Reforming Federal Contracting Policy, or Neutering It?

Following up on this recent post on the rapidly changing world of federal privatization, Government Executive reports today on yet another questionable move by the Obama administration on contracting and procurement policy:

Less than two weeks after his inauguration, President Obama signed a little-noticed executive order that could dramatically change how federal contractors staff their government projects. The Jan. 30 directive requires service providers that win follow-on contracts to offer jobs to nonmanagerial employees at the previous company. No positions can be advertised until former employees have been granted the right of first refusal, according to the order. “The federal government’s procurement interests in economy and efficiency are served when the successor contractor hires the predecessor’s employees,” the order states. “A carry-over workforce reduces disruption to the delivery of services during the period of transition between contractors and provides the federal government the benefits of an experienced and trained workforce that is familiar with the federal government’s personnel, facilities and requirements.”

But unlike some other Obama directives — including the president’s March 4 contracting reform memorandum — the order does little to change government’s dependence on the private sector. The work still will be performed by contract employees; the order simply limits the pool of talent. Some industry officials question the wisdom and necessity of the order. Service contractors frequently offer jobs to the incumbent company’s workers to retain their knowledge and to keep transition costs low.

But mandating such a system, in which a company is stuck with employees it did not hire, could limit the contractor’s flexibility, increase personnel and training costs, and stifle innovation, says Stan Soloway, president of the Professional Services Council, an industry trade association. “The biggest concern from an industry perspective . . . is making certain that appropriate flexibility is given that any employer would need to make determinations of suitability for hiring,” Soloway says.

In fairness, the aforementioned executive order offers agencies and prospective contractors some degree of discretion in implementation, and more detailed rules and guidelines are currently under development and will be unveiled later this year. Further, proponents are correct in noting that the order enshrines a practice that already happens quite frequently today. But that leads to an important question: why mandate something that’s already commonly practiced, especially when doing so has the nasty side effect of potentially increasing the risks and red tape (and thus costs, direct or indirect) for private contractors?

And the potential ramifications go much deeper. As the GovExec article mentions, some observers (including myself) are concerned that this represents the camel’s nose under the tent for more attempts to extend de facto civil service protections to government contractors, which will inevitably lead to higher costs, less flexibility for contractors, and less innovation in service delivery.

In that scenario, how long before government just starts trying to bring everything in-house, since it will have so neutered one of the more potent policy tools at its disposal—privatization—that it becomes difficult to use effectively?

It sounds like policymakers need to be reminded of some simple math on contracting:

more private sector risk
+ more red tape
+ more government hiring mandates
= less competition = less benefit to taxpayers = less efficient government

Even though federal contracting may seem like a remote issue for most U.S. taxpayers, they would do well to pay attention. What we’re starting to see is a death-by-a-thousand-cuts policy in action, each cut aimed at the private sector and competitive service delivery.

At the very same time that we face “bailout fever,” an increasingly dire fiscal forecast and a need to fundamentally rethink the way the federal government delivers services, both the administration and Congress are delivering policies that will ensure a less dynamic and efficient government and more of the failed status quo.

Reason’s Federal Privatization Research and Commentary