Government Contracting: Lower Wages, But Higher Cost

POGO has a must-read report showing what actually happens when the Federal government outsources jobs: while the actual workers doing the jobs may make less than government (unionized) workers, the work costs more overall.

POGO’s study analyzed the total compensation paid to federal and private sector employees, and annual billing rates for contractor employees across 35 occupational classifications covering over 550 service activities. Our findings were shocking—POGO estimates the government pays billions more annually in taxpayer dollars to hire contractors than it would to hire federal employees to perform comparable services. Specifically, POGO’s study shows that 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, and more than 2 times the total compensation paid in the private sector for comparable services. [emphasis original]

In other words, not only is the federal government spending a lot more by paying contractors, in the end it pays more even than the private sector for the same function.

And while limitations on the data prevented POGO from pinpointing where those costs came from, it did suggest two obvious sources: profit and executive compensation.

Contractors make profits by providing services,[95] and that is a sound business practice. The federal government also provides services, but does so without making any profit. The critical question is not whether contractors are entitled to earn profits but whether the government is paying higher costs to contractors for comparable services that could be provided by federal employees.

Because POGO’s cost analyses were limited to contracts for services entered into under GSA’s Schedule program, we did not address the issue of contractors’ executive compensation.[96] Federal law currently permits a contractor to bill the federal government a portion of executive compensation.

For example during FY 2010, contractors were allowed to bill the government up to $693,951[97] of a contractor’s executive compensation.[98] While that rate may reflect only a partial level of an executive’s corporate compensation, it constitutes approximately three times the level of actual salary the federal government pays its top executives. For example, in 2010, the President was paid $400,000 per annum, the Speaker of the House was paid $223,500 per annum, the Senate Majority Party Leader and the Senate Minority Party Leader, as well as the House Majority and Minority Leaders, were each paid $193,400 per annum, and Cabinet Members were paid $199,700 per annum.[99] The fact that high-level executives in the private sector often receive seven-figure salaries and benefit packages should not have any bearing on how much those executives should bill federal taxpayers, which should not exceed the salary paid to senior federal employees performing comparable work. [emphasis original]

And for some functions, the outsourced work is a gross rip-off, as with the Claims Assistance Clerks we’re paying more for than Federal judges.

The most egregious example of an outsourced occupational classification that resulted in excessive costs rather than cost savings is claims assistance and examining—administrative support positions that involve examining, reviewing, developing, adjusting, reconsidering, or recommending authorization of claims by or against the federal government. To provide these services, on average, federal employees are fully compensated at $57,292 per year, private sector employees are fully compensated at $75,637 per year, and the average annual contractor billing rate is $276,598 per year. POGO found the government may therefore be paying contractors, on average, nearly 5 times what it pays government employees to perform the same services.[77] Put another way, the government may be paying the contractor providing support services for claims assistance and examining more than it does federal judges or administrative law judges, who earn less than $200,000 per year.[78] Contractors may be billing the government, on average, approximately 3.66 times what private sector employees are compensated for performing similar services.

Federal judges have been lobbying for raises for some time, because judges can make so much more in the private sector. I do hope they use this factoid to prove their point.

And, as the report’s narrative of NeoLiberal Democrat followed by corporatist Republican shows, the problem is just getting worse. Not only has Obama backed off his early efforts to insource, but Bush effectively created an entirely new federal workforce during his term.

Since 1999, the size of the federal employee workforce has remained relatively constant at about 2 million,[6] while the contractor workforce has increased radically—from an estimated 4.4 million to 7.6 million in 2005.[7] In other words, the federal contractor workforce dwarfs the federal employee workforce nearly four-fold.

3.2 million new government jobs in the first half of the Bush Administration (this excludes things like military and postal service jobs). It’s as if Bush created one and a half new federal workforces in a matter of years, all while claiming to make government smaller.

Then again, these contractors are paying a lot to the same politicians who allow this to persist. So I suspect it’s not going to end anytime soon.

29 replies
  1. dakine01 says:

    Even when DoD would come up with support contracts with supposed ‘strict’ wage rates for various job types, they would usually let multiple versions of the same contract – each of the winning contractors would have three to five hourly wage rates that were significantly higher than the other rates or higher than the same job classifications from the other contractors. These were the spots where the contractors could really make the extra bucks.

  2. Sojourner says:

    Look up LOGCAP IV on the Internet. Talk about pigs at the trough! Three different contractors won the right to submit bids on Task Orders as they are issued.

    Any form of outsourcing — domestic or foreign — will cost MUCH more than initially expected. The wages to workers will be much lower, and the overall billings will be substantially higher. Guess where the difference goes!!

    The initial thought is that the service provider will deliver “temporary” services, and the company (or in this case, the government) will not have to deal with laying people off at the end. “Temporary” becomes “long term.”

    KBR was the sole provider of services on the LOGCAP III contract. In 2006, the Army had had enough of KBR’s issues and announced that it would divide the contract among three different providers. KBR still wound up as one of the three. LOGCAP III was worth about $17.1 billion in contractor dollars.

    Substantial ripoff!!

  3. Sojourner says:

    One other thought… Outsourcing is the Republican way to minimize government and help the free enterprise system. Except, it only appears to have those effects. Government still has to account for the money spent to ensure that it is practicing good stewardship. As for the free enterprise system? I think that most of the rewards that are seen go to the executives and NOT the average workers, thus further widening the divide.

  4. rugger9 says:

    Let’s also not forget the ceilings that rained sh$&^Et in KBR-built buildings and the electrocuting showers for which no one has ever been held accountable. Soldiers died in them, but apparently it was an acceptable cost to KBR because it wasn’t THEIR kids in the fight.

  5. Sojourner says:

    I am reading through the report and I love this statement on page 39: “…national security is not a business decision.”


  6. orionATL says:

    as many federal managers (i’m not one) well-know,the “overhead” that must be paid in additional to the contract employee’s salary is often enormous.

    and don’t think that these contractors are all greedy defense contractors either.

    contractors universities, research institutes, national “laboritories”, not-for- profit “think tanks”, as well as for profirs.

    there are a lot of american institutions npt named lockheed or haliburton who take home bags and bags of gold from the federal treasury.

    this is not to say the work they do is not beneficial or not well done.

    the issue is contracts and compensation rules that are not at all transparent and allow/encourage grossly outsized contractor “overhead”.

  7. bittersweet says:

    orionATL, I was working on explaining the same issue:
    One of the legitimate reasons to hire private sector contractors is that it relieves the government from providing ongoing employment for limited term functions. In over words, private sector businesses are migratory, we go where the work is. The government can not afford to rent office space and provide infrastructure and management for “temporary” work loads.

    When a company bids on a government contract they are required to submit the billable rates on every worker category.
    A general business model hopes that a multiplier for labor is 3. The worker is paid “x” amount, the same amount “x” covers the business’s overhead like: desk, computer, office space, workman’s comp, health insurance, professional liability insurance, (in my case Errors and Omissions insurance for Architects), accounting, human services, reception, tax prep, social security, unemployment insurance, and marketing for future work, and senior management salary, etc. The third “x” amount covers profit. The government generally limits the profit to a set percentage. It is understood that much of the second “x”, the overhead amount, would have to be duplicated if the government was supplying the same functions for its workers.

    As I said, the government usually limits that third “x” for profit to a certain multiplier. In Architecture, the billable rate for each worker is generally less than our private billable rates. The advantage of working for the government is that they generally pay their bills, (which is often NOT the case in the private sector), and the contracts can be bigger and last longer, and therefore limit some of the expense for ongoing marketing.

    Thus the multiplier for the salaries in the private sector should be looked at in terms of the third “x” covering profit. The salary paid for a private sector worker SHOULD be twice that of the government employee, because the government employee’s salary does not include the overhead it costs the government to house them. The profit number would be the percentage above “double’ the salary. So private sector should be paid 2.x% more than a government employer. The test for hiring in the private sector should be in terms of how long the contracts last, and the cost to the government for providing the same function including overhead. The other test is “special talent”. Does the private sector have a monopoly of the talent? Would the government be better at designing cars, teaching children, or writing legislation. I picked these jobs because in each case the answer is maybe yes, and maybe no. They must be evaluated individually.

    All the above is to say that the multipliers in the above article should be looked at in terms of excesses over 3 times the salary basis.

  8. earlofhuntingdon says:

    This won’t surprise most readers here, but it is good to see documented the obvious, the necessary, the planned consequences of massive government outsourcing. Not only does it divert huge sums to the private sector, costing us much more than anything the government could do with its own resources. It ordinarily produces far less bang for the buck. The government is still tarred with the inefficiency, but for most corporations, making government inefficient and ineffective in all but channeling funds to them is the goal.

    This level of outsourcing displaces government and the rules it is legally compelled to live by, subjecting the citizenry to a quiet, self-financed tyranny for profit. The displacement serves profit-making corporations because only government can act as a barrier to their worst excesses, whether they be employment discrimination, environmental degradation, price and market collusion, or doing whatever it is that would be illegal for government to do. The trick is controlling enough of the governmental leadership so as to neuter regulatory and law enforcement. Given what has become of the SEC, IRS and DoJ under Bush and now Obama, I’d say corporations have won the war, not just the battle.

  9. earlofhuntingdon says:

    There are many great harms in this level of outsourcing. Cost is one, especially when government and corporations are combining to tear down the relatively small and parsimonious social safety net that exists here. Privatizing government also privatizes its processes and decisions. It hides its stated priorities behind newspeak.

    Perhaps the greatest harm in this level of outsourcing is that corporations exist – as a function of legislation, not economic or historical necessity – solely to make a profit. Government exists, however, to serve the needs of its citizens, not the legal fictions called corporations. We are witnessing, however, a process whereby the corporations are becoming the principal, almost the only “citizen” the government protects.

  10. earlofhuntingdon says:

    Probably few here would argue that government “accounting” is a contradiction in terms, a Kaffkaeque thing that ought to be given its own circle in hell. But the same could be said of the arcane rules that allow the world’s largest corporations to pay little or no tax, yet basque in the protection of a government that also directly enriches them through contracts that of late protect the private corporation much more than the government, which is a placeholder for the taxpayers and citizens who form and pay for it and, naively, expect it to work for them, regardless of whether they would recognize a lobbyist by the make of his suit or his address in Wshington, DC.

    Yes, government needs goods and services the private sector provides. The economic questions evolve around balance. Of late, the scales appear grossly tilted toward private sector interests, which are given aid and comfort by priorities established in the White House and on Capital [sic] Hill.

    The political questions, however, evolve around those priorities, how they are set, by whom, and whose primary interests those serve. Of late, those scales, too, appear heavily tilted in favor of private profits over community needs. Yet it is the community, individual families and their neighbors, who are doing the paying, while private corporations profit. Given the increasingly small share of the economy this system allocates to labor, the economic justice of that system could seriously be questioned.

  11. Sojourner says:

    There is another aspect to all this that I have not seen addressed… Government cannot compete for the human resources that it needs (such as for armed forces) because the contractors are far more attractive employers in terms of pay.

    If there is a question between making a profit and meeting the terms of a contract, guess which one will win? Been there, seen it…

  12. orionATL says:

    bittersweet –

    that detailed explanation is very helpful to comprehending what is involved in this enormous, and ususally, out-of-public-sight economic activity.

  13. earlofhuntingdon says:

    @Sojourner: That used to be true across the board. Government salaries always lagged, sometimes considerably, the private sector. But then, private sector jobs used to include a host of union-begotten benefits, such as medical, dental, and eyecare; substantial vacations that one was expected or allowed to take; and retirement payments that were a percentage of income, not a function of an individual’s ability to save. Government jobs, on the other hand, except the most senior federal slots, used to be considered for the average, the unambitious, the workaday plodder. Not anymore.

    Three things, at least, have changed that. Government and public opinion have allowed companies to slash benefits without legal, economic or social penalties, and to eliminate job security below the ranks of corporate officers, who continue to have contracts and tenure, regardless of the HR-derived names that substitute for them.

    A related development is that labor’s share of the productivity pie has plummeted, hence the stratospheric multiples over average worker pay that CEO’s, CFO’s and their brethren now take hom. Ironically, that has happened at the same time that productivity has gone up, as individuals do the work of two or more former colleagues, what with their ever-present cell phones, PDA’s and PC’s and their being on call virtually night and day.

    Those changes make federal government and many state and local government jobs much more attractive, even for twenty-somethings who think they’ll be healthy and live forever.

  14. Diane says:


    You are exactly right! The R’s and a lot of D’s think that contracting in the long run will eliminate other costs associated with real govt. employees, such as health care, retirement, etc. And the intention is to take those benefits away from employees, and guess where that “savings” (and then some) goes? Yup, PROFITS and shareholders rather than workers.

    My spouse has worked for governments and contractors, and says the employer has much more control over work quality with regular employees than with contractors who do not care about the actual work, but do think that maximizing profit to the investor class is very important, indeed. Doesn’t matter to them a hell of a lot if the hospital housekeeper uses a cleaning rag from one room in another…

  15. emptywheel says:

    @bittersweet: Right. But many contractors are schooled by their inside champion to jack up the hourly billing for the project so as to get a higher profit level for the project as a whole. So while the govt may in fact limit profit (though not necessarily exec comp), lax oversight gives businesses a way around that.

    Also note, one of the other things POGO noted is the length of the contracts, unnecessarily signed for 10 years, for example, which in many cases eliminates the competitive value of doing the contracting.

  16. emptywheel says:


    Government exists, however, to serve the needs of its citizens, not the legal fictions called corporations. We are witnessing, however, a process whereby the corporations are becoming the principal, almost the only “citizen” the government protects

    Yeah, I was gonna say, in neofeudalism, govt no longer exists for the citizens, but rather as a means of collecting tithes from the serfs.

  17. bittersweet says:

    @emptywheel: Agreed. I simply wanted to supply a framework for analysis. I should say that the thing I always brag to people about your site, is the in depth, factual analysis. I this case, I was proud to supply some background on what should be a fair rate. I agree, a ten year contract eliminates the whole marketing department. The only justifications I can think of would be development cost, like designing a jet fighter, or else a job the government doesn’t want to get caught doing….thing’s you often investigate!

  18. emptywheel says:

    @bittersweet: Thanks for doing so.

    I once worked for a company that did a lot of consulting for clients doing govt contracting. And then they had me scope our own govt contract just as I was leaving. After disliking some of the games going on, I ultimately said, “here’s what our costs are; you’re responsible for whatever you’re going to tell the govt they were when you bill them.”

    It can be a seedy, seedy, business. And that was a long time ago. I’m sure it has gotten far worse.

  19. JohnJ says:

    Here’s some of my experiences being a “contractor”:

    Yeah, I’m now a “contractor”. I had to sign a paper that said I know will receive NO benefits; no insurance, no sick time, no holiday pay, no vacation, and no expectations of an offer of employment by the client. This is what the (major) Government Contractor I ultimately do the work for pays 3 to 3.5 times my wages for. There seems to be only one employment contracting company that supplies workers for this location.

    This is not limited to Government contracts, I see the same thing in private industry all the time. These “job houses” are fly-by-night and extremely profitable. Since we work at the client’s site the overhead is covered by them. Unemployment Insurance is a joke because they will offer you a minimum wage job as a replacement when your job expires. Being tech jobs, workman’s comp is not very high (and I doubt many actually pay it by claiming to be “self-insured”). There is no assistance toward insurance.

    Several tech jobs opened up at once around here and I receive many calls from recruiters, all offering different amounts varying by as much as $8/hour between them, for the same job. One of recruiters opened up to me that the client had actually set the wage they wanted offered ($20/hr), yet some offers were as low as $12/hr. The recruiters wanted to pocket an additional $8/hr for my work.

    Interestingly several people I know have tried to cut out the middle man and contract directly. The companies won’t even discuss it. Most of these “businesses” are somehow connected to employees of the client (i.e. ex-employees or spouses).

    Contracting, in the tech sector especially, is not unto itself bad, I think it’s an excellent way to test new employees (a half hour interview really isn’t a way to pick a long term employee), or to fulfill a one time large order. The problem is that the people at the place I “work” now actually brag that they won’t let you go after a certain amount of time, you can stay a contractor for years! Many have been there for 2 years or more…with absolutely no benefits.

  20. sojourner says:

    @JohnJ: I am pretty much in the same boat… In the tech sector and have enough experience that I can command a pretty good rate. The trouble is that, as you noted, no vacations, no expectations of benefits. You are on your own!

    My last “permanent” job, however, was with a very prominent government contractor that did things its own way to cut costs instead of providing the services contracted for. It has been the subject of numerous audits and was very prominently mentioned in the report that came out today. The interesting thing was that it has little or NO expertise in the areas it was bidding for… It simply relied on the idea that it would hire “in place” the employees of whatever company lost the bidding war.

    The whole thing is absurd!

  21. sojourner says:

    @earlofhuntingdon: Hah! I don’t disagree totally… I worked for one of the prominent contractors, and it was offering some rather attractive pay rates for working in the Middle East. Funny thing was, they could not attract enough candidates to fill their needs, even at enhanced pay rates. There was a considerable amount of discontent by the people who went over, though — they did not seem to get the pay they agreed to, and neither did they get to come home when they thought they would. Instead of abiding by the agreements it made with the workers, the company spent more time trying to deny them what was agreed to.

  22. JohnJ says:


    I should say I am not directly contracted to the Government, but to a major defense contractor. I like the company, but I am not happy with getting back into an industry I swore off 25 years ago (Government contracting companies).

    The cash isn’t bad but the holidays hurt. Losing a week or two of pay at that time of the year sucks.

  23. Carolyn Kay says:

    OF COURSE a service is going to cost more if a profit has to be built in.

    When are we going to start using this kind of information to demythologize the political process–in the national discourse, that is, not just amongst ourselves?

    Carolyn Kay

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