If you haven't been monitoring your actual indirect costs thru the year, it is not too late to analyze and make an effort to control this before the end of the year. Why is this important? If you have a cost type contract with the Federal Government you will be required to do an Incurred Cost Report 6 months after the end of your fiscal year per FAR 42.705-1(b)(1)(ii). Assuming many companies have a December 31st year end, this means there are only a couple of months left to affect the final indirect cost rate. The contracting officer will then use the final indirect cost rate to adjust the billing on the contract if it differs from the provisional billing rate that the contractor used through the year. This could result in a loss of revenue that the contractor had received on the contract thru the year. By loss of revenue, it usually means that the government offsets these "over payments" against future invoices to the government or uses this in the calculation of the final contract closeout calculation of the contract.
So what can the contractor do to prevent a discrepancy between the provisional billing rate used through the year and the final billing rate as determined in the incurred cost report? I think there are a couple of factors to help in this process:
- Do a thorough and accurate job of budgeting in preparing your provisional rate proposals at the beginning of the year or contract
- Monitor actual indirect rates every month through the year and control costs accordingly to manage the indirect rates
If you have done these two things through the year then your actual indirect rates are probably already tracking close to your provisional billing rates. If not, then you need to do something now. Ideally you will need several months to affect a change in your overall billing rate for the year so don't procrastinate this task. But, if you do an analysis to find out why your actual rates are under-running your provisional rates you can pinpoint areas in your operation where you may need to spend more time in the coming months to achieve the budgeted expenditure levels prior to year-end. For instance, your analysis may show that you have spent more time on direct work for a contract at the expense of some of your bid and proposal work that you projected. By directing more effort on the bid and proposal area, at the expense of some direct work from those individuals, you can bring those expenses back up and affect the indirect rate calculation. It is a simple math problem to evaluate how much effort must be added or subtracted from each area in order to achieve the desired result on the indirect rate. I'm not saying it isn't a bit tedious and requiring focus but it can be done, it isn't too late. It will be too late if you wait, even a couple of weeks right now will make a difference, depending on how far off of your provisional rate your actual rate is running. Certainly this is something that ReliAscent can help with if you would like to discuss it. Don't hesitate to give us a call.
Provisional Billing Rates - DCAA Provisional Rate Submissions
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