Every organization measures itself in a slightly different manner, but certain performance metrics are relevant for most government contractors. Tracking the right KPIs can provide insights to help you make the right business decisions.
In this article, we'll address the top 10 key financial performance indicators for government contractors.
1. Revenue
The revenue recognized by government contractors may be influenced by the contract type(s) in effect for each project, as well as by governing guidelines such as GAAP.
Contractors often calculate revenue differently for time and materials, cost plus, and firm-fixed price contracts, and there are countless variations for each primary type. Government contractors will want to do revenue analysis by organization, project manager, customer, and specific project.
2. Profit
Profit is arguably the most important metric for any company and is the ultimate measure of your success. As with revenue, as a government contractor your profit is impacted largely by contract type. You should be able to assess profitability trends across contract types to ensure that you’re pursuing the right type of business.
3. Backlog
Your backlog analytics help track how much work remains for your organization and allow you to measure whether you’re operating above or below your budget. It’s important that this analysis include not just existing contracts but also those you’re proposing and hope to win.
4. Labor Utilization
Labor utilization evaluates how efficiently your employees are being applied to direct, or billable, projects. The labor utilization analytic can offer insight into which employees are over or underperforming and let you know whether your staffing levels are appropriate. It’s imperative that management can review both direct and indirect components of the metric.
5. Indirect Rates
Government contractors track, at a minimum, two different versions of rates for indirect pools such as fringe, overhead, and G&A.
The target rate is a contractor's estimated rate based on its budget, while the actual rate is calculated based on incurred costs.
Comparing both as the fiscal year progresses is a critical function for contractors and a valuable component of an analytics system.
6. Proposal Win Rate
Analytics don’t have to be limited to financial data. The ability to win new business, for instance, is paramount to the success of any government contractor. Setting targets for proposal win rates across different parts of your company will allow you to evaluate the performance of your business development function.
7. Projects at risk
Perhaps the greatest potential of an analytics application is to draw attention to areas that need corrective action. Government contractors will immediately want to know whether they’re operating projects that have the potential to generate losses or put the company out of compliance with contract terms.
Examples of risk categories are:
- Billing in excess of funded contract value
- Costs incurred after project end date
- Revenue recognized in excess of contract value
- Revenue recognized below budgeted amount
8. Cash Flow
Lack of cash is one of the biggest reasons small businesses fail. A monthly cash flow report and 12-month cash flow projection can help you plan ahead to smooth out the swings in cash flow by accelerating collections, requesting an initial payment prior to starting projects, and carefully planning resource needs and investments.
Lines of credit can be helpful, and often necessary, but should be used sparingly as the cost of interest to finance operations can cut into profits.
9. Days Sales Outstanding (DSO)
The process of quickly and efficiently recording costs, billing the government, and receiving payment has a dramatic impact on the success of contractors. Errors in coding vouchers or timesheets, or delays in generating invoices, can be devastating to cash flow. Days Sales Outstanding, or DSO, is a measure of the time it takes to collect on an invoice, converting a receivable into cash.
10. Accounts Receivable Aging
The Accounts Receivable Aging report helps direct management attention to accounts that are slow to pay. If your AR collections are much slower than normal, it can be a warning sign that you are taking a greater credit risk in your sales practices or that business may be slowing down.
Strive to streamline your billing and collection processes and collect all outstanding invoices on time. This can have a huge impact on improving a company’s cash flow, and is particularly important for small government contractors with limited access to cash.
