Contractors report revenue growth, modest profits from federal business
While most of the private sector languishes, the government contracting industry continues to enjoy increased revenue from its federal business, according to a recent survey by the Chicago-based consulting firm Grant Thornton. However, most of those same contractors also report merely modest profits.
According to Grant Thornton’s 14th Annual Government Contractor Survey, 55 percent of government contractors experienced revenue increases from federal business during the past year. Only 18 percent reported a decrease. A little over a third (37 percent) of surveyed companies reported either no profit or a pre-tax profit between 1 and 5 percent, while another 39 percent had profit rates between 6 and 10 percent.
Only 14 percent of the government contractors participating in the survey reported profit rates of 15 percent or more, according to Grant Thonton.
“These findings are consistent with last year’s survey, indicating that moderate profits are a steady trend in government contracting,” said Kerry Hall, Grant Thornton Government Contractor practice leader. “Contrary to public and media perceptions, government contracting is not a business that generates abnormally high earnings. One could argue that profits are unusually low, particularly when you consider the performance and financial risks inherent in government contracting.”
Among the highlights of the survey:
- Executive compensation remains the most frequent cost challenged by government auditors.
- Headcount of management and support staff as a percent of total staff increased to 16 percent this year from 9.9 percent last year.
- There was a slight decrease in the number of respondents who expect to see an increase in revenue from federal prime contracts (67 percent versus 72 percent last year).
- Survey participants reported a 30 percent win rate from proposals for non-sole-source business. The win rate jumps to almost two in three (65 percent) when the company establishes a special business unit, such as a joint venture or a limited liability corporation to bid the work.
New risk for contractors
The government issued new regulations, effective Dec. 12, 2008, adding more requirements and greater risk for government contractors, according to Grant Thornton.
The regulations stipulate new minimum requirements for government contractors’ internal control systems. Among the requirements are monitoring and auditing, as well as an internal reporting mechanism to detect criminal conduct.
“The government’s imposition of these new comprehensive formalized ethics and compliance programs adds significant new risk and expense for government contractors,” Hall asserted. “Because these requirements are mandatory in most situations, the risk and cost cannot be avoided for companies who consider the government to be a key customer. Ultimately, government contractors will bear the cost of these new or expanded requirements.”
For a summary of the survey, click here.