You know Eli Whitney as inventor of the cotton gin, but most of his fortune came from government contracts to make weapons for the U.S. Army. When Whitney won his first contract in 1798 — to deliver 10,000 muskets at $13.40 each within 28 months — his first order of business was to build a gun factory in Connecticut, since he didn’t actually have one then.
Whitney’s company today would be just one of more than 141,262 companies holding contracts with the federal government, filling orders for goods and services totaling more than $532 billion in fiscal 2011. That’s larger than the gross domestic product of more than 150 countries.
- Read More:Bloomberg Insider - Convention 2012
- Download:Bloomberg Insider 9/5
The government spends more on contractors each year than it does on the salaries and benefits for military and civilian government personnel, a fact lost in debates over cutting the federal budget. When federal spending rises, much of the money flows to private companies. When spending drops, private companies feel the pain.
No matter who occupies the White House next year, he will need to squeeze savings out of every corner of the federal government to rein in the deficit. That will affect the 2.1 million civilians and 1.5 million military service members employed by the U.S. government.
President Barack Obama or his challenger, Republican Mitt Romney, will have to manage the political consequences of similar reductions in contractor jobs during the next four years. The key swing state of Virginia, for example, pulled in more federal contract dollars than any other state in the country last year.
The president also will have to mind the potentially disproportionate impact on small businesses that the cuts could have.
The impact will be felt by millions of private-sector employees working under contract. Estimates of the total are rare, but New York University Professor Paul C. Light calculated there were 7.6 million federal contractor employees in 2005, when contract spending was $90 billion lower in inflation- adjusted dollars than in 2011.
Contract spending has boomed along with the federal budget over the past decade, almost doubling from $275 billion in inflation-adjusted dollars in fiscal 2001. The Iraq and Afghanistan wars, Sept. 11-induced homeland security spending, and growth in most non-security agencies’ budgets fueled the increase.
Seventy percent of U.S. contracts by value in 2011 were awarded by the Defense Department. They included everything from Lockheed Martin Corp. (LMT:US)’s $396 million contract to manage the U.S. Special Operations Command’s logistics center in Lexington, Kentucky, to Guam Tropical Landscaping Inc.’s $1 million Navy contract for grounds maintenance in Guam.
The other 30 percent of contracts were issued by non- defense agencies such as the Energy Department, NASA and the Health and Human Services Department. HHS, for example, spent $5 billion last year on drugs, including anthrax, flu and smallpox vaccines.
Small businesses won $91.5 billion in contracts in fiscal 2011, according to the Small Business Administration. That’s three times the amount the SBA lent to help small businesses last year, and contract awards are dollars that business owners don’t have to pay back.
Spending on contracts is declining as the Iraq and Afghanistan wars wind down and economic stimulus spending dries up. Last year, Lockheed, the largest government contractor, announced layoffs or offered buyouts for about 8,000 employees in Florida, Pennsylvania, Colorado, Texas, California and the Washington, D.C., area.
The next president will have to find ways to get contractors to provide services and goods to the government more efficiently. The price tag of the Navy’s most expensive warship, the aircraft carrier USS Gerald R. Ford, rose 18 percent in four years to $12.3 billion, according to Defense Department data. Reining in such cost overruns and getting contractors to deliver on time may help the government achieve its budget goals without decimating a raft of other contracts.
That’s been a 200-year-old struggle for presidents and contractors. As Whitney waited for his gun factory to become operational, President George Washington handed off the musket contract to John Adams, who handed it off to Thomas Jefferson.
Whitney delivered the last of his 10,000 muskets about eight years late. If he were a contractor today, he’d be sweating bullets as well as making them.
(Brian Friel is a federal business intelligence analyst with Bloomberg Government. The views expressed are his own.
To contact the analyst: Brian Friel in Washington at email@example.com
To contact the editor responsible: David Rapp at firstname.lastname@example.org