What Government Contractors Should Do If They’re Not Going to Hit Their 2026 Targets
Original article published on LinkedIn(opens in new tab).
Sometimes the forecast says what nobody wants to hear: you're not going to make the number.
That's not failure.
Ignoring it until year-end is.
When you find a shortfall in October, you still have options. When you find it in January, you inherit the consequences: fewer choices, harder conversations and stakeholders who feel surprised.
Good forecasting doesn't prevent every miss. It prevents surprises.
Here's what to do with the time that's left.
Heine Rivera
Senior Staff Accountant
1. Accept the forecast
Accuracy is more valuable than optimism. If your year-end forecast shows a gap, share the realistic number with leadership now, along with what's driving it.
The same applies outside the company. A lender, surety or board that hears about a shortfall in October reacts very differently than one that finds out from the year-end financials in February.
2. Reforecast from facts, then find the driver
Rebuild the year-end view from what's real:
- Revenue booked through September
- Funded backlog you will actually bill in Q4 at current staffing
- Only the pipeline that can realistically start billing before December 31, not just get awarded
Our blog How Much Revenue Do Government Contractors Still Need to Hit Year-End Targets walks through this math step by step.
Then name the driver behind the gap. Was it a delayed award, a contract that ended early, slower hiring, lower utilization, or scope that grew without a contract modification? Each one has a different fix, so a general "revenue is down" isn't enough to act on.
3. Manage costs strategically, not across the board
In Q4, controlling expenses is often faster than finding new revenue. Review discretionary indirect spending, open positions, travel, and planned purchases that can move to next year.
But cut with care. Across-the-board cuts to the people or systems you need to deliver next year's work can make 2027 harder than 2026. Protect what earns revenue; trim what doesn't.
4. Preserve your margins
Revenue growth doesn't always mean profit growth, and a revenue miss doesn't have to become a margin miss. Look closely at:
- Fixed-price contracts running over on hours
- Costs approaching contract ceilings or funding limits
- Unallowable costs that can't be recovered on any contract
- Customer-driven scope changes that were never formalized
Where a customer changed the scope, document it and pursue the modification now. Work performed outside the contract's terms is the hardest money to recover later.
5. Check what the miss does to your indirect rates
This is the step most contractors miss. When revenue falls short, your indirect costs (rent, administrative staff, systems) usually don't fall with it. But the base those costs are spread over does. Same costs over a smaller base means higher indirect rates, even if you didn't spend a dollar more.
An illustrative example:
- You budgeted a G&A pool of $1.2 million over a $10.0 million cost base: a 12.0% rate.
- A contract ends early and the base comes in at $8.5 million. Same $1.2 million pool: the actual rate is now 14.1%.
- If you keep invoicing cost-type work at the 12.0% provisional billing rate, you recover $1.02 million of that $1.2 million pool. If all of that base were cost-type work, you'd be $180,000 under-recovered for the year.
What that means by contract type:
- Cost-type contracts: you may be under-billing every month at your current provisional rates, financing the government with your own cash until final rates are settled.
- Fixed-price contracts: the higher cost comes straight out of margin.
- T&M contracts: your fixed hourly rates may no longer cover your true costs.
The good news: provisional billing rates aren't locked. FAR 42.704 allows billing rates to be revised by mutual agreement when needed to prevent substantial overpayment or underpayment. Compare your actual year-to-date rates with the rates you're billing, prepare a short rate proposal with supporting schedules, and raise it with your contracting officer or DCAA early.
6. Adjust plans and expectations early
Reset targets and cash plans with the people who rely on them: leadership, lenders and key partners. Update your hiring plan and the timing of planned investments. Re-run your cash forecast through Q1, since a revenue shortfall in Q4 often shows up as a cash squeeze in January and February.
7. Use the lessons to build a stronger 2027
Before the year closes, ask four questions:
- What changed since we built the 2026 budget?
- Which assumptions were wrong?
- What could we still influence, and did we?
- What should we adjust for next year?
Build those answers directly into your 2027 budget and next year's provisional billing rates. Then make the forecast a monthly habit: accounting brings the numbers, operations brings what it knows about contracts ending, expanding or slipping. Forecasts get accurate when both views meet every month, not once a year.
Our free 2027 Budget Planning Checklist can help: The Government Contractor’s Budget Planning Checklist for 2027
A simple Q4 action timeline
- Late October: finalize the reforecast, name the drivers, share the realistic number with leadership.
- November: compare actual vs. billed indirect rates; submit a billing rate revision if they've drifted; pursue open contract modifications; tighten discretionary indirect spending.
- December: update cash forecasts with lenders and partners; lock in lessons learned for the 2027 budget; schedule monthly forecast reviews for next year.
The bottom line
A missed target is a business problem with solutions. A surprise is a credibility problem. The earlier you face the number, the more of those solutions are still on the table.
Forecasting isn't about predicting the future. It's about creating visibility so you can make better decisions today.
For more information, explore our Client Advisory Services (CAS).
Frequently Asked Questions
Yes. FAR 42.704 allows billing rates to be revised by mutual agreement, prospectively or retroactively, to prevent substantial overpayment or underpayment. Work with your cognizant contracting officer or DCAA, and support the request with actual year-to-date rates and a reforecast.
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