Federal Budget Cuts Won’t Slow Reliance on Contractors

Even with sequestration, Washington will pay $6 trillion for outside help for the rest of the decade.

Contractors who work for the federal government face a torrent of criticism.

Critics say contract security specialists failed to protect the ambassador when the U.S. consulate was attacked in Benghazi. They also note the contractors didn’t flag mental health problems with one of their own before he went on a shooting spree that left 13 dead earlier this year at the Navy Yard in Washington, D.C. And, of course, contract workers are having trouble getting HealthCare.gov running right.

They’re also being squeezed by the automatic budget cuts of sequestration. Officials would much rather cut contracts than eliminate federal jobs or slash programs.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

But Uncle Sam won’t abandon contractors. And efforts to limit their use will falter, as they have several times since Washington’s reliance on contractors exploded in the decades after World War II. The Pentagon and the Department of Homeland Security are hiring additional federal workers to replace hired guns, but other agencies will have trouble taking that route at a time when Congress is cutting spending and arguing so strenuously about the size and role of the federal government.

The feds will reduce spending on contracts for a few years, but the cuts will barely be noticed. Hundreds of thousands of contractors will remain on the payroll to protect diplomats, mow lawns and fix computers. They’ll also continue to provide goods of all kinds, from pens to planes.

Uncle Sam will pay contractors about $3 trillion over the rest of the decade, even if annual payments are trimmed from the roughly $517 billion the government spent on them in fiscal year 2012. Costs won’t dip much below $500 billion a year. And they’ll eventually rise again as computers, weapons systems and other gear need to be replaced, and as spending resumes for programs that are now on hold.

All of these numbers are estimates. There’s no central clearinghouse to keep tabs on the total number of contractors being paid with tax dollars.

One longstanding argument in favor of using contractors — that it saves money — just isn’t true. Some contractors are paid nearly double what the government pays federal workers who perform comparable tasks. Overall, spending on service contracts jumped by 79% from fiscal year 2002 to fiscal year 2012, while federal payrolls rose by just 34%. Much of the run-up came during the extended twin wars in Iraq and Afghanistan, but reliance on contractors is standard procedure in nearly every civilian agency, too.

The Defense Department will continue to award the lion’s share of contracts — about $350 billion a year. These contractors drive fuel trucks, provide food and maintenance work at bases, serve as security forces, and build Army tanks, Navy ships and Air Force fighter jets. In one day in mid-November, the Pentagon announced 14 pacts valued at $1.38 billion. Keeping tabs on all those contractors is, in itself, a growth industry. The military will hire a few hundred accountants to monitor thousands of contracts.

Over time, the scope of federal contract work will continue to expand. For years, contractors did work that Uncle Sam wasn’t equipped to handle. The first government contract, for instance, was for delivering provisions to outposts on the western frontier…in 1798. Now, contractors even conduct security clearance checks on other U.S. contractors, and they have replaced much of the government’s information technology workforce. Those decisions and many others are too time-consuming and expensive to reverse.

Richard Sammon and Kenneth R. Bazinet contributed to this report.

David Morris
Deputy Managing Editor, The Kiplinger Letter
Morris has covered every presidential election since 1984 and has been based in Washington since 1994. Before joining Kiplinger in 2010, he directed exit polling operations for The Associated Press, was chief White House correspondent for Bloomberg News and was managing editor and executive editor of National Journal's CongressDaily. He was also assistant director of the polling unit for ABC News, worked for three Pennsylvania newspapers and directed AP's bureau in Sacramento, Cal.