(RNN) - A federal prison labor company owned by the U.S. government has made life difficult for several small manufacturers that depend on government contracts to stay in business. But while some manufacturers are losing contracts to prison labor, others are cashing in.
Federal Prison Industries (FPI), also known as UNICOR, is a government-owned company that uses prison labor to satisfy lucrative government contracts. But because of its far cheaper labor pool, FPI has been viewed as a cheaper option for the federal government to make products like clothing for the military, and this has forced several small U.S. manufacturers to lay off employees or face the possibility of going out of business.
The most recent examples of companies losing out to FPI have been in Alabama and Mississippi, where the Tuscaloosa News reported on Sept. 5 that American Power Source, a manufacturer of apparel for the U.S. Military, lost a contract to FPI and will be forced to shut down its plants in both states unless the government changes its decision. If it does not, an estimated 261 people will be out of work by November.
In May, American Apparel Inc., another manufacturer of clothing for the military, lost a contract to FPI that forced the company to close down one of its plants in Fort Deposit, AL, which resulted in 175 jobs lost.
Small manufacturers say competing with FPI is impossible. Federal prisoners make between 23 cents to $1.15 an hour and FPI does not have to pay for any of the normal costs associated with incarcerating its prisoner laborers, such as health care or housing, out of its revenues. That business model is part of the reason the government-owned company was able to take in nearly $1 billion in revenue in 2011.
"We pay employees $9 on average," Kurt Wilson, an executive for American Apparel Inc., told CNN Money. "They get full medical insurance, 401(k) plans and paid vacation. Yet we're competing against a federal program that doesn't pay any of that."
But while companies are losing out to FPI, others are cashing in. A bulk of the federal prison labor program's workload is for the manufacturing of law enforcement and military equipment, and there have been instances where they did shoddy work, which led to contracts being awarded to private manufacturers.
One recent example occurred in 2010, when 44,000 helmets made by FPI for the U.S. Army and Marine Corps were deemed to be defective and had to be recalled by the military. To make matters worse, the military did not know where the helmets had been shipped.
"Of the 44,000, we don't know where they are," said Brigadier Gen. Peter Fuller, U.S. Army, in an interview with CNN at the time. "So they could be on some soldier's head in either Iraq or Afghanistan. They could also be anywhere else in the world."
The incident caused FPI to be stripped of its helmet-making duties and two Pennsylvania-based companies, Gentex Corp. and British-owned BAE, were awarded the multi-million dollar helmet manufacturing contracts. Both companies had been making military equipment for several years and have since been awarded more highly lucrative military contracts, including a $21.6 million contract awarded to Gentex Corp. in May by the U.S. Defense Logistics Agency to make "advanced combat helmets," the company's website said.
But not everything FPI makes has to be recalled, and the government-owned company, which has been in business since 1934, is one of the country's largest "employers," with approximately 20,000 federal prisoners working as full-time laborers, making everything from military equipment and weapons to office furniture for the federal government.
FPI's website boasts that with more than 75 years of experience, "it is a corporation that has stood the test of time, and one that you can count on to be there for you in the future." And because many government agencies are required by law to buy from FPI, the prison labor company has a reliable customer base, as well as a stationary labor force.
Recent law changes have weakened the requirement for some government agencies, such as the Department of Defense, to buy from FPI as long as FPI's products are not the best value, according to the U.S. General Services Administration.
But FPI has been marketing itself as a manufacturing option to private companies, including Constellation Energy, which signed a 20-year contract with the federal government to convert government buildings to solar and wind-based energy.
In the agreement, Constellation Energy is to use FPI's prison labor to manufacture solar panels required for completion of the project.
Although the 20-year deal was hailed as a job-maker by company and government officials, a company press release said that the entire project would only create four to six permanent, non-prisoner jobs while costing more than $50 million.
FPI says that even though its prison labor pool sometimes creates unequal competition with American manufacturers in the marketplace, the true value of its prison labor program is that it teaches inmates job skills, which helps reduce recidivism rates.
However, a 2011 Congressional Research Service report said that most of the skills inmates learn are manufacturing-based, which are increasingly inapplicable to the outside world due to overseas outsourcing of those jobs.
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