The Grant Thornton Annual Survey of the Aerospace and Defense Industry offers some interesting insight into the world of government contracting. Washington Technology asks “Are contractors at risk of a flame out?” but that is the wrong question.
What’s really happening, besides just an anticipated decline in national security spending that naturally affects the private sector dependent on government money, is that national security contractors are becoming less transparent. Thus the news isn’t only of interest to insiders, but to Congress and the public as well.
The 17th annual survey, conducted by the global audit, tax and advisory business, concludes, according to the company:
- “Revenue from government contracts grew for 50% of survey participants, while 21% experienced no significant change, and 29% experienced reductions in revenue. The fact that the highest percentage of companies experienced revenue growth continues a long-term trend reported in previous surveys indicating that government contractors are far less vulnerable than commercial companies to recessions or slow growth in the overall economy. However, the 29% of companies experiencing revenue reductions is the highest percentage reported in several surveys, indicating that government efforts to reduce deficits are adversely impacting government contractor revenue.
- Profit rates reported by survey participants followed a predictable pattern consistent with the profit guidelines in the government procurement regulations. About one-third (31%) of participants reported profit rates of between 1% to 5% as a percentage of revenue; 37% experienced profit rates of 6-10%; 18% saw profit rates between 11% and 15%; and , 8% reported profit rates above 15%. The remaining 6% of participants either broke even or experienced a loss. On an overall basis, profits appear to have improved slightly compared with the results in the 16th annual survey.”
Retired Vice Adm. Lewis Crenshaw Jr., head of the aerospace and defense business for Grant Thornton, tells Washington Technology, that many companies in the market are dangerously close to stalling out. He cites a five percent reduction in reported growth compared with last year, and of course, the fact that 29 percent of companies reported a decrease in revenue, a seven percent increase over the year before.
Crenshaw observes that despite rhetoric – and I might add government policy – to increase the use of firm-fixed-price contracts, they only constitute about 20 percent of contracts.
In the services sector – that is, the vast consulting business that supports intelligence and other secret endeavors – the vast majority of work is ordered by the government through what are called “task orders.” These are sub-elements of larger contracts; if you will, exchanges of letters between government entities and companies. They are not publicly announced, even for unclassified work. There is no database of task orders, despite transparency pledges and boasts. There are hundreds of thousands of them.
Crenshaw told Washington Technology that companies reported that the use of task order contracts rose by 50 percent. In addition “81 percent of the companies reported that they were asked to do out-of-scope work on contracts and 84 percent of those did the work. Surprisingly, only 25 percent filed for adjustments to their contracts.”
In English, this means that once a company was on the government dime, awarding it additional work, even work outside the scope of the original contract, increased.
The solution is simple: Task order awards and changes should be posted online in a searchable database. As a long time Internet user, I’ll make the observation that many used to be. But then when the task orders revealed news or controversial work, they ceased appearing online.
I’m working on an analysis (watch this space) of some of the task order work being done, just to show what I mean.