Government contractors, regardless of size, must develop provisional indirect billing rates if they have cost-reimbursable contracts. These indirect rates are forecasts of what contractors believe will approximate their final rates for a particular accounting period (calendar year or fiscal year). The rates are applied to direct costs charged to cost reimbursable contracts and then billed to the Government. Because they are provisional, contractors must set up a system to periodically monitor their actual rates, compare then to the billing rates, and adjust the billing rates if their estimates do not track fairly closely to the actual rates. Within six months after the end of the accounting period, contractors are required to calculate their final rates and true-up or adjust their billings accordingly.
Contractors need to submit provisional billing rates to DCAA at the beginnig of each year for approval. DCAA is tightening up its procedures in this area. Whereas before, DCAA was somewhat lenient, allowing contractors a month or two to submit rates for a new year, they are not so apt to do that any longer. Now they routinely reject vouchers that are prepared without approved provisional billing rates. This can certainly affect contractors' cash flow as it adds several weeks to the process of getting paid.
The Government requires contractors to set up a process for monitoring provisional billing rates so that those rates can be adjusted (either up or down) as required. Some DCAA offices assert that the monitoring should be performed monthly. Others contend quarterly. Still others rely on judgment. The FAR does not perscribe a particular interval. We maintain that the monitoring should be performed more frequently when rates are volitile and less frequently when rates are stable. The nature of the business and business volume fluctuations have a lot to do with rate stability. Mature businesses tend to have more rate stability than start-ups. Contractors with significant backlog tend to have more rate stability than those with little or no backlog.
Usually, the process of calculating interim indirect expense rates is not difficult or time-consuming. Some accounting systems such as Deltech, do this automatically. But even if you're using QuickBooks, it is a simple matter to build a spreadsheet model to calculate rates. Most of our clients on QuickBooks can run their rates in just a few minutes.