So, How Much Money Would Using Military Labor Really Save?
I got asked a question the other day that intrigued me. And as longtime readers probably guessed – I decided to play with some numbers and see where they led.
The particular question was in the context of a military logistics contract. The question was, in effect, “How much money would DoD save by doing that with military labor”?
Obviously, I don’t have the specifics of that contract. But I decided to make a couple of assumptions, then “run the numbers” for a contrived but IMO reasonably representative example to see where the numbers led.
As that example, I chose a warehouse operation – two shifts, with 3 nominal 7-person teams (team lead plus 6 workers each) and a shift lead for each shift, plus a warehouse supervisor and his/her deputy. (Let’s call the teams on each shift “receiving”, “warehousing”, and “shipping”.) I then assumed military and civilian staffing and compared costs.
Since costs vary by region and the logistical contract in question was in the “South”, I assumed the location was in the vicinity of Fort Bragg, NC.
The military staffing for the operation I assumed was as follows:
- OIC: 1 ea O-2, 3 yrs TIS
- NCOIC: 1 ea E-7, 14 yrs TIS
- Shift Supervisors: 2 ea E-6, 9 yrs TIS
- Team Leaders: 6 ea E-5, 5 yrs TIS
- Team Members: 18 ea E-4 (3 yrs TIS), 18 ea E-3 (2 yrs TIS)
I further assumed the OIC, NCOIC, Shift Supervisors, and Team Leaders were all married; that the Team Members were 50/50 split married/single; and that all lived “on the economy” (e.g., received housing allowance and separate rations). This was necessary because – unlike civilian industry – military personnel costs vary depending on whether or not an individual is married.
Military Staffing Costs
Salary data is easy to obtain. However, that’s only part of the actual cost of military employment. In fact, it’s generally only about 2/3 the cost, and sometimes far less.
Here are the components of that cost I used. I probably missed a few:
- Salary: obtained from DFAS for the above grades with TIS indicated.
- Housing allowance: obtained from 2013 Housing Allowance Tables for the Fort Bragg, NC, area.
- Rations allowance: obtained from DFAS.
- Retirement Fund Contribution – for this, I used 15% of salary. This was a Scientific Wild-Ass Guess (SWAG). It’s more than civilian employee planning figures for DoD – those are around 10% of salary, if I recall correctly – but military pensions are more generous percentage-wise and start much earlier.
- FICA Taxes (Employer Share – and no, DoD ISN’T exempt from paying this to the SSA) – 7.65% of salary.
- Medical Care Cost Subsidy – for this, I used 11.22% of salary, That’s based on the estimate of $49.4B total DoD medical costs for 2014; the assumption that 1/3 of medical care costs goes for routine care for military personnel and dependents; and a total personnel budget of $147B.
- Dental Costs – this is a Wild-Ass-Guess (WAG), 1% of salary.
- MWR/Quality of Life Programs – also a WAG, 2% of salary.
- Commissary Subsidy – subsidy is currently about $1.4B annually, equal to approximately 1% of DoD personnel costs, so I’m assuming 1% of salary.
- Other: 2.15% – this is a pure WAG to cover stuff I overlooked and make the numbers come out even.
Other than housing and rations, the other benefits total just over 40% of salary. I thus used 40% as an aggregate percentage for the cost of benefits (over and above housing and rations allowances) for military personnel. Housing and rations allowances I included explicitly below.
Doing the math, here’s what I came up with, Sorry for the somewhat smallish print and image; the table’s too large to fit width-wise using the normal font.
Total Annual Cost: $2,557,006
That’s an estimate for the full personnel cost of running the warehouse operation using military staffing.
Contractor Staffing Costs
So, how does that compare with staffing the same facility with civilian labor? You’re probably going to be surprised.
Case 1: All Full-Time Labor
Here’s what I used as contractor costs – the contractor would charge the government the “Unit Cost” line for each individual in that category. I used a benefits “load” of 1/3 of salary (fairly common, and likely a bit generous; private-sector benefits are in general much less generous than those in the military). And based on limited spot-checking for the Fayetteville, NC, area, at least some of these salaries are rather high – which means the contractor cost would probably be lower than I’ve estimated here:
|
Qty |
Position |
Salary |
Bennies |
Unit Cost |
Line Cost |
Hourly Cost |
|
1 |
Warehouse Mgr |
$90,000 |
$29,700 |
$119,700 |
$119,700 |
$47.80 |
|
1 |
Warehouse Foreman |
$75,000 |
$24,750 |
$99,750 |
$99,750 |
$39.83 |
|
2 |
Shift Lead |
$60,000 |
$19,800 |
$79,800 |
$159,600 |
$31.86 |
|
6 |
Team Lead |
$50,000 |
$16,500 |
$66,500 |
$399,000 |
$26.55 |
|
36 |
Workers |
$37,566 |
$12,397 |
$49,963 |
$1,798,660 |
$23.94 |
Total Annual Cost, Case 1: $2,576,710
Even using these numbers, we save less than 1% by using military labor. And as I’m about to explain, we probably won’t even see that due to (a) lower contractor salaries than used above, and (b) contractor use of part-time labor.
Case 2: Extensive Part-Time Labor
As noted, the figures above assume the contractor uses 100% full-time staff getting full benefits for all positions. Now, let’s see what happens if the contractor staffs the warehouse floor (the “Workers”) with part-timers at $18/hour and working part-time (an average of 24hrs/week) vice full-timers. For part-timers, the benefit load drops to a WAG of about 10% (employer pays FICA plus state unemployment insurance, but no medical/retirement/other). Now the contractor cost becomes:
|
Qty |
Position |
Salary |
Benefits (33%) |
Unit Cost |
Line Cost |
Hourly Cost |
|
1 |
Warehouse Mgr |
$90,000 |
$29,700 |
$119,700 |
$119,700 |
$47.80 |
|
1 |
Warehouse Foreman |
$75,000 |
$24,750 |
$99,750 |
$99,750 |
$39.83 |
|
2 |
Shift Lead |
$60,000 |
$19,800 |
$79,800 |
$159,600 |
$31.86 |
|
6 |
Team Lead |
$50,000 |
$16,500 |
$66,500 |
$399,000 |
$26.55 |
|
60 |
Workers |
$22,540 |
$2,254 |
$24,794 |
$1,487,614 |
$19.80 |
With a total annual cost of $2,265,664, Case 2 represents a savings to Uncle Sam of a bit over 11% vice using military labor.
Bottom line: military labor ain’t exactly all that cheap any more, folks.
Category: Defense cuts, Economy, Military issues
How much would it cost using Gov’t workers including legacy costs?
Jo: what exactly are you referring to with the term “legacy costs”?
Here’s the deal, however……. I can order those military folks to keep working during an emergency. Civilian workers could simply leave. They can also go on strike, and if I needed to move that entire operation somewhere, I can move it WITH all the military personnel whereas I’d prolly have to look at rehiring staff, etc, at the new location which would entail some sort of delays for hiring, teaching them the new job, etc.
In every single case, I would prefer to have military folks doing the work, vice civilians. Every single case. Perhaps it’s nothing more than personal bias, but I can see no reason to hire a civilian for work on a military base. None whatsoever.
Well the salary is one thing, but honestly with all of the required training both MOS / rate specific, annual, semiannual, quarterly, monthly, weekly GMT, and whatever is the current hot button (SAPR, Suicide awareness) the assumption of getting 8 hours of work out of a crew of Soldiers or Sailors isn’t going to happen. I would bet that by the time all of the other commanders “requirements” were met you would be lucky to get 5 hours of actual “work” time, and that doesn’t count breaks and chow.
Legacy Costs:
Are the ongoing costs to a company that come from funding activities that, by definition, do not increase revenue. IE-Vehicles, machinery, tools, equipment, parts and supplies, computer systems, office supplies, ect can be passed on to the customer as a percentage of the service order or monthly statement, at 1%. (Industry average is 1%.) Perhaps the most prominent example of legacy costs are the funding of pension, health care and insurance plans. (Those are a bit of a different horse and fluctuate with the market)
Legacy costs often accrue when a company takes on too many responsibilities in times of strong performance (expands beyond the business plan) or when it takes on an appropriate level of responsibility (maintains steady growth pattern with an eye on operating costs)and then its priorities change.
Critics of legacy costs contend that they make industry uncompetitive, while proponents, notably labor unions, argue they are part of an employer’s moral obligation to its employees. This is laid out in layman’s terms and not a factual representation of seasoned professionals whom earn their living performing financial functions.
Dog pile now…
don’t forget to add the longer term costs of retirement pay for the military. A contractor hits retirement it’s on the company to pay retirement (or Social Security. That E-7 in 6 more years (assuming no promotion) will be getting 50%, and while not directly part of the warehouse, does figure in some place. Of course, for this example guess they are not necessarily needed.
I think the big benefit to contract/civilian labor is that people can stay in the position for longer. How much knowledge, experience and productivity does the military just throw away by transferring people between bases every 2-3 years, and between desks (to make them “well-rounded”) every 0.5-1.5 years? Contractors also spend less of their day, PTing, taking care of BS training requirements, buffing the floor, etc.
But also, with using civilians, you risk having to deal with unions and shop stewards, and all the rest of that crap.
Our Maintenance Control Divisions in the navy used standard procedures throughout the fleet. You could go to any aviation unit, or to the AIMD facilities on a Naval Air station, and you’d find the same procedures, same nomenclature, etc. So transferring folks from one unit to another wasn’t a problem. The procedures and language was universal, and it worked very very well.
Our Galleys were also staffed with Navy cooks (Mess Management Specialists) with officers in charge of the facilities from the Navy Supply Corps. All of our medical folks were Navy, and all the base personnel folks were also Navy. Fleetwide systems, language, etc, made it simple to transfer folks as needs be.
And you know what? When the squadron or airwing deployed, we were a self-contained unit. We had everything we needed to function wherever we were sent, regardless of the mission. Well, except for a Chaplain. Those were not part of our TOE, but hey, no one’s perfect, eh? 🙂
But our dependency upon massive numbers of civilian contractors and full-time DoD employees is a serious flaw, and an ultimate source of weakness for our military. We need to rebuild ALL of our military, and make it entirely self-contained, able to be deployed anywhere at any time, and able to hit the ground running, as it were.
We used to be that way. We need to get back to that, and sooner, rather than later.
Disagree, Reaperman. Corporations can and do transfer employee’s at will or as the need arises so costs would be at an identical level. Travel, entertainment and household movement, food, in-company training sessions, floor sweeping, outdoor maintenance, ect are factored in, too.
There’s far more to it but for now, simple explanation can help illustrate..
Not to pile on Mongo, but those additional items you mention, are often times done “in addition to” the normal duty day. So in a sence your right you aren’t going to get 8 hours of work from a military crew, your going to more like 9 or 10 when you add these items in.
-Ish
um, brian – you obviously didn’t read the article very closely. Military retirement funding IS included in the above numbers. It’s part of the 40% add-on for other benefits (4th column from the right), and was also explicitly indicated in the article as 15% of annual salary.
My understanding is that’s actually how the Federal government funds its retirements, by the way – via contributions to a trust fund against future retirements. (I know that’s true for civilian employees and I believe it’s also true for those in uniform as well.) It’s somewhat similar to the way Social Security is funded – but for military, there’s no individual contribution requirement. (There is for Federal civilian employees, but it’s small under FERS – typically less than 1% of pay – and comes out of the employee’s paycheck. Of course, they also pony up 7.65% for FICA taxes on top of that.) It’s why the Federal civilian and military retirement systems are among the few in the nation that are considered adequately funded at this time.
Typical private industry practice when estimating payroll costs is to include an allowance for future retirement costs under the cost of “benefits”. For a rough estimate, benefits costs are generally collectively estimated at from 25% to 33% of actual salary.
The Federal government does the same when rough-estimating payroll costs for civilian employees, but typically uses 33% to 50% as an add-on to salary. The 33% factor for Federal employees seems more honest, as the 50% factor seems to adds the “value” of vacation time and sick leave on top of annual salary – which is already accounted for IMO in the individual’s salary. The higher factor is thus only valid if they bring in a “temp” to cover the individual’s absence – and I don’t think that’s normal practice.
AW1 Tim: contractors can strike, though that’s generally fairly rare. However, under Federal law, Federal civilian employees do NOT have the right to strike – as quite a few Air Traffic Controllers found out the hard way early in Reagan’s first term. They can, however, unionize and file grievances, etc . . . . Roughly 1/3 of the Federal workforce is indeed a member of some union.
— break —
streetsweeper: corporations can indeed transfer folks at-will. However, if they’re a Federal contractor, the government typically DOES NOT pay for them doing so. So that’s typically limited to senior managers and/or overseas contracts. If the contract is in CONUS (as this one is), most other employees are hired locally after the contract is acquired. The bottom line is that for a support contract, having someone work 10+ years doing the same job (or a succession of jobs at the same location including a promotion or two) isn’t that uncommon.
The question regarding using Federal civilian employees raised by Jo is a good one. When time permits, I’ll publish an update (probably a second article) on what it would cost to staff the same facility with Federal civilian employees.
Hondo, the personnel costs to the government are about twice that of what the contracting company actually pays the employees. When I was with SAIC, I got about $70K per year from the firm. I found out the government was actually paying $180K for me to SAIC. I would think the personnel costs are considerably higher to the government.
Part-timers are also not given any holiday pay, earned time off, sick time or leave of any type… The problem with part-timers in my experience is they have nothing invested in the business, they earn no benefits and have no stake other than the pay check consequently their productivity reflects the investment the company is making in these people which is limited. Those military crews will be more productive on a consistent basis than part timers due to the nature of the employment. Disciplining a part timer is about as effective as herding cats, my experience is that when the paycheck is the only leverage it’s only as good as the paycheck and a part time paycheck isn’t much incentive to work your 4ss off….so for me part-timers are indeed cheaper, but you really are getting what you pay for, cheaper labor with little incentive to work beyond defined parameters or respond effectively to sudden increase in labor output demand… Full time civilian workers are far different animals than full time military workers as well, or at least in my experience they are different. Motivation of civilians varies by trade or profession. A degree in logistics works well for your managers but your floor workers will experience regular turnover as is common among lower paid less skilled labor, a savings of 1% by using a military crew will result in better consistent productivity which means steady predictable outcomes. Warehouse operations in companies like C&S distribution have a steady turnover because the work sucks and the conditions are such that there is little incentive to work hard on the floor…sure you can find civilians to do the work, the question is how efficiently will they do the work vice your military crew? Nice analysis as always Hondo, you missed your calling as an economist certainly….I like your numbers they seem to work in my head based on my years of civilian workforce management…I do believe though that military crews are more easily managed and are better motivated out of the gate than civilians. Civilians have all sorts of messy personal life… Read more »
You left out one tiny item, Hondo, which always gets factored into any contract or business enterprise, and that is profit. DoD is a non-profit environment. While overhead in the form of operating expenses (salaries, lodging, food, utilities, facilities, etc.) is factored into what the military does, there is no profit motivation involved in figuring those costs. In a civilian environment all costs are calculated and then an additional percentage added to the contract for the sole purpose of profit. This is true of all private sector business activities, whether they are selling jeans in a GAP store or doing logistics supply for DoD. The profit margin on anything is 100% or more of actual cost to the company. The possibility of fraudulent charges is also not factored into your calculation. While they may be hidden as ‘overage’ – non-specific charges – they are still there, and are the basis for the investigation of fraud and bribery charges currently going on with Leonard Glenn Franics, a/k/a ‘Fat Leonard’ in re: overcharging the Navy for berthing fees, etc. http://www.navytimes.com/article/20131115/NEWS06/311150017/-Fat-Leonard-fallout-Officers-talk-growing-bribery-scandal-epic-parties- There is someone down in Florida, whom we all know and despise, who is part and parcel of a $5.5 billion supply contract for DoD. Supply includes thousands of items as innocuous and common as Post-it Notes and flashlight batteries, all of which can be bought directly by DoD at cost, but instead will cost more than double what DoD would have had to pay directly to the manufacturers. You didn’t include materials costs, liability and property insurance costs, transportation and shipping costs, equipment replacement, or any of the other costs to a company that is in business to make a profit. When you take into consideration only the labor costs, it may seem like it’s less, but it isn’t. The civilian contracts with DoD are entirely profit-oriented. The markup on these DoD contracts is probably closer to 1500% than the normal 400% to 500% that a retailer would charge. Here’s the difference; an iPad made in China costs about $60 to manufacture. An iPad bought at an Apple store retails at… Read more »
VOV: thanks for the compliment.
One quibble with your last comment. Military folks bring the same petty personal-life BS to work as do civilian types. Guaranteed. Sometimes it has an effect; sometimes it’s dealt with reasonably well.
Please do NOT sterotype DoD’s civilian workforce based on your experiences with your local/state DMV (or any other local/state government office, for that matter). here’s a world of difference.
I’ve personally found DoD civilian employees to be a nearly-uniformly professional crowd, with very few drones or duds, at least at the activity/project level. They actually seem to give a sh!t nearly as much as the troops they’re supporting. (Inside the beltway, it seems you encounter a fair number of politicians and political appointees among those in the DoD civilian workforce. But IMO even most of those seem to give a damn, even if they have a personal agenda too.)
And if you think I’m talking through my hat, go back to those congressional investigations into the expense of building ships and submarines and all those questions regarding the $50 charge for a claw hammer that you can get at a local hardware store for $10.
None of that has changed and it won’t until DoD gets its chicken-fried head out of its backside, and politicians stop grabbing government contracts for businesses in their districts/states.
And my last comment obviously concerned contractors vice regular DoD folks too. I think they tend to use contractors for these jobs.
Not to be a d1ck Ex but retail is not the best analogy because low bid labor only contracts are very unlikely to see 1000% markups, especially in a warehouse environment. With all due respect to warehouse workers, it’s not a skill that’s difficult to master. Consequently it’s not easy to win a labor only bid with a markup similar to retail production.
A more appropriate analogy for warehouse work would be a commodity labor or manufacturing item where your gross margins are more on the order of 25-40% and your nets are in the 3-8% range. Government printing contracts are more in this nature, you don’t win any production print contracts with1000% markups. You have to come in with maybe a 25% gross margin and hope to net 5% if all goes well, often there are penalties if you are late and those penalties compound each day you are late.
If the contracts are awarded no bid shame on the government…but low skilled service labor jobs should never be contracted at out with gross margins over 100% never mind 1000%…
@16 My comment about personal life bullsh1t was for the E1-E4 crowd which would be similar to the college age workforce typically used in a warehouse distribution environment. Those kids are a f#cking mess on the civilian side typically.
At the project level I suspect you are not dealing with as many 18-25 year olds and at that point things change. In our highly technical computer environment the average age of my team is about 45 and I have no personal issues from anyone that I deal with unless there is a serious medical issue and that’s not the type of issue that requires disciplinary action.
Sorry I was not clearer in my explanation regarding the age range I was addressing.
Part timers and floor warehouse personal are usually younger, less experienced, less educated at least on the civilian side. My experience has been that these younger less educated workers take up a lot of management time dealing with petty bulls1ht similar to an NCO spending a lot of time dealing with d1ckhead privates and E
4s….
Ex-PH2: true. Profit and overhead is typically factored into the hourly rate charged the government by a contractor. Overhead/management expenses may be either factored in to the hourly rate or included as an explicit overhead/management charge.
Both are also at least partially accounted for in the estimate above, if not completely covered. The actual average salaries paid in the Fayetteville, NC, area appear to be far lower than I estimated above – by close to 1/3 in at least one case, and likely across the board. Based on that fact, I’d be surprised if any contractor running a warehouse for DoD charged DoD much more for their labor than the figures I used.
For an ongoing industrial operation such as this, materials/supplies/equipment/etc . . . , charges will also be either (a) GFE or (b) included in the hourly rates charged. And, frankly, those would be roughly the same for either a government-operated or a contractor-operated facility. They’re thus not included above.
Nicki: if you had a high-level clearance when you worked as a contractor, that likely allowed your employer to make mucho profit from your labor. DoD pays contractors absolutely exorbitant ant rates for those with TS and/or compartmented clearances. That’s partly due to the fact that the company, not DoD, technically must pay for the background investigations involved – and those ain’t cheap. It’s also one reason such firms love to hire vets. (smile)
Ex-PH2: be careful in using that kind of example. Often, DoD gives itself a cal .45 hole in the foot by specifying things that look similar to (or are listed on paper the same as) commercial items, but which are far different.
The classic example was the “$3000 toilet seat” of 1980s fame for one of the USAF’s aircraft. In fact, the item was NOT a commercially-available toilet seat (as was implied when one Congressman held one up while talking about the “overpriced” USAF toilet seat). Rather, if I recall correctly it was a specially-made, stainless-steel panel that covered the entire top of the aircraft’s port-a-pot (and maybe some other areas as well), and had the toilet seat permanently mounted (welded, I think – also stainless) to it. I’m pretty sure each replacement had to be individually fabricated from sheet metal.
Why? Because that’s what the USAF specified for that part of the aircraft. Why it wasn’t a flat cover panel with a modified commercial-style or specialty toilet seat attached, I dunno. You’ll have to ask the USAF.
The item was probably overpriced somewhat, but it definitely wasn’t a $5.00 toilet seat you could buy at a hardware store.
VOV – Really? Then explain the overcharges for common items like toilet seats and claw hammers. That was a major scandal and it still goes on, and those contacts were not ‘no bid’.
Boeing has military contracts for aircraft. If you think a fighter jet is overpriced at $52 million, the cost to Boeing for the manufacture of that airplane is nowhere near $52 million.
Boeing, McDonnell-Douglas, General Dynamics, and Rockwell were all military contractors. I think only Boeing and McD-D are left – not sure about that, but GenD and Rockwell disappeared a long time ago, bought out by Boeing.
Your $52 million fighter jet per-plane price has the following costs built into the manufacturing contract: research and development, labor, materials, testing and a profit margin.
If Boeing builds and sells 100 of those planes, each of them pays the company a profit of 10 times (or 1000%) the cost to develop, manufacture and fly them.
I’m not talking about facilities like the Bureau of Printing and Engraving or the Post Office. I’m talking about civilian contractors like this Leonard Glenn ‘Fat Leonard’ Francis, now being investigated, and that bloated jackass down in Florida.
There is NO civilian contractor who does not build a huge profit margin into its connections to doing business with the government. They operate exactly the way retailers do.
And before you argue the point and get your shorts in a bunch over what I said, and ‘how on earth could they be that dishonest’ stuff, just ask yourself why no one watches the purse strings unless someone blows the whistle about fraud.
And then, there’s that mad scramble called ‘Operation CYA’, and lots of blame to go around.
VOV: agreed. Been my experience that the old “90/10” rule isn’t that much different in either civilian or military in that age group.
However, in the private sector dealing with personal issues may actually be easier than on the military side – provided the military individual doesn’t do something stupid. Especially for part-time workers, it’s pretty easy in “at will” employment states for a private employer to get rid of a “problem” employee. Barring disciplinary issues, the military imposes some substantial admin barriers to separating someone early.
Hondo, those ‘toilet seats’ being investigated were also standard seats found in heads on Navy ships and submarines.
The comparison is colored by end usage. The whole toilet facility for the space station, for example, is a specifically-desiged zero gravity toilet, because without a specific design that accommodates a zero-gravity environment, well — shit floats. Some minor parts of that have gone into handicapped bathroom design, I think. It was extremely expensive to come up with a working zero-G commode.
I wasn’t talking about that kind of thing. I was talking about more common items included in construction contracts for ships and submarines.
Ex- those are not low skilled commodity items, warehouse work and fighter jets are not comparable items for budget discussions about contract bids and profit margins.
You have 3 or 4 major aircraft manufacturers, they all have similar R&D costs and their labor force is virtually the same skill sets between them….that’s not a commodity item but an item expressly manufactured to a set of specifications from a customer, that’s what’s called custom manufacturing. Custom manufacturing is expensive as you can get, if you doubt that try getting a shop to fabricate some antique parts for an old car that’s no longer manufactured and is no longer available for parts either…
Warehouse labor is a commodity like toilet paper, not toilet seats…that was my point.
While custom manufacturing to client specs is and always has been a lucrative business, producing commodity items has not been lucrative on a small scale it’s when you get an economy of scale you see the money. 5% net on a few one off projects will run you out of business, but 5% net profit on 10 billion dollars of commodity work is often quite acceptable. Especially when there is no capital investment required like warehouse labor…Hondo chose a service industry example because I suspect that most contractors on base perform service oriented tasks, such as janitorial, food, and logistical support. Those tasks at the worker level are not custom projects but unskilled or low skilled commodity labor. Those contracts are not high markup contracts. That was my only point.
I won’t dispute that custom manufacturing to client spec is an expensive procedural process, but that was not Hondo’s example to my thinking.
VOV: actually, I chose a warehouse operation as the contract in question was a logistics contract, and that’s the first thing that came to mind. Running a small-equipment-repair facility, performing facility and grounds maintenance, providing food service, or providing janitorial and trash removal services would also have been decent examples, but I didn’t think of them.
VOV, the comparison between custom manufacturing and warehouse labor actually is appropriate. The actual labor costs may differe because of skill set differences, but there is still a massive markup for labor costs and all other costs.
The difference is this: as a direct buyer, DoD could get wholesale prices on all its lower end logistical items such as paper products without even going to generic items. If DoD goes through a contractor to get the same items, the price will be marked up far beyond the wholesale/at cost level to the contractor, and will include a hihg-end profit margin.
The comparison is this. During WWII, Ford Motors converted some of its auto plants to airplane factories. DoD bought the planes directly from Ford, as it does with Boeing. Once the price is established, that’s what the government pays now and back then, whatever it was back then.
If DoD went through a third party to buy those fighter planes from Ford or from Boeing, the price per plane would at least double and possibly triple. IF a current fighter jet costs DoD $52 million on a direct buy, a 3rd party price will run it up to anywhere from $85 million to $104 million per plane, easily.
That’s the point I was making.
The contractor down in Florida will be buying common use items, e.g., post-it notes, batteries, facial tissues, etc., at a possibly deeply discounted wholesale price, and marking them up on invoices to DoD by as much as 1000%.
It isn’t unusual, it happens all the time, and no one says ‘Wait, let’s just go down to Staples. They’re having a sale, and I have coupons.’
It also leaves the door wide open to fraud, which for some unknown reason, nobody thinks will happen.
@27 It makes sense to me, all of those items you mention though are typically service oriented commodity work. There are 100s of qualified providers, it’s not custom work to client specification. It’s not easy to win work with 1000% markups when you have that many competitors…commodity work is never won with that kind of markup…that’s why I thought your numbers were pretty close, even marked up 25% one would have to decide what made more sense to the mission.
That was my point to Ex-PH2, custom spec work is far different than commodity service or manufacturing work…
You talk about 3,000 dollar toilet seat.
Who the hell cares?
On my second ship the “Great Grey Ghost of the Viet Nam Coast” USS Edson (DD-946), I would have gladly paid the 3,000 dollars for a toilet seat if it came with a privacy curtain.
The Edson in 1983 was the oldest DD in the Navy, it had never hadd a berthing or head retrofit and every shitter was “open bay” style!
The Edson fired more NGFS during Viet Nam than any other.
I repeat, the comparison is exactly the same, whether it’s custom manufacturing or supply or just staffing a mess tent with civilians.
It is always cost + labor + facility + %%%% markup for profit, regardless of the product or service provided.
Here’s an example: 3M manufactures all kinds of paper products. The cost is modest and a lot of their paper for product manufacturing is recycled from other paper products.
Let’s say that DoD wants a special bag for troops deployed to Central Asia. It has to be made of paper, super strong, recyclable, and biodegradable. The R&D team comes up with a bag made of a biodegradable cellulose starch, with reinforcement straps that are made of another kind of cellulose starch but are also biodegradable. All of these bags can be recycled into other paper products.
The cost to manufacture these bags is maybe $.05. The retail value, once it hits the market, is $1.50. The DoD gets a deal for a price of $.15 per bag for direct bulk purchase.
However, DoD, decides to go with a third party contractor, who gets the bags for $.10 and sells them to DoD for $2.50.
That’s the difference. It’s a custom job, it’s cost-effective if done as a direct buy, but for some crapazoid reason, DoD decides to waste money going through a contractor who bumps up the price FAR BEYOND what DoD would pay by doing direct buying.
You grumble about taxpayers being ripped off and I’m telling you why we’re being ripped off. If you don’t get that, you aren’t paying attention.
Master Chief, was I unclear about anything I said? Just askin’.
You’re complaing about open bay commodes? I lived at Quarters K in Arlington, across the road from the Pentagon, until it was torn down. We had cubicles and no curtains. That meant you couldn’t bring your Marine Corps boyfriend into your lodgings for a bit of noeken in the PM. The back seat of somebody’s car is SO pre-prom high school.
Hondo, exactly. I had a TS/SCI as a contractor, and holy balls, did the government get raped! LOL!
PH2 – quick observation, Boeing bought McDonnell in the mid-’90s and Lockheed is now Lockheed-Martin. Add General Dynamics and you have the majority of all fixed-wing contracts (and many rotary, too.)
I thought so. Wasn’t sure. I didn’t keep track of those acquisitions, I just knew something bought something up and they became as one. Rockwell was spun off form General Dynamis.
A question – the soldiers don’t just come out of nowhere. You need MEPS, background investigations (usually with at least a Secret clearance), Reception, BCT and AIT (or OSUT), often an enlistment bonus…ought not that be factored into the cost of applying those soldiers to the warehouse operation?
Pulling a figure out of my 4th point of contact, let’s say it’s $100K for the junior enlisted…amortize that over three productive years for a bunch of them, that’s another $33K; for the NCOs and the junior enlisted who plan to stay in, you’ll have a bigger investment with additional schools, but a longer career to spread the costs over…still, you’d want to figure $10K/year at least, wouldn’t you?
Again, my source here is my posterior, but my main question is, am I thinking of this correctly, or am I missing something?
EX-PH2 … We are good. I am just blathering.
SGT E – if you look at it as total investment, you also need to dial in total returns received against all that training etc. Their training does not come out of nowhere, true, but they are utilized over those same years for a variety of functions, which hopefuly offset (and overtop) training costs. Total cost to train someone $100K vs. $30K worth of work for 5 years = $50K to the good. Like any investmnt, you have to consider ROI.
Thanks, VOV. You said what I was searching the dusty, rusty memory for, lol. My experience is a equipment service environment and though we had a front end operation (retail) that wasn’t none of my concern. I didn’t waste much time on employee’s if they couldn’t make the 90 day probationary period. I knew by mid-point of the probie period if they were going to make it or not. Monthly planning was for no less than 1% profit and made 3% except for slow periods (hence 1%), kept the guys happy, working and loyal, specialty tools and equipment repaired or replaced as needed and raised productivity to 92% from 18% (according to their computer program) by getting rid of one man that was a foreman and so-called efficiency expert. Had it been a government job, there is no way I could have dealt with personnel problems as quickly as I was able to.
Break:
Thanks Hondo. You did very well and I look forward to part two.
@36: You are also not going to get as efficient use out of those soldiers because at any given time a half to a third of them will be on post details, military schools, preparing to ETS/PCS or just got in and still inprocessing. Then there’s the factor of training, with a 100% turnover every 3 years or so, a lot of time will be spent training replacements.
Honestly, if you ran with an all-military crew, you’d need to staff at something like 125 – 135%% of needs to account for all the extra stuff soldiers would be doing vs. civilians.
Ex- it is indeed always plus markup for profit, however it’s not correct to think it’s always 1000% for commodity items, that’s simply not true. Your plastic bag process only works if you assume every contractor bids the project with that markup, it only takes a couple of contractors to bid the process at 25 cents a bag for that whole process to come apart. If the contractor included delivery and inventory maintenance at those numbers the $2.50 a bag guys are out of business. With 3 manufacturers producing a jet your comparison is valid, with 300 hundred vendors competing for a plastic bag and delivery process it’s not…because not all 300 are going to bid $2.50. It makes more sense to bid at your best pricing to win the work. These aren’t designer jeans they’re bags… I bid regularly on government contracts in the commodity service sector, there’s no way I am winning any work with a 1000% markup it just doesn’t happen. As it is with a modest 25% gross margin over my costs I still don’t win every contract, we do fairly well but we are not killing the contract process on commodity spec work… I’ve not had the pleasure of doing custom manufacturing work for the government so I can’t speak directly to that. My point is that I use materials in my process the same as any one else does and I don’t get to mark sh1t up 1000% and pass off an invoice post contract award. The jobs I bid are simple, produce this many of these items at this cost….period. If I don’t spec the job right or I don’t get the best price I can’t go back and ask for more money, it just doesn’t work that way. I am stuck with my pricing for better or worse, there is no way for me to hose the taxpayers. I make a modest decent profit and the government gets a quality product. It’s a win-win at reasonable cost. I get your point, but I do not believe it is valid to Hondo’s example… Read more »
Adding to the above – high turnover rates are a real problem the more technical or complicated the job is. Working in the G2 of the 2nd ID in Korea, we were constantly in a state of training the new people, and of course, once you got them trained up (which took several months of hands-on training), they would do the job for a few months, take mid-tour leave and at that point they were “SHORT!” and hard to keep focused on task.
Having civilians who live in the area means you have people who have roots and are likely to stay in the same job for years, greatly increasing their efficiency.
Interesting how assigning “SWAG” creates the desired results, numerically.
Interesting that when one then uses the resulting employee only compensation, rather than including the employer costs, and the employer profits of that contractor, it confirms it.
The number of E3’s and E4’s that retire is pretty small. Hence those “pension costs” of those enlisted that don’t re-enlist are not “costs” at all.
And that’s just the first, most obvious problem with this “analysis.”
Contractors have their place..in my experience, the best reason to hire a contractor is for a specific skill set that you only need for x amount of time.
As the G-4 Colonel I worked for told me: “I hire contractors for this work because they’re easier to fire.”
If you have a mix of green-suit/DA civilian/contractor, you can get the best of all worlds with the mix. Recency of field experience/leadership from the green-suit, long-term knowledge and stability with the DAC, and short-term high-end skills with limited time of application from the contractor.
As with most things, the needs are not black and white/one or the other. It has been my experience that a logical assessment of the needs (even where I work now) leads to a Neopolitan Ice Cream mix of the three for best success.
@43: let me respond to your not so subtle accusation that the comparison above was deliberately rigged: that’s bull. It wasn’t. I don’t operate that way. Had I been interested in rigging the results, I’d have used even higher numbers for military benefit costs. And based on DoD’s total military personnel costs, I could quite easily justify doing so if I so desired. DoD will spend approximately $147 billion on military personnel costs in 2013. DoD pays far less than that to military personnel in salaries. Now regarding your specific veiled accusations: a. The SWAG of 15% for military retirement contribution is indeed that – but it’s a reasonably well-educated SWAG. As I quite clearly stated above, the planning figure for civilian retirement fund costs is around 10% for Federal civilian employees. Both percentage-wise and duration-wise, military pensions are substantially more generous than Federal civilian pensions. I SWAGed the difference at around 50% – so I used a 50% larger percentage contribution. In point of fact, the Federal government made a contribution of $67.2B (yes, that’s a “B” – as in “billion”) into the Military retirement fund in 2013. While a portion of that contribution is funding provided to amortize the unfunded liability for said fund over a 50-year period, it’s also in excess of 45% of DoD’s total personnel costs for 2013 (which include substantially more than salaries alone). So no, I don’t think 15% of actual salary is out of line as an estimate of what Uncle Sam is setting aside each year to fund military retirements, or that the 15% figure is contrived to inflate a damn thing. In fact, I’d guess if anything it’s probably a bit low. http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0CC8QFjAB&url=http%3A%2F%2Fwww.csbaonline.org%2Fwp-content%2Fuploads%2F2012%2F08%2FAnalysis-of-the-FY-2013-Defese-Budget.pdf&ei=hJeLUrm2D9aw4AOJh4G4Cw&usg=AFQjCNFxdv5O1lhzDM50UMPkTdw3RzjCbA&bvm=bv.56643336,d.dmg b. Salary figures used for contractors in the above examples are substantially higher than the actual prevailing salaries for the Fayetteville, NC area – and indications are they’re high by at least 1/3 if not more. I clearly noted that in comment 21 above, and alluded to that fact in the base article as well. So yeah, those numbers IMO probably do fairly represent what a contractor… Read more »
OK, VOV, I guess I wasn’t clear about the markup. I meant that it CAN be as much as 1000%, even on government contracts. Most of the contractor fraud has been due to lack of oversight, literally no one eyeballing or auditing the invoices. They simply get paid, with no cost comparison to the same things in the private sector.
That’s what I intended to say. I think it got lost in the process.
I’ve seen these things happening, and so have you, the worst being the constant reports of Medicare fraud, in which Medicare is charged for services and medications that were never rendered to the people whose accounts were billed, or whose accounts were intentionally overcharged. And you and I pay for these things, whether we like itor not.
@43 David – so if I understand it, what you’re saying is that you put $100K into training that E4, he deploys to Afghanistan for a year, then spends two years in the warehouse – the investment you put into his training was for that combat deployment, where he produced way more than $100K worth of foreign policy execution. Therefore, you’ve already gotten your ROI on his IET, so no need to continue to count it.
Do I have that right? If so, that pretty well undercuts my argument. Well, as long as you get that deployment out of him. Of course, even if you don’t, you could say that $100K went into *preparing* him to deploy, and that capability was worth the $100K, regardless of his day-to-day gig.
Hondo, there is one thing that you aren’t taking into account. The complaint popular now with politicians is that military personnel are too expensive to maintain, hence the cutbacks, drawdowns and sequestration. In the days of the draft, personnel came and went on a rotating basis and military career people were at a lower level than they are now.
In order to make the all-volunteer military attractive, it obviously had to be considered as a career option with pay and benefits, including health care and retirement pay, comparable to civilian careers.
(As a disclaimer, I have worked only one place that offered any kind of retirement plan and I stayed there until I retires.)
This is what has driven up personnel costs, more than expensive equipment and logistics contracts. That’s why I asked that question in the first place. From some of the things coming out of the news services, it almost appears as though some of these politicians would rather see a standing military done away with and mercenaries hired on a contract basis instead, on an as needed basis, which would be far more expensive and far less trustworthy.
If you will recall, Hessian mercenaries were employed by the Continental Army to fill in where experience was lacking during the War of Independence.
What I’ve suggested may seem outlandish, but unless the draft is reinstated to provide a rotating inflow/outflow of lower-level personnel, I can’t see what else these politicians can be aiming at.
@46 Thanks Ex—yes that makes sense I think we are using the same coin perhaps heads vs tails is all…in a no bid situation or limited contractor bid opening I think it’s quite possible for things to get ugly and fraudulent…in a public bid opening it’s hard to get away with sh1t because the guys who lose the bid are there in the room and they’re going to get real p1ssy if a higher number than they submitted wins the work….
Well right now I’m sitting in my cube in the finance department at one of the General Dynamics companies. The gov audits the hell out of our bids, products, finances, and gets to know our exact profit because it’s negotiated. It’s usually around 10 percent.
Yes the oversight adds cost but there is no way we could get away with 100% markup. The fine and payback of money would be high.
Also, we do buy from staples, with corporate discount.