Are Adjusting Billings to Final Year-End Rates Really That Important?

Yes, they are! Did your company make it through its year-end and closing of last year’s books? If so, hooray! But is it really over for those that have Government cost-type contract billings? Not really. OK, as the Federal Acquisition Regulation (FAR) 42.704, Billing rates, allows interim payments through contract performance with the intent of making the contracting officer or contract auditor approved provisional billings rates as close as possible to the expected final indirect rates. This allows you to bill your costs throughout the year of your cost-type Government contract billings. Now that you know what the year-end indirect rates really are, there is one more thing to do: adjust the provisional indirect billing rates to actual rates in a Public Voucher (Standard Form 1034). Those year-end indirect rates should be net of any unallowable costs in FAR Part 31, Contract Cost Principles and Procedures. Sounds easy. It really should not be that difficult.

Is it Required?

Yes, it is! To comply with (FAR) 52.216-7(e), Allowable cost and payment, Billing rates, requires the adjusting voucher for year-end rates. It states, “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 (for example, the contract auditor), subject to adjustment when the final (year-end) rates are established.” An adjustment voucher is essentially a restatement of the provisional billing rates used for the actual year-end rates.

For those subject to the DFARS Business Systems, such as the Accounting System, it is also required under DFARS 252.242-7006(c)(16)), Accounting System Administration, required criteria, number 16, “Billings that can be reconciled to the cost accounts for both current and cumulative amounts claimed and comply with contract terms.”

DCAA auditors will review for this adjustment and its FAR 52.216-7(e) compliance in its Post Award Accounting System and Accounting Business System audits. If not done, DCAA will cite this as a deficiency with your accounting system and issue a Statement of Conditions and Recommendation (SOCAR). This will force you to respond to the cited SOCAR with essentially your reason(s) why you did not adjust your provisional billing rates and explain how you will make corrective action(s).

If you have a SOCAR to address, it may not be as simple as providing a response to the Government and have the issue go away. You have a compliance issue with your accounting system to address which will include a DCAA audit follow-up. Another problem is if you are in an overpayment situation due to the provisional indirect rates billed being higher than the year-end indirect rates. The Government may request full payment through a demand letter. Many Administrative Contracting Officers, or ACOs, may work with contractors and agree to spread the overpayments over future invoices.

Benefits of Adjusting Billings

There are at least two benefits of adjusting the provisional indirect rates for the final year end rates:

1. Cost Flow. If you are properly monitor your billings rates throughout the year to keep your provisional rates lower than your expected year-end rates, your provisional billings rates will be lower than your year-end indirect rates. Thus, the benefit of adjusting for the final indirect year end rates, beyond the compliance with FAR and DCAA audits, is this adjustment will allow to bill more on your contract(s) and increase your cash flow or provide more money.

2. Accounting System Compliance. If you monitor your provisional billing rates throughout the year to ensure the rates would be lower than the year-end rates, then adjusting for the year-end indirect rates should be a part of your billing monitoring. If somehow the condition happens that the year-end rates were somehow lower than your provision billing rates, you are now in an overbilling situation.

Since you made the adjustment for the year-end rates, this provides an opportunity to refund the overpayment of billings. This is important since FAR 52.232-25, Prompt Payment, (d) Overpayments, where “If the Contractor becomes aware of …the Government has otherwise overpaid on a contract financing or invoice payment, the Contractor shall…remit the overpayment amount to the payment office cited in the contract along with a description of the overpayment.”

Your Actions

What should you do? You should ensure you analyze your provisional billing rates at least quarterly and make any adjustments for an overbill or underbill situation. The sooner the better. As soon as final year end rates are available, remove any FAR Part 31 unallowable costs, and begin preparing your adjustment vouchers. If you find you are in an overbill situation, especially if there was a significant event at the end of the year that reduced your rates, consider contacting your ACO to discuss the situation and a repayment schedule. Adjusting your provisional billing rates to final year end indirect is important for not only compliance of contract administration, but also may provide further billing or just call it, money.

Redstone GCI assists contractors throughout the U.S. and internationally with understanding the Government’s expectations and supporting contractors with the process of establishing and revising provisional billing rates and preparing adjustment vouchers. We would be happy to be part of your team.