The Heritage Foundation

Issue Bulletin #4

May 2, 1977

May 2, 1977 | Issue Bulletin on

Amendments to Service Contract Act of 1965

(Archived document, may contain errors)


May 2,, 1977 AMENDMENT TO. SERVICE CONTRACT ACT H. R. 314 This bulletin analyzes the proposed changes- in the Service Contract Act to extend its coverage to professional employees.


The bill was introduced on January 4, 1977, by Congr6issman Frank Thompson, Jr. (D-N,.J.) and Congressman James C. Corman (D-Cal.) and was referred to the House Committee on Education and Labor chaired by Carl D. Perkins (D-Ky.). It is pending in the Labor-Management Relations Subcommittee where no iction is scheduled. On March 10, 1977, Senators Lawton Chiles (6-Fla.), Richard Stone (D-Fla.), and John Sparkman (D-Ala.) introduced S. 969 as a companion bill to H.R. 314. It is in the Subcommittee on Labor of the Senate Human Resources Committee where no hearings have been held yet.


The Federal Government now plays an enormous role in such areas as health, welfare, agriculture, labor, and edubation, apart from such traditional functions as the Defense and the Justice departments. Honest men will-have differences about the proper role of the Federal government in our socii3ty;, however, all will agree that the taxpayer deserves efficient and economical service. This not- only applies to the basic function of an agency or a department such as Coinmercep Defense,, or Labor# but also to the support services such as R&D, maintenance, guards or security, food service, janitors, etc. If these servi-ces can be delivered at high quality, but be less costly than paying civil servants. to do them, then it is to the taxpayers' best intekbats -that 'these services be contracted out -through competitive'bidding. This happens to be exactly the official policy of the Federal government. In fact, since 1955 through the support of both Democratic and Republican Presidents, it has been the official policy of the Executive Branch to rely an the private sector for the goods and services the government requires to perform its missions.

The -particulars of that policy are set forth in OMB Circular A-76. This circular gives guidelines to Federal agencies on the option of making objective cost comparisons between doing the work themselves,

or contracting it out to private industry where there is reason to believe that cost-savings might be accomplished.

In a letter to Rep. William L. Clay (D-Mo.) dated March 4, 1977, from Bert Lance,, OMB Director,, Mr. Lance states,, "OMB Circular A-76 states that the longstanding policy of the Government is to rely on the pri- vate sector, and was initially issued at the direction of President Johnson in 1966. Essentially, it provides that agencie's should not encrage-in activities which provide a product or service that is com- mercially obtainable except when rieces-sary for military readiness or if commercial sources are not available, are more costlyr or would disrupt an agency mission. Circular A-76 does not single out any specific areas of work for attention, but applies to any Government activity providing a product or service that is obtainable from a private source.


The obvious way that the private sector can be more attractive in sup- plying products or services for'-a Government agency, is to be cost conscious and also have a higher'productivity rate than civil s.ervice counterparts. This has been the case. In its 1975 Annual Report, the National Commission on Productivity and Work Quality found that the private sector continues to be 20% more productive than the Federal sector. According to-the Commission, productivity grew by 11.1% for 1.7 million Federal civilian workers for fiscal years 1967-1973. However, during the-same time, productivity of total nonfarm employees in 'the private sector increased by 13.4%, which. shows that productivity in the private economy for these years outgrew the Federal growth rate by 20.7%.

In the matter of worker compensation, again, it seems that private in- dustry is more cost effective.. The White Paper, "Government -competition With Industry: Some Economic Realities," issued by the Aerospace. Resear@h Center, Washington, D.C.j, November 1975, showed the fcillowing-statistics ake illustrative of this point.

Based on government expenditures for purchases from the pri- vate sector and the resulting employment therein, the average sales dollars per employee is $21,091. Assuming that the aerospace industry is typical of other government suppliers and using the standard aerospace industry formula that 50% of sales- is in the form of compensation, the average annual compensation for private sector employees responsible for supplying the government with goods and services is $10,546.

On the other hand, using data from the Department of Commerce and other government agencies, compensation for Federal government personnel (less military combat forces) averages $14,267 per annum. The ratio (1:1.35) developed from these figures indicates that a one dollar purchase made by the Federal government from the private sector would cost 35% more if the procurement was made in-house. This is consistent with comparative data on productivity measurements for both the publIc and private sector."


With the economic data showing that work performed by private contractors tending to be less expensive than that performed in-house, one would expect that the Congress would try to preserve this competitive factor. However, in 1965 the Service- Contract Act was created which covered private employees on -Fed 'eral government contracts, performing the unskilled or semi-skilled labor,, janitorial, food service, housekeeping, and guard service work. The Act mandated that contractors, when bidding for Federal government contractsi, would -have to pay no less,than a federally predetermined wage for certain types of job classifications. This Act not only eliminated wage competitiveness between contractorsj, but to a certain' extent any. competitive wage advantage that private industry had over the Federal government.

In mid-1972, the Department of Labor began to include clerical workers, keypunch operators, file clerks, secretaries, computer operators, and draftsmen in-its wage and fringe benefit determinations under the Act; and on September 21, 1976, the House of Representatives voted 395-3, "to provide that all employees, other than bona. fide executive, administrative, or professional employees, shall be considered to be service employees for purposes of such Act." The bill was H.R. 15246 which was introduced by Rep. Frank Thompson (D-N.J.). It is now Public Law 94-489. With this change in the Service Contract Act, the only area not covered by predetermined wage floors were professional employees, and on January 4,1977, Rep. Frank Thompson introduced H.R. 314 which would "amend the Service Contract Act of 1965 to extend its coverage to professional-employees."


Both H.R. 314 and S. 969 would mandate minimum salaries for professionals identical to those described in the National Survey of Professional, Administrative Technical and Clerical Pay issued by the U.S. Department of Labor and prepared by its Bureau of Labor Statistics.


This amendment would determine a minimum level of wages and fringe benefits to be furnished to professionals, and in successor contracts, to protect those esfand fringe benefit levels reached through col- lective bargaining agreements. Furthermore, it would provide to professional- the same protection that is presently provided to all others under the Act. According to Senator Lawton Chiles (D-Fla.), "It'would eliminate the specter of professionals with families and a mortgage scrambling to accept positions which require sophisticated technical expertise,-yet barely pay theminimum wage." (Congressional Record - Senate, Thursday, March 10, 1977, P. S3933).


Salaries and fringe benefits established by government would destroy the system of individual merit under which all professional employees are judged..@

If these salary and benefits packages are predetermined ahead of tire for each service contract, it would destroy the-competitiveness that each company must have to "land" the contract.

Why would a government agency bother to contract out certain services, when the personnel'compensation portion of the contract is comparable to salaries paid inhouse? With the facts that we have on hand about government productivity vs. pri 'V_ate sector productivity, it is .apparent that the taxpayer would- lose by having the government agency provide all these goods and services inhouse.

Finally, by mandating minimal salaries and'fringe benefits, this amendment to the Service Contract Act would further fuel' the fires of inflation by adding more costs and increasing the time for the completion of these projects.

David A. Williams .Economics/Taxation

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