We’re paying a lot of money for defense contractors. It’s not clear how much of this is wasteful.
Hayes Brown, ThinkProgress (“Federal Defense Contractors Paid Almost Double Obama’s Salary“):
A new report out from the government’s oversight agency finds that millions of dollars could be saved if federal contractors — particularly at the Pentagon — made only as much as the President of the United States.
The report — invitingly titled “Information on the Impact of Reducing the Cap on Employee Compensation Costs” — was mandated as part of the National Defense Authorization Act for the current fiscal year, to find what sort of savings were to be had if the cap on the amount that defense contractors could charge the federal government was lowered. At present, the cap on the amount of compensation that contracting firms can charge the federal government per employee stands at a mind-boggling $763,029 for 2011 and 2012, up from $693,951 in 2010.
Specifically, the act charged the Government Accountability Office (GAO) with seeing the effect on moving the cap back downward, setting the level at the annual salary of the President or Vice-President. Under law, President Obama currently makes $400,000 per year — the highest amount in the federal government — and Vice-President Joe Biden is paid a salary of $230,700 annually. According to their report, the GAO found that contractors “identified over $180 million per year in compensation costs that would have exceeded a cap set at the President’s salary, and at least $440 million per year if set at the Vice President’s salary.”
From this, Brown concludes,
That the government currently overpays defense and intelligence contractors is no secret. The Office of the Director of National Intelligence recently reported that it pays contractors 1.66 times as much as a federal employee for the same work. Likewise, a 2007 Senate report found that the average contractor in the intelligence community made almost double what a similar federal worker would. This spending comes in the face of mandated budget cuts across the Pentagon which, despite the negative effects they are having on national security, exempt currently signed contracts from their effects.
I’d begin by noting that both $180 million and $440 million, the purported savings to be gained by capping salaries at the level of the president and vice president, respectively, are tiny numbers in relation to not only the federal budget but to the budget deficit. Now, obviously, one has to start somewhere. And if this is in fact “overpayment,” then I agree that this is as good a place as any to start. But that’s not obvious.
The fact that a contractor costs a given amount of money does not mean he or she is being paid that amount of money. That’s irrelevant to the taxpayer, of course–cost is cost–but it’s important in understanding the numbers. I worked as a contractor for the Defense Information Systems Agency for a couple of years some time back and cost the government more than the salary of the GS-15 to whom I reported. My actual salary was significantly less than hers but the additional overhead expenses (which paid for management at my base employer, health care, retirement contributions, etc.) nonetheless cost the government a lot of money. The upside, of course, was that they could stop paying me as soon as my contract ran out if they no longer needed my services. That’s not the case for a civil service employee. Additionally, the salary of a civil servant is, as it was for me as a contractor, but a fraction of the total cost to the taxpayer. (And, of course, in the specific case of the president, the $400,000 annual salary is actually a tiny portion of his cost to the taxpayer.)
As the executive summary of the GAO report notes, there are plenty of reasons why contractors cost more in the short term:
DOD noted that it fully supported the principle of paying only reasonable compensation costs and some DOD officials supported reducing the cap, though DOD cautioned that there are limited data on the potential impacts of doing so and that the impact on the defense industry would need to be carefully monitored and assessed. Industry associations and contractors representatives noted that the compensation they offer to their employees is generally based on market surveys of compensation paid by private sector companies. While acknowledging that a reduced cap would not preclude them from compensating their employees above the cap, contractor representatives noted that doing so would come at the expense of company profits, which in turn may result in challenges in attracting capital from the financial markets. They also noted that reducing the cap may affect companies’ ability to attract and retain top talent and, over the long term, lead companies to reassess their business and staffing models and potentially shift work or personnel from government business to their commercial sector.
People are willing to take comparatively lower salaries as civil servants for a variety of reasons. Most notably, sequestration notwithstanding, it comes with substantial job security. Talented employees working on a year-to-year basis are naturally going to command more money than they would with a guaranteed contract.
There are at least two reasons why the Defense Department has outsourced so much of its work to contractors. First, it’s to gain flexibility, essentially side-stepping the red tape of the bureaucratic civil service personnel system. To the extent it’s that’s valuable, it’s worth paying for. Second, it’s to sidestep limits on permanent employment, especially to meet increased wartime needs. That’s probably wasteful, although more Congress’ fault than DoD’s.
