Confessions of the Deep State — Part Two: The Big Business of Government

Good day, dear reader. If you’re just tuning in, this is the second of a series of essays on some of the real problems with the US Federal Government. Full disclosure, your humble author works for that entity, although not under this name. Also, full disclosure, as we discussed briefly in Part 1, there is no “Deep State” in the sense that the alt-right would like you to believe. My apologies for luring you into an informative discussion under false pretenses. And with all that said, onward!

In this edition of the Confessions, we’re going to be looking at the Big Business of Government. No, I’m not talking about the military industrial complex, although that’s a good guess. I’m talking about something a bit more more insidious — the slow, gentle curve of the American government towards privatized operations. In summary: every year the government spends more and more on private contractors. And this is a serious problem, because it’s often times a waste of money, and it’s always a reduction in federal accountability.

As a quick reference point, back in 2012 the US government spent approximately $500 billion on private contractors used to support government operations. At the time that represented somewhere around 13% of the total federal budget. This increased to about $660 billion in 2016, or about 17% of the total budget. For a variety of reasons, it is unlikely that contractor spending will be going down any time soon. Let’s talk about why that might be the case for just a minute, then return to the topic of Bad Stuff.

So why might contractor spending continue to increase? In part, contractor spending will increase due to the pressures imposed on the government thanks to Congressional-mandated caps on federal employees, coupled with pressure from the recent hiring freezes. I wrote a separate article on that subject. These two factors basically mean that government responsibilities tend to increase, whereas the number of personnel allowed to work at each federal agency tends to stay the same or go down. The shortfall is often made up by contract staff, using a variety of wink-and-nod accounting sleight of hand and management tactics to get around the fact that this is technically illegal.

Additionally, there is a developing trend in the federal workforce towards outsourcing expert knowledge. A good example can be found in the Information Technology (IT — computers) community, wherein IT organizations are moving away from directly coding new products in favor of purchasing platform solutions that come pre-loaded with a variety of options. If that sentence didn’t make sense to you, look at it like this: pretend your computer is a Lego set. Let’s say you want to build a Lego castle. Instead of building the castle brick by brick, wouldn’t it be easier to have someone else assemble whole chunks of the castle that you could just drop in place? Sure it would. Same thing with programming.

The upside to this trend is that, theoretically, an IT office can buy one product to take care of several different business needs. The downside is that they are now dependent on expert users of that product. The easiest way for a federal agency to acquire expert users is… you guessed it… through contracting. The logic here is that it would take too long to train a fed to use the tool, especially if you think you might get rid of it in five years anyway; easier to bring on a contractor to do the work.

There are similar moves being made across the federal workforce, particularly in areas like safety oversight. As the safety mandate of individual agencies expands (which happens naturally as the country develops more infrastructure to account for a growing population) it becomes more and more difficult to acquire federal employees with the right skill set; accordingly more and more contractors are hired.

Last but not least, there is a large-scale and well-financed lobbying effort in place to ensure that Congress (and the public) hears the following narrative: “Government employees are slugs. They are inherently inefficient. If you hire private industries to take over, they will save you money because they will be more efficient.” This is the origin of campaign phrases like “Run government like a business!” This sounds good in theory, and is awful in practice.

The Bad Stuff

I did say we’d get back to this. There are at least four fundamental problems with contracting out government services: cost, efficiency, accountability, and visibility. These combine to form a decent-sized shitstorm of problems for both the government and the American public.

To summarize: contractors are more costly than feds, it’s really bothersome to have to deal with lots of contracts, it’s hard to enforce federal regulations at the contract level, and we have no idea how many contractors the government actually employs.

If you’re up for it, feel free to take a quick look at each of these problems in turn. Otherwise you have my generous permission to skip straight ahead to the Solutions section. Let it never be said that your humble author is not a kind and considerate long-winded blowhard.

Cost

Why, oh why, do contractors cost more than feds? Wasn’t the whole point of employing contractors to take a bite of that lean, mean, efficient private industry sandwich? Well, unfortunately, somewhere along the way people forgot that a primary difference between the federal government and private industry is that private industry expects to make money. Shockingly, this also applies to government contracts.

Let’s take a moment to offer a brief comparison. The majority of federal employees earn between $78,000 and $110,000 (GS 11 mid-step to GS 13 mid-step, for those of you following the federal pay scale). That’s a lot of money for everyplace that isn’t Washington DC, San Francisco, or New York (sadly, the government is located in DC, and $78,000 is just about enough to get you down to one or two roommates; but I digress). One might be able to forgive Average Joe Congressman for assuming that outsourcing to a private company where the average wage for equivalent work is, let’s say, $60,000, would automatically translate to cost savings. Unfortunately, that comparison leaves out the difference between what the employee is paid and what the contractor charges.

It is common practice, of course, for contracting companies to charge more money for their services than they pay their employees. Otherwise they wouldn’t make a profit. However, it is also common practice for contractors to charge at a rate of 1.5 or 2 times their employee’s salary. So, for example, a GS 11 federal employee is considered a low-to-mid level worker bee and earns $78,000 after a few years on the job. A corresponding worker bee at a contracting company earns $60,000. Based on that comparison, you hire the contractor, right? Well sure, but the contractor’s company is actually charging you $90,000 for that resource. So you’re actually losing money by hiring a “cheaper” resource.

Another reason why feds hire contractors to “save money” is so that they don’t have to hire federal employees to fill short-term project. Let’s say you have a safety system — maybe a network of sensors tracking rail traffic, for example — that you want to build. It’s only going to take five years to build the system, but if you hire federal employees to do the work you’ve basically purchased a bunch of resources that will stay on your books forever, regardless of when the project ends. On the other hand you can hire a contractor to build the system, hire one or two feds to run it when it’s done, and just terminate the contract when the project is complete, thereby freeing up funds for another project.

Sounds like an obvious choice, right? Sure, the contractor might be a little more expensive up front, but over the long term you’ll save money by not hiring resources you can’t terminate. This always looks like an easy choice for a federal manager.

Except that our hypothetical manager has forgotten about the expertise problem — whichever company builds the system will be the only group that knows how to run it. Also, our hypothetical manager has forgotten the federal hiring problem — you only get so many feds per agency. Typically this hiring limit is not flexible or scalable at short notice. So in practice, what happens is that you build the system and then keep the contractors around to run it. The supposed trade of short term cost for long term savings simply becomes long term costs.

All of this is compounded by the Iron Law of Institutions — the tendency of people within large organizations to care more about their own position than about the organization as a whole, and the tendency of large institutions to value their own relative power over their stated goals. In the federal government this translates to a budgetary maxim: “If you don’t spend it, you won’t get it next year.” This means that there is enormous pressure on agencies to spend as much of their allocations as possible each year, and hiring contractors is a great way to do that.

Bottom line: contractors are always more expensive than federal employees, it is always harder to get rid of them than it ought to be, and federal agencies are always under pressure to hire them. And that, dear reader, is why contractor spending increased by $140 billion over a four year period. This is simply not sustainable if the goal is a balanced and efficiently allocated federal budget.

Efficiency

Ok, so contractors cost more, but isn’t it at least easier to hire and replace them then it is to bring on new feds? And don’t they work harder? This has been one of the core arguments around using a contract workforce for many years, and it consistently fails in practice.

Part of the allure of hiring contractors is that they do not fall under the federal employee management guidelines; theoretically once you hire a contracting company, they should be able to roll employees on and off of projects according to the needs of the situation. Theoretically this means that a federal project manager ought to be able to fire low-performing contractors much more easily than they could fire a comparable federal employee, or replace skill sets on a much shorter timeline. Also theoretically, this should translate to higher productivity.

In practice, there are a lot of real-world problems with this idea. I’ll go over a few of them to give you a flavor.

One of the big issues is that managing a contractor workforce as a federal employee is a bit like driving a car from the backseat. The contractors normally don’t actually sit at the government office, so it is very difficult to tell what they’re working on day-to-day. There’s also an extra layer of communication between you, the federal manager, and the contractor workforce — and that is, of course, the contractor management team. Federal employees are typically forbidden from actually directing the actions of contract workers, and have to go through the contractor management to tell people what to do. This adds hours and days to what should be short interactions; the comms problem is real and deadly to staying on schedule.

This also functionally defeats the idea that a federal manager can easily fire a poor-performance employee, as it takes a much longer time to figure out exactly who is performing poorly. One might think that the contractor management team would notice this, but contractor managers are typically overworked and as reliant on deputies and status reports as anyone else. In practice, this means that federal employees often notice poorly performing contractors, then must convince the federal contract manager that something is going wrong, who must then convince the contractor project manager of the same thing. This can take months, and then you run right into the replacement problem.

See, the thing is that even though you’ve hired contractor employees, they still have to have the same security clearance as the federal staff. Security clearance can take a LONG time — if you’ve ever had a friend or relative who worked for the federal government, you are probably familiar with their stories of waiting six months or more to find out if they actually had a job. It’s no different for contract staff; however, with many contracts, the government starts paying the contractor on the contract award date whether or not they are able to fully staff the contract. This means lost productivity and sunk cost. It also means that “just replace” is only a slightly more valid strategy with contract staff than it is with federal employees.

But surely the contractors are working harder than the feds, right? Well… no, not really. You have to consider the factors that make someone want to work harder: money, challenge, ego, and recognition. Most worker-bee contract staff get minor bonuses, but the worker-bee feds typically get paid more, so the money angle is pretty much a wash. Challenge? There’s very little that’s challenging about bureaucratic work for anyone with half a brain. Ego? That’s only an option for the most type-A of type-A contractors, since they don’t really own the projects; the feds do. Recognition? Contractors don’t get recognized for federal accomplishments; that’s kind of the point, in many ways.

So functionally speaking, contract employees are no better motivated than federal workers. They also tend to be dramatically overworked — Big Four companies like Deloitte pride themselves on burning out fresh meat with 80 hour work weeks. This has a tendency to translate to terrible morale. These factors have consequences; the old “Office Space” mantra of doing just enough work to not get fired is very much on display for a lot of contract staff.

Fiscally speaking, there’s another hurdle as well: it’s often not in the interests of contractors to get work done fast, particularly in cases where the government doesn’t have a good way of judging how fast the work is being done and the contractor is being paid by the hour. Let’s take an example: Assume that the government wants to use software X because some manager heard it’s better than software Y (this happens a lot). Problem is, no one on the fed side knows how to use software X. So the government hires a contractor to install and manage software X. This means no one on the government side knows how software X really works, so if the contractors are just a little greedy they can slow-play development activities; the government will never know that they’re taking too long, and they can use resources they’ve formally assigned to the software X project to do other things on the sly.

This happens ALL THE TIME.

Last but by no means least, while contractors are in higher and higher demand the number of staff assigned to federal procurement offices is not increasing, both because of federal employee caps and because procurement is the most boringest thing evvvver (but seriously, if you want to make some good money, go be a federal procurement specialist). This is a problem, because you can’t just hire a contract team as a manager in the federal service; you have to go through your procurement office. This means that a larger and larger volume of work is getting shoved through a smaller and smaller acquisition pipeline, which has the practical effect to delaying contract awards. Functionally speaking, this prevents federal agencies from rapidly bringing on support staff, which you may recall was one of the key selling points of contractors in the first place.

All in all, there is very little real evidence that contractors contribute any efficiency whatsoever to the federal government.

Accountability

We’ve already touched on elements of the accountability problem, but to reiterate, it’s very difficult for federal contract authorities to verify that contractors are following federal guidelines for the same reason it’s tough to enforce efficiency standards: there’s very little visibility into what contract companies are actually doing.

Let’s take a fairly common office violation: unpaid overtime. It’s actually illegal for contractors working for federal customers to make their workforce take unpaid overtime when working on certain types of contracts. But since contractors often work in different offices from their federal overseers, in practice if a contractor manager cracks the whip, there’s no way for the feds to know.

Another example: cybersecurity. Most contractors are required to use government equipment to access government computer systems. This equipment is provided by the government at no cost to the contractor, but it’s usually crappy old laptops, and the very first thing a lot of contract companies do is find backdoors into government systems so that they can use their own equipment. Virtual desktop interfaces (VDI), for example, are used by most federal agencies to allow employees to access their networks during telework periods. But by its very nature, VDI is run on personal computers with fewer security measures in place than a government-issued device. So it’s comparatively easy for someone to accidentally infect a government device over a VDI connection, and there is no real way to force contract staff to only use their government-provided laptops when they can log in via VDI on their local private servers.

Still another example: who gets blamed when things go wrong? This problem goes fractal very quickly in a lot of situations, particularly when the government hires a contractor who then hires a sub-contractor, who may or may not hire their own subcontractors. Now there are three or four teams who might be the group that screwed up, and it takes time to sort out all the finger-pointing. And there will be ample finger-pointing, since the government employees are trying to not look stupid, and the contract employees are trying to keep their contracts afloat. An empirical example of this phenomenon in action was the abject failure of the sign-up websites for the Affordable Care Act when they first went live, and the ensuing round of circular firing squads in the Department of Health and Human Services.

To put it simply, the hands-off nature of contract work makes it very hard to impose functioning processes or exercise quality control in a wide variety of situations; as a fed, you are quite often at the mercy of contractor project managers.

There’s also another, potentially more serious angle here: there is a real discussion that we need to have about what we mean as a society when we say “government work.” Traditionally that meant work performed by civil servants, people who had taken an oath to defend the Constitution and who worked at the pleasure of President. We are rapidly moving away from that concept to a more “mercenary” style of civil service, where the people performing government work have no real stake in the government and may not even be loyal American citizens. The thing is, there’s no way for us to know, as the following section discusses.

Visibility

Remember how earlier we discussed the fact that Congress limits the number of federal employees an agency is allowed to hire? Well, there’s a reason why they do that: it’s a time-honored strategy designed to limit the size, cost, and reach of the federal government. Contract employees blow that limitation right out of the water. They are not included under the federal employee restrictions; on the balance sheets they are more or less classed as equivalent to furniture — I’m not really kidding about that. And they are not obligated to report how many employees they have working on many types of contracts.

The practical upshot of this lack of visibility is as follows: The federal government has only a hazy idea how much money it spends on contractors every year, and it has no real idea at all how many contractors it actually employs.

Sound hard to believe? Well, I don’t blame you for being skeptical, but think about it — let’s say you’re a federal agency and you buy a software license. You get some contract support for your implementation of that license, but it’s a flat fee incorporated in the license structure, and you’re not obligated to actually call the support crew unless something goes wrong. So you’re not technically even employing the team unless your software stops working, and when your software stops working you have no real idea how many people come online to fix it.

Technically, you’re employing contractors in this case… but there’s no way to tell how many of them, or how much they actually cost individually. See the problem? Are you actually employing contractors if nothing goes wrong? Multiply that conundrum by several thousand instances, and you start have a scope of that kind of reporting problem.

Another example: one of the most common types of federal contracts is called a “Fixed Price” contract. This means that the government pays a flat rate and receives a certain amount of service in return. But the contractor is given free rein to assign resources to meet their service obligations, and the government is not allowed to dictate how many resources they assign, or even really demand to know how many resources are working on the contract at any point. The logic goes: if the work is getting done, who cares? But that means the government has no real idea how many people are actually required to do the work, which can make it very difficult to correctly assess the contract, and makes it impossible to figure out how many contractors you’re employing at any given time.

The consequence of all of this is that contract workers represent a MASSIVE loophole in congressional control over federal agencies. This has had the effect of tilting the balance of power more towards the executive branch. It also has the effect of lining congressmen’s pockets with campaign donations, and giving them a way to “cut” the federal government without actually impacting services for their constituents (there’s a reason why this hasn’t been fixed).

Solutions

This is the tough bit; the problem is that the entire federal structure is now set up to propagate an increasing number of contractors, so any solution set is fighting against an enormous amount of bureaucratic inertia. However, there are a few things that the government could potentially do to ease the problem. Here are eight of my ideas:

Number one, rationalize federal employee limits. The nation keeps growing. The government will have to keep growing with it. This is not up for debate, it’s just what happens; the more people you have, the more government you need (for the same reasons that you needed a government in the first place, namely that people are not angels — but that’s another topic). So it doesn’t make sense to arbitrarily limit the size of federal agencies. A better way might be to peg federal employee limits to the population size; as long as the population keeps growing, every agency would get a modest increase in their federal employee pool. This would allow agencies to staff needed positions (e.g., procurement) and increase their operational efficiency (because most federal agencies are continually short staffed, which is really bad for efficient operations).

Number two, transition long-term contractors to federal positions. Several agencies have experimented with this idea, and it actually has produced cost savings. The rationale here is simple: if a contractor has been continually employed for several years, and their employment is likely to continue for the foreseeable future, then it’s obvious that they are not fulfilling a short-term need, and therefore the government should assume that their function is proper for a federal employee.

Number three, simplify the federal contracting process. Currently, federal contracting is governed by a series of directives, memos, guidance documents, and regulations — most notably the infamous FAR (Federal Acquisition Regulations) handbook. You are welcome to click on that link if you suffer from serious insomnia, because dear God it’s hard to read without falling asleep. The FAR is sprawling, labyrinthine, meticulously detailed, and therefore functionally useless since no one has time to read or remember the bloody thing.

Rewriting the FAR is probably long overdue. A proper rewrite should make it vastly simpler, and give more power (and risk) to federal contract managers. Currently federal contracting officers are stifled by risk avoidance regulations and legally hidebound by restrictions on what they can and cannot ask of contract managers. Drop all that crap, give the contracting officers some actual discretion, increase training, and increase the size of each agency’s Office of the Inspector General and Legal offices to deal with the screw-ups. Bring it back to bare-knuckles contracting and make it easier for feds to aggressively negotiate terms.

Number four, require contractors to enumerate personnel and employee salaries (both nominal and actual), and make it a felony if they don’t. People will howl over this. Let them. This should be about the United States Federal Government and it’s obligations to the voting public, not about whether Deloitte or PWC are butt-hurt over a potential disclosure of their salary structures. If that’s the cost of doing business with the government, I guarantee people will still do business with the government, and this will at least get us some actual data on the size and cost of the contractor population.

Number five, make it illegal for contracting companies to employ foreign nationals or non-naturalized residents on government contracts. This one kind of seems obvious, but you’d be surprised how often it comes up, particularly in IT and engineering work.

Number six, rationalize contractor security screening processes — an easy way to do this might be to require that all personnel working in a contractor’s federal division be pre-screened. That would off-load some of the risk of waiting on contractor staff to achieve a security clearance. This would also require a commonly accepted screening standard for federal agencies, which we currently lack. A common standard would enable a resource cleared at one agency to work for another agency without re-entering the screening pool. No, this isn’t already the way things work. Yes, it’s dumb that it’s not already happening. That’s why we should fix it.

Number seven, require co-location of federal and contractor resources. This could work either way — either the contractors have to come to the federal office, or a federal contract manager has to sit at the contractor’s office for a few days every week. This would radically improve the efficiency of contractor teams. Telework is a wonderful thing, but nothing beats being able to look over someone’s shoulder.

Number eight, issue a regular report detailing the breakdown of contractor spending across all federal agencies. Make it easy for the public to acquire this information, and foster a real discussion of the topic in the media and government oversight organizations. Take contractor spending out of the shadows, and put it front-and-center.

Final Thoughts

Contractors aren’t going away. The federal government has always employed them and always will, because there are many, many blurry lines between government and the private sector. But it does fall on us, as patriotic citizens of a democratic nation, to pay attention to what they are costing us, and make sure that we only give the private industry money in situations where the government’s needs simply cannot be met with civil servants.

Government is not a business. Government should not be focused on enriching private companies. Government should not be forced into efficiencies that violate its core purposes. Government will always be less efficient than the private sector — and that is OK! It’s OK because the government exists to make sure certain things GET DONE. If a private company fails, people lose some money. If a government agency fails, someone is probably going to die.

So don’t fall for this nonsense about running government like a business — that’s just something people who don’t know how government works like to say to look savvy. Run government like a government. If that means that the government has to operate bureaucracies with multiple redundancies (and corresponding inefficiencies), well, that’s the price you pay to run an army, maintain a national power grid, and provide healthcare to sick poor people. Hiring more and more contractors will not necessarily help with that.

Instead, let’s figure out ways to use contractors logically, roll them over to federal staff when necessary, and generally start treating them as actual members of the federal workforce — not “furniture” on the balance sheets that Congress and agency directors can conveniently ignore.

P.S.

For more confessions from the Deep State, check out Part 1 and Part 3 of this series.

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