Rose Report: Issue 7

Reaching the Right Rate

Before contractors can start billing the government for work performed on cost type contracts for the coming year, they need to do some educated and accurate estimating.

To proceed with billing projects, they must first come up with provisional indirect rates—their estimate of what the rates will be at year-end. Since a provisional rate is just a best estimate of what the work will cost, whatever number a contractor proposes is only temporary. As the work progresses, it’s up to the contractor to keep tabs on whether the estimated rates match up with reality. If they don’t, the contractor should submit a new provisional rate to the government.

Even though contractors aren’t locked in to their provisional rates, they still need to make every effort to ensure their estimates are as accurate as possible. Contracting officers may closely assess whether they’ve fully supported and explained how they arrived at the rates.

Coming up with an accurate provisional rate should be a relatively straight forward process, as long as the contractor has closely monitored its financial data for the previous year, and put together a detailed budget for the coming year. It’s important to keep good records on the assumptions used during this process.

When a contractor submits its provisional rate to the Defense Contract Audit Agency (DCAA), the government will compare what the contractor’s actual rates turned out to be for the previous year with its estimated rates for the coming year. If there’s a significant discrepancy between the two figures, the contractor must be able to sufficiently explain why.

Contractors are required to have a billing system that allows them to compare the actual cost of a project with the estimated cost on a regular basis. This way, throughout the year, they will consistently have an accurate idea of their financial situation. By year-end, they should have a clear picture of what their actual rates will be.

Assessing the budget on a monthly—or at the very least a quarterly—basis also allows a contractor to determine as soon as possible if it needs to revise the provisional rates it initially gave the DCAA. There are no hard and fast rules about when or if a contractor should revise its provisional rates, nor is there a limit on how many times it can do so.

It’s up to the contractor to determine if the difference between its estimated rates and its actual costs are becoming too large. “If a contractor sees a five percent difference, it could be significant,” says Rose Financial Services partner Jeanne McMillen. “That adds up.”

In other words, to ensure its provisional rate is as accurate as possible, a contractor needs to practice common sense, in addition to good billing and budgeting practices.