Contractors Are Highly Valued Members of the National Security Team

By Lawrence P. Farrell Jr.

Throughout the history of this nation, from the American Revolution to the war on terror, the private sector has provided the military necessary equipment and services.

In the period just after World War I, government turned on the industries that had supplied defense materiel, accusing them of excessive profits. The political environment then was so onerous that many companies withdrew from supplying the military. DuPont, for example, which had made most of the gunpowder supplied to the military in World War I, stopped its production and turned completely to commercial work.

The result of this political campaign against business was that when it came time to ramp up production before World War II, the country was totally unprepared. There is a history lesson here that our elected officials seem to have to re-learn time and again: Government must have a partnership with industry to carry out its functions. That is as true today as it ever was.

The release of classified information by Edward Snowden on data-mining programs that support U.S. counterterrorism efforts has created a renewed call for reduction of contractors involved in sensitive government work. The implications are that they can’t be trusted with the nation’s secrets, and they cost too much. Neither of these assertions is accurate. 

The assumption that the Snowden incident would not have occurred if his job had been done by a government employee, rather than a contractor, is simply unfounded. One only needs to look at the record to see that the most serious breaches of public trust were committed by public servants sworn to protect the nation. 

America’s worst espionage case was Robert Hanssen, an FBI agent assigned to counter-intelligence efforts against the Soviets. There have been others. Aldrich Ames was a career CIA employee, Robert Walker was a Navy chief warrant officer, Jonathan Pollard was a Navy intelligence analyst, Alger Hiss was a State Department employee, and of course Benedict Arnold, who became the synonym for a traitor, was an Army officer. 

The nation trusted these men, and they betrayed that trust just as Snowden has. These betrayals are reflections on the character and ethics of the individual, not the organizations to which they belong. 

Contractors with clearances are not as risky as the news media might lead one to believe. The Office of Personnel Management estimated that there are 4.9 million people with some level of clearance. Of these, only about 10 percent are contractors with the rest being government employees and active-duty military. Only one in three high-level clearances are held by contractors. With regard to conducting background checks necessary to be granted a clearance, 80 percent of these are performed by contractors. According to the OPM inspector general, there have been only 20 prosecutions for fraudulent background checks, and about half of these have involved federal employees. 

There is simply no evidence that contractor performance of background checks is any more risky or involves lower quality than those conducted by government employees. It should be clear that the growth in contractors within the intelligence community did not have any negative effects on security or produce greater risk.

The Snowden affair also increased the volume of the rhetoric comparing the differences in cost of a federal worker and a contracted employee. This is not a new issue. It has been thoroughly studied and reported over the past several decades by numerous government and private sector entities, and each of these studies arrives at a different conclusion, depending on how all the elements are considered and counted.

The Congressional Research Service stated in a July 2012 report, “Comparing the Compensation of Federal and Private-Sector Employees,” that issues related to the compensation of federal employees often center on the “pay differential between federal workers and their private sector counterparts. For several years, the annual president’s pay agent (PPA) study has shown a large wage penalty for federal workers compared to private sector workers in similar occupations.

A few recent studies, however, which use a different analytical approach and data sources, have partially contradicted the findings of the PPA study by concluding that at least some federal workers enjoy a wage premium over comparable private sector workers. These disparate findings make it difficult to determine how compensation of federal employees compares to workers in the private sector.”

There is a difference between what federal employees and contractors are paid, particularly when it comes to highly sought-after skills. But the more telling comparison is the overall cost burden of each to the U.S. taxpayer. A government contractor must include in its rates all costs it experiences in support of the government contract, commonly called the “fully burdened cost.” This figure is examined and audited by various federal agencies. The government, on the other hand, uses a formula to determine “direct labor rates.” Efforts at comparing these two methods of determining equitability have proven to be difficult.

The components of a fully burdened cost for a government contractor include salary, fringe benefits, overhead, general and administrative expenses, and profit. Contractors must include all of the costs, direct or indirect, associated with providing to the government the services of an employee.

Generally, the components of the government’s direct labor cost include salary, fringe benefits and some overhead. Profit does not apply to government employees, but other expenses do. Some of the government’s overhead expenses that are not included in many public-private cost comparisons are supervision and management support above the second level; support staff and command; and local facilities, utilities, equipment and maintenance.

Other expenses that are often not allocated to a government labor rate are human resources, comptroller/budget, security, information-technology services and administrative services such as mail. Thus it is very difficult to get a correct apples-to-apples comparison of fully burdened government and contractor labor costs.

On Jan. 20, 2010 — and updated April 3, 2013 — the Defense Department’s director of cost assessment and program evaluation issued a directive-type memorandum (DTM 09-007) titled, “Estimating and Comparing the Full Costs of Civilian and Military Manpower and Contractor Support.” Since the issuance of this directive, there have been a multitude of studies and analyses that have found the DTM lacking in total specificity, especially when considering the fully burdened cost of a government contract. 

The Center for Strategic and International Studies in a May 2011 report titled, “DoD Workforce Cost Realism Assessment,” found that DTM 09-007 had several key shortcomings: It lacks consistent focus on fully burdened government wide costs, it fails to account for the full cost of Defense Department-owned capital but includes those costs for contractors. It fails to account for taxes forgone by the federal treasury or state or local governments.

The directive does not account for the inherent risk of cost growth among public producers, overlooks the cumulative effect of multiple in-sourcing decisions and the imputed costs of insuring and indemnifying in-house producers. It fails to account for non-cost factors, such as varying workload stability, and it does not use a detailed scope of work as a basis for cost estimation. It also lacks specificity on how to calculate cost components.

The CSIS report goes on to indicate that of these shortcomings, the first is the most critical. “If the true cost of public performance of commercial services cannot be determined, any budget-driven in-sourcing decision becomes immediately suspect.” In-sourcing decisions need to be based on facts, and even if the reason for in-sourcing is good policy, the budget impact still should be known. 

The American Enterprise Institute, the Professional Services Council and even the Government Accountability Office have all commented on the lack of accurate and acceptable methods of comparing contractor costs to those of federal government employees. Without good data, any cost comparison is simply guesswork.

Snowden’s revelations have stirred calls for the government to in-source this type of work, rather than have it performed by contractors. In the information technology field, however, there cannot be a completely clean separation, and by in-sourcing, the government will degrade its ability to innovate.

There are several reasons why government employees cannot perform all the work. 

The government has acknowledged the pay differential between public and private sectors. The oft-maligned “revolving door” of people leaving the public sector for jobs with contractors ignores certain pertinent facts.

First, the private sector offers rewards for highly desired skills that the public sector can’t match. These may or may not be technical. Knowledge about how government works is crucial for businesses that hope to serve government, and therefore businesses will place a value on that knowledge. Although it happens, it is a rare occurrence when a former government official can and does materially affect decisions on contract awards. Those who attempt this are usually caught by be safeguards in the system. 

Additionally, there is a public service aspect to the revolving door that is often overlooked. Many top-flight executives take positions in government because they feel called to serve. The penalties they pay in terms of reductions in compensation and levels of scrutiny are significant. Yet they do it not for personal gain, but because of a desire to serve. The unintended consequence is that they bring into government an understanding of the business world that career government workers rarely, if ever, attain.

Federally funded research and development centers (FFRDCs) are another example of how the government obtains access to unique experience and talent that it would have a hard time hiring. FFRDCs were established 60 years ago to perform specific tasks that neither industry nor government were equipped to perform.

The skilled workers who innovate, who come up with brilliant solutions to complex problems, will always gravitate to the sector that can offer more appealing rewards. Take the underlying engine that drives the National Security Agency’s PRISM surveillance program, the Accumulo low-latency database. It was developed at NSA by a bright, young, highly-skilled team.

It was a tremendous accomplishment with some clever technical innovations. But it was based on a least two commercial developments: The open-source Apache Foundation Hadoop Distributed File System and the Google Bigtable distributed database architecture. In 2012, the NSA released Accumulo as open-source software. Members of the NSA development team left the government to found a high-tech startup in Silicon Valley, Sqrrl Data Inc. This illustrates how innovation seeks the place of maximum reward.

There are many smart and dedicated individuals in government service. This anecdote shows that the essential partnership between government and industry is much more collaborative than a simple in-sourcing/outsourcing relationship.

Nothing lasts forever, they say, but government employment comes close. One of the primary uses of contractors is to augment the government workforce in both capability and capacity. Contractors are easy to get rid of when either budget or requirements are no longer there. Contracts are scaled back, modified or simply terminated and the cost of that resource is no longer there. Government employees are not so easy to shed, particularly when there is no termination for wrongful action involved. Coming back to the cost comparison debate, the value of this “job security” becomes an issue in comparing federal and non-federal pay, it is simply never considered.

The American Enterprise Institute in a June 2011 paper titled, “Comparing Federal and Private Sector Compensation,” states that “given rising federal budget deficits and persistently high unemployment in the private sector, it is understandable that federal employee compensation would come under increased scrutiny. … The greater job security enjoyed by federal government employees is equivalent to a compensation increase of around 17 percent. Together, these generate an overall federal compensation premium of approximately 61 percent.”

The pay agent’s — in Executive Order 12748, the president designated the secretary of labor and the directors of the Office of Management and Budget and the Office of Personnel Management to serve as the president’s pay agent — deeply flawed method for comparing public and private salaries requires fundamental reform. The pay agent should collect and use systematic, comprehensive and consistent benefits data for both sectors. It needs to do both theoretical and empirical work on the value of job security in the federal government, which it currently implicitly considers to be zero.

These reforms would lead to a fairer and more cost-effective federal compensation system.”

Thousands of contractors perform their jobs with professionalism and integrity. It would be grossly unfair to portray them as less honorable or dependable than a government employee. Government depends on industry to be a valued partner on the national security team. And while everyone must be vigilant, there is no truth to the myth that contractors can’t be trusted or that they cost too much.

Lawrence P. Farrell Jr., retired U.S. Air Force lieutenant general, is president and CEO of the National Defense Industrial Association.

Topics: Business Trends, Doing Business with the Government, Service Contracts, Defense Contracting, Defense Contracting, Defense Department, Civilian Workforce, DOD Policy

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