Unlocking the Mystery of Provisional Billing Rates: Why They Matter!

At a Glance

• Revealing the importance of Budgeting Indirect Rates and how they can be used.
• Unveiling where to begin what often feels like a daunting task!
• Who needs to prepare Provisional Budgeted Indirect Rates.

The full story 

What are Provisional Billing Rates or PBRs? 

Provisional Billing Rates (PBRs) are a way for contractors to invoice interim costs at a temporary rate for a specific fiscal period. This allows the contractor to invoice in accordance with their billing terms of their contracts, at the anticipated year-end actual rates. By stabilizing the billing rates for invoicing, it becomes more predictable for those responsible for approving the payments. Those that find their budgeted rates become materially different from the actuals, can resubmit and adjust what has been invoiced cumulatively (FAR 42.704(c))https://www.acquisition.gov/far/52.216-7. It’s crucial to note that while invoices aren’t ideal for calculating remaining funding, they are the customer’s primary reference.

Contractors with flexibly priced contracts (e.g., cost type and T&M) are required to submit provisional billing rates until final annual indirect rates are established, FAR 52.216-7(6)(e). Honestly, preparing your budgeted indirect rates on an annual basis is best practice for ALL government contractors, whether prime cost type contractor or firm fixed price subcontractor, and especially for those that have adequate accounting and estimating systems! The benefits outweigh the headache of preparing your budgeted rates!

An added benefit of preparing your annual budgeted indirect rates is revisiting your rate structure and assessing if that is the optimal rate structure for where your business is going?

Where do you begin?

A great place to start is with historical data, often when a Federal Agency auditor is reviewing budgeted rates, they like to understand where you have been.  Have your rates changed dramatically, and if so, why? Beginning with historical data helps to link the past to the future.

What are the two (2) primary uses for PBR?

Understanding who and how the PBR will be utilized helps the preparer “begin with the end in mind” as Author Stephen Covey puts it so eloquently! This arms the preparer to talk with different departments within the business from the Business Development (BD) team, to Accounting, to Operations. Pulling in all viewpoints and expectations.

In our opinion the two primary uses are:

• One is to establish the upcoming year’s billing rates for invoices. Once submitted you would begin billing the new fiscal year’s costs at the newly established billing rates. You would monitor throughout the year to ensure that what is being invoiced is tracking as close as possible to the actual rates.,

• The second use is for bidding on proposals for the upcoming fiscal year. If the budgeted rate was correctly prepared to include expected growth or decline, the rates would be applicable for any expected proposals. However, there are exceptions to this rule and that may mean an impacted budgeted rate is proposed for specific RFPs (Request for Proposal).

Where and When do I submit the PBR?

For those of you that have Prime contracts, you will submit your PBR to your ACO (Administrative Contracting Officer) or Contracting Officer of your largest Cost Type Contract (by default they are your de facto ACO) and/or to your Cognizant Federal Audit Agency such as DCAA, NIH, USAID, NASA, etc. Those Contractors only functioning as a subcontractor, you technically do not have a contract with the Federal Government and therefore they do not need to establish your provisional rates. However, some audit agencies like DCAA will sometimes establish budgeted rates for significant subcontractors.  Whereas other agencies (especially civilian ones) do not have the resources and workforce to review subcontractor’s budgeted rate packages.  That leaves you wondering what do I do? We would recommend having your rates established and audited by CPA firms that are well versed with the FAR and Government contracting to establish your rates for your prime contractors. It is really a discussion with your Prime contractor and the Federal Agency you are working with.

You should be submitting your Provisional Rate Package in early December, for those running a little behind, early January is fine but not preferred. This is of course assuming your company is on a December year end. We recommend, for those that have a different year end, to submit your PBR 30 to 45 days prior to your Company’s established year end.

Once submitted, you may receive acknowledgement of the submission, some will have their budget rates package audited, some may receive letters of their newly established provisional rates.

What if I choose not to submit my PBR?  What Then? Here are a few consequences to consider:

• With some agencies like USAID, they allow you only to invoice a de minimis 10% indirect cost rate without having established NICRA rates.
• However, for some contractors, the issue is non-compliance with your contracts and your accounting / estimating systems is a greater problem. Non-compliance with your business systems is an issue that can lead to withholds on your invoices and loss of your approved system(s)! The loss of an approved business system can prevent you from winning new work. It is a slippery slope that we find most contractors want to avoid.
• The other issue with not properly budgeting future fiscal year costs, is that you could be pricing and billing at a loss! Especially for those Fixed Price or Fixed Labor Hour type contracts, once they are signed and in place you are located to that amount whether you are making a profit or a loss!

Other names Provisional Billing Rates go by in the GovCon world:

• NICRA – Negotiated Indirect Cost Rate Agreement (typically issued by U.S. Agency for International Development aka USAID)
• ICRP – Indirect Cost Rate Proposal
• FPRA – Forward Price Rate Agreement (for Contractors that expected to have a significant amount of sales in the upcoming year).  This is typically for the top-tier contractors.
• Budgeted Indirect Rates
• Billing Rates
• Provisional Rates

A final thought: 

There are more upsides than downsides to preparing your annual budgeted provisional rates! The consequences of not preparing them can leave your accounting and estimating systems at risk of non-compliance.  You can also find yourself invoicing contracts at a loss, or just with uncompetitive rates because you have not spent time evaluating your rate structure with your budgeted costs.  There is a simple solution to avoiding these issues, prepare your budgeted rates today!

Aprio’s dedicated Government Contract Compliance team is here to help with your PBR development needs. Connect with us today to discuss your unique situation.