Do Forward Pricing Rate Agreements (FPRAs) Require Certification?

Negotiated forward pricing rate agreements are very useful for facilitating contract negotiations. Often times, direct and indirect rates are sticking points in the negotiation process. FPRAs remove discussions of rates from the process because the contractor and the Government have already come to an agreement on what those rates should be.

Negotiation of forward pricing rate agreements (FPRAs) may be requested by the contractor or the contracting officer, 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. Practically, that means FPRAs should be negotiated only with contractors having a significant volume of Government contract proposals. Because of the time and effort associated with negotiating FPRAs, there needs to be a lot of pricing actions on the horizon to justify the expense.

When certified cost or pricing data re required, offerors are required to describe any FPRAs in each specific pricing proposal to which the rates apply and to identify the latest cost or pricing data already submitted in accordance with the FPRA. All data submitted in connection with the FPRA, updated as necessary f, form a part of the total data that the offeror certifies to be accurate, complete, and current at the time of agreement on price for an initial contract or for a contract modification.

Contracting officers will use FPRA rates as bases for pricing all contracts, modifications, and other contractual actions to be performed during the period covered by the agreement. Conditions that may affect the agreement's validity shall be reported promptly to the ACO. If the ACO determines that a changed condition invalidates the agreement, the ACO shall notify all interested parties of the extent of its effect and status of efforts to establish a revised FPRA.

Contracting officers shall not require certification at the time of agreement for data supplied in support of FPRAs or other advance agreements. When a forward pricing rate agreement or other advance agreement is used to price a contract action that requires a certificate, the certificate supporting the contract action shall cover the data supplied to support the FPRA or other advance agreement, and all other data supporting the action.

When a contractor certifies the completeness, currency, and accuracy of its cost or pricing data as of the date of agreement on price, it is also certifying the same for its FPRA rates. It doesn't matter that the rates were negotiated months earlier. The contractor still has an affirmative duty to ensure that the rates are still valid and based on current, complete, and accurate cost or pricing data.

Contractors to Get Double Teamed on Forward Pricing Rate Proposals

DCMA (Defense Contract Management Agency), not to be confused with DCAA (Defense Contract Audit Agency) recently implemented a policy to encourage its contract administration staff to complete reviews of forward pricing rate proposals (FPRP) within 30 days of receipt and commence negotiations of forward pricing rate agreements (FPRA) within 60 days of receipt.

DCMA is growing their cost monitoring function because they can no longer rely on DCAA to provide timely reporting on FPRPs.  DCMA is gearing up its capability to make sound and timely assessments of contractor submitted FPRPs and they will be performing their reviews at the same time DCAA is conducting their audit(s). This means that contractors will need to prepare themselves to be responsive to simultaneous reviews, one from DCMA and the other from DCAA.

The DCMA policy emphasizes that input from DCAA is not necessary to complete its review unless someone in their chain decides that audit input is necessary to close a critical gap of information. That begs the question, doesn't it, as to why DCAA's audit is necessary to begin with. Who in DCMA is going to say that he/she can't finish their review of an FPRP because it needs information from DCAA. That will never happen.

But, DCAA is going to plug along and do their review anyway. At such time as they're comfortable with the sufficiency of their audit tests, they'll issue their report to DCMA. DCMA, in turn, will look it over and do one of two things (according to a recent DCAA memo). DCMA will look it over and see if there is something in there that would cause them to bail on the rates that they had negotiated and re-open the rate determination process or, they will read it and file it for future use. Guess which of the two options will prevail most often.

Notwithstanding the fact that we have two Agencies wasting resources by performing the same reviews, but we have contractors already complaining that they have to provide the same information, sometimes formulated slightly different to appease the respective staffs, at additional cost to them (and ultimately the Government).

This dual approach to reviewing FPRAs can't last too long. Complaints will be heard at a high enough level for someone in the Defense Department to make an executive decision and call off one of the Agencies.

This work should stay with DCAA. That Agency has the auditors who are first and foremost, accountants, who understand the vagaries and intricacies of indirect rate analysis and complex cost accounting systems, DCAA just needs to stop trying to "audit" everything and develop non-audit processes for some of its "products". If they forget about GAGAS (Generally Accepted Government Auditing Standards) for a moment and get back to being nimble and responsive to customer needs, they can provide an extremely valuable service to the Government.

Another DoD Checklist - This Time For Forward Pricing Rates

Back in March, the DoD published a final rule in its FAR Supplement (DFARS) to require contractors to complete and submit a proposal adequacy checklist whenever a solicitation requires the submission of certified cost or pricing data. You can read more about this 37 item checklist by following this link.

Yesterday, May 16th, DoD published another checklist, this time as a proposed rule. This 27 item proposal adequacy checklist will be required of contractors submitting forward pricing rate proposals (FPRPs) to the Government. FPRPs are the precursor to FPRAs (Forward Pricing Rate Agreements). FPRAs greatly facilitate contract negotiations because the parties do not have to haggle over the indirect rates. FPRAs are most beneficial at contractors with a significant number of pricing actions every year. Refer to FAR 42.1701 for more information concerning FPRAs.

One of the greatest challenges in forecasting indirect expense rates is trying to reasonably estimate future workload or volume. Indirect rates can swing significantly depending upon future events (e.g. winning a particular bid) where there is some uncertainty. One of the checklist questions tries to pin that down. It asks:

Does the proposal disclose known or anticipated changes in business activities or processes that could materially impact the costs? For example

• Management initiatives to reduce costs;

• Changes in management objectives as a result of economic conditions and increased competitiveness;

• Changes in accounting policies, procedures, and practices including:

• reclassification of expenses from direct to indirect or vice versa;

• new methods of accumulating and allocating indirect costs and the related impact and

• advance agreements;

• Company reorganizations (including acquisitions or divestitures);

• Shutdown of facilities

• Changes in business volume and/or contract mix/type.

Contractors need to take special care when answering these questions. Failure to disclose anticipated changes in business activities could lead to allegations of defective pricing.

New Adequacy Checklist for Forward Pricing Rate Proposals

When there is a substantial amount of pricing activity at a particular contractor location, the contractor and the Government sometimes tries to negotiate direct and indirect rates to be used for future proposals. The contractor first submits a forward pricing rate proposal (FPRP). If the contractor and the Government can reach agreement, the parties sign a forward pricing rate agreement (FPRA). When the parties cannot reach agreement, the Government will often issue a unilateral determination called a forward pricing rate recommendation (FPRR). When there is a FPRA, contract negotiations are simplified and expedited because there is no need to "negotiate" direct and indirect rates.

Both the contractor and the Government need to be in agreement that an FPRA is desirable. A contractor might want one but the Government might deem the level of pricing activity insufficient to warrant the effort involved in the process of negotiating an agreement. And vice versa.

The primary responsibility for reviewing and negotiating FPRA's is that of the Defense Contract Management Agency (DCMA). The Defense Contract Audit Agency (DCAA) participates when requested. Most of the time, DCAA's assistance is requested.

DCAA recently issued a checklist for FPRPs. This checklist should not be confused with the Agency's checklist for pricing proposals discussed here and available here. The former covers direct and indirect rates only. The latter covers the entire proposal.

Contractors who plan on submitting forward pricing rate proposals should become familiar with the checklist to improve their submissions and reduce the chance that such submission will be declared inadequate and returned to the contractor for correction. Having a proposal returned will significantly delay the process forward pricing rates.

The key to the checklist is the understanding that in submitting forward pricing rate proposals, contractors are still bound by the format/content requirements  of FAR 15.403-5. The requirements for adequately supported direct and indirect cost rates are not lessened when a contractor separately submits an FPRP for the rates.

See related post: More on DCAA's Adequacy Checklist
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For those expecting the continuation of the discussion on compensation, we will return to that series in a few days.