Making Contracting Work for the United States

Government Spending Must Lead to Good Jobs

David Madland and Michael Paarlberg argue that the federal government needs to better enforce existing laws and regulations, and focus on raising standards.

The federal government can save $400 billion over 10 years by changing the way it buys goods and services. (iStockphoto)

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The federal government is failing to live up to its legal and moral obligations as a model employer. Through numerous laws and executive orders, Congress and the executive branch have expressed a clear and long-standing objective to set and enforce high standards for the treatment of contracted workers. The federal government, however, is falling far short of this goal. Instead of helping to create quality jobs, all too often the federal government contracts with companies that pay very low wages and treat their workers poorly.

For taxpayers, shortchanging federal contract workers is often penny wise but pound foolish. Without decent wages, benefits, and working conditions, work quality can sometimes suffer due to high turnover, inadequate training and experience, and low morale. And when contract workers are poorly compensated, taxpayers often bear additional costs, such as for Medicaid and food stamps, in effect subsidizing low-road companies. But when contracted workers have quality jobs, taxpayers often receive quality work and law-abiding companies are able to compete on a level playing field. Moreover, like the canary-in-the-coal-mine warning of problems, contracted workers being treated poorly can be a sign that taxpayers are being hurt as well.

Due to massive increases in federal contracting coupled with inadequate oversight, the twin problems of contractors treating their workers poorly and ripping off taxpayers have grown in importance. While people may be aware that some federal contractors are excessively compensated and waste taxpayers’ money, the problems of the contracted workforce, and how they are connected to taxpayers’ interests, have largely remained hidden from public view.

The government’s lack of knowledge about the contracted workforce is shocking and unacceptable. Information about contractors—and especially their subcontractors—is veiled behind layers of lax oversight, inadequate record keeping, and unnecessary secrecy.

This report attempts to pierce this veil by providing one of the first examinations of the federally contracted workforce. As the report makes clear, too many companies that receive federal contracts treat their workers poorly and fail to pay adequate wages or benefits. Among the report’s key findings:

  • Low quality jobs are a widespread problem. An estimated 80 percent of the 5.4 million federally contracted service workers are low-wage earners. Contracted workers are often excluded from prevailing-wage law protections and, for many jobs, the minimum prevailing wage allowed is below a living wage. And contractors often violate labor laws.
  • Poor treatment of workers and taxpayers are linked. Companies that violate laws designed to protect workers are among the most wasteful of taxpayer funds, and contracted workers are often paid far less than taxpayers are charged.
  • Workers and taxpayers are harmed by a lack of transparency and inadequate oversight. Inadequate oversight results in scofflaw employers being rewarded with new contracts, harming workers and taxpayers. Too little information is collected about contractors and their workers, and the information that is collected is not provided in a useful format to either contracting officers or the public, contributing to problems of poor oversight and lax enforcement.
  • President Bush exacerbated waste and poor treatment of contracted workers. The Bush administration doubled the amount the federal government spends on contracting while avoiding increased transparency and oversight. The outgoing administration also stymied efforts to systematically collect information on wages and benefits of contracted workers and actively weakened protections for contracted workers.

The findings in this report make clear that the contracting process needs significant reforms. The federal government needs to live up to the letter and spirit of existing laws to ensure that contracted workers have decent jobs and taxpayers get the best value for their money. This will require not only better enforcement of existing laws and regulations, but also a new focus on raising standards.

As a senator, Barack Obama took a leading role to reform the contracting process to improve transparency and accountability, and as a candidate for president, he emphasized the need to rebuild the middle class. The agenda highlighted in this report shows how the incoming Obama administration and the new Congress can harness these reform instincts to fix the contracting system so that it improves conditions for workers and ensures that taxpayers get their money’s worth. Specifically, we seek four basic reforms.

Greater transparency

Improved transparency, especially about working conditions, is necessary to ensure that contractors are complying with the law. In order to protect workers and taxpayers, the government needs to systematically collect more information about contractors—such as the number of workers and their wages and benefits—and create a centralized database with those and other records about federal contractors. The database should be used by federal contracting officers when evaluating bids, as well as be available to the public because sunshine is a powerful force for exposing wasteful and abusive contracting.

Better oversight and enforcement of the law

Making sure that workers and taxpayers are protected requires better oversight. This should start with rigorous scrutiny during the bid process by subjecting all contracts to an open and competitive process that seeks to prevent contracts from being awarded to unscrupulous businesses in the first place. Increasing the number of contract officers and boosting their training are key to this effort, as is effective use of the information in a centralized database. In addition, better monitoring of existing contracts, including targeted investigations into industries known for a prevalence of abuses, is needed.

Judicious use of contracting

To protect taxpayers and workers, we should contract out only those services that private companies are able to provide more capably and affordably. Inappropriate contracting can have profoundly harmful impacts on the functioning of government, but also more directly related the focus of this report, can lead to a transfer of jobs from sectors where wage and benefit information, compliance with the law, and performance records are easily known and enforced, to those where they are not. It can also hollow out government, depriving it of key staff and thus weakening the government’s ability to oversee contracts.

Promotion of improved job standards

To encourage a race to the top and ensure that government contracting leads to high-quality work for taxpayers and good jobs for workers, contracting agencies should promote improved job standards by adopting a system that gives special consideration to contractors who meet or exceed certain wage and benefit levels. Doing so would provide a strong incentive for companies that do business with the government—especially in sectors where low-wages and benefits prevail—to treat their employees fairly and help ensure that taxpayers receive quality work in return. In addition, all contract workers should be covered by prevailing-wage laws, and prevailing-wage calculations should be reformed.

By making these four sets of reforms, we can protect taxpayers and federally contracted workers and ensure the contracting system works as it should. Improving working conditions and holding companies accountable for how they treat workers not only helps uphold the federal government’s role as a model employer but also benefits taxpayers by eliminating hidden welfare costs, improving the quality of services, and preventing wasteful and abusive contracts. To the extent that any single recommendation might impose an additional cost on the government, which studies suggest is unlikely, it would likely be dwarfed by the prevention of waste, fraud, and abuse. As a result, promoting high standards is the right and the smart thing to do.

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David Madland

Senior Fellow; Senior Adviser, American Worker Project