Pentagon Push to Cut Contractors Takes Toll on Businesses

(AP)

The Pentagon's push to bring contract work in-house has started to cause hardship for the myriad companies that rely on government business to stay afloat, amid concerns that the strategy is not yielding the kind of taxpayer savings anticipated.

The shift to so-called "insourcing" marks a reversal from the decade-long period when the use of contractors in the U.S. military skyrocketed. Concerned that businesses were picking up jobs better left to the government -- at great expense to the taxpayer -- then-Defense Secretary Robert Gates in 2009 called for the elimination of 33,000 service-support contractors by 2015.

According to statistics provided by the Pentagon last month, nearly 17,000 government positions have been created as a result of eliminating contracted services. Nearly 7,000 of those positions were established in the Army. According to data obtained by FoxNews.com, nearly 1,000 of the positions were established to replace the work of a small business.

The shift was rooted in concern that the web of military contractors had become too vast, too complex and too costly. The rise of contractors in Iraq and Afghanistan has been notorious -- according to a Congressional Research Service report, the Defense Department as of March had more contractor personnel in both countries than uniformed personnel. Contracts in Iraq and Afghanistan totaled more than $27 billion in fiscal 2010.

Outside those war zones, the Pentagon reports that the total cost of contractors rose from 26 percent of the workforce budget in 2000 to 39 percent in 2009.

But the campaign to reverse that trend has since slowed, amid questions over whether creating new government jobs to replace private contracts was actually saving money. Yet the insourcing continues, and businesses are raising alarm that the Defense Department has not treated them fairly.

"Employees are just left high and dry," said John Palatiello, president of the Business Coalition for Fair Competition. "It is occurring all over the country."

Bringing contract work back into the government can erode companies in two ways -- the government can either sever a contract and leave the company entirely, or it can sever a contract and hire the private-sector workers to do the same work full-time that they used to do under contract.

At a June hearing of the House Small Business Committee, Bonnie Carroll, president of the Tennessee-based Information International Associates, testified that her company has lost 16 percent of its employees to insourcing this way over the past eight months. She, like many in the private sector, said she supports the Pentagon going in-house for inherently governmental work. But she claimed the military's decision-making to date has been driven more by "arbitrary" standards.

She also decried what she described as the "reprehensible tactics" of poaching her employees before her firm was even informed that a contract was ending.

Jeff Lovin, whose Ohio company Woolpert has worked on mapping data for the Air Force for the last decade, was hit with the same problem just last year.

He said Air Force officials started picking off his employees, while ending the contracts under which they used to work. As a result, Lovin said, he's lost about $1 million in business and at least nine employees who bolted for the public sector.

"It's been quite shocking," he told FoxNews.com. Not only does the company lose contract money, it's then tasked with finding qualified new workers.

"Finding someone highly skilled enough to take these roles or getting someone to move is quite a challenge," Lovin said.

The Pentagon had its reasons for wanting to reduce contracted work, beyond concern that the contracts were not cost-effective. Officials were also concerned about the kind of work being performed. In a startling report, the Government Accountability Office in January showed that the Army had nearly 2,400 contractors performing "inherently governmental functions" -- with 46,000 doing work "closely associated" with those functions.

But as the military moved to change the culture, Gates said in an update last summer that he was "not satisfied" with the progress made toward reducing the military's "over-reliance on contractors."

He said the effort had not produced the savings "we had hoped" and, taking his foot off the insourcing pedal, said the Pentagon would no longer automatically replace contract roles with full-time government employees. He announced a "freeze" on creating new positions in specific offices, and several months later the Army announced that it was enacting strict new rules for replacing contract work with civilian positions.

Gates said contractors should be used for certain jobs, like peeling potatoes and doing the dishes, that soldiers should not have to waste their time doing. At the same time, Gates continued to call for a 10 percent cut in funding for contractors for the next three years.

Reached for comment, Pentagon spokesman Cynthia Smith said Thursday that the Defense Department remains "committed" to reviewing contracted services and determining those "that are no longer required, are of marginal value, or should be performed by government personnel." She said the criteria and approach "has not changed." The department, she said, is looking to absorb the kind of "inherently governmental" work that so many contractors have assumed over the years.

At the same time, she expressed support for the companies that do business with the Pentagon.

"The Department values the contributions made by private sector firms and recognizes that industry is, and will continue to be, a vital source of expertise, innovation, and support to the Department's Total Force," she said in a statement.

Alan Chvotkin, vice president at the Professional Services Council, credited the ex-secretary with taking a new approach, but expressed concern that companies continue to be negatively affected.

Noting that government employees come with hefty retirement and health benefits, Chvotkin said insourcing does not always save the government money. And he said the military, in some cases, has brought work in-house -- like information technology -- that is readily available in the private sector.

"There are a lot of skills that the government never had and should probably never develop the skills to do," he said.