October 5, 2021
For government contractors with cost reimbursable contracts including Cost Plus Fixed Fee (CPFF), Provisional Billing Rates (PBRs) are projected indirect rates approved by the Administrative Contracting Officer (ACO), or more commonly by the Defense Contract Audit Agency (DCAA). PBRs allow a contractor to estimate anticipated year-end final rates to be used in their monthly interim vouchers, SF 1034 and SF 1035. Unfortunately, DCAA is experiencing significant delays in their PBR approval process and they are providing guidance that is inconsistent with the regulations, forcing contractors to be both vigilant and patient.
Overview of PBR Approval
The goal for projected or forecasted indirect rates in a cost proposal or in indirect rate projections is to provide proposed indirect rates are as close to the expected final or historical indirect rates at year-end. A Memorandum for Regional Directors (MRD) from January 15 of this year entitled “Revised Guidance on Interim Cost Voucher Reviews” requires a “review all first-time vouchers for all new contractors and new contracts.” This means that each time a contractor receives a new CPFF type contract, DCAA audits that voucher. If the indirect rates in the voucher are not based on the most current PBRs that supports your current fiscal year, DCAA will not approve the first interim voucher until the PBRs are at least submitted.
For this reason, it is in the contractor’s best interest to be current on their PBR submission. If DCAA has not approved the contractor’s outstanding PBRs, they will continue to use the prior year.
The regulatory requirements for PBRs are located in FAR 42.704. To facilitate the approval process, contractors should be prepared to provide these items in addition to projected indirect cost rates.
- A comparison of forecasted and actual rates for the prior two completed years;
- A list of forecasted and incurred pool expenses by account with related base amounts and rates for the fiscal year (year-to-date data if your fiscal year is not complete by the time of your submission). This information should identify and explain the amount of unallowable expenses incurred. Furthermore, identify the mix of US government (DoD, NASA, FHWA, etc.) and commercial contracts in the allocation bases. The government contract mix should be presented by contract type (e.g., FFP, CPFF, T&M), and the commercial contracts do not need to be presented by contract type;
- A list of U.S. government contracts awarded during current fiscal year. This list should show, at a minimum, contract number, award date, period of performance, awarded amount, and contract type;
- A description of any changes in organization, operations, business volume, or allocation bases that impact the subject fiscal year; and
- A list of forecasted pool expenses by account with related base amounts and rates for the subject fiscal year. This list should also identify and explain any adjustments for unallowable expenses.
Delays and Confusion in the PBR Approval Process
In one example, a contractor with a year end of December 31 received a notice to prepare their upcoming year PBRs within 6 days, otherwise DCAA would use a recent rate review to establish its indirect rates. While the notice required submission by December 15, DCAA’s review did not begin until mid-May. The contractor in this example did not receive the final PBR approved rate letter until September 13 – a full 9 months into their new fiscal year.
In addition to the delay in approving the contractor’s PBRs, the September 13 approval letter stated, “The subject rates are for billing purposes only and you should not use these rates for other applications such as cost proposals or forward pricing rates.” This statement is in direct conflict with FAR 42.704 b which states, “auditor should ensure that the billing rates are as close as possible to the final indirect cost rates anticipated for the contractor’s fiscal period, as adjusted for any unallowable costs”. Further, DCAA’s statement effectively prevents the contractor from using their forecasted indirect rates for other appropriate purposes.
In another example, a contractor switched DCAA branches but neither branch had reviewed their prior year PBRs. Although the contractor was using their most recently settled incurred cost indirect rates, DCAA instructed the contractor to instead use their last approved PBR rates from 2 years ago approved by the prior DCAA branch.
The contractor in this example presented several useful reports including projected indirect rates for the upcoming fiscal year. Unfortunately, DCAA would not accept the use of EXCEL pivot tables and had difficulty identifying a clearly labeled pool and base. The auditor was also unfamiliar with job costing involving members of an LLC, causing further PBR approval delays.
With no change in sight, government contractors must operate at the mercy of DCAA’s slow and confusing approval process. Working with a consultant experienced in DCAA negotiations and developing proactive strategies for PBR approval is a contractor’s best defense for recouping expenses related to their cost reimbursable contracts.
GRF’s team of government contracting specialists boast a successful track record of DCAA negotiation and USAID audit resolution support. Our professionals, including a former DCAA auditor, work with contractor clients to develop successful strategies based on extensive experience with the regulations and DCAA’s audit process. Learn more about GRF’s services for government contractors at https://www.grfcpa.com/specialties/government-contractors/.
Paul H. Calabrese
Principal, Outsourced Accounting & Advisory Services