DCMA and DCAA have issued guidance on how to deal with the impact of the $487,000 rate cap that applies to contracts subject to FAR 31.2 and awarded on or after June 24, 2014. If you have not read this document, see DCAA’s MRD 16-PSP-005(R), dated February 19, 2016. It includes the DCMA guidance also. You have flexibly priced contracts that require an annual incurred cost submission. Now what, exactly, are you supposed to do with this guidance?

Step 1:

Determine if your company incurred compensation for any employees that exceeded $487,000 since June 24, 2014. If not, stop. The guidance has no impact until that threshold is exceeded by one or more employees.

Step 2:

Determine when your company started having active contracts in the same fiscal year (FY), which were awarded both before and after June 24, 2014. For example, if your company’s FY 2014 ended 9/30/2014 and you had no new contracts between June 24 and September 30, 2014, then you don’t need to consider blended rates until FY 2015.

Step 3:

Once you determine what FY blended rates apply to, review your incurred cost submission (ICS) for that FY to determine the cost impact. Use the DCAA/DCMA guidance to perform the calculations.

Step 4:

If the effect of applying the guidance is significant, withdraw your impacted ICS and seek an advance agreement with your Administrative Contracting Officer (ACO). The advance agreement should outline the agreed-to process, auditable data submission, and applicable period for the blended rates.

Step 5:

Using the guidance, evaluate the impact of the blended rate calculation on any existing provisional (interim) billing rates, forward pricing rate agreements (FPRA’s) or forward pricing rate proposals (FPRP’s). If significant, withdraw the FPRP/FPRA. If you do not submit FPRP’s, ensure forward pricing rates used in price proposals reflect your use of the blended rates. If you don’t already have an advance agreement from following Step 4, seek one.

Step 6:

Calculate new indirect rates for provisional billing, forward pricing, and incurred costs using the process agreed to in the advance agreement.

Step 7:

Fully document your calculations and maintain this documentation until you have a finalized FPRA or finalized indirect cost rate agreement for the related year(s), as applicable.

Step 8:

Resubmit any withdrawn provisional billing rate proposals, FPRP’s/FPRA’s and ICS.

Step 9:

Be prepared for DCAA to evaluate your provisional billing rates, rates used in forward pricing, and incurred cost proposals to ensure that only the total allowable compensation is/was billed to the Government for each FY based on the different authorized caps.

Step 10:

Watch the following sites or our newsletter for revised caps: for caps on or after 6/24/2014

Step 11:

Each year, calculate a blended rate for forward pricing and/or billing purposes and an actual blended rate for incurred costs to include in your incurred cost submission.

Step 12:

Repeat steps 6-11 as long as you have contacts falling under two different rate caps or the impact of the difference in the rate caps becomes insignificant.

Finally, if blended rates apply due to the fact that a contractor has employees exceeding the lower cap and also has contracts executed before and after June 24, 2014, the blended rates concept will apply until the “old” (pre-June 24, 2014) contract is complete. However, as time passes and “old” contracts complete, the blended rate will migrate toward the lower cap of $487,000, or slightly higher if/when OMB publishes a new cap. From all appearances, OMB is in no hurry to increase this cap. Thus, some contractors may opt to forego the blended rate, particularly for forward pricing, because it isn’t worth the trouble. That said no contractor impacted by the lower cap with employees whose compensation as defined in FAR 31.205-6(p) exceed $487,000,should assume that it’s not worth pursuing. The computation is relatively straightforward, particularly for an ICS, and it may be the only time that defense contractors can readily obtain an advance agreement.

One last reminder, the blended rates authorization, and instructions have been issued by DOD (DPAP, DCMA, and DCAA); hence, it does not automatically apply to contracts with civilian agencies. By implication, it applies to all US Government contracts for contractors whose final indirect cost rates are DCAA determined or negotiated by a DCMA ACO, i.e., DOD is the agency responsible for determining final indirect cost rates. In contrast, DPAP/DCMA cannot implement a blended-rates policy for contractors whose rates are determined by a civilian agency ACO.

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Written by Cheryl Anderson

Cheryl Anderson Cheryl Anderson is a Director with Redstone Government Consulting, Inc. She provides Government Contract Consulting services to our government contractors primarily related to equitable adjustment claims, terminations, and DCAA audit expectations. Prior to joining Redstone Government Consulting, Cheryl served in a number of capacities with DCAA for over thirty-five years. Upon her retirement, Cheryl was a regional audit manager with DCAA. Cheryl began her DCAA career in 1977 as an auditor-trainee with the Ingalls Resident Office in Pascagoula, Mississippi. After instructing at the Defense Contract Audit Institute for four years, she returned to the Eastern Region in 1990, holding various audit positions before ultimately becoming a Regional Audit Manager in August 2005. She had overall management responsibility for audits performed by approximately 200 employees. During Cheryl’s tenure with DCAA, she was involved in conducting or managing a variety of compliance audits, to include cost proposals incurred cost submissions, systems, Cost Accounting Standards, claims, defective pricing, financial capability and agreed-upon procedures. She directly supported the government litigation team on a contract dispute and has prepared and presented various lectures and seminars to DCAA staff. In addition, she has served as an instructor for the Government Audit Training Institute for over 20 years. She currently specializes in preparing clients for more complex DCAA audits, providing advice on FAR cost principles and contracts regulatory provisions, and assisting clients in anticipating and addressing audit. Education Cheryl has a BS Degree in Accounting from Auburn University at Montgomery and a Masters of Business Administration from Wichita State University. Cheryl also completed courses at OPM’s management and executive development centers and at the Federal Executive Institute and is a Georgia Certified Public Accountant.

About Redstone GCI

Redstone Government Consultants are a team of the most senior industry veterans and the brightest new talent in the industry. Many have held senior government positions including leadership roles in the DCAA. Our new talents bring significant accounting and software experience along with fresh perspectives, inspiration and energy to our team. Through our leadership and combined experience, we provide a unique perspective, bringing both government and contractor proficiencies to bear and ensuring rock-solid government compliance for our clients.

Topics: Compliant Accounting Infrastructure