In early 2013, during his second term in office, then-President Barack Obama signed the annual Defense Authorization Act, setting in motion a process to change the federal government’s small business contracting programs. That same year, the Defense Contract Audit Agency made small business a focal point by implementing a small business outreach program.
And yet, even with programs like these designed to support small businesses in the government contracting world, the United States has lost 30 percent of its defense industrial base in the last 10 years, according to Isabell Guzman, administrator for the U.S. Small Business Administration. Fewer small businesses, or SMBs, are doing business with the federal government.
In spite of this, fiscal year 2022 was a good one for SMBs in terms of contract dollar volume. According to Washington, D.C.-based market intelligence firm Higher Gov, they received a record $158.7 billion in federal contracts. On the flip side, however, the number of small businesses receiving federal government contracts in 2022 is less than half what it was in 2010.
Having realized the negative impact a shrinking government contracting SMB base could have on national security and competition, federal agencies like the SBA are moving to reverse trends in the hopes of bringing more SMBs back into the mix. The SBA finalized a rule to allow SMBs that have previously done business with the federal government to use that experience to demonstrate past performance, helping them win new government contracts. In January 2023, the U.S. Department of Defense unveiled a strategy to get more SMBs involved in its contracting and research work by reducing barriers to entry, increasing set-aside competitions and leveraging programs to grow the industrial base.
Initiatives like these signal a coming wave of new government contracting opportunities for SMBs in 2023 and beyond. How, then, can small and midsized government contracting businesses put themselves in a strong position to capitalize on the new opportunities?
One important executive decision is to expand the SMB business planning time horizon beyond the near-term and instead plan for the next three to five years. This broader planning timeframe recognizes the longer contracting cycles associated with large government-wide acquisition contracts. But widening the planning window also presents unique challenges, especially to SMBs.
Hot-off-the-press findings from Unanet and CohnReznick’s soon-to-be-published 2023 GAUGE benchmarking report for government contracting firms highlights these challenges. For example, findings for GovCon firms with up to $25 million in annual revenue indicate they are experiencing significantly higher margins than companies with greater than $25 million in annual revenue. As surprising as that finding may seem, it begins to make sense with a deeper dive into the numbers, which shed light on why SMB contractors tend to struggle to put together reliable three-to-five-year business plans. The data suggests that the type and number of contracts a smaller business can execute often boxes them in. An awarded indefinite-delivery/indefinite-quantity contract a SMB just won could comprise a large percentage of its business. What happens if they fail to win the next competition for a contract that size? If all their eggs are in one basket, they take on a major risk in that scenario. All of which helps to explain why SMBs in general are good at sprinting — shorter-term planning — but less adept at looking further into the future.
What new opportunities could an SMB capitalize on if it was better than its SMB peers at longer-term business planning? To answer that question, let’s first revisit fresh data from the forthcoming GAUGE Report. The report provides context and helps us better understand how and why SMB GovCons sometimes struggle with longer-term planning compared to major contractors:
About twice as many SMB GovCons indicated their growth rate is shrinking. The old “grow or die” adage appears to apply.
Pipeline forecasting is less of a priority for SMBs; twice as many SMBs said it is not important.
Indirect rate forecasting is less of a priority for SMBs; twice as many SMBs said it’s not important.
Inaccurate backlog forecasting is an issue, with 19 percent of SMBs indicating their backlog forecasts were inaccurate compared to 5 percent of the majors.
Almost one-third (30 percent) of SMBs said their pipeline forecasts were inaccurate.
Close to two-thirds (60 percent) of SMBs indicated they either lacked forecasting policies and procedures or were just in the process of creating them.
A staggering 60 percent of SMBs that reported having forecasting policies said those policies were not being followed.
No wonder SMBs are struggling to plan beyond the near term. They don’t have to resign themselves to that fate, however. SMB GovCon firms can turn themselves into better longer-term business planners, and by doing so, position themselves to take advantage of all the opportunities Uncle Sam is aiming to create for them.
Here are some steps they can take to overcome SMB planning challenges:
- Allocate some of the cashflow from the higher margins they’re earning toward infrastructure and capabilities to mature the business. Critical forecasting and planning functions become more straightforward with modern systems and processes in place.
- Get a clearer picture of the pipeline. Pipeline is the heartbeat of a business, so it’s important for SMBs to be good at forecasting business wins in the near- and long-term horizons. Forecasting is a huge challenge for businesses that rely on siloed spreadsheets to manage pipelines. SMBs would be wise to consider finding a customer relationship management tool to assist in being target-smart and reinforcing a disciplined capture process to fill the pipeline with projects that are within the overall win strategy. Be sure your company has a plan in place for a significant contract that is due to be recompeted.
- Optimize indirect rates. Indirect rate forecasting can be the difference between winning and losing new contracts. Sales forecasts (derived in out years by pipeline forecasts) are key to optimizing indirect rates and need to be as solid as forecasting overhead expenditures. As business changes, so should the indirect rate strategy.
- Focus on ROI. As difficult as forecasting can be, firms that do return on investment forecasting well tend to reap huge rewards. Their business is more predictable and course corrections can be made in a timely manner.
- Invest to improve processes and procedures. It often pays to hire an expert third party firm to help develop policies that explain and reinforce the planning and forecasting procedures and processes that people across the firm must use. Once these policies are in place, complement them by investing in role-based training for tools and procedures so teams know how to utilize the resources at hand.
Besides providing insight into how SMB government contracting firms can become better planners and forecasters to win more federal contracts, the forthcoming 2023 GAUGE Report from Unanet and CohnReznick is full of findings that help GovCon firms measure themselves relative to the competition and ultimately run their businesses more efficiently and profitably. Stay tuned for release of the full report this summer. In the meantime, you can dig deeper into GovCon forecasting with our complimentary white paper, “How to Produce an Accurate Forecast.”