Effect of the Recent Partial Government Shutdown on WRAP Rates
The end of 2018 and beginning of 2019 saw a partial government shutdown here in the United States. Approximately 800,000 government workers were sent home or expected to work without pay, not to receive a paycheck until the end of January. The good news
is those workers, for the most part, received back pay when the government started up again on 25 January. The bad news is that many Government Contractors weren’t so lucky. Hundreds of thousands of contract workers were affected, mostly if they worked on-site at agencies that were shuttered, such as DHS, FAA, and NASA. Despite efforts from a few senators, there is currently no plan from the government to provide lost back-pay to those contractors.
Since McNulty and Associates is in the business of Price to Win, Competitive Assessments, and WRAP Rate Analysis, we wondered how the government shutdown will affect pricing. More to the point, how will it impact WRAP rates?
In simple terms, WRAP rates are the way companies recoup their indirect expenses related to Fringe Benefits, Overhead, and G&A. This WRAP, or multiplier, is applied to the Direct Labor charges for Government Contractors in order to fund those indirect expenses. When a company incurs those indirect expenses but their employees are not working, as in the case of the government shutdown, how will they recover those expenses? How are companies dealing with the government shutdown from the standpoint of indirect expenses, lost revenues, and profit?
The short answer so far is, “it depends.” For large companies who do most of their contracted work in their own facilities (where they can bill later for work they continue to perform), there has been little impact. Indeed, in their 4th quarter earnings call, Lockheed Martin CEO Marilyn Hewson stated that the shutdown “did not have significant impact” on their financials, though future shutdowns could be negative. Most of their work is with the Department of Defense, which was fully funded.
SAIC, whose fiscal year ends at the end of January, which could not be a worse time, considering the shutdown affected an entire month of their year’s operations, warned Wall Street that they may fall short on revenue numbers due to shutdown-caused unpaid contracts. SAIC CEO Tony Moraco told investors that SAIC has “used a combination of administrative leave and paid time off. We typically try to recover as much as we can through billing, but we have not furloughed anyone.”
All in all, we don’t see the big companies feeling much pressure from the shutdown. We expect to see greater impacts for smaller Contractors where much or most of their work occurs at government locations that were shut down. So far, we have seen a range of reports that suggest these companies are taking different approaches. Some employees were asked to use accrued PTO to cover their time; others were furloughed or opted for Leave Without Pay (LWOP). In the short term, this could drive WRAP rates upward, as companies are left to pay out Fringe, Overhead, and G&A costs that they cannot recoup; most companies did not send their Corporate Management, Finance, and HR teams home. Some technically qualified direct charge employees were shifted to work on B&P projects that were available, to help balance cost increases from shutdown-related lost revenue. The bottom line is, the smaller the company, and the larger the revenue concentration with the shuttered agencies, the more material the effect of the shutdown.
Some agencies have offered to let Contractors work overtime to make up for the missed work. This is the best potential outcome. In this scenario, indirect expenses incurred during the shutdown will be applied over the rest of the year as employees are compensated for regular time and overtime.
We don’t expect every agency to allow overtime, and not all companies avoided the direct labor expense of the affected employees through the use of LWOP, furlough, or other means. This creates the perfect storm for these companies, where direct and indirect expenses were incurred, but there is no way to recover them in the year without raising the company’s WRAP rate. This combination would have the largest impact on WRAP rates, revenues and profits.
It’s been over a month now since the shutdown ended, and we still don’t have a clear picture of how it’s affecting every company’s WRAP rate, although several are leaving clues. We’ll be keeping an eye on this topic to evaluate its impact on WRAPS, Revenue and Profit, and advising our Clients as they compete for business in the rest of 2019. We’ll update our blog as we find more information.