Forecasting Beyond the Clouds: How GovCons Can Plan for a Bright Future by Tracking the Right Metrics

Small and medium businesses (SMBs), defined as those with under $25 million in annual revenue, are the economic backbone on which our nation depends. Every state in the union and members of every community have a vested interest in and depend on the success of small and medium businesses. To plan for success, businesses utilize forecasting. Forecasting employs past data to make educated predictions about future trends. Companies use this method to decide on budget allocation or prepare for expected costs in upcoming periods, usually influenced by the anticipated demand for their products and services.

How important is forecasting for SMBs to our nation’s overall economic health and security? Very. This is emphasized further when the focus is narrowed to GovCon SMBs. Their success- or failure- is shared and felt among our nation’s citizens. 

“Above all, the forecaster’s task is to map uncertainty, for in a world where our actions in the present influence the future, uncertainty is opportunity.” Paul Saffo 

Events over the last several years have allowed ample opportunity for business managers and executives to navigate uncertainty. Indeed, even the concept of certainty seems quaint among GovCons when the US has lost 30% of its defense industrial base (DIB) over the last 10 years, as shared by Isabella Guzman, administrator for the U.S. Small Business Administration (SBA). Forecasting for non-GovCons may include Sales Revenue, Cost of Goods Sold (COGS), Gross Margin, Operating Expenses, Interest and Tax Expenses, Capital Expenditures, Inventory Levels, Accounts Receivable and Payable, Cash Flow, Market Trends and Economic Conditions, Workforce Needs, New Projects and Investments, Break-even and Risk Analysis.

There are abundant challenges for GovCons to consider when forecasting in addition to the lengthy list above that are unique to them due to specific operational, regulatory, and financial environments:

Regulatory Compliance and Changes: GovCons must anticipate and plan for changes in government regulations, which can affect everything from contract bidding to execution. 

Budget Cycles and Funding Fluctuations: Government budgets are subject to political processes and fiscal cycles, leading to fluctuations in funding availability. They must have an understanding of the government’s budgeting process, the timing of appropriations and the (frustrating) potential for shutdowns.

Contract Types and Payment Schedules: GovCons deal with a variety of contract types (e.g., fixed-price, cost-reimbursement, time-and-materials) each with its own financial and performance risks. Forecasting must account for the specifics of these contracts, including payment schedules, performance milestones, and risk of adjustments.

Bid and Proposal Efforts: Forecasting in GovCons must include the costs and timelines associated with preparing bids and proposals, as well as the probability of winning contracts. 

Long-term Contracts and Lifecycle Management: Many government contracts are for long-term projects that can span several years. Forecasting needs to account for the lifecycle management of these contracts, including potential modifications, maintenance, and operational support.

Security Clearances and Classified Work: Projects requiring security clearances or involving classified information add layers of complexity to forecasting. This includes considerations for personnel clearances, secure facilities, and IT infrastructure.

Public-Private Partnerships and Joint Ventures: GovCons often engage in public-private partnerships or form joint ventures to pursue contracts. Forecasting must consider the dynamics and obligations of these partnerships, including shared risks and revenues.

Market and Political Environment: The demand for government contracting services can be influenced by political priorities, geopolitical events, and changes in policy. Forecasting in this sector requires a deep understanding of these external factors and their potential impact on contract opportunities.

Technology Adoption and Innovation Cycles: Government contracts may involve cutting-edge technology or require adherence to specific technical standards. Forecasting must factor in the costs and timelines for research and development, technology adoption, and potential innovation cycles.

Don’t Miss the Shifts 

Are there additional critical areas that GovCon’s should track into the future for their businesses to succeed in a climate of such uncertainty for the sake of national security? Yes. As a business that provides compliance, information technology, and business consulting, we have insight into some areas that should be tracked now by GovCons that are often missed.

Survey Says: GovCons are Up at Night

In truth, executives are kept up at night by several issues regarding their companies that are unique to GovCon businesses. The GAUGE 2023 Report, by Unanet and CohnReznick, gathers information from 1,180 survey responses from a variety of government contracting professionals. 60% of respondents were in a C-Suite or Controller role, and more than half of the respondents were small and mid-sized businesses. 

One area of concern that repeated throughout the GAUGE report and vital to forecast was that of compliance. 44% said the cost of compliance was among the topmost concerns of their organization. Meeting the requirements of Cybersecurity and CMMC (Cybersecurity Maturity Model Certification), and managing compliance also featured among areas of worry. With the flurry of rule-making, updates to compliance frameworks, and rule finalization, simply keeping up-to-date on compliance requirements is a full-time job. 

Who IS minding the (cybersecurity) baby?

Interestingly, of the respondents, only companies with annual revenues above $10 million dollars or with total employee counts greater than 100 had at least one full-time equivalent (FTE) employee whose function was “Compliance.” So, while we understand from the data that compliance is a major concern for businesses, most do not have more than a single employee whose focus is compliance. As an important note, cybersecurity compliance is only one type of compliance with which GovCons must adhere; compliance with other programs is also mandatory. 

With that in mind, one wonders: is any one role focused on cybersecurity compliance? Even in companies where revenue exceeds $50 million dollars, only 3.8 FTEs were counted toward compliance functions. In many companies, the onus for cybersecurity compliance is on Information Technology (IT) FTEs, who also likely serve multiple additional functions like support, system maintenance, and project work. This is a vast area of vulnerability for GovCons, who are targeted from a cybersecurity standpoint by our nation’s adversaries for intellectual property, contract details, and other sensitive information. To mitigate this risk, GovCons are increasingly outsourcing cybersecurity compliance implementation with a senior officer tasked with ultimate oversight, as there are legal ramifications for lack of compliance. (Read more about the False Claims Act here.)

Based on government trends toward oversight and verification of compliance, GovCons should look critically at earmarking resources toward implementing and maintaining the required compliance frameworks in their forecasting. For GovCons that are part of the defense industrial base and have not fully implemented CMMC, significant time should be planned for documentation, organization, and technical infrastructure improvements, and expenses should be planned for consulting and assessment. The final CMMC rule is expected in late 2024. 

IT is a significant challenge for GovCons

Another area of concern to GovCons from the GAUGE report data was IT. IT support is most often classified as overhead, and costs have grown by 5% over the past three years. The doubling of IT FTEs, on average, doubled in 2023 to 4.3, highlighting the pressure GovCons are under in relation to keeping up with technology. This is hardly surprising in light of dramatic increases in cyber attacks, the velocity of tech innovations required to keep competitive, and that almost all businesses rely on tech to run their business. And it feels like a very few persons charged with a great deal of responsibility. 

Sourcing and retaining top talent, with the requisite security background for IT support, and technical and compliance implementation work, is a daunting process. 

According to the GAUGE 2023 report; 

“Across all company types, respondents identified resource recruiting/retention as most likely to keep executives awake at night, easily outdistancing increased competition for contracts. What’s more, talent recruiting/retention is a significantly greater concern for executives at SMBs (with annual revenues less than $25 million) than in companies with greater than $25 million in revenue.”

It is no wonder that SMBs find outsourcing technology solutions an easy-button option, especially when they have a depth-of-bench on whom to call for various functions without the overhead and management of FTEs. 

With so much to track, businesses require robust application sets to track their work products, operations and accounting, projects, pipeline, and compliance activities along with secure systems and devices. Applications and operating systems are famous for cost increases placing SMBs at a disadvantage. Since most GovCons do not have IT as their core line of business, the management of licensing, monitoring technology market trends, procurement, and user training and support are not natively managed by the organization and must be outsourced for optimal results.

With IT as such a significant source of vulnerability to operations, forecasting IT costs accurately into the future is vital knowledge as it can directly impact cashflow. Cashflow is king for SMBs.  

Forecasting for the future: M & A 

As found in the report, net profits are between 10%-24% for a third of respondents. Since mergers and acquisitions are a priority for a full 36% of those surveyed, it is easy to understand that every dollar counts. 

GovCons serve the US with many critical functions. Forecasting accurately contributes to improved cash flow management, funding costs, borrowing and credit decisions, strategic planning, and toward mitigating underlying risk. GovCons need to build out their forecasting to include a wide breadth of compliance and IT metrics to plan for a secure, profitable, and bright future.