Insourcing Functions Performed by Federal
Contractors: An Overview of the Legal Issues
Kate M. Manuel
Legislative Attorney
Jack Maskell
Legislative Attorney
May 5, 2011
Congressional Research Service
7-5700
www.crs.gov
R41810
CRS Report for Congress
P
repared for Members and Committees of Congress
Insourcing Functions Performed by Federal Contractors: An Overview of the Legal Issues
Summary
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).
Congressional Research Service
Insourcing Functions Performed by Federal Contractors: An Overview of the Legal Issues
Contents
Introduction ................................................................................................................................ 1
Background ................................................................................................................................ 1
Legal Issues ................................................................................................................................ 4
Administrative Procedure Act and Insourcing Guidelines ...................................................... 4
Jurisdictional Questions .................................................................................................. 5
Whether Particular Guidelines Are Binding ..................................................................... 8
Constructive Termination or Breach of Requirements Contracts .......................................... 10
Civil Service Laws and Limitations on “Direct Hires” ......................................................... 12
Ethics Laws and the Activities of Former Contractor Employees ......................................... 13
Small Business Law............................................................................................................ 15
Potential Congressional Actions ................................................................................................ 16
Contacts
Author Contact Information ...................................................................................................... 16
Congressional Research Service
Insourcing Functions Performed by Federal Contractors: An Overview of the Legal Issues
Introduction
While agencies are prohibited by federal law and policy from contracting out functions that are
“inherently governmental,”1 other functions could potentially be contracted out.2 There has long
been debate over both general government policies promoting the use of the private sector to
perform “commercial functions”3 and whether specific functions should be performed by
government personnel or contractors.4 However, since 2008, the “insourcing” initiatives of recent
Congresses and the Obama Administration have caused particular controversy.5 Several lawsuits
have been filed challenging agencies’ determinations to insource particular functions, and broader
questions have been raised as to whether agencies’ implementation of insourcing runs afoul of
civil service, ethics, or small business laws. This report provides a brief overview of key legal
issues related to recent insourcing initiatives. It will be updated as developments occur.
Background
Since January 1955, the federal government has consistently had policies promoting the use of
the private sector to produce commercial products and perform commercial services, although the
wording of such policies and, particularly, the degree to which they have been implemented by
1 In brief, an “inherently governmental function” is one that is “so intimately related to the public interest as to require
performance by Federal Government employees.” 31 U.S.C. § 501 note, at § 5(2)(A). There has recently been concern
about the definition of “inherently governmental functions” and, particularly, whether the existence of multiple and/or
contradictory definitions of this term has resulted in the contracting out of functions that must be performed by federal
employees. See CRS Report R40641, Inherently Governmental Functions and Department of Defense Operations:
Background, Issues, and Options for Congress, by John R. Luckey, Valerie Bailey Grasso, and Kate M. Manuel
(surveying existing definitions of inherently governmental functions); CRS Report R41209, Inherently Governmental
Functions and Other Work Reserved for Performance by Federal Government Employees: The Obama
Administration’s Proposed Policy Letter, by L. Elaine Halchin et al., (discussing the Obama Administration’s proposed
guidance regarding inherently governmental and related functions).
2 See, e.g., Gulf Group, Inc. v. United States, 61 Fed. Cl. 338, 341, n.7 (2004) (treating items on the Federal Acquisition
Regulation’s list of “functions approaching inherently governmental” as capable of being contracted out by agencies).
Congress can, however, remove agencies discretion to contract out particular functions by prohibiting them from doing
so (or from using appropriated funds to do so). See, e.g., Consolidated Appropriations Act, 2008, P.L. 110-161, § 730,
121 Stat. 1846 (2008) (“None of the funds made available in this Act may be used to study, complete a study of, or
enter into a contract with a private party to carry out, without specific authorization in a subsequent Act of Congress, a
competitive sourcing activity of the Secretary of Agriculture, including support personnel of the Department of
Agriculture, relating to rural development or farm loan programs.”).
3 See CRS Report R40641, Inherently Governmental Functions and Department of Defense Operations: Background,
Issues, and Options for Congress, by John R. Luckey, Valerie Bailey Grasso, and Kate M. Manuel, at pp. 2-6. For
purposes of insourcing and outsourcing, a “commercial function” is “[a] recurring service that could be performed by
the private sector. This recurring service is an agency requirement that is funded and controlled through a contract, fee-
for-service agreement, or performance by government personnel. Commercial activities may be found within, or
throughout, organizations that perform inherently governmental activities or classified work.” See U.S. Office of
Management and Budget, Circular No. A-76 (Revised), May 29, 2003, at D-2.
4 See, e.g., Duncan Hunter National Defense Authorization Act for FY2009, P.L. 110-417, § 832, 122 Stat. 4535 (Oct.
14, 2008) (“It is the sense of Congress that ... the regulations issued by the Secretary of Defense pursuant to section
862(a) of the National Defense Authorization Act for Fiscal Year 2008 ... should ensure that private security
contractors are not authorized to perform inherently governmental functions in an area of combat operations.”).
5 See infra notes 43, 94, and 99 and accompanying text.
Congressional Research Service
1
Insourcing Functions Performed by Federal Contractors: An Overview of the Legal Issues
the executive branch have varied over time.6 The George W. Bush Administration, for example,
promoted this policy vigorously under the name of “competitive sourcing” (later “commercial
services management”), which was a key component of the President’s Management Agenda.7 Its
doing so prompted concern among some commentators, who asserted that competitive sourcing
represented a concerted effort to shift work to the private sector and resulted in contractors
performing functions that should have been performed by government employees.8
Responding, in part, to such concerns, the 109th Congress enacted legislation directing the
Secretary of Defense to “prescribe guidelines and procedures for ensuring that consideration is
given to using Federal Government employees for work that is currently performed or would
otherwise be performed under Department of Defense [DOD] contracts.”9 These guidelines and
procedures are to ensure that “special consideration” is given to using government personnel to
perform functions that
• had been performed by government employees at any time on or after October 1,
1980;
• are closely associated with the performance of inherently governmental
functions;
• are performed under contracts that were not competitively awarded; or
• have been performed poorly by a contractor due to excessive costs or inferior
quality.10
Subsequent Congresses expanded upon these requirements. First, the 110th Congress required that
DOD guidelines and procedures also give consideration to using government employees to
perform new functions, as well as those contracted out.11 Then, the 111th Congress imposed
similar requirements upon civilian agencies.12
6 Compare Bureau of the Budget Bulletin No. 55-4 (Jan. 15, 1955) (“[The] Federal Government will not start or carry
on any commercial activity to provide a service or product for its own use if such product or service can be procured
from private enterprise through ordinary business channels.”) with Bureau of the Budget Circular A-76 (March 3, 1966)
(“The guidelines in this Circular are in furtherance of the Government’s general policy of relying on the private
enterprise system to supply its needs.”) and Office of Management and Budget Circular A-76, supra note 3 (“The
longstanding policy of the federal government has been to rely on the private sector for needed commercial services.
To ensure that the American people receive maximum value for their tax dollars, commercial activities should be
subject to the forces of competition.”).
7 U.S. Office of Management and Budget, Performance of Commercial Activities, 67 Fed. Reg. 69772 (Nov. 19, 2002)
(“President [George W. Bush] has identified competitive sourcing—i.e., the process of opening the government’s
commercial activities to the discipline of competition—as one of the five main initiatives of his Management Agenda
for improving the performance of government.”).
8 Peter R. Orszag, Director, U.S. Office of Management and Budget, Managing the Multi-Sector Workforce, July 29,
2009, p. 1, available at http://www.whitehouse.gov/sites/default/files/omb/assets/memoranda_fy2009/m-09-26.pdf
(stating that overreliance on contractors was “encouraged by one-sided management priorities that have publicly
rewarded agencies for becoming experts identifying functions to outsource”).
9 National Defense Authorization Act for FY2006, P.L. 109-163, § 343(a)(1), 119 Stat. 3200-01 (Jan. 6, 2006)
(codified at 10 U.S.C. § 2461 note).
10 Id. at § 343(a)(2)(A)-(D).
11 National Defense Authorization Act for FY2008, P.L. 110-181, § 324, 122 Stat. 60-61 (Jan. 28, 2008) (codified at 10
U.S.C. § 2463).
12 Omnibus Appropriations Act, 2009, P.L. 111-8, § 736, 123 Stat. 689-91 (Mar. 11, 2009) (codified at 31 U.S.C. § 501
note).
Congressional Research Service
2
Insourcing Functions Performed by Federal Contractors: An Overview of the Legal Issues
When President Obama took office, these and related legislative actions13 were supplemented by
a number of executive branch initiatives that also promoted insourcing of at least certain
functions. President Obama himself paved the way for such initiatives with a March 4, 2009,
memorandum on government contracting, which suggested that “contractors may be performing
inherently governmental functions.”14 Although explicitly focused on impermissible and
inappropriate outsourcing of inherently governmental functions, this memorandum implied that at
least certain functions that have been outsourced should be returned to government performance
(i.e., insourced). DOD and the Office of Management and Budget (OMB), in particular, both
subsequently issued additional guidance regarding insourcing. In a May 28, 2009, memorandum,
the Deputy Secretary for Defense called for the development of insourcing plans and stated that
insourcing should be part of a “total force approach to workforce management and strategic
human capital planning.”15 OMB took a similar approach in its July 29, 2009, memorandum on
“Managing the Multi-sector Workforce,” directing agencies to conduct a pilot human capital
analysis of at least one program where the agency has concerns about reliance on contractors.16
The President’s FY2011 budget submissions later reiterated the call for agencies to “be alert for
situations in which excessive reliance on contractors undermines the ability of the Federal
Government to control its own operations and accomplish its missions for the American
people.”17 DOD, in particular, heeded this call, with the Secretary of the Army testifying in
February 2010 that the Army intended to insource 7,162 positions in FY2010 and 11,084
positions in FY2011 through FY2015.18 Such announcements prompted some commentators to
object that DOD’s insourcing initiatives had become a “quota driven exercise.”19 While DOD’s
initiatives were largely abandoned after the Secretary of Defense noted that DOD was not “seeing
the savings [it] had hoped from insourcing,”20 they generated several lawsuits, discussed in more
13 In addition to requiring the development of insourcing guidelines and procedures, the 109th through the 111th
Congresses enacted other legislation that could promote insourcing, or at least government performance of particular
functions. For example, the 111th Congress enacted legislation requiring agencies to complete inventories of their
service contracts before they “begin, plan for, or announce a study or public-private competition regarding the
conversion to contractor performance of any function performed by Federal employees pursuant to Office of
Management and Budget [OMB] Circular A–76 or any other administrative regulation or directive.” Consolidated
Appropriations Act, 2010, P.L. 111-117, § 743(g), 123 Stat. 3218 (Dec. 16, 2009). Previously, the 110th Congress had
enacted legislation requiring OMB to review existing definitions of inherently governmental functions, in part to ensure
that such functions are not contracted out. Duncan Hunter National Defense Authorization Act for FY2009, P.L. 110-
417, § 321(a)(1)-(4), 122 Stat. 4411 (October 14, 2008).
14 President Barack Obama, Government Contracting, Mar. 4, 2009, at 2, available at http://www.whitehouse.gov/
the_press_office/Memorandum-for-the-Heads-of-Executive-Departments-and-Agencies-Subject-Government.
15 Deputy Secretary of Defense, Insourcing Contracted Services: Implementation Guidance, May 28, 2009, Attachment
I, at 1, available at http://www.asamra.army.mil/scra/documents/DepSecDef%20Memo%2028MAY09%20In-
sourcing%20Implementation%20Guidance.pdf.
16 Managing the Multi-Sector Workforce, see supra note 8.
17 ABA Public Contract Law Section, Legislative Coordinating Committee, Insourcing Initiatives, Mar. 6, 2010,
available at http://www.arnoldandporter.com/resources/documents/In-
Sourcing%20Presentation%20for%20ABA__VA_804440_1_%20_2_.pdf
18 See, e.g., Matthew Weigelt, Army Vows to Cut 7,000 Contractor Jobs This Year, Wash. Tech., Feb. 23, 2010,
available at http://washingtontechnology.com/articles/2010/02/23/army-insourcing-core-governmental-functions.aspx.
19 Professional Services Council, Letter to the Honorable Robert Gates, May 3, 2010, available at
http://www.govexec.com/pdfs/050410rb1b.pdf (objecting that DOD had largely insourced routine commercial
functions, not critical positions).
20 See, e.g., Matthew Weigelt, Insourcing Failed, DOD’s Gates Says. Now What?, Wash. Tech., Aug. 10, 2010,
available at http://washingtontechnology.com/articles/2010/08/10/gates-insourcing-did-not-work.aspx. Instead, among
other things, Secretary Gates directed a 10% reduction in funding for support contractors in each of the next three fiscal
(continued...)
Congressional Research Service
3
Insourcing Functions Performed by Federal Contractors: An Overview of the Legal Issues
detail below, alleging that agencies failed to comply with their own policies and procedures when
determining to insource specific functions.
Legal Issues
Because federal agencies have broad discretion in determining their own requirements and how
they will meet these requirements, whether with their own employees or by contracting out,21
there do not appear to be any legal barriers to insourcing per se.22 However, various provisions of
federal law could constrain whether and how agencies may proceed with insourcing in particular
circumstances, as well as limit the activities that former contractor employees may perform after
being hired by the federal government. These provisions include (1) the Administrative Procedure
Act, which could potentially preclude agencies from implementing insourcing determinations that
were not made in accordance with agency guidelines; (2) contract law, under which agencies
could be found to have constructively terminated for convenience, or even breached, certain
requirements contracts by augmenting their in-house capacity to perform services provided for in
the contract; (3) civil service law, which would generally limit “direct hires” of contractor
employees; and (4) ethics law, which could limit the involvement of former contractor employees
who are hired by the government in certain agency actions. No issues of small business law
would appear to be implicated, even though small businesses are generally given special
consideration under federal law,23 and some commentators have expressed concern that
insourcing, at least as implemented to date, has disproportionately affected small businesses.24
Administrative Procedure Act and Insourcing Guidelines
The Administrative Procedure Act (APA) could potentially constrain an agency’s implementation
of insourcing by requiring the agency to abide by its insourcing guidelines, even if compliance
with these guidelines would result in the continued outsourcing of certain functions. The APA
(...continued)
years.
21 See Perkins v. Lukens Steel Co., 310 U.S. 113, 127 (1940) (“Like private individuals and businesses, the
Government enjoys the unrestricted power to produce its own supplies, to determine those with whom it will deal, and
to fix the terms and conditions upon which it will make needed purchases.”) (emphasis added). The legislative branch
can, however, restrict the discretion of the executive branch to contract out, or perform in-house, specific functions.
See, e.g., Water Resources Development Act, P.L. 101-640, § 314, 104 Stat. 4641 (Nov. 28, 1990) (codified at 33
U.S.C. § 2321) (“Activities currently performed by personnel under the direction of the Secretary in connection with
the operation and maintenance of hydroelectric power generating facilities at Corps of Engineers water resources
projects are to be considered as inherently governmental functions and not commercial activities.”); National Defense
Authorization Act for FY1994, P.L. 103-160, § 848(a)(1), 107 Stat. 1724-25 (Nov. 30, 1993) (codified at 10 U.S.C. §
2304e(a)) (prohibiting certain types of competition between Department of Defense (DOD) and small businesses).
22 Other aspects of sourcing policy may also raise legal issues, such as whether the agency properly conducted any
public private competitions that resulted in outsourcing determinations. See, e.g., Patricia A. Thompson—Agency
Tender Official, B-310910.4 (Jan. 22, 2009). However, such issues are outside the scope of this report. This report also
does not address any de facto limits on insourcing that may be imposed by agency personnel ceilings or caps.
23 See, e.g., Small Business Act of 1958, P.L. 85-536, § 2(a), 72 Stat. 384 (July 18, 1958) (codified at 15 U.S.C. §
631(a)) (“[It is] the declared policy of the Congress that the Government should aid, counsel, assist, and protect, insofar
as is possible, the interests of small-business concerns.”).
24 See, e.g., Robert A. Burton & James Y. Boland, Concrete Steps Government Should Take to Alleviate Growing
Procurement Challenges for Small Businesses, 94 Fed. Cont. Rep. 190 (Aug. 17, 2010).
Congressional Research Service
4
Insourcing Functions Performed by Federal Contractors: An Overview of the Legal Issues
allows challenges to agency actions that are “arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with the law,”25 including, in certain circumstances, an agency’s
failure to comply with its own guidelines.26 The APA also waives the government’s sovereign
immunity as to suits brought against it in the federal district courts.27 However, this waiver is
limited and does not apply if “any other statute that grants consent to suit expressly or impliedly
forbids the relief which is sought.”28 Among the other statutes waiving the government’s
sovereign immunity is the Tucker Act, as amended by the Administrative Dispute Resolution Act
(ADRA) of 1996, which also provides that, effective January 1, 2001, the U.S. Court of Federal
Claims has exclusive trial-level jurisdiction over any “action by an interested party objecting to a
solicitation by a Federal agency for bids or proposals for a proposed contract or to a proposed
award or the award of a contract or any alleged violation of statute or regulation in connection
with a procurement or a proposed procurement.”29 Thus, the key questions raised, to date, by
litigation challenging the Obama Administration’s insourcing initiatives have been jurisdictional,
with contractors and federal agencies contesting whether the federal district courts or the U.S.
Court of Federal Claims have jurisdiction over such claims.30 Until these jurisdictional issues are
resolved, courts are unlikely to reach the question of which, if any, of the numerous insourcing
guidelines currently in effect are legally binding upon the agency.
Jurisdictional Questions
It is presently unclear whether the federal district courts or the Court of Federal Claims have
jurisdiction over complaints alleging that agency insourcing determinations were “arbitrary,
capricious, an abuse of discretion, or otherwise not in accordance with the law,” in violation of
the APA. The district courts that have addressed this question have split in their findings, and no
court of appeals appears to have addressed the issue.31
25 5 U.S.C. § 706(a)(2)(A).
26 See, e.g., Pacific Molasses Co. v. Fed. Trade Comm'n, 356 F.2d 386, 389-90 (5th Cir. 1996) (“When an
administrative agency promulgates rules to govern its proceedings, these rules must be scrupulously observed. This is
so even when the defined procedures are ‘… generous beyond the requirements that bind such agency …’ For once an
agency exercises its discretion and creates the procedural rules under which it desires to have its actions judged, it
denies itself the right to violate these rules.”). But see Farrell v. Dep't of the Interior, 314 F.3d 584, 590 (Fed. Cir. 2002)
(“The general consensus is that an agency statement, not issued as a formal regulation, binds the agency only if the
agency intended the statement to be binding.”).
27 5 U.S.C. § 702. Because it is a sovereign, the United States is immune to suits without its consent. See, e.g., United
States v. Sherwood, 312 U.S. 584, 586 (1941).
28 5 U.S.C. § 702.
29 Ch. 359, 24 Stat. 505 (Mar. 3, 1887) (codified, as amended, at 28 U.S.C. § 1491(b)(1)).
30 See Vero Technical Support, Inc. v. U.S. Dep’t of Defense, 733 F. Supp. 2d 1336, 1340 (S.D. Fla. 2010) (“There
appears to be no dispute that the APA governs the Plaintiff’s claim. Rather the dispute concerns which court has
jurisdiction to hear the APA claim.”). Although the government has also argued that contractor challenges to insourcing
determinations constitute contract disputes, which are within the exclusive jurisdiction of the Court of Federal Claims
under the Contract Disputes Act, this argument has generally been rejected. See, e.g., K-Mar Industries v. U.S. Dep’t of
Defense, 2010 U.S. Dist. LEXIS 126885 (W.D. Okla. Nov. 4, 2010); Rothe Development, Inc. v. U.S. Dep’t of
Defense, 2010 U.S. Dist. LEXIS 116934 (W.D. Tex. Nov. 3, 2010), motion to amend denied, 2011 U.S. Dist. LEXIS
5236 (W.D. Tex. Jan. 19, 2011).
31 Additional cases are reportedly pending. See, e.g., Robert Brodsky, Tell It to the Judge: Contractors Are Turning to
Courts to Challenge Insourcing, Gov’t Exec., Nov. 1, 2010, available at http://www.govexec.com/features/1110-01/
1110-01na2.htm (reporting that eight cases were pending as of November 1, 2010).
Congressional Research Service
5
Insourcing Functions Performed by Federal Contractors: An Overview of the Legal Issues
For example, in K-Mar Industries, Inc. v. U.S. Department of Defense, the U.S. District Court for
the Western District of Oklahoma found that it had jurisdiction because the case was not within
the Court of Federal Claim’s jurisdiction under ADRA.32 ADRA amended the Tucker Act to give
the Court of Federal Claims exclusive jurisdiction over “any action by an interested party
objecting to a solicitation by a Federal agency for bids or proposals for a proposed contract or to a
proposed award of a contract or any alleged violation of statute or regulation in connection with a
procurement or a proposed procurement” brought after January 1, 2001.33 According to the K-
Mar court, a contractor challenging an insourcing determination is not an “interested party,”
within the meaning of the Competition in Contracting Act (CICA) of 1984, because no contract or
prospective contract is at issue.34 CICA defines an “interested party” as an “actual or prospective
bidder or offeror whose direct economic interest would be affected by the award of the contract or
by failure to award the contract.”35 The K-Mar court similarly found that an insourcing
determination is not made “in connection with a procurement or a proposed procurement,” given
the definition of “procurement” in the Office of Federal Procurement Policy Act (OFPPA) of
1974.36 The OFPPA defines “procurement” as including “all stages of the process of acquiring
property or services, beginning with the process for determining a need for property or services
and ending with contract completion and closeout.”37 In so finding, the court relied on the plain
meaning of the OFPPA, which, according to the court, provides that procurement begins with
determining “a need for property or services,” not with determining “whether there is a need” for
property or services.38 It also noted that the term “acquisition,” which it characterized as “the
critical concept” within the definition of “procurement,” denotes only purchasing or leasing by
contract,39 and that even if ADRA’s grant of jurisdiction arguably applied through a broad reading
32 2010 U.S. Dist. LEXIS 126885. In a separate decision, the court denied K-Mar’s motion for a preliminary injunction.
However, in so doing it made clear that “[n]othing stated in this order is intended to pre-judge in any way the merits of
the procedures-based claims. At this stage the court has no view regarding the merits of any permanent relief based on
these claims.” K-Mar Industries v. U.S. Dep’t of Defense, 2010 U.S. Dist. LEXIS 126955 (W.D. Okla., Nov. 4, 2010).
33 P.L. 104-320, § 12(a) & (d), 110 Stat. 3874-75 (Oct. 19, 1996) (codified, as amended, at 28 U.S.C. § 1491(b))
(emphasis added). ADRA did not define either “interested parties” or “procurement.”
34 K-Mar Indus., 2010 U.S. Dist. LEXIS 126885, at *9-*10. The court relied on the U.S. Court of Appeals for the
Federal Circuit’s decision in American Federation of Government Employees, AFL-CIO v. United States, 258 F.3d
1294, 1302 (Fed. Cir. 2001), in concluding that ADRA relies on CICA’s definition of “interested party.” The U.S.
District Court for the Southern District of Florida, however, has questioned the relevance of this case to determinations
of who is an interested party for purposes of ADRA because the case involved a challenge by government employees—
not a contractor—to agency sourcing determinations. See Vero Technical Support, 733 F. Supp. 2d, at 1343.
35 P.L. 98-369, § 2713, 98 Stat. 1183 (July 18, 1984) (codified, as amended, at 31 U.S.C. § 3551(2)).
36 K-Mar Indus., 2010 U.S. Dist. LEXIS 126885, at *11-*12. See also Distributed Solutions, Inc. v. United States, 539
F.3d 1340, 1345 (Fed. Cir. 2008) (holding that the meaning of “procurement,” for purposes of ADRA, comes from the
OFPPA).
37 P.L. 93-400, § 4, 88 Stat. 796 (Aug. 30, 1974) (codified, as amended, at 41 U.S.C. § 403(2)).
38 K-Mar Indus., 2010 U.S. Dist. LEXIS 126885, at *11. The government had attempted to argue that, for purposes of
ADRA and the OFPPA, the “process for determining a need for property or services” begins with a decision by the
agency as to whether there is a need to acquire property or services and, thus, encompasses any insourcing
determination.
39 Id. at *12. This definition also comes from the OFPPA. See 41 U.S.C. § 403(16) (“The term ‘acquisition’—(A)
means the process of acquiring, with appropriated funds, by contract for purchase or lease, property or services
(including construction) that support the missions and goals of an executive agency, from the point at which the
requirements of the executive agency are established in consultation with the chief acquisition officer of the executive
agency; and (B) includes—(i) the process of acquiring property or services that are already in existence, or that must be
created, developed, demonstrated, and evaluated; (ii) the description of requirements to satisfy agency needs; (iii)
solicitation and selection of sources; (iv) award of contracts; (v) contract performance; (vi) contract financing; (vii)
management and measurement of contract performance through final delivery and payment; and (viii) technical and
(continued...)
Congressional Research Service
6
Insourcing Functions Performed by Federal Contractors: An Overview of the Legal Issues
of the definition of “procurement,” this would not constitute a clear jurisdictional grant and
waiver of sovereign immunity, only an implied one, and waivers of sovereign immunity are
construed narrowly.40
In contrast, in Rothe Development, Inc. v. U.S. Department of Defense, the U.S. District Court for
the Western District of Texas found that a contractor’s challenge to an insourcing determination
falls within the exclusive jurisdiction of the Court of Federal Claims under ADRA because a
contractor is an interested party and an insourcing determination is made in connection with a
procurement.41 The Rothe court found that the contractor was an interested party because it had
identified itself as “a prospective bidder in a future procurement process,”42 and it was only
within the “zone of interest,” as is required for standing for an APA or other challenge, insofar as
it was a prospective bidder.43 The Rothe court similarly found that ARDA’s language regarding
activities “in connection with a procurement” is to be construed broadly and includes anything
with “a connection with any stage of the federal contracting acquisition process, including ‘the
process of determining a need for property or services.’”44 It characterized a decision to insource
as a “decision not to acquire, not to enter a procurement process” and, thus, “necessarily a
decision made ‘in connection with a procurement or proposed procurement.’”45 It further noted
the incongruity between the district court’s having jurisdiction when an agency determines to
insource, but not when it determines to outsource.46
The U.S. District Court for the Southern District of Florida reached the same conclusion on
similar grounds in Vero Technical Support, Inc. v. U.S. Department of Defense.47 However, it also
(...continued)
management functions directly related to the process of fulfilling agency requirements by contract.”).
40 K-Mar Indus., 2010 U.S. Dist. LEXIS 126885, at *12.
41 2010 U.S. Dist. LEXIS 116934. Another case challenging an agency insourcing determination was settled by the
parties without a decision on the merits. See Rohmann Servs., Inc. v. Dep’t of Defense, Case No. 10-CV-0061 (W.D.
Texas). This appears to have been the earliest of the cases challenging the Obama Administration’s insourcing
initiatives, and the terms of the settlement, which resulted in the agency continuing the contract, were widely
characterized as a “win” for the contractor. See, e.g., Matthew Weigelt, Small Business Fights Insourcing … and Wins,
Wash. Tech., May 5, 2010, available at http://washingtontechnology.com/articles/2010/05/03/procurement-insourcing-
boone-v-air-force.aspx. Rohmann’s president was also quoted in the media encouraging other contractors to obtain cost
estimates for any insourced work from the government and carefully “scrutinize” them. Id. Additionally, a partner at
the law firm that represented Rohmann formed the Small Business Coalition for Fair Contracting, an association which
reportedly seeks “to give small companies an opportunity to respond to procurement actions that could have major
consequences for their contracts and business overall.” See, e.g., Matthew Weigelt, Small-biz Coalition Takes up
Insourcing Fight, Wash. Tech., May 7, 2010, available at http://washingtontechnology.com/articles/2010/05/07/burton-
small-business-coalition-for-fair-contracting.aspx.
42 Rothe, 2010 U.S. Dist. LEXIS 116934 at *13.
43 Id. at *14-15 (stating that the plaintiff “cannot rely on its potential bidder status for its theory of APA standing and
simultaneously refute it in an effort to keep its lawsuit in this Court.”). Courts generally limit standing to plaintiffs
whose asserted interests are “within the zone of interests to be protected or regulated by the statute or constitutional
guarantee in question.” Ass'n of Data Processing Serv. Orgs., Inc. v. Camp, 397 U.S. 150, 153 (1970). The Rothe court
reached no findings as to whether the plaintiff would have been within the zone of interests protected by the various
insourcing statutes, and there is some question as to whether requirement that agencies develop and implement
insourcing guidelines reflects a congressional intent to be “fair” to contractors, as well as government employees.
44 Rothe, 2010 U.S. Dist. LEXIS 116934 at *10 (quoting Distributed Solutions, 539 F.3d at 1346).
45 Id. at *12.
46 Id. at *12-*13 (“[I]t is illogical to conclude that a challenge to the identical procedure does not fall under the Tucker
Act when, for economic reasons, it happens to result in the opposite outcome.”).
47 733 F. Supp. 2d, at 1341-43.
Congressional Research Service
7
Insourcing Functions Performed by Federal Contractors: An Overview of the Legal Issues
noted that standing to bring suit under ARDA in the Court of Federal Claims is “narrower” than
standing to bring suit under the APA in district court.48 This is potentially significant because
insourcing determinations could be found to be made in connection with procurements, while
contractors challenging such determinations are found not to be interested parties. Were this the
case, agencies’ insourcing decisions could be immune from judicial review.
The Court of Federal Claims does not appear to have recently directly addressed the question of
whether challenges to agency insourcing determinations are within its jurisdiction under ADRA.
Previously, in 2005, it found that it had jurisdiction under ADRA over a challenge to an
insourcing determination after the U.S. District Court for the District of Columbia found that it
lacked jurisdiction under the APA.49 However, more recently, the court has suggested in dicta that
it is at least somewhat sympathetic to the argument that challenges to agency insourcing
determinations are within the jurisdiction of the district court:
[P]laintiff’s deliberate choice of forum in the District Court and chosen basis for jurisdiction,
traditional APA jurisdiction, resonates with this court. Without a contract or solicitation at
issue, even as amended by the ADRA, Tucker Act jurisdiction to challenge insourcing policy
decisions is not immediately apparent.50
The court did not reach any holding as to its jurisdiction over such cases, though, and it noted that
it had “not fully explored the issue at this time.”51
Whether Particular Guidelines Are Binding
Once these jurisdictional questions are resolved, courts will need to determine which, if any, of
the insourcing guidelines currently in effect constrain an agency’s actions when bringing work in-
48 Id. at 1343.
49 Labat-Anderson, Inc. v. United States, 65 Fed. Cl. 570 (2005) (finding jurisdiction under ARDA over a challenge to
an agency’s determination to take work in-house until it could issue a new solicitation); Labat-Anderson, Inc. v. United
States, 346 F. Supp. 2d 145 (D.D.C. 2004) (finding that the district court lacked jurisdiction under the APA and
transferring the case to the Court of Federal Claims).
50 Vero Technical Support, Inc. v. United States, 94 Fed. Cl. 784, 792 (2010). In Vero, the court dismissed plaintiff’s
complaint without prejudice because the time for the plaintiff to appeal the decision of the federal district court had not
passed, and Section 1500 of Title 28 of the United States Code prohibits the Court of Federal Claims from exercising
jurisdiction “of any claim for or in respect to which the plaintiff or his assignee has pending in any other court any suit
or process against the United States or any person who, at the time when the cause of action alleged in such suit or
process arose, was, in respect thereto, acting or professing to act, directly or indirectly, under the authority of the
United States.”
51 Id. The Government Accountability Office (GAO), which, pursuant to CICA, shares jurisdiction over contractor bid
protests with the Court of Federal Claims, has found that it cannot hear challenges to insourcing determinations that
allege an agency failed to comply with its internal guidelines. See, e.g., Triad Logistics Servs. Corp., B-403726 (Nov.
24, 2010) (dismissing challenge to agency insourcing determination); Aleut Facilities Support Servs., LLC, B-401925
(Oct. 13, 2009) (same); Hughes Space and Communications Co., Lockheed Missiles & Space Co., Inc., B-266225.6, B-
266225.7, B-266225.8, B-266225.9, B-266225.10 (Apr. 15, 1996) (“[O]ur Office generally will not review an alleged
violation of an internal policy.”). In one of these cases, GAO also noted that 10 U.S.C. § 129a, the key statute that the
protester relied upon in alleging that the agency’s insourcing determination was based on an improperly performed
comparison of the costs of performance by the government and the contractor, (1) did not actually require a cost
comparison and (2) did not constitute a procurement statute. Triad Logistics Servs. Corp., B-403726 (Nov. 24, 2010).
Instead, GAO viewed this statute as one governing DOD personnel policy and, thus, outside its jurisdiction to hear
protests “concerning an alleged violation of a procurement statute or regulation.” Id. (quoting 31 U.S.C. §§ 2552,
3553(a)).
Congressional Research Service
8
Insourcing Functions Performed by Federal Contractors: An Overview of the Legal Issues
house. There are a number of such guidelines,52 some of which are binding upon the agency (e.g.,
statutes, regulations promulgated by a notice and comment process) and others of which may not
be (e.g., statements, policies). Where guidelines not based in statutes or regulations are
concerned, courts would need to determine, among other things, whether the agency intended to
be bound or has employed the guidelines in a manner such that they are binding as a practical
matter, because this is key to determining which agency statements or policies are enforceable
under the APA.53
As courts consider the various guidelines that might apply, it is possible that they could find that
binding guidelines do not require the specific procedures that the agency failed to implement
when making its allegedly improper insourcing determination. This proved to be the case in
Labat-Anderson, Inc. v. United States, where the contractor claimed that the Department of
Defense (DOD) improperly insourced functions the contractor had performed for DOD while
DOD prepared to award a new contract.54 The contractor alleged that DOD’s insourcing
determination was improper because DOD did not follow the procedures for comparing the costs
of performing the function in question with government and contractor employees that were set
forth in OMB Circular A-76, 10 U.S.C. § 2462, and Executive Order 12615.55 However, this
argument proved unavailing because the Court of Federal Claims found that
1. the cost-comparison and other requirements of OMB Circular A-76 were binding
only insofar as they had been incorporated into agency regulations, and the
52 The recent statutes directing agencies to “consider” insourcing certain functions have, among other things, required
agencies to develop and implement guidelines for determining which functions should be insourced, a requirement that
the Office of Management and Budget (OMB) and individual federal agencies have met by developing several policies
that ensure functions are “performed in the most fiscally advantageous way possible” and establishing procedures for
conducting cost comparisons. See, e.g., Omnibus Appropriations Act, 2009, P.L. 111-8, § 736, 123 Stat. 689-90 (Mar.
11, 2009) (requiring civilian agencies to develop guidelines); National Defense Authorization Act for FY2008, P.L.
110-181, § 324(a)(1), 122 Stat. 60 (Jan. 28, 2008) (requiring defense agencies to develop guidelines); Dep't of Defense,
Personnel & Readiness, OSD Costing Information, available at http://prhome.defense.gov/RSI/REQUIREMENTS/
INSOURCE/INSOURCE_COSTING.ASPX; OMB Civilian Fringe Benefit Cost Factor, quoted in Rohmann Servs.,
Inc. v. U.S. Dep't of Defense, No. SA-10-CA-0061-XR, Application for Preliminary Injunction (W.D. Tex., filed Feb.
9, 2010) (requiring agencies to assume certain “fringe costs,” as well as loss of manpower productivity, when
conducting cost comparisons). Other sources cited by Rohmann include (1) 10 U.S.C. § 129a, which states that “[t]he
Secretary of Defense shall use the least costly form of personnel consistent with military requirements and other needs
of the Department;” (2) Under Secretary of Defense (Personnel and Readiness)’s Guidelines and Procedures for
Implementation of 10 U.S.C. §2463, which reads, “[r]equests for manpower shall be fiscally informed and closely
managed to ensure responsible stewardship of Defense resources. When a [DOD] Component … is considering
whether to convert from contractor to government performance, manpower managers shall follow standard …
procedures to determine and validate the manpower requirements. … Also, the effectiveness, efficiency, and economy
of the activity shall be assessed;” and (3) Insouring Implementation Guidance, which authorizes the insourcing of
“contracted services that [DOD] civilian employees can perform … if a cost analysis shows that [DOD] civilian
employees would perform the work more effectively than the private sector.” Rohmann Servs., Inc. v. U.S. Dep't of
Defense, No. SA-10-CA-0061-XR, Original Complaint for Declaratory and Injunctive Relief, at ¶¶ 34-36 (W.D. Tex.,
filed Jan. 26, 2010).
53 See, e.g., United States v. Alameda Gateway Ltd., 213 F.3d 1161, 1168 (9th Cir. 2000); Chiron Corp. v. Nat'l Transp.
Safety Bd., 198 F.3d 935, 943-44 (D.C. Cir. 1999); Troy Corp. v. Browner, 120 F.3d 277, 287 (D.C. Cir. 1997); Am.
Portland Cement Alliance v. Envtl. Prot. Agency, 101 F.3d 772, 776 (D.C. Cir. 1996). But see U.S. Tel. Ass'n v. Fed.
Commc'ns Comm'n, 28 F.3d 1232, 1234-35 (D.C. Cir. 1994) (policy statement not binding on agency unless
promulgated as rule).
54 75 Fed. Cl. at 572.
55 Id. at 573-74.
Congressional Research Service
9
Insourcing Functions Performed by Federal Contractors: An Overview of the Legal Issues
relevant DOD regulations either did not specify procedures for conducting cost
comparisons or did not apply;56
2. the agency had complied with the requirements in 10 U.S.C. § 2462, although not
with the allegedly related requirements in OMB Circular A-76 that had not been
incorporated into regulations;57 and
3. Executive Order 12615 did not bind the executive branch because it explicitly
stated that it did not create a private right of action, and it did not provide the
court with a meaningful standard of review.58
Similar findings could result once a court considers the particular insourcing guidelines currently
at issue. Additionally, if the district courts find they do have jurisdiction under the APA over
agency insourcing determinations, there is also the possibility that different courts could reach
different conclusions as to whether particular guidelines are binding.59
Constructive Termination or Breach of Requirements Contracts
Because certain contracts provide for the contractor to supply all of the contracting activity’s
requirements for goods or services, there could also be situations where the government must
either delay insourcing so as to allow current contracts to expire, or face the prospect of liability
to the contractor for constructive termination for convenience60 or even breach of contract.61 This
issue is most likely to arise with so-called “requirements contracts,” or contracts
56 Id. at 577-79.
57 Id. at 579-80.
58 Id. at 580-81.
59 For example, some, but not all, federal circuits have found that the 1983 and 2003 versions of OMB Circular A-76
were issued pursuant to statutory authority, which is one of the conditions for guidelines being reviewable by the
federal courts. See Labat-Anderson, 65 Fed. Cl. at 578 (2003 version); Diebold v. United States, 947 F.2d 787, 800 (6th
Cir. 1991) (1983 version).
60 The government always has the right to terminate a contract for convenience, even if the “standard” termination-for-
convenience clause was not included in the contract. See, e.g., G.L.A. Christian & Assocs. v. United States, 375 U.S.
954 (1963) (court reading the standard termination-for-convenience clause into a contract from which it was lacking).
Depending upon the type of contract involved, agencies that no longer need certain services for which they had
contracted could also be obligated to pay the contractor, at a minimum, termination costs. For example, unless it
terminates the contractor for convenience, the government generally cannot avoid paying the contractor for goods or
services contracted for under a firm-fixed-price contract—the preferred type of government contract—if it no longer
needs those goods or services. See, e.g., North Chicago Disposal Co., ASBCA 25535, 82-1 BCA ¶ 15,488 (1981)
(government could not recover when it contracted for removal of “wet garbage” from galleys at the Great Lakes Naval
Base and then did not use the service because the galley personnel were unaware of it and disposed of the garbage in-
house); Rolligon Corp., ASBCA 8812, 65-2 BCA ¶ 15,488 (1965) (government liable for the full contract price when it
leased two experimental vehicles from the contractor for a one-year testing-and-evaluation period and then
discontinued testing after one month).
61 Courts often treat governmental failures to comply with the terms of procurement contracts as constructive
terminations of the contract. See, e.g., Nesbitt v. United States, 543 F.2d 583 (Ct. Cl. 1965); Integrity Mgmt. Int'l, Inc.,
ASBCA 18289, 75-1 BCA ¶ 11,235 (1975). However, they will generally not convert failure to order under a
requirements contract into a termination for convenience when the failure was in bad faith or based on circumstances
known to the government at the time of contracting. See, e.g., Torncello v. United States, 681 F.2d 756 (Fed. Cl. 1982)
(termination based on the contractor’s prices, which were known to the government at the time of contracting); Kalvar
Corp. v. United States, 543 F.2d 1298 (Ct. Cl. 1976) (termination in bad faith).
Congressional Research Service
10
Insourcing Functions Performed by Federal Contractors: An Overview of the Legal Issues
… by which one party, the seller, agrees to satisfy all of the agency’s requirements for
services and/or items for a specified period of time. That contract is violated if either the
buyer does not purchase all of its requirements from the seller, or, if the seller fails to satisfy
all of the buyer’s needs. The consideration that makes such a contract binding is the buyer’s
promise to purchase all of its requirements from the seller and the seller’s promise to satisfy
those requirements.62
Because a requirements contract obligates the procuring activity to obtain “all” its requirements
from the contractor,63 not just a certain quantity specified in the contract,64 developing additional
in-house capacity to perform the function—as would be expected to occur with insourcing—
could raise legal issues, depending upon the terms of the contract.
If the contract provides for the contractor to supply those goods or services “required to be
purchased by the government,” it will generally be construed to allow the procuring activity to
develop additional in-house capacity during the term of the contract.65 However, if the contract
provides that the contractor is entitled to supply those goods or services “in excess of the
quantities which the activity may itself furnish with its own capabilities,” it will generally be read
to refer to the procuring activity’s capabilities at the time of contracting and preclude the
development of additional in-house capacity during the term of the contract. For example, in
Maya Transit Company, the Armed Services Board of Contract Appeals found that the contractor
was entitled to an equitable adjustment (i.e., additional payment) under its contract because the
procuring activity developed additional in-house capacity to provide busing services and began
relying upon this capacity, instead of using the contractor’s busing services, to meet its
requirements, which had not changed.66 Similarly, in Henry Angelo & Sons, Inc., the Board
granted the contractor recovery under a contract for painting and related work after the procuring
activity began using its own personnel to paint military housing because it was less expensive.67
In so doing, the Board explicitly noted that “[t]he Government does not have an arbitrary right to
62 Aviation Specialists , Inc., DOTBCA 1967, 91-1 BCA ¶ 23,534 (Dec. 30, 1990). If the government legitimately has
no requirements for the goods or services in question, it has no obligation to purchase anything from the contractor. See
G.T. Folge & Co. v. United States, 135 F.2d 117 (4th Cir. 1943). Any estimates of quantity contained in the solicitation
or the contract are nonbinding. See, e.g., Franklin Co. v. United States, 381 F.2d 416 (Ct. Cl. 1967) (government not
obligated to furnish work orders up to the estimated amount); Kasehagen Sec. Servs., Inc., ASBCA 25629, 86-2 BCA ¶
18,797 (1986) (contractor must fill orders above the estimate). However, the government could potentially be liable to
the contractor if the estimate was negligently prepared. See, e.g., Alert Care Ambulance Serv., VACAB 2844, 90-3
BCA ¶ 22,945 (1990) (government failed to exercise due care in preparing the estimates because it did not consider
historical data regarding prior years’ requirements); Pied Piper Ice Cream, Inc., ASBCA 20605, 76-2 BCA ¶ 12,148
(1976) (same).
63 Requirements contracts can contain maximum quantities, requirements in excess of which the contractor is not
obligated to meet. See 48 C.F.R. § 16.503(a)(2). They can also be limited to the procuring activity’s needs in a
particular geographic area. See, e.g., Metcom, Inc., B-153450 (May 6, 1964) (finding that a requirements contract
limited to a particular geographical area is no impediment to the issuance of a new invitation for bids for the same
items to be supplied to a different area).
64 Even in an “indefinite quantity contract,” there is some minimum quantity specified in the contract. The government
is only liable to the contractor for orders up to this amount. See, e.g., 48 C.F.R. § 16.504(a)(1); Peter J. Brandon,
AGBCA 91-186-1, 92-1 BCA ¶ 24,648 (1991).
65 See, e.g., Export Packing & Crating Co., Inc., ASBCA 16133, 73-2 BCA ¶ 10,066 (1973); Applied Painting &
Decorating Co., ASBCA 15919, 73-2 BCA ¶ 10,358 (1973).
66 ASBCA 20186, 75-2 BCA ¶ 11,552 (1975).
67 ASBCA 15082, 72-1 BCA ¶ 9,356 (1972).
Congressional Research Service
11
Insourcing Functions Performed by Federal Contractors: An Overview of the Legal Issues
develop and use potential capabilities at the expense of a contractor.”68 While older, both cases
apparently remain good law.
Civil Service Laws and Limitations on “Direct Hires”
Civil service laws could also impose certain limitations upon agencies’ implementation of
insourcing by requiring that government positions generally be filled through a competitive
process with selections based on merit.69 Because of this requirement, it is typically not possible
for an agency insourcing a function to hire, on the spot, the person currently performing that
function under a contract.70 Only when an agency has “direct hire” authority, or other similar
authority, may it hire “any qualified person” without engaging in the appropriate competitive
process.71 Currently, agencies have direct hire authority on a temporary basis under the National
Defense Authorization Act for FY2004, as amended by National Defense Authorization Act for
FY2008, for “Federal Acquisition positions.”72 These include positions in the General Schedule
(GS) contracting and purchasing series, as well as other positions in the GS series “in which
significant acquisition-related functions are performed.”73 However, agencies generally lack such
authority for other positions, which means that they cannot directly hire contractor employees,
although a person who performed a particular function on behalf of a contractor would probably
be well qualified when competing for any government position that would perform that function.
It should also be noted that civil service laws are intended to protect the integrity of the
government hiring process and applicants for government positions, not employers concerned
about the possibility of the government hiring “their” employees.74 Regardless of how sizable or
destructive to a firm,75 such loss of employees would not appear to give rise to any cause of
action against the government, particularly in the absence of “no-solicitation” clauses in federal
contracts.76 Depending upon their terms, such clauses could potentially preclude one party to a
contract from attempting to hire the employees of its vendors. However, such clauses are not
standard terms of government contracts. Similarly, even if employers were to draft covenants not
68 Id.
69 See, e.g., 5 U.S.C. §§ 3309-3318; 5 C.F.R. Parts 211 & 337.
70 “Targeting” contractors’ employees by informing them of government positions and encouraging them to apply is
generally permissible, even if some commentators have characterized it as inconsistent with the intent of the “Merit
System’s hiring and other procedures.” See David Hubler, Is the Government Trying to Steal Your Best Employees?,
Wash. Tech., Aug. 26, 2009, available at http://washingtontechnology.com/articles/2009/08/26/contractors-worries-
feds-fish-for-their-employees.aspx. For example, in Labat-Anderson, the court noted, without expressing any
disapproval, that the agency emailed employees of the incumbent contractor encouraging them to apply for positions
with the agency after determining to insource functions performed by the incumbent contractor. Labat-Anderson, 65
Fed. Cl. at 573.
71 See U.S. Office of Personnel Management, Direct-Hire Authority (DHA) Fact Sheet, available at
http://www.opm.gov/DirectHire/factsheet.asp (discussing the possible ways in which agencies can be authorized to
make direct hires).
72 P.L. 108-136, § 1413(a), 117 Stat. 1665-66 (Nov. 24, 2003) (codified at 41 U.S.C. § 433 note) (authority through
September 30, 2007); P.L. 110-181, § 853, 122 Stat. 250 (Jan. 28, 2008) (authority through September 30, 2012).
73 41 U.S.C. § 433(g)(1)(A).
74 See, e.g., Matthew Weigelt, Defense Officials Hone Their Insourcing Strategy, Wash. Tech., Feb. 3, 2010, available
at http://washingtontechnology.com/blogs/acquisitive-mind/2010/02/dod-insourcing-initiative.aspx (quoting some
contractors as objecting to the government’s “aggressiveness” in hiring their employees).
75 Id. (describing one small business that lost 20% of its workforce to the government).
76 See, e.g., Hubler, supra note 70.
Congressional Research Service
12
Insourcing Functions Performed by Federal Contractors: An Overview of the Legal Issues
to compete that could be construed to prevent their employees from working for the government
in the future, such clauses are generally enforceable only against the employee, not against any
party who subsequently hires them.77
Ethics Laws and the Activities of Former Contractor Employees
The federal ethics and conflict of interest laws and regulations would not prohibit or necessarily
prevent the employment by a federal agency of an individual from the private sector who has
experience, expertise, or knowledge about or concerning a particular project, contract, or other
such matter. Once employed, however, there may exist certain narrow limitations on the official
duties or conduct of that government employee in relation to matters in which that employee may
have a continuing or current personal financial interest, or concerning which a former employer
of that individual is a direct party to a governmental transaction or other such matter.
Unlike employees in the private sector, federal employees and officials are subject to several
layers of ethics and conflict of interest laws and regulations which seek to limit or restrict
personal “conflicts of interest,” and to assure fealty to the overall, public interest, as opposed to
private financial or economic interests of persons or companies. The principal statutory method
of dealing with potential conflicts of interest in the executive branch is through disqualification or
“recusal” requirements which prohibit a federal official from participating in any particular
governmental matter in which that official, or those close to the official, has any financial
interest.78 This conflict of interest provision, which is a criminal statute, is directed only at
current and existing financial interests and connections, and does not reach past affiliations,
employments, or previous representations of private clients.79
While the statutory disqualification provision is a criminal law covering only current financial
interests of the official, there are also “regulatory” recusal requirements that might apply in
narrow circumstances to certain past affiliations and previous economic interests. Such recusals
are generally required in relation to a “particular matter involving specific parties,” when entities
or organizations previously affiliated with the federal official are now parties to or represent
parties in those matters. The regulations provide that a federal official should recuse or disqualify
himself or herself from working on a particular governmental matter involving specific parties if
a “person for whom the employee has, within the last year, served as an officer, director, trustee,
general partner, agent, attorney, consultant, contractor or employee” is a party or represents a
party in such matter.80 This one-year recusal requirement, as to matters involving an official’s
77 For example, when Oracle hired the former chief executive officer of Hewlett-Packard, Hewlett-Packard filed suit
against this individual to enforce a confidentiality agreement, not against Oracle. See Hewlett-Packard Co. v. Hurd, No.
110CV181699, Civil Complaint for Breach of Contract and Threatened Misappropriation of Trade Secrets (Cal. Sup.
Ct., filed Aug. 26, 2010). Because they are restraints of trade, covenants not to compete and similar agreements are
looked upon with disfavor by the courts and will generally be enforced only when they are reasonable in terms of the
times, places, and activities which they encompass. See, e.g., Kolani v. Hluska, 75 Cal. Rptr. 2d 257 (Cal. App. 1998);
Rector-Phillips-Morse v. Vroman, 489 S.W.2d 1 (Ark. 1973).
78 18 U.S.C. § 208. Interests “imputed” to the employee are the financial interests of that employee’s spouse or
dependents, or the financial interests of an organization in which the employee is affiliated as an officer, director,
trustee, general partner or employee, or one “with whom he is negotiating or has any arrangement concerning
prospective employment.”
79 CACI, Inc.-Federal v. United States, 719 F.2d 1567,1578 (Fed. Cir. 1983); Center for Auto Safety v. F.T.C., 586 F.
Supp. 1245, 1246 (D.D.C. 1984).
80 5 C.F.R. § 2635.502(a), (b)(1)(iv).
Congressional Research Service
13
Insourcing Functions Performed by Federal Contractors: An Overview of the Legal Issues
former employers, businesses, clients, or partners, applies to any officer or employee of the
executive branch, but applies narrowly only to “a particular matter involving specific parties”
when such former employer or business associate is or represents a party to the matter. Matters
“involving specific parties” may apply to such things as contracts, investigations, or prosecutions
involving specifically identified individuals or parties, as opposed to broader “particular matters”
which may involve a number of persons or entities (such as most rule making). Notwithstanding
the fact that a past employer, client, or business associate with whom the employee has a
“covered relationship” may be a party or represent a party to such a matter, an employee may, as
with the regulatory restriction on current interests, receive authorization by his or her agency to
participate in the matter.81
There are also recusal requirements in regulations concerning such matters when a party (or one
representing a party) had made an “extraordinary payment” to the official prior to the official’s
entry into government. The regulations of the Office of Government Ethics provide for a two-
year recusal requirement which bars an official in the executive branch from participating in a
particular matter in which a “former employer” is or represents a party when that former
employer had made an “extraordinary payment” to the official prior to entering government. An
“extraordinary payment” is one in excess of $10,000 in value made by an employer after the
employer has learned that the employee is to enter government service, and one which is not an
ordinary payment (that is, a payment other than in conformance with the employer’s “established
compensation, benefits or partnership program”).82 This disqualification provision may also be
waived in writing by an agency head, or if the individual involved is the head of an agency, by
the President or his designee.83
Finally, there are now additional restrictions on certain presidential appointees issued by way of
executive order. On January 21, 2009, President Obama issued an executive order requiring the
signing of an “ethics pledge” by all presidential and vice presidential appointees to full-time, non-
career positions in the executive branch, including all non-career SES appointees, and appointees
to positions excepted from competitive service because they are of a confidential or policy
making nature (such as Schedule C appointments).84 The “ethics pledge” places two additional
restrictions on such appointees entering the executive branch, with respect to their former
employers or clients. Initially, such “appointees” may not participate in, and must recuse
themselves for two years after entering federal service from any particular governmental matter
involving specific parties when a former client or former employer of the appointee is a party to
or represents a party in that particular matter.85 This extends the similar regulatory recusal
requirement applicable to all executive branch officials from one year to two years for such
“appointees.”86 Secondly, any such “appointees” who were registered “lobbyists”87 prior to
entering the executive branch, are under additional and further restrictions. Such
appointees/former lobbyists may not, for two years after entering the government, (1) participate
81 5 C.F.R. § 2635.502(c), (d).
82 5 C.F.R. § 2635.503(b)(1).
83 5 C.F.R. § 2635.503(c).
84 Executive Order 13490, 74 Fed. Reg. 4673 (Jan. 26, 2009).
85 E.O. 13490, Section 1, para. 2.
86 See 5 C.F.R. § 2635.502(a), (b)(1)(iv).
87 “Lobbyists” are those required to register and file under the Lobbying Disclosure Act of 1995, as amended, including
employees listed as lobbyists of organizations registering under the law. See 2 U.S.C. §§ 1602 et seq. The restriction
applies if one had been a “lobbyist” within two years of his or her appointment.
Congressional Research Service
14
Insourcing Functions Performed by Federal Contractors: An Overview of the Legal Issues
in any particular matter on which the appointee had lobbied within the two years prior to his or
her appointment, (2) participate in the specific issue area in which that particular matter falls, or
(3) seek or accept employment with any agency that the appointee had lobbied within the two
years prior to entering government service.88
Small Business Law
Small businesses generally receive special consideration under federal law and policy.89 For
example, it is the “declared policy of Congress that the Government should … insure that a fair
proportion of the total purchases and contracts or subcontracts for property and services for the
Government … be placed with small-business enterprises,”90 and there are a number of
contracting preferences for various types of small businesses, including set-asides, sole-source
awards, and price evaluation preferences.91 However, such protections do not appear to furnish
grounds for challenging an insourcing determination even if, as some commentators allege,
insourcing disproportionately affects small businesses.92 Under most provisions of federal law,
preferences for small business apply only in the case of “acquisitions” or “contract
opportunities,”93 which could be construed to mean that they exist only when an agency has
determined to contract out a function, not when it is determining whether to contract out a
function.94 While the regulations implementing Section 8(a) of the Small Business Act are
somewhat broader in that they refer to agency “requirements,”95 there does not appear to be any
precedent for construing the regulatory prohibition upon removing a requirement from the 8(a)
Program without the consent of the Small Business Administration (SBA) to mean that agencies
need the SBA’s permission to insource functions formerly contracted out through the 8(a)
88 E.O. 13490, Section 1, para. 3.
89 See supra note 23.
90 15 U.S.C. § 631(a).
91 See 15 U.S.C. § 637(a) (set-asides and sole-source awards for small businesses owned and controlled by socially and
economically disadvantaged individuals); 15 U.S.C. § 637(m) (set-asides for women-owned small businesses); 15
U.S.C. § 644(g) (set-asides for small businesses generally); 15 U.S.C. § 657a (set-asides, sole-source awards and price
evaluation preferences for Historically Underutilized Business Zone (HUBZone) small businesses); 15 U.S.C. § 657f
(set-asides and sole-source awards for service-disabled veteran-owned small businesses).
92 See Burton & Boland, supra note 24. Such commentators are concerned that the functions currently performed by
small businesses are more likely to be insourced than those performed by larger firms, and several small business
associations have called upon the Obama Administration to abandon its insourcing initiatives. See, e.g., U.S. Chamber
of Commerce et al., Letter to the President, Aug. 19, 2010, available at http://www.techamerica.org/content/wp-
content/uploads/2010/08/Coalition_Letter_President_Obama-Insourcing_Moratorium_8-19-2010.pdf (“Given
Secretary Gates’ recent acknowledgement that insourcing does not save money, Senator Menendez’s concerns that
insourcing is ‘counter-intuitive’ to your Administration’s goal of creating Federal contracting opportunities,
particularly for small and minority owned businesses, and the current state of the nation’s economy, we respectfully
urge your Administration to issue a revision to the insourcing agenda calling for an immediate moratorium on
all insourcing efforts throughout the Federal government.”) (emphases in original).
93 By definition, an “acquisition” is “the acquiring by contract with appropriated funds of supplies or services
(including construction) by and for the use of the Federal Government through purchase or lease, whether the supplies
or services are already in existence or must be created, developed, demonstrated, and evaluated.” 48 C.F.R. § 2.101
(emphasis added).
94 Cf. supra note 39 and accompanying text (noting that “acquisition” has a narrower meaning than “procurement”
under the OFPPA).
95 See, e.g., 13 C.F.R. § 126.606 (“A [contracting officer] may request that SBA release an 8(a) requirement ...
However, SBA will grant its consent only where neither the incumbent nor any other 8(a) participant can perform the
requirement.”).
Congressional Research Service
15
Insourcing Functions Performed by Federal Contractors: An Overview of the Legal Issues
Program.96 However, the Obama Administration’s Interagency Taskforce on Federal Contracting
Opportunities for Small Business recently recommended that the “relationship between policies
that address the rebalancing of agencies’ relationship with contractors and small business
contracting policies” be clarified, and the impact of insourcing of federal small business
contractors be evaluated.97 It remains to be seen what, if any, changes in insourcing policy may be
made in response to this recommendation.
Potential Congressional Actions
While most of the legal issues related to insourcing discussed herein arise from agencies’
implementation of insourcing initiatives, there is considerable scope for Congress to influence
whether and how insourcing is implemented. Broadly, Congress could restrict or expand the
scope of any insourcing. For example, the 112th Congress is currently considering legislation that,
if enacted, would limit agencies’ ability to insource functions by requiring that agencies complete
a “public-private competitive sourcing analysis” and determine that the “provision of such goods
or services by Federal employees provides the best value to the taxpayer” before using
government personnel to provided goods or services previously performed by a “private sector
entity.”98 Alternatively, Congress could consider legislation, like that enacted in the 109th through
111th Congresses, encouraging agencies to insource particular functions. More narrowly, Congress
could also expand or limit the jurisdiction of particular courts over contractors’ challenges to
insourcing determinations; require that agency insourcing guidelines be promulgated in ways that
are more or less likely to be found to be legally binding; expand or limit direct hire authority;
impose or remove restrictions upon the activities of former contractor employees who enter
government service; or seek to protect small businesses from the effects of insourcing
determinations.
Author Contact Information
Kate M. Manuel
Jack Maskell
Legislative Attorney
Legislative Attorney
kmanuel@crs.loc.gov, 7-4477
jmaskell@crs.loc.gov, 7-6972
96 In fact, a recent decision by the Court of Federal Claims upheld an agency’s determination to remove a requirement
from the 8(a) Program without the SBA’s consent. See K-LAK Corp. v. United States, 2011 U.S. Claims LEXIS 310
(Fed. Cl. Mar. 9, 2011).
97 Report of the Interagency Task Force on Federal Contracting Opportunities for Small Business, 7 (Sept. 23, 2010),
available at http://www.sba.gov/idc/groups/public/documents/sba_homepage/contracting_task_force_report.pdf.
98 Freedom from Government Competition Act, S. 785, § 4(e). There is an identical provision in the House version of
this bill, H.R. 1474.
Congressional Research Service
16