Deltek: Contractor profits continue to rise

March 14, 2014

While the federal contracting industry is by no means recovered, the future looks a good deal brighter than it did just a few months ago.

The two-year budget agreement has partially mitigated the impact of sequestration and greatly reduced the risk of a government shutdown. The agreement brought some stability and predictability to a market that has been starved of both for several years.

Each year, Deltek conducts a Clarity study assessing critical business metrics in the government contracting industry, such as growth rates and profit margins, plus operating metrics and trends, in areas such as business development, program management and financial operations.

The early results reflect the improved outlook resulting from the budget resolution. Yet, as one would expect, certain financial metrics — such as profits, mergers and acquisitions and win rates — reflect the difficult year that was 2013.

Profit

Government contractors’ initial profit results suggest many had the right strategies to weather the sequestration storm. Our preliminary results so far: 67 percent of companies reported profits of 10 percent or more in 2013 — double that of 2012.

Rates for both general and administrative and composite indirect expenses dropped from 2010 to 2012. This trimming of internal expenses has paid off as profits rose for the second consecutive year for contractors.

Win rates

The rates at which contractors won work appear to have changed little, based on our preliminary survey results, while economic conditions remain the top challenge for government contractors.

While sequestration has been lifted and a spending plan is in place, the overall budget is reduced — including a drawdown of war spending in Iraq and Afghanistan — while base funding has seen an increase.

Contractors list limited business development as the second most important challenge this year.

This challenge may reflect the trend toward task order-based contracts, which create more work for business development teams and little elbow room for additional resources in contractor budgets.

Mergers and acquisitions

The preliminary survey results show a potential shift in merger and acquisition activity as well.

In 2013, 23 percent of survey respondents indicated plans to buy or sell. This is a dramatic shift from expectations for 2014, where only 12 percent have definite plans to buy or sell.

This 11 percent drop is a surprise in light of the end of sequestration and more optimistic economic conditions expected for 2014.

More work to do

This year’s Clarity survey is still open. Contractors that take the survey get priority access to the comprehensive survey of findings, including what strategies appear to be working, areas of opportunity, how performance is trending over time and what to expect in the future.

Kevin Plexico is vice president for information solutions at Herndon-based Deltek, which analyzes the government contracting market and can be found at www.deltek.com. Warren Linscott is vice president for product strategy and management.

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