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
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AGENDA Current Environment Demographics Financial Benchmarking FTE Benchmarking Contract Activity DCAA Trends Financial Ratios Key Take Aways 2
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
CURRENT ENVIRONMENT Current Trends Shaping Federal Contracts in 2017 1. Continued contract consolidation through category management Category management concepts introduced in 2015, procedural foundation set in 2016. 2017 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
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
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 2017. Source: Bloomberg Government 6
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
Survey Respondent Demographics
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
ENTITY STRUCTURE 10
OWNERSHIP ESOP 33% 34% 100% 26%-49% less 25% 33% 14% PE 14% 100% 26%-49% less 25% 72% 11
CONTRACT TYPES 45% 40% 40% 39% 35% 30% 25% 20% 21% 15% 10% 5% 0% Cost Plus Time and Material Fixed Price 12
AGENCIES 13
ACCOUNTING SYSTEMS 14
Financial Benchmarking
DIRECT COSTS Costs as a % of Revenue Direct Labor Subcontract Labor Other Direct Costs Gross Margin 16
DIRECT COSTS AS A % OF REVENUE 17
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
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
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
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
INDIRECT COSTS Costs as a % of Revenue Fringe Costs Indirect Labor Net Profit Health Insurance Expense Rent Expense Business Development Expense EBITDA 22
INDIRECT COSTS AS A % OF REVENUE 23
INDIRECT COSTS AS A % OF REVENUE 24
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
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
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
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
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
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
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
EBITDA AS A % OF REVENUE 32
INDIRECT RATES By Revenue Segment Fringe Overhead Government Site Overhead Contractor Site Material/Subcontractor Handling General & Administrative Wrap rate without fee 33
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
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
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
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
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
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% 1.51-1.75 1.76-2.0 2.01-2.25 2.26 + $100 - $250M $51 - $100M $25M - $50M Up to $25M 39
FTE Benchmarking
FTE ANALYSIS By Revenue Segment Revenue per FTE FTEs Per Function 41
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
FTES PER FUNCTION 25.0 20.0 9.0 8.3 5.0 15.0 9.3 13.0 4.0 6.7 $100 - $250M 10.0 8.0 9.0 1.7 $51 - $100M $25M - $50M 5.0 4.6 4.0 6.0 4.0 9.3 3.8 7.4 Up to $25M - 2.0 2.7 1.0 1.2 1.1 0.6 2.3 1.4 1.5 Accounting HR Recruiting IT Contracts BD Project Control 2.3 1.2 43
Contract Activity
CONTRACT ACTIVITY 45
CONTRACT ACTIVITY 46
CONTRACT ACTIVITY 30 25 28 Up to $25M 20 15 10 5-13 7 4 1 0 Active Bid Won Loss Delayed Protested Up to $25M 47
CONTRACT ACTIVITY 40 35 36 38 $25M - $50M 30 25 20 15 10 5-12 3 1 0 Active Bid Won Loss Delayed Protested $25M - $50M 48
CONTRACT ACTIVITY 90 80 70 60 50 76 79 $51 - $100M 40 30 20 32 29 18 $51 - $100M 10 0 Active Bid Won Loss Delayed Protested 0 49
CONTRACT ACTIVITY 50
DCAA Trends
DCAA TRENDS By Revenue Segment Types of DCAA Audits Year Indirect Rates Audited Through 52
TYPES OF DCAA AUDITS IN 2016 40% 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
DCAA Trends 40% 35% Year Rates Audited Thru by DCAA 35% 30% 25% 20% 15% 19% 15% 19% 10% 5% 8% 4% 0% 2011 2012 2013 2014 2015 2016 54
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
CONTACT INFORMATION Christine Williamson CohnReznick 703-847-4412 Christine.Williamson@cohnreznick.com Lynne Gummo CohnReznick 703-286-1710 Lynne.Gummo@cohnreznick.com Donna Kilbourn Unanet 703-689-9752 Dkilbourn@unanet.com 56