For our 12/31 year-end contractors, this is a busy time of year. Year-end books are ending and 2019 budgets are being formed. This is also the time of year for submitting provisional billing rates or PBRs for contractors that have cost reimbursable type contracts such as cost-type and time and material contracts.
What are provisional billing rates?
As many of you know, cost reimbursable contracts are utilized by the Government when there are uncertainties involved with contract performance that prohibit costs to be estimated with enough certainty. These are typically research and development type projects where the approach to get to the end product or the requirement for materials purchased may change throughout the course of contract performance. An estimated cost is established in the proposal/negotiation phase of the contract award so that the Government can obligate funds and establish a ceiling or limit on the contractor’s costs. For cash flow purposes, the contractor must establish provisional billing rates to invoice for indirect costs related to performance of the contract. Time and material or labor hour contracts have a fixed element and a cost reimbursable element. The cost reimbursable element for time and material or labor hour contracts, for example, would be the general and administrative burden on travel. These indirect costs associated with travel is trued up at year end, however, throughout the year the contractor for cash flow purposes needs to bill that indirect rate applied to travel.
Indirect Rates—Direct Costs
When billing cost-type contracts, a contractor must apply indirect rates to direct costs to determine the total invoice costs and then fee is applied, if applicable. The contractor is responsible for preparing and submitting invoices according to the terms of the contract, including any special billing or payment instructions. Because actual indirect rates fluctuate from month to month, the government does not allow the billing of actual indirect rates throughout the year. Therefore, there is a requirement to forecast and estimate indirect rates in order to appropriately bill on cost type contracts. This estimate of indirect rates for billing purposes is call provisional billing rates. Provisional billing rates are estimates of what the contractor has determined the actual indirect rates will be at year end. Typically, the process for estimating provisional indirect rates for the new fiscal year, involves the analysis of historical information based on previous experience coupled with reliable data of new contracting activities. The goal is to forecast provisional billing rates as close as possible to the final indirect cost rates anticipated for the contractor’s fiscal year end, including adjustments for any unallowable costs. These provisional billing rates are trued up to actual, final indirect rates, at year end when the incurred cost submission is prepared and submitted. Therefore, it is critical to monitor actual vs provisional billing rates throughout the year.
What is the process for submitting provisional billing rates?
Regulation surrounding provisional billing rates is found in FAR 42.704. This regulation requires the Contracting Officer or auditor responsible for establishing the final indirect cost rates to also be responsible for determining the provisional billing rates. Once the contractor has forecasted the new fiscal year provisional billing rates, these should be provided in a letter to the Contracting Officer and cognizant Defense Contract Audit Agency (DCAA). The letter should include the provisional billing rates proposed, an enclosure of the estimated indirect cost pools and bases, and a brief summary of the basis of those estimates. We recommend that the information included with the provisional billing rate letter be at a summary level. Any detailed information supporting the estimates can be provided, upon request, should DCAA audit the provisional billing rates.
So, what happens if your provisional rate forecasts are wrong or need to be revised during the fiscal year?
FAR 42.704 states that once established, the billing rates may be prospectively or retroactively revised by mutual agreement of the Contracting Officer or DCAA auditor at either party’s request, to prevent substantial overpayment or underpayment. Monitoring provisional billing rates to actual costs alerts the contractor of any significant over or under runs of costs compared to billings so that adjustments can be made before year end. This process is vitally crucial to any government contractor as it is not good practice to significantly overbill or underbill the government during your fiscal year, as this can raise red flags about the adequacy of a contractors accounting and billing system.
Managing Provisional Billing Rates and Submissions
Redstone Government Consulting has many years of experience with assisting contractors determine provisional billing rates in accordance with FAR 42.704. We work with contractors to ensure the approach to provisional billing rates is adequate and compliant. We often help with the forecasting of indirect rates, the final review and submission of the provisional rate package, as well as the response to DCAA as they review and audit a contractor’s provisional billing rates.