Path to profits gets tougher

Contractors report lower margins and longer waits to get paid by government customers

The tough economy of the past two years is hitting hard the bottom lines of government contractors, who are reporting lower profit margins and longer wait times to get paid.

According to Deltek Inc.’s annual Clarity report, the average number of days sales outstanding, which is a measure of the number of days it takes to collect revenue after a sale has been made, has grown in the past year.

More companies reported that takes more than 60 days to get paid compared to 2009. Fewer companies reported that it takes less than 29 days to get paid.

“Everyone that we are talking to says it is taking longer to get paid,” said Rich Wilkinson, vice president of government contracting marketing.

The annual Clarity report is based on a survey and interviews that Deltek conducts of its contractor customers. More than 300 companies responded to the 2010 survey.

The increase in days sales outstanding has a direct impact on company profits, Wilkinson said.

The survey found that reported profit margins dropped from an average of 5.8 percent in 2009 for businesses with more than $100 million in revenue to 4.2 percent in 2010.

Small businesses, with less than $19 million in annual revenue were squeezed the most with margins dropping to 2.7 percent, compared to 8.9 percent a year ago. Midsized businesses (revenues between $20 million and $99 million) dropped to 4.7 percent in 2010, from 7.2 percent in 2009.

Wilkinson warned that the drop in profits might be worse now than when they were reported in the survey.

Another hot button issue the survey revealed is the continuing pressure on contractors from the Defense Contracts Audit Agency.

The most common audit issues involve indirect rates, labor and timekeeping, and unallowable costs.

DCAA appears to be in chaos, Wilkinson said. The agency says it is only doing risk-based audits and the total number of audits has dropped. At the same time, data requests are up and auditors are digging deeper into areas they didn’t peruse before, he said.

Audits that took 28 days in 2008, now take 72 days, he said.

“While we aren’t seeing more audits, we are seeing more adverse results,” he said.

About the Author

Nick Wakeman is the editor-in-chief of Washington Technology. Follow him on Twitter: @nick_wakeman.

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