In today's market, growth is slowing and profits are had by cutting costs. How long can that trend continue?
Retired Vice Adm. Lewis Crenshaw Jr. is a former Navy aviator so you have to forgive his aviation analogy, but in presenting accounting firm Grant Thornton’s annual contractor survey he made a convincing case that many companies in the market are dangerously close to stalling out.
On the surface, some of the numbers look good: 50 percent of the respondents said revenues were up. But that is down from last year’s survey that showed 55 percent reported growth.
Also troubling, is that 29 percent reported a decrease in revenue, compared to 22 percent last year.
Companies also reported profit margins in keeping with previous surveys, but the profits aren’t coming from revenue growth, Crenshaw said, but from controlling costs.
The aviation analogy for Crenshaw, now the national practice leader for Grant Thornton’s aerospace and defense market sector, is that you can only slow your airplane down for so long before it stalls and then you crash and burn.
“Next year’s numbers should be very interesting to look at,” he said.
Another warning sign is the assets to liability ratio, where 60 percent of companies reported a ratio of two or less.
“You’re not in good shape with that and it supports my stall analogy,” he said.
Grant Thornton’s annual survey asks companies about a variety of financial and business factors, including financial statistics, compensation, business strategies and contracting issues such as delays and terminations and issues dealing with government customers.
The accounting and consulting firm uses the survey to present a benchmark of the market and as a platform for discussing trends in the market.
Some of the highlights of its findings include the fact that firm-fixed-price contracts have not grown in use, according to the respondents and remains at about 20 percent of contracts.
“Despite the rhetoric it hasn’t changed year-to-year,” Crenshaw said.
Companies reported that the use of task order contracts rose by 50 percent and that less than 45 percent of revenue came from these contracts.
Another interesting finding was that 81 percent of the companies reported that they were asked to do out-of-scope work on contracts and 84 percent of those did the work. Surprisingly, only 25 percent filed for adjustments to their contracts.
“Out-of-scope work might become a bigger issue if more contracts go to firm-fixed price,” Crenshaw said.
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