The Scalpel Act Plan

Written By Cheryl Kelley

Oct 5, 2026 · @cheryl kelley

The Scalpel Act goes after the money Washington hides: the markup it pays middlemen for work civil servants already do, the September rush to burn expiring funds, and the red tape and reporting that feed both. At full speed it saves about $450 billion to $500 billion a year, roughly $1.8 trillion to $2.0 trillion over four years, and it forbids counting a single dollar of savings that comes from cutting benefits, inspectors or safety work.

 

The plan at a glance

 

Reform

What it fixes

Savings per year

Cut out the middleman

Contractors paid nearly double for work civil servants already do

~$169–223B

End the September spending spree

Agencies racing to burn expiring money; managers punished for saving

~$150B

Cut the purchasing red tape

A 3,000-directive rulebook that shuts out competition

~$79B

End reporting for reporting's sake

Performance paperwork for agencies, hospitals, schools and researchers

~$20B

Audit by risk, not the calendar

Identical audits every year regardless of risk

up to ~$0.4B

Stop government billing government

The unmeasured cost of agencies invoicing each other

Measured first, then cut

Total

~$420–500B

 

Instead of another big reporting requirement money simply stays in agency’s accounts and expire – turning back to the Treasury. It’s that simple. The easiest savings you can possibly measure and report on!

 

1. Cutting out the middleman

The biggest saving in the plan comes from bringing continuing work back in-house wherever a federal employee costs less than the contractor doing the same job. Projected savings: about $169 billion to $223 billion a year once running.

What the research shows

  • Contractors cost nearly double. The Project On Government Oversight (POGO) compared 35 occupations and found the government approved contractor billing rates averaging 1.83 times what it pays federal employees in total compensation, benefits included. Federal workers were cheaper in 33 of the 35 jobs; in one, the contractor cost nearly five times as much.

  • At the Pentagon, it's worse. A follow-up POGO review of Defense data found contractor employees cost 2.94 times as much as DoD civilians doing the same work.

  • Then the government pays again to manage them. Every contract needs contracting officers, contracting officer's representatives (CORs), cost estimates, invoice review, renewals and recompetes. Civilian agencies alone reported more than 52,000 certified CORs. OMB's former cost-comparison guidance priced contract administration at 4% of contract cost; state and local governments put it at 10% to 20%.

  • The money is enormous. Agencies spent about $487 billion on service contracts in FY2025: $238 billion at Defense and $249 billion everywhere else.

  • Nobody counts the workers. There is no official count of the contract workforce. Applying Defense's own cost of about $200,000 per contractor full-time position to service spending puts roughly 1.5 to 1.7 million people full time on federal service contracts.

How it works

The decision goes to the people who already see both numbers: each agency's chief financial officer and budget officers.

  1. Bring the job home.  The officer either posts the job, open to anyone, or offers it directly to the contractor employee already doing it. That person must have done the work for at least 12 of the past 18 months and meet the job's qualifications. Veterans' preference is fully kept, and contract clauses that bar contractor employees from taking a federal job can't block the move.

  2. Move the money. Funds shift from the contract account to the payroll account, with 15 days' notice to the Appropriations Committees.

  3. Let the contract run out. The position comes off the contract at the next renewal or the end of the term, so the government pays no penalty to leave.

One job, start to finish

POGO found the government paid contractors $268,653 a year for computer engineering work that cost $136,456 with a federal employee. A budget officer who converts that one position saves about $132,000 a year, before counting the cost of managing the contract. The engineer keeps doing the same work, at the same desk, as a federal employee.

Why this time is different

The Pentagon tried bringing work in-house in 2009 and dropped the effort a year later when the savings didn't appear. The Scalpel Act reverses each choice that failed.

2009 Pentagon effort

Scalpel Act

Run from headquarters with numerical targets

Each budget officer decides one job at a time; quotas are banned

Savings assumed in advance

Savings counted only after a year of actual payroll cost

Headcount caps pushed work back to contractors

Converted jobs don't count against headcount caps or hiring freezes

Contractor workers lost their jobs

The worker already doing the job can be hired directly

Agencies can't quietly hand the work back to a contractor for three years without a published cost comparison showing the contract is cheaper. Weapons, equipment and other products, research and development, and overseas combat support are excluded.

2. Ending the September spending spree

Today a manager who spends every dollar loses nothing, and a manager who returns a dollar loses it and risks a smaller budget next year. The Scalpel Act flips that: managers who find money they don't need get rewarded, and the money goes back to the Treasury. Projected savings: about $150 billion a year.

What the research shows

  • Money is spent because it is expiring. In a study of 14.6 million federal contracts, 8.7% of agency spending fell in the last week of the fiscal year, nearly five times the normal weekly level (Liebman and Mahoney, NBER).

  • The rush buys worse results. Year-end IT projects were 2.2 to 5.6 times more likely to receive below-median quality ratings than projects committed earlier in the year.

  • Some agencies do much of their buying in September. An even pace would put about 8.3% of contract spending in each month. In FY2013, the State Department spent 38.8% of its contract dollars in September and HHS spent 28.7%.

  • Large sums already sit idle. Agencies held $560 billion in unspent discretionary funds at the end of FY2025, up from $199 billion a decade earlier.

  • Almost nothing goes back. GAO found only 1.6% of available budget authority was canceled government-wide from FY2009 to FY2019.

How it works

  1. Get rewarded for it. Finding unneeded money becomes a required part of every spending official's performance rating, and a heavy part for senior executives. Savers can earn awards of up to $25,000 or 10% of pay, from a pool capped at 1% of the savings. Teams can share awards, and savings count toward promotion. No employee may ever be rated on spending their full budget.

  2. No punishment for saving. No one can be demoted, reassigned or denied an award for returning money. Orders to spend money just to keep it from expiring are banned, and reporting them is protected whistleblowing. An office that returns a one-time surplus keeps its budget for two years.

Where the 10% comes from

10% of discretionary funding, which CBO put at about $1.83 trillion for FY2025. That target equals about one-third of the $560 billion agencies were already holding unspent. OMB sets each agency's share based on its own record: how much it rushes out in September, how much it leaves idle, how often it buys without competition, and what its auditors have found. No agency's target is below 2% or above 20%, and agencies Congress funds late get lower targets.

3. Cutting the purchasing red tape

The Federal Acquisition Regulation, the rulebook for every federal purchase, has become so complex that it keeps competitors out and drives prices up. The Scalpel Act replaces it with a short, plain-language Federal Purchasing Code built around competition. Projected savings: about $79 billion a year.

What the research shows

  • The rulebook is the problem. OMB found that the FAR's nearly 3,000 directives, along with many more at the agency level, impose significant transaction costs for industry and unnecessarily complicate the workforce's ability to deliver cost-effective services on time. The FAR runs more than 2,000 pages.

  • The verdict is consistent. Executive Order 14275 states that federal procurement under the FAR receives consistently negative assessments regarding its efficiency. The White House said studies have consistently found the FAR to be a barrier to doing business with the government.

  • Competition is missing from nearly half of spending. In FY2025, almost $278 billion of the $793 billion in contract obligations, 35%, was awarded without full and open competition (Congressional Research Service). GAO has found billions more go to contracts labeled competitive that drew only one offer, 13% of obligations when it last measured.

  • The supplier base is shrinking. Since 2010, the number of small businesses winning federal contracts has fallen about 40%, to under 60,000, and first-time winners have dropped about 60%.

  • The savings are proven. GAO reports that leading companies save 10% to 20% of total procurement costs by buying strategically, and OMB reports more than $111 billion saved through category management since 2014.

How it works

  1. Replace the rulebook. Within three years, the FAR and every agency's add-on rulebook are replaced by one short code, written in plain language, after at least 120 days of public comment.

  2. Six rules for every purchase. Compete it unless a published exception applies. Pay a price that can be shown to be reasonable against commercial prices. Make past performance count. Publish solicitations, awards, prices and performance. Prevent and punish fraud and self-dealing. Let small businesses and newcomers bid without hiring specialists to decode the rules.

  3. Keep it short. No new rule can be added without removing one, and the length of the code is reported to Congress every year.

  4. Force competition back. Any agency that awards more than 40% of its contract dollars without competition or to a lone bidder must give Congress a plan to fix it, and every solicitation likely to draw one bid requires market research first.

  5. Protect the buyers. The layers of review boards and approvals built for the old rules are eliminated, but the people who negotiate, price and oversee contracts cannot be cut, because short-staffing them raises costs.

4. Ending reporting for reporting's sake

Federal performance law has built a stack of strategic plans, performance plans, reports, quarterly reviews, councils and contractors, much of it reporting to offices that report on the reporting. Agencies then push the data-gathering down onto every hospital, school, university and nonprofit they fund. The Scalpel Act ends it. Projected savings: about $20 billion a year.

What the research shows

  • Agencies push the paperwork onto grantees. The performance law's requirements fall on agencies, but SAMHSA requires every grantee to collect client-level data so SAMHSA can meet its obligations, and NSF awardees file reports tied to NSF's performance goals.

  • The burden on grantees is large. In Federal Demonstration Partnership surveys, scientists on federal grants spent 42% to 44% of their grant-funded research time on administrative work instead of research.

  • The agency side costs real money too. CBO estimated that complying with the existing performance law already cost agencies $50 million to $100 million a year before the 2010 expansion.

How it works

  1. Repeal the stack. The performance planning and reporting requirements (31 U.S.C. 1115–1125) are repealed, and the offices and council built to run them are folded into each agency's chief financial officer.

  2. One plain report. Each agency publishes a 30-page Annual Accountability Statement answering three questions: What are we required to do? How much did we spend? What did we deliver? It must use data the agency already collects, and no agency may hire staff or contractors to write it.

  3. Free the grantees. The reporting categories agencies impose on grant recipients to feed their performance plans go away, from Meals on Wheels to NIH and NSF research. The plan targets at least 5% of the roughly $390 billion a year in discretionary and research grants, without cutting the services those grants pay for.

5. Two smaller fixes

Audit by risk, not the calendar. Today every agency gets an identical financial audit every year. Under the Scalpel Act, agencies with weak controls, poor audit results, high improper payments or programs on GAO's high-risk list are audited every year; the rest at least every three years. In off years, the agency head and CFO must still vouch for their controls and the Inspector General can call for a full audit. GAO reports agencies spent less than $50 per $1 million of cost on their FY2024 audits, so savings run up to about $365 million a year, and the freed audit effort goes to fraud and improper payments.

Stop government billing government. Agencies constantly invoice each other for services, and no one knows what that paperwork costs. Within 18 months, OMB and Treasury must count every agreement, the staff and systems that run them, and their cost. Arrangements that cost more to administer than they're worth are then replaced with direct funding. Nothing is scored until the count is done.

How it rolls out

When

What happens

First 6 months

Agencies find and cancel every internal rule that pushes year-end spending

Year one

CFOs begin converting contract jobs; agencies publish quarterly spending plans and September spending; audit risk ratings begin; savings appear on the public scorecard

Eighteen Months

The Federal Purchasing Code replaces the FAR

Year 6

Saver awards expire unless Congress renews them based on GAO's findings

 

 

A public scorecard, updated every quarter, shows savings by agency and office, each agency's progress against its target, September spending, competition rates and every award paid, written so any citizen can see how much was saved, by whom and how.

The middleman figure. The estimate assumes about 70% of the $487 billion in service contracts, $341 billion, pays for continuing labor. At POGO's government-wide rate of 1.83 times, converting that work saves about 45%, or $155 billion. Using POGO's 2.94 times for Defense raises it to $189 billion. Removing contract oversight adds $14 billion (OMB's 4%) to $34 billion (10%). Together: $169 billion to $223 billion a year.

What's a target and what's measured. The middleman, audit and agency-reporting figures rest on measured cost ratios. The September, purchasing and grant figures are targets set in the law, each anchored in the research above. Four-year totals assume full speed; year one saves less, because contract jobs convert as contracts expire and savings count only after a full year of federal payroll. GAO estimates more than $100 billion more could be saved by fixing duplication across government, but that figure overlaps savings already counted here, so the plan leaves it out.

Sources

Contracting and purchasing

Year-end spending

Contractor cost and oversight

Performance reporting and grants

Audits

 

Cheryl Kelley https://cheryljeankelley.com
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