Inflation Challenges Margins at Government Contractors
CFOs of government contractors face different challenges than their peers at companies with a private sector customer base, but share many issues with those colleagues, according to Amy Wood, chief financial officer at Intelligent Waves.
“The benefit to dealing with the government customer base is — it’s the government. They’re stable and I don’t have to worry about them paying in a timely fashion. My cash flow looks good most of the time.
“On the other hand — it’s the government. We don’t worry about getting paid, but we must worry about our margins being a little less than a commercial entity might see. So, there are trade-offs like anything else,” Wood said.
Wood has been with the company for a year but has previous experience working with government contractors and other types of companies.
The Vicissitudes of the Federal Budgeting Process
Intelligent Waves was founded in 2006. The firm provides services and products to federal defense and intelligence agencies.
While geopolitical tensions are bad for many businesses, Intelligent Waves benefits from increased demand for its services and products.
“I think it’s important enough work that they’re going to find a way to get us the budget,” Wood said.
Automating Payments
Like many tech companies, most of its expenses are for personnel. However, the firm relies to an extent on independent contractors. Prior to the pandemic, these ICs were paid by paper check. However, that process was automated during the crisis.
“COVID changed the workplace for a lot of things, and we were printing out paper checks up through COVID. With COVID everyone went home, and you had to find a way to get checks out without them having to be physically signed and doing that pass off. So, we have switched to ACH and EFT payments. We only use checks in absolute emergencies,” Wood said.
However, one of the idiosyncrasies of government contracting is compliance. “We have to do approvals and use our knowledge base of what’s acceptable from a regulatory perspective on a government contract and what’s not, and that really falls to the finance organization,” Wood said.
Wood’s office must ensure expenses are appropriate and allowable by regulatory agencies to be billed under the company’s federal contracts, or whether they need to be assigned somewhere else. This involves differentiating direct built vs. the back office and the things needed to get the job done for those regulatory agencies as a percentage of those costs that the company incurs for direct contract.
“So, there’s always a balance there, constantly looking at budget versus actual. How does it compare? What are the drivers? One day it might be that are fringe expenses are a little too high and what’s driving that? The next day it might be that our invoices are looking a little off and why is that so?” Wood said.
Impact of Wage Inflation
Wood foresees material impact of inflation on the business. “With federal government contracts we have five-year period of performance, and the escalation is prebuilt into those contracts. So, what we’re seeing is that the job market as it is today really asking for a lot more in salaries and benefits and we may not have the rate structures to support that,” Wood said.
According to Wood, there are remedies available for unanticipated labor cost inflation in certain circumstances. “Some of our contracts have labor categories that we bill our people out in and sometimes we can put them into a different labor category so that it supports the salary, but a lot of times we’re kind of locked into the escalation that was agreed to up front,” Wood said.
Recruiting Response
The company has responded by offering enhanced benefits and implementing a very successful referral program.
“We’ve set up a program where we have offered our employees some substantial referral bonuses. Recently, I would say 50% of our new hires are referrals from people within the company,” Wood said.
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