Signs of friction in contractor-government relations

Federal budget cuts are eating into private firms’ revenues, survey finds.

Contractor relationships with federal auditors and contracting officers deteriorated somewhat during the past year as government agencies scaled back programs in an effort to reduce the budget deficit, according to a recent survey.

A separate study released Thursday found that large companies were securing a high percentage of federal contracts set aside for small businesses. In the 17th Annual Government Contractor Industry Survey released Monday by Grant Thornton LLP, contractor relationships with auditors were rated either fair or poor by 19 percent of surveyed companies, up from 11 percent the previous year. Relationships with contracting officers were rated fair or poor by 10 percent of respondents, double the previous year’s total.

Only 22 percent of respondents said the government resolved contract disputes efficiently, a drop from previous surveys.

Revenue from government contracts during the past year grew for 50 percent of the companies, was flat for 21 percent and declined for 29 percent, the survey found. “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,” Grant Thornton analysts said.

“However, the 29 percent 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.”

The survey went out to an unspecified number of companies, in 24 states, that depend primarily on federal contracts; most of them are for-profit and two-thirds provide services to the Defense Department. Forty-six percent are small businesses.

The survey also found that profits improved slightly from the previous year. The biggest cost factor within these firms was executive compensation, and survey analysts said they disagreed with the methods the Defense Contract Audit Agency uses in determining whether to allow such costs.

“While government contracting has never been a model of efficiency, it is our view that the decline in efficiency and business relationships during the past few years can be traced directly to changes in DCAA policy adopted after [Government Accountability Office] reports were issued in July 2008 and September 2009,” they wrote.

“Unfortunately, the GAO criticized the DCAA for having a management and agency culture that focused on a production-oriented mission, emphasizing the need for timeliness in supporting the needs of contracting officers in the procurement process,” the survey said.

Regarding the average time for contractors to collect accounts receivable from the government, results showed the period was less than 30 days for 21 percent of survey participants, while 60 percent reported receivables were collected within 30 to 60 days. The remaining 19 percent reported waiting more than 60 days.

The average win rate on proposals submitted in a competitive environment was 30 percent.

On the topic of revenue by type of contract, the companies said, on average, 45 percent of revenue was from cost-reimbursable contracts and 35 percent was from time-and-materials contracts. The remaining 20 percent was from firm fixed-price contracts.

When asked how often they were required to perform out-of-scope work without a contract modification, 81 percent said frequently or occasionally. Only 16 percent said they refused such requests.

A separate contracting study by the Petaluma, Calif.-based American Small Business League found that of the top 100 companies receiving federal small business contracts, 72 were large companies that “significantly exceed” the Small Business Administration’s small business size standards; only 24 were “legitimate small business,” the league said.

The large companies -- among them Lockheed Martin Corp., Rolls-Royce, Boeing Co., General Dynamics and Blue Cross Blue Shield -- accounted for $16 billion of the $21 billion total for the top 100, the study found.