Do you have approved provisional billing rates for your interim billing and financing on your U.S. government contracts? The contract clause in the Federal Acquisition Regulation (FAR) 52.216-7, Allowable Cost and Payment, is included in your cost reimbursable contracts. Paragraph (e) of this clause provides that:
Until final annual indirect cost rates are established for any period, the Government shall reimburse the Contractor at billing rates established by the Contracting Officer or by an authorized representative (the cognizant auditor), subject to adjustment when the final rates are established.
These billing rates:
- Shall be the anticipated final rates; and
- May be prospectively or retroactively revised by mutual agreement, at either party’s request, to prevent substantial overpayment or underpayment.
Your fixed price contracts with progress payments based on costs also require the use of provisional indirect billing rates. FAR Subpart 42.7 addresses the establishment of these rates. FAR 42.704(a) states that the person responsible for establishing final indirect cost rates is also responsible for determining provisional billing rates. Your final and provisional rates may be established by your contracting officer or your cognizant auditor.
Typically, the cognizant auditor is the Defense Contract Audit Agency (DCAA). Even when your rates are determined by a contracting officer, the contracting officer will usually request the cognizant auditor’s assistance. The DCAA’s audit guidance stresses that your provisional billing rates should be established in a timely manner, typically at the beginning of your fiscal year (to support the first voucher submitted for the year).
You are encouraged to submit provisional billing rates at the end of your current fiscal year to establish billing rates for your new fiscal year.
If you do not submit provisional billing rates, FAR 42.704 allows the contracting officer or auditor to establish your rates considering historical unallowable costs, nonrecurring costs and new or changed conditions.
The auditor will review prior incurred cost audit reports to ascertain the significance and trend of any questioned costs/rates. If significant questioned costs were identified, the auditor will consider decrementing your proposed or historical rates by a similar amount when establishing the provisional billing rates.
The auditor will also compare the billing rates from prior years to your actual year-end rates. If there are significant variances, you will be asked for an explanation. If applicable, the auditor will compare the rates in your recent incurred cost proposal for your prior fiscal year with established billing rates for the current year. Significant variances will be discussed with you, and depending on your responses, the auditor will make appropriate adjustments to your billing rates.
If you have submitted support for your proposed provisional billing rates (for example, budget, projections for changes, etc.), you will have the opportunity to provide the auditor with a walk-through to discuss any significant changes from your previous year’s rates.
Once their process is complete, the auditor or contracting officer will provide you a letter establishing the provisional billing rates.
Avoid U.S. government unilateral establishment or adjustment of your provisional indirect billing rates. Here are some steps:
- Prepare a budget or forecast of indirect expense and allocation bases for your upcoming fiscal year.
- Support your base projections based on anticipated sales and historical ratios of prior years’ allocation base costs to prior years’ sales.
- Support your variable indirect expense projections based on historical ratios of expense items to allocation base costs.
- Support your fixed indirect expenses by comparison to prior years’ actual expenses.
- Adjust your projections for inflation and specific expense items for any known or anticipated increases or decreases and be prepared to provide documentation supporting these adjustments.
Monitor your indirect rates during your fiscal year, update your forecast at least quarterly and be prepared to request adjustment to provisional billing rates to avoid over or under billing.
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