OpenFeds Analysis
Contractors vs Federal Employees: The $700 Billion Question
The federal government spends over $700 billion annually on contracts — more than double the entire civilian payroll of $300 billion. An estimated 4.1 million contractor workers serve alongside 2.2 million federal employees. Is outsourcing saving money — or creating a shadow government that costs more and answers to less?
👥The Shadow Workforce
When politicians talk about "shrinking government," they usually mean cutting federal employees. What they don't mention is the contractor workforce that has grown to nearly twice the size of the civilian federal workforce. The government didn't get smaller — the work just moved off the books.
2.2M
Federal Civilians
Direct government employees
~4.1M
Contractor Workers
Estimated (no official count)
$300B+
Federal Payroll
Salary + benefits
$700B+
Contract Spending
FY2024 obligations
Here's the remarkable part: the federal government doesn't officially count its contractor workforce. The 4.1 million estimate comes from researchers at NYU and the Brookings Institution who back-calculated from contract dollar values. The government tracks every federal employee in OPM's FedScope database — their occupation, grade, salary, and duty station. For contractors? We know how much we spend. That's about it.
📌 The Counting Problem
No federal database tracks the total number of contractor workers. The Federal Procurement Data System (FPDS) records contract obligations but not headcount. Estimates range from 3.7 million to 5.2 million depending on methodology and whether subcontractors are included. When the government can't even count its workforce, cost comparisons become guesswork.
The federal government has spent 40 years 'shrinking' its workforce by hiring contractors instead. The workforce didn't shrink. It just became invisible — and more expensive.
— Paul Light, NYU, 'The True Size of Government'
💰Cost Comparison: Head to Head
The core question: does it cost more to have a federal employee do a job or to contract it out? The answer depends on the job — but the data increasingly suggests contractors cost more for comparable work.
| Cost Component | Federal Employee | Contractor |
|---|---|---|
| Average annual salary | $103,000 | $110,000–$140,000 |
| Benefits (health, pension, TSP) | $38,000 | Varies ($15K–$40K) |
| Overhead (facilities, IT, admin) | $25,000 | Included in rate |
| Company profit margin | N/A | 8–15% of contract value |
| Contract management/oversight | N/A | $15,000–$25,000 per FTE |
| Total estimated cost per worker | $160,000–$170,000 | $175,000–$250,000 |
A 2019 study by the Project on Government Oversight (POGO) compared federal and contractor costs across 35 occupational categories. In 33 of 35 categories, contractors cost more than federal employees performing the same work. The average contractor premium was 1.83x — meaning the government paid nearly double for the same labor when contracted out.
Where Contractors Cost Most vs Least
- Most expensive to contract: IT support ($268K contractor vs $131K federal), claims processing ($196K vs $100K), groundskeeping ($115K vs $42K)
- Closest to parity: Engineering services, legal support, medical professionals
- Cheaper to contract: Specialized short-term projects, surge capacity, niche expertise (AI, cybersecurity)
The government pays contractors an average of 1.83 times more than it would cost to have federal employees do the same work. In IT services, the ratio is over 2:1. 'Outsourcing saves money' is the most expensive myth in Washington.
— POGO, 'Bad Business' Report, 2019
📈Growth Trends
While the federal civilian workforce has been roughly flat at 2.0–2.2 million since the 1960s, contract spending has exploded. Adjusted for inflation, federal contract obligations have more than doubled since 2000.
| Year | Federal Civilians | Contract Spending | Est. Contractor Workers |
|---|---|---|---|
| 2000 | 1.78M | $235B | ~2.4M |
| 2005 | 1.87M | $390B | ~3.3M |
| 2010 | 2.13M | $540B | ~3.8M |
| 2015 | 2.08M | $440B | ~3.5M |
| 2020 | 2.10M | $665B | ~3.9M |
| 2024 | 2.20M | $700B+ | ~4.1M |
The post-9/11 surge in contract spending was particularly dramatic. DOD, DHS, and intelligence agencies outsourced aggressively — hiring contractors for everything from interrogation to IT management. Even after the wars wound down, contract spending never returned to pre-2001 levels. Once a function is outsourced, the in-house expertise to bring it back evaporates.
🏭 The Top Federal Contractors (FY2024)
The ten largest federal contractors received over $200 billion in FY2024:
- Lockheed Martin: ~$50B
- RTX (Raytheon): ~$28B
- General Dynamics: ~$22B
- Boeing: ~$18B
- Northrop Grumman: ~$16B
- Plus Leidos, Booz Allen Hamilton, SAIC, Accenture Federal, and Deloitte rounding out the top 10.
🔍The Accountability Gap
Federal employees are subject to ethics rules, financial disclosure, the Hatch Act, Freedom of Information Act requests, and congressional oversight. Contractors operating in the same offices, doing the same work, are subject to... their contract terms. The accountability asymmetry is enormous.
| Accountability Mechanism | Federal Employee | Contractor |
|---|---|---|
| Congressional oversight | ✅ Direct | ⚠️ Indirect |
| FOIA requests | ✅ Yes | ❌ No |
| Ethics/financial disclosure | ✅ Required | ❌ Rare |
| Whistleblower protections | ✅ Strong | ⚠️ Limited |
| Inspector General audits | ✅ Yes | ⚠️ Contract-dependent |
| Merit system protections | ✅ Yes | ❌ No |
| Performance accountability | ⚠️ Weak (hard to fire) | ✅ Can terminate contract |
We've created a two-tier federal workforce. The employee sitting at Desk A is subject to financial disclosure, FOIA, and the Hatch Act. The contractor at Desk B — doing the same job — is subject to none of it. Same work, different rules, higher cost.
⚖️The Real Question
The debate shouldn't be "federal employees vs. contractors" — it should be "what's the most cost-effective and accountable way to deliver each function?" The data suggests a few clear principles:
When to Use Each:
- →Use federal employees for: Core government functions, long-term steady-state work, roles requiring public accountability, positions where institutional knowledge matters. This includes most federal occupations in policy, regulation, and oversight.
- →Use contractors for: Surge capacity, specialized short-term expertise, commercial services (janitorial, food service), and cutting-edge technology where government can't compete on salary.
- →Stop using contractors for: Inherently governmental functions (policy, acquisition management, intelligence analysis core), long-term staff augmentation disguised as "services," and any role where the contractor has been in the same seat for 5+ years.
The uncomfortable truth for both sides: hiring freezes that cap federal headcount while allowing unlimited contract spending don't save money. They cost more. And blanket "insourcing" mandates that bring work in-house without the expertise to manage it create different problems. The government needs both workforces — but it needs to be honest about what each costs and manage them as a single workforce, not two parallel universes.
Until the government can answer a basic question — "how many people work for us?" — it can't meaningfully manage its workforce or its costs. The 2.2 million federal employees are tracked in detail. The 4+ million contractor workers are a rounding error in a spreadsheet. That's not oversight. That's negligence.