Regardless of what deal Congress figures out, federal spending is going to rise sharply next year. That will mean more acquisition contracts than ever. Some federal contractors might have technical debt in their ability to manage large volumes of contracts. For some free advice, Federal Drive with Tom Temin spoke with Warren Linscott, the Chief Product Officer at Deltek.
Tom Temin And you have written about this idea of, we hear technical debt on the part of the federal government all the time, but contractors kind of mirror that in some way. What is their management challenge in the current age of acquisition we’re in?
Warren Linscott Yeah, I think there’s a lot of different challenges that government contractors are facing, both small and large, and I categorize them in a couple different areas. So there’s the macroeconomic challenges I think we’re all familiar with in terms of increased cost of labor, general inflation, supply chain challenges, material challenges. So all those things are impacting the federal contracting community and there’s some specific challenges around ever-increasing cybersecurity challenges for these contractors. CMMC is due to come out later this year if the DoD can get it out. There’s other challenges for a regulatory environment like environmental sustainability and government’s regulatory challenges. So all these things impact the contractors ability to think about improving their technology debt situation and improving their processes overall as a business so they can efficiently not only manage all the cost pressure from those challenges, but then compete in a marketplace that’s getting even more competitive as there is less prime contract opportunities for folks.
Tom Temin Because some of the pressures you mentioned, the environmental and this and that have been laid on in recent years by the Biden administration, there’s this huge compliance burden that was always there. I mean, for federal contractors now it’s even expanded and that can get them into false claims situations or whatever. How do you then translate what you need to do on compliance with what you need to do to manage your company? Because compliance has always been kind of a siloed function in some ways.
Warren Linscott Yeah, I think it’s less siloed now than it ever has been as it starts to permeate through every part of what we would call the project lifecycle for a federal contractor. You know, there’s compliancy that they have to think about for their personnel, for how they run their business, for their cybersecurity, which touches everything as they’re handling sensitive data throughout the bid process, all the way to project execution in close. And so they really have to have a comprehensive view of that. And this all starts with a view of people, process and tools, around that project lifecycle and how do they build in compliancy with these new regulations or have systems that are flexible or agile that can address them as they come up? Because if there’s one thing that’s for certain is there’ll be more regulations and more regimes that they have to comply with.
Tom Temin Yes, because there’s a couple of ways to look at how you manage from a contractor standpoint. One is as a company and there’s ERP systems and management software that companies have to run themselves by. But in many ways, you really have to manage by project. If you’re a federal contractor, costs go with a particular project when you bill the government and they look carefully at that stuff sometimes. What’s the best way to cut the way you look at your company as a whole with accounting, compliance, etc., all mixed in? Or is there some way to kind of project that over project by project, if that makes sense?
Warren Linscott Yeah, it does. We look at the world through the lens of a project lifecycle, right? And I think that each one of those areas from finding and winning new business to managing the contracts, once they come in to developing the talent within your business, most of these businesses are people-based businesses driving that financial performance, both at the project level and the corporate level. There are KPIs associated with each one of those, and there’s kind of a best practice in terms of generating those KPIs, and there’s a best practice in terms of where you should fall. So for example, if your day sales outstanding is greater than 45 days, you’re above the mean for the industry at large and you’ve got a problem with how you generate invoices that could come back to how you collect time. And so having a good way to look at these KPIs across the project lifecycle and to manage them effectively have owners that are responsible for delivering them and then to look at what they mean relative to your performance can give you insight into where you might be inefficient from a process perspective and help you drill in. So the first step really is understanding can we generate these KPIs? And from there you can start to look at, you know, where am I inefficient as a business? And by doing this right, most of the reporting and regulatory requirements are based on the granularity at which you maintain data within these systems. So if you can generate these KPIs and you can understand how to get more efficient, that’s one step in a direction of compliancy.
Tom Temin We’re speaking with Warren Linscott. He is the chief product officer at Deltek. And with these KPIs and all of these metrics. Is it then easier for a contractor to know which projects are profitable and which are not because not everyone makes money on every federal contracting deal?
Warren Linscott Absolutely. Like if you look at just. A managed section of the project lifecycle, which is all about managing your projects. You have to understand profitability, schedule risk, how you’re delivering on time and on budget. You have to predict things like estimates at complete estimates to complete in your resource utilization. And so without a system that can track things at that project level in a more granular and fine way, you don’t know where your profitability is. You know which one of your project managers is the most profitable or which agency that you’re working for is delivering the best projects for you to get that profitability. And so managing those KPIs and really driving that into the fabric of your business can help inform your go to market so that you’re going after contracts that are best fit to get the best profit for your organization.
Tom Temin And how do you tie in accounting to all of this? Because there are those types of contracts where you might be audited or you will be audited even if it takes them ten years to get around to the audit. But that doesn’t absolve you from making sure that your cost accounting fits the standards that the government demands if it’s a contract that is liable for cost accounting. And can you get the accounting metrics and KPIs into your system in such a way that you can later on have a better confidence in showing that you did what you’re supposed to from an accounting standpoint?
Warren Linscott Yeah, absolutely. There are solutions, right? I happen to know one or two myself that are designed with project accounting in mind, and that project accounting ledger really feeds into the general ledger and in general corporate accounting. And so when we do it in that way, we’re maintaining all the labor costs onto the project at the right level, all the materials cost, all the expenses. We’re looking at both direct project costs so someone’s billing directly to the project versus indirect costs that are allowable to go back on the bill to the federal government. And so by maintaining that granularity at the project accounting level and having trust in the systems in the process and the validations that would occur, then you can more easily comply with the regulatory regimes when they come around to audit those projects to ensure that all those direct and indirect costs are correct, that the rate structures are what were agreed to if it’s a cost plus contract. So having that granularity at the project accounting level is absolutely critical to being able to more easily pass an audit. But I think the other more important thing, maybe, at times for government contractors is getting paid. So if you don’t have accuracy in terms of your bills, if your customers don’t trust what’s coming out in your bills and it can’t stand behind that in the audit, then that day’s sales outstanding can grow and you don’t get paid. And cash flow is really critical for these businesses, especially the smaller ones that have to weather these other costs and challenges we talked about with really limited resources.
Tom Temin And contractors have varying levels of maturity at all of this. I mean, if you’re one of the large aerospace contractors and even they run into trouble from time to time with cost accounting and they even get False Claims Act winnings against them from time to time. But they have a great level of maturity going back decades. But the government is trying to get all of these new contractors having trouble getting small businesses. In fact, the small business roster is shrinking by most measures, and one of the reasons might be compliance and cost accounting on the back end, let alone getting the contract on the front end in the first place. So what’s your best advice for a so-called innovative contractor that would like to take their expertise to the federal government? And how do you forewarn them that the government talks a good game, but when you actually do business with it, you’re kind of entangled?
Warren Linscott Absolutely. I think the first bit of advice I would give is never go it alone. I think that, you know, you need to be humble and what you don’t know and there’s a large community of CPAs out there, of companies, you know, like Delltek and others that have a community of folks that have been through this transition. And we see this all the time with small businesses that are coming off generic, off-the-shelf accounting packages that were built for general accounting. And they have to make a transformation to federal contract accounting. And it is a big shift and they need help. And so what we find is that the ones that use either some or partial managed accounting services are the ones that really make that transition successful, even if that’s for just a quarter and helping through a quarter close, they benefit from seeing how somebody that has the experience would do it. And so definitely don’t do it alone. There’s a lot of community support for getting new contractors in the door. There’s a lot of folks of all kinds of different, you know, diversity in terms of ownership. So there’s a group just about for everyone that’s trying to start a new business or get into the federal contracting world. And the other thing I would say is that, you know, these projects never happen alone, right? As you mentioned, you have large prime contractors. They have vast subcontracting networks. They’re always looking for new teaming partners. So they’re willing those networks are willing to help out new folks with new capabilities to learn the ropes and to make that transition.
Tom Temin And once you figure it out and having good government contracts is not a bad annuity, is it?
Warren Linscott Not at all. Right. I mean, as we talked about, this federal spending environment is quite positive, continues to grow. And so it’s a great place to be. And when we have downturns in the economy, if you look back to 2008, 2009 and then you look at that compared to what happened in the pandemic the federal contracting community suffered maybe low single digit declines versus double digit declines in other industries in the commercial sector. So it is a great place to be because of the stability, but also because the fairness in contracting. You’re not going to see the federal government award somebody a contract and then halfway through it, switch that award to another vendor because of a price difference or whatever.