• Newsletters
• Digest

Grant Thorton Survey on Professional Firms

(Editor’s Note. For the last several years we have been happy to summarize the results of the Grant Thorton Annual Government Contractor Industry Survey. The survey benchmarks important financial and contracting data for firms that offer primarily professional services to the US Government market. Unfortunately, Grant Thorton has informed us that they will not be publishing the survey this year due to a shortage of respondents. Since many of our subscribers have been asking us where the survey is we decided there was sufficient interest to offer last year’s survey results with a little modification rather than simply omitting it. Since there are not significant changes from year to year, we believe the results shown here are similar to those that would be reflected in a 2013 survey.

Company Profile

53% of the surveyed companies are classified as large and 47% as small where 18% had sales less than $10M, 10% between $10M-20M, 17% between $20M-50M, 13% between $50M-100M and 42% over $100M. The vast majority of surveyed companies sell professional services – consulting, IT, research, engineering, general business services, science and technology, training and education, other services - while less than 5% sell products. 84% said their primary customer is the federal government. 47% of their revenue came from the Defense Department, 37% from other federal agencies, 7% came from state and local government and 9% was commercial. The survey shows government business trends are lower where 36% of respondents had increased revenue over the prior year (50% in 2011), 26% had no significant change while 38% had reductions (compared to 29% in 2011). Indications are that 2013 and 2014 will see even more reductions.

Indirect Headcount Breakdown

12.5% of total headcount is represented by management and support functions. There is an overall downward trend over the last several years which is attributed to more outsourcing of support services such as HR, legal, internal audit, contract compliance as well as some larger contracts allow for direct billing of normal indirect support costs. The breakdown of certain functions are finance and accounting (2.9%), contract and procurement administration (1.7%), sales and marketing (2.1%) and other indirect (5.8%). Though not reported this year, facilities costs as a percentage of revenue in 2011 last year was reported by 80% of respondents as less than 5%, 14% reported 6-10% and 6% said it was greater than 10%.

Government Contracts

Breakdown of Revenue by Contract Type. 40% of revenue from federal contracts came from cost type contracts compared to 45% in 2011, 20% are fixed price (equal to 2011) and 40% are time and material (compared to 35% in 2011) indicating a decrease in cost type and a corresponding increase in T&M.

Fees. Though fees were not tracked this year, the results for 2011, which is pretty consistent from year to year, were average negotiated fees for cost type contracts was 6-7%, T&M contracts had an average of 8-9% while firm fixed contracts had 9-10%. It should be noted that these negotiated profit rates are computed after deducting unallowable costs and before income taxes so actual profit rates are lower than negotiated rates.

Proposal Win Rates. Surveyed companies stated their win rate on non-sole source proposals was 30% and 50% when they were the incumbent. Win rates when either a special business unit or joint ventures were created was 50%, higher than 43% in 2011.

Bid and Proposal costs as a Percent of Revenue. 14% reported less than 1%, 41% 1-2% while 44% reported greater amounts.

Claims and Terminations. Identifying out of scope work, whether it comes from an easy to recognize direct change or sometimes difficult to recognize constructive changes, provides an important opportunity to receive additional entitled revenue. 30% of the respondents said their procedures for recognizing out of scope work are very effective, 52% said somewhat effective and 18% said not effective. 85% of respondents said the government requests out-of-scope work either occasionally or frequently without issuing contract mods. 23% of respondents who have performed out-of-scope work indicate they have filed either requests for price adjustments and/or claims indicating the majority of firms are performing out-of-scope work without compensation. The authors assert this high level partially explains the lower profit levels discussed below. As for terminations for convenience the survey found that 32% of all respondents had a contract terminated for convenience in recent times where 40% submitted a settlement proposal while 60% did not. As for partial terminations, where an increase in contract price is usually justified due to allocating fixed or semi-fixed costs over a smaller base, 32% of those experiencing a partial termination actually negotiated a price adjustment on continuing work (up from 17% the prior year) while 68% did not.

Contractor Business Systems. The survey notes recent changes to contractors either fully or modified CAS covered are now subject to audits of six business systems (cost accounting, EVMS, estimating, purchasing, material management and accounting and property management) where future surveys will focus on results of these audits. For now, the survey found that 33% of respondents had already undergone at least one of these audits and that 29% said they had made improvements to their business systems in order to comply with these new rules.

Financial and Cost Statistics

Profit. Contrary to common public perceptions, government contracting does not generate abnormally high profits where the survey defines it as profit before interest and taxes as a percent of revenue. Profit rates appear to be plunging compared with prior years where 56% of survey companies had profit rates between 15%, 31% between 6-10%, 5% between 11-15% and 4% above 15%. 4% of respondents reported no profit. These figures would be even lower after deducting interest and taxes. Compared to 2011, there has been a substantial decrease in profit where this year 60% of surveyed companies either did not make a profit, experienced a loss or posted a 1-5% profit rate compared to 37% last year.

Fringe Benefit Rates. Fringe benefit pools consist of payroll taxes, paid time off, health benefits and retirement benefits (some include bonuses while others do not). Fringe benefit rates as a percentage of total labor averaged 36.4% when bonuses were included and 34% when excluded which is an increase from last year.

Medical Expenses. Despite widespread concerns about health care costs increases, most contractors have apparently not made any changes to health coverage. In response to questions asking what percent of health benefits are paid by the company the survey results were: 5% reported the company pays for less than half, 12% pays 51-60%, 20% pay 61-70%. 36% pay 71-80%, 9% pay 81-90% and 18% pay 91-100%. With respect to health costs as a percentage of labor costs, 6% of respondents incurred health costs less than 4% of labor costs, 5% between 4.1-5%, 11% between 5.1-6%, 13% between 6.1-7%, 9 between 7.1-8%, 5% between 8.1-9%, 12% between 9.1-10% and 39% over 10% of labor costs.

Overhead Rates. These costs are considered to be in support of direct staff working directly on contracts and hence are normally allocated as a percentage of direct labor costs. Some companies include fringe benefits associated with direct labor in the direct labor base while others do not – the result when they do is to lower overhead rates. Average overhead rates are as follows: (a) on-site direct labor (on-site means performed at company sites) - 84% compared to 80% in 2011 (b) on site direct labor and fringes – 43% compared to 48% in 2011

(c) off-site direct labor – 38% as opposed to 48% in 2011 (off-site is lower because facility related costs are normally borne by the customer at their facilities) (d) off-site direct labor and fringes – 21% compared to 23% in 2011. When companies used multiple overhead rates logic used for them were location (52%), labor function (13%), customer (28%) and products versus services (7%).

G&A Rates. The survey states that general and administrative rates are typically those incurred at the headquarters and include executives, accounting and finance, legal, contract administration, human resources and sales and marketing as well as IR&D and bid and proposal costs. G&A costs are most often allocated to contracts on total cost input (direct operating costs, overhead, material, subcontracts) or a value added base that generally includes all the above costs except material and/or subcontracts. Average G&A rates under a total cost in 2 put base was 12% (13.5% in 2011) while those using a value added cost input was 15% (15.4% in 2011).

Material handling and subcontract administration costs. 24% of surveyed companies used a material handling and or subcontract administration rate as a burden chargeable on direct material and subcontract costs (higher than 2011’s 22% and 19% the previous year). The survey notes that in service industries a handling rate is established in conjunction with use of a value added G&A base to reduce burden applied to pass-through subcontract and material costs. Average material handling rate was 3.0 and subcontract handling rate of 3.4% (2.7 and 2.5% in 2011).

Labor multipliers. Multipliers, a term commonly found in the commercial world, are fully loaded labor multipliers used to price out work and are derived by dividing total burdened labor cost by base labor cost. The average labor multiplier was 2.2 for on-site work and 1.9 for off-site work. Almost all respondents expressed a belief their labor multipliers were competitive with their industry. It should be pointed out that the labor multipliers are overall averages where many companies commonly use different multipliers for different markets.

Uncompensated overtime. (Editor’s Note. Uncompensated overtime refers to hours worked exceeding the normal 40 hour work week by those salaried employees exempt from the Fair Labor Standards Act.) 60% of respondents said their employees work uncompensated overtime (UOT) while 40% said no. 80% of the companies working UOT use total time reporting while the other 20% report only 40 hours per week. 78% use a rate compression method of accounting (e.g. computing an effective hourly rate dividing salary by hours worked) while 22% use a “standard/variance method” that charges an hourly standard rate and then credits an indirect cost pool for the difference between labor costs charged to projects.

Charging Subcontractor hours on T&M contracts. We have frequently reported on new regulations that provide that subcontract labor can be charged at fixed rates provided in the prime contract as opposed to the older way of simply billing subcontractor costs plus applicable prime indirect rates. 80% of surveyed companies bill the cost of subcontract hours at the fixed rates in the contract or subcontract while 20% bill on a cost reimbursable basis (i.e. as an ODC). This change has led to a different audit focus from merely auditing hours charged to ensuring labor skills being billed meet contract requirements where 77% of respondents state their procedures for properly assigning employees to labor categories are effective while 23% state they are either somewhat effective or not at all.

Dealing with the Government

The Defense Contract Audit Agency, because of their Defense Department contracts or contracts with other agencies that use the audit agency, audits most of the contractors in the survey. Regarding the respondents’ opinions of DCAA audits, 47% say auditors’ opinions are substantiated with appropriate references and 53% are arbitrary and not substantiated while 40% of auditors are open-minded and receptive to contractor rebuttals and 60% say auditors are inflexible and are rarely receptive. Contracting officers receive higher ratings where 60% of their opinions are considered substantiated with references and 56% are considered open-minded and receptive. When asked if their relationship with DCAA has changed, 71% said it had stayed the same, 19% reported the relationship had worsened (compared to 2% in 2011) while 10% said it had improved. In an effort to measure the quality of relationships with ACOs and DCAA, the survey found 18% of respondents resolve issues efficiently where the remaining 82% say the government was inefficient where 56% say they believe DCAA is the primary cause for delays of resolving issues while 26% believe it is the ACO. The most frequent types of costs questioned by DCAA are executive compensation (23%), consultant costs (7%), incentive compensation (17%), labor charging (11%), indirect cost allocations (12%), legal expenses (9%) and employee morale (5%). Most frequently cited violations of cost accounting standards were CAS 401, consistency (2%, compared to 16% last year), CAS 403, home office expenses (3%) and CAS 405, Unallowable costs (9%, compared to 4% last year). Costs questioned as a percent of revenue were less than 1% of revenue (61%), 1% of revenue (11%), 2% of revenue (6%), 3% of revenue (3%), 4% of revenue (0%) and 5% or more of revenue (19% compared with 4% last year). Of those companies experiencing audit issues, 18% were very satisfied with the resolution of the issues, 61% were somewhat satisfied and 21% were not satisfied.

Executive Compensation

(Editor’s Note. Care should be used if our readers consider substituting the following results for a bona fide compensation survey where sometimes hundreds of firms are surveyed. How 3 ever, the results shown below are interesting. If you want to escalate the results below for 2013, applying a 3% escalation factor would be a conservative approach.) Surveyed companies provided information on the four highest paid executives in the company and the results are presented by company size measured by revenue for 25th, median and 75th percentiles. The following is a summary of the results.

Highest Position (in thousands)

Second Highest Position

Third Highest Position

Fourth Highest Position

Companies whose executive compensation was challenged by DCAA and provided rebuttals and/or additional information state 30% of their positions were sustained, 30% stated a reasonable compromise was achieved and 40% stated either DCAA’s position was sustained by the ACO or an unreasonable compromise was put forth.