Effective Operational & Financial Performance: Budget Considerations During Year-End

ERIC POPPY: Hello. Welcome to Cherry Bekaert's GovCon podcast where we discuss current government contracting trends, compliance matters, and best practices to guide federal contractors forward.

ERIC POPPY: My name is Eric Poppy. I'm a managing director with Cherry Bekaert's government contract consulting team. With me today is Todd, a director in the government contracting practice. Todd has over 20 years of experience in operations working at government contractors, large and small.

TODD: Happy to be here, Eric. Do you want a quick background on me?

TODD: I've been in the government contracting space for over 20 years. I started in regulatory compliance and corporate accounting. I have experience with forward pricing rates, disclosure statements, incurred costs, and audits. I then moved into program line management and have been in operations for well over 15 years of my career.

TODD: I was at Northrop Grumman and Task for 17, and I was at a small company for about six years before I came to Cherry Bekaert two years ago.

ERIC POPPY: That's a lot of experience for this topic. We've hit on this topic several times with clients and prospects, so I'm glad you're joining for this podcast.

ERIC POPPY: Today we're talking about budgeting and forecasting for government contractors. We're close to the end of the year and many companies have either started their FY24 budgeting process or are in the midst of approvals. We want to discuss major items to consider during the budgeting process, especially those unique to GovCons.

ERIC POPPY: Todd, what should GovCons be considering as they move into the next calendar year?

TODD: It's definitely a now thing. The larger the contractor, the earlier the process starts. Smaller contractors may just be embarking on it now. Start with a look back at year-to-date performance to identify trends, what's gone well, and areas needing improvement. Use that information as you launch into next year's budgeting process.

TODD: Contract types and contract life cycles matter. Consider what's coming up relative to pipeline and recompete. Review historical performance month to month and quarter to quarter, assess current year-to-date variances, and then project the future in the forecast.

TODD: Take a top-line to bottom-line approach and review the operating plan, including indirect rates. Many clients only think about provisional rates for the next contract year, but the operating plan should be comprehensive.

ERIC POPPY: Do you want to start with revenue?

TODD: From a revenue perspective, look at the flavor of revenue generated so far relative to line of business, customer, and contract type. Analyze variances in the current year's performance and conduct root cause analysis to determine necessary course corrections. Consider contract-specific issues: are you burning cost on a T&M? Are you meeting deliverables and milestones on fixed-price work? Are you approaching a ceiling on cost-type contracts? Also consider where you are in the contract life cycle—option year, midterm, or closeout—when projecting revenue for the next year.

ERIC POPPY: That drives direct labor and staffing considerations for next year.

ERIC POPPY: Start looking at labor mix and current staff alignment. Consider retirements, succession planning, and recruiting sources. Salary competitiveness and escalation assumptions are critical because attracting and retaining talent is a major pain point for many clients.

TODD: Consider escalation rates and what you can absorb on a contract-by-contract basis. If one contract is capped, that can erode overall profitability and you may need to offset with other measures. Training and developing junior staff can help mitigate margin pressure.

TODD: Engage in a detailed analysis of staff qualifications and labor categories. Ask whether you are staffed correctly and whether you need to graduate personnel within labor categories. If your escalation is 3% but you want to give merit increases above that, consider internal grading or promotion strategies.

TODD: Fringe expenses are a key consideration relative to supporting staff. Evaluate whether your benefit structure is sufficient to attract and retain talent. Are your health benefits competitive? Are you leveraging company size to negotiate effectively? Review PTO policies, 401k plans, and employer match levels.

ERIC POPPY: Healthcare is often the wildcard. It tends to rise each year, and benefits are a lever for competitiveness when salaries are constrained by contract-defined labor categories or market benchmarks.

TODD: Benefits depend on the demographic you're trying to attract. Some candidates prefer PTO over retirement benefits or vice versa. Consider contract type and the talent profile you need when structuring benefits.

TODD: From an overhead perspective, assess whether you're managing project staff and project profitability effectively. Review infrastructure that supports labor—recruiting, security requirements, and operational support. Overhead expenses are often predictable because many are driven by the denominator, but you still need to manage them proactively.

TODD: Training and mentoring junior staff require budget for learning and development. Also consider customer satisfaction metrics and scoring mechanisms. Customers will often indicate where you need to invest—if they are concerned about talent or staffing consistency, allocate resources accordingly.

ERIC POPPY: From an indirect rate standpoint, GNA rates often get cut to hit profitability targets, but you should analyze C-suite effectiveness relative to corporate goals. Back-office functions—finance, accounting, legal, IT, and home office allocations—drive GNA.

TODD: Measure indirect rate performance consistently on a monthly basis, review quarterly, and analyze by contract or program. That helps manage rates at the program level. Also consider business development objectives and whether you should increase budget for B&P costs.

ERIC POPPY: Proposal development often requires a five-year trend of indirects in the cost narrative. Be realistic in forward pricing rates. If your historical G&A is 13% but you propose 10% in forward pricing, explain how you'll get from the run rate to the proposed rate.

TODD: If you're changing your indirect rate structure, document how that change impacts forecasts and historical comparisons. Be prepared to explain positive or negative effects in the cost narrative.

TODD: Everything we've discussed leads to the bottom line. If you're tracking, monitoring, course correcting, and optimizing cost and revenue, the bottom line should be the fallout of proper operations. Regular, deliberate reviews and engagement with cross-functional teams are essential.

TODD: Implement course corrections and track initiatives. Have a documented budgeting process that is reviewed and approved up the chain and that collects inputs from divisions, departments, and cost centers.

ERIC POPPY: Todd, what are some key drivers companies should consider when planning their budgets?

TODD: Start with base programs and current execution. Set stretched targets and determine whether you're pursuing on-contract growth or expanding footprint. Assess recompete status and the maturity of your pipeline. Pipeline maturity and robustness are primary considerations.

TODD: For new opportunities, evaluate probability of win, agency relationships, and whether you have a foot in the door. Consider large contract vehicles like GWACs and IDIQs and whether they will generate task orders. Conduct cost-benefit analysis of pursuing those vehicles, since some companies win an IDIQ and drive little or no work through it.

TODD: From a resource standpoint, evaluate infrastructure versus needs to support growth: IT, recruiting, security clearances, and GNA overhead. The maturity phase of opportunities matters—qualified opportunities require different resources than pre-RFP or RFP-phase opportunities.

TODD: Recruiting is often the long pole. If a contract requires cleared personnel or geographically constrained resources, plan for how you will staff quickly. Contracts may require full staffing within 30 days or key personnel within a week, which is challenging for new work.

ERIC POPPY: Before we close, what should companies aiming to grow focus on during this budgeting process?

TODD: Be deliberate and intentional, and make results measurable. Build an annual operating plan with a solid revenue projection, associated direct labor projection, profitability, and backlog forecasts. Include gross and funded backlog.

TODD: Incorporate provisional billing rate development into the operating plan. Project rates and spend across all elements so you have baseline plans to track and measure against all year. That enables variance analysis, root cause identification, and timely course corrections.

TODD: The process will also reveal immature processes and potential weaknesses to refine, providing insight into current and future financial state.

ERIC POPPY: Thank you, Todd, for joining today on Cherry Bekaert's GovCon podcast.

ERIC POPPY: Cherry Bekaert has professionals with years of operational and contractual experience to assist with budgeting and forecasting. Please reach out to Cherry Bekaert for support.

ERIC POPPY: Make sure to follow Cherry Bekaert wherever you get your podcasts and tune in for additional episodes on government contracting topics, including Cost Accounting Standards and business systems.

ERIC POPPY: Thank you.