We've written about billing rates (see FAR 42.704) before but this isn't a re-post. We are seeing a lot of misinformation passed around and frankly, some goofy positions taken by Government contracting and audit personnel regarding billing rates. Here's the deal with billing rates. Billing rates should be adjusted as often as necessary to reflect contractors' best estimates of final year-end rates. Billing rates are not sacrosanct. They must be adjusted whenever necessary to prevent substantial overpayment or underpayment of indirect costs (see FAR 42.704(c)).
Billing rates established at the beginning of the year can be based on the prior year's actual rates, the prior year's actual rates adjusted for known changes in workload and other factors, discrete forecasts, budgetary data, or some combination of these methods. As the year progresses, estimates become "actual costs" and indirect rates can be derived from actual costs. In all likelihood, actual rates are not going to mirror billing rates. If actual rates are materially different than billing rates, an adjustment is necessary.
If billing rates are higher than "actuals", the Government ends up temporarily paying too much. We say "temporarily" because billing rates are eventually adjusted to final year-end rates and ultimately to negotiated or settled rates.
If billing rates are lower than "actuals", the contractor is not being reimbursed all of its allowable, allocable, and reasonable indirect costs. While adjustment at year-end will also take care of underbillings, contractors are losing out on cash-flow but more importantly, the Government doesn't know what the contract is really costing and may have allocated funds away from the contract.
So, contractors should be monitoring their actual incurred cost rates, measuring them against provisional billing rates. When the difference - either higher or lower - becomes material, send a letter to your contracting officer and/or contract auditor revising those billing rates.
Don't let the Government tell you that you cannot revise your billing rates. Revisions are absolutely required by FAR when billing rates are no longer equitable to either the contractor or the Government.