2018 Clarity Industry Study Finance, Operations, Compliance Results In Depth
Reading between the lines of the Finance and Finance Compliance sections from the 9th Annual Clarity Industry Study, this year’s results reinforce the revised role of chief financial officers (CFOs) in the government contracting space. Growth rates among government contractors have more than doubled, according to the Study, and are at historic highs compared to the last five years. Profits are up to pre-sequestration levels for businesses of every size, and so far, 2018 is sporting the highest level of appropriations in a decade. With such optimism in the air, CFOs are stepping away from their spreadsheets to step into the part of trusted analyst and adviser on everything from profitability potential of government opportunities, to better managing overall risk.
Recently, I reviewed the results of the Finance and Finance Compliance sections of this year’s Clarity Study with a little more depth during Deltek’s webinar Financial Metrics, Operational & Compliance Trends, one of six installments of the 9th Annual Clarity Industry Study series. Based on the results from these sections, I touched on key changes in CFO responsibilities, as well as the business dealings crossing their desks every day. Read on for top takeaways to factor into short- and long-term finance and finance compliance strategies.
Deltek’s 9th Annual Clarity Deep Dive: Financial Metrics, Operational and Compliance Trends
On Demand Webinar
Top Financial Challenges
Organic topline growth and increasing profitability switched ranking positions compared to last year, to come in as the number one and two financial challenges respectively. More than likely, this is due to government contractors positioning themselves for expected growth and being okay with sacrificing a few profit percentage points to do so. Topline growth could have been bolstered in a variety of ways, including but not limited to a healthy environment for mergers and acquisitions. In terms of increasing profitability, cost-cutting measures worked in every major category, and days sales outstanding (DSO) and invoice cycles trending down indicated that efficiency is definitely being realized.
Additional drivers of topline growth include contractors making diversification within federal agencies a priority for the second straight year, and involvement of the CFO in the qualification of profit potential for new opportunities.
G&A, Fringe and Overhead Rate Trends
General and administrative (G&A) rates dropped a few percentage points compared to last year. With profits trending toward pre-sequestration levels, so are G&A rates. Increases in competition are also contributing to companies getting better at controlling their costs.
Fringe and overhead rates experienced additional drops, two- and three-point respectively. More companies are moving to software as a service (SaaS) vendors and dismantling physical information technology (IT) infrastructures. Coupled with healthcare costs being increased and passed on to the employees, and new competition entering the market with early-adopter mentalities, it is uncertain these drops are setting the stage for a true downward trend or not.
Current Course for Average DSO and Monthly Invoice Cycle
Focusing on making the invoice process more efficient seems to have paid off for Clarity respondents. They reported a drop in average DSO from 40 to 38 days, when compared to last year’s results. Monthly invoice cycles were also down, from 15 days (2017) to 11 days, in part due to iRapt adoptions (formerly WAWF). Decreases in both metrics have meant increases in cash flow, much to the delight of company bottom lines within the sector.
For 2018, unallowable costs was the only metric to see a bump, if only by half a percentage point. An influx of new small businesses pursuing federal contracts and only just getting familiar with “the ropes” of compliance is likely the source for the slight uptick.
Financial Compliance Top Audit Troublemakers
Even though 83% of Clarity respondents reported going through an audit in the past year, changes in government oversight were flat compared to a year ago. Most small and mid-sized companies claimed no level changes, while larger businesses reported the most increase. However, compared to 2016, a sharp oversight decline is glaringly apparent – from 29% to 10% – for larger businesses.
Indirect rates continued to hold the number one audit troublemaker spot for the sixth year in a row, with internal control systems moving to the number two pole position from number four a year prior. Rounding out the top three challenges list was labor and timekeeping, and for the first time in as many years, unallowable costs fell out of the five most alluded to audit issues.
The key approaches to address audits when they happen, or to prepare for the future, include conducting internal audits, reengineering business processes to better compliance, and hiring more experienced talent, specialists who have been through specific audit types, when possible.
Of the nine overall audit categories identified by contractors, specifically in the last two years, contractor purchasing system reviews (CSPRs), Defense Contract Management Agency (DCMA) and DCAA floor check audits proved to be the costliest, with CSPRs topping the investment-needed list. Additional audit types included: DCAA, incurred cost submission, internal controls, pre-award cost accounting system, forward pricing, and others.
Hours Spent on Government Audits
In terms of actual hours spent on government audits, smaller companies reported spending less time than their mid-sized to larger business counterparts. Overall, 25% of surveyed businesses spent 40 hours or less, 31% spent between 41 and 160 hours, with 11% spending more than 161 hours. Of all business sizes, larger companies spent the most time in the audit trenches.
Even More Clarity Results
The Financial Metrics, Operational & Compliance Trends webinar is brimming with additional results from the 9th Annual Clarity GovCon Industry Study – like the hours spent specifically on incurred cost submission (ICS) reports and the potential future for investing in dedicated risk officers. Watch the on demand webinar anytime.
For complete results from the Deltek Clarity GovCon Industry Study, download the full report.
About the Study
The 9th Annual Deltek Clarity GovCon Industry Study provides critical benchmarks and insight for finance, operations and compliance leaders, as well as decision makers in business development, human capital management, information technology, and project and risk management, to help each assess the health of their firm and identify steps to drive future success.
For the 2018 Study, more than 600 survey respondents answered a series of benchmarking questions to provide a comprehensive overview of the federal contracting environment. Businesses of every size were represented, with most identifying themselves as IT services, professional services, or defense, weapons, aerospace, transportation or manufacturing providers. Healthcare or medical, management consulting, and engineering services were also included in the results. Forty-three percent of companies are headquartered in the Washington, D.C. metro area and the surrounding states of Maryland and Virginia, while 57% call other U.S. regions home.
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