Pain of Defense service contractor cuts might not be felt evenly

Cuts in Defense Department spending on contract services may not have a harsh effect on hiring and pay, according to observers.

The Senate Armed Services Committee last week approved its version of the fiscal 2012 National Defense Authorization Act, which freezes the department's operation and maintenance accounts for contract services at fiscal 2010 levels. The cuts, totaling $1.1 billion, are comparable to the limits on civilian employee spending, the committee wrote.

The cuts are significant but do not imply there will be an across-the-board hiring or pay freeze, said Alan Chvotkin, executive vice president of the Professional Services Council, a contractor trade group. Defense may award fewer contracts, and companies could cut staff or find other ways to reduce billings to the government, but the impact will differ across programs, he said.

"It's really more appropriate to look at what missions need to be accomplished and how best to execute those missions," Chvotkin said. "There may be opportunities to reduce spending on current work with the current federal workforce and contractor workforce to achieve savings."

According to Ray Bjorklund, senior vice president and chief knowledge officer at research firm FedSources, the legislation increases the expectation that agencies will continue to cut or hold steady spending on contractor labor. Similar to the civilian workforce, contract firms could struggle to attract skilled workers, fill staffing requirements and deliver high-quality services to government, he said.

"In the near term, it's probably is not going to have a terribly deleterious effect, but in future when you have political and statutory pressures to reduce spending, the possible effect on the blended workforce may be pay freezes for quite a few years," Bjorklund said. "There are still quite a few functions that need support from contractors. I just hope we don't go too far on reducing size and activity."

The legislation also calls for an expansion of the cap on contractor executive compensation. Whether that will be applied to salaries or total compensation and how it will be implemented across compensation plans remains to be seen, Chvotkin said.

Like the House version of the bill passed last month, the Senate authorization also includes a 1.6 percent pay raise for military service members. The figure is the same as President Obama's request in his fiscal 2012 budget proposal. Federal civilian workers are under a pay freeze through 2012.

The legislation also would allow Defense to increase TRICARE Prime fees beginning in fiscal 2012. The jump, which would affect military retirees and their dependents enrolled in the program, would be limited to the annual cost-of-living adjustment applied to retirement annuities, however. The House approved a similar provision. The Pentagon had proposed a 13 percent increase in 2012, later indexed to slightly more than 6 percent.

Participant fees under TRICARE were set in 1995 and have remained at $460 per year for the basic family plan. But the cost for comparable coverage for federal workers is between $5,000 and $6,000 annually. According to Congressional Budget Office estimates, TRICARE Prime fees in 2012 will total $260 for individual enrollees and $520 for families.