Top Challenges for Government Contractors [And How to Strategically Overcome Them]

Written by Hobie Frady, CPA on September 4, 2019

The government contracting industry is seeing growth, as many individual organizations have seen budget increases and the government is releasing more contract awards. This is creating more and more opportunities for government contractors. Today’s government contractors are optimistic as the industry continues to thrive. However, this optimism isn’t without caution.

While many companies are positioned for success today, unique challenges and opportunities are arising in this positive environment. Here are the top three challenges our advisors are seeing the government contracting industry take on today, as well as our recommendations for emerging successfully on the other side.

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Challenge #1 – Finding, securing and retaining skilled talent that can propel the organization’s progress

In today’s economy, and in a job market with low unemployment, talent can be hard to find, and candidates with specialized skills who understand the government contracting industry can be even harder to come by. Because the unemployment rate is so low, it’s likely that the skilled and knowledgeable team members you’re looking to add to your organization are already in a job, which makes it much harder to identify potential candidates that could benefit your business.

Government contractors should make connections with their own accountants, attorneys, insurance brokers and others—especially those who share an objective view of the industry as a whole. These allies are well acquainted with the trends and needs of government contractors and can offer valuable insight when it comes to meeting your organization’s talent and staffing needs. They may even be able to foster a connection with a potential candidate for your company that checks all of the boxes you’re looking for in a team member or executive.

Additionally, because these advisors have an understanding of government contracting beyond the scope of your individual business, they may even be able to offer insight that can help you determine if the talent requirements you’ve established are truly the right fit for your business as you strive to remain as competitive as possible within the industry. The way that government contractors offer pay and benefits to employees in order to be efficient, effective and competitive is changing, so it’s becoming more and more important to have at least one objective advisor who can offer strategic insight into your company in light of what’s going on in the industry as a whole.

Challenge #2 – Preparing and planning for a successful transaction

A trend that many government contractors are seeing within the industry is an increase in mergers and acquisitions, and there’s a good reason. Years ago, many Baby Boomers began government contracting businesses, and now, many of those business leaders are turning an eye to retirement, which is fueling a great deal of movement, especially among smaller government contractors. As companies are started, it’s only natural that as business founders and leaders retire, companies will reach new life cycle stages, and the government contracting industry in particular is seeing a concentration of companies that are in later life cycle stages and pursuing a transaction of some type.

It’s important, especially for smaller organizations, to keep a transaction strategy somewhere on your radar. Unfortunately, if you’re only considering a merger or exit for your company when it’s time to actually go through it, it may be too late to accomplish many of the things that can position your company for a successful transaction. I like to encourage companies, even if they are just getting started in the government contracting industry, to begin with the end in mind in order to effectively take all things into consideration that can tee them up for success. There are certain strategic decisions you can make that will ensure that your company is as attractive to a potential buyer as possible when that time comes.

Compliance activities, as one example, are of great importance when it comes to laying the groundwork for positive acquisition conversations for government contractors. Especially for smaller contractors, it’s also important to consider having prime contracts—not just subcontracts—because it positions your company to be able to offer more experience and long-term value to a potential buyer. Succession plans, business forecasts and exit strategies for five to ten years from now are of great importance today—not just in the future.

Challenge #3 – Understanding DCAA requirements and what they truly mean for your operations

The Defense Contract Audit Agency (DCAA) sets forth the regulations that direct the way that government contractors conduct their operations. Gaining a full and thorough understanding of what these regulations mean isn’t a new challenge, and it will continue to be a priority for government contractors throughout the future. Because there are ramifications of noncompliance, it’s important for businesses to be confident that they are in compliance with DCAA regulations, but some businesses may miss or misinterpret these regulations or how they apply to specific scenarios.

One of the most important, and often confusing, areas to understand with regard to DCAA regulations is allowable and unallowable costs. While many businesses understand the difference, it can be difficult for many to distinguish between the two in real-life situations within their companies. For example, if your company spends money to purchase registrations and/or an exhibit booth for a tradeshow, those costs are unallowable, yet we often see businesses overlook the fact that the cost of sending the people AND the labor associated with those individuals to work at the tradeshow is unallowable as well.

Businesses may also need clarification and guidance concerning DCAA requirements of accounting systems. Many government contractors believe that they need to spend thousands of dollars on a DCAA approved accounting system, yet for most startup contractors, systems like QuickBooks will do the job. An accounting software is not what needs to be DCAA approved. It’s the implementation of that system, how it’s set up and how it’s operating that needs to be DCAA approved.

Because compliance is so important, because no two organizations are alike and because we see that businesses often benefit from third-party insight, our team recommends that government contractors partner with an accountant or advisor who can effectively offer guidance about how these regulations impact your business.

Maximizing Opportunities in the Government Contracting Industry

The government contracting industry is a great industry to be working in, and especially now, the environment is ripe for opportunity. Though many contractors are facing the challenges outlined here, I believe that these challenges are truly opportunities that are symptomatic of growth in this area, and I believe that government contractors will be able to make the most of these opportunities and continue the growth that we have recently seen.

If you would like to learn more about how your specific company can respond to the challenges outlined above, or if you would like to connect with a Warren Averett advisor who can offer valuable and objective insight for your government contracting business, connect with our team today.

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