Thursday, September 2, 2010

Forward Pricing Rate Agreements

Forward Pricing Rate Agreements (FPRAs) are very useful for contractors having a significant volume of Government contract proposals. When there is an FPRA in effect, the contractor and the Government do not need to spend time during contract negotiations haggling over indirect expense rates - the proposed indirect rates are already settled.
Anyone can initiate a request for an FPRA. It may be requested by the contracting officer or the contractor or initiated by the administrative contracting officer (ACO). In determining whether or not to establish such an agreement, the ACO should consider whether the benefits to be derived from the agreement are commensurate with the effort of establishing and monitoring it. Normally, FPRA’s should be negotiated only with contractors having a significant volume of Government contract proposals. The cognizant contract administration agency is usually the final authority as to when an FPRA will be established.

The process begins with a proposal from the contractor that is based on cost or pricing data that are accurate, complete, and current as of the date of submission. The ACO usually invites the cognizant contract auditor and all contracting offices having a significant interest to participate in developing a Government objective and in the negotiations. Upon completing negotiations, the ACO prepares a price negotiation memorandum (PNM) and forward copies of the PNM and FPRA to the cognizant auditor and to all contracting offices that are known to be affected by the FPRA.

Even though the contractor's proposal must be based on current, complet, and accurate cost or pricing data, a Certificate of Current Cost or Pricing Data is not required at this time. It is required for individual pricing actions and a certificate at that time also applies to any FPRA used in negotiations. That makes it critical for contractors to continuously monitor the propriety of the rates included in the FPRA.

The FPRA provides specific terms and conditions covering expiration, application, and data requirements for systematic monitoring to ensure the validity of the rates. The agreement shall provide for cancellation at the option of either party and shall require the contractor to submit to the ACO and to the cognizant contract auditor any significant change in cost or pricing data.

When an FPRA is invalid, the contractor should submit and negotiate a new proposal to reflect the changed conditions. If an FPRA has not been established or has been invalidated, the ACO can issue a forward pricing rate recommendation (FPRR) to buying activities with documentation to assist negotiators. In the absence of an FPRA or FPRR, the ACO shall include support for rates utilized.

If you believe your company has sufficient contracting volume to support an FPRA, you should contact your administrative contracting officer (ACO) to initiate the process. If you find that contract negotiations get bogged down when discussing indirect costs and/or it takes inordinate time to come to a meeting of the minds, you might be a good candidate for an FPRA.


  1. How does a company handle the situation where OH rates are approved at the beginning of a contract but, later, as the contract progresses, the OH rate decreases, because of the increasd volume of work? Forward pricing agreeemnts are straightforward except the rates may change as time goes by. Referring to a FFP contract wheer payment is by Progres Payments on % Complete.

  2. It sounds like you have a performance based progress payment clause. Where progress payments are based on performance (such as a percentage completion), the overhead (or indirect expense) rates have no bearing on the progress payment amount.

    Its good that your rates are dropping. That should improve your profitability, all other things being equal.