Understanding the Differences: Provisional Billing Rates, Forward Pricing Rates, and Predetermined Rates

In government contracting, understanding the various types of indirect cost rates used for pricing and billing is crucial.

Why? By establishing indirect rates, contractors are equipped to calculate the total cost of contract performance. Additionally, federal contractors are also able to determine how much of their indirect costs (G&A, overhead, etc.) can be recovered. There are three indirect cost rate types commonly used:

Each rate type is unique, serves a distinct purpose, and is applied at different intervals during the contract life cycle or contract process. Understanding these differences helps contractors manage their financial planning, business operations, award portfolio, and compliance with government regulations effectively. Equally important, negotiating indirect cost rates directly with prime contractors is crucial for federal subcontractors to ensure fair and adequate compensation to maintain profitability. Often, this can involve multiple rounds of discussions to reach a mutually acceptable indirect rate. For subcontractors exceeding certain thresholds, they must provide certified cost or pricing data to support their proposed rate. However, this can become a challenge when trying to protect proprietary data when partnering with a competitor for a teaming agreement or under a prime/sub-agreement. In any case, certified cost and pricing data must be current, accurate and complete as of the date of the pricing agreement. Let’s explore the differences between them.

Provisional Billing Rates are typically established at the beginning of the contractors’ fiscal year and are temporary indirect rates purposed for interim billing and reimbursement of costs incurred. These rates may be adjusted during the fiscal year, if needed, but otherwise are set rates until actual/final indirect rates are determined, concluding the contractor’s fiscal year-end. Provisional billing rates are used to facilitate cash flow during contract performance, particularly for cost-type contracts, time and material contracts, or fixed-price contracts with progress payments.

Subcontractors may also use provisional billing rates to bill the prime contractor for indirect costs incurred during their portion of the work. This helps maintain their cash flow and ensures they can cover ongoing expenses. Just like prime contractors, subcontractors need to reconcile provisional rates with actual costs at the end of the fiscal year. This can lead to adjustments in payments, either additional reimbursements or refunds.

Forward Pricing Rates are estimates of future costs used to price contracts and contract modifications which provide a basis for pricing contracts and modifications. These rates are negotiated between the contractor and the government and are intended to establish a fair and reasonable baseline for the negotiation of product or service pricing, often covering multiple fiscal years.

When prime contractors negotiate forward pricing rates with the government, these rates often include costs associated with subcontractors and escalation factors and consider known and anticipated changes to business volume and/or operations. Subcontractors need to provide accurate cost estimates to the prime contractor to ensure that the forward pricing rates reflect their anticipated costs. Forward pricing rates help subcontractors by providing a consistent basis for pricing their work on future contracts and modifications. This can simplify negotiations and ensure that subcontractors are fairly compensated for their contributions.

Predetermined Rates are fixed indirect cost rates applicable to a specified period, usually the contractor’s fiscal year. These rates are based on an estimate of costs to be incurred during the period and cannot be adjusted once established regardless of actual costs incurred. Fixed rates provide certainty and stability in budgeting and cost allocation but do not offer the flexibility to account for or recover costs due to unexpected change.

Subcontractors benefit from the stability and predictability of predetermined rates. These fixed rates allow subcontractors to plan their budgets and allocate costs with confidence, knowing that the rates will not change during the specified period. Subcontractors use predetermined rates to allocate indirect costs to their contracts consistently. This helps in maintaining accurate financial records and ensures compliance with government regulation.

Authors: Bernadette Sweeney, CPA, Principal | [email protected] and Shayla Ferguson | [email protected]