Kim Koster, vice president of GovCon Strategy at Unanet, co-author of the 2020 GAUGE Report and GovCon Expert, has published a new article on Thursday as a member of Executive Mosaic’s GovCon Expert program.
For her latest article, GovCon Expert Kim Koster has issued a guide to help the government contracting (GovCon) community glean further insight and expertise from the business practice of benchmarking and the best source for answers as the 2021 GAUGE Report is written.
“Are our overhead rates too high? Are our expenses in line with those of other companies? How do we stack up in terms of FTEs (full-time employees) by department? And big picture, what kinds of approaches and practices are best-in-class firms using that our firm could and perhaps should adopt?”
You can read Kim Koster’s latest GovCon Expert article below:
The Bottom Line on Benchmarking…Can You Spell G.A.U.G.E.?
By Kim Koster
Successful businesses may be built on grit, guile and gut instinct, but they’re sustained over the long run by the hard strategic insight that comes from relevant, reliable business data. And for government contracting firms, there are few better sources for that insight than benchmarking using the GAUGE Report.
For its ability to provide perspective on a firm’s relative financial health and competitive standing, and to identify areas to target for improvements that go directly to the bottom line, benchmarking has long been a best practice for government contractors. It enables them to assess where they stand versus their peers in terms of financial and project performance, expenditures, policies, strategies, and more.
Are our overhead rates too high? Are our expenses in line with those of other companies? How do we stack up in terms of FTEs (full-time employees) by department? And big picture, what kinds of approaches and practices are best-in-class firms using that our firm could and perhaps should adopt?
The best source for answers to these questions often are your peers in the GovCon space, which is why Unanet and CohnReznick each year undertake a government contractor-specific benchmarking study known as the GAUGE Report.
(Your firm is invited to participate in the 2021 GAUGE Report, for which we are currently gathering data. Click here to learn more about the quick participant survey).
We’ve heard from many of our GAUGE users such as this $60M, 200+ employee DOD contractor that explained: “The GAUGE Report has been invaluable to us in understanding our industry and what to expect from subcontractors. We use it to support price analysis, particularly with respect to subcontractor pricing.”
There are two types of benchmarking on which businesses tend to rely, internal and external.
While the former can reveal much about the profitability, productivity and efficiency of a firm across divisions, departments and portfolios, the existence of siloed processes and procedures, along with disparate systems, can make internal benchmarking a difficult and sometimes even counterproductive undertaking.
Let’s focus instead on how GovCon firms can go about harnessing the power of external benchmarking.
As valuable as benchmarking is proving to be for organizations, a focused, methodical approach tends to yield the most eye-opening and actionable insights. We’ll use a hypothetical external benchmarking example to illustrate what that approach might look like.
To set the stage, EXAMPLE GovCon has:
- 2020 annual recurring revenue of $9 million.
- 1 accounting/compliance/audit FTE.
- 2 project controls FTE.
- 2021 projected recurring revenue of $18 million, thanks to multiple new business wins.
An analysis of the above figures reveals a few important takeaways:
- The firm’s FTEs are aligned except for accounting for our current revenue band.
- The firm is staffed to win new business, but its mix of accounting vs. project controls is slightly off balance.
- Firm revenue is growing enough that it appears it could safely hire three more accountants.
- The Project Controls team is staffed to execute.
Benchmarking can indeed be a goldmine of insight, provided a firm focuses on the right things. Here are several areas on which GovCons should be reviewing their benchmarking sights:
Government Compliance – Keeping close tabs on regulatory changes and on broader economic conditions can be quite a balancing act. Here are audit tips to help your firm remain compliant and save unnecessary cost:
- Prepare a strategic plan for compliance.
- Prepare yourself with policies, procedures and tools.
- Understand the purpose of the audit.
- Get familiar with the Defense Contract Audit Agency (DCAA) audit program via the DCAA website.
- Choose a point of contact to be a liaison with your auditor.
- Understand the recordkeeping requirements in FAR 4.7.
- Insist DCAA hold entrance and exit conferences.
- Keep DCAA within the scope of the audit.
Accounting – As companies begin to staff to meet contractual obligations, they may find they need to make strategic investments in technology, business development, training, project management practices, and recruiting. That in turn could entail updating the firm’s revenue plan for the year ahead. In doing so:
- Examine your pipeline for new opportunities.
- Understand EBITDA trends.
- Benchmark expenditures as a percent of revenue with prior years.
- Assess spend on labor vs. subcontractor labor.
- Examine backlog (opportunities and awarded work).
Utilization – People are a professional service-based firm’s biggest investment — and its largest revenue generator. To maximize utilization, focus on managing resources throughout the entire project lifecycle, from initiating the proposal to closeout. Along the way, be sure to focus on key performance indices (KPIs). At a minimum, you should be able to answer the following questions:
- What utilization level do you need to be profitable?
- What utilization level should you target to avoid burnout?
- Can you clearly distinguish between billable and non-billable utilization?
- Are you projecting probability in people forecasting to more accurately understand both billable revenue and utilization?
Growth – With so much pressure on the bottom line, contractors will continue to divest, merge and restructure to stay competitive. Firms eying one of those pathways to growth should ask themselves:
- Organic growth vs. merger & acquisition?
- Are you managing the pipeline?
- Are you examining portfolios to see which have the best return?
- Have you considered teaming arrangements to enter new areas and share the risk?
Efficiencies – A firm’s growth and profitability often come down to how efficiently it manages rates. To maximize rate efficiency:
- Don’t forget to budget for indirect costs.
- Look at labor utilization to better understand the indirect component.
- Can you live with the rate ceilings on potential contract wins?
- Do you have a system that will handle cost pools and allocations?
- Understand your sales forecast and demand for resources.
For government contracting firms like our quoted $60M DOD contractor, benchmarking provides a compass, a critical source of certainty, for navigating today’s extremely volatile business environment. Firms that know how to use that compass stand a better chance of meeting their bottom-line strategic goals.
So one final recommendation: Make the most of the benchmarking resources available to you. Besides the GAUGE Report (access the 2020 edition here; click here to participate in the 2021 report), there’s valuable information for GovCons to glean from on GovCon360 from CohnReznick and Pulse of the Profession 2020 from the Project Management Institute. Happy benchmarking!
About GovCon Expert Kim Koster
Kim Koster is Vice President of GovCon Strategy for Unanet, a leader in ERP software purpose-built for government contractors. She supports GovCons in their effort to streamline project management, accounting and other businesses processes. She co-wrote the GAUGE Report with Christine Williamson, senior partner of the Government Contracting Practice at CohnReznick.
