What lies ahead for government contractors in 2014In 2013, many of our government contracting clients maintained successful track records, even in the face of critical factors such as sequestration, insourcing, and fee pressure. Most have entered the New Year well prepared to compete in the changing marketplace by reducing overhead rates, enhancing project management capabilities, and staying closer than ever to customers in an effort to truly understand their needs.

The road ahead is not entirely smooth, though. The Defense Contract Audit Agency is under continual pressure to enhance audits and cut down backlog, despite fewer resources. Additionally, while executive compensation caps continue to make the news, there have been no real changes to date.

As you plan for the year ahead, here are some key metrics and trends to keep in mind. The data below is from Deltek’s fourth annual GovCon Industry Study, based on information collected in early 2013 from 366 firms of all sizes.

  • Days sales outstanding. The figure continued to average around 44 days.
  • Win rates. Most firms reported steady win rates, thanks in large part to being more selective about which contracts to pursue, and allocating limited resources to those contracts with the best chances of winning.
  • Federal spending. A top challenge continues to be ‘decreasing and/or unpredictable federal spending environment.’
  • Task order contracts. These contracts have become even more popular for the government. More than half of the firms surveyed manage task order contracts with a centralized group (to maximize revenue capture). However, many contractors continue to struggle to meet task order response dates with limited resources.
  • Risk management. This is still an area of concern. Most of our contractors continue to monitor their ‘at risk’ work on a monthly basis.
  • Prime/sub work. The breakdown of prime/sub work was similar to the prior year: 50/50 at small firms, 60/40 at mid-size organizations, and 70/30 at larger firms.
  • Fixed price contracts. There is a trend toward fixed price contracts as the government shifts the risk of delivery to the contractors – often at a lower cost to the administration.
  • Contract vehicles. Customers are using a variety of contract vehicles, and contractors may struggle to determine how to proceed with opportunities if they lack a total understanding of the particular contract vehicle being used.
  • Teaming arrangements. More companies are forming teaming arrangements versus building a bench for new opportunities.
  • Project management. This continues to be a challenge, especially with limited resources and inexperienced project managers. PMP certified managers decreased from 50 percent to 32 percent in 2013, most likely as a result of cuts to training budgets.
  • Profits. Firms reported greater profits in 2013. Cost cutting was a short-term solution to maintain the bottom line but keeping the customer happy in this environment will be a challenge for contractors that cannot offer value to their customers.

Looking forward, pay attention to these key government agencies that should see budget increases:

  • Veterans Administration – A large number of military personnel have returned from Afghanistan and Iraq and the Veterans Administration will require assistance to meet their needs.
  • Department of Health and Human Services – The population is aging and their resources are not growing.
  • Department of Homeland Security – The agency is fully committed to preventing another terror attack like 9/11.
  • Department of Energy – There is a greater focus on sustainable, cost-effective, and reliable delivery of energy.
  • Department of Defense – Cybersecurity and C4ISR (command, control, communications, computers, intelligence, surveillance, and reconnaissance) are key priorities.

Also, in recent news, Capitol Hill just released a $1.1 trillion spending bill that will restore $45 billion in automatic cuts otherwise required under sequestration. This is welcome news for federal government contractors.

David E. Shaffer can be reached at Email or 215.441.4600.