[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
INSOURCING GONE AWRY: OUTSOURCING SMALL BUSINESS JOBS
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HEARING
before the
SUBCOMMITTEE ON CONTRACTING AND WORKFORCE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
HEARING HELD
JUNE 23, 2011
__________
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
Small Business Committee Document Number 112-024
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HOUSE COMMITTEE ON SMALL BUSINESS
SAM GRAVES, Missouri, Chairman
ROSCOE BARTLETT, Maryland
STEVE CHABOT, Ohio
STEVE KING, Iowa
MIKE COFFMAN, Colorado
MICK MULVANEY, South Carolina
SCOTT TIPTON, Colorado
JEFF LANDRY, Louisiana
JAIME HERRERA BEUTLER, Washington
ALLEN WEST, Florida
RENEE ELLMERS, North Carolina
JOE WALSH, Illinois
LOU BARLETTA, Pennsylvania
RICHARD HANNA, New York
NYDIA VELAZQUEZ, New York, Ranking Member
KURT SCHRADER, Oregon
MARK CRITZ, Pennsylvania
JASON ALTMIRE, Pennsylvania
YVETTE CLARKE, New York
JUDY CHU, California
DAVID CICILLINE, Rhode Island
CEDRIC RICHMOND, Louisiana
GARY PETERS, Michigan
BILL OWENS, New York
BILL KEATING, Massachusetts
Lori Salley, Staff Director
Paul Sass, Deputy Staff Director
Barry Pineles, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
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Page
OPENING STATEMENTS
Mulvaney, Hon. Mick.............................................. 1
Chu, Hon. Judy................................................... 3
WITNESSES
Ms. Dawn L. Hamilton, President and CEO, Security Assistance
Corporation, Arlington, VA..................................... 5
Mr. Bryant S. Banes, Managing Shareholder, Neel, Hooper & Banes,
P.C., Houston, TX.............................................. 9
Ms. Bonnie C. Carroll, President, Information International
Associates, Oak Ridge, TN...................................... 7
Ms. Jacque Simon, Public Policy Director, American Federation of
Government Employees, Washington, DC........................... 10
APPENDIX
Prepared Statements:
Ms. Dawn L. Hamilton, President and CEO, Security Assistance
Corporation, Arlington, VA................................. 30
Mr. Bryant S. Banes, Managing Shareholder, Neel, Hooper &
Banes, P.C., Houston, TX................................... 36
Ms. Bonnie C. Carroll, President, Information International
Associates, Oak Ridge, TN.................................. 41
Ms. Jacque Simon, Public Policy Director, American Federation
of Government Employees, Washington, DC.................... 47
Additional Materials for the Record:
Letter from Rep. Mick Mulvaney to The Hon. Daniel I. Gordon,
Administrator, Office of Federal Procurement Policy........ 68
Letter from Rep. Mick Mulvaney to The Hon. Jacob Lew,
Director, Office of Management and Budget.................. 71
Statements for the Record:
Clarke, Hon. Yvette.......................................... 74
Business Coalition for Fair Competition...................... 75
PAR Government Systems Corporation and Rome Research
Corporation................................................ 87
INSOURCING GONE AWRY: OUTSOURCING SMALL BUSINESS JOBS
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THURSDAY, JUNE 23, 2011
House of Representatives,
Committee on Small Business,
Subcommittee on Contracting and Workforce,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:00 a.m., in
room 2360, Rayburn House Office Building. Hon. Mick Mulvaney
(chairman of the subcommittee) presiding.
Present: Representatives Mulvaney, Landry, Chu, Schrader,
and Critz.
Chairman Mulvaney. Good morning to everyone. Welcome. We
are going to go ahead and start on time. This is the new
government. We are actually starting on time. We will finish on
time. Thank you very much for coming in.
Some explanation of how we are going to proceed today. I
was just telling the ranking member, Ms. Chu, that ordinarily
when we have these 10 o'clock meetings we are under the gun
with votes that are imminent. We just learned that we will not
have votes probably till around noon today. So I will be a
little slower with the gavel. If you go over a few minutes on
your opening testimony, that would be great. We will also give
more latitude to the members in their five minutes of
questioning.
As I was discussing with Ms. Carroll before the hearing,
five minutes, if you have not done this before, really is not
that long a period of time. And this is an important topic that
I think it is important enough for us to build a good solid
record on all sides of this issue. So we are going to try and
do this as thoroughly as we can today.
The order of business is I will give a brief opening
statement. Ms. Chu will give her opening statement as the
ranking member. Then we will introduce each of the witnesses.
We will introduce them together and then we will have you take
your testimony and then we will go back and give every member
of the Committee a chance to ask a round of questions. I will
then make a closing statement, as will Ms. Chu, and we will
wrap up.
So again, thank you. We are going to go ahead and call the
meeting to order. And I want to thank you again for
participating.
In 1987, Ronald Reagan brought attention to the need for
the federal government to procure commercial goods and services
for the best value whether from government employees or from
the private sector. He recognized that inherently governmental
work should be performed by government employees, but that, at
the same time, inherently nongovernmental functions could and
should be performed by the private sector, including small
businesses. Such an outsourcing of nongovernmental functions
would encourage private growth, help small business, and
actually save the taxpayer money.
Toward that end, we support the continued insourcing of
inherently governmental work. This hearing then is not about
outsourcing military operations, for example. This hearing is
about the recent push to insource inherently nongovernmental
work for alleged cost savings.
Over the past five years, primarily at the Department of
Defense, there have been concerted efforts to take commercial
or nongovernmental functions performed by the private sector
and make them a permanent government function.
In the 2006 National Defense Authorization Act, the
Secretary of Defense was instructed to ensure that
consideration is given to using Federal Government employees
for any work done by federal employees since 1980, and any work
that is inherently governmental was not competitively awarded
or was poorly performed due to excessive costs or inferior
quality.
In the 19, excuse me, the 2008 National Defense
Authorization Act, that guidance was expanded and codified to
ensure that the Department of Defense civilian employees are
used on a regular basis to perform activities that are
currently performed by contractors but could be performed by
federal employees.
In 2009, insourcing was expanded even further to include
agencies outside the DoD and agencies were directed to produce
specific guidance on insourcing. We are still waiting on much
of that insourcing guidance from the civilian agencies.
However, this lack of guidance has not stopped those agencies
from insourcing but has merely meant that the insourcing that
is being done is being done without any transparency or without
any regular process. Even at the Department of Defense where
there is a detailed guidance on insourcing, the cost
comparisons used to justify insourcing commercial or
noninherently governmental work previously performed by small
business has not held up to scrutiny, and yet there is no
process for the small businesses to challenge the decisions.
Insourcing was initially sold as a way to save the
Department of Defense as much as 40 percent. President Obama
claimed that it would save as much as $40 billion a year.
However, after years of implementing this policy, the
Department of Defense has admitted that they have not achieved
significant cost savings. In fact, in February, the Army froze
all insourcing efforts without direct approval of the secretary
due to cost increases.
Our national debt stands at $14.3 trillion. Our federal
deficit is higher now than at any point since World War II. The
federal budget comes in a $3.7 trillion--a quarter of our
entire GDP. And the federal workforce has expanded to over 2.1
million employees. We need to find ways to both reduce spending
and to keep it low. Continuing the policy of insourcing
commercial functions without demonstrable cost savings
increases the size and the cost of the federal government and
moves us in exactly the wrong direction.
When the government chooses to consider insourcing, the
burden should fall on the government agencies to prove that the
full, long-term cost (including pay, benefits, and support) of
hiring and training new federal employees is, in fact, less
than a temporary government contract. Recent reports indicate
that it is not.
I want to thank the small businesses that have come here
today to testify about the lack of transparency in the
insourcing process and the need to reform the process to ensure
that taxpayer dollars are being used to maximize productivity
and not to maximize government employment or union membership.
I would also like to thank the work of outside groups,
including the Business Coalition for Fair Competition for
documenting the many instances in which the government has
sought to compete directly with small business to provide
commercial items to the federal government.
I look forward to hearing from the small businesses that
will testify today about how insourcing has affected them
individually, and, again, I want to thank everyone for their
participation.
I will yield now to Ms. Chu, the ranking member, for her
opening statement.
Ms. Chu. Thank you, Mr. Chair.
The federal government buys a wide range of goods and
services annually running the gamut from office supplies and
janitorial services to aircraft and engineering services. In
the last decade, such procurement spending has doubled to more
than $500 million as policy changes encouraged more and more
services to be contracted out to the private sector. With this
rapid growth in mind, it is appropriate that we consider the
impact of these policies not only on the private sector but
also on the government itself.
Over the years, and as administrations have changed, the
government's reliance on the private sector has ebbed and
flowed. These changes have had a direct affect on the private
sector and small businesses in particular with regard to their
ability to secure federal contracts. Conversely, it has also
affected agencies which now rely on private sector corporations
to carry out many functions.
Determining the proper balance of these public-private
arrangements is critical to increasing efficiency and reducing
costs. Across agencies this balance varies and often there can
be disagreements over what is inherently governmental. It is
not uncommon for the purchasing needs, management
responsibilities, and overall spending related to certain
similar tasks to differ across the executive branch.
As a result, many agencies have taken steps to better
achieve their core missions. Such rebalancing efforts have been
used to ensure that inherently governmental functions be
performed by federal employees.
In other cases, the process has been used so that agencies
can build their capacity and capabilities in certain critical
areas. In doing so, agencies have implemented new processes to
review their responsibilities and determine which functions
should be retained in-house and which should be conducted by
vendor.
In many cases, the process has been complicated. In
instances where cost is the primary justification for
rebalancing, there has been some disagreement as to the method
used to determine which functions are selected. There is a
tension here and we must recognize agencies' desire to retain
inherently governmental functions, but also fairly treat small
businesses that are currently or may want to in the future
perform these tasks.
To make certain that small businesses are respected in
these processes, transparency is a key. It is important that
small firms that are provided with full and complete
information regarding why these efforts are being undertaken
but also made a means for them to contest any inequitable
treatment that they may be subjected to. Doing so can ensure
that agencies can proceed with such efforts but in a manner in
which small firms are respected.
The effect of these transformational practices on small
businesses has been recognized by administration officials.
Agencies have been advised to place a lower priority on
reviewing work performed by small firms in certain instances.
While this is an important first step in ensuring fair
participation by small businesses and federal contracting,
additional examination is needed. While we may not be able to
always outsource contracts to small businesses, we must do what
we can to diminish the impact on them.
Today, this hearing will focus on the process of how
functions are selected for federal performance, examine the
effects that it has on small firms, and identify steps to
improve the process so that we can determine the appropriate
balance between functions that should be performed by federal
agencies and the private sector. We will hear from a number of
witnesses who will provide different perspectives on these
practices and look at the challenges they have presented.
I want to thank all the witnesses who have traveled here
today for both their participation and their insights. And I
look forward to hearing their information about this important
topic.
Thank you, and I yield back.
STATEMENTS OF DAWN L. HAMILTON, PRESIDENT AND CEO, SECURITY
ASSISTANCE CORPORATION; BONNIE C. CARROLL, PRESIDENT,
INFORMATION INTERNATIONAL ASSOCIATES; BRYANT S. BANES, MANAGING
SHAREHOLDER, NEEL, HOOPER & BANES, P.C.; JACQUE SIMON, PUBLIC
POLICY DIRECTOR, AMERICAN FEDERATION OF GOVERNMENT EMPLOYEES
Chairman Mulvaney. Thank you, Ms. Chu.
It is a great panel. I am looking forward to it. First, we
have Dawn Hamilton. Ms. Hamilton is the president and CEO of
Security Assistance Corporation, a Virginia-based, small,
disadvantaged, woman-owned A business, which she formed in
2003. And Ms. Hamilton will be telling us about her personal
experiences with insourcing, specifically, I believe at the
Coast Guard.
Next, we have Bonnie Carroll, the president of Information
International Associates, a woman-owned, small business
headquartered in Oakridge, Tennessee. They provide information
management systems and technology services to the government,
academic, the private sector, and international entities. Ms.
Carroll will be testifying regarding her personal experience
with having three contracts insourced.
Finally, we have Bryant S. Banes, the managing shareholder
at Neel, Hooper, and Banes. Mr. Banes formerly practiced
government contract law on behalf of the Department of Justice,
and for eight years active duty as a judge advocate general.
Thank you for your service, Mr. Banes.
Mr. Banes has taught government contracting at George Mason
and the U.S. Army's Judge Advocate General's School. He will be
talking today about issues of standing and insourcing cases,
something that only lawyers could really appreciate, Mr. Banes.
So thank you for doing that. As well as the recent Court of
Federal Claims, excuse me, Court of Federal Claims Case,
Hallmark Phoenix 3 v. The United States.
And I will yield now briefly to the ranking member for the
introduction of the fourth witness.
Ms. Chu. Yes. I would like to introduce Jacque Simon,
director of Public Policy of the American Federation of
Government Employees. Thank you for being here.
Chairman Mulvaney. Very well. Ms. Hamilton, if you will
begin. You have roughly five minutes but again, we are going to
be a little slow with the gavel today. So do not feel the need
to rush.
STATEMENT OF DAWN L. HAMILTON
Ms. Hamilton. Chairman Mulvaney, Ranking Member Chu, and
distinguished members on the Subcommittee on Contracting
Workforce, thank you for inviting me today to discuss my
experiences with respect to the implementation of the current
administration's insourcing policies. I am Dawn Hamilton,
president and CEO of Security Assistance Corporation.
SAC was founded in 2002 and is a small disadvantaged,
minority woman-owned SBA certified 8(a) security services
provider.
In September 2008, the Coast Guard awarded SAC a small
business set-aside contract to process merchant mariner
applications at the National Maritime Center (NMC) in
Martinsburg, West Virginia. This work is comprised of three
task orders.
Shortly after receiving the contract, SAC instituted
various process improvements at the NMC to alleviate a
significant backlog in merchant mariner applications. As a
result of SAC's process improvements, the credentialing process
is significantly improved today. For this work, the Coast Guard
has recognized SAC for its outstanding performance and
contribution to the Coast Guard's receiving the Alexander
Hamilton award.
Notwithstanding SAC's exceptional performance, and without
any warning, on December 23, 2010, I received a call from Coast
Guard Headquarters stating that they would be insourcing two of
the task orders. By the end of the business day, the Coast
Guard posted the relevant position on the USA jobs website.
Soon after being informed of this insourcing action, SAC
requested the cost analysis and documents that allegedly
justified the insourcing action which revealed that the
positions at issue were not inherently governmental. The Coast
Guard's insourcing process failed to provide SAC with an
opportunity to provide actual cost data or respond to this
action.
The cost analysis was incomplete and inaccurate. It
underestimated significant costs, including indirect costs, the
cost of additional positions, salary, transition, short-term
and training costs.
The cost analysis justification and conclusions were also
unsupported. The analysis stated without authority that the
cost of a contractor is automatically higher than a government
employee and that the insourcing would have no adverse impacts
to other organizations. This obviously is incorrect since this
insourcing action has the potential of putting SAC out of
business.
SAC repeatedly attempted to meet with the Coast Guard to
present its findings. When the Coast Guard finally met with
SAC, we apprised the Coast Guard of the faulty process and
offered to provide actual cost information. In response, the
Coast Guard stated they had performed a robust cost analysis,
had spent significant time and resources on their analysis and
had no interest in reviewing SAC's actual cost data.
SAC then met with the Small Business Administration
officials, for which the first time have effectively intervene
in an insourcing action. Specifically, the SBA procurement
center representative has requested the Coast Guard halt the
insourcing action until it is able to conduct a true cost and
impact analysis and discuss the results with the SBA.
Regardless, the Coast Guard is moving forward with the
action and has already extended offers to over 55 of SAC's
employees. In fact, the number of SAC's employees insourced
represents approximately 23 percent of all the Coast Guard
insourcing for the last two years.
There is no question that the insourcing of these task
orders have profoundly affected the future viability of SAC.
This action has directly resulted in the loss of 75 percent of
SAC's jobs and revenue.
SAC respectfully submits the following recommendations. (1)
That a moratorium be placed on all cost-based insourcing
actions until further government-wide procedures are in place.
(2) That the Federal government adopt government-wide
procedures through a public rulemaking process.
At a minimum, such procedures should include: (a)
Requirements that affected companies and organizations be
provided with all government cost data and analyses used in
making an adverse insourcing action; (b) an impact analysis for
insourcing actions that affect small businesses; and (c) an
appeal process for affected companies and organizations.
And finally, (3) that the SBA be given a defined role in
the review of agency insourcing actions.
In summary, the positions at issue in the insourcing action
taken against SAC are not inherently governmental functions.
Rather, the Coast Guard claims it was done to save money. The
cost analysis provided by the Coast Guard is riddled with
problems and is ultimately inconclusive of whether the Federal
government will realize any cost savings. What is certain is
that the Coast Guard's actions have inflicted real and actual
harm to my small business--cutting jobs and revenue (during
this economic downturn) by up to 75 percent.
Going forward, it is imperative that the impact on small
businesses, the driver of our economy, must be a required
consideration in any future, excuse me, insourcing action.
I appreciate your time and attention today and look forward
to answering any questions that you may have. Thank you.
[The statement of Ms. Hamilton follows on page 30.]
Chairman Mulvaney. Thank you, Ms. Hamilton. And by the
way--thank you, Ms. Hamilton. By the way, just an explanation
of the lights in front of you. Again, we are going to be a
little looser with the time but I do not know if you actually
see the amount of time or if you just see red, yellow, and
green. Green, obviously, means that there is more than a minute
left; yellow means there is a minute; red means that we have
ended the five minutes. If we go much over five you will hear a
light tapping. A light tapping sound just to bring to your
attention the fact it is time to wrap up. But, again, we will
be fairly loose with the time.
So thank you, Ms. Hamilton. Ms. Carroll, would you please
begin with your testimony?
STATEMENT OF BONNIE C. CARROLL
Ms. Carroll. Chairman Mulvaney, Ranking Member Chu, and
members of the Subcommittee, I appreciate the invitation and
opportunity to provide testimony on this very important issue.
In addition to being president of Information International
Associates, I am also a member of the Professional Services
Council and serve on their board. So I am pleased to testify on
behalf of many other small businesses at PSC.
The insourcing actions that we have had that were the most
significant impact on us has been for the Department of
Defense, and particularly the Air Force. So I will focus a
little bit on our experiences from the Air Force today. But
similar activities are taking place across the government.
We are proud of the quality and level of service we provide
the nation's military men and women. We have done work on over
15 Air Force bases. Our contract performance has been
outstanding. Our contract prices have saved as much as 33
percent over previous government in-house costs. Our work has
never been identified as inherently governmental. In fact, we
continue to do that work, as do other contractors across the
whole Air Force.
Yet, despite these performances metrics, we have lost 16
percent of our employees to insourcing by the Air Force over
the last eight months and we hear rumblings about the potential
for another 15 percent. Amen when I say we do agree with the
strategic need of the Federal government to strengthen
performance of inherently governmental functions, particularly
the Federal acquisition workforce and also in areas where the
government must have internal expertise to manage agency
mission. Coming from Oakridge, I hope the government has
internal nuclear expertise.
Where insourcing fulfills a validated strategic need, we
support its proper use. As a taxpayer, of course I
wholeheartedly support saving the taxpayers money. However, the
tactical methods of implementing the insourcing requirement and
the impacts on the Air Force mission raise grave concerns for
us. What we have observed is that decisions to insource are
driven more by arbitrary budget and manpower boogies than by
the objectives of enhancing the government's workforce
capabilities or by true cost savings.
Furthermore, the reprehensible tactics of directly
recruiting our staff before official notice is given about the
government's even decision to insource is highly inappropriate.
Finally, where insourcing decisions were based on cost
savings, the cost analysis of how the deliberations were made
have not been transparent and there really is no effective
mechanism for a contractor to gain enough information in
appropriate time.
In addition to the faults and the decision and transition
process, once the insourcing occurs we do not believe that
there is any meaningful internal or external oversight to
ensure that the claimed savings and desired programs'
objectives have been achieved. In fact, quite the contrary.
What we see is evidence that insourced positions have not been
fulfilled and services to our war fighters have, in fact, been
diminished.
In my written testimony, I have provided three case studies
where outsourcing has occurred to the detriment of my company.
Rather than going into the details here, I would like to
address some recommendations that can be done to perhaps fix
some of the problems created by inappropriate insourcing.
First, in the issue of transparency, and I think we are
saying many of the same things, Congress should insist on more
transparency for any contract which is considered for
insourcing. From the moment the consideration begins, some kind
of an ombudsman or ombuds process should be appointed to work
with industry to assure an appropriate and fair process is
followed. Another recommendation in transparency as part of
that process, actions taken to fulfill the requirements should
be documented and made available to the contractor before
contracts are terminated. Going through the FOIA route is not
giving people information when they need it to have any kind of
reasonable ability to take action.
Next in the issue of competition, when the government is
pricing contracted function, a contractor also should be
allowed to put in a price to ensure that the taxpayer is,
indeed, getting the best price. Five years after a contract
begins, the contractor might, in fact, have lower prices to
offer. Unless there is significant and special justification in
insourcing, small businesses should be allowed to complete the
contract with all of the options exercised and not stopped in
the middle. Special justification should be required.
Transition planning and consequences. And I emphasize the
word ``consequences.'' The government should demonstrate that
it can transition the contract just as a contractor would be
required to meet a transition plan. There should be
consequences to the government's failure, just like there are
to a contractor when commitments are not met.
Ongoing reviews of process during performance should be
required. This is like the letter of obligation that is
applicable under A-76 and some form of it should be used and
enforced.
And finally, and probably most problematic, is
inappropriate recruitment. Poaching, and I hope you have heard
that word before, and other questionable recruitment practices
aimed at contractor employees on contracts targeted for
conversion should be dealt with. It is against regulations and
it has a significant financial impact on the contractor. We
recommend where the workforce is converted from private to
public sector positions, the government should actually
compensate contractors for the cost of hiring and training
those personnel. If the government did not take them over, they
would have to incur these costs. At a minimum, these costs
should be considered in the cost analysis.
So we are proud to do the work we do and are proud to
support the important missions of our government. What we ask
for is fair opportunity to compete and a government that makes
the right decisions for the right reasons.
Thank you for the opportunity to testify. And I am pleased
to answer questions.
[The statement of Ms. Carroll follows on page 41.]
Chairman Mulvaney. Thank you, Ms. Carroll. We will hold off
the questions until the very end.
So, Mr. Banes.
STATEMENT OF BRYANT S. BANES
Mr. Banes. Mr. Chairman, Ranking Member Chu, distinguished
members of this Subcommittee, it is an honor and a privilege to
talk to you today about the legal developments on insourcing,
their adverse impacts on small business, and job creation and
the lack of transparency in the process. More specifically, I
have been asked to talk to you today about the recent decision
by the U.S. Court of Federal Claims and Hallmark-Phoenix 3, LLC
v. United States. In this case, I want everybody to understand
that the Court of Federal Claims--one judge on the Court of
Federal Claims issued a decision ruling that the Court lacks
jurisdiction to review insourcing decisions by the Federal
government because private contractors are not within the zone
of interest of the applicable statutes. This was a Defense
Department insourcing action by the Air Force, specifically the
United States Air Force Space Command. And it concerned a
contract that was far from inherently governmental or anything
close to that.
I would like to talk to you about this today because it is
a very, very bad thing once we understand that we can no longer
question our government and we do not have the right to go into
court and say stop, take a look at this, and is it the right
thing to do.
In this case, that is exactly what the Court said. It
looked at the statutes at issue, namely 10 U.S.C.
Sec. Sec. 129a and 2463, the Defense Department's insourcing
statutes, and decided that private contractors have no right to
question the government's insourcing in court, saying that that
is for the halls of Congress.
Well, we are here today, and I would echo the concerns of
my distinguished colleagues and the private contractor
community. I see the same things where I am for several
contractors. I represent several that have been subject to
insourcing and it is interesting to see, to talk about Hallmark
today because that is an excellent example of insourcing gone
awry. The Hallmark contract is a transportation contract and
vehicle maintenance contract. It does not concern weapons. It
does not concern policymaking. It was competitively awarded.
The contractor has no adverse performance history. In fact, did
a very good job. And from what we can tell, they were doing the
work in a very, very cost-effective manner.
The statutes at issue that we are talking about require the
least cost form of manpower, either military, civilian, or
private contractor when you are looking at whether or not to do
insourcing. The Court, when it was looking at it, said that,
well, no, you cannot look at, you cannot question the analysis
that they did because you are not within the zone of issue and
legal parlance. In other words, this statute was not passed for
your benefit. But when you look at 10 U.S.C. Sec. 129a, it does
say and it mandates from Congress that the least costly form of
manpower be used. And it specifically states military, federal,
civilian, or private contractor.
Now, if a private contractor is the least costly form of
manpower, which in the Hallmark case we believe it was, then
that would make a private contractor the beneficiary of that
statute and one that should get the contract and it should stay
outsourced. But for some, for a host of legal reasons that we
do not have enough time to go into here, the Court decided that
private contractors had no legitimate right to question that
action.
There was a CRS (Congressional Research Service) Report
issued earlier this year titled Functions Performed by Federal
Contractors: An Overview of the Legal Issues. This is an
excellent report and it talked about an analysis that the
current administration was doing. And this is in line with some
of the recommendations we are going to make today.
When we are looking at how we fix the problem of whether we
can question insourcing in court, we have to do three things, I
think, to make sure that no court in the future denies that
opportunity. First of all, we need to amend the Competition in
Contracting Act to define protest to include conversion of a
function that is being performed by private contractors to
federal, civilian, or military employee performance. Second, we
need to amend the Competition Contracting Act to provide the
prudential standing and a protest action is coextensive with
interested party status. And three, I think it is appropriate
to impose a legislative moratorium on insourcing, the one that
was named in the CRS report, until the administration completes
an evaluation of the impact of insourcing on small business and
the general overall cost savings.
This is key because when you look at this, in the Hallmark
case when we talked to the people at Air Force Base Command, we
learned that they had not asked any of these questions. They
specifically told us that we have not considered the impact on
small business, we have not considered the impact on the union
workforces that will lose their jobs, and there is no direct
higher authority. So in that context, that was another reason
that we had to question the insourcing in court.
Because the administration has not considered these things
and has had no emphasis placed on considering these things,
that is why we recommend putting the brakes on this today.
[The statement of Mr. Banes follows on page 36.]
Chairman Mulvaney. Thank you, Mr. Banes.
Ms. Simon.
STATEMENT OF JACQUE SIMON
Ms. Simon. Mr. Chairman, Ranking Member Chu, and members of
the Committee, thank you for the opportunity to discuss the
importance of insourcing and reducing the Federal government's
expensive and risky overreliance on service contractors.
For the uninitiated, there is no better reminder of how
insourcing can be used to save money and improve services than
the retirement and annuity work at the Defense Finance and
Accounting Service (DFAS). In 2001, the work was privatized. In
2003, the DoD inspector general determined that the decision to
contract out had been wrong and reported that a systematic flaw
by a CA-76 process against the in-house workforce and raised
serious questions about the integrity of all A-76 cost
comparisons.
Despite growing concerns over the contractors. poor
performance, including reports that thousands of military
retirees with disabilities died before they received their
benefits, DFAS did not actually decide to insource the work
until 2010. DFAS's decision to insource 600 jobs saved money
and improved services because according to the agency, federal
employees were more flexible, were better able to change the
way they worked, and to accommodate increases in demand.
In 2011, DFAS told the House Defense Appropriations
Subcommittee this insourcing would save $5 to $10 million
this year and $19 million in the next fiscal year. As DoD
reported in December 2010 regarding its overall insourcing, and
I quote, ``Execution to date has been highly successful. More
than half of current insourcing actions are because the
contracted work was determined to be inherently governmental,
closely associated with inherently governmental, or otherwise
exempt from private sector performance to mitigate risk, ensure
continuity of operations, build internal capacity, meet
readiness needs, et cetera.'' Moreover, on a case by case basis
at the organizational level, DoD components are finding that
they can generate savings or efficiencies through insourcing
certain types of services or functions.
Regardless of what is said today, this hearing has provided
a very valuable service because we now know that of the almost
17,000 in-house positions created in DoD through insourcing in
2010, just six percent were established where the prime
contract holder was a small business. Although not the final
word, DoD's six percent report is the first set of undisputed
facts to be introduced in a debate rife with disinformation and
misinformation.
Here is a bit of historical context. During 2010, when DoD
actually insourced, it has been a record $248 billion on
service contracts, a huge increase from the $104 billion spent
in 2001. Civilian personnel costs during that same period
increased from $41 to $69 billion.
And a little bit about proportions. I think defense service
contractors would have a very difficult time convincing
taxpayers they have been victimized by insourcing when there
has been such a large net increase in service contracting--a $5
billion net increase in 2010 despite insourcing. Insourcing
affected less than one percent of contracted outwork at DoD in
2010.
As we have seen, insourcing can be used to improve service,
save money, and reassert public control over public functions.
Federal employees are often far more flexible than contractors
because they do not insist on lengthy negotiations and costly
surcharges every time something unanticipated occurs. Yet,
despite significant savings from reducing overreliance on
contractors, DoD insourcing has all but stopped.
DoD is no longer managing its workforce based on the usual
criteria of cost, policy, risk, and the law. Instead, it is not
assigning work to federal employees; indeed, it is taking away
work from federal employees merely because they are federal
employees, which inevitably undermines the interests of
taxpayers and war fighters.
It is also important to understand that the insourcing laws
do not cover conversions to performance by military or reserve
personnel. This has not stopped lawmakers from offering
draconian amendments to stop insourcing even when the so-called
horror stories that inspired them actually involve insourcing
to military or reserve personnel, not to federal employees. The
insourcing laws also have nothing to do with contracts that are
terminated simply because the agency no longer needs the work
to be performed.
I realize that both of those points are obvious, but the
vast majority of alleged horror stories we have been presented
with are actually contracts that are not continued or have been
converted to performance by military and reserve personnel. At
a time of large budget deficits, it is important that
contractors, both big and small, be required to make the same
sacrifices that rank and fire federal employees are already
making.
Proposals to prevent managers from using federal employees
instead of contractors even when money would be saved for
taxpayers are indefensible. Contractors consume enormous
amounts of discretionary spending. No effort to reduce the
burden of contractors on the taxpayer can be taken seriously if
it does not allow managers to substitute federal employees for
contractors when savings are possible.
This concludes my statement. I would be happy to answer any
questions members of the Committee may have.
[The statement of Ms. Simon follows on page 47.]
Chairman Mulvaney. Thank you, Ms. Simon. And thank you to
everybody.
As is my practice, I will defer first to Ms. Chu and then
allow the members who are participating to ask their questions
and I will hold my questions till the end. So Ms. Chu, you have
as much time as you need.
Ms. Chu. Thank you, Mr. Chair.
Ms. Simon, last year the Department of Defense instituted
the efficiency initiative to reduce taxpayer costs by
increasing efficiencies and eliminating redundant functions.
And you have talked in detail about that. What was the impact
on insourcing and why is it important that agencies comply with
the laws that require them to inventory their service
contracts?
Ms. Simon. I will answer the second part of your question
first if that is okay. One of the reasons bipartisan majorities
of the Congress have endorsed a moratorium on outsourcing is
because the outsourcing policy based on A-76 competitions was
conducted in a way that was not consistent with the public
interest. There has never been systems in place that have
allowed agencies to actually track the costs and savings, if
any, of A-76. The A-76 process itself has been found by
independent third parties, such as the DoD, IG, and the
Government Accountability Office, to be systematically biased
against in-house performance because of the vast overstatement
of overhead costs that are put onto the in-house cost estimate.
And I can talk about that further.
And then there is the fact, and it is very interesting to
hear my fellow panelists talk about the importance of
transparency. You know, one of the reasons that federal
employees have been the exclusive targets of the efficiency
initiative is because we are so transparent in the budget
process. Anybody looking at an agency's budget, DoD or any
other agency, can see exactly how may federal employees there
are, what they do, and how much they cost. But the same has
never been true for the contractor workforce that is in many
cases many, many times larger than the federal workforce, you
know, the civilian in-house workforce and any given agency.
Consequently, the moratorium on A-76 was imposed to exist
unless and until agencies could compile inventories of their
service contracts, that it would allow them to bear the same
kind of scrutiny that the federal employee workforce bears on a
continual basis. We want to know, and the public deserves to
know given the hundreds of billions of dollars spent on service
contracts, exactly how many there are, what they do, and how
much they cost.
And in that context, because, and you can see in my written
statement there is an exchange between Senate Armed Services
Chairman Levin with the person from DoD in charge of the
efficiency initiative where he admits that in the efficiency
initiative contractors have been spared any kind of scrutiny or
any kind of proportional request for sacrifice because they are
invisible in the budget. Nobody can tell exactly how much they
cost, what they are doing, and how many of them there are.
And so because of the fact that we are easy targets because
we are visible because of the transparency, and I am not
complaining about the transparency about federal employees, it
is as it ought to be, there just ought to be equivalent and
comparable transparency to the even larger service contract
workforce.
Ms. Chu. Now, it seems to me that there are certain
inherently governmental functions. For instance, oversight on
spending. What type of positions do you think should be
performed by federal employees?
Ms. Simon. Well, our position is that obviously inherently
governmental functions should be performed by federal
employees. I mean, that is not just our position as, you know,
I think there does not even seem to be any disagreement about
that. There is always going to be disagreement about the
definition of what is inherently governmental. It is a
controversial concept but we do have one both in statute and
regulation that if we only enforced that we would be in a much
better place than we are today according--the Army, the
Department of the Army is the one agency in the government that
has actually done a good job in creating a contractor inventory
and its initial findings are that there are about 45,000
inherently governmental jobs being performed by contractors
right now.
But there is also the concept of work that is closely
associated with inherently governmental work and critical
functions. In fact, the OMB's Office of Federal Procurement
Policy is in the process right now of putting together a new
definition of inherently governmental that will include the
concept of critical function. And the FAR includes a long list
of examples of work that--specific examples of work that fall
into the category of closely associated with inherently
governmental. And it involves things like preparing budgets,
writing regulations, evaluating contract bids. I mean, a lot of
work that is currently performed by contractors that even on
the face of it raises people's eyebrows because it is work that
is so closely identified with the public interest and work
where there is almost inevitably a conflict of interest when it
is performed by a private business that we would want it
performed by employees of a federal agency.
Then there is also work that has been contracted out
without any competition. The vast majority of federal employees
who lose their jobs to outsourcing do so when there is what is
called a direct conversion. There is no cost comparison, there
is no competition, there is often no private-private
competition. Just the work is handed over to one particular
contractor. And we have suspicions. Since everyone in this room
is a great believer in the benefits of competition, that
competition lowers prices. And when work is handed over without
benefit of any kind of competition--public-private or private-
private--I think that there is certainly a good public policy
argument to be made that at a minimum it should be subjected to
some form of competition.
And then, of course, there is the category of work that is
poorly performed by contractors, either far more expensively
than originally promised or quality problems. And God knows we
have a long, long list of headlines in the newspaper of
contracts that are, you know, poorly performed for one reason
or another or very, very, very expensive, more expensive than
they ought to be.
Ms. Chu. Let me ask a question about the controversies with
regard to the costing methodology for analyzing whether a
particular function should have been in-house or outsourced.
Has the costing methodology for DoD where there was
predominantly more reviews than efficiency been reviewed by
other congressional committees?
Ms. Simon. Oh, yes, they have. I have a few different
things I would like to say, if I may, about the DoD's costing
methodology and the insourcing context. But in answer to your
question, the Armed Services Committees, which are the
committees that probably have spent the most amount of time
actually studying and analyzing questions of cost comparison
methodology have codified now twice. And the National Defense
Authorization Act for fiscal year 2011 and then again when the
Democrats were in charge and now again when the Republicans
have been in charge, in the fiscal year 2012 National Defense
Authorization Act, two times that Committee had codified and
endorsed the DoD costing method that has been used in the
context of insourcing.
We are aware, of course, of the critique that has been put
forward by CSIS of the costing methodology and we have actually
asked the Department of Defense to respond to that critique. It
is interesting to us, however, you know, our critique of A-76
costing methodology has been validated by independent third
parties, Government Accountability Office, and the Department
of Defense Inspector General. So far at least the contractors
have only been able to find one of their own to criticize DoD's
costing methodology.
I think the fact that, you know, two separate House Armed
Services Committees have endorsed this costing methodology and
that to date we have no independent third party that has
validated in any way the CSIS arguments gives us reason to at
least have some faith in it but we are absolutely--if there are
flaws in that methodology, we would want them to be corrected.
Ms. Chu. And, in fact, the non-DoD agencies do not have a
public costing methodology. And, of course, you have mentioned
that the Professional Services Council has recommended OMB
circular A-76. Would that alleviate the costing methodology
concerns raised by contractors?
Ms. Simon. I doubt it. I think that, you know, they are
looking for some kind of issue to hang their objections to, and
costing methodology is sort of the argument of the day. A-76 is
systematically biased and we know that. Bipartisan majorities
in both houses of Congress have also recognized that. The GAO
has recognized it. The DoD IG has recognized it. I mean, during
the heyday of A-76 outsourcing during the Bush administration,
it is true that in-house bids won most of the time in spite of
this rather enormous bias against in-house performance. I mean,
the overhead costs, it is not just double counting. You know,
overhead costs should only be charged to the in-house bid when
it is a cost that would only--that would go away when the work
is outsourced. And, of course, what the DoD IG found was these
costs continued even after outsourcing. So they were
inappropriately charged to every in-house bid.
And so A-76 is just--it is a deeply flawed costing
methodology. It is possible that the OFPP will issue a new and
improved A-76 and we expect any time that OFPP will issue a
costing methodology for non-DoD agencies to use in the
insourcing context because I think there is obviously, in DoD,
if half of the work that is considered for insourcing is
because it is inappropriate for outsourcing and half is due to
cost reasons, well, then there is a lot of money to be saved
once these non-DoD agencies have an opportunity to perform
these kinds of rational cost-based comparisons.
Ms. Chu. Okay. Thank you. I yield back.
Chairman Mulvaney. Thank you. I am going to recognize now
the gentleman from Louisiana, Mr. Landry, for five minutes.
Mr. Landry. Thank you, Mr. Chairman.
Ms. Simon, when you say that contracts that have been
insourced to private contractors are performed poorly, are they
poorly performed because they may be poorly managed? I mean, is
it possible that the management of the Federal government in
some of those contracts may not be adequately supervised and
managed improperly? Is that possible?
Ms. Simon. Well, I would not say that it is a logical
impossibility but it seems really doubly unfair to federal
employees to blame them when they are performing the government
work if it does not go well and also blame them when it has
been contracted out and it does not go well. I mean, federal--
--
Mr. Landry. Would you say there is a bias when you manage
those kind of projects?
Ms. Simon. No. I think that, unfortunately, there were in
the course of hollowing out agencies that occurred in the great
downsizing of the `90s, we did find ourselves with so much work
contracted out that contract management itself was contracted
out. And agencies lacked adequate in-house personnel to
effectively oversee their contractor workforce. When the
contractor workforce was five, six, seven times bigger than the
in-house workforce, things were completely out of control. And
that is exactly what gave rise to the idea of insourcing work
that is inherently governmental.
Mr. Landry. But the private industry has a record of being
able to manage, you know, they have management teams that
easily manage seven, eight, nine times their size and perform
well in the private sector. And when they perform well, of
course, you can see that they perform well because their
profits go up. And so I just wonder, you know, the problem I
have is that, you know, it is easier, and especially in times
when this country is broke and American families are having to
tighten their belt and cut certain things, you know, whether it
be going to the movies or not taking that summer trip to
Disneyland and just going to the park instead, it is--it
becomes, I guess, easier for us to be able to look into,
especially when we are insourcing, to be able to eliminate
programs that are not useful. But when you load them up with
federal employees, they seem to become difficult and become
this animal that you are not able to properly cut when you
should be cutting.
And so those are my two concerns, is that one, are we
properly managing our private contractors? I have yet to be
able to, even before I came to Congress, find a government
agency that really is as proficient as the private sector. Now,
I will admit my bias. I come from the private sector so I just
mention that. I did want to just ask Ms. Hamilton a question
before I run out of time. Why do you think your contract was
canceled?
Ms. Hamilton. Excuse me. Well, I only have what was given
to me by the Coast Guard and the FOIA request which is it is
based on cost. And that is all I can really say.
Mr. Landry. And what is your feeling on it though?
Ms. Hamilton. Well, the numbers. There are a lot of people
on the contract. It did make up over 23 percent of all the
contracts that they have insourced over the last couple of
years. So I guess it is numbers. They are under pressure to cut
contractor positions by the agency that oversees them.
Mr. Landry. But you believe that you are creating a cost
savings to the Coast Guard?
Ms. Hamilton. Oh, there is no--I am creating a cost
savings, yes.
Mr. Landry. Right.
Ms. Hamilton. But insourcing--I do not believe.
Mr. Landry. So why would there be pressure for them--there
should be pressure for them to save in the budget rather than
to spend more money. So what is the pressure?
Ms. Hamilton. I think it is just the appearance of numbers
being cut. They are being asked to cut by these jobs and save
this money and then they are producing a document that is
saying it is saving $5 million and it is coming out of their
pocket. And then I guess it goes over to the Federal
government's pocket instead of the Coast Guard's pocket. So it
creates that appearance or illusion of saving some money from
that agency when, in fact, it is not; it is just coming from a
different purse.
Mr. Landry. I see. Mr. Chairman, I yield.
Chairman Mulvaney. Thank you, Mr. Landry.
We are going to recognize now Mr. Critz from Pennsylvania
for five minutes. Mr. Critz.
Mr. Critz. Thank you, Mr. Chairman.
I was actually going to ask a couple of questions other
than to Ms. Simon, too, to give other people a chance to talk
and give you a chance to rest a little bit. Now I am going to--
let me get my papers in front of me.
Ms. Hamilton, you had mentioned that--well, in your
testimony you had 75 percent of your workforce you lost with a
Coast Guard contract. Is that correct?
Ms. Hamilton. That is correct.
Mr. Critz. How much notice did you get that this contract
was going to be eliminated or you were not going to get a
follow on or anything?
Ms. Hamilton. Well, they called me on Christmas Eve, as I
stated, and said--then jobs were posted that evening. Through
the FOIA request we did see that they had sent out a notice.
However, it was sent to the wrong address. So if it was sent to
the right address that would have been maybe six months. But
that did not happen.
Mr. Critz. Oh, so they sent a notice out but because it
went to the wrong address you did not get that six months
notice. Is that what you----
Ms. Hamilton. That is correct. And we brought that to their
attention when we met with them.
Mr. Critz. Okay. All right. The contract you had with the
Coast Guard, what was our margin, would you say on it?
Ms. Hamilton. You mean our profit?
Mr. Critz. Yes.
Ms. Hamilton. Probably around six percent.
Mr. Critz. Six percent. But you were still saving the Coast
Guard money and making six percent?
Ms. Hamilton. Yes.
Mr. Critz. Okay. All right.
Ms. Carroll, you lost work and it looked like from your
testimony about 25 percent of your workforce?
Ms. Carroll. It was 16 percent in the last 18 months with
another 15 potential.
Mr. Critz. Okay. How much notice did you get that this
contract was going to be eliminated?
Ms. Carroll. Well, you know, notice is a funny thing
because we get lots of rumblings. Okay? We get, oh, this is
going to be insourced. We hear from our people this is going to
be insourced and things like that. So we did get some notice,
maybe four to six months notice on some of these contracts.
Mr. Critz. Okay.
Ms. Carroll. One of which was canceled before the last
option year.
Mr. Critz. Yeah.
Ms. Carroll. And so, you know, the official notice versus
the rumblings that go on and when people are approached and
told to apply for jobs when we have not even been told that an
official decision is made is a real problem.
Mr. Critz. Okay. Thank you. Mr. Banes, you cited a CRS
report and I missed what report--what the title of the report
was.
Mr. Banes. Yes, sir. It was Functions Performed by Federal
Contractors: An Overview of the Legal Issues. Excuse me. It was
Functions Performed by Federal Contractors: An Overview of the
Legal Issues. The cite to it is in my testimony.
Mr. Critz. Is it? Okay. I went through rather quickly and I
did not see it. Thank you very much.
Now, for the three of you, I have some data here in front
of me and I was curious if you were aware of it. There is a
report by the Office of the Director of National Intelligence
in `08 that concluded that in the intelligence community,
contractors make up around 29 percent of the workforce yet they
account for nearly half of the personnel budgets. So obviously
there is an issue. And I think what you see from the Federal
government is that we have a way of making a one-size-fits-all
solution and I think you can cite personally that one-size-
fits-all did not fit you because you were doing good work. But
when the Federal government moves, it is a huge mass of people
that move and trying to save money.
And I am on the Armed Services Committee. I used to work
for a member that was Defense Appropriations. And what I can
tell you is when you go into country in Iraq or you go into
country in Afghanistan, there are way more contractors than
there are military personnel and it is a huge problem because
the management, as Mr. Landry cited, is tough because there are
so many moving parts. And I think things like this, what I just
cited with intelligence, is that it is not working as it was
set to be. But it works in some instances. You can cite that.
But it does not work in all instances because there are some
functions that are inherently governmental. There are some
functions that are better done within the government. And it is
not a perfect system. And I think it is great that we all can
sit down here and talk about this.
The one thing that Ms. Simon brought up that I think is
very interesting is that of all the insourcing, 17,000 in-house
positions created in DoD, six percent of them were displaced
small businesses. So it is not perfect but it is close.
Go ahead.
Ms. Carroll. That number is a very interesting number but,
you know, numbers can be used to tell many stories. The reality
is maybe there is a big company that has 800 positions. Okay,
so are we talking percentages by contract? You have to look at
how many small business contracts there are and what percentage
of small businesses being insourced versus large contractors
and what percentage. That six percent does not really mean very
much to me.
Mr. Critz. Well, it says where the prime contract holder
was a small business, six percent.
Ms. Carroll. Of the money? Of what? I do not really
understand that money.
Mr. Critz. Ms. Simon, can you address that?
Ms. Simon. I would have to get back to you with the details
but I believe it is of contracts.
Mr. Critz. Of contracts. Okay. My time has expired. Thank
you, Mr. Chairman.
Chairman Mulvaney. Thank you, Mr. Critz. I am now going to
yield five minutes to Mr. Schrader from Oregon for his
questions.
Mr. Schrader. Thank you, Mr. Chairman. I am just trying to
get a handle on the fairness of the contracting issue area and
reference is made to--each agency I guess gets to pick how it
wants to define what cost should be allocated to a contract. I
guess I ask Ms. Simon and Mr. Banes that question.
Ms. Simon. I am sorry. I am not sure I understand the
question.
Mr. Schrader. In other words, there does not appear to be a
standard methodology for the Federal government to include, you
know, a set number of costs, whether it is in your variable
costs, you know, direct costs, overhead. I mean, all these----
Ms. Simon. As we----
Mr. Schrader. It is up to each agency. Is that correct?
Ms. Simon. Well, no. Not exactly.
Mr. Schrader. Okay.
Ms. Simon. As we speak, only the Department of Defense has
issued and had codified into law a costing methodology for use
when making insourcing decisions that are not based on--that
are based on cost as opposed to based on whether the work is
inherently governmental, closely associated to inherently
governmental poorly performed----
Mr. Schrader. It seems like cost, providing it is not
national security interests it would be.
Ms. Simon [continuing]. Competition. Non-DoD agencies right
now are not insourcing for cost as far as we know because they
are waiting for OMB to issue a costing methodology that they
can use when their insourcing decisions are going to be based
on which is the lowest cost.
Mr. Schrader. When is that due? Or do we know?
Ms. Simon. I have no idea. They are on their own schedule.
Mr. Schrader. You indicated at one point, well, sorry, Mr.
Banes, a comment on that also?
Mr. Banes. Yes, sir. When you are looking at what the
costing methodology is for the Department of Defense, I mean,
Ms. Simon is right in her exposition of what the field of play
is. But the directive-type memorandum 09-007 is the Department
of Defense costing methodology. That one was talked about in
the Ike Skelton Act and it basically was reviewed at that
point. The interesting thing about it, and from a fairness
perspective, is that there were two sets of numbers that are
made in this directive-type memorandum or that are used.
One is the set of numbers that is used to justify
insourcing and then the other set of numbers is used to report
to Congress how much money you need or how much money the
agency needs. The number that the agency needs in reports to
Congress is up here. The number that is used to justify
insourcing is down here. It is less. So, you know, I did not,
you know, I did not think the government was supposed to make a
profit in its appropriations but that is one way.
Mr. Schrader. So there is a mix and match? In other words,
a report of two different numbers using different variables?
Mr. Banes. Yes, Your Honor. Or yes, sir. I am thinking I am
in court.
Mr. Schrader. That is okay.
Mr. Banes. Sorry. But, you know, it is an interesting
memorandum. When you look at it there are just two sets of
numbers in there. There is one in the front that talks about
reports to Congress.
Mr. Schrader. I see. So the reporting is different than the
costing actually to some degree.
Mr. Banes. Yes, sir. And that is the, you know, that is our
concern, is the full costing methodology. I would echo the
chairman's concerns that, you know, I do not think the DTM
actually has a full costing in it on the insourcing side. I
think it does on the report to Congress side. But we do not,
you know, no one ever sees the insourcing side. That is secret.
You know, I cannot--it is under a protective order. I cannot
tell you what it was for the Hallmark contract here today.
Mr. Schrader. Okay.
Mr. Banes. But I can--but Ms. Simon is right. You can go to
Congress and you can see what the agency asked for. But you
cannot see what the justification was.
Ms. Simon. Well, and I would also like to add, of course,
what Mr. Banes says may be true but it is also true that the
true costs of service contracts are truly invisible in the
budget process. And the cost of hiring federal employees and
the full lifetime costs of hiring federal employees are
extremely transparent and known to all of us in great detail.
Mr. Schrader. I appreciate that. You mentioned the CSIS
critique and stuff. Could you elaborate a little bit on that?
Ms. Simon. Well, I only raised it because it is certainly--
the contractor lobbying organizations and pressure groups have
tried to make great fanfare out of this report that we are not
sure if they commission it or not. We do not really know, you
know, what moved CSIS to suddenly jump into this arena. But
they produced a report. And like I said earlier, we have
formally requested that the Department of Defense respond to
the criticisms that CSIS has made. From our own cursory review
we did not find them persuasive. And what we find least
persuasive is the recommendation in the report that the
government revert to A-76 as a costing methodology because we
know that that is a fatally flawed methodology.
Mr. Schrader. Thank you very much. I yield back.
Chairman Mulvaney. Thank you very much. And again, thanks
to all the panelists for coming in today and thank you for the
questions.
I will take a few minutes now and go down with each of the
witnesses and ask a couple of questions.
Ms. Hamilton, tell me a little bit more about your
contract. What--you spoke briefly about the services that you
were providing. Could you go down that list again of what you
were actually doing under your contract?
Ms. Hamilton. Sure. Absolutely. What we do is we perform
professional qualification evaluation of merchant mariner
credential applications and safety and suitability screening of
these applications as well. So basically the criteria is
established by the Coast Guard and we simply administer its
routine and administrative function in nature. SAC does not--it
is not involved in any exercise of government discretion. So it
is just administrative.
Chairman Mulvaney. So it was personnel-based?
Ms. Hamilton. It is personnel services. Yes.
Chairman Mulvaney. And I guess my question to Ms. Simon,
Ms. Simon, you talked about the horror stories. The horror
stories of either contracts that had been canceled or contracts
that were non--that were performing inherently or near
inherently governmental functions. I guess my question to you
is what she just described, does that raise your eyebrows as to
whether or not it is inherently governmental?
Ms. Simon. If Ms. Hamilton says that she learned from the
agency that the work had never been categorized under a Fair
Act inventory or otherwise as inherently governmental, I have
no reason to doubt the truthfulness of her statement. Whether
or not it is closely associated with inherently governmental
work is really a judgment that is inherently governmental. I
think that is for the agency to decide. You know, it is not
really--I am absolutely a layperson when it comes to these
kinds of distinctions but there are people in the agencies who
are much more knowledgeable about the integration of the work
of the agency and are in a much better position to judge when
work is a critical function for an agency or whether it is
closely associated with inherently governmental.
Chairman Mulvaney. Ms. Simon, give me a few examples of
what would not raise your eyebrows, of something that to you is
absolutely noninherently governmental?
Ms. Simon. Well, I would be happy to answer that question
but I just want to put my answer in a little bit of context. I
am sorry that Mr. Landry left because one of the arguments that
contractors--the most compelling arguments that contractors
have, I believe, made in their own favor is that they are
essentially disposable. You can hire contractors for temporary
needs, for surge situations, but not necessarily for ongoing
functions that are core to the mission of an agency. And I
think this concept that once a contract is let to a contractor,
the contractor has some kind of a fundamental right to a
continuation of that work and perpetuity. It just seems to be
certainly counter to everything I know about the free
enterprise system and what people can expect from their
government.
There are jobs that are, you know, commercial in nature and
that, you know----
Chairman Mulvaney. What would some of those be in your
mind?
Ms. Simon. I think that, you know, I guess the rule that I
personally use when I analyze this kind of issue, I look at a
business and if a business has 100 percent of its work is
government work, that makes me think that business might be
inherently governmental. If it has----
Chairman Mulvaney. If I was the food service----
Ms. Simon [continuing]. Absolutely no customers outside of
the government and there is not that good or service is never
exchanged solely in the private sector----
Chairman Mulvaney. If I was the food service provider in
this building and that was 100 percent of my business or 100
percent of my business was providing services to the
government, would you consider that to be inherently
governmental or commercial?
Ms. Simon. I will tell you a food service function that I
do think is inherently governmental, and that is the food
service in a VA hospital. And that has been inappropriately
contracted out in far too many cases.
Chairman Mulvaney. Why is the food service in a VA hospital
inherently governmental?
Ms. Simon. The veterans--an overwhelming majority of the
employees of the VA who do provide food service are veterans
themselves and providing, you know, veterans who are in a VA
hospital are acutely ill, of course, and they often have very
special dietary needs. And the integration of--food service is
actually very highly integrated with patient care in a VA
hospital and it is part of the internal functioning of the
holistic care of a veteran who is in the hospital. And often
what has happened when food service has been contracted out
solely for cost reasons is people get inappropriate meals that
might have food or additives in their meals that are actually--
counteract the effectiveness of the drug regime they might be
on or that they are only available certain hours and so people
are forced to have frozen meals that are, you know, that also
vary from either their taste or the regime that they have been
placed on by their health care provider.
Chairman Mulvaney. Is not food service provided
commercially?
Ms. Simon. I think food service is a great example.
Is food service provided commercially at every hospital?
Chairman Mulvaney. At every hospital other than VA
hospitals in this country?
Ms. Simon. At every hospital. Of course it is. But I think
that other hospitals, private hospitals, do not outsource their
food service.
Chairman Mulvaney. I am sorry. What?
Ms. Simon. Private hospitals do not outsource their food
service to patients. Selling a hamburger to visitors, sure,
that is commercial.
Chairman Mulvaney. Okay. All right. You mentioned before,
Ms. Simon, that to your knowledge it was only the DoD that was
doing this on a cost basis. I think you said they were the only
ones that had come up with the actual rules and to our
knowledge there were other----
Ms. Simon. To my knowledge, yes.
Chairman Mulvaney. Who as your contract with, Ms. Hamilton?
Ms. Hamilton. The Coast Guard.
Chairman Mulvaney. And the Coast Guard falls under what
agency?
Ms. Hamilton. Department of Homeland Security.
Chairman Mulvaney. Ms. Carroll, your contract was with
whom?
Ms. Carroll. Air Force One with the Department of Labor.
Chairman Mulvaney. Department of Labor. Is that under the
Department of Defense?
Ms. Carroll. No.
Chairman Mulvaney. Is it fair to say then that in the real
world what is actually happening is there are other agencies
other than the Department of Defense that are doing this
supposedly based on cost?
Ms. Carroll, tell me a little bit more about the Department
of Labor contract that you had. You did not get a chance to
talk about the specific examples. And I do think the specific
examples are real. In fact, the reason we are having this
hearing is because I was approached by somebody who went
through something that was very similar to what you folks have
gone through. He was a mapmaker, a cartographer who showed up
at work one day to find out that he had been insourced and that
all of his employees had been hired by the Federal government.
And when he inquired as to whether or not the employees were
willing to do that he was informed that they were actually
getting paid 20 percent premium to go to work for the
government over what he was paying for them. And it was in
large part that experience that drove this hearing today. So I
think the individual experiences are real. And Ms. Carroll, I
will be curious to know yours.
Ms. Carroll. In the Department of Labor, as I said in my
testimony, we were not the prime. We were a sub. We were
working with a minority business. We had been in that library a
number of years before so we knew the library. And they just
said--a lot of the things we are hearing today come down to the
way contracts are managed. I totally agree. That is what
someone said. The problem is that the government has to step up
and manage these contracts right. When you say in the food
service that, you know, the right thing is not served, if there
are standards of performance and they are well written, then
the right things will, in fact, be done. And I know many
contractors will do the right things even though it is not
written in there.
So in the case of the Department of Labor, they--eight
weeks before the end of the contract we were notified that the
contract would not be renewed nor recompeted. We had no
indication why that would happen except we knew that the Cos,
the management of that contract, the COTR changed all the time.
So they really did not understand what was going on at all. And
they somehow had the idea to pull that work in.
We had two librarians that worked there and two of the
people were insourced. The rest were just laid off. They gave
us no time to really prepare for that kind of an action. And
since we were not the prime, we could not motivate the prime to
go ahead and do FOIAs and do various things. They just said you
know what? At some point it is worth just going on. And they
did.
Chairman Mulvaney. Ms. Carroll, you also mentioned
something that I am not familiar with which is poaching. To me
that is shooting an animal that does not belong to you. What
does it mean in your world?
Ms. Carroll. Not necessarily shooting but taking an animal
that does not belong to you. How about that?
Chairman Mulvaney. Is that the term for hiring away the
employees and so forth?
Ms. Carroll. Right. Yeah. You do a very extensive
recruitment process. You hire people. You train them. They
work. And the government comes in and suggests that this person
apply for a government job.
Now, there are two kinds of poaching. Okay? There are some
contracts we have we know this is going to occur. We know we
are going to hire people and eventually they are going to
become government. And yeah, they post the jobs but everybody
knows that that person is wired for that kind of a job. That is
kind of voluntary. The individual has the right to choose to
apply for a government job that is posted. Okay? But it is the
involuntary poaching that really is very distressing.
Our project manager at an Air Force base in California was
told before we were told that the contract was officially going
to be outsourced--of course there were rumblings--she was told
your job is being posted. Go and apply for it.
Chairman Mulvaney. Do you have any idea what it paid in
that particular circumstance?
Ms. Carroll. No, I do not know that.
Chairman Mulvaney. Whether it was more or less?
Ms. Carroll. I could get you data on that. I do not know
what GS level it was. I never did that cost comparison but I
could get it if you would like it.
Chairman Mulvaney. We talk about cost comparisons and I am
going to ask Ms. Simon a question in a few minutes about some
of this supposed systematic bias in the A-76 process I think
you mentioned specifically about overhead. Are you convinced,
Ms. Carroll, that when you do or when the departments do the
cost comparisons that they are taking into consideration all of
the costs that they should when they cost the government side
of things? When they cost the government option?
Ms. Carroll. No, I am not convinced that they do cover it.
The problem is that government lifecycle costs for employees
for benefits are in many different pots, sometimes not even in
the same organizational pot. And so I do not think it is that
transparent a process. I think you would have to go through all
kinds of roots in order to really know what the full lifecycle
cost to these people are. On the other hand, with a contractor
it is very clear exactly what the costs are.
Chairman Mulvaney. You and I were talking before the
hearing about a circumstance with a posting overseas. Do you
want to share that with the panel?
Ms. Carroll. Yeah. We had a contract, U.S. Air Force Europe
(USAFE). And we were doing, you know, we were performing very
well. Before the end of the contract they decided they would
not exercise the last option year. And they said they were
insourcing. Unfortunately, the German labor laws and the U.S.
agreement requires those people to come back to the United
States so they could not be directly insourced. So some of the
people just were out of jobs.
But what happened was very interesting. The government
never filled some of--still has not--months later still has not
filled those positions. We are hearing through our previous
project manager who still is in Europe that the positions are
not filled. And what they are doing now is they are paying
people to go on duty to Germany. Now, was this figured in the
cost? I mean, what is the accountability and what is the
metrics and the measurements after the fact on whether this
really works?
We know a couple of the positions are still vacant, which
means there is not good data for promotions, for career paths,
and other things. So the servicemen and women are suffering.
Chairman Mulvaney. You raise a good question, something I
heard from all three of the panelists. Regarding finding out
about the process, Mr. Banes, given the decision in the
Hallmark case, what methods, what avenues are available to Ms.
Carroll if she wants to find out how the government costed that
project?
Mr. Banes. Mr. Chairman, I do not think there are any
avenues at that point because if you cannot file--if you cannot
file in the Court of Federal Claims, if there is no
jurisdiction there, then you cannot get a protective order to
look at this data. So, because, and the government takes the
position when you ask for it under the Freedom of Information
Act that it is source election information. And that is secret.
So I cannot tell you what the numbers were in the Hallmark case
sitting here today because they are still under a protective
order.
But I can tell you that when you scrutinize them there are
two aspects that are totally out of whack. One is how many
people it would take to do the job internally in the
government; and then two, how much--what are the full costs of
performance of those individuals? And when you look at them and
scrutinize exactly what is going on and exactly what the Air
Force is going to do in the future, it does not make any sense
at all. And now under this decision there may not be an
opportunity to even find out ever.
Chairman Mulvaney. Ms. Simon, I will ask you. What is wrong
with making the process public? What is wrong with sharing the
information with the contractors with the public? What is wrong
with granting standing to the businesses that have had their
contracts terminated?
Ms. Simon. Well, I am listening to the three panelists. All
I could think of is welcome to our world. This is the exact
same situation that federal employees, only I would say we are
in an even weaker position. This is the same kind of situation
that federal employees face in the outsourcing context. We do
not have--we still do not have standing ever to go to the Court
of Federal Claims. We are allowed to be an interested party and
intervene but we can only do so when we get the information on
the in-house bid, the bid that was made on our behalf, and the
contractor bid after it is too late to file a protest. We are
in a complete veil of ignorance.
Chairman Mulvaney. Well, certainly somebody in the
government has that information. Right?
Ms. Simon. But not us.
Chairman Mulvaney. Who are you in that circumstance?
Ms. Simon. The employees that are losing their jobs. The
employees that have----
Chairman Mulvaney. But you are a counterpart to what Ms.
Carroll and Ms. Hamilton do. I mean, the bosses, I guess, have
access to the information. Do they not?
Ms. Simon. There are designated individuals within the
agency that have that information but certainly not the people
who are affected by the decision to outsource the government
work.
And there is effectively no appeal right because by the
time we get the information, again, through FOIA requests or
the intervention of members of Congress, it is too late for us
to file any kind of protest or do anything about it.
We are for transparency. On the other hand, I think that be
careful what you wish for. If contractors are granted the right
to engage in endless litigation whenever there is any
possibility of having their contract terminated, I think
agencies will certainly think twice before they sign these
contracts because it certainly raises the stakes and raises the
long-term costs of engaging in a contract with a private
company because you do not have the flexibility that
contractors, you know, use as their best argument for
themselves. If you can never terminate a contract because you
no longer want to perform that function or you would like to
compete it in another way or bring it back in-house and the
prospect is endless litigation, why would you ever want to
subject yourself to that?
Chairman Mulvaney. I think there is a distinction. We might
be using legal terms here that mean different things to
different people. To me the termination of a contract is one
thing. The expiration of a contract is another. The expiration
of a contract would be the ending of a contract by its own
terms and it is completely contemplated in the document itself.
The termination of a contract is the breaking of a contract.
Ms. Simon. Yeah. I think that what Ms. Hamilton referenced
was that the government did not exercise all of its options. Is
that correct?
Ms. Hamilton. No, that is not correct. I am sorry.
Ms. Simon. Ended prematurely? I am sorry.
Chairman Mulvaney. I think there has been testimony that
some of the contracts discussed today were that but other ones
were actual terminations. So I guess my question to you is to
get--to try and focus here, it is fairly simple which is what
is wrong with giving the managers of private businesses the
same information that the managers of the government projects
have?
Ms. Simon. I think that we have no problem with the concept
of notice. Notice is one thing. And the provision of all the
internal costing information prior to the decision is another.
And we have some misgivings about that. Notice, no problem at
all.
Chairman Mulvaney. All right. Then lastly, I do want to
touch on this issue of overhead because in my world, Ms. Simon,
by the way, you are the first person I have heard in Washington
and I mean this slightly tongue in cheek, that has said that
this place is inherently transparent and everybody understands
what is going on. You may be the only person in town who
believes that.
Ms. Simon. No, I said that with respect to federal
employees, not the government as a whole.
Chairman Mulvaney. That is right.
Ms. Simon. Certainly, there is a contractor workforce----
Chairman Mulvaney. But regardless of transparency, as a
lawmaker, as someone who is ultimately called upon to sot of
choose between these two things, obviously we set policy and it
gets implemented at a different level, if you present me with a
private contract for Ms. Hamilton to provide the services to
the United States Coast Guard that she described, I know
exactly what that is going to cost. I know how long it is going
to cost and what it is going to cost on a year-to-year basis. I
have what in the legal world we call a liquidated sum. I know
it is going to be $100,000, whatever the number is. If you come
in and tell me, well, I also want to hire the same number of
government employees to do that exact amount of work, I would
suggest to you I have no idea how much that is going to cost
because what I am doing now is I have got permanent workers. I
am not--I do not have a short-term contract. I have not hired
contract workers to do this work. I am actually taking federal
workers and putting them to work on this particular job. You
mentioned that overhead should not be counted. It strikes me
that that is bizarre. No one in the private sector would ever
say those words, that you cannot cost overhead into what you
are doing. And it just strikes me as odd that you have taken
the position today that you actually know what the government
is paying for these services because I think the exact opposite
tends to be the case.
I am going to yield back to Ms. Chu. And I will give you a
chance to propose----
Ms. Simon. May I respond?
Chairman Mulvaney. Very briefly. Let me get Ms. Chu and she
may give you the opportunity to do that. I have spoken for way
too long and I apologize for doing that. So Ms. Chu, if you
have any follow-up questions I will yield to you as much time
as you need.
Ms. Chu. Well, I will just thank all the witnesses for
coming and give you a chance to respond to that question.
Ms. Simon. Okay. I would not agree that when you sign a
contract that specifies a certain amount of work to be done for
a certain price that that is the end of it. One of the problems
with service contracting is that that is often not the end of
it. When new requirements arise, unanticipated events occur, it
requires renegotiation, new task orders. You know, there is
often--contracts often grow far beyond their initial terms and
costs. In contrast, when you hire a federal employee, you agree
to pay a certain salary or an hourly rate for when they are
working. But each time you give the federal employee a new
assignment or a new task, you do not suddenly raise their pay.
You do not have to engage in a whole new negotiation over the
terms of employment. There is a very useful term in every
federal employee's job description--other duties as assigned.
You can move federal employees around, you can tell them to
do whatever you want them to do and they have to do it. And
there is no increase in cost.
And I would also object to the assumption that once a
federal employee is hired they are forever. The efficiency
initiative in the Department of Defense, for example, the 600
employees that I talked about that DFAS hired when it insourced
that work, because of the sort of zero--it is not a zero sum.
Because of the fact that the efficiency initiative has a cap on
federal FTE, any new employees hired have to be offset with
positions eliminated. So many federal employees are going to
lose their jobs and many federal positions are going to be
eliminated in the context of the efficiency initiative.
Ms. Chu. Thank you. I yield back.
Chairman Mulvaney. Ms. Chu, I am finished. Would you like
to give your closing statement?
Ms. Chu. I would just like to thank all the witnesses for
coming. It was a very informative hearing today.
Chairman Mulvaney. Thanks very much. I will close with
this. I do appreciate everyone's participation. I think it has
been a healthy debate and it has been helpful to me to help
frame the issues.
Ms. Simon, I especially appreciate your testimony.
Ms. Simon. Thank you.
Chairman Mulvaney. It is obvious counter to what positions
I would take. And I would, before we close, point out that
actually it was Robert Gates who said that in his opinion this
system within the DoD, the insourcing system, has completely
failed to meet its goal to save costs. As is so often the case,
one part of the government is saying one thing and one is
saying the other. In fact, I see some heads nodding negatively
in the body so I will read the quote. ``We were not seeing the
savings we had hoped for from insourcing as the Defense
Department brought work from the private sector in-house,''
Secretary Gates said on August 9th of last year. And thank you
to everybody.
Having the stories, not only from the private sector but on
behalf of the federal employees is extraordinarily helpful to
us. And as this Subcommittee continues to focus on creating
opportunities for small businesses to compete for federal
contracts, we will continue to investigate instances where
agency actions harmed small business and cost the taxpayer more
money.
Ms. Simon mentioned earlier today that most of the horror
stories were probably contracts that were expired over their
own terms or that were inherently governmental. I would suggest
to everyone here in the room that that is not the purpose of
this hearing. The purpose of this hearing and the purpose of
the additional hearings that we will do will be to focus on the
exceptions to those two things. I cannot sit here and defend
somebody who is upset because their contract that was a three-
year contract with the government expired and they have not
decided not to hire them again. That is the government's right
and it is the contract terms that set forth that. Similarly
speaking, if you were doing something like trying to shoot
people, I would think that that would be one of those
inherently government functions that should be insourced.
I want to focus, however, as we go forward on the other
things, the other exceptions to those two rules where the
government actually reaches out and takes things from the
private sector that are not inherently governmental functions
and that do not save costs. We are here on the Small Business
Committee and both party members I know agree with this, to
protect the interest of small business. And to the extent that
the Federal government is trampling on the opportunities that
are afforded to our small businesses, I know that both parties
where will do everything we can to prevent that from happening.
After today's hearing we are going to take four actions. I
am going to ask the full Committee to follow up with the
agencies mentioned by Ms. Hamilton and Ms. Carroll. Secondly, I
am going to send a copy of the transcript to the Office of
Federal Procurement Policy so they can suggest, excuse me, they
can look at the suggestions offered by our witnesses as they
finalize their policy guidance. Third, I will send a letter to
OMB requesting that each agency publish their insourcing
guidance pursuant to notice and comment rulemaking and that OMB
and each agency ask them to impose a moratorium on cost based
insourcing until those rules are, in fact, published. Fourth,
as we consider contracting legislation, excuse me, contracting
legislation for this Congress, we will look at ways we can
address standing for small businesses, facing insourcing
difficulties, and ways that we can strength the SBA's roles in
this process.
At this time I would also ask unanimous consent that
members have five legislative days to submit statements and
supporting materials for the record. Hearing you objection, it
is so ordered.
Thank you all again. Thank you for participating. This
meeting is adjourned.
[Whereupon, at 11:28 a.m., the Subcommittee was adjourned.]
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