Feeling the Pinch

Agencies watch their wallets and bring work back in-house.

The Obama administration has taken out its paring knife and started slowly peeling back recent layers of growth in civilian contract spending. The Office of Management and Budget urged federal agencies to cut their procurement budgets, insource some private sector functions and eliminate high-risk contracts. More specifically, agencies must save 7 percent from their baseline contract spending by fiscal 2011 and reduce by 10 percent their use of sole-source, cost-reimbursement and time-and-materials contracts. OMB expects these reforms to save $40 billion annually.

By December 2009, the 24 agencies that perform most federal contracting had identified about $19 billion in proposed savings during fiscal 2010. Agencies took different approaches to the cuts. For example, the Homeland Security Department standardized its desktop operating systems, saving more than $87 million. The Environmental Protection Agency followed the lead of many agencies by using strategic sourcing to consolidate its IT requirements and switching many of its older, more stable service contracts from cost-reimbursement to fixed-price models, which are considered safer because costs can be better controlled. The Veterans Affairs Department, meanwhile, is focusing on issuing fewer sole-source contracts while the Education Department is designing contracts with hybrid cost structures and scrutinizing higher-risk procurements.

The administration also has started the process of bringing certain federal services back in-house. Agencies have been asked to identify at least one area of potential overreliance on contractors and to conduct a pilot insourcing program. In addition, in March, the administration issued a long-awaited proposed policy directing agencies to use a single governmentwide definition of functions that are inherently governmental and therefore prohibited from outsourcing. The memo instructed officials to avoid an overreliance on contractors for functions that are "closely associated with inherently governmental" or are "critical" for the agency's mission.

These reforms and policy proposals, however, aren't yet reflected in civilian agency spending figures, which increased from $138 billion in fiscal 2008 to more than $160 billion in fiscal 2009. Significant upticks in contract spending occurred at the Energy Department and General Services Administration, both of which were major recipients of Recovery Act funds. Contract spending at other civilian agencies such as NASA and DHS-which were not among the largest recipients of stimulus funding-stayed flat. Across the federal landscape, the stimulus provided a major infusion of contract spending. To date, Energy has obligated $7.2 billion in Recovery Act contracts, followed by GSA ($4.6 billion); Health and Human Services Department ($1.5 billion); and the Interior Department ($1.4 billion).

While Recovery Act spending is slowly beginning to wind down, a pair of unforeseen events has given a recent boost to federal contracting spending. Agencies have responded to January's devastating earthquake in Haiti by issuing $123 million in contracts, and closer to home, the federal government has ramped up its procurement in response to the April Deepwater Horizon oil spill in the Gulf of Mexico with another $45 million in contracts.

Click here for the top 100 civilian contractors.

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