Federal contractors reported higher profit margins last year despite shrinking contracting budgets, a survey shows.
Most of the profit growth was achieved by cutting overhead expenses and decentralizing or eliminating program management offices, Warren Linscott, vice president of Deltek's GovCon business line, said Tuesday at the release of the third annual Clarity survey.
Companies reported an average profit margin of 8 percent of their total revenue in 2011, double the 4 percent average profit margin in 2010.
More companies of all sizes reported double-digit profit margins in 2011, according to the survey of 429 respondents, some of whom represented the same firm.
Among respondents from large firms that earn more than $100 million in annual revenue, 10 percent reported net profits in the double digits in 2011, compared with less than 5 percent in 2010.
Twenty percent of midsized firms, defined as those that earn between $20 million and $100 million a year, earned profits in excess of 10 percent in 2011. Less than 10 percent of midsized contractors had double-digit profits in 2010. And about 45 percent of small businesses that earn less than $20 million saw double-digit profits in 2011, compared with about 20 percent in 2010.
The increase in profit is tied to contractors' early efforts to cut costs, not growth, Linscott said. The average growth rate of companies dropped from 14 percent in 2010 to 7 percent in 2011.
Companies reported reductions in expenses that show up in contract overhead rates. General and administrative expenses accounted for 13.4 percent of revenue in 2011, compared with 16.7 percent of total revenue in 2010.
But companies still realize they need people specifically trained in project management, not just administrators, to successfully meet the government's requirements and maintain federal business in the future, Linscott said. An increasing number of contractor program managers receive formal project management training, which in turn helps keep costs down, he said.