Back in March, we posted comments on the requirements and expectations for establishing billing rates. You can read that post here. Since then, we have received a number of inquiries as to how often those rates need to be revised. In this post, we hope to answer that question.
The requirements for establishing provisional billing rates (sometimes called interim billing rates) is found in FAR 42.704. FAR states that the contracting officer or auditor shall establish billing rates on the basis of information resulting from recent review, previous rate audits or experience, or similar reliable data or experience of other contracting activities. In establishing billing rates, the contracting officer or auditor should ensure the billing rates are as close as possible to the final indirect cost rates anticipated for the contractor's fiscal period.
As a practical matter, it doesn't really work that way. The contracting officer or auditor rely on contractors to propose their own provisional billing rates and once submitted, will review the supporting data and estimating methodologies and either approve the proposed billing rates or make some adjustments.
The goal in establishing billing rates is to approximate the year-end actuals as closely as possible. As the year progresses, and actual costs become known, estimates of final rates will become easier to determine. One element of an adequate billing system is a process to compare actual rates (or actuals plus estimates to complete) with provisional billing rates and adjust the provisional billing rates if the difference becomes too great. There is no limit to the number of times during the year for contractors to revise their billing rates. Circumstances change throughout the year and significant changes (like losing out on a significant bid) will impact rates.
At the end of the fiscal year, the actual rates (less adjustments for potentially unallowable costs) will replace the provisional billing rates and both the contractor and the Government are even, in theory.
There are no set criteria for determining when established billing rates need to be revised. We often advise clients to get serious about revising rates when it appears that rate trajectory will impact billings by plus or minus five percent. Some auditors see five percent as too high. Since at the end of the year, provisional rates are adjusted to actuals, the impact to the Government or to the contractor, depending upon whether the rates are too high or too low, is limited to the time value of money.
We recommend that small contractors compare actual rates with approved billing rates on a quarterly basis at a minimum. Larger contractors should make those comparisons on a monthly basis.