Contractors see revenues, profits drop in tough market

Grant Thornton's annual contractor survey finds no growth in firm-fixed-price contracts and tighter profits and revenue growth.

Grant Thornton's annual contractor survey offers some findings that reinforce what many in the market think, such as the unpopularity of the Defense Contract Audit Agency, but also includes some surprises.

The accounting firm has been conducting the survey for 18 years and uses the survey to ask contractors about everything from accounting practices to profit margins to compensation.

Julian Rosenberg, government contractor advisory practice leader at Grant Thornton, offered his 10 takeaways from the survey during a presentation on the results on Thursday.

No increases in firm-fixed-price contracts.

This was a surprise because “I think most of us have heard that cost contracts are going down, and fixed-price is going up, but we’re not necessarily seeing that,” Rosenberg said. Twenty percent of companies reported revenue from firm-fixed-price contracts both last year and this year.

Cost-type contracts are down.

Last year, cost-type contracts accounted for 45 percent of revenue for companies, whereas this year, cost-type contract account for only 40 percent.

Time and materials contracts are up.

This is a real surprise to Rosenberg because “we have heard was that fixed-price would be going up, and everything else would be going down,” he said. According to the survey, time and materials accounted for 40 percent of revenue this year, as opposed to 35 percent last year.

What might be happening here is that some of the time and materials contracts may start off being time and materials, but then eventually be converted to fixed-price, Rosenberg said.

Revenues are decreasing.

According to the survey, 36 percent of companies reported an increase, 38 percent a decrease, and 26 percent reported no change; this is an overall decrease from last year's results, when 50 percent reported an increase, 29 percent reported a decrease, and 21 percent reported no change.

Profits are decreasing.

This is a significant change, according to the study. The majority this year are in the 1 percent to 5 percent range, when in prior years, it was higher, Rosenberg said. Last year, for example, the majority was in the 6 percent to 10 percent range, according the study.

Bid protests are up.

In fact, the amount of protests over the past year has more than doubled, Rosenberg said. In terms of general competition factors, win rates are steady at 30 percent, and the win rates for incumbents is at 50 percent, according to the study.

Indirect costs are going up.

As for what this means, rising indirect costs may point to an increase in idle employees, Rosenberg said.

“I know the government is talking to some of you, and asking you to bring your cost down, bring your overhead down, bring your labor down,” he said. So that’s the question —does this mean that there are more idle employees over the past year than in the past, he asked.

Forty-two percent reported an increasing trend in indirect costs, 17 percent reported a decreasing trend, and 41 percent reported no significant change.

Fringe benefits are increasing.

According to the survey, fringe benefits have increased by 7 percent. The study also reported health insurance costs are less than 9 percent of labor.

“I’m not sure if that means that health insurance is going down. I think everyone is expecting health insurance costs to go up; seems to me that they’ve been going up over the past fifteen years,” Rosenberg said.

DCAA’s fan base decreasing.

Fifty-three percent of the companies surveyed do not believe the DCAA’s findings are substantiated with appropriate references, according to the survey.

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