For Immediate Release
December 1, 2011
Grassley, Boxer win Senate approval of amendment to limit contractor salary reimbursement
WASHINGTON – Senator Chuck Grassley said today that the Senate has accepted an amendment he offered with Senator Barbara Boxer of California to limit taxpayer reimbursement for defense contractor salaries. The legislation will be included in a larger bill to authorize $662 billion in Pentagon spending for the next fiscal year.
Grassley said their reform amendment is aimed at runaway federal spending on contractor salary reimbursements. Cost-reimbursement type contracts are used extensively by the Department of Defense.
“We can’t afford to waste increasingly limited defense dollars,” Grassley said.
Between 1998 and 2010, the benchmark for reimbursing executive salaries – separate from what these executives are paid by their private-sector employers – grew 53 percent faster than the rate of inflation.
Here is Grassley’s statement to the Senate regarding the Boxer-Grassley amendment.
The Congressional Record
Thursday, December 1, 2011
At a time when the national security budget is under immense pressure, it is vitally important that we spend our defense dollars more wisely. The Boxer-Grassley amendment will contain runaway spending in contractor salary reimbursements. Notice that I said “salary reimbursements” not salaries. Someone not familiar with government contracting might ask why it’s any of our business what government contractors get paid, and I would agree if we’re talking about what their company pays them out of its own pocket.
When most people hire a contractor to renovate their bathroom or re-shingle their roof, they find the one that does the best work for the least cost. Having done that, you’re not likely to ask or care what their cut is or what they pay their crew. To the extent that government contracts work the same way, the same principle applies. Unfortunately, not all government contracts do work that way.
A large proportion of government contracts actually reimburse the contractor directly for the costs they incur, including for the salaries of their employees. These types of contracts are risky because contractors lose the incentive to control costs. They are only supposed to be used when a fixed price contract is not possible, for instance if the scope or duration of the work is not possible to determine at the outset.
Nevertheless, cost-reimbursement type contracts are used extensively by federal departments and agencies. The Defense Department alone accounted for over $100 billion in cost reimbursement type contracts in fiscal year 2010. President Obama has criticized the widespread use of these types of contracts and has set a goal of slowing the growth and ultimately reducing their use. He’s made a little progress. However, we’re talking about a small dent in a large bucket. It’s clear that cost type contracts are going to account for a major proportion of the dollars spent on federal contracting for the foreseeable future. As a result, we must take steps to limit unreasonable expenditures under these types of contracts.
Senator Boxer and I worked together to try to head off this problem back in 1997. At that time, we proposed capping salary reimbursements at the salary level of the President of the United States. However, a compromise was ultimately enacted that capped how much the top 5 highest earning contractor executives could charge the federal government for their salaries. The cap was set at the median salary of the top 5 executives at companies with annual sales over $50 million, which must be recalculated annually. Since that time, the cap has more than doubled from $340,650 to $693,951. That’s 53 percent faster than the rate of inflation.
The House-passed version of the National Defense Authorization Bill expands the current cap to all contractor employees, not merely the top 5 executives, closing a loophole that was being exploited. The version of the National Defense Authorization Bill before the Senate extends the cap only to the top 10-15 executives. However, Senator Boxer and I think it’s time to reconsider a fixed cap at the level of the President’s salary, which I should add was doubled by Congress to $400,000 since our previous proposal. That’s more than generous. Surely the taxpayers shouldn’t be asked to pay the salary of a contractor more than the President makes, which is twice what any cabinet secretary makes. Keep in mind that this cap just limits how much Uncle Sam can be billed for, which is on top of whatever the company chooses to pay its employees out of its own pocket.
Not only would our straightforward cap save man-hours in the Office of Federal Procurement Policy, which has to gather the data every year to determine the current convoluted cap, but it would save millions of dollars that need not be spent. Again, we cannot afford to go on wasting our increasingly limited defense dollars. We have to be more aggressive in weeding out waste in defense spending and this is one unnecessary expenditure that we can easily eliminate in favor of higher priorities. I urge my colleagues to join us in this commonsense cost cutting measure.