Cost Controls

How Government Can Get More Bang for Its Buck

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By Bernard D. Rostker, Robert S. Leonard, Obaid Younossi, Mark V. Arena, and Jessie Riposo

Bernard Rostker is a senior fellow at RAND and a fellow of the National Academy of Public Administration. Cost analyst Robert Leonard, management scientist Obaid Younossi, physical scientist Mark Arena, and operations researcher Jessie Riposo are all RAND researchers.

Controlling government costs, a perennial priority for taxpayers, poses a dilemma for the administration of President Barack Obama. The president has coupled his commitment to boost spending as needed for economic recovery with a promise to cut spending as required for fiscal responsibility. Hoping to save $40 billion a year in federal procurement spending, he has ordered his budget office to issue new guidelines by September 30, 2009, for awarding government contracts to private firms.

The problems at issue are prevalent and yet particular. Over the past several decades, RAND teams have identified many causes of excessive cost growth across U.S. government agencies, both civilian and defense. Causes range from faulty cost estimates for weapon systems at the outset of such programs to increased technological complexity and performance over the life of those programs. Still other causes pertain to the management of workforces and workloads in general and specifically in connection with the expanded use of contractor personnel.

Beyond identifying the key causes of rising costs, we offer suggestions for reducing government expenditures while enhancing government effectiveness. We summarize our conclusions here:

  • Curtail the overuse of contractors. The U.S. government needs to bring the unfettered use of private contractors under control. The overuse of contractors appears to be costing taxpayers more money rather than saving it, and shortages of government employees limit the government’s ability to monitor those same contractors.
  • Base budgets on realistic cost estimates. The average percentage increase above estimated cost for U.S. military weapon programs has remained high over the past three decades. Better cost estimates would not necessarily save money but would give policymakers a better basis for deciding whether to embark on costly investments in the first place.
  • Ensure rigorous oversight. The defense acquisition reforms of the 1990s gutted government oversight of contractors. The process of estimating contractor costs has also been tainted by bureaucratic conflicts of interest. It is important to make cost-estimating functions more independent of program offices that hold advocacy positions, to collect more data that are more relevant, and to verify the capabilities of contractors.
  • Rethink technical requirements. The purchase prices of U.S. military ships and aircraft have risen faster than the rate of inflation. Ships could be built less expensively by limiting their requirements, sizes, or missions. For aircraft, a difficult choice must be made between quantities and capabilities. Both the U.S. Navy and U.S. Air Force appear to be opting for fewer aircraft with the highest capabilities, resulting in very expensive systems and steadily dwindling fleets.
  • Consider hiring more shipyard workers. The navy spends $4 billion a year on ship maintenance but consistently underestimates the workload, resorting to excessive overtime levels. Increasing the number of permanent journeymen at public shipyards could reduce high overtime levels and hedge against future workload growth, at virtually no additional cost.

The overuse of contractors appears to be costing taxpayers more money rather than saving it, and shortages of government employees limit the government’s ability to monitor those same contractors.

Curtail the Overuse of Contractors

The federal government must limit the functions it has been contracting out and engage more government workers to do the work of government. The high costs of contract workers relative to government employees, combined with the number of private firms the government is now taking legal action against, are unnecessarily costing the taxpayers billions of dollars.

Antigovernment sentiments have been in vogue since the 1970s, partly as a result of the loss of confidence in government following the Watergate scandal. Leaders of both major political parties have considered a decline in the number of federal employees to be a measure of merit. To this end, federal administrators have increasingly substituted government personnel with contract personnel. The U.S. Congress and the Office of Management and Budget have even imposed federal personnel ceilings that push managers to hire contractors rather than government employees, often granting new tasks to existing contractors without competition.

Today, the U.S. government faces an unparalleled crisis in its ability to do the nation’s business. Decades of neglect and hostility toward the federal civil service, together with the coming loss of experienced workers due to an unprecedented number of retirements, will exacerbate problems that the U.S. Government Accountability Office (GAO) has been highlighting for years.

In 1991, GAO compared the costs of 12 contractors with the costs of government employees working for the U.S. Department of Energy. On average, 11 of the 12 contractors were 25 percent more costly than their federal counterparts. In 2007, the U.S. House Select Committee on Intelligence found that, on average, an intelligence community contractor cost almost twice as much as a government employee. In 2008, the U.S. Office of the Director of National Intelligence concluded that the full salary and benefits for government employees averaged $125,000, whereas the direct labor cost per contractor, excluding overhead, averaged $207,000.

As the federal workforce has shrunk, it has also aged, portending what the U.S. Merit Systems Protection board in 2008 called a “brain drain” because of high retirement eligibility rates. Figure 1 shows the sharp increase in the number of civil servants who are now eligible to retire.

Figure 1 — The Federal Workforce Is Getting Older, with Many Eligible to Retire

The Federal Workforce Is Getting Older, with Many Eligible to Retire
SOURCES: The Fact Book: Federal Civilian Workforce Statistics, 1998 and 2006 editions, p. 10 (of both), Washington, D.C.: U.S. Office of Personnel Management.
NOTES: All data represent full-time permanent employees as of September 30th of each year. Data for employees under the Civil Service Retirement System represent hires before January 1984. Data for employees under the Federal Employees Retirement System represent hires since January 1984.

And as the contract workforce has expanded, government oversight has waned. In 2007, GAO found numerous cases in which the U.S. Department of Homeland Security “lacked the capacity to oversee contractor performance due to limited expertise and workload demands.” On July 2, 2008, the Washington Post reported that more than 900 cases of contractors who allegedly defrauded taxpayers out of billions of dollars are languishing in a backlog built up over the past decade because the U.S. Department of Justice “cannot keep pace with the surge in charges brought by whistleblowers.”

The only way to provide adequate government oversight is to increase the size of the in-house federal workforce. Congress might have turned the corner last year with its passage of the 2009 National Defense Authorization Act. Section 324 of that bill urges the Department of Homeland Security to “establish an aggressive plan to convert contract functions to in-house functions where appropriate.”

Beyond Section 324, a number of other things must happen. The government must eliminate federal personnel ceilings that have been politically imposed, determine the proper mix and roles of contractors and government employees, and ensure that a skilled and qualified workforce can be recruited, trained, developed, and retained. Bottom line: The government will not be able to control its use of contractors if it continues to impose arbitrary personnel ceilings at any level.

Converting positions from contractors back to government employees will not be easy and will run counter to the canard that measures the efficiency of government by the number of people it employs. The myth of smaller government in the face of hordes of private contractors and their spiraling costs must be debunked. The Obama administration should be honest with the American people by spelling out, once and for all, that it is not the number of government employees but rather the efficiency and effectiveness of government that really matters.

Next section: Base Budgets on Realistic Cost Estimates
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