Government Contracting in Construction: Trends, Pain Points, and Solutions
Government Contracting in Construction: Trends, Pain Points, and Solutions
SumX, Inc
November 17, 2025
Government Contracting in Construction: Trends, Pain Points, and Solutions
Government Contracting represents one of the biggest opportunities for construction firms in the US. Construction spending in the US has surpassed the $2 trillion mark, with public construction spending alone accounting for just over $500 billion in 2024, a 4.3% increase from 2023. The total public construction spending, as reported for July 2025, reached a seasonally adjusted annual rate of $515,842 million, reflecting a robust and active market. A survey by the Associated General Contractors of America (AGC) backed this optimism, with contractors reporting a positive outlook for future work in sectors such as Data Centers (42%) Water and Sewer Projects (35%), Power Projects (32%), Transportation Structures (29%), and Federal Contracts: (22%).
Industry Trends Shaping GovCon Construction
In 2025, the government construction sector has been pushed ahead by a combination of significant federal investment, rapid technological developments, and dynamic market shifts that have created both opportunities and operational challenges for contractors.
1. Federal Infrastructure Investment: A key driver of the opportunities in the construction industry comes from the federal industrial policies and infrastructure laws. The Infrastructure Investment and Jobs Act (IIJA) has been a catalyst in doubling manufacturing construction spending, with more contractors reporting growth. Similarly, the Inflation Reduction Act (IRA) and CHIPS Act are expected to help drive growth in the sector through increased manufacturing facilities and energy projects.
2. Technological Demand: The substantial growth of artificial intelligence and advanced technological development throughout various industries has directly fueled an increased construction of data centers. With the highest net positive outlook among all construction segments, i.e. 42%, data centers have become an important growth area for construction companies that touch upon both public and private interests.
3. Digital Transformation: The construction industry has been increasing its investment in and through integration of technology to improve efficiency and manage complexity. The AGC’s report shows that 44% of firms plan to increase their investments in AI. Beyond AI, contractors are also increasing their uptake of other digital tools including document management software, accounting software, Building Information Modeling (BIM), and digital twins.
Challenges pertaining to GovCon Construction
While government construction contracting provides lucrative business opportunities, succeeding in this area requires more than just construction expertise. It involves adhering to complex regulations and complicated operational rules designed to protect the public interest, which brings a unique set of compliance and operational burdens. With a growing public-sector demand, infrastructure spending, and defense projects, construction firms must manage not only their businesses, but also the complexities of FAR, DCAA, CAS and Davis-Bacon compliance. The challenges of stringent regulations, persistent labor shortages, and ever volatile costs mean that contractors need a level of operational discipline far exceeding that of the private sector.
Compliance and Audit Burdens
Stringent compliance and audit requirements are the key characteristics of government contracting. Federal agencies, led by the DCAA, need to ensure taxpayer money is spent appropriately, making a contractor’s accounting and business systems the primary focus of compliance from pre-award to final closeout.
• DCAA, FAR, and CAS: These can be regarded as the three pillars of GovCon compliance. The Defense Contract Audit Agency (DCAA) is the government's primary audit arm, responsible for ensuring contract costs are fair and reasonable. The Federal Acquisition Regulation (FAR) is the comprehensive rulebook for federal procurement; specifically, FAR Part 31 dictates the cost principles that determine if a cost is allowable and how it can be allocated. For larger contractors, the Cost Accounting Standards (CAS) provide an even more detailed set of rules governing how costs must be consistently measured, assigned, and allocated.
• Accounting System Adequacy (SF 1408): Before awarding a cost-reimbursable contract, the government uses the Preaward Survey of Prospective Contractor Accounting System (SF 1408) to determine if a contractor's system is acceptable. An adequate system must meet several critical criteria, including:
◦ Proper segregation of direct costs from indirect costs.
◦ Identification and accumulation of direct costs by individual contract.
◦ Accumulation of costs under the control of the general ledger.
◦ A timekeeping system that identifies employees' labor by specific cost objectives.
• Incurred Cost Proposals (ICP): As mandated by FAR 52.216-7, contractors with cost-reimbursable contracts must submit an annual Incurred Cost Proposal (ICP) within six months of their fiscal year-end. This detailed submission reconciles actual costs incurred with amounts billed throughout the year. To assist in this complex process, the DCAA provides a standardized template known as the Incurred Cost Electronically (ICE) model.
2. Labor Shortages and Skill Mismatch
Labor shortage remains one of the top concerns for construction contractors, creating significant pressure on project schedules and costs. According to the AGC, 78% of firms report difficulty filling hourly craft positions, and the challenge is expected to persist, with 88% of surveyed firms expecting it to become more difficult to find qualified workers. This challenge is underscored by the fact that the industry had an average of 382,000 job openings each month over between 2023 and 2024. The scarcity of labor has also been driving up expenses. Rising direct labor costs (including pay, benefits, and taxes) are the single biggest concern for 62% of construction firms.
Furthermore, the nature of construction work has also been changing. The industry is experiencing a mismatch in skills alongside a shortage of traditional craft labor, since there is a rising demand for digital competencies such as data analytics, cloud computing, and BIM operation to support the industry's technological transformation. Moreover, on federally funded projects, contractors need to comply with existing wage laws like the Davis-Bacon Act, which mandates specific wage rates for different labor categories and adds another layer of administrative complexity.
3. Cost Accounting and Allocation Challenges
Proper cost segregation and allocation are foundational to government contracting. Failure to adhere to the strict guidelines laid out in the FAR is a major audit red flag that can lead to disallowed expenses, financial penalties, and damage to a contractor's reputation.
Segregating Costs: The accounting system used by contractors must be able to distinguish between three types of costs as stipulated in FAR Part 31.
Direct costs are identifiable to a specific contract (e.g., materials for a single project).
Indirect costs benefit multiple contracts and must be allocated equitably (e.g., office rent).
Unallowable costs are expenses the government will not reimburse (e.g., entertainment, bad debts).
Understanding this segregation is the foundation of a strong pricing strategy and the primary defense against cost disallowance. A single misclassification can impact the entire contract, risking profitability and audit outcomes.
Job Costing: The contractor’s system must identify and accumulate direct costs by individual contract or job order. This ensures that each project's true cost is accurately tracked and billed.
Indirect Rate Calculation: To allocate indirect costs, contractors group them into logical pools, such as Overhead (costs related to direct project performance) and General & Administrative (G&A) (costs of running the business). These pools are then allocated to contracts using a logical and consistent base, such as direct labor dollars or total cost input.
4. Compliant Timekeeping
Since labor is a primary cost driver on most government contracts, timekeeping and timesheet management come under intense and non-negotiable inspection. The DCAA has a specific set of rules designed to ensure labor costs are accurate, verifiable, and properly charged.
DCAA Timekeeping Checklist:
Daily Entry: Employees must record their hours on their timesheet on a daily basis.
Accurate Allocation: Every time entry must be charged to a specific, correct project or task code.
Employee Certification: Employees must personally sign or certify their own timesheets to confirm their accuracy.
Supervisor Approval: A supervisor must review and approve all employee timesheets.
Traceable Edits: Any changes made to a timesheet after submission must be documented with what changed, when it changed, who made the change, and a clear reason for the adjustment.
Secure Audit Trail: The system must maintain a complete, unalterable audit trail of all entries, changes, and approvals.
5. Ensuring Strict Project Controls and Billing
Billing the government on cost-reimbursable contracts is a formal process regulated by specific procedures and forms designed to ensure transparency and prevent fraud. This process requires accurate documentation and adherence to specific protocols.
Provisional Billing Rates: Contractors use provisional billing rates to claim reimbursement for indirect costs on interim vouchers. They are estimated payments, approximate to the final, actual indirect rates for the fiscal year, which looks to prevent substantial over- or under-payment until the final rates are audited and settled.
Standard Forms (SF 1034 & SF 1035): The SF 1034 (Public Voucher) and SF 1035 (Continuation Sheet) are the standard forms used to submit claims for reimbursement. The SF 1035 continuation sheet must provide a detailed breakdown of costs by major elements, including direct labor, materials, fringe, overhead, and general and administrative (G&A) expenses.
Electronic Submission (WAWF/iRAPT): Department of Defense (DoD) contractors are required to submit their payment requests electronically through the Wide Area Workflow (WAWF) system, a secure, web-based platform for invoicing and payment processing.
Withholding and Retention: Contracts often include provisions that allow the Government to withhold a portion of payments as a safeguard to protect its interests. For instance, under Cost-Plus-Fixed-Fee (CPFF) arrangements, the contracting officer may withhold up to 15 percent of the total fixed fee or $100,000, whichever is less, until all contractual requirements are fulfilled, in accordance with FAR 52.216-8(b). Similarly, under Time-and-Materials (T&M) or Labor-Hour contracts, the contracting officer may withhold up to 5 percent of payments, not to exceed $50,000 in total, as authorized by FAR 52.232-7(b)(7).
6. Supply Chain and Cost Volatility
The construction industry continues to face significant challenges related to supply chain stability and the volatility of material costs, adding another layer of risk to project management. Rising materials costs are a top concern for construction contractors. Trade policies, such as tariffs on steel and aluminum, have directly driven up costs. According to constructiondive, steel prices have shot up by 5-8% since the beginning of 2025, while other construction materials have risen by as much as 50%. ABC also noted that construction backlog fell to 8.4 months in May due to tariff-related project delays and cancellations after a two-year high.
The Solution: Investing in Purpose-Built Technology
Building a resilient and competitive government construction business requires compliant and efficient workflows along with an enabling purpose-built technology. The complexity and compliance requirements of the government contracting sector render generic tools like spreadsheets and disconnected software systems inefficient and non-compliant. Manual systems lack the integration, controls, and traceability required to pass a government audit, creating significant financial and contractual risk for any business that relies on them. To manage the vast compliance needs of government contracting, construction firms in GovCon must adopt technology specifically made for this. A purpose-built Enterprise Resource Planning (ERP) system in GovCon is not a luxury, but a strategic necessity for ensuring compliance and operational efficiency. Furthermore, system designed for DCAA compliance must possess the following core features:
Integrated General Ledger: The system must be able to properly segregate direct, indirect, and unallowable costs in a clear and auditable manner.
Compliant Cost Accounting: The system should be able to automate the allocation of indirect costs from cost pools (like Fringe, Overhead and G&A) to final cost objectives (contracts) according to established, consistent bases.
Robust Timekeeping: The system should be able to follow DCAA's rules for timekeeping, including daily entry, employee certification, supervisor approvals, and a complete, irreversible audit trail for all changes.
Automated Billing: The software should streamline the creation of government-compliant invoices and public vouchers (SF 1034/1035), ensuring accuracy and fast-tracking payment cycles.
Full Audit Trail and Internal Controls: The system must provide end-to-end traceability for every transaction and include strong internal controls to prevent fraud and ensure data integrity. DCAA auditors must be able to trace any transaction from the general ledger all the way back to its source document, such as an approved timesheet or a vendor invoice.
How SumX Simplifies GovCon for Construction Contractors
As the construction industry continues to navigate the challenging world of government contracting, ERP systems like SumX offer a complete solution tailored for success in GovCon. Designed for project-based construction firms, SumX brings accounting, payroll, timekeeping, and billing together in one DCAA-compliant platform that ensures full traceability and control. Its integrated labor tracking and geofencing capabilities allow contractors to monitor employee time and location in real-time, validating hours worked against approved job sites and reducing the risks of inaccurate reporting or non-compliant entries. SumX also automates payroll, indirect cost allocation, and AIA/1035 billing, delivering audit-ready data without manual intervention. By replacing spreadsheets and disconnected tools with an integrated, smart workspace, SumX helps construction companies strengthen compliance, accelerate payment cycles, and gain complete visibility from the field to accounting. In an environment where accuracy and accountability are non-negotiable, SumX enables contractors to build smarter, operate easier, and compete with confidence.
The insights shared in this newsletter are intended for general informational purposes. Readers should evaluate and apply this information according to their own business needs and professional judgment. SumX is not responsible for any decisions, outcomes, or actions taken based on this content.