As chief financial officer of a military clothing manufacturer, Steven W. Eisen was accustomed to winning contracts to make garments for the Defense Department.

But in December, Mr. Eisen received surprising news. His company, Tennier Industries, which is in a depressed corner of Tennessee, would not receive a new $45 million contract.

Tennier lost the deal not to a private sector competitor, but to a corporation owned by the federal government, Federal Prison Industries.

Federal Prison Industries, also known as Unicor, does not have to worry much about its overhead. It uses prisoners for labor, paying them 23 cents to $1.15 an hour. Although the company is not allowed to sell to the private sector, the law generally requires federal agencies to buy its products, even if they are not the cheapest.