Provisional Billing Rates – Part II

You now understand a little bit more about provisional billing rates from our first of this two-part series. In this second part of our coverage of provisional billing rates, we delve a little deeper into the purpose behind provisional billing rates as well as how to prepare them and the differences between provisional billing rates and proposal bid rates. Knowing these details will enable you to prepare an accurate DCAA submission.

What Regulation Provides Guidance for Provisional Billing Rates?

FAR 42.704 Billing Rates.

What Type of Contracts Require the Use of Provisional Billing Rates?

Contracts that have a cost-reimbursable element to them will require provisional billing rates.  This includes all forms of cost plus and then likely time and material contracts as well.  If your contract includes the Allowable Cost and Payment Clause, FAR 52.216-7, or the T&M Payment Clause FAR 52.232-7, then provisional billing rates will likely be required.  Pure labor hour contracts (T without the M) should not require provisional billing rates, because they do not have a cost reimbursable portion.

When Do you Prepare Provisional Billing Rates and How Often?

Per FAR 42.704, provisional billing rates should be submitted early within a contractor fiscal year for purposes of invoicing indirect costs (January for those contractors with a 12/31 fiscal year-end).  This should be done annually at a minimum.

Why Do you Prepare Provisional Billing Rates?

Provisional Billing Rates are established to estimate the contractor’s final year-end indirect rates.  They are used for interim billing purposes until settlement is reached on the final indirect rates via the incurred cost submission filed for the contractor’s fiscal year. The better the estimate, the less true-up required.

Who Do I Submit my Provisional Billing Rates to?

Contractors should submit provisional billing rates to its DCAA Office and Administrative Contracting Officer (electronic submissions are preferred).

What Happens if I Never Get a Response from my ACO or DCAA Approving my Provisional Billing Rates?

Often times contractors might not receive a timely response to their submitted provisional billing rate package.  Sometimes no response at all.  We recommend adding language within your correspondence that lets DCAA or your ACO know that you intend to begin using your provisional billing rates within 30 days of submittal. This puts DCAA and/or your ACO on notice of what your intentions are moving forward.  Be advised, though, if voucher examinations are conducted DCAA will default to the last approved provisional billing rates which can often cause delays in voucher payment.  It is important to follow-up with your ACO and DCAA particularly in situations where use of prior year “approved” provisional rates will result in overbilling or underbilling.

Can I Change my Provisional Billing Rates Mid-year?

Yes.  It is the contractor’s responsibility to monitor provisional billing rates throughout the year.  If, through your monitoring process, you determine that your provisional billing rates are no longer accurate, you may submit revised provisional rates.  Once revised, provisional rates are accepted, retroactive application of those rates would then be applied to fiscal year billings via a true-up voucher.  Coordination of the true up voucher with your customer and DCAA is important to ensure timely payment as the voucher is typically submitted outside the monthly or bi-weekly payment cycle for normal invoicing. 

Should Provisional Billing Rates be Used as Bid Rates?

Lately, some solicitations have allowed contractors to use their approved provisional billing rates as bid rates in their proposals.  We caution this method because provisional billing rates, by definition, only apply to the current fiscal year.  They do not take into account the impact of the award, on not only your current year, but the subsequent years to come.

Why Does my Provisional Billing Rate Letter from DCAA State that Provisional Billing Rates Should Not be Used for Cost Proposals or Forward-Pricing Rates?

When your ACO or DCAA established billing rates, they do so in accordance with FAR Part 42. Part 42 deals with contract administration and not proposal pricing. Remember, provisional billing rates apply to one year only. They should be established early in a contractor’s fiscal year and be used for billing indirect rates for cost-type contracts or any contract that will require final indirect cost rates per FAR 42.705. In most cases, provisional billing rates are not reasonable representations of indirect rates for future years. The government will never make the assumption that a bidder’s provisional billing rates are indicative of future rates. There is too much risk from a government perspective. In some solicitations, there are clear requirements for the bidder to assume a win and to factor in the direct costs from the proposed effort into an indirect rate allocation base for purposes of forecasting indirect cost throughout the contract period. In most government pricing models, this addition is very clear: current work plus assumed win of this effort equals new allocation base for indirect costs. The only time provisional billing rates should be used for bid rates, would be a situation where a solicitation has a very narrow period of performance – within a contractor’s current fiscal year. And those situations are very few and far between.

When Do I True up my Provisional Rates to my Actual Indirect Rates and How?

Internally, you should be truing up your provisional rates to actuals on a monthly basis for evaluation and budgeting.  However, you are required to true up your rates annually.  The Allowable Cost and Payment Clause (FAR 52.216-7) requires a contractor to submit an incurred cost submission (ICS) annually.  The ICS in an excel file that DCAA provides contractors on their website that, once populated, provides the actual rates incurred for the year.  Within the ICS, Schedule I trues up your annual billed amounts to the costs that were actually incurred for review by DCAA.

Can I Use my Proposal Bid Rates as my Provisional Billing Rates?

No.  Proposal bid rates are developed at a different point in time than your provisional billing rates.  Proposal bid rates are specific to the expectation of what a win on a particular contract will do to your business base and how it will affect your indirect rates.

Do I have Different Provisional Billing Rates for Each Contract?

No.  Your provisional billing rates should be the anticipated rates for the upcoming year based on all contracts you have and expect to gain in the upcoming year.  Because the provisional billing rates take into account your entire business base, you will use the same billing rates for all contracts that you have and gain in the fiscal year.

The team at Redstone GCI has the expertise to help you navigate provisional billing and proposal bid rates, ensuring contractors of all types prepare timely rate according to FAR Part 42. Let our experts guide you through this process.