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Does Federal Contracting Waste Tax Dollars?

David Callahan

Is the National Security Agency wasting tax dollars by paying Booz Allen to handle routine intelligence tasks, such as the systems administration work that 29-year old Edward Snowden was doing for $122,000 a year? It sure seems that way. 

A stack of studies has documented the apparent high cost of using private contractors compared to federal employees. In September 2011, the Project on Government Oversight -- a Beltway watchdog group -- released a reported entitled Bad Business: Billions of Taxpayer Dollars Wasted on Hiring Contractors. POGO analyzed compensation paid to federal and private sector workers and billing rates for contractor employees across 35 occupations covering more than 550 service areas.The study found: 

the government pays billions of dollars more annually to hire contractors than it would cost to hire federal employees to perform comparable services. Specifically, the federal government approves service contract billing rates—deemed fair and reasonable—that pay contractors 1.83 times more than the government pays federal employees in total compensation (including benefits), and more than 2 times the total compensation paid in the private sector for comparable services.

That does sound like bad business. One particularly galling finding was that "Private sector compensation was lower than contractor billing rates in all 35 occupational classifications we reviewed."

Let me run that by you again: Contractors didn't just perform services for a higher cost than it would cost to pay federal exmployess to do the same thing, they also charged the government more than the going rate within the private market for such services. Of course, that makes sense because contractors earn profits by being the middleman. If Booz Allen hires a computer expert at the going market rate of, say, $100,000 a year, it's not going to make any money if it then bills the government that same amount. It only makes money if it bills more and keeps the difference. 

This is a great business model and explains why the consulting industry overall has boomed in recent decades. Places like Booz Allen and McKinsey scour top universities for smart grads, pay them handsomely, and then hire them out to corporations and governments at a far higher rate. Law firms, by the way, have been doing this for over a century: They pay young lawyers seemingly exorbinant annual salaries and then make a fortune by billing clients five times what they are paying their associates. 

But the obvious question here is why should we taxpayers be underwriting private middlemen who live in mansions in McLean? 

One reason might be because, when all is said and done, the private contractors actually aren't more expensive. The nice thing about contractors is that you can hire and fire them at will, and you don't have to pay their pensions and health benefits. In contrast, the federal labor force is less flexible and these workers incur various long-term costs. It's hard for the federal government to rapidly hire huge numbers of new people for a big project -- rebuilding a war torn country, for example, or creating a new IT infrastructure -- and then get rid of them when the project is finished. 

POGO's evidence, including a 2012 study that just focused on the Pentagon, strongly suggests that even when all these costs are factored in, contracting out is still a bad bargain. 

But POGO also readily acknowledges -- and this is truly shocking -- that nobody in the federal government really knows what the comparative costs are of contracting vs. doing work in-house. As POGO said about it's 2011 report: 

our study found that the federal government has failed to determine how much money it saves or wastes by outsourcing, in-sourcing, or retaining services, and has no comprehensive system for doing so.

Wow. The federal government spends over $500 billion a year on outside contractors and doesn't have a clue as to whether this is smart business. 

Earlier this spring, POGO called on the Office of Federal Procurement Policy at the OMB to create an expert panel to devise a rigorous cost comparison model to analyze contracting decisions. 

Sounds like a good idea, don't you think?