Measuring the right Key Performance Indicators (KPIs) is critical for small to midsize government contractors to ensure profitability, maintain compliance, and achieve sustainable growth. The unique nature of government contracting, with its complex regulations (like FAR and CAS) and various contract types, demands specific metrics beyond standard business KPIs.
Top KPIs for a Small to Midsize Government Contractor
- EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s a way of measuring your company’s financial performance that strips out factors that may not reflect your actual operating performance.
Here’s the formula:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
In plain terms, EBITDA shows how much profit your business generates before financial structure (interest), tax environment, and non-cash accounting charges (like depreciation on equipment) are considered.
- Indirect Rate Variance (Actual vs. Target) This is arguably the most critical KPI for any contractor with cost-reimbursable contracts. It tracks the difference between the provisional indirect rates you use for billing and the actual rates your company incurs.
Why it’s important: A high variance where actual rates exceed provisional rates means you are losing money on cost-plus contracts and cannot recover those costs. It also means you are underpricing future fixed-price bids. Consistently monitoring this allows you to adjust spending or seek rate adjustments before year-end.
Calculation: For each indirect pool (Fringe, Overhead, G&A):
Variance = Applied Indirect Costs – Actual Indirect Costs
- Contract Backlog This represents the total value of awarded contracts that has not yet been recognized as revenue. It’s a key indicator of future financial stability.
Why it’s important: A strong backlog provides visibility into future revenue streams, allowing for better strategic planning, hiring, and resource allocation. A shrinking backlog is an early warning sign of future revenue problems.
Calculation:
Backlog = Total Awarded Contract Value − Invoiced-to-Date Revenue
- Labor Utilization Rate This measures the efficiency of your workforce by tracking the percentage of employee time spent on direct, billable projects versus indirect activities or unbillable time.
Why it’s important: In a services-based business, labor is the primary driver of revenue and cost. A low utilization rate indicates that you are paying for staff that are not generating revenue, which directly harms profitability and increases your indirect rates.
Calculation:
Utilization Rate = ( Total Direct Billable Hours / Total Available Hours )×100
- Project Profit Margin This measures the profitability of each individual contract or task order. It should be tracked meticulously by contract type.
Why it’s important: Company-wide profit margins can hide unprofitable projects. Knowing the margin on each job—whether it’s Firm-Fixed-Price (FFP), Time & Materials (T&M), or Cost-Plus—is essential for understanding which types of work are most profitable and where corrective action is needed.
Calculation (for an FFP contract):
Project Profit Margin = (Project Profit/Project Revenue)×100
- Revenue Per Employee This KPI measures the overall efficiency of the organization in generating revenue from its workforce.
Why it’s important: It provides a high-level view of productivity. A rising revenue per employee suggests improving operational efficiency, while a declining figure may indicate issues with utilization, project management, or an bloated overhead structure.
Calculation:
Revenue Per Employee = Total Annual Revenue / Number of Employees
- Book-to-Bill Ratio This ratio compares the value of new contracts “booked” (awarded) to the amount of revenue you have “billed” (recognized) in the same period.
Why it’s important: A ratio greater than 1.0 indicates that your backlog is growing and the company is expanding. A ratio less than 1.0 means you are burning through your backlog faster than you are replacing it, signaling a future decline in revenue if the trend continues.
Calculation:
Book-to-Bill Ratio = Value of New Contracts Booked in a Period / Revenue Billed in the Same Period
- Win Rate This measures the effectiveness of your business development and proposal efforts. It can be measured by number of bids or by dollar value.
Why it’s important: A low win rate may indicate problems with your bidding strategy, proposal quality, or pricing competitiveness. Tracking this helps you refine your capture process and focus on opportunities you are more likely to win.
Calculation (by value):
Win Rate = ( Total Dollar Value of Contracts Won /Total Dollar Value of Contracts Bid) × 100
- Days Sales Outstanding (DSO) DSO measures the average number of days it takes to collect payment after a sale has been made.
Why it’s important: Cash flow is king for small businesses. Government payment cycles can be slow and complex (e.g., WAWF invoicing). A high or increasing DSO can signal a cash crunch, indicating issues with your invoicing process or delays in government payment processing.
Calculation:
DSO = (Ending Accounts Receivable/ Total Credit Sales for the Period )×Number of Days in Period
- Current Ratio This classic liquidity ratio assesses a company’s ability to meet its short-term obligations (due within one year).
Why it’s important: It provides a quick snapshot of financial health and your ability to weather unexpected expenses or delays in payment. A ratio below 1.0 is a significant red flag. Most lenders and sureties look for a ratio of 1.2 or higher.
Calculation:
Current Ratio = Current Assets / Current Liabilities
Bay Business Group helps small to midsize government contractor clients grow by providing expert accounting, DCAA-compliant bookkeeping, and strategic financial guidance. We ensure accurate indirect rate calculations and real-time reporting to support smarter bidding and budgeting. With deep knowledge of government regulations, BBG helps clients stay compliant and focus on scaling their business.