Voluntary Benefits: The Profitable Harbor in Government Contracting’s “Perfect Storm”

Jim Campbell

Aug 31, 2015

Voluntary Benefits: The Profitable Harbor in Government Contracting’s “Perfect Storm”

 Much like being in fierce storm while at sea, government contracting is at a tumultuous experience. Two different, but serious, “storms” have arisen in the government contracting marketplace, and their combined strength is going to be enough to completely sink a lot of contractor’s businesses.

Some of the issues being faced are beyond the control of the contractor, but that does not mean there is not hope for calm seas or prosperity. Voluntary benefits can offer a lifeline that will help government contractors not only stay afloat, but thrive in their new market conditions.

By adding voluntary benefits to a government contractor’s company, they can reduce wasteful taxes and burdensome costs, provide an alluring work environment where people want to stay, and best of all- it comes out of fringe dollars that contractors are already required to spend, ultimately providing contractors with more value for less money than they were probably spending.

The “Storms” of Government Contracting

The two major issues contractors who have government work are facing feed into each other. Like two storm fronts whose force slams together, construction’s “skills gap” and the government’s “new approach to bidding and contracts” threatens to crush any contractor that does not adapt.

The Skills Gap

In a 2015 Construction Industry Hiring & Business Outlook survey conducted by The Associated General Contractors of America, 87 percent of contractors said that they are having trouble trying to find qualified skill workers. What that means is essentially 9 out of 10 contractors do not have enough carpenters, masons, electricians, HVAC, etc. necessary to properly grow or sustain their business.

There are a lot of different reasons for the shortage. A lack of vocational training schools is a need that government has recognized and started to work on. But truth be told, it goes back the recession of 2008. Skilled workers took a hard hit when housing plummeted, and a great deal of them have not come back to the work force in their trade. Many have found new jobs or do not trust that it will not happen again.

No matter the reason, simple supply and demand theory dictates that because the demand for these workers is high and the supply is low, prices will rise. Meaning contractors will have to pay more and more to find the skills sets they need to bid on and complete contracts.

For so many reasons, continually raising the wages of these workers will not be sustainable for a contractor. This leaves them searching for a way to attract and keep talent, without raising wages.

The New Government

In recent years the Federal Government, with many state and local governments following suit, have changed how they evaluate bids for their contracts. Factors like experience, innovation, and qualifications have taken a back seat to the new and most important factor- price.

Lowest Price Technically Acceptable (LPTA) is a government initiative to evaluate contracts by price if the contractor meets the minimal requirements. The program on average costs the tax payer over 50 percent less than when awarded by any other means, and is completed faster too.

LPTA, and programs like it, have made trying to be “low man” on the bid a cutthroat competition. Many contractors are struggling to turn a profit with their old methods, and if they do not adapt will most likely watch their government revenue disappear. Contractors must become more efficient, and quickly.

The “Perfect Storm”

The rising cost of labor, due to the skills gap, strikes at about the same time when all government contractors need to be trying to save and maximize every cent to remain competitive on bids or profitable on a contract.

Leaving the contractor to try and lower his or her price, while the cost of the people they depend on sky rockets. A very difficult sea to navigate successfully, no matter who you are.

Voluntary Benefits to the Rescue

Contractors who provide their employees with voluntary benefits can attack both of these problems simultaneously and successfully. By purchasing voluntary for their employees, instead of deducting it from the employee’s check, they can create a healthier company bottom line and a more attractive work environment for skilled employees.

Costly “Cash Fringe”- The Face of the Enemy

Government contracts (federal, state, or local) often have minimum fringe rates the contractor pays for anyone who works on that job. The current rate for a federal contract is $4.27 per hour. Cash fringe is when the employee chooses to pay the fringe rate in their wages, rather than in employee benefits.

Even though it seems like an easy solution, it actually costs contractors a lot of money. For every dollar they add to wages, they also pay more FICA, unemployment, worker’s comp., etc. that does not count toward the fringe rate. On average 50 percent should be added to every dollar of wage an employer pays.

If that fringe rate, for example the Federal $4.27, were used on voluntary benefits like life, vision, dental, disability, and beyond it would not add the 50 percent on taxes and burdens like the cash fringes do. The fringe rate has to be paid no matter what, avoid extra taxes and burdens caused by cash fringe can help cut expenses and lower bidding prices. 

Dynamic Benefits are the Key to Recruiting and Retention

Raising wages to be competitive has the same problem “cash fringe have, for every dollar you raise them the ancillary cost goes up with it, which is why it is not sustainable. But it may shock you how much recent attitudes have changed when it comes to the importance of benefits packages. 

Benefits Are Important to Workers

1.     50 percent of employees cite benefits as an important reason they remain with their current employer (MetLife)

2.     At companies offering 11 or more benefits, 66 percent (employees) would recommend their employers as great places to work (MetLife)

3.     86 percent of Millennials state they value having benefits personalized to meet their individual circumstances and age (MetLife)

Being able to offer a comprehensive and customizable benefits package makes you an attractive employer that people will want to stay with. It fosters a sense of long term caring and partnership in the employee, and saves you on the costly business of recruiting and training new workers.

Allowing the employee to personalize their plan from a wide variety of coverages, will let them select what protection matters most to them will only add depth to their value. Pet insurance may sound silly to some, but not to the owner of three dogs who lives in fear of visits to the veterinarian.

Any Port in the Storm

With the time it will take to ramp up vocational programs and the success of LPTA style contracts, neither of these problems are going to just disappear right away. The best a government contractor can do is adjust to what is going on, and ride it all out.

In order to help contractors, we at Axim Fringe Solutions Group, went out and partnered with leading voluntary benefits providers and got them to agree to allow us to provide voluntary benefit rates to government contractors cheaper than the insurance carriers themselves can offer.

Axim believes that voluntary benefits can be the first in one of many benefit solutions that can help the government contractor stay upright and afloat in an ever more competitive market, so they can continue to win bids. We also believe those same benefits will help recruit and retain the skilled worker contractors will then need to get the job done.

If nothing else, voluntary benefits can help protect you and your employees against this “Perfect Storm.”

About the Author

Jim Campbell - Founder and President of Axim FSG. Jim aids government contractors to more efficiently manage compliance by helping them reduce overhead, improve contract profitability, and avoid costly fines and debarments. Axim created the industry's only voluntary benefits platform (paid with fringe dollars) for government contractors.