As you look at our incentive comp, improving margins, generating more earnings growth is a key part of the incentive comp metric for the team. And we are going to push as hard as we need to push recognizing that where we are right now allows us to meaningfully think about the balance between investing in the business for additional future growth relative to delivering upsized margins that may be a little more temporal in the near-term. So we’re trying to get that balance right, but recognize where we’re sitting right now is sort of near the top end of our current updated guide of about 9.4%, but we obviously have our work cut out for us over the next couple of quarters, and we are committed to doing the best we can, but recognize that we are thinking about this on a multiyear journey as a multiyear journey.
And to the latter part of your question around margin rates for FY ’25 and ’26, I recognize that we’re off to a really strong start, and it obviously puts us in a good position relative to those targets, but I wouldn’t want to get ahead of the transition we have ahead of us and our first earnings call with Toni next quarter, as well as our guidance call in March of next year, and we’ll get you guys appropriate to calibrate on where we see margins for next year, recognize we’ve actually done a really good job, and I’m just incredibly proud of the performance we’ve delivered, and we’ve got work to do here for the next half of the year.
Jason Gursky: Okay, great. And then maybe just one quick follow-up. This is kind of wrapped up into bidding and book-to-bills. But just the availability of labor and the cost of that labor, what that’s doing to your rates and just kind of just what you’re seeing in the general competitive environment, how you and others are reacting to what’s been a few years of escalating costs and the success that you’re all having and passing on those rates to the customer?
Nazzic Keene: Yes, Jason, let me talk a little bit about the macro environment on labor, and then Prabu can provide some color. I think as we sit here today, it’s a very different place than as we sat here a year ago. And so we’re seeing some great progress in the labor market and our ability to hire. I think we’ve got a very compelling value proposition as we hire employees. Our retention rates are higher than they’ve been in some time. So we’ve seen a reduction in our turnover rates. And we’ve certainly seen our ability to hire and increase over the course of the last year. So I feel very good about our position and our posture. We’ve implemented some new tools and practices and several things internally to help us advance that.
On the cost side, certainly, we’re seeing some minor escalation, but I would say, and Prabu can provide some color. We’re not seeing it as a significant headwind as we continue to navigate our contract base, and certainly, we have to and will always pay at market and ensure that we can attract and retain the best talent in the industry. But I sit here in a much better and more confident place than I was probably a year ago, just looking at our results on the labor — the broad category of labor attraction, hiring and retention. Prabu, do you want to add some color?
Prabu Natarajan: That was perfect, Nazzic. Thank you. Jason, what we’re assuming for merit increases is sort of in that 2% to 4% range, I think towards the higher end of that range for certain categories of employees that we believe have skill levels that are going to require us to pay a little more. So to me, that’s how we’re calibrating it. As a reminder, approximately 60% of our business is cost-plus. So while inflation has been a factor over the last couple of years, we’ve also had the mix of contracts working in our favor that has allowed us to pass on somewhat higher cost. That’s not infinite math. At some point, labor costs will catch up, but we’ve actually managed that problem, if you will, pretty effectively over the last couple of years.
We’ve estimated the pressure from labor-related inflation as costing the company, maybe 10, 20, 30 basis points of margin over the last couple of years. And therefore, as we look ahead with the improving labor environment, we would expect some of that to endure to the benefit of margin rates, and that’s where the balance conversation comes in around investing for growth versus investing to drive additional margin rate improvement in the business, and we’re laser-focused on the dynamics, but recognize really big picture. Things are looking better now on the inflation front and labor front. And we’ve got room in our rates. And candidly, one of the things we’ve really focused on over the last couple of years, and we’re starting to see the benefit of this in the margin rates we’re delivering is we’ve undertaken a significant number of cost-related initiatives that has really allowed us to manage our wrap rates, if you will, for overall competitiveness.
That includes facility costs and all of the other sort of if you will, fixed indirect costs that we have in running the business. And therefore, to the extent we continue our efforts to manage those costs effectively and assertively, I would expect that the naturally sort of turning environment around labor pressure and inflation pressure is going to be a little bit of a tailwind to margins. But again, recognize we’re trying to balance the equation here and stay calibrated.
Jason Gursky: That’s great. Thank you very much. [Indiscernible]
Prabu Natarajan: Of course. Thank you.
Nazzic Keene: Thanks, Jason.
Operator: Your next question will come from the line of David Strauss with Barclays. Please go ahead.
David Strauss: Good morning, thanks and Nazzic, congratulations and best wishes.
Nazzic Keene: Thank you very much.
David Strauss: Could you just run through the current kind of landscape on the recompete side, how you’ve done year-to-date, what the rest of the year looks like and updates as well, kind of the balance of work to be recompeted over the forecast period? Thanks.
Nazzic Keene: Yes. Let me touch on a couple of things. So we — as we discussed probably a year ago, we have seen some challenges in the recompete space. I think the team has done an exceptional job of focusing on that and improving the overall metric in our underpinning of the business. So I would say I’m very confident with where we are in our recompete win rate. Clearly, we lose some — we’re always going to lose some business, and it’s just the nature of the way that the government acquires and the way that competitors step into new opportunities. But I feel we’re in a much better space than we were a year, 1.5 years ago. as we look at recompetes. We don’t really go through the big significant moving pieces as much for competitive reasons as anything else.
