Following is an excerpt from a recent Congressional Budget Office letter to a House member who asked for data on the private sector workforce that works indirectly for the government under contracts.

As you requested, the Congressional Budget Office has performed a brief analysis of federal contracts in an attempt to ascertain the size and cost of the federal government’s contracted workforce. Regrettably, CBO is unaware of any comprehensive information about the size of the federal government’s contracted workforce.However, using a database of federal contracts, CBO determined that federal agencies spent over $500 billion for contracted products and services in 2012. Between 2000 and 2012, such spending grew more quickly than inflation and also grew as a percentage of total federal spending. The category of spending that grew the most in dollar terms was contracts for professional, administrative, and management services, and the category that grew the most in percentage terms was contracts for medical services. Because the database that CBO used is not complete and because questions have been raised about its accuracy, those findings should be considered approximate.

Using Contracts to Perform Government Operations
Federal agencies perform their missions in various ways. They use government employees and purchase other inputs, such as office supplies and computers, from the private sector. In some cases, they purchase not only inputs but also finished goods and services, such as fighter aircraft and facility maintenance, from the private sector. In general, they mix those two approaches on the basis of what is convenient, less costly, and allowed by law.

Such purchases from the private sector are necessary because it would not make sense for a government agency to provide all of the goods and services necessary to carry out its work. An agency (or a company) would never make its own pencils, of course; it is much more economical to buy them from a retail store or to write a contract to procure a large quantity from a supplier. In many cases, however, the government would not make purchases from the private sector; for example, the Department of Defense (DoD) would not hire contractors to command troops in battle or contract with a private think tank to make high-level decisions about military policy.
Such contracts would be difficult to enforce, have inherent conflicts, and probably violate laws and regulations.

Between those two extremes are many products and services that could be provided or performed by either a federal agency or contractors—or by both. For example, to manufacture, equip, maintain, and operate its ships, the Navy uses a mix of its own personnel (both uniformed and civilian) and private contractors. All of the Navy’s ships are manufactured in private shipyards, though that has not always been the case. Most weapons, software, spare parts, fuel, food, and other supplies for the ships come from private suppliers, sometimes passing through government agencies outside the Navy. Maintenance is provided by a combination of uniformed personnel, government-employed civilians, and contractors. Uniformed Navy officers and sailors operate warships, and government-employed civilians operate some supply and support ships, but contractors maintain certain systems on board—sometimes even while ships are under way. Research and development related to ships is performed by government-employed civilians and contractors at government research facilities, by researchers at universities, and by private companies. Many other government functions are likewise performed by a complex and changing mix of government employees and private-sector contractors.

When deciding whether the best way to perform a function is with its own employees or with contractors, a government agency must take a number of factors into account: whether the function is inherently governmental (as high-level policy decisions, contract administration, criminal prosecutions, and command of military forces are); the feasibility and legality of writing and managing a contract for the function; and the relative cost of different methods of performing the function.In general, a government agency may be able to reduce costs somewhat by changing the mix of work done by government employees and by contractors, provided that one approach is less costly than the other or that opening the function to competition leads to savings. For example, cutting contract spending without reducing the scope of an agency’s programs or functions would probably result in shifting work to federal employees; similarly, making significant cuts to the federal workforce without reducing an agency’s scope would probably shift work to contractors. Either approach could lead to some net savings in certain circumstances, depending on relative costs and other factors. However, achieving significant savings generally requires eliminating or significantly reducing programs or functions that an agency provides.3 If an agency’s total workforce—that is, including both federal and contract employees—was reduced significantly without a corresponding reduction in the scope of its work, the agency’s programs and functions would probably be performed less effectively, resulting in longer wait times, for example, or in declining quantity or quality of work products.

Available Data on Federal Contracting
The Federal Procurement Data System–Next Generation (called FPDS-NG, or FPDS for short) is the only comprehensive source of information about federal spending on contracts.However, FPDS’s data are not complete, and several government reports have called the accuracy of some of those data into question.

The Federal Government’s Contracted Labor Force
Neither FPDS nor any other source reports the size of the total labor force funded by federal contracts. In recent years, DoD has started to collect and report the number of full-time-equivalent (FTE) positions funded by some of its service contracts. However, that report, called the Inventory of Contracts for Services (ICS), excludes contracts for products, as well as service contracts that are related to facilities.9 Furthermore, some of the data in ICS are reported by contractors, and other data are estimated by DoD officials. ICS is relatively new, and its accuracy and completeness are unknown. Moreover, ICS is limited to contracts issued by DoD. Therefore,ICS does not provide enough information to allow CBO to estimate the overall size of the government’s contracted workforce. Neither does ICS allow CBO to compare the cost of performing a task with contracted employees with the cost of performing the same task with federal employees. For example, the ICS for 2012 reports that $129 billion was spent on the covered service contracts and that those contracts paid for 670,000 FTE positions among contractors. A simple calculation might suggest an average cost of about $193,000 per full-time contractor. However, that calculation fails to account for all of the other contract costs that are included in the $129 billion total, such as costs for materials that are purchased by the contractor to perform its work, the cost of the capital equipment and structures involved in that work, and training and noncash benefits for the workers. Thus, the $193,000 figure cannot be usefully compared to the salary of a federal employee. Another reason that comparisons are difficult is that even if a contractor is performing a task similar to that performed by government employees, it may perform the task differently. For example, a contractor might hire a smaller but more experienced workforce to perform the task (or a larger but less experienced workforce); or the contractor might provide different facilities, equipment, working hours, or training to its employees. Furthermore, ICS does not include information about subcontracts, which means that a contractor may report fewer FTEs in ICS by subcontracting some work—thus increasing the apparent cost per FTE but possibly lowering the cost of completing the work. In short, making comparisons between the cost of federal employees and the cost of contracted workers requires a detailed analysis of the structure of each contract and the contractor’s costs, information that is not available in ICS.