Federal contractors fear they will lose business as a result of new guidance issued by the Obama administration on when federal agencies should reserve work for federal employees.

The Office of Federal Procurement Policy issued a proposed policy letter in March that defines functions that are "inherently governmental" and therefore should be performed by federal employees.

It also calls for federal agencies to give special consideration to using federal employees for functions that are closely associated with inherently governmental functions, and it asks agencies to make sure they have enough employees in-house to manage functions that are critical to the agency's operations and mission.

The comment period for this guidance ended June 1. Business groups fear the guidance will lead federal agencies to insource work now handled by contractors. They asked OFPP to revise the guidance to offset what they see as a bias toward hiring more federal workers.

Unions representing federal employees, on the other hand, contend the guidance doesn't go far enough and gives agencies too much discretion to contract out government positions.

The Council of Defense and Space Industry Associations said it appreciated OFPP's attempt to provide clarity on what type of work should and shouldn't be contracted out.

"On the other hand, we have a continuing concern that agencies will interpret this policy as a mandate to insource," the council stated, even though "we do not believe this is the intent."

John Palatiello, president of the Business Coalition for Fair Competition, is concerned that adding a category for work "closely associated" with inherently governmental functions "will create a buffer zone that will result in more federal employees and more untested government monopolies."

"I'm hopeful that the administration will look at the comments and make some revisions to lessen the impact on the private sector, particularly small businesses," Palatiello said. "This rule has the potential of severely restricting contracting out and, quite frankly, killing jobs in the private sector and small business. I don't think that's something the administration really wants to do at this time and in this economy."

OFPP Administrator Daniel Gordon, however, doesn't expect the guidance, "if finalized in something like its current form, will lead to a widespread shift away from contracting."