Financial Benchmarking and Market Trends for Government Contractors: How Does Your Company Compare?

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1 Financial Benchmarking and Market Trends for Government Contractors: How Does Your Company Compare? Presented by: Lynne Gummo, CPA Christine Williamson, CPA Partners, CohnReznick June 14, 2017

2 PLEASE READ This presentation has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. This presentation and its content are the property of CohnReznick LLP and are protected by applicable copyright laws. Any unauthorized use of the information herein will be considered a violation of CohnReznick LLP s intellectual property rights. Unless stated otherwise herein, no part of this presentation may be copied, distributed, or published, in whole or in part, without the prior written agreement of CohnReznick LLP. 1

3 AGENDA Current Environment Demographics Financial Benchmarking FTE Benchmarking Contract Activity DCAA Trends Financial Ratios Key Take Aways 2

4 CURRENT ENVIRONMENT Need to Grow Revenue & Profits Trump-onomics Federal Budget Passed Through September 2017 Increased Competition Increasing interest rates Middle Market No-Mans Land Growing internal & external pressures currently impacting the GC industry Pricing Pressure Government s Need for Greater Efficiencies Increasing combinations and M&A activity Impending Tax Reform 3

5 CURRENT ENVIRONMENT Current Trends Shaping Federal Contracts in Continued contract consolidation through category management Category management concepts introduced in 2015, procedural foundation set in will identify which contracts are preferred source for acquisition of goods and services Expected decrease in the number of MACs and more fierce competition at the order level. 2. Anticipation of relief of the stringent budgets from the last 8 years. Preliminary spending have increased for civilian agencies Anticipated spending for DOD and Intelligence agencies Source: Bloomberg Government 4

6 CURRENT ENVIRONMENT Current Trends in the Federal Market Place 3. Increased agency use of Simplified Acquisition Procedures Simplified Acquisition Procedures (SAP) spending has grown. Threshold amounts have changed and agencies relying on the SAP competition procedure to avoid protest delays. Source: Bloomberg Government 5

7 CURRENT ENVIRONMENT Current Trends in the Federal Market Place 4. Increase in compliance and accountability Contractors are required to submit various data points monthly due to transactional data reporting rule Agencies must standardize their spending reports to comply with DATA Act by May Source: Bloomberg Government 6

8 CURRENT ENVIRONMENT Current Trends in the Federal Market Place 5. Contractors will continue to divest, merge and restructure Contractors need to change to protect profits amid higher competition. Strategic sourcing, aggressive small-business utilization strategies and continued use of LPTA bid evaluation strategies. Companies will restructure internal operations to reduce costs. Many operating in a virtual environment. Large Prime Contractors will separate lowermargin from higher margin work. Many shifting focus to weapon systems. Combinations, spin-offs and M&A activity on the rise Increase focus on the use of Joint Ventures Source: Bloomberg Government 7

9 Survey Respondent Demographics

10 SERVICE TYPES - Engineering Services - Custom Computer Programs - Computer System Design - Other Computer Related Services - Administrative Management - Human Resources Consulting - R & D, Physical Engineering & Life Sciences - Other Professional Scientific and Technical 9

11 ENTITY STRUCTURE 10

12 OWNERSHIP ESOP 33% 34% 100% 26%-49% less 25% 33% 14% PE 14% 100% 26%-49% less 25% 72% 11

13 CONTRACT TYPES 45% 40% 40% 39% 35% 30% 25% 20% 21% 15% 10% 5% 0% Cost Plus Time and Material Fixed Price 12

14 AGENCIES 13

15 ACCOUNTING SYSTEMS 14

16 Financial Benchmarking

17 DIRECT COSTS Costs as a % of Revenue Direct Labor Subcontract Labor Other Direct Costs Gross Margin 16

18 DIRECT COSTS AS A % OF REVENUE 17

19 DIRECT LABOR AS A % OF REVENUE 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 38% 33% 25% 23% Up to $25M $25M - $50M $51 - $100M $100 - $250M 18

20 SUBCONTRACTOR AS % OF REVENUE 50% 45% 40% 35% 30% 28% 25% 20% 15% 10% 5% 18% 17% 18% 0% Up to $25M $25M - $50M $51 - $100M $100 - $250M 19

21 ODC AS A % OF REVENUE 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 3% 7% 9% 4% 0% Up to $25M $25M - $50M $51 - $100M $100 - $250M 20

22 GROSS MARGIN AS A % OF REVENUE 50% 45% 45% 40% 35% 30% 25% 31% 24% 29% 20% 15% 10% 5% 0% Up to $25M $25M - $50M $51 - $100M $100 - $250M 21

23 INDIRECT COSTS Costs as a % of Revenue Fringe Costs Indirect Labor Net Profit Health Insurance Expense Rent Expense Business Development Expense EBITDA 22

24 INDIRECT COSTS AS A % OF REVENUE 23

25 INDIRECT COSTS AS A % OF REVENUE 24

26 EBITDA AND NET PROFIT AS A % OF REVENUE 8% 7% 6% 5% 4% 6% 7% 5% 5% 4% 6% 6% 6% EBITDA 3% Net Profit 2% 1% 0% Up to $25M $25M - $50M $51 - $100M $100 - $250M 25

27 FRINGE COSTS AS A % OF REVENUE 20% 18% 16% 14% 17% 19% 16% 14% 12% 10% 8% 6% 4% 2% 0% Up to $25M $25M - $50M $51 - $100M $100 - $250M 26

28 INDIRECT LABOR AS A % OF REVENUE 20% 18% 16% 16% 14% 12% 10% 8% 6% 10% 9% 4% 3% 2% 0% Up to $25M $25M - $50M $51 - $100M $100 - $250M 27

29 NET PROFIT AS A % OF REVENUE 6.0% 5.9% 6.1% 5.8% 5.6% 5.4% 5.2% 5.2% 5.2% 5.0% 4.8% 4.6% Up to $25M $25M - $50M $51 - $100M $100 - $250M 28

30 HEALTH INSURANCE AS A % OF REVENUE 10% 9% 8% 7% 6% 5% 4% 3% 4% 3% 3% 3% 2% 1% 0% Up to $25M $25M - $50M $51 - $100M $100 - $250M 29

31 RENT AS A % OF REVENUE 10% 9% 8% 7% 6% 5% 4% 3% 2% 2% 2% 3% 2% 1% 0% Up to $25M $25M - $50M $51 - $100M $100 - $250M 30

32 BD EXPENSE AS A % OF REVENUE 10% 9% 8% 7% 6% 6% 5% 4% 3% 2% 1% 2% 1% 1% 0% Up to $25M $25M - $50M $51 - $100M $100 - $250M 31

33 EBITDA AS A % OF REVENUE 32

34 INDIRECT RATES By Revenue Segment Fringe Overhead Government Site Overhead Contractor Site Material/Subcontractor Handling General & Administrative Wrap rate without fee 33

35 FRINGE RATE 35% 18% 30% 26% 26% 30% 4% 25% 4% 4% 20% 15% 10% 9% 9% 4% 9% 13% $100 - $250M $51 - $100M $25M - $50M 5% 9% 13% 9% 13% Up to $25M 0% 30% or less 31% - 35% 36%-40% 41% + 34

36 OH GOVERNMENT RATE 60% 35% 14% 51% 50% 8% 40% 30% 7% 14% $100 - $250M $51 - $100M 20% 14% $25M - $50M 10% 14% 14% 29% Up to $25M 0% 15% or less 16% - 20% 25% + 35

37 OH CONTRACTOR RATE 70% 18% 24% 58% 60% 50% 40% 30% 20% 10% 0% 12% 12% 6% 6% 6% 28% 6% 18% 6% 20% or less 21% - 30% 31% + $100 - $250M $51 - $100M $25M - $50M Up to $25M 36

38 HANDLING RATE 70% 17% 67% 16% 60% 17% 50% 40% 30% 20% 10% 0% 25% 25% 8% 17% 8% 1% or less 2% - 5% 6% + $100 - $250M $51 - $100M $25M - $50M Up to $25M 37

39 G & A RATE 45% 40% 35% 17% 40% 22% 21% 5% 30% 25% 22% $100 - $250M 20% 4% 4% $51 - $100M 15% 10% 5% 0% 4% 4% 9% 4% 9% 13% 9% 13% 10% or less 11% - 15% 16%-20% 21% + $25M - $50M Up to $25M 38

40 WRAP RATE WITHOUT FEE (USING GOVERNMENT RATE) 40% 35% 35% 20% 30% 15% 30% 25% 10% 5% 20% 15% 10% 5% 0% 10% 10% 15% 5% 15% 15% 10% 5% $100 - $250M $51 - $100M $25M - $50M Up to $25M 39

41 FTE Benchmarking

42 FTE ANALYSIS By Revenue Segment Revenue per FTE FTEs Per Function 41

43 REVENUE PER FTE $300,000 $250,000 $200,000 $150,000 $196,866 $245,779 $221,745 $168,146 $100,000 $50,000 $- Up to $25M $25M - $50M $51 - $100M $100 - $250M 42

44 FTES PER FUNCTION $100 - $250M $51 - $100M $25M - $50M Up to $25M Accounting HR Recruiting IT Contracts BD Project Control

45 Contract Activity

46 CONTRACT ACTIVITY 45

47 CONTRACT ACTIVITY 46

48 CONTRACT ACTIVITY Up to $25M Active Bid Won Loss Delayed Protested Up to $25M 47

49 CONTRACT ACTIVITY $25M - $50M Active Bid Won Loss Delayed Protested $25M - $50M 48

50 CONTRACT ACTIVITY $51 - $100M $51 - $100M 10 0 Active Bid Won Loss Delayed Protested 0 49

51 CONTRACT ACTIVITY 50

52 DCAA Trends

53 DCAA TRENDS By Revenue Segment Types of DCAA Audits Year Indirect Rates Audited Through 52

54 TYPES OF DCAA AUDITS IN % 35% 34% 30% 25% 20% 15% 10% 5% 11% 6% 11% 11% 11% 3% 6% 6% 0% Incurred Cost Pre Award Purchasing system Accounting System Provisional rates Billing review Forward Pricing Voucher Floor checks 53

55 DCAA Trends 40% 35% Year Rates Audited Thru by DCAA 35% 30% 25% 20% 15% 19% 15% 19% 10% 5% 8% 4% 0%

56 KEY TAKE AWAYS Infrastructure (G&A) spending is up Be aware of the struggles of no-man s land Government shifting to purchases thru MAC s M&A is considered on the rise lots of shoppers Monitor your wrap rate Use of the vertical income statement analysis Be prepared for any type of possible contract audit Monitor your largest indirect expenses Share results with management Begin budget process early to see where you co lands in comparison Its healthy to benchmark! 55

57 CONTACT INFORMATION Christine Williamson CohnReznick Lynne Gummo CohnReznick Donna Kilbourn Unanet