Outsourcing vs. insourcing: Solving the cost-comparison conundrum

Defense and civilian agencies often fail to consider a range of administrative costs when comparing contractors’ and federal employees’ proposals for work, a problem that can lead to unexpected costs, according to a report released May 17.

As the Defense Department looks to minimize spending, it's often impossible to compare contractors’ costs and in-house overhead expenses, because policies do not include expenses outside the realm of a statement of work, the Center for Strategic and International Studies (CSIS) wrote in its report, DOD Workforce Cost Realism Assessment.

The problem is that no one knows what to include when comparing contractors’ and federal employees’ expenses, CSIS said. “The challenge for determining an adequate overhead rate starts with the definitional question of what constitutes overhead. There does not exist a universally accepted definition of what costs are subsumed under overhead,” the report states.

Even so, a single definition that would cover the vast expanse of federal work is suspect, the report states.

But when budgets are strained, officials need a data-driven approach, with verifiable results, to make good decisions on allocating resources, CSIS wrote. Then they can also understand the implications of how they’re spending their funds, including the associated costs.

Officials need to account for costs of oversight and administration, whether the work is being done in-house or by a contractor, and they need to consider the risks of cost growth for each case. Factors to weigh include tax revenues, personnel (such as health care and retirement) and the cost of transitioning the work from one sector to the other, the report states.

When laying out the initial statement of work, an agency should clearly describe the performance parameters on which it will assess the federal employees and private company’s proposals for work, the report states.

Stan Soloway, president and CEO of the Professional Services Council, has said the issue of deciding when to insource work that can be done by either sector has to account for various costs beyond the direct cost of a project or certain work.

“For too many years, we have been embroiled in a continual debate over how to calculate the relative costs of performance,” Soloway said. “No one believes the current process offers an accurate perspective but until now, no viable, fair, and analytically rigorous alternative was available.”

Now, DOD has to put something in action, David Berteau, senior advisor and director of CSIS’ Defense-Industrial Initiatives Group, said in a presentation May 17. DOD must do more with guidelines than simply issue memos that lack the power to institute real change.

“Guidance only matters if it’s part of guidance that’s institutionalized,” Berteau said. Memos may carry little weight unless they’re turned into as directives or other official orders.

Berteau also stressed the need for better transparency and access to data and information about costs. “This information isn’t publicly available so it’s hard to understand,” he said.

For example, information on out-year DOD budget savings from insourcing was still unaccounted for as of a Feb. 15 conference call with Robert Hale, DOD budget comptroller, according to Berteau.

If such information is ever found, it would help determine if DOD is on the path to streamlining its resources toward the warfighter. Without the data though, no one can understand the implications of spending and other decisions made inside the DOD.

“The ball is in their court,” Berteau said.

Reader comments

Wed, May 18, 2011 Cesare Borgia Virginia

Oooh, wow. A Machiavelli reference (where, incidentally, you spelled his name wrong). Nice straw man argument. It's disingenuous to compare federal contractors with Machiavelli's definition of "mercenaries." Apparently, you missed the point.

Wed, May 18, 2011

No way will the AFGE et al allow a true cost accounting as it would impact A-76 as well. I know my employees who accepted an insourced position tell me they have had 2 pay raises plus more paid time off and longer coffee breaks and lots of wasted time in meetings at the Pentagon that as contractors they could not enjoy. The 10% contractor cuts are now hurting some commands to meet their mission. The cycle will swing back but will it be too late to save DoD and the services?

Wed, May 18, 2011 dp dc

Typical response of the person who is "skeptical" - can't offer a solution nor has little to say about the issue, just attacks the organization. In addition, he/she ignored who the authors of the study were -- three with direct DoD experience and another with long history as a third-party defense assessor here and abroad. Difficulty of pricing from the govt side is how do you include the costs of services provided by an agency's department and by OPM and GSA and capital costs. These need to be considered, but are part of the difficulty this study tries to address.

Wed, May 18, 2011

So...Iread the article. It sounded like an ad for this report. Then I read the report. I didn't find much new or fabulous about it. I would like clarification of a couple categories added to the cost components of in-sourcing. Then I read through CSIS Annual Report. The financial portion was less than 1/2 a page pie charts. Also the key players, Board, et al. included attorneys, politicians, Wall Streeters, and representatives from Boeing, Raytheon, and EXXON. Sorry if I'm skeptical of the message here. Instead I think I'll read Macchiavelli's essay on mercenaries again.

Wed, May 18, 2011

I took two courses in accounting. Money transfers are either debit or credit. Aocounts are set up to describe how money is used. Theoretically, money flow should not be that hard.

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