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 pilot human capital analyses of programs where the agency has concerns about its reliance on contractors, as a prelude to potentially insourcing functions performed by contractors.

Several lawsuits have recently been filed, alleging that agencies’ determinations to insource particular functions were “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law” in violation of the Administrative Procedure Act (APA). These suits raise several legal issues that are presently unresolved. First, questions have arisen as to whether the federal district courts or the U.S. Court of Federal Claims have jurisdiction over such suits. 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 proposed procurement” under the 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. Second, there is the question of whether contractors meet any prudential standing requirements to challenge insourcing decisions. Courts have also reached differing conclusions as to whether such standing requirements apply to “interested parties” under ADRA, and there may also be disagreement as to whether contractors are within the “zone of interests” to be protected by insourcing statutes. Finally, assuming that contractors meet any prudential standing requirements, there could also be questions as to whether particular insourcing guidelines are legally binding under the APA, as well as to whether particular agency actions were contrary to any binding guidelines.

Other provisions of law could also constrain whether and how agencies may proceed with insourcing in particular circumstances, or limit the activities that former contractor employees may perform after being hired by the federal government. These include (1) contract law, under which agencies could be found to have constructively terminated certain requirements contracts by augmenting their in-house capacity to perform services provided for in the contract; (2) civil service law, which would generally limit “direct hires” of contractor employees; and (3) ethics law, which could limit the involvement of former contractor employees in certain agency actions.

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). A provision of the House-passed National Defense Authorization Act for FY2012 (H.R. 1540, § 939) could also limit agencies’ ability to insource functions.


Date of Report: June 8, 2011
Number of Pages: 21
Order Number: R41810
Price: $29.95

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