Confessions of a $600 Hammer

Posted on 31st October 2011 by Ryan Somma in Enlightenment Warrior

You need to go get rid of 250,000 contractors in the Defense Department, where you can really pick up some small change.” ~ Former Republican Senator Alan Simpson, February 16, 2011 on balancing the budget (source)

For 10 years of my life, I was one of those $300 toilet seats or $600 hammers you hear about in the Pentagon’s spending. I was the waste, fraud, and abuse that everyone complains about in government, but up until a year ago, I had no idea just how much my job was costing American taxpayers.

A study by the Project on Government Oversight (POGO) found the Government pays IT Contractors nearly twice as much as its own IT Workers.

OPM Series Description Full Federal Annual Compensation Full Private Sector Annual Compensation Contractor Annual Billing Rates
Accounting $124,851 $83,132 $299,374
Auditing $122,373 $83,132 $283,005
Budget Analysis $110,229 $124,501 $302,661
Building Management $111,564 $179,740 $265,242
Computer Engineering $136,456 $131,415 $268,653
Contracting $113,319 $115,596 $259,106
Environmental Protection
Specialist
$127,247 $105,964 $177,570
Facility Operations
Services
$108,060 $119,449 $179,254
Financial Analysis $132,262 $106,679 $171,288
Financial Management $164,218 $145,486 $337,002
Human Resources Management $111,711 $100,465 $228,488
Information Technology Management $124,663 $114,818 $198,411
Logistics Management [Deployment] $116,047 $123,349 $204,443
Logistics Management [Planning] $116,047 $97,269 $168,938
Management and
Program Analysis
$124,602 $108,132 $268,258
Program Management $173,551 $179,740 $269,901
Quality Assurance $98,939 $104,891 $107,786
Statistics $125,192 $108,586 $207,563
Technical Writing
and Editing
$103,801 $82,873 $112,091

This begs the question: What service is the Federal Contractor providing to justify charging double what it would cost the Federal Government to employ these same personnel directly?

They don’t provide us the facilities to do our jobs. No. The Federal government provides our computers, office space, and pays for all the utilities to keep it running. The government buys all the software, hardware, and pays for any training we need to bring our skills up to date to effectively do our jobs. This appears to be a fairly standard practice in Federal Contracting as a GAO review found “that significant numbers of defense contractor employees work alongside DOD employees in the 21 DOD offices GAO reviewed. At 15 offices, contractor employees outnumbered DOD employees and comprised up to 88 percent of the workforce.” In my department contractors outnumbered government employees by about four to one.

The contractor also doesn’t have to manage us, because the government employees serve as supervisors. In fact, it’s policy in our department that government employees supervise the contractors directly. Our Project Manager was the most expensive billet on the contract but I only met with him once a year for my annual evaluation, where I had to explain what I had been working on for the past year and why I deserved a raise. He never had the foggiest idea what anyone in the department was working on and relied on complaints from Government employees to know when he needed to chew someone out.

The only thing the Contractor is responsible for is ensuring that our timesheets are filled in correctly and on time; otherwise, they might experience a delay in invoicing Uncle Sam. They handle my 401k, medical benefits, and direct deposit my paycheck twice a month. Guess what America? You are paying twice what it costs the government to employ personel directly for the added value of having a contractor manage the human resource functions for 73 employees. The cost for the Federal government to handle this itself would be a fraction of the yearly salary of a single GIS employee, someone who is already serving as the HR rep for all the other government employees for between $50k and $80k a year.

We also have to consider the quality of the service provided by the Federal Contractor in light of its fixed-priced profit motives:

Price (fixed) – Cost = Profit

What the POGO report doesn’t mention is that the IT Workers employed by federal contractors are making as much or less than Federal IT workers. When you’re only overhead is your employees’ salaries, you have a very strong incentive to keep those salaries artificially low. Whenever a government position would open up in our department, contractor employees would jump at the opportunity for stability and better benefits.

Why does the Federal Government operate this way, outsourcing millions of jobs to contractors who could be more cheaply employed through directly? The answer, unsurprisingly, is politics. Politicians hand out billions of dollars to Federal Contractors who, in turn, use the revenues to lobby the politicians. “The top 20 service contractors have spent nearly $300 million since 2000 on lobbying and have donated $23 million to political campaigns,” according to the New York Times. It’s a self-perpetuating system.

But there’s a less visible political reason for the outsourcing. Every time a worker leaves the Federal Payroll to become a private-sector Federal Contractor, the President and Congress can claim to be reducing the size of government. They publicize the fact that “1990 total government employment… was 5.23 million,” which fell to “2.84 million in 2009.”

But the number of people whose job depends on funding from the Federal Government: University Grants, Defense Contractors, Construction Workers, Public Schoolteachers, Regulators, etc. etc. has skyrocketed. Redefining “Federal Worker” to include all of these jobs increases the number of people employed with tax dollars to between 14.6 million and 17 million, translating to between 10% and 12% of America’s total employed population. The true number is incredibly hard to pin down because there are no hard data publicly available on how many American jobs depend on funding from the Federal Government. This obfuscation of employment data is why many critics refer to federal contractors as the Government’s “Shadow Workforce.”

I loved my job developing applications for the Coast Guard, but it angered me that the contractor was raking in taxpayer money by delivering sub-quality service to the government while overworking and underpaying employees. When I confronted management about what I considered fraud and demanded solutions, the answer was we will not pay for training, we will not pay for qualified personnel, and we will not bring your salary up to the national average. They even welcomed my resignation despite the fact that it meant the project I had been working on for two years would completely collapse shortly after my absence. Any project failures are the fault of government employees managing them, not the contractor who merely fills the billets.

Between socialism and capitalism, Government Contracting takes the worst of both worlds. It’s capitalism’s greed mashed up with socialism’s inefficiency. With America struggling to define austerity measures that will reduce the federal deficit, eliminating Federal Contractors and employing personnel directly seems like an obvious place to start.

Additional Food for Thought:

The top 100 Defense Contractors cost taxpayers $306,521,269,483.

There was $442 billion in contractor funds available to small businesses in 2009. What gets hidden in this number is the fact that many small business team up with a large corporation to bid on these contracts.

For a particularly egregious example of Federal Contractor fraud, waste, and abuse, I refer you to the Coast Guard’s $24 billion effort to modernize its fleet, which sounds like it actually ruined more ships and equipment than it produced, but the contract was written so that the Federal Contractors could not be held accountable.

14 Comments »

  1. Do the salary numbers include benefits? The usual rule of thumb for hiring an employee is that you need revenue of at least 2 times, and better yet 3 times, the salary to cover expenses and benefits and make some kind of profit. With much of the overhead covered by the government (offices, equipment, etc.) the 2X figure doesn’t seem out of line.

    Comment by David — October 31, 2011 @ 1:57 pm

  2. Could you provide a link to support that estimate? The following article from the MIT Business Journal suggests benefits add between 25% and 40% to the base salary:

    How Much Does An Employee Cost?

    As I mention in the post, our salaries were well below the national average and our benefits were the bare minimum the company could get by with and still claim to be providing health insurance and retirement savings accounts.

    Comment by ideonexus — October 31, 2011 @ 2:08 pm

  3. The problem isn’t contractors.

    The problem is that politicians have to spend millions of dollars to be seen by enough Americans to get elected.

    Comment by Michael — October 31, 2011 @ 2:36 pm

  4. This is not an unreasonable figure.

    One BIG difference between the contractors and government employees really IS the benefits.

    Government benefits are not that good. Neither are their salaries. Many government workers do the job because they like the environment. Most contractors take the job for money.

    And then there is that drive to “privatize” government functions. This discounts the jobs that the government workers do, and maximizes the outsourcing.

    And there is more than just “filling out timecards” done. There is requirements matching (finding people to fill the jobs), there is personal management (some good people can be difficult to handle). In some cases, there is even job sharing (one person handling two or three different similar “part time” jobs).

    In addition to this, the contractor can request additional help from the company without having to carry out independent research (the company already has the information in it’s corporate archives). This alone expands the capability that an ordinary government employee could not do, and enhances the value of the contractor to the government.

    Comment by jesse — October 31, 2011 @ 3:34 pm

  5. I’m not seeing an issue here. Having worked as a contractor as well as an employee who manages contracts with Ad/PR/Marketing Agencies it’s not unusual for any of these Agency types to bill at a rate of $120/hr (I’m using CA as my reference for pricing) regardless of which of their employees are doing what specific part of a task for the client. On their end the part-time social media person is probably getting around $10/hr and their full-time web developer $60/hr. This is not uncommon nor unfair by any means.

    Comment by Michael G. Hurston — October 31, 2011 @ 4:06 pm

  6. I’m sorry but the rates you show in your table aren’t even remotely egregious, if anything they are on the low side. Either way you have how cost plus fixed fee contracts work (which is how most of these things go out btw). The company builds up their total costs for a given employee and then is allowed to charge a certain profit above that. That isn’t some mythical 200% or something insane, it’s usually in the ballpark of 10-15%. That’s assuming that the market in your area isn’t especially competitive and the contractors have to cut that number. If you think that a contractor is making away like a bandit charging the rates above then you are missing a big part of the picture. Said contractor has to pay a staff of business developers to find new business when that contract ends. They have to pay HR staff to make sure they are within regulations. They have to pay an accounting staff to make sure they are within IRS, DCAA, DCMA and god knows what other regulations–and then pay to have their books audited to ensure they will continue to be in compliance. The contractor has to eat time that people are on the bench between projects, their vacation time, their sick time.

    The contractor has to absorb the risk of the employee and the cost of maintaining them as an employee. Those are costs that the government is buying with these rates. They don’t have to have some massive HR infrastructure to cover an entire location’s employees, the contractors do it. They can expand and contract the head counts in organizations and projects far more easily because they don’t have to deal with what happens to the excess personnel, the contractors have to do that now.

    I honestly was expecting to see something like $300 an hour admins or graphic designers or something. What I’m seeing is run of the mill labor rates for job positions that are totally within norms. Your overly reductionist view of the “cost” of a civil servant of the same position totally misses the mark in terms of the infrastructure cost to the government to have that civil servant not to mention the near impossibility of being able to lay off civil servants once they are in the system.

    Comment by HG — October 31, 2011 @ 4:16 pm

  7. When I was in the Navy, working at Nctams Pac in Hawai’i, the Satcom facility was run by contractors employed by Bae.

    Bae was a horrible employer, and did everything they could to make the lives of their employees a living Hell. Nobody was allowed to take more than a few days of vacation at a stretch, working hours did not mesh with ours, and there were lots of pay problems.

    Because their working hours didn’t mesh with the watchstanders, it meant the BAE people had to do pass-down four times a shift instead of twice. When you’re handling crypto, that gets old really darn fast.

    The reason Bae was so horrid, was because they *wanted* the techs to quit and go somewhere else. If the tech left, that meant the position was now empty. Per the contact, Bae had up to 90 days to fill the empty slot, or they would lose the position and cause a contract violation. So Bae simply waited 89 days to hire someone, and kept the money.

    See, they were still getting paid for those 89 days, even though there was nobody actually working in the position!

    In the meantime, we, the Navy personnel, had to deal with Satcom techs who were dangerously tired, outrageously overworked, and more than a little irritable. To the credit of those techs, they did outstanding work, and we had few complaints?

    But wow! They sure did!

    - IT2(SW) Keoni Wahiawa (not a real name, not a real email.)

    Comment by Keoni Radioman — October 31, 2011 @ 9:12 pm

  8. I’m gonna have to chime in on both sides of the issue here. The fact is that pretty much ANY company, government contract or commercial contract is going to be billing you out at around 2-3 times your pay to cover overhead costs and make a profit, and the figures you cited seem pretty mush in line with that.

    As HG mentioned above, overhead covers much more than benefits and facilities. You’ve got legal, contracts, HR, procurement, admin, etc. I don’t know how other companies handle this, but at least at the company I worked at for ten years, and I assume it’s similar at other companies, these departments generally do not direct bill to contracts, so it is up to the engineer’s billing rates to make up for that labor that cannot be directly billed.

    That being said, I have also seen the flip side of the coin. Some of it intentional, some of it simply due to incompetence and that way government contracting works(i.e use it or lose it when it comes to funding).

    At my last gig(major defense contractor), it was a combo of both. Long story short, we worked 3 shifts with a 2 hour overlap between shifts to transfer knowledge between shifts. Of course when each shift is working on a different subsystem, there’s really nothing to take over from the shift before you, so our direction for those 2 hours was basically, ummm, go check your email or read some documentation or something. We’re talking 20+ engineers here, charging 2 hours a day to twiddle their thumbs on taxpayer money. Let’s see, that adds up to 40 man-hours/day, or 200 man-hours/week. For 6 months. Now THERE’S your $200,000 hammer.

    Comment by Chriggy — November 1, 2011 @ 1:34 am

  9. I don’t buy the overhead defense that much. I know the standard ratio is 1/3 to the employee, 1/3 overhead, 1/3 profit. But that overhead number is supposed to include much much more then HR time. It also includes management of the employee which sounds like a function provided by government employees. Employee training, which sounds like the government pays for. Office space, equipment, etc, again also sounds like the government pays for. And sometimes employee benefits which may or may not be included in the wage numbers cited by the poster. On top of that the government already employees people to take care of the HR, job search, and the other few employer overhead duties they aren’t already covering for these contractor companies.

    There was a study done recently that showed the government paying 2x to 3x to a contracting company what it would cost them to have a direct hire do the same position. And even more outrageous then that was the fact that apparently the government doesn’t try to figure out if it would be more cost effective to do the work in house vs. outsourcing it.

    Comment by Chris — November 1, 2011 @ 5:59 am

  10. Did you guys even bother to read the damn article before you opined about whether the salaries are even unreasonable? Did he ever frickin say he was paid the national average? He said he was paid well BELOW the national average and had crap benefits. RTFA before you guys open your mouth. To the idiot that implied government insurance is not that good, what planet are you on? Its the single most luring incentive to have a government job. Government insurance covers more procedures, has lower costs to the member, pays more of the dependent coverage than any plan your average 50 employee small business can achieve.

    to the author, perhaps you should expand your table to show actual salaries paid versus national average and versus amount billed to the government.

    Comment by Erik — November 1, 2011 @ 8:01 am

  11. The numbers are actually quite interesting and consistent.

    http://www.atr.org/updated-cost-hire-new-federal-employee-a4452

    Based on this article, the average cost to hire a civilian federal employee(including benefits) over a 40 year career is about $7 million for a GS-11(intermediate) and $13.86 million for a GS-15(senior level). That comes out to about $175,000/yr for a GS-11 and $346,000 for a GS 15. Do these numbers seem high? They may be and for now, let’s assume they are.

    Now lets look at a federal employees actual pay. In DC, based on 2011 government pay scales, a GS-11 will average about $70,000 while a GS-15 will average around $140,000. So now we have a high and low end of the scale.

    Now assuming the estimates including benefits were high, lets just split the difference between the estimate with benefits, and actual pay. That gets us about $122,000 for a GS-11, and $243,000 for a GS-15. And remember, government benefits are pretty good(i.e 4 weeks vacation, plenty of federal holidays, pension, etc…)

    With the exception of some outliers, these figures are pretty much on the same order of magnitude as what the government is paying for a contractor. We also need to take into account that the gvmt WILL pay a premium to be able to get rid of you at will as opposed to having you on the payroll.

    Comment by Chriggy — November 1, 2011 @ 4:43 pm

  12. Look, so many govies and contractors are commingled, married, genetically mixed, spayed and neutered, etc., that you can’t tell much difference. The POGO numbers are nuts; the methodology grossly understates govt costs. Feds can’t get fired, and feds get a whale of a pension deal that 95 percent of US workers do not. I could go on, but the author is extremely gullible

    Comment by Jawaralal Bernstein — November 1, 2011 @ 6:07 pm

  13. The reason why they hire contractors is so they can fire them. It takes 5 years to fire an incompetent federal worker. It takes less time to have the contractor company move them off.

    Comment by XXX — November 4, 2011 @ 4:16 pm

  14. What some fail to see is the difference in billable rates and what a contractor takes home. I am a GS-12 employee and I bring home 73k a year while that sounds like a lot, it is far below the average market value of someone with a masters degree and 18 years experience in the IT field.

    Our contractors on the same job have almost no schooling requirement (A+ cert and a Windows environment cert) and are only required two years of experience. They bring home roughly 56k a year ($26.72 per hour) however the billable rate to the government is $89.00 per hour, so they really cost 185k a year! Think about that… I hate to say it but someone is making out and its not the tax payer.

    Comment by Vehemyth — November 16, 2011 @ 10:57 pm

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