Insourcing a Threat to Small Contractors By Jonathan T. Williams To borrow a phrase from Ross Perot, that giant sucking sound many small business contractors have been hearing is the result of the increasing number of private sector jobs that are being insourced by the federal government. At a time when the economy is still struggling to turn the corner and unemployment remains high, the government is accelerating its initiative to eliminate outsourced functions—and jobs. Small businesses, often touted as the engine that will drive our economic recovery, have been most affected by insourcing because they typically hold smaller contracts that make easier targets for agencies looking to shave their contracting budgets. Small businesses also have less leverage and resources to contest improper government hiring practices. And because small businesses are more apt to be dependent on fewer contracts, the impact of the government’s decision to end a contract early is more severe. We are hearing from an increasing number of small businesses on the front lines of insourcing. One small disadvantaged business told us that its customer, a defense agency, planned to immediately hire all of the company’s security guards who have military experience. Then, as the government took the firm’s personnel, the government made clear that the firm was expected to backfill the positions so there would be more personnel available to be hired by the government at a later date. Another small disadvantaged business lamented the government’s practice of cherry-picking employees from the firm’s administrative services contract. The government interviews this contractor’s employees, none of whom are providing inherently governmental or even critical services, offers the employees a higher salary, and asks the employees to resign from the contractor on a Friday before starting work as a government employee the following Monday. Such practices have serious consequences for small businesses, from the loss of key personnel and institutional knowledge to contract performance issues and an unexpected end to revenue streams. This is not likely to stop without more guidance and parameters for agencies regarding when and how work should be insourced, particularly ongoing work performed by small and disadvantaged companies. Although the Office of Federal Procurement Policy recently issued a proposed policy letter providing agencies with guidance on what functions should be insourced, the OFPP letter does not indicate that the damaging hiring practices discussed above are the wrong means to the end. We agree with the OFPP that the government should be required to perform inherently governmental functions, and it makes sense that the government would insource work when it can be done more cost effectively by the government. However, we are concerned that the OFPP’s policy letter expands insourcing to “critical” functions and potentially to functions closely associated with inherently governmental functions. Adding more fuel to the insourcing fire will enhance the need for measures to protect small businesses, to provide transparency for agencies’ cost analyses, and to establish mechanisms for small businesses to challenge an insourcing decision. As the insourcing initiative continues to unfold, it is important for the voices of small businesses to be heard. You can submit comments on the OFPP’s policy letter by June 1, which is particularly important if you are in one of the targeted industries such as acquisition support, guard services, prison operation and cybersecurity. Additionally, Bridget Bean, the director for SBA’s Washington District Office, is collecting anecdotes to assist SBA’s efforts to combat the negative effects of insourcing on small businesses. If you have your own story to tell, you can send it to her at bridget.bean@sba.gov. Other initiatives are underway to represent and fight for the rights of small businesses facing insourcing. Please contact us if you would like more information about how to get involved with these efforts. Finally, there are a few steps you can take if you are faced with losing work to insourcing. You should seek to obtain the insourcing agency’s cost analysis to confirm that it was performed and that it accurately shows a cost savings for the government. You should also explore whether you have grounds to challenge insourcing via a protest or lawsuit under the Administrative Procedure Act. Furthermore, you should not ignore the cost implications of losing key employees and having to backfill positions on short notice. In these ways, insourcing may justify a proposal to revise your indirect expense rates, a request for equitable adjustment to your contract, or a claim for costs. And depending on your industry, you may need to factor the prospect of insourcing into your cost proposal for new work, and into your bid/no-bid decision. The bottom line is that given the new insourcing realities, you should be proactive in seeking to minimize the impact of insourcing on your business. Jonathan Williams is a partner in the government contracts practice group at PilieroMazza PLLC, where he also handles corporate and litigation matters. Founded in 1983, PilieroMazza is a boutique government contracts law firm in Washington, DC. The firm’s practice areas span a diverse array of legal matters, with a primary focus on government contracts, U.S. Small Business Administration procurement programs, litigation, corporate transactions, and labor/employment law. He can be reached at jwilliams@pilieromazza.com or www.pilieromazza.com.