Toward a Valid Comparison of Contractor and Government Costs

Abstract

In this report, we show that the prevalent methods for comparing contractor employees with government employees, in terms of overall cost, are generally inadequate. Too often, government labor rates are directly compared with the cost of procuring a service from a contractor. Needless to say, such comparisons fail to account for the full range of costs. Part of the problem is that a comprehensive, standardized methodology to compare costs has yet to be articulated. We contend that a meaningful analysis must occur in a multi-dimensional space that includes the following factors: direct costs, indirect costs (i.e., overhead), the military or government civilian rotation base, contractor agility and scalability, and the benefits from competition. At present, however, the make-or-buy decision that leaders regularly face is based, it seems, on little more than intuition or preconceived bias. Over much of the 20th century, it was widely assumed that if the government needed something, it should acquire it internally often without consideration for whether or not the task was inherently governmental. Over time, this has led to the buildup of large government bureaucracies, with increasing numbers of government employees. In the 1980s, this assumption began to attract a fair number of critics from both inside and outside of the government. After the fall of the Soviet Union, the federal government began to reduce the military force structure and cut defense spending. As a result, the government acquisition workforce (civilian and military) saw a significant reduction in its number of employees.