Are Your Provisional Billing Rates Ready for the New Year?
Why Provisional Billing Rates are important in Government Contracting, and what you need to know about setting accurate rates for the year ahead
Have you had to pay back the Government because you over-billed for indirect costs on your contract? Maybe your Forward Pricing Rate Proposal established Provisional Billing Rates that had nothing to do with the year-end reality. Save yourself from jumping through hoops, not to mention embarrassment, by taking time now to develop more realistic Provisional Rates.
What are PBRs?
No, not the beer. PBRs, or Provisional Billing Rates, are used in interim payments to contractors for reimbursement of indirect costs incurred on cost-type contracts. Provisional Billing Rates enable you to bill for an estimated share of indirect costs like Fringe, Overhead, and General & Administrative (G&A), in addition to your direct costs, pending final determination of your indirect rates.
Direct costs are pulled out of the general ledger for invoicing. While indirect costs are also incurred, actual indirect rates are not known until the end of the contractor’s fiscal year when all costs have been recorded and final indirect rates have been agreed upon. Provisional Billing Rates are established each year to approximate the contractor’s year-end indirect rates, so you can recoup indirect costs over the course of the year. When a contractor submits a periodic invoice to the Government, along with the contract’s direct costs, indirect costs incurred are invoiced using the agreed upon Provisional Billing Rate.
How are Billing Rates set?
In setting Provisional Billing Rates, the objective is to come as close as possible to the contractor’s final indirect cost rates for the fiscal year. PBRs are set based on the expected indirect costs for the contractor’s fiscal year, excluding any unallowable or nonrecurring costs. FAR part 42.704(b) specifies the process:
The contracting officer (or cognizant Federal agency official) or auditor shall establish billing rates on the basis of information resulting from recent review, previous rate audits or experience, or similar reliable data or experience of other contracting activities. In establishing billing rates, the contracting officer (or cognizant Federal agency official) or auditor should ensure that the billing rates are as close as possible to the final indirect cost rates anticipated for the contractor’s fiscal period, as adjusted for any unallowable costs. When the contracting officer (or cognizant Federal agency official) or auditor determines that the dollar value of contracts requiring use of billing rates does not warrant submission of a detailed billing rate proposal, the billing rates may be established by making appropriate adjustments from the prior year’s indirect cost experience to eliminate unallowable and nonrecurring costs and to reflect new or changed conditions.
Prior to the beginning of the fiscal year, contractors may submit a Provisional Billing Rate Proposal to the administrative contracting officer (ACO) or auditor responsible for the final indirect cost rates, to assist with establishing an accurate provisional billing rate.
What should you include in a PBR Proposal?
Contractors should include the following in Provisional Billing Rate Proposal according to DCAA (See: DCAA’s Provisional Billing Rates presentation):
- Proposed billing rate calculations (Pool and Base) with brief rationale
- Prior fiscal year (FY) pool and base
- Current fiscal year-to-date pool and base
- Current FY budget pool and base (if available)
- Comparative analysis with explanation of any significant differences
The above details should be provided for each cost pool.
How should you account for growth?
DCAA provides guidance on Provisional Billing Rates through a presentation available on their website. They expressly state that you cannot simply use the most recent FY ended rates for billing purposes. The contracting officer or auditor responsible may take prior year history into account, excluding unallowable costs, nonrecurring costs, or a change in conditions, when establishing provisional billing rates.
Ideally, Provisional Billing Rates should be based on the forward looking budgetary data for the new fiscal year (See: Information for Contractors, Enclosure 5). Contractors can, and should, provide input on changes anticipated for the coming year to assist in determining accurate rates.
A detailed budget justifies a more precise (and thus potentially more favorable) PBR for the upcoming year. Let’s say you have had a significant shift in your workload. Through your budget development process, you find your anticipated indirect rates will be going down compared to your prior year’s historical data. If you establish a PBR for the new year based on last year’s data alone, you may be setting your company up to over-bill the Government. Instead, by providing your budgetary data as the basis for establishing your PBRs, you’ll be billing closer to what you anticipate costs will actually be for the year.
Suppose your business is on a growth trajectory. You anticipate additional money will be spent in your indirect cost pools in the coming year. You want to recover your costs, so you should incorporate this information into your budget in order to propose provisional rates that adequately fund the anticipated indirect costs.
Remember, always exclude unallowable costs when making your provisional billing rate calculations.
What happens if your rates are off?
Ultimately a contractor’s actual year-end indirect rates are set at the end of the contractor’s fiscal year, when the final allowable expenses are signed off on through a Incurred Cost Proposal.
No contractor wants to be in the position of under-billing, or vice versa, over-billing and owing money back to the Government. The Government certainly doesn’t want to overpay.
Contractors should regularly monitor actual indirect rates versus your established Provisional Billing Rates throughout the year. If your actual rates start to show a significant variance from your projected expenses, you may need to request an adjustment on your interim rates.
How ICAT can help
ICAT's Indirect Rate Variance Report helps you stay on top of your Provisional Billing Rates vs. actual indirect rates throughout the year.
ICAT’s budget development tool enables you to take last year’s actual costs and build a financial road map for the new year. Toggle in/out proposed work, build in escalation rates and known changes, and calculate your new provisional billing rates based on how these factors will impact your finances in the year ahead.
Learn more about ICAT for QuickBooks®.