Provisional Billing Rates - Recent Audit Guidance

Reasonably accurate provisional billing rates are important for both the Government and contractors. Rates that are too high harm the Government. Rates that are too low, negatively impact a contractors cash flow. Whether too high or too low, its difficult to derive an accurate projection of costs and to comply with other contractual provisions such as limitation of costs or limitation of payments.

FAR 42.704 lays out the requirement for establishing provisional billing rates. It states, in part, that the contracting officer or auditor shall establish billing rates on the basis of information from recent reviews, previous rate audits or experience, or similar reliable data or experience of other contracting activities. Additionally, those rates should be as close as possible to the final indirect cost rates anticipated for the fiscal year.

The key point from FAR 42.704 is that the Government is going to establish provisional billing rates, with or without contractor input. It is almost a certainty that if the Government establishes the rates, it will include some form of decrement to reflect potential unallowable costs. It is always better for the contractor to propose provisional billing rates because the contractor will have the best information on factors that will affect future rates.

DCAA (Defense Contract Audit Agency) recently issued new audit guidance for reviewing provisional billing rates. First of all, the Agency states that the development of provisional billing rates is not an audit. That should help expedite DCAA's role in establishing rates and/or reviewing contractor provisional rate proposals. Further, the steps to reviewing rates consist of the following:

1. Notify the contractor and ask whether the contractor wishes to provide any input.
2. Review past audit files for relevant information.
3. Review incurred cost audits and ascertain trends. Although not stated in the guidance, the audit should review unaudited incurred cost submissions as well.
4. Compare prior year billing rates with actual year end rates to see how close the contractors' estimates compare to actuals.
5. Ask for a walk-through of any data submitted by the contractor.
6. Summarize and come up with an estimate.

These are fairly straight-forward tasks and should not cause any undue grief. From the Government's standpoint, provisional billing rates are low risk because the rates will be trued-up at the end of the year after contractors submit their final indirect rate proposals.