times the cost of a federal employee to perform a similar task in one case and almost five times as much in another. In over a third of the jobs studied, service contractors charged the government more than twice what federal employees earned to perform similar work.
The occupational classifications span routine services like grounds keeping and quality assurance to functions like budget analysis and language specialization – "frequently used to perform intelligence functions" – that can fall between legitimate work the government can outsource and inherently governmental tasks that only a federal employee should perform.
POGO limited its investigation to the General Service Administration's (GSA) 35 occupational classifications because the federal government does not provide accurate data on "contractor employees who perform government functions at a particular department or agency at any given time."
POGO calls on Congress to require federal agencies to use a standard coding system when awarding contracts, "the collection, reporting, and oversight of life-cycle costs associated with government services," and "greater transparency and improved pricing on GSA Schedule service contracts." Lack of transparency will continue to limit the ability of the government and the public to determine how much money the government saves or wastes through outsourcing, or to correct any excessive costs incurred. However, the report does not make the case that the federal government should never utilize contractors to perform the examined functions. POGO's investigation simply found that on average, federal employees perform the vast majority of the given tasks for less than a comparable contractor employee.
In addition to collecting and reporting lifecycle costs and greater accuracy and transparency of service contractor numbers, Congress should eventually require the posting of all federal contracts online – with appropriate redactions of any proprietary information – and the creation of a more accessible Federal Awardee Performance and Integrity Information System (FAPIIS), which provides contractor performance information. While the cost of contractor services and the raw numbers of contractors are important to determining whether the government is getting value for its dollars, the public deserves a full accounting of what contractors are getting paid and how they perform.
This is particularly true today, as the nation debates how to reduce government spending. Members of the Super Committee should think about reducing the amount spent on service contracts before considering funding cuts for important public programs that help keep Americans safe and healthy, like food inspection, child nutrition, and low-income housing.