Seeing the Glass Half Full with Clarity GovCon Finance and Compliance Trends
While sifting through the results of the 10th Annual Deltek Clarity Government Contracting Industry Study, one sentiment has been consistently clear, leaders within the market are feeling bullish about the year that was, the year that is, and the year that is to come. So what has everyone seeing the glass as half full? During the breakout webinar Financial Metrics and Compliance Trends, part of the 10th Annual Deltek Clarity Government Contracting Industry Study series now available on demand, I was able to go in depth with these targeted results to reveal exactly why firms are feeling so optimistic.
10th Annual Deltek Clarity Government Contracting Industry – Financial Metrics and Compliance Trends
On Demand Webinar
Get to the Numbers
The average profit/loss margin reported by businesses of all sizes was 8%, with small businesses disclosing a slightly higher margin than their medium and large business counterparts. This is likely an indication of government firms making the investment of going after larger contracts and acquiring the talent to manage the ins and outs of the work.
Also apparent, contractors have gotten good at cost cutting, as evidenced by the averages:
- General and administrative (G&A) rate – 12%
- Overhead rate – 19%
- Composite fringe – 31%.
All on a year-over-year trend downward compared to last year’s Study. The composite fringe rate confirms that the war for talent continues to wage on. With the overhead dipping compared to the last few years of results, companies are getting creative with what they are offering potential employees, such as more frequent remote work.
In terms of day-to-day operations, the average days sales outstanding – calculated as days from which an invoice was sent to when payment was received – was 35. This was the fourth year of decrease for this metric. Also trending down in the best possible way, monthly invoice cycles, with the number of days from when a project ends to the when an invoice is sent averaging at 10 days for businesses.
Feeling Good About Growth
Small companies (less than $20 million in revenue) felt the most bullish about projected and targeted growth, predicting into the double digits for the days ahead. Medium businesses ($20-$99 million in revenue) are feeling optimistic as well, with large companies ($100 million or more in revenue) also feeling positive but a bit more conservative with their estimations. Reinforcing the confidence for all government businesses, changes in federal contract levels within their portfolios have stayed the same or increased for more than three quarters of reporting firms.
However, these growth forecasts will not be without their challenges. Financial leaders pointed to increasing profitability and cash flow and encouraging organic topline growth as the top three immediate roadblocks that could hinder their firms. Diversifying with new customers, agencies and/or markets, in addition to investigating the profitability potential of opportunities prior to pursuit, were identified as key strategic pillars to address these top challenges.
Also top of mind for many in finance, controlling costs, improving project performance and process optimization with the aid of digital solutions. Especially for smaller firms, using cloud-based options, like Deltek Costpoint, provides stability with predictable use costs and no additional outlay for equipment and maintenance.
Federal Contracts and Financial Compliance
A majority of the near 750 Clarity Study respondents reported that federal contracts levels within their scope of work stayed the same or increased. Large businesses saw the most increase, with more than half stating that the amount of federal contracts definitely ticked up. The trends were similar for indefinite delivery/indefinite quantity (IDIQ) revenue, with most businesses reporting levels staying the same or increasing.
In terms of the amount of oversight businesses are experiencing, most reporting businesses stated that audit activity stayed the same or increased. Firms shared that the audits they experienced most in the past two years were Defense Contract Audit Agency (DCAA), internal controls and incurred cost submission (ICS) reviews. The most costly audits reported were contract purchasing system reviews (CPSR) and other Defense Contract Management Agency (DCMA) examinations.
Aside from audit types, indirect rates, internal control systems and labor and timekeeping were the top identified audit challenges. To address these concerns, government firms conducted internal audits more frequently, hired third parties to assist with compliance and audits and assigned more dedicated resources for reviews.
With solid financial performances in 2018, and a pervasive optimism by government businesses of all sizes, undoubtedly, increased competition is on the horizon. Though the amount of time businesses are spending on audits is decreasing, government contractors are still challenged by the costs involved. And, in the interest of effectiveness and efficiency, finance leaders have found themselves in expanded roles, cross pollinating with project management and human capital management teams to improve overall business strategy and results.
The on demand webinar 10th Annual Deltek Clarity Government Contracting Industry Study – Financial Metrics and Compliance Trends offers even more regarding the results. Download and listen to the complete session to learn some additional takeaways, like the resurgence of other transaction authority (OTA) contracts and how finance factors into overall project management needs.
Want to explore more specific results from the Deltek Clarity Government Contracting Study? Register for the complete, in-depth webinar series.
You can also download the full Deltek Clarity Government Contracting Industry Study
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