13th annual government contractor industry …...provides those interested in government contracting...

Industry Survey Highlights 2007

13th Annual Government ContractorIndustry Highlights Book

Contents

01 Introduction

02 Executive summary

03 Company profile information

05 Financial statistics

06 Government contracts

07 Dealing with the government

08 Workforce compensation

09 Business strategies

10 Executive compensation

11 Intellectual property

Kerry B. HallPartner-in-charge, Government Contractor Industry practice

“Our goal is to serve thegovernment contractingindustry with passionand pride.”

Introduction 1

Government Contractor Industry Survey Highlights

Introduction

Grant Thornton provides this annual survey as part ofour continued thought leadership for the governmentcontractor community - a community we serve withpassion and pride. We are fortunate to be supportedby our generous sponsors, who share our passion forthis industry.

The Annual Government Contractor IndustrySurvey was developed by Grant Thornton forcompanies considering entering the governmentcontracting arena. We hope that existing industryparticipants will also find the survey results of interest.Survey findings provide a comprehensive look at theindustry as a whole, as well as detailed information onthe day-to-day business of being a governmentcontractor.

Through collection and analysis of responses froma cross-section of companies that consider the federalgovernment to be a significant customer, the surveyprovides a perspective on how the governmentcontracting industry has evolved over the past year.This feedback identifies key trends leading to futurechallenges and opportunities.

Whether you are an established governmentcontractor or a business considering entering thismarket, we hope you will find the informationcontained in Grant Thornton’s 13th AnnualGovernment Contractor Industry Survey helpful inplanning the future of your business.

Grant Thornton prides itself on being a firm ofthought leaders who provide personalized attentionand the highest quality of service. Our goal is toensure that this survey continues to evolve andprovides those interested in government contractingthe most specific and useful information possible. Tooffer suggestions for next year’s survey, please contactme directly at [email protected], or 703.847.7515.

Many thanks to oursurvey sponsorsBB&T Capital Markets I Windsor Group

Cassidy & Pinkard ColliersCommerce BankExecutiveBizHolland & KnightProfessional Services Council

2 Executive summary


Executive summary

The Grant Thornton AnnualGovernment Contractor Survey presentsbusiness information from small, mediumand large companies that represent across-section of the governmentcontractor industry. We sincerelyappreciate the participation of the manycompanies that took part in our survey.We welcome comments and suggestionsfrom survey participants and endeavor toincorporate those comments andsuggestions when updating ourquestionnaire for future surveys.

Revenue by marketOn average, survey participants reportthat approximately 90% of total revenuecomes from government contracts. Thiscompares to 88% last year.

Revenue trends52% of survey participants experiencedrevenue increases during the past yearwhile 24% suffered decreases. Thesefindings are very impressive and continuethe trend from prior years.

Management and support headcountManagement and support headcountcontinues to fall as a percentage of totalheadcount. The ratio this year is 9.9%compared to 13.8% last year.

Profit rateProfits before interest and taxes continueto be modest in the governmentcontracting industry. 42% of surveyedcompanies had either no profit or profitrates between 1-5% of revenue.

Current ratio54% of surveyed companies report acurrent ratio of 2 to 1 or less.

Labor multipliersLabor multipliers inclusive of fee haveincreased over last year’s survey. Themultiplier for company site direct laborgrew from 2.0 to 2.3 and for customer sitelabor from 1.7 to 1.9.

Uncompensated overtime32% of surveyed companies do notaccount for all hours worked and as aresult are at risk for underbilling time andmaterial contracts.

Proposal win ratesSurvey participants report a 33% win ratefrom proposals for non-sole sourcebusiness. The win rate jumps to 58%when the company establishes a specialbusiness unit, such as a joint venture or alimited liability corporation to bid thework.

Identifying out-of-scope work66% of surveyed companies considertheir procedures for identifying out-of-scope work to be either not effective oronly somewhat effective. This finding ispractically identical to last year’s survey.

Earned value management systems(EVMS)27% of surveyed companies havecontracts which require EVMS. Of these,41% report they rarely if ever receivemeaningful feedback from thegovernment regarding information in theEVMS reports.

Executive compensationExecutive compensation remains the costmost frequently challenged by theDefense Contract Audit Agency(DCAA).

Intellectual property49% of surveyed companies ownintellectual property. Of these, only 33%charge their customers license fees for theuse of the property.

New developmentsThe Federal Acquisition Regulatory(FAR) Council is in the process ofcreating new regulations in the areas ofethics and compliance which addsubstantial new risks for governmentcontractors.

Company profile 3


Company profile information

The Grant Thornton 13th AnnualGovernment Contractor Surveyrepresents findings from well over 100companies who do business with thefederal government. Survey questionnaireswere distributed in early 2007 andresponses were received by July 2007.Financial and business statistics in thesurvey typically relate to fiscal yearsended in 2006.

We analyze all data provided byrespondents to ensure the data in thesurvey is statistically valid andrepresentative of most respondents.Throughout the survey, data is presentedas a whole or by company revenue sizewhen appropriate. We also include anarrative in each section explaining thedata and, in most cases, compare the datato the results from prior Grant ThorntonGovernment Contractor Surveys toidentify trends.

Ownership structureThe majority of the participants in thesurvey are privately held companies.Company management or individualinvestors own 82% of the surveyedcompanies while 9% are publicly tradedand the remaining 9% are not-for-profitcompanies. See Figure 1. In last year’ssurvey, 83% of participants were privatelyheld, 12% were publicly traded and 5%were not-for-profit companies.

Private 82%

Not-for-profit 9%

Public 9%

Figure 1: Ownership structure

Location of the companySurvey responses were received fromcompanies in 22 states and the District ofColumbia. 71% of the respondents arelocated in Maryland, Virginia andWashington, DC and others are located inAlabama, California, Connecticut,Delaware, Florida, Kansas, Kentucky,Massachusetts, Michigan, Minnesota,Missouri, North Carolina, New Jersey,New Mexico, Ohio, Oklahoma,Pennsylvania, Tennessee, Texas andVermont.

Primary products or servicesApproximately 94% of surveyedcompanies sell professional services totheir clients while 6% sell products. Theservices companies provide a wide rangeof skills including consulting (18%),information technology (18%), research(17%), engineering (16%), generalbusiness services (11%), science andtechnology (8%) and other services (6%).

Defense 60%

Other federal 30%

State and local 6%

Commercial 4%

Figure 2: Revenue by market

4 Company profile

Revenue by market90% of the revenue for surveyedcompanies was from contracts with thefederal government. See Figure 2. Thiscontinues an upward trend that has beenevident in the previous three surveys. Thepercentage of revenue from contracts withthe federal government was 79% in the10th annual survey, 84% in the 11th, 88%in the 12th, and 90% this year. There isno doubt that the added governmentspending in the wake of September 11 hascaused this steady increase in the share ofrevenue derived from governmentcontracts.

The entire increase in the revenuepercentage from government contracts inthis year’s survey was from contracts withthe Department of Defense (DoD). Onaverage, revenue from DoD accounted for60% of total revenue compared to 56% inlast year’s survey. This 4% increase wasoffset by 2% reductions in the revenuepercentages for other federal agencies andcommercial work.

The 2% reduction in revenue fromcommercial clients continues a trendnoted in the last several years. Revenuefrom commercial clients was 15% of totalrevenue in the 10th annual survey, 10% inthe 11th, 6% in the 12th and 4% in thisyear’s survey. It is evident from this trendthat as the federal budget continues togrow, government contractors aredevoting their time and energy tomaximizing business from that marketrather than applying resources to expandcommercial business.

Financial statistics 5


Financial statistics

We asked surveyed companies to providea wide variety of information thatillustrates the financial health of theirorganization. Some of the responses arepresented in this section.

Profit rate (before interest and taxes)Contrary to recent public and politicalperception, government contracting is nota business where companies generateabnormally high profits. Indeed, theinformation provided by surveyedcompanies demonstrates the reality is fardifferent from the perception.

Surveyed companies providedfinancial information on gross profitbefore interest and taxes as a percentage ofgross revenue, and the results are shownin Figure 3. 42% of surveyed companieshad either no profit or profit ratesbetween 1-5% while 76% had either noprofit or profit rates between 1-10%.Only 12% of the government contractorsparticipating in this survey had profitrates over 15%. The profit rates in Figure8 would be further diminished afterdeducting interest and taxes.

Current ratioThe current ratio is derived by dividingcurrent assets by current liabilities fromthe balance sheet. A current ratio of 2 to1 or higher generally indicates afinancially healthy company.

Surveyed companies provided theircurrent ratios and the results are shown inFigure 4. 54% of the respondents reporta current ratio of 2 to 1 or less, 24%report current ratios between 2.1 to 3, andthe remaining 22% report 3.1 or higher.Although the current ratios for mostcompanies are rather modest, the risk ofmajor cash flow problems is lessenedconsiderably by the ability to invoice atleast monthly on most governmentcontracts.

Figure 3: Profit rate before interest and taxes

1 – 5% profit rate



>15% profit rate

No profit

35%

34%

12%

12%

7%

Figure 4: Current ratio

0 – 1.0

1.1 – 2.0

2.1 – 3.0

3.1 – 4.0

>4.0

8%

46%

24%

12%

10%

Costreimbursable 40%

Fixedprice 32%

Time andmaterial 28%

Figure 5: Revenue by contract type

“The government seemsconflicted between theirprofessed devotion toefficient commercial businesspractices and their instinctivepreference for costreimbursable contracts, moreaudits, more reporting andmore investigations.”

Norman E. Duquette Government Contractor Industry Specialist

In the mid-1990s, the federal governmentstreamlined its systems to procure goodsand services. Prior to that time,government procurement was a lengthy,inefficient process that put a premium onmassive proposal submissions, timeconsuming pre-award audits, and abureaucratic source selection process thatemphasized the content and format of theproposal rather than the past performanceof the proposer. The procurementprocess was no longer able to keep upwith the new products and technologiesbeing offered by businesses, leaving thegovernment with little choice other thanstreamlining.

Revenue by contract typeThe government’s recent change indirection from promoting efficientcommercial practices to a moremicromanaged and audit and investigationintensive environment is evidenced bysurvey responses on revenue by contracttype. See Figure 5.

Government Contract Industry Survey Highlights

Government contracts

6 Government contracts

In this year’s survey, 40% of therevenue from federal contracts was fromcost reimbursable contracts, which isslightly higher than the 39% reported inthe 12th annual survey and significantlyhigher than the 28% and 30% reported inthe 11th and 10th annual surveys. It isdifficult to reconcile the high use of costreimbursable contracts with the notionthat the government is attempting to usemore commercial processes to streamlinefederal procurement. The commercialenvironment generally uses fixed price ortime and material contracts while thegovernment continues to maximize theuse of cost reimbursable contracts.

Same 81%

Worsened 10%

Improved 9%

Figure 7: Change in relationship with governmentauditor

Figure 8: Most frequent cost issues

Executive compensation

Legal

Consultants

Incentive compensation

Employee morale

27%

10%

9%

8%

6%

0 5 10 1515 2020 2525 30

Relationship with the governmentauditorThe DCAA is the largest contract auditresource within the federal government.Although DCAA is part of the DoD, itfrequently performs contract audits forother government agencies.

We asked surveyed companies todescribe the quality of their businessrelationship with the DCAA. 90%reported that their relationship isexcellent or good while 10% reported it isfair or poor. See Figure 6. These findingsare consistent with last year’s survey.

Figure 6: Relationship with government auditor

Good

Excellent

Fair

Poor

0 1010 2020 3030 4040 5050 66000

59%

31%

7%

3%


Dealing with the government

Dealing with the government 7

We also asked how their relationshipwith the DCAA has changed in the pastyear. The results are shown in Figure 7.81% reported the relationship has stayedthe same compared to 89% in last year’ssurvey. 10% of respondents reported therelationship had deteriorated, which isdouble the 5% reported last year. 9%reported the relationship with the DCAAhad improved, compared to 6% in lastyear’s survey.

Most frequent cost issuesSurveyed companies were asked toidentify the categories of costs that weremost frequently challenged by theDCAA. The results are shown in Figure8. Executive compensation continues thetrend from the last several surveys as themost frequently challenged cost.

Medical benefitsWe asked surveyed companies to providethe medical benefits costs as a percentageof labor costs. The results are shown inFigure 9.

In most companies, the cost ofmedical benefits is shared by the companyand the employee. We asked surveyedcompanies to provide the percentage ofmedical benefits paid by the employee.The results are summarized in Figure 10.

Wage increasesWe asked surveyed companies to provideinformation on the average wage increasepaid to full-time employees during thepast year. On average, wage increaseswere 3.5-4.0% of labor costs, which isslightly lower than the 4.5% reported inlast year’s survey. It is possible thatcompanies are increasing their emphasison other forms of incentive compensationin place of annual wage increases since theamount of incentive compensation paid isdiscretionary and it can be targeted tothose employees who are considered mostvaluable to the company.

Figure 9: Health insurance as a percentage of laborcosts

<4%

4.1 – 5%

5.1 – 6%

6.1 – 7%

7.1 – 8%

8.1 – 9%

9.1 – 10%

>10%

8%

22%

10%

9%

10%

5%

19%

17%

0 5 1010 1515 20205

Figure 10: Percentage of health insurance paid by thecompany

<50%

51 – 60%

61 – 70%

71 – 80%

81 – 90%

91 – 100%

9%

5%

22%

41%

12%

11%

8 Workforce compensation


Workforce compensation

In-house 54%

Outside 4%

Both 42%

Figure 11: Performance of due diligenceDue diligenceIn our experience, we find far greaterbusiness risks in government contractingthan are found in commercial contracts.Outstanding performance is never enoughto secure the future for governmentcontractors. Government procurementregulations require a rigorous competitiveprocess before contracts are awarded andthe source selection often puts a premiumon price above experience. Governmentcontract terms and conditions imposeunique compliance burdens in practicallyall aspects of the company’s business andthose burdens are continually increasing.Ongoing programs are often curtailedwith short notice because of changingbudget priorities. And then of coursethere are the audit risks. Costs whichhave been routinely accepted for years cansuddenly be challenged by governmentauditors with potentially severeconsequences for the financial health ofthe business. It is extremely importantthat these unique risks be well examinedwhile performing due diligence on agovernment contractor.

We asked surveyed companies toidentify who performed due diligence ontheir mergers and acquisitions. In 54% ofthe cases, due diligence was performed in-house, while 42% used a combination ofin-house personnel and outside firms. SeeFigure 11.

Business strategies 9


Business strategies

Price reductions resulted fromdue diligence in 32% of the cases.The risk areas that caused pricereductions included overvalued networth, collectability of unbilledreceivables, quality of funded andunfunded backlog projections,contract renewals, eligibility for smallbusiness awards, value of fixed assetsand specific terms and conditions ingovernment contracts.

techniques since the surveys often do notpresent data by company size comparableto the size of the company being audited.The auditor will then average the mediancompensation by position using the datadrawn or extrapolated from the three orfour surveys used in their analysis. TheDCAA typically then adds 10% to theaverage and disallows the differencebetween the contractor’s actual costs andthe amount computed by the DCAA.

Surveyed companies that facedDCAA challenges to executivecompensation provided information onthe ultimate resolution of the issue. Thecompany position was sustained in 28%of the cases with a reasonable compromisereported by 44% of respondents. TheDCAA position or an unreasonablecompromise resulted in 28% of the casesreported.

DCAA challenges to executivecompensationExecutive compensation is challenged bythe DCAA far more frequently than anyother element of cost. The DCAA’sanalytical technique is simplistic andformula driven and does not apply a greatdeal of auditor judgment in the initialanalysis. First, the DCAA selects three orfour commercially available compensationsurveys. They then extract compensationdata at the median level for executivepositions at companies of similar revenuesize in similar industries as the companybeing audited. On occasion, the DCAAwill fragment the total revenue of thecompany being audited to the divisionlevel, thereby drawing compensation datafrom surveys for companies much smallerthan the company being audited.Oftentimes, the DCAA will be forced toextrapolate median level compensation bycompany size using regression analysis

Executive compensation 10


Executive compensation

Intellectual property 11


Intellectual property

Ownership of intellectual property49% of surveyed companies ownintellectual property, which is verycomparable to the 46% reported in lastyear’s survey.

We asked surveyed companies howthe intellectual property was acquired andthe results are shown in Figure 12. 92%report that intellectual property wasdeveloped entirely at private expense orwith a mix of private and governmentfunding. This is comparable to the 90%reported in last year’s survey.

Government regulations classifydevelopment paid for with IndependentResearch and Development (IR&D)funds as private expense even in situationswhere the IR&D costs are allocated togovernment contracts as an indirect cost.

Figure 12: Source of intellectual property

Private and government

Private including IR&D

Government contract

Acquisition

56%

36%

4%

4%

0 1010 2020 3030 4040 5050 60

Grant Thornton has been helping

government contractors develop their

business for more than 20 years.

Our team is dedicated to helping

your company meet the challenges

and complexities of the government

contracting industry.

Passion for serving our clients, technical expertise, and partner

involvement have been the hallmark of Grant Thornton LLP

in the U.S. for more than 80 years. Plus, you get the benefit of

Grant Thornton International member firms in 112 countries

around the world. Give Kerry Hall, Government Contractor

Industry Practice Leader, a call at 703.847.7515 or visit

www.GrantThornton.com/govcon to learn more about

our industry services.

Find out how it feels to work with people who love what they do!

Audit • Tax • Advisorywww.GrantThornton.com


Sponsors

BB&T Capital Markets I Windsor Group

Cassidy & Pinkard Colliers

Commerce Bank

ExecutiveBiz

Holland & Knight

Professional Services Council

Washington, DC Northern Virginia Maryland Worldwide Offices

Real Resultsin Real Estate®

Dale Powell

Michael Hammond

703.770.3400

Thanks to all our Government Contracting clients

who helped make 2007 another fantastic year

for our Government Contracting Division.

For more information, contact:

Our local team of trusted lenders has more than 100 years ofcombined experience helping Government Contractors succeed.The members of our Government Contractor Lending Groupserve as your partners, offering flexibility, responsiveness andstrategic advice to meet the changing needs of your businessand help you achieve your financial goals.

For more information, call Eric Pietras at 703-663-4352.

commerceonline.com

450+ convenient locations throughout Metro New York, Metro Philadelphia, Metro Washington, DC and Southeast Florida

Member FDIC

The GovernmentContractorBanking Experts

The GovernmentContractorBanking Experts

Copyright © 2007 Holland & Knight LLP All Rights Reserved.

www.hklaw.com

Richard O. Duvall

Northern Virginia

703 720 8600

[email protected]

Offices: 17 U.S. + 6 International

To deal effectively with complex government contracts challenges, finding creative integrated solutions

is key to your success. How do you manage the complexities of your government contracts?

Holland & Knight’s Government Contracts Group.The breadth of experience to efficiently provide integrated government contracts and commercial

capabilities. A “one-firm” approach drawing upon the extensive capabilities of our industry-based

teams. Lawyers with the specific experience and knowledge geared to your needs to help you

achieve your goals.

Navigating the complexities of government contracts.

• Bid Protests

• Claims

• Defense of Audits

• Mergers & Acquisitions

• False Claims Act Defense

• Small Business Issues

• Suspension/Disbarment

• International Procurement

• Construction

Founded in 1972, PSC is the principal national trade association

of the government professional and technical services industry

and is an unmatched resource for policy insight, analysis and

information. Widely regarded as the industry’s most respected

and credible advocate, PSC is indeed the Voice of the

Government Services Industry.

www.pscouncil.org

The Voice of the Government Services Industry

About Grant Thornton LLPGrant Thornton LLP is the U.S. memberfirm of Grant Thornton International, oneof the six global accounting, tax andbusiness advisory organizations. Throughmember firms in 112 countries, including50 offices in the United States, the partnersand employees of Grant Thorntonmember firms provide personalizedattention and the highest quality service topublic and private clients around the globe.

Our professionals help governmentcontractors form the strategies andsupporting infrastructure that willmaximize opportunities, build a successfulbusiness base, minimize taxes and improveprofitability.

Further information

About Grant Thornton

Grant Thornton’s GovernmentContracting practice is a thought leader inthis industry. The practice holds quarterlyroundtables on such topics as mergers andacquisitions and the annual governmentcontractors survey.

Please visit the Grant ThorntonGovernment Contractor Industry websiteto learn more about the services weprovide.www.GrantThornton.com/govcon

Table of contents

Full survey results

The below summarizes the information included in the full survey results. To learn how to obtain a full copy of the survey results,or to participate in next year’s survey, please contact:

Melissa FordT 703.847.7553E [email protected]

Introduction 1

Executive Summary 2

Company profile information 3Ownership structure 3Age of business 3Size of the business 4Location of the company 4Primary products or services 4Revenue by market 4Revenue trend 5Anticipated growth over the next three years 5Workforce composition 6

Financial statistics 7Profit rate (before interest and taxes) 7Current ratio 7Fringe benefit rates 8Overhead rates 8G&A rates 9Material and handling and subcontract administration rates 9Special allocations 10Labor multipliers 10Billing practices for rate variances 10Service centers 12Uncompensated overtime 12

Government contracts 14Revenue by contract type 15Fees 15Billing practices for fee retention 16GSA Schedules and other IDIQ contracts 16Investigations of GSA contract pricing 18Proposal win rates 18Special business units 18Bid and proposal costs 19Project management and contract administration functions 19

Funding notices 19Identifying out-of-scope work 20Filing claims 20Earned value management systems 21

Dealing with the government 22Relationship with the government auditor 22Most frequent cost issues 23Most frequent CAS issues 23Resolution of audit issues 23

Workforce compensation 25Incentive compensation and fringe benefits 25Medical benefits 26401(k) benefits 26Wage increases 26Paid holidays 26

Business strategies 27Exit strategy 27Mergers and acquisitions in the past year 28Due diligence 29Contract novations 29

Executive compensation 30Compensation for senior executives 30DCAA challenges to executive compensation 31Effective method to respond to DCAA challenges 32

Intellectual property 33Ownership of intellectual property 33Data rights provided to the government 33License fees 33

Other current topics 34Billing subcontractor hours on time and material contracts 34Compliance and ethics programs 35

13th annual government contractor industry …...provides those interested in government contracting...

Documents