Insourcing Functions Performed by Federal Contractors: An Overview of the Legal Issues

Kate M. Manuel
Legislative Attorney

Jack Maskell
Legislative Attorney

Recent Congresses and the Obama Administration have taken numerous actions to promote “insourcing,” or the use of government personnel to perform functions that contractors previously performed on behalf of federal agencies. Among other things, the 109th through the 111th Congresses enacted several statutes requiring the development of policies and guidelines to ensure that agencies “consider” using government employees to perform functions previously performed by contractors, as well as any new functions. These statutes also require that “special consideration” be given to using government personnel to perform certain functions, including those functions (1) performed by government employees in the recent past, (2) closely associated with the performance of inherently governmental functions, (3) performed pursuant to a contract awarded on a non-competitive basis, or (4) performed poorly by a contractor because of excessive costs or inferior quality. The Obama Administration has similarly promoted insourcing. Among other things, on July 29, 2009, the Office of Management and Budget directed federal agencies to conduct a pilot human capital analysis of one program where the agency has concerns about its reliance on contractors, as a prelude to potentially insourcing functions performed by contractors.

These recent insourcing initiatives raise several legal questions, including whether agencies complied with their own guidelines when insourcing particular functions. Because the Administrative Procedure Act (APA) allows challenges to agency actions that are “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law,” contractors may have standing to challenge insourcing determinations that are contrary to guidelines based in statutes, regulations, or policy documents that the agency intended to be binding or has employed in such a manner that they are binding as a practical matter. However, it is presently unclear whether the federal district courts or the U.S. Court of Federal Claims have jurisdiction over such claims. The district courts have reached differing conclusions as to whether a contractor challenging an insourcing determination is an “interested party” within the meaning of the Administrative Dispute Resolution Act (ADRA) of 1996, and whether an insourcing determination is made “in connection with a procurement or proposed procurement” under this act. Assuming that contractors are interested parties and insourcing determinations are made in connection with proposed procurements, the U.S. Court of Federal Claims would have exclusive jurisdiction under ADRA. If not, the district courts would have jurisdiction under the APA.

While the APA would not prohibit insourcing per se, it could constrain whether and how agencies proceed with insourcing in particular circumstances, as could other provisions of law. For example, the terms of certain requirements contracts could potentially require agencies to delay insourcing so as to allow current contracts to expire, or face the prospect of liability for constructive termination for convenience. Similarly, limitations on “direct hires” under civil service law could prevent agencies from hiring, on the spot, the person currently performing a function under a contract, although no provisions of federal law appear to prevent the government from hiring the employees of its contractors. Federal ethics and conflict of interest laws and regulations could also result in certain narrow limitations on the official duties or conduct of former contractor employees in matters in which that employee may have a continuing or current personal financial interest, or which involve a former employer of that individual as a direct party to a governmental transaction or other such matter.

The 112th Congress is considering legislation that could constrain insourcing initiatives by requiring agencies to conduct a public-private competition and determine that provision of goods or services by federal employees provides “best value” prior to insourcing (H.R. 1474, S. 785).


Date of Report: May 5, 2011
Number of Pages: 19
Order Number: R41810
Price: $29.95

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