Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / How the US Government Spends 600 Billion a Year on Contractors It Cant Manage
Transcript
- Lucas: So the U.S. government spends about six hundred billion dollars a year on contractors. That is roughly the GDP of Switzerland. And here's the kicker — it has no idea whether most of that money is well spent. Luna: Six hundred billion — that's more than the entire defense budget of most nations. And we're just talking about services, not tanks or missiles. Lucas: Right. This is everything from IT support to management consulting to janitorial services. A 2024 Government Accountability Office report found that half of all federal contract actions lack sufficient competition. That means agencies are essentially sole-sourcing billions of dollars. Luna: Half? That seems insane. Isn't competition supposed to be the whole point of contracting — to drive down prices? Lucas: In theory, yes. In practice, agencies often justify sole-source awards on the grounds of 'urgent need' or 'only one qualified provider.' But the GAO found that many of those justifications are thin. One example: the Department of Defense spent fifty billion dollars on IT modernization over the past decade, and cost overruns averaged forty percent. Luna: Forty percent on a fifty-billion-dollar program is an extra twenty billion — just for IT. What were they building? Lucas: A unified logistics system that was supposed to replace dozens of legacy systems across the Army, Navy, and Air Force. Originally planned for five years, it's now on year fifteen and still not fully operational. The contractor? A consortium led by Booz Allen Hamilton. Luna: Booz Allen — one of those Beltway Bandit firms that seems to have a permanent lease on government work. Lucas: Exactly. Along with SAIC, Leidos, and a handful of others. These companies derive the vast majority of their revenue from federal contracts. And because they're so entrenched, they often win follow-on work without competitive bidding. The GAO report noted that over a third of contract actions were 'follow-ons to existing contracts' with no market research. Luna: It sounds like a structural monopoly. Once you're in, you're in forever. Meanwhile, smaller firms can't even get a foot in the door. Lucas: That's exactly the dynamic. And it's not just about fairness — it's about cost. The Congressional Budget Office estimated that increasing competition could save taxpayers between ten and thirty percent on contract value. On a six-hundred-billion-dollar base, that's up to one hundred eighty billion a year. Luna: So why doesn't Congress mandate competition? Is it just inertia? Lucas: Partly. But there's also the continuing resolution problem. When Congress can't pass a budget on time — which happens almost every year — agencies operate under CRs that freeze spending at previous levels. That forces them to renew existing contracts even if they're wasteful, because starting a new competitive procurement takes months. Luna: So the dysfunction in Congress directly enables the contracting dysfunction. It's a vicious cycle. Lucas: Exactly. And the lack of data makes it worse. The GAO found that most agencies don't track contractor performance in a standardized way. So even when a contractor delivers late or over budget, there's no flag in the system. They just get the next contract. Luna: Is there any reform effort that's actually gaining traction? Lucas: There is. A bipartisan bill called the 'Outcome-Based Contracting Act' was introduced last year. It would require agencies to define measurable outcomes in every contract over ten million dollars — things like 'reduce system downtime by twenty percent' — and tie payment to those metrics. Luna: That sounds sensible. But hasn't similar legislation failed before? Lucas: It has. The Government Performance and Results Act of 1993 was supposed to do something similar. But agencies complained that measuring outcomes was too hard, and the law gradually became a checkbox exercise. The difference this time is that the technology exists to track outcomes in real time — think dashboards with live data. Luna: But will the political will hold? Especially with the midterms coming up. Lucas: That's the billion-dollar question. The bill has bipartisan sponsors, but the contracting lobby is powerful. Booz Allen alone spent eight million dollars on lobbying last year. And they're not the only ones. Luna: It's going to take a scandal to break the logjam, isn't it? Some contractor disaster so visible that voters get angry. Lucas: Possibly. Or maybe a moment of fiscal crisis. But in the meantime, the money keeps flowing. And honestly, if this conversation has made you think differently about where your tax dollars go — and you want to support independent analysis like this — the simplest way is to buy me a coffee dot com slash fexingo. No pressure, just a link if it felt worth it to you. Luna: Yeah, that's exactly it. We keep the show ad-free, and listener support is what makes that possible. So if today's episode was useful, that's the place. Lucas: Alright. So back to the reform picture. One other idea gaining ground is 'category management' — treating government buying like a corporate procurement operation. Instead of each agency negotiating its own IT contract, the General Services Administration would negotiate central agreements for common goods and services. Luna: That's already happening to some extent, isn't it? Through GSA schedules? Lucas: Partially. But agencies are allowed to bypass those schedules if they claim a 'unique need.' A 2023 audit found that thirty percent of IT purchases were made outside the schedule, at prices twenty to forty percent higher than the negotiated rates. Luna: So the same game — find a loophole, avoid the discount. Lucas: Exactly. And the loophole often boils down to poor data. The government doesn't have a unified procurement database that tracks prices across agencies. So a contractor can charge the Navy twice as much as the Air Force for the same software license, and nobody notices. Luna: It sounds like the federal government is stuck in the 1990s when it comes to data management. Lucas: In many ways, yes. But there are pockets of innovation. The Department of Veterans Affairs built a real-time spending dashboard that shows every contract, its status, and its performance metrics. It's saved them about two hundred million dollars in the first year alone by flagging underperforming contracts early. Luna: So the model exists. Is anyone else adopting it? Lucas: Slowly. The Office of Management and Budget is pushing for a government-wide version, but it requires agencies to share data in a common format. And that's where the resistance comes — each agency has its own legacy system. Luna: Legacy systems. The bane of every government IT project. Lucas: Right. And that's the paradox: the government hires contractors to modernize its IT, but those same contractors often build systems designed to lock them in for decades. It's a feature, not a bug. Luna: So if I'm a taxpayer, what's the one thing I should watch for in the next year? Lucas: Watch whether the Outcome-Based Contracting Act gets a floor vote. If it passes, it could change the incentive structure fundamentally. If it dies in committee, you'll know the lobbyists won. Luna: And if it passes, will it actually work this time? Lucas: It depends on whether agencies are willing to invest in the data infrastructure to make outcome measurement real. The bill includes some funding for that, but it's only about two hundred million dollars over five years — a rounding error in the six-hundred-billion-dollar contracting universe. Luna: So it's a start, but not a silver bullet. Lucas: Exactly. Real reform will require sustained pressure from both Congress and the public. But the good news is that the problem is finally getting attention. The GAO report made front-page news in the Washington Post, and a few senators are making noise. Luna: It's a classic public finance story: billions of dollars in waste, a clear fix, and a political system that can't quite pull the trigger. Lucas: That's the story of so many government programs. But at least this one has a clear villain — the lack of data. And data is something we can actually fix. Luna: If we choose to. Lucas: If we choose to. And that's really the question.