In the second episode of Cherry Bekaert’s Operational Effectiveness podcast series, Eric Poppe, a Managing Director in Cherry Bekaert’s Government Contracting Industry practice, is joined by Todd Angioli, a Director in the Firm’s Government Contracting practice with 20+ years of financial operations experience.
Together, Eric and Todd discuss mid-year considerations when budgeting and forecasting.
Listen to this episode to find out more about:
- What government contractors should consider at the mid-year point when forecasting for the remainder of the calendar year
- High-level considerations when reforecasting the operating plan:
- Revenue
- Direct Labor
- Fringe
- Overhead
- General and Administrative Expenses (G&A)
- Bottom Line
- Key forecasting and planning areas:
- Recompete andNew Business
- Current Execution
- Improvement Initiatives
- Need Assessment for Mid-Year Burden Recalculation
- The Need to Move Investments
- Other Course Corrections
- What growing government contractors should be doing at the mid-year point
Cherry Bekaert’s team of government contracting consultants have significant operations and contracting experience to help you navigate any operational considerations. If you have any questions specific to your situation, our government contracting consultants are available to discuss your situation with you.
If you haven’t already, catch up on part one of the budgeting considerations series:
Effective Operational & Financial Performance: Budget Considerations During Year-End
View All Government Contracting Podcasts
HOST: Welcome to the Cherry Bekaert GovCon podcast, where we discuss current Government Contracting trends, compliance matters, and best practices to guide federal contractors forward. My name is Eric Poppy. I am a Managing Director in our Government Contract Services Group.
Joining me today is Todd Anjoli. Today, we are talking about operational effectiveness and midyear budget and forecast considerations.
ERIC POPPY: Todd, thank you for joining me on the podcast today.
TODD ANJOLI: I am glad to be here, Eric. Thanks.
ERIC POPPY: At the end of last year in Q4, we sat down for the first podcast in this series where we discussed Q4 considerations as you move into the new year and annual operating budget discussions. This is the second podcast in this series, focusing on midyear budget considerations.
We are practically halfway through the year now. What are some of those midyear considerations that companies should think about as they forecast the rest of the year and look at past performance?
TODD ANJOLI: All of these things are topics you should be thinking about throughout the year at a minimum. However, this is the point where instilling realism and making hard decisions—including significant course corrections if necessary—is vital.
There is not a lot of time left in the year. Instilling realism is important at this point for everything from top-line through to bottom-line projections.
ERIC POPPY: At the very beginning of the year, everyone is very proactive, trying to get new projects up and running to hit early forecast projections from a revenue standpoint. For Finance and Accounting teams, they then transition into the busy seasons of tax and audit through the winter and spring.
They deal with bank covenants and line renewals while working with auditors. Come April and May, the fog starts to clear. There is always a readjustment period where you look at actuals versus the original forecast and budget projections.
For contractors, I feel a lot of this coincides with looking at indirect rates, especially if you do Cost-Plus work. From your standpoint, are there certain items companies should examine regarding their original expectations?
TODD ANJOLI: Everything you mentioned is spot on. There is often a certain level of attachment to a revenue forecast. You projected something, you want to hit your numbers, and you stay attached to that goal.
For the first few months, even as things shift or get canceled, you are still trying to hit your number. You might start to move things into "go-get," "wedge," or unidentified new business categories.
At this point in time, if things haven't happened, they likely won't happen in a timely enough fashion to hit your year-end numbers. Now is the time to start adjusting those revenue projections if you need to.
ERIC POPPY: That is a good point. Back in Q3 or Q4 of last year, you likely evaluated new opportunities, recompetes, and options that might be extended. You reviewed win probabilities and forecasted accordingly.
However, things happen. You might have lost a few recompetes or won unexpected projects. If you are trying to make up a revenue gap, you are likely looking at short-term solutions like teaming or subcontracting arrangements because the sales cycle for some of this work can take years.
TODD ANJOLI: Recompetes are important, but current execution is also critical. Regarding Time and Materials (T&M) contracts, you must determine if revenue is lost or if it can still be recovered.
Look at all revenue projections, including current execution, to see if there is room to make up ground. If there is ceiling available and meaningful work left within the Statement of Work, see how much you can pull in. You might use subcontractors to help complete that work before the end of the Period of Performance (POP) or the calendar year.
All of this flows through to the direct labor impact and your indirect rate structures. If you lose base or fail to deliver the base you projected in current execution, you have to decide when to reduce spending and how to optimize costs.
ERIC POPPY: It all trickles down from the top line. Everything, from direct labor to materials, is built off that. This feeds into your rates.
If your labor is lower but your pools, benefits, and indirects remain the same, your rates will go up. You then have to worry about your Provisional Billing Rates and whether you are overrunning.
We tell clients they should monitor indirect rates on a monthly basis. If there is a material change, you should consider submitting new Provisional Billing Rates. This prevents surprises from a financial reporting perspective on the back end.
TODD ANJOLI: I agree 100%. I have seen many midyear burden recalculation activities in the industry. As you were sharing that, Eric, I was thinking about how the needs of a company change over six or eight months.
You may have invested early in the year in Business Development (BD) and Bid and Proposal (B&P) efforts. Now, you must shift those investments to where they will have the biggest impact before year-end.
If you have gaps in contracts and are having trouble staffing, you may want to invest in recruiting. If your IT backbone is not supporting your organizational growth, you should reinforce that. You move investments based on need and then evaluate cost optimization.
ERIC POPPY: The re-evaluation of costs and people is vital for professional services companies. Depending on labor categories and requirements, you have to ensure the customer is satisfied while looking at margins.
Are there levers like "greening" staff or finding others who meet qualifications to improve margins? Every dollar matters when you are readjusting midyear so there are no surprises at the end of the year.
TODD ANJOLI: Getting this forecast right gives you the launching point for your Annual Operating Plan process, which usually occurs in the August or September timeframe. This is about positioning yourself for that.
These improvement initiatives should happen all year, but this is when you instill realism and look at execution. This is when you implement profit improvement initiatives.
Look at your current staffing mix and whether you have effectively leveraged mentoring and coaching to bring up junior staff. You should also look at fixed-price and T&M contracts. Finally, consider cash flow and Day Sales Outstanding (DSO).
ERIC POPPY: That is a good segue because we are at the end of our time for this podcast. To all our listeners, please tune in to our previous Q4 podcast if you haven't heard it yet.
We will release another podcast in this series at the end of the summer to help kick off the annual operating budget season. I appreciate you joining this episode of the Cherry Bekaert GovCon podcast.
TODD ANJOLI: Excellent. Thank you, Eric.
