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DoD insourcing makes financial sense

GAO confirms federal workers cost less than contractors

Oct. 29, 2013 - 10:53AM   |  
By J. DAVID COX SR.   |   Comments

Senior Defense Department officials admit that civilian employees are significantly cheaper than contractors. In 2010, then-Defense Secretary Robert Gates told the Washington Post “that federal workers cost the government 25 percent less than contractors.” Comptroller Robert Hale acknowledged to a Senate subcommittee in June that contractors are two to three times more expensive than civilians. In a September House hearing, the Army chief of staff echoed Hale’s remark.

So why isn’t DoD systematically substituting civilian employees for contractors, given the budget crunch? As part of the “efficiency initiative,” the Pentagon arbitrarily capped the size of the civilian workforce, preventing work from being insourced despite the prospect of significant savings. The imposition of a civilian workforce cap shut down an insourcing initiative that DoD officials told the Government Accountability Office saved the department $900 million in fiscal 2010 alone. In 2012 Senate testimony, the Army claimed that insourcing resulted in savings of 16 percent to 30 percent and that insourcing was largely responsible for reducing the Army’s contract services obligations from $51 billion in 2008 to $36 billion in 2010.

Contractors, insisting that the insourcing process was biased against them, turned to the Center for Strategic and International Studies, which claimed that the DoD’s costing methodology did not take into account a multitude of in-house costs. Congress later assigned the Government Accountability Office to review DoD’s costing methodology. After discussions with contractors, CSIS and the American Federation of Government Employees, GAO last month issued its own assessment of the costing methodology, “Human Capital: Opportunities Exist to Further Improve DoD’s Methodology for Estimating the Costs of Its Workforces,” which implicitly rejected the CSIS critique. If anything, GAO’s recommendations indicated that the methodology is biased against civilian employees.

GAO reported that DoD Instruction 7041.04 “reflects improvements to DoD’s methodology for estimating and comparing the full cost to the taxpayer of work performed by military and civilian personnel and contractor support.”

GAO also had several recommendations for improving the methodology:

■Improve accountability for in-house overhead. DoD’s methodology accounts for the items that constitute in-house overhead costs, reports GAO, but does not attach costs to those items. When subject-matter experts can’t assign costs to overhead items, the default position is to automatically impose a 12 percent overhead charge on the in-house workforce. The DoD inspector general determined in 2003 that this charge is arbitrary and unjustifiable, and that it was instrumental in a botched Office of Management and Budget Circular A-76 privatization process that wrongly contracted out the work of 600 Defense Finance and Accounting Services employees. DoD must revise the methodology so that only actual — not imaginary — overhead costs are imposed on in-house workforces.

■Don’t attribute excessive retirement costs to civilian personnel. As GAO politely put it, “our analysis found that the instruction also directs the inclusion of several cost elements that may not be appropriate to consider. These include payments for part of unfunded liabilities — any previously identified shortfalls in federal retirement assets.”

■Use more accurate data in determining the cost of contractors. Fortunately, as GAO points out, this problem will be rectified when the Defense Department completes its long-delayed inventory of contract services. AFGE is proud to be the biggest booster of the inventory, and we look forward to it finally being completed.

Surely, we can all stipulate that precious DoD dollars must be used wisely, and that decisions about who performs work must be based on a rigorous methodology, instead of caps, freezes, prejudices, politics and conflicts of interest.

The DoD costing methodology is not perfect, but, as GAO notes, it is improving. To the extent it has biases, they disadvantage civilian employees. Civilian employees are heartened to learn that DoD’s successful insourcing program has been vindicated. However, they’d be even more pleased if DoD lifted the cap on the size of its in-house workforce, allowing more work to be insourced, so that money can be saved for taxpayers and services can be improved for war fighters.

J. David Cox Sr. is national president of the American Federation of Government Employees, which represents more than 670,000 federal and Washington, D.C., government employees.

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