Skip Navigation

At the direction of the Office of Management and Budget, most federal agencies have long been procuring certain needed support services from private firms. The practice has adamant proponents and detractors. The present Administration, adhering to the position that the private sector is the most economical source of many support services, is pursuing a policy of accelerated contracting out. Besides issues of job security for federal workers and quality of services, the potential federal outlay savings that contracting out can achieve are the focus of much attention. Concern also centers on the mandatory cost measures that guide agencies in deciding what services to purchase under contract. This study, undertaken at the request of the Senate Committee on Appropriations, provides analytical background for the Congress' assessment of these questions.

R. Mark Musell of the General Government Management staff of CBO's Office of Intergovermental Relations prepared the paper under the supervision of Earl A. Armbrust and Stanley L. Greigg. The author gratefully acknowledges the contributions of Sherri Kaplan of CBO, who assisted with research and writing, and Linda Preshlock of the House Information Service, who provided computer support. Numerous staff members at the Department of Defense and the Office of Personnel Management also provided essential information. 3ohanna Zacharias edited the paper. In keeping with CBO's mandate to provide objective analysis, the study offers no recommendations.
 

Alice M. Rivlin
Director
October 1982
 
 

SUMMARY

CHAPTER I. INTRODUCTION

• Current Rules and Administration Policy
• Issues in the Debate About Contracting Out
• Overview of Current Commercial-Type Activities
• Past Experience

CHAPTER II. THE CURRENT SYSTEM-COMPARING COSTS

• How Decisions Are Made
• Personnel Compensation--A Key Cost Component
• Recognition of Retirement Costs
• Recognition of Conversion Costs
• Sensitivity to Cost Factors

CHAPTER III. POTENTIAL SAVINGS AND BUDGETARY IMPACTS UNDER THE CURRENT PROGRAM

• Estimates of Total Potential Savings
• Near-Term Outlay Impacts

CHAPTER IV. OPTIONS FOR CONTRACTING OUT

• Option I: Continue the Current System
• Option II: Modify Cost-Comparison Guidelines
• Option III: Modify Cost-Comparison Guidelines and Reduce Restrictions on Contracting Out
• Option IV: Modify Cost-Comparison Guidelines and Maximize Near-Term Outlay Savings
• Option V: Impose a Moratorium on Contracting Out
• Other Considerations

APPENDIX. COST-COMPARISON ANALYSIS METHODOLOGY
 

TABLES
S-1.	ANNUAL SAVINGS, OUTLAY, AND EMPLOYMENT EFFECTS OF CONTRACTING-OUT OPTIONS
1.	FEDERAL OUTLAYS FOR SERVICE CONTRACT AWARDS, 1979-1981
2.	COMPARISON OF DEFENSE AND NONDEFENSE COMMERCIAL-TYPE ACTIVITIES IN 1981, BY MODE OF PERFORMANCE
3.	THE INHOUSE SUPPORT SERVICE WORK FORCE OF THE FEDERAL GOVERNMENT
4.	INHOUSE VERSUS CONTRACTING-OUT COSTS--EXAMPLE FOR CUSTODIAL SERVICE
5.	ESTIMATED IMPACTS OF CONTRACTING-OUT
6.	DISTRIBUTION OF FEDERAL EMPLOYMENT IMPACTS, BY OCCUPATION
7.	ESTIMATED POTENTIAL SAVINGS FROM CONTRACTING-OUT OPTIONS
FIGURE
1.	DISTRIBUTION OF ESTIMATED DEFENSE DEPARTMENT SAVINGS FROM CONTRACTING OUT, BY TYPE OF SERVICE, AS PERCENTS OF INHOUSE COSTS: 1979-1981

 

Considerable debate surrounds the question of who should provide the federal government with services that are essentially commercial in nature--maintaining facilities and equipment, providing food, operating military bases, processing data, and guarding government property. Should such services be performed "inhouse" by federal workers, or should they be purchased--often at lower cost--from private-sector firms under contract to the federal government? Advocates of "contracting out" point to it as economically prudent, buttressing their position with the argument that the federal government ought not to engage in commercial-type activities that the private sector can provide. Opponents' criticisms focus largely on the lower quality of services that contractors often deliver and on the employment concerns of federal workers threatened by layoff. Skeptics also see it as giving an illusion of a smaller, less costly federal government.

In 1981, about $19.4 billion went toward some three-fifths of the commercial-type services performed for the government by a mostly blue-collar inhouse work force numbering roughly 495,000. The rest was contracted out to private firms. Since 1979, the number of service contracts with federal agencies has more than doubled, but there is still room for considerable expansion.

This document is available in its entirety in PDF.