Rose Report: Issue 27

Year-End Rate Reconciliations

Year End issue-27-pic-story2For government contractors with cost-reimbursement contracts there may be some discrepancies between their provisional rates and actual rates. Provisional rates are forward looking projected rates that are utilized for proposal preparation and for billing active projects. At the end of each year, while government contractors are preparing to close their books and calculating their actual rates, they will need to communicate the difference between their provisional indirect rates and their actual indirect rates to their contracting agencies. This communication is performed through an “extra” invoice, sometimes referred to as a “13th Invoice” or “Adjustment Voucher”, which is intended to make adjustments and prevent under or over billings on a contract due to indirect rate variances. Since indirect rates are estimated at the time, differences will occur when the actual rates are finalized. This difference may either be an amount owed to or due to the contractor or subcontractor. It’s important to keep the contracting officer informed of any billing differences that may arise, so there aren’t any surprises at the end of the year.

The differences occur when contracts are billed at provisional rates during the year, and compared to the actual indirect rates at the end of the year. The rate adjustment for Time and materials (T&M) contracts, is usually a material handling or general & administrative (G&A) rate. Cost-reimbursement contracts usually have several rates and it is not uncommon for differences to occur.

The contractor should also monitor indirect rates throughout the year, and keep track of costs on a monthly basis. Significant differences may illustrate that the contractor may not be calculating the budgets accurately and should re-evaluate how they are arriving at their provisional rates. If the contract is over several years, these differences should be discussed and resolved annually. An immaterial variance one year may suddenly be material the next, so reviewing these changes every year can help avoid any issues for the duration of the contract. It is best to settle the differences once the contractor has calculated their actual indirect rates and is confident in the difference in rates.

Once the contractor is comfortable, the adjustment invoice can be submitted. This is usually within 90 days or less of year-end or the conclusion of the contract, but sooner is better especially if there is a significant difference. It’s important to communicate with the client regularly throughout this process and making sure both parties are on the same page when it comes to billing, which will also aid in a more accurate budgeting plan and smoother closeout process.

 

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