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Forward pricing vs. provisional billing


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As far as I can tell, my company has never had a forward rate pricing agreement (FRPA) but has always had negotiated provisional billing rates with DCAA (NICRA). Given the absence of an FRPA, the NICRA has been a catch-all rate agreement used in all cost plus billings subject to the allowable cost and payment clause, but also used in all cost proposal and pricing activity. Is this process alone deficient? 

The rates estimation process has always been very successful and never results in material fluctuation of the rates. In fact, the provisional rates are always quite close to our actuals, so to use them in our proposals seems very reasonable and is a good indicator of what our future costs may be. I know the FRPA and NICRA are for different purposes but I am much more familiar with NICRAs. Is there an inherent risk of bidding contracts in this way?

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If the provisional billing rates are valid only for the current FY(subject to adjustment at year end), how does this work for proposed work that extends into another FY or two? Even if the work is to be performed only during the current FY, how would this work if the proposed increased your base enormously? Would you not think there should be some adjusted rates in the proposal response if current cost or pricing data applied? Maybe you could clarify the details of the  Provisional Billing Rate Agreement.

Edited by Neil Roberts
add parenthesis and substitute Provision Billing Rate Agreement for FPRAwith
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Thanks Neil. All I can really say is that it has always worked that way, and I have never heard of the government requiring the FP versus just accepting provisional billing rates as the award basis. I’m with you though, they two agreements would seem to serve fundamentally different purposes.

If we sent a proposal at our current year provisional indirects last June, and the government now intends to award today (new fiscal year, new rates), would we be required to disclose the new rates and submit a final proposal revision? (Assuming a certificate of cost and pricing data were required).

I suppose with the FP the rationale is that forward period would already be covered with an approved rate correct - unless true government took a really long time to make the award?

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@Needforspeed, since this has always worked, keep doing it is one option. I would disclose that a new provisional rate agreement is in work and if the award is made before that takes place, I would sign the current cost or pricing certificate without any related changes to the proposal.

Edited by Neil Roberts
delete redundant wording
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It is not mandatory to have a Forward Pricing Rate Agreement (FPRA). Oftentimes they are more trouble than they are worth.

The contractor should propose its best estimate of future indirect rates to be incurred during contract performance and be prepared to support its estimate during a proposal fact-finding or audit just like any other estimate. That said, normally DCAA likes to see detailed budgets for the upcoming year with outyear adjustments based on known events/trends, such as award of large contracts.

If you read 52.217-6, it is clear that the provisional billing rates should be the contractor's expected actual rates, and that the billing rates should be adjusted as necessary (either prospectively or retroactively) to prevent any significant under or over billings.

In my experience, a NICRA covers audited, negotiated rates. It is the document that establishes final billing rates, not provisional or interim billing rates. To be clear, I'm not saying that a NICRA cannot be used to establish provisional billing rates; I just haven't experienced that scenario.

There is another set of rates, which is what the contractor uses to establish contract costs during performance, prior to receiving audited/negotiated final rates. Those rates may be linked to an FPRA or a NICRA, or they can be the contractor's best estimate of actual indirect cost rates to be incurred during the current year. Note that these rates are not subject to government approval, but they are critical because they help establish contract Estimates at Completion and thus drive tracking of costs incurred against funds provided.

So ... there can be overlap between actual rates, billing rates, and forward pricing rates--especially for the current or upcoming year. A contractor with cost-type contracts should understand where the sets of rates overlap and where they differ. That contractor should be monitoring variances and proposing adjustments to provisional billing rates as required by 52.216-7. That contractor should be updating its (internal) forward pricing rates based on what it sees in the future, especially if those same rates are also used to estimate fixed-priced contracts.

Frankly--and without meaning to condescend--understanding the interaction of indirect rates between actual, provisional, final, and forward pricing is fundamental to managing cost-type work, regardless of whether you are on the contractor or government side. I'm frequently surprised how many people--especially those in contracts--don't understand the interplay. I strongly recommend a thorough read of 52.216-7 for any individual who wants to better understand billing rates. For forward pricing rates, see Table 15-2.

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1 hour ago, here_2_help said:

Note that these rates are not subject to government approval, but they are critical because they help establish contract Estimates at Completion and thus drive tracking of costs incurred against funds provided.

This is an important point.  It is surprising how many contractors track direct costs for compliance with the Limitation of Cost clause, but forget to track indirect costs.  This frequently results in the contractor experiencing an overrun on the contract because the contractor's final indirect cost rates turn out to be higher than the billing rates.  Unless the contractor could not have known of the overrun before it occurred, the contractor generally cannot recover the overrun costs.

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16 hours ago, Neil Roberts said:

since this has always worked, keep doing it is one option.

Just beware, the Certificate of Current Cost or Pricing Data covers the indirect cost rates you apply in the proposal.

And for COs: beware of trusting a proposal with just an extension of current year provisional billing rates into outyears.  Ask the question: did you analyze your business base to project these outyears?

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17 hours ago, Neil Roberts said:

I would disclose that a new provisional rate agreement is in work and if the award is made before that takes place, I would sign the current cost or pricing certificate without any related changes to the proposal.

What if DCAA already agreed to the now current year target rates which are different from the ones first proposed? Agree about disclosing it - of course. But is there an actual obligation to amend your pricing if required to sign a C&P certificate - if the government doesn’t ask for a final proposal revision? 

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In my experience on the civilian agency contracting side, most COs would not know the difference between provisional and actual indirect rates. They also would not have any real awareness for how or why rate fluctuations occur. Maybe if there was a cost/price analyst in the office. If awarding a cost plus contract COs knew they had to document their analysis of the rates in the negotiation memorandum to demonstrate they reviewed the rates and found them reasonable. Even if that meant pointing to the previous rate agreement used for the same contractor five years back and not wanting anything updated. Forward pricing rates? Not a shot.

To counter Retreads point that contractors forget to track indirect costs - any adequate accounting system should have a decent ability to estimate and compare actuals to provisionals throughout the year. I think most project and finance staff grasp that concept pretty well. I don’t know that they forget to track them though - how could one even forget and still be compliant with the award - only calculating your indirects once after the completion of the entire fiscal year? I would say more likely the estimation of the rates was just bad. For whatever reason. The fluctuations were so drastic they could not have seen the broader impact against available funding before it was too late. Unless you are in a really big company, the act of estimating the rates is probably a job privy to one or two people in the company. 

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37 minutes ago, Needforspeed said:

But is there an actual obligation to amend your pricing if required to sign a C&P certificate - if the government doesn’t ask for a final proposal revision? 

No.  In regard to the certificate, you only have to make sure that you have disclosed all the relevant cost or pricing data.  Your proposal is not cost or pricing data.

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2 hours ago, Needforspeed said:

What if DCAA already agreed to the now current year target rates which are different from the ones first proposed? Agree about disclosing it - of course. But is there an actual obligation to amend your pricing if required to sign a C&P certificate - if the government doesn’t ask for a final proposal revision? 

I would ensure the disclosure was in writing and states that the most current data is that there now revised rates agreed to by DCAA and Contractor. Most medium to large size contractors that I have worked for or dealt with over the years have a written procedure (which may be required for an approved procurement system) and/or practices to do a final sweep of current cost or pricing data and whether you want to call it courtesy or required, will provide a revised proposal even if only limited in elements or even just the bottom line delta dollars and more, if asked to do so. This can also provide a company with more confidence against any later allegation of defective pricing. Some such contractors even go the length of including a laundry list of the data items disclosed and a reference to the document description and date that did so, and reference the laundry list in the Certificate that is signed.  

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