• Company Profile

82% of the “over 100” surveyed firms are privately owned, 9% are publicly traded and 9% are not-for-profit concerns.  Size of the survey participants were 19% had sales less than $10M, 12 between $10M-20M, 29% between $20M-50M, 15% between $50M-100M and 29% over $100M. More than 94% of respondents are service companies while 6% sell products. The services companies consisted of engineering (16%), information technology, science and technology (8%), general business services (11%), consulting (18%), research (17%) and other services (6%). The primary customer of the respondents is the federal government where 90% of the revenue comes from the federal government. 60% of their revenue came from the Defense Department, 30% from other federal agencies while 6% came from state and local government and 4% was commercial. 52% of respondents had increased revenue over the prior year, 24% had no significant change while 24% had reductions.  9.9% of total headcount represented indirect labor with the following breakdown of functions: finance and accounting (2.1%), human resources (.8%), IT support (1.0%), contract administration (.8%), legal (.4%), pricing (.4%), procurement (.5%), sales and marketing (1.5%), corporate officers (1.1%), office maintenance (.8%) and security (.5%). The 9.9 percent is a reduction from last year’s 13.8% which Grant Thorton ascribes to both an increase in revenue and higher use of consultants which is common during periods of high growth.

• Government Contracts

The breakdown of Revenue by Contract Type. 40% % revenue from federal contracts come from cost type contracts, 32% are fixed price and 28% are time and material. The percent of cost type contracts has substantially increased each year apparently putting to rest the impression that the government is moving more toward commercial practices where fixed price or T&M contracts predominate.

Fees. Average negotiated fees for cost type contracts averaged 6-7%, T&M contracts had an average of 9-10% while firm fixed contracts had 11-12%.  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 33%. Reasons stated for loosing competitions was a combination of price and technical – 54%, price only – 28% and technical – 8%. Special business units such as joint ventures or limited liability corporations were established by 20% of surveyed respondents where they report a 58% win rate.

Bid and Proposal costs.  72% of respondents reported spending less than $1 million while 13% spent between $1-2 Million.

Claims and Identifying Out-of-Scope Work. Identifying out of scope work, whether it comes from an easy to recognize direct change or a sometime difficult to recognize constructive change, provides an important opportunity to receive additional entitled revenue. 34% of the respondents said their procedures for recognizing out of scope work are vey effective, 40% said somewhat effective and 26% said not effective.

• Cost Structure

Profit.  Contrary to often public perceptions, government contracting does not generate abnormally high profits. 42% of survey companies had no profit or profit rates between 1-5% while 76% had either no profit or rates between 1-10%. Only 12% had profit rates over 15%. These figures would be diminished after deducting interest and taxes.

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 - 81% (on-site means performed at company sites) compared to 70% last year (b) on site direct labor and fringes – 49%, same as last year (c) off-site direct labor – 46% (off-site is lower because facility related costs are normally borne by the customer at their facilities) compared to 38% last year and (d) off-site direct labor and fringes – 13% compared to 22% last year. When companies used multiple overhead rates logic used for them were location (51%), market (15%), labor function (14%), customer (14%) and products versus services (6%).

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. (Editor’s Note. In our experience, the elements of costs included in G&A pools vary more than the survey implies.  G&A costs may include non-overhead indirect costs incurred at a business segment level which usually includes an allocation of headquarters costs while we also find all the categories of overhead costs identified above as part of the G&A pool when a company decides such categorizations meet their needs.) 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 input was 12% while those using a value added cost input was 16%.

Material handling and subcontract administration costs. 35% of surveyed companies used a material handling or subcontract administration rate as a burden chargeable on material and subcontract costs. 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 3.5%, subcontract administration rate was 4.5% and combined was 4%.

Special allocations. The FAR and CAS provide authority to negotiate special allocations of indirect costs when an inequitable allocation would result from its normal practices such as when there is an unusual dollar amount of material, subcontracts or equipment that does not commonly occur on its other work.  It’s often a good idea to adopt a special allocation for a contract that has an unusual cost mix rather than change the indirect rate structure to accommodate the contract. Only 7% used a special allocation.

Service centers.  Certain functions that support the company are accumulated in separate pools and then charged to users (e.g. clients, indirect cost pools) on a pre-established allocation method. The most frequently used service centers are facilities (used by 56% of the respondents), information technology (44%) and human resources (32%).

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 2.3 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.

Uncompensated overtime. (Editor’s Note.  We have analyzed this issue in numerous prior issues of the DIGEST and we suggest using our word search tool at our website to find them. Uncompensated overtime refers to hours worked exceeding the normal 40 hour work week by those salaried employees exempt from the Fair Labor Standards Act.) 64% of respondents said their employees work uncompensated overtime while 36% said no.  64% of the companies use total time reporting while the other 36% report only 40 hours per week. 64% use a rate (or hours) “compression method” of accounting (e.g. computing an effective hourly rate dividing salary by hours worked) while 36% 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 and compensation paid to employees.

• 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. 59% of respondents described their relationship as good, 31% as excellent while 10% described it as fair or poor.  (Editor’s Note. That is certainly a surprise to us but understandable since we are often asked to help contractors only after they have a poor experience with auditors.  We would be shocked, however, if the same level of satisfaction applied to other agencies’ or local and state auditors.) When asked if their relationship with DCAA has changed, 81% said it had stayed the same, 10% reported the relationship had deteriorated while 9% said it had improved. The most frequent types of costs questioned by DCAA are executive compensation (27% citing this as an audit issue), consultant costs (9%), legal expenses (10%), bonuses and incentive compensation (8%) and employee morale (6%). Most frequently cited violations of cost accounting standards were CAS 405, Unallowable costs (6% cited this as a compliance issue), CAS 403, Home office expenses (5%) and CAS 410, G&A (3%). The number of companies citing CAS issues was significantly lower than last year indicating a possible turning away from CAS to other areas of audit interest. 91% of surveyed companies reported that DCAA did not question a significant amount of costs while 9% reported either a significant or very significant amount. Of those companies experiencing audit issues, 35% were very satisfied with the resolution of the issues, 55% were somewhat satisfied and 10% were not satisfied.

• Workforce Compensation and Fringe Benefits

The shortage of skilled workers has forced most companies to offer a comprehensive package of incentive compensation and fringe benefits as part of a minimum compensation package to attract needed personnel.

A list of different fringe benefits was provided to determine whether they were offered to all employees or only to senior executives. When available, defined contribution and defined benefit retirement plans were offered to all employees almost all of the time. 61% of companies with post retirement health or life insurance offered them to all employees while 39% offered them only to senior executives. 75% of companies with stock options offer them only to senior executives while 25% to all employees.  Cash bonuses are paid to all employees at 84% of the companies.  Deferred compensation is paid to only senior executives at 88% of the companies.

Medical benefits.  In response to questions asking what percent of health benefits are paid by the company the survey results were: 9% reported the company pays for less than half, 5% pays 51-60%. 22% pay 61-70%. 41% pay 81-90% and 11% pay 91-100%.

410(k) benefits.  On average the company will match an employee’s contribution up to 6% of their compensation and 91% of respondents reported they do not anticipate any changes in the near future.

Wages Increases. Surveyed companies state that the average increase was 3.5 -4.0 %, lower than last year’s 4.5%.

Paid time off. 68% of companies polled paid 10 holidays per year, 9% offered 9 and 9% offered 8. None offered more than 12. Though answers were not given this year, last year approximately 49% of responding companies combine vacation, holiday and sick leave into a single personal time leave package while 47% maintain separate leave benefits for each type of leave.

• Executive Compensation

(Editor’s Note. Care should be used if our readers consider substituting the following results for a bona fide compensation survey where hundreds of firms are surveyed.  However, the results shown below are interesting.)  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)

 Revenue  25% Med. 75%

 $1-10 M   160  178  268
 $11-20M   250  326  415
 $21-50M   290  375  447
 $51-100M 383  425  562
>$100M     518  610  829


Second Highest Position

 $1-10 M   105  161  172
 $11-20M  183  245  331
 $21-50M   210  275  359
 $51-100M 240  263  315
>$100M     360  429  447

Third Highest Position

 $1-10 M   100  148  170
 $11-20M   187  204  311
 $21-50M   200  215  315
 $51-100M 190  260  282
 >$100M    308  357  413

Fourth Highest Position

 $1-10 M    116 122  154
 $11-20M   135 176   233  
 $21-50M   141 190   296  
 $51-100M 215  243  295
 >$100M    289  327  379

• Intellectual Property

Possession of intellectual property can be an important factor in limiting competition for government contracts and revenue from license fees can help partially recoup investments in developing IP. 49% of surveyed companies own IP and of those owning it 92% report it was developed either entirely at private expense or a mix of private and government (IR&D costs are considered private funding even if some are allocated to government contracts). 63% of respondents provide intellectual property with limited or restricted rights, 30% allow the government purpose rights and only 7% allow the government unlimited or unrestricted rights. As for charging license fees, 33% charge them while 67% do not resulting in them not recovering the high costs of obtaining IP.

• Charging Subcontractor Hours on T&M contracts

We have frequently reported on new regulations that provide when subcontract labor can be charged at fixed rates provided in the prime contract and when blended or separate rates may be used. 78% of surveyed companies bill the cost of subcontract hours at the fixed rates in the contract while 22% bill on a cost reimbursable basis (i.e. as an ODC). As for subcontractor hours and costs for incidental activities not specified in the labor rates in the prime contract, 58% said they bill such costs on a cost reimbursement basis while 42% said they bill the hours at the fixed labor rate in the prime contract.