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 cost-type contract? Were your year-end actual indirect rates wildly different from the Provisional Billing Rates set at the start of the year? Now is the time to develop accurate billing rates for the new year, so you can invoice for indirect costs using provisional rates that are as close as possible to what you anticipate final indirect rates will be.

What are Provisional Billing Rates?

Provisional Billing Rates (PBRs) are estimates of a contractor's indirect rates used to invoice indirect costs incurred on cost-reimbursement type contracts, pending final determination of indirect rates once the contractor's year has ended and the books have been closed.

FAR 42.701 defines provisional billing rates as:

an indirect cost rate
(1) Established temporarily for interim reimbursement of incurred indirect costs; and
(2) Adjusted as necessary pending establishment of final indirect cost rates.

Direct costs charged to a contract are pulled from 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. PBRs enable contractors to bill the Government for an estimated share of a contract's indirect costs like Fringe, Overhead, and General & Administrative (G&A) over the course of the year.

How are Billing Rates set?

In estimating provisional indirect rates, the objective is to come as close as possible to the contractor’s final indirect cost rates for their fiscal year. Provisional Billing Rates are set based on the expected indirect costs for the contractor’s fiscal year, excluding any unallowable or nonrecurring costs.

FAR 42.704(b) specifies the process for setting Provisional Billing Rates: 

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 accurate provisional billing rates.

What is included in a Provisional Billing Rate Proposal?

Contractors should include the following in a 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 when estimating rates?

DCAA provides guidance on Provisional Billing Rates through a presentation available on their website. It expressly states that you cannot simply use the most recent FY ended rates for provisional 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 (For more, see DCAA's: 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 more precise PBRs (and thus potentially more favorable) 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 an Incurred Cost Proposal.  The contractor must then "true up" interim rates with the actual final indirect rates.

No contractor wants to be in the position of significantly 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 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.