With sequestration and continuing resolutions dominating government contracting for several years now, contractors have been plagued by spending uncertainty. When a budget was finally approved by Congress last year, the business community breathed a collective sigh of tentative relief.
Even though the budget is tighter and sequestration still looms overhead, contractors in the Mid-Atlantic region have continued to prosper due to an increase in the total dollars spent by the government over the past three years in Maryland, DC and Virginia. Between 2012 and 2014, government spending has increased 22 percent, from $87.6B to $107.5B, among recipient companies in the Washington metro region.
The news is not all positive, however. Although the overall federal spend has increased, dollars are still tight, with more companies pursuing smaller amounts. LPTA (lowest price technically acceptable) has wreaked havoc in the industry, but there are signs that the worst of it is behind us and we may see the trend begin to swing back.
So, what does the future hold for government contracting and how will companies adapt to the “New Govconomy”? How can contractors position themselves for the growth opportunities that will inevitably follow?
Government contractors have had to become leaner and more agile, adapting rapidly and adopting new tactics. They are becoming more efficient in delivery of services, including utilizing technology whenever possible. However, the uncertainty of the government market may force quick adjustments and contractors need to be aware of those possibilities. ”Strategize, optimize and realize” should be the new mantra for companies that want to stay ahead of the curve.
In the early stages of this major shift to a new economy, contractors have the opportunity to proactively address key parts of their business strategy, rather than just reacting to the changing market. There is a window of opportunity, albeit a small one, to get ahead of the curve by plotting a plan for innovation and competitive differentiation. Think ahead – not just to the next opportunity, but to your exit strategy. What are your goals, both short and long-term?
Take a good, hard look at where you are in the life-cycle of your business and what it will take to get to the next level. For instance, business owners thinking of selling their companies need to start the process years in advance, with a focus on building shareholder value and growth potential. A pre-acquisition preparedness review can offer insightful guidance on next steps.
Similarly, as you begin to strategize for an eventual exit, you should consider whether or not an employee stock ownership plan (ESOP) is appropriate for your goals. Many business owners who are exploring a near term liquidity event are looking to ESOP transactions if an M&A exit is not feasible, or does not generate the appropriate valuation. A leveraged ESOP provides management and employees with a stake in the business, while providing liquidity to owners, often in a tax favorable manner.
Not sure what your next step should be? Partner with advisors who specifically understand the evolution of a government contracting business.
With well-formed goals in place, you can begin to deploy optimization tactics that allow you to reach those goals. There is a multitude of ways that government contractors can optimize operational effectiveness in order to make the most of the New Govconomy.
Effective tax planning will be a key part of your corporate development strategy. Consider tax minimization reviews, and work with a qualified government contracting accountant to make sure that you are working to take advantage of federal, state, local and international tax credits and incentives.
Maximizing tax efficiency and taking advantage of tax credit opportunities is also a great way to ensure that you are operating at peak profitability. For example, many companies historically have overlooked federal and state research and development (R&D) tax credits due to misconceptions regarding the definition of R&D. There are many activities within their contracts that federal contractors should consider in claiming these credits and lowering their tax bill. Nexus studies are particularly useful for many contractors in the Mid-Atlantic region, where a business can unknowingly have tax obligations related to having a presence in multiple taxing jurisdictions. A tax expert with experience in government contracting can be a key ally in finding unexplored tax opportunities.
A mid-year assurance review can help you ensure that your financial records are in order and year end recommendations have been implemented. In addition, annual compliance monitoring is a helpful tool for avoiding costly mistakes that jeopardize your ability to do business with the federal government. An experienced advisor can help you address issues such as accounting and purchasing systems, incurred cost submissions, CAS disclosures, provisional billing rate submissions and more.
Don’t forget about technology. This is a great time to take a look at investing in your software system. A comprehensive and respected software package can help you stay in compliance while streamlining your operational processes. By making a smart investment now, you can implement a system that will grow as you grow, rather than having to reevaluate your options a few years down the line.
Now that the days of “hunkering down” for the long, cold spell are over, expect to see more deals on the horizon and more maneuvering as companies look to position themselves to realize their exit strategies. This may take the shape of acquisitions, divestitures and new strategic alliances, particularly with commercial technology companies. IT expertise and a mission focus will be powerful combination that can drive growth and value.
Whether your goals are increased market share or a profitable exit, the work you did in the strategy and optimization stages will help you realize those goals. Assistance in the areas of entity structure and shareholder tax planning, as well as gain-on-sale modeling and analysis are key areas of focus for companies who want to best position themselves for their exit strategy.
A back-to-business-fundamentals strategy is more important than ever, but it’s critical that contractors adapt this approach based on what they are seeing in the New Govconomy. Companies must become more prudent in the management of their costs and look to the best practices of commercial organizations, even outside of your industry, in order to be able to compete. As spending increases, regulatory oversight will be high, but so will opportunities, which makes this is a great time to consult with experienced government contracting experts who can help you strategize for success, optimize your business and realize your goals.
Contact Aronson’s Government Contract Services Group at 301.231.6200 for more details on new service packages designed to help clients make the most of opportunities in this New Govconomy.