The Power of the Purse

The procurement process has long been used as a lever to influence social policy, but some say favoring contractors who pay higher wages would be going too far.

At first glance, the premise of government contracting is fairly straightforward. Purchase quality goods and services for the best price from the most capable vendor. But anyone who has dipped his toe into the half-a-trillion-dollar-per-year federal marketplace understands that winning government work is never that simple.

Contractors who successfully navigate the political waters of Washington and jump though the regulatory hoops still can come up short if they fail to meet certain socioeconomic criteria. Dating back to an 1840 executive order from President Martin Van Buren limiting the workday to 10 hours for federal employees and contractors, government has used its massive purchasing power to influence social policy. Procurement rules address concerns ranging from racial inequality, challenges for the disabled and gender discrimination. "It's the nature of being a politically elected official," says Steven L. Schooner, associate professor of law and co-director of the government procurement law program at The George Washington University Law School. "You have the spoils, and you need to distribute them."

President Obama could be poised to take contracting a step further into the social conscience. In the coming weeks, the administration is expected to introduce its High Road program, a controversial effort to award contracts to firms that pay their employees higher wages and benefits. If implemented-a big "if" given the growing legislative opposition to the policy even before it was announced-High Road has the potential to dramatically alter how and to whom the government awards billions in taxpayer dollars.

Rocky Road

Procurement officers currently base contract awards on best value considerations such as price, technical skill and past performance. The High Road policy, according to draft documents, would mandate selection criteria include certain labor standards. Bidders would be graded on whether they pay their staffs a "livable wage," offer "quality, affordable health insurance," an employer-funded retirement plan and paid sick leave. Other factors would include the company's record in complying with tax and labor laws. Officials in the Obama administration have declined to discuss the proposal.

State and municipal governments have adopted similar living wage policies in recent years, but the federal marketplace is an entirely different challenge. According to Labor Department data, nearly one-quarter of the nation's civilian workforce is employed by companies that contract with the federal government. High Road proponents say the policy will improve wages and benefits for millions of Americans and cut their reliance on social services, such as food stamps and Medicaid.

But altering the bidding process for contracts is just one aspect of the policy. The larger goal, some have argued, would be to raise wages for millions of nonfederal employees. For contractors, High Road would apply not only to their employees who work on government programs but to their entire workforce as well. Several of the world's largest corporations, such as Exxon Mobil, General Electric and Hewlett-Packard, contract with the government but earn most of their revenue from nonfederal sources.

"This is the kind of policy that hits the sweet spot between broad social policy goals and efficient contracting," says David Madland, director of the American Worker Project at the Center for American Progress Action Fund, a nonprofit citizens advocate group that supports the program.

Critics argue the policy is a thinly veiled attempt to reengineer private sector compensation with little regard to the cost of contracting. "My experience has been that these wealth distribution policies, even though they are irresistible for politicians, do not work," Schooner says. "There is no empirical evidence that they actually achieve, in an efficient manner, what the politicians are attempting to do. The costs are very, very high and they are hidden." It is difficult to gauge the need for such a policy, because the government does not collect data on the salaries or benefits of its contractor workforce.

In a February 2009 report, the Economic Policy Institute, a nonpartisan think tank, estimated nearly 20 percent of all contract employees earn poverty-level wages. But the study is based on employment data for nongovernmental workers, which is then applied to contractor staffs. The data assumes, for example, that a private sector custodian earns the same salary as a janitor working on a government contract.

Other data sources are either too old or limited in scope to prove entirely reliable, procurement observers say. The Government Accountability Office is conducting a broader examination of contractor salaries and benefits, but those results could be several months away. Industry officials suggest the effort to boost the wages of contract employees is unnecessary. "This is a solution for a problem that does not exist," says Stephen Sandherr, chief executive officer of Associated General Contractors of America, a trade group. "For the construction industry this is not a problem."

Under the 1931 Davis-Bacon Act, employees on contract for public works projects must be paid the prevailing wage, as set by the Labor Department. The average construction worker earns more than $25 per hour, but those on a government contract earn $4.43 more than their private sector colleagues, according to a 2008 study by the Beacon Hill Institute at Boston's Suffolk University. The 1965 Service Contract Act applies the prevailing wage formula to service-based acquisitions, which account for more than half the government's contracting expenditures.

In some regions, particularly those with little union presence, prevailing wage laws are of little help to workers. Carpenters in Orlando, Fla., earn a prevailing wage of $6.55 per hour while a laundry worker in Dallas takes in less than $9 per hour, according to Labor Department statistics. "The federally contracted workforce includes millions of substandard jobs with employers that pay poverty wages, provide meager benefits, and violate workplace, tax and other laws," noted the National Employment Law Project, a nonprofit group aimed at improving economic security for working families, in a 2009 report.

There is little argument that contractor employees are far from a homogenous entity. Workers developing cybersecurity protocols and testing the Pentagon's missile defense system undoubtedly earn more than textile employees sewing military uniforms, or cafeteria staffers serving meals to soldiers at U.S. bases. But some observers fear that by attempting to help lower paid workers, the entire system could be thrown out of balance.

Larry Allen, president of the Coalition for Government Procurement, an industry trade group, says small businesses would be unable to comply with High Road guidelines. Their choices are to cut staff so they can raise wages and provide benefits for their remaining workforce, or not to bid on work, he notes. "

Some people will be pushed off the payroll," Allen says. "Others will be out of this business. And, these are the same people who are then going to be relying on the government for social services."

If High Road becomes reality, then contracting giants with the means and opportunity to provide higher wages could find themselves with an even bigger slice of the market. "If Lockheed Martin is competing, do you really want to send a signal that their likelihood of success is correlated to them paying their labor more than they believe the market requires?" Schooner says. "And how [are agencies] going to compare Lockheed to a neighborhood IT firm? I can't even fathom how they are going to do that."

Competing Goals

The High Road proposal is a new concept, but the fundamental principle behind the policy-giving disadvantaged groups a leg up in an unfamiliar marketplace-is entrenched in government contracting. "The policy is effectively going back to its [procurement] roots," says Christopher McCrudden, a professor of human rights law at Oxford University and the author of Buying Social Justice: Equality, Government Procurement and Legal Change (Oxford University Press, 2007). "It started in the U.S. back in the 1830s specifically in the context of wages."

Federal procurement has long operated as a petri dish for social policy reform. Guidelines were established to direct contracts to the disabled, women, minorities and most recently, service-disabled veterans. In many cases, contracting regulations were ahead of the legislative curve, McCrudden says. More than 20 years before the passage of the Civil Rights Act, President Franklin Delano Roosevelt issued an executive order banning discrimination by government contractors. Successive policies required affirmative action to award disadvantaged groups government contracts and create set-asides for minority-owned businesses.

The policies "promoted a dramatic increase in the percentage of women and minorities who are managers at firms that contract with the federal government," John Podesta, president and CEO of the Center for American Progress, said during a July 2009 Office of Management and Budget hearing. A highly influential figure who led Obama's transition team, Podesta is considered the architect of the High Road proposal.

Globally, the practice of using procurement as a social policy tool is arguably more overt. In Malaysia, preference in the bidding process is provided to firms operated by the indigenous bumiputeras people. Similarly, legislation was enacted in Northern Ireland and post-apartheid South Africa to assist racial and religious minorities.

At the crux of these policies is a trade-off between the lowest possible price and a larger societal or political objective. "Every public procurement system has competing goals," says Daniel Gordon, administrator of the Office of Federal Procurement Policy at OMB. "They want to move very quickly, but they want to have lots of competition. . . . Every procurement system wants to get low prices, but they also want best value."

As in the case of prevailing wage legislation, cost could become secondary to ensuring workers are fairly compensated. "You could say that is at odds with getting the lowest price, but it's a decision we as a country have made," Gordon says.

Oxford's McCrudden says there is little empirical evidence indicating social policies increase procurement prices, suggesting that the contractors often absorb additional costs. "It's difficult to know what the price is for this procurement mechanism," he says. But in a down economy, some argue social policy must take a back seat. "During a time of high un- employment it should be the government's aspiration to employ, deploy or mobilize the resources of the greatest number of people rather than redistributing money to a select few," Schooner says.

'Irresistible Temptation'

As the government's mammoth purchasing power has inflated, so has the number of groups that receive preference in their contracting bids. Billions in contracts are set aside to firms operating in the 8(a) business development program, located in Historically Underserved Business Zones or owned by service-disabled veterans. A program for women-owned small businesses has been in the works for years.

One of the most controversial of these programs involves Alaska native corporations, which is designed to level the competitive field for homegrown companies. Firms with native Alaskan owners are allowed to win unlimited sole-source contracts of any value, but some in the program have ample workforces and resources and have been criticized for being a go-between for larger companies. "Giving some small businesses a preference to receive government contracts should be limited in scope and time," says Sen. Claire McCaskill, D-Mo., a harsh critic of the program. "ANCs warp that concept until it is unrecognizable. It's ridiculous that these giant corporations don't compete and can front contracts. It should be stopped."

Industry groups contend that set-asides are different from the High Road proposal. "Set-asides broaden the pool and the base to compete for contracts," says Glenn Spencer, executive director of the Workforce Freedom Initiative at the U.S. Chamber of Commerce. "High Road is an attempt to narrow access and lessen the number of people in the pool."

Others fail to see the distinction. "We have been pursuing social policy goals through government contracting basically since the existence of government contracting," says Madland at the American Worker Project. "Once policies get established and don't have a detrimental effect, opposition lessens. The Service Contract Act and Davis-Bacon were controversial when they were enacted, but now people see they work well."

But resistance to the High Road proposal has grown on Capitol Hill, especially among Republicans, who say the program will scare away small businesses, raise the cost of acquisitions and distort the best value proposition. "Small businesses could choose not to compete for federal contracts, undermining the diversity of the federal contracting base and lessening competitive pressure on larger federal contractors," five Republican senators wrote in a Feb. 1 letter to outgoing OMB Director Peter R. Orszag.

With few exceptions, Democrats have been quiet on the High Road proposal and even labor-backed constituencies have raised concerns. In a March 23 letter to Orszag, John Gage, president of the American Federation of Government Employees-which is a member of the AFL-CIO-expressed concerns that the policy "could significantly increase subjectivity and politics in federal procurement."

The closest comparison to High Road is the Clinton administration's contractor responsibility rule, which required agencies to take into account a firm's compliance with tax, labor and employment, environmental, antitrust, and consumer protection laws before awarding a contract. The rule produced more than 1,800 comments, many of which suggested it would be used to blacklist certain contractors. Nonetheless, the rule went into effect on Jan. 19, 2001, the last full day of the Clinton administration. Six days later, the Bush administration suspended the policy, and it was never revived.

"This is not the first administration to try to drive home perceived societal goods through the procurement process," Allen says. "It's almost an irresistible temptation no matter who you are."