While a contractor’s forward pricing rates may sometimes get confused with their provisional billing rates, by the contractor and even the government, they are completely different rates developed for completely different purposes.
From a purely technical perspective forward pricing rates are defined by FAR Part 15, Contracting by Negotiation, and are part of the solicitation process. Provisional billing rates are defined in FAR Part 42, Contract Administration and Audit Services. From a practical perspective, forward pricing rates establish a fair and reasonable baseline for the negotiation of product or service pricing and anticipated profit (i.e. impacting the P&L) while provisional billing rates provide for cash flow during contract performance (i.e. impacting the Balance Sheet) through progress payments and public vouchers on cost-type contracts.
Provisional Billing Rates
If you have cost-type contracts, time and material contracts or fixed price contracts with progress payments you will need provisional billing rates to use for interim invoicing until actual indirect rates are determined and invoiced amounts adjusted, up or down, to reflect actual costs incurred.
These provisional billing rates should not be confused with forward pricing rates used for pricing contractual efforts that can and often do cover more than one fiscal year. Provisional billing rates to be used in preparing interim contract billings should be established directly prior to the beginning of the contractor’s fiscal year or at the latest prior to the preparation of the first billing. They are established by the cognizant administrative contracting officer or auditor responsible for determining final actual indirect cost rates for the applicable fiscal period.
These rates are expected to approximately equal the final actual indirect rates for the applicable fiscal period. They can, and should be, prospectively or retroactively adjusted during the applicable fiscal period by the mutual consent of the government or the contractor to prevent substantial over or under payment situations when compared to actuals.
The contractor should provide the ACO or the auditor a billing rate proposal that includes:
- A comparison of allocation base and indirect expenses by account as forecasted and actual indirect rates for the prior two completed years and, if applicable, the current fiscal year to-date if the year is not completed at the time of submission.
- An explanation for any significant variances between the forecasted and actual amounts for each prior period.
- The mix of U.S. Government contracts by agency (DoD, NASA, FHWA, etc.) and contract type (FFP, CPFF, T&M, etc.) reflected in each allocation base reflected above (Reflected in Schedule H of the Incurred Cost Submission).
- A listing of all open and anticipated U.S. Government contracts to be performed during the coming fiscal period indicating the contract number, award date, period of performance, award amount and contract type.
- A listing of forecasted pool expenses, by account, and the associated allocation base amounts applicable for each indirect rate pool proposed for the subject fiscal period.
- A description of actual and/or anticipated changes in organization, operation, or indirect rate structure for the subject year.
Final indirect cost rates will be determined through the submission of the contractor’s Incurred Cost Submission as required by FAR 52.216-7, Allowable Cost and Payments.
Forward Pricing Rates
A Forward Pricing Rate Proposal (FPRP), governed by FAR Part 15, is submitted to the cognizant Administrative Contracting Officer (ACO) by the contractor. It establishes an estimate of their indirect rates over a projected period of time (i.e., next fiscal year or multiple future fiscal years reflecting the anticipated period of contract performance. Once agreed to by the government and the contractor, the resulting Forward Pricing Rate Agreement (FPRA) is to be utilized in the preparation and negotiation of all subsequent pricing actions applicable to the periods projected. These FPRA’s are extremely convenient and cost effective if the contractor anticipates experiencing a large volume of proposal activity and subsequent price negotiation since it removes the negotiation of indirect costs from the pricing and auditing equation.
The government and the contractor should continually monitor these projected rates to those being experienced or anticipated. The indirect rates included in the FPRA should reflect the impact of including the subject proposal and be adjusted for use on any proposed contractual efforts that would significantly impact the agreed to rates. Support to be provided is essentially the same as indicated above in requesting provisional billing rates except for the period of time projected.
FPRA’s often require a contractor to have the ability to project allocation bases and indirect expenses pools over more than the current fiscal period so as to cover contractual efforts/periods of performance that spans more than the current fiscal period. For this reason, a contractor needs to establish a comprehensive budgeting process documented in written policies and procedures to ensure consistent applications that have been reviewed and accepted by the government.
When preparing a proposal never arbitrarily reduce your forward pricing rates to become more competitive unless you have a solid plan to increase the applicable allocation bases or reduce the allocated indirect expense pool. Your customer needs to know the cost of your efforts. If you need to propose a lower price reflect the reduction in a separate “management adjustment” outside of your pricing rate calculation.