Provisional Rates Are Not the Same as Bid Rates

Calculating what to charge your agency customers is obviously one of the foundational actions for success in the government marketplace. What isn’t so obvious is how to navigate the complexities of rate setting to come up with a price that will reach your goals: 1) attract agency clients, 2) comply with government regulations, and 3) still earn a healthy profit.

One area where the process can get confusing is the proper use of provisional rates and bid rates. It’s true that there are certain circumstances—discussed below—where provisional rates may function as bid rates.

For the most part, however, provisional and bid rates are apples and oranges. They serve different purposes and get developed at different stages in the government procurement process.

The Apples: Provisional Rates Run for A Year

Your firm must establish provisional rates for interim billing purposes. Here’s how it works:

  • Provisional rates are based on the indirect costs (fringe, overhead, general & administrative, and other allowable indirect pool costs) 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 your customers for their estimated share of your allowable indirect costs. Rules for establishing provisional billing rates appear in the Federal Acquisition Regulation (FAR) Part 42.704. These rules specifically regulate contract administration, not proposal pricing.
  • Provisional rates apply to contracts with a cost-reimbursable element—including cost-plus—as well as the reimbursable portion of most Time & Material (T&M) contracts. If a contract includes an Allowable Cost and Payment Clause (FAR 52.216-7) or a T&M Payment Clause (FAR 52.232-7), a provisional rate is required.
  • Your firm calculates provisional rates before the year begins, or as early in the fiscal year as possible, so you can invoice indirect costs throughout that year. Provisional billing rates are intended to approximate the future year-end rates adjusted for any unallowable costs. You are responsible for monitoring provisional billing rates and revising them if significant changes render your original estimates inaccurate.
  • The DCAA prefers a voluntary submission of a billing rate proposal each year. Ultimately, this should be discussed with the Contracting Officer or cognizant auditor in terms of establishing billing rates and the process for truing up indirect rates.
  • Actual indirect rates are computed for the fiscal year’s end and submitted through an incurred cost submission to your Defense Contract Audit Agency (DCAA) office and Contracting Officers (COs). The final true-up of provisional rates occurs when a settlement is reached on final indirect rates, although you may coordinate a process for annual adjustments.

The Oranges: Bid Rates (Mostly) Span Multiple Years

Once you’ve carefully calculated the most accurate provisional billing rates possible, it may seem to make sense to use them as bid rates in contract proposals. After all, some bid solicitations even sanction this use of provisional rates.

Here’s why provisional rates are rarely an adequate stand-in for bid rates:

  • Most proposal bids are for multi-year contracts. When provisional rates cover a single fiscal year, they cannot reasonably represent forward pricing rates for future years.
  • Calculations for provisional billing rates do not factor in how a contract win will affect the bidder’s indirect rates. The solicitation often explicitly requires you to do the math: bidder’s current work + contract win = new basis for calculating indirect costs.
  • The letter you receive from DCAA that establishes your provisional billing rates will explicitly state something comparable to, “The established rate shall not be used for any other purpose than for provisional billing rates (e.g. forward pricing or final indirect cost rates).”
  • You may, however, include provisional billing rates as part of your justification and support for your forward pricing bid rates.

Mixed Fruit: The Exceptions to The Rule

There are circumstances where you can use provisional billing rates as your bid rates. One exception may be when you’re bidding on a contract with a narrow period of performance that is completely encompassed by your current fiscal year and the bid will not materially change your rate outlook.

Other instances are when the bid will not materially change your rate outlook over multiple years.  Examples include:

  • The bid is not large enough to have a notable rate impact,
  • Indirect cost increases are needed to support the work, effectively maintaining the existing rate structure, or
  • The bid will replace business ending—resulting in a neutral position.

The bottom line is, do the extra math!  Know your rate impact and use this to your advantage in pricing your bids.

Contract bidding requires calculations that are complete, precise, and profitable. That’s the only way to produce a win-win for you and your agency customer. CAVU’s experienced financial team has helped our clients come out on the winning end of hundreds of government solicitations. Contact us to tap into that expertise.