Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / How One Procurement Rule Adds 30 Percent to Every Government Contract
Transcript
- Lucas: So there's this law from 1936 called the Walsh-Healey Public Contracts Act. It was written to make sure companies selling to the federal government paid their workers a fair minimum wage. Sounds good on paper. Luna: But I'm guessing the reality is messier. Lucas: It's a textbook case of what happens when a well-intentioned rule meets eight decades of accumulated bureaucracy. Walsh-Healey today doesn't just set a floor — it imposes a whole wage-determination process that can add thirty percent or more to the cost of a contract before a single product is delivered or a line of code is written. Luna: Thirty percent? That's not a rounding error. That's a tax on every federal purchase over fifteen thousand dollars. Lucas: Exactly. And the threshold is $15,000 — anything above that triggers the act. The Department of Labor's Wage and Hour Division has to issue a wage determination for each contract, specifying minimum pay for each job classification. For a ten million dollar IT services contract, you're looking at maybe three million dollars in pure compliance overhead before the vendor can even start. Luna: So agencies have an incentive to bundle work into giant contracts to spread that fixed cost. That locks out smaller businesses who can't absorb the compliance burden and locks in the big incumbents who already have the systems in place. Lucas: That's the perverse incentive. Instead of multiple smaller, more competitive contracts, you get one megacontract worth hundreds of millions. The compliance cost per dollar goes down, but competition goes way down. And the government ends up paying more over the long run. Luna: I remember reading that the Government Accountability Office found that over eighty percent of federal IT contracts over the last decade went to the same five firms. This rule is partly why. Lucas: Right. And the irony is that Walsh-Healey was supposed to protect workers. But when the compliance costs push work into fewer, larger contractors, those workers often end up with less bargaining power anyway. The big contractors are monopsony employers in some regions. Luna: So what's the specific mechanism? How does the Department of Labor actually calculate a wage determination? Lucas: They survey local prevailing wages for each occupation — systems analyst, network engineer, project manager — and then set a minimum that the contractor has to pay. But the survey methodology is notoriously slow. It can take six to twelve months to get a determination. By the time it's issued, the labor market may have shifted, so the wage floor is already outdated. Luna: That's a problem in a tight labor market like we're in right now, mid-2026. If the determination lags behind market wages, contractors either can't hire or they have to pay above the floor anyway, meaning the rule is just adding paperwork without actually changing pay. Lucas: Exactly. The rule becomes a tax on compliance, not a floor on wages. And the cost of that tax is passed right back to the government in higher bids. The Congressional Budget Office did a study a few years back estimating that Walsh-Healey compliance adds between fifteen and thirty percent to contract value, depending on complexity. Luna: And that's just the direct cost. There's also the opportunity cost of slower procurement. Agencies spend months waiting for wage determinations, which delays projects. Lucas: Right. So you have a triple hit: higher prices, fewer competitors, and slower delivery. And the people the law was meant to protect — low-wage workers on federal contracts — often don't see the benefit because the determinations are stale. Luna: Has anyone tried to fix it? I know there was talk of a pilot program at the Office of Management and Budget. Lucas: Yes, in 2025 the OMB launched a pilot to exempt certain commercial off-the-shelf items from Walsh-Healey. The idea was that if you're buying a product with an established market price, the wage determination is just redundant bureaucracy. But the pilot stalled because of pushback from labor unions and some members of Congress who saw it as a rollback of worker protections. Luna: So the political optics are toxic. Any attempt to reform it gets framed as anti-worker. Lucas: Which it's not necessarily. You could reform the survey methodology, speed up determinations, index them to market data — but that's less dramatic than outright exemption. The pilot's failure means we're stuck with the current system. Luna: Let's talk about a concrete example. Say the Department of Energy wants to buy a cloud computing platform for data analytics. What happens? Lucas: They issue a request for proposals. The contract value is above $15,000, so Walsh-Healey kicks in. They submit a request to the Wage and Hour Division for a determination covering cloud engineers, data scientists, devops specialists. That request sits in a queue. Meanwhile, the agency has to estimate the wage floor in its independent government cost estimate. If they guess wrong, the bids come in way over budget or way under — and under can be a problem too, because it means the wage determination was too low and workers might actually get underpaid. Luna: So the procurement team is essentially flying blind on the biggest cost driver — labor. Lucas: Exactly. And that uncertainty makes them risk-averse. They add margin, they extend timelines, they prefer incumbent contractors who already have the determinations on file. The net effect is the opposite of what a good procurement process should do. Luna: If walking through the economy with us has made something click — whether it's Walsh-Healey or something else — you might want to know what keeps this show ad-free. A small group of listeners already chips in monthly through buy me a coffee dot com slash fexingo, and that's what makes it possible to do episodes like this. Lucas: Yeah, it's a straightforward model. No ads, no sponsors, just listeners who find value in the deep dives. And it's totally fine if that's not your thing — we're glad you're here either way. Luna: So back to Walsh-Healey — is there any data on how many contracts are actually affected? Lucas: The Department of Labor issues roughly 15,000 wage determinations per year, covering about $200 billion in contract value. That's a huge chunk of federal procurement. And because the determinations are contract-specific, you can't reuse them across agencies. So there's massive duplication. Luna: So you have 15,000 separate determinations, each one taking months, each one potentially stale by the time it's used. Lucas: Right. And the Wage and Hour Division's budget hasn't kept pace with the volume, so the backlog grows. In 2025, the average time from request to determination was 210 days. That's over half a year. Luna: Meanwhile, the private sector moves on Internet time. A six-month delay in an IT procurement can mean the technology is obsolete by the time the contract is awarded. Lucas: That's exactly what happens. Agencies end up buying last-generation solutions because the procurement cycle is so long. Walsh-Healey is a big part of that cycle. Luna: So what's the reform that could actually pass? Not the pilot, but something more structural. Lucas: One idea is to index wage determinations to Bureau of Labor Statistics data automatically, removing the manual survey process. Another is to allow multi-agency use of a single determination for similar occupations. But both require legislative changes, and the act hasn't been significantly amended since the 1980s. Luna: So the odds of reform are slim in the current political climate. Lucas: I'd say very slim. But the cost — the thirty percent premium — is real, and it's borne by taxpayers. It's one of those hidden taxes that doesn't show up in the budget as a line item, but it's there in every contract price. Luna: And it disproportionately affects small businesses, because the compliance burden is fixed regardless of contract size. A $50,000 contract has the same determination process as a $50 million one. Lucas: That's why small businesses avoid federal contracting. The barriers to entry are too high. And that reduces competition, which drives up prices further. Luna: It's a vicious cycle. The rule meant to protect workers ends up concentrating power in a few large contractors, which actually harms worker bargaining power in the long run. Lucas: Exactly. And the workers on those contracts are often non-union and have little leverage. So the original intent is completely subverted. Luna: Is there any hope that the pilot program gets revived? Lucas: There's some noise about a revised version that would exempt commercial items but keep wage determinations for services. But the political will is weak. Most people have never heard of Walsh-Healey, so there's no public pressure to fix it. Luna: It's a perfect example of how an obscure regulatory detail can have massive economic consequences. Lucas: And that's why we talk about it. The next time you hear about a billion-dollar government IT contract that went to one of the usual suspects, remember that Walsh-Healey helped make that outcome almost inevitable. Luna: It's a good reminder that the biggest inefficiencies in government are often not in the big headline programs but in the quiet machinery of procurement. Lucas: Exactly. Thanks for listening.