3 Updated Challenges of Provisional Billing Rates & How to Be Prepared

Summertime, and the livin’s easy…unless you’re tackling provisional billing rates, that is.

Summer is not the traditional rate-setting season for government contractors. Your GovCon, however, may be preparing to submit mid-year revised rates or bid on a contract that requires you to submit provisional billing rates for the first time.

Whatever the case, while rate setting can be more complex than it seems, you can emerge from the process in a stronger strategic position by preparing for the challenges ahead of time.

Due Diligence with DCAA

The government typically directs contractors to submit provisional billing rates (aka indirect cost rates) to the Defense Contract Audit Agency (DCAA) on an annual basis in the month preceding the beginning of the fiscal year—December for most companies. DCAA reviews and approves the rates and issues a provisional billing rate agreement letter.

Provisional rates are based on indirect costs [fringe, overhead, general & administrative (G&A), and other allowable indirect cost pools] that apply across all government contracts your firm has already won or expects to win for the fiscal year. You apply these provisional rates to bill agency customers for their estimated share of your indirect costs. Rules for establishing provisional billing rates appear in the Federal Acquisition Regulation (FAR) Part 42.704.

GovCons are responsible for monitoring provisional billing rates and revising them when there are significant changes in original estimates. We recommend checking provisional rates against actual indirect costs on a monthly basis.

Potential Pitfalls and & How to Avoid Them

In past blogs, we have presented the basic steps of provisional billing rate development. Now, we update you with the latest challenges so you can be prepared:

  1. DCAA is conducting more extensive reviews that require presentation of multi-year analyses and calculations of indirect expenses for comparison against proposed provisional rates. These more extensive reviews magnify the strategic importance of establishing accurate rates at the beginning that cover all expenses. Otherwise, past inaccuracies can return to haunt you.

For example, if you bid low indirect cost rates on initial contracts without rationale, you may lack the resources to invest in growing the infrastructure necessary for a thriving business in future years. When you attempt to increase indirect rates to rectify the situation, you may get resistance from DCAA, which can cite your rate history to justify its objections.

  1. DCAA is also asking for more supporting details. In the post-pandemic era, these may include whether you received Paycheck Protection Program funding, a Small Business Administration (SBA)-a backed loan that helped businesses keep their workforce employed during the COVID-19 crisis.

They may also ask for contract mix data—prime, full-and-open (F&O); prime, small business set aside (SBSA); subcontract, etc.—as well as current fiscal year awarded contracts and their applicable demographics.

  1. Be ready to present your analysis in an electronic format (e.g., Excel) with sufficient detail for the agency to readily review your submittal’s adequacy. These may include data such as:
      • Staffing analysis with labor costs allocated among direct labor, overhead labor, and G&A.
      • Line-item projection based on your chart of accounts for indirect expenses.
      • Rate calculations.

Be prepared for DCAA to perform a detailed analysis that compares proposed expenses to the prior year and year-to-date amounts.

Preparing to gain DCAA approval on provisional billing rates can seem overwhelming, especially when you’re confronting the process for the first time or have a complex scenario to consider. The GovCon accounting experts at CAVU have the tools you need to pull relevant data from your business records, present them in preferred DCAA formats, and crunch the numbers for rates that attract customers, meet DCAA requirements, and earn a profit.