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DCAA Issues new Guidance on Establishment of Provisional Billing Rates

On June 27, 2014, the Defense Contract Audit Agency (“DCAA”) issued Memorandum for Regional Directors (“MRD”) 14-PPS-012(R) Guidance on Establishing Provisional Billing Rates. The new guidance is effective October 1, 2014, but early implementation is encouraged.

This new guidance should help to ease issues that have arisen between DCAA and contractors regarding a contractor’s obligation to submit a proposal to establish billing rates. In the past, some of our clients have had DCAA auditors cite them for having deficient accounting systems because the contractor did not submit a “timely” proposal to establish billing rates. This was inappropriate because there is no specific requirement in the FAR for a contractor to submit such a proposal as a matter of course. Further, the Federal Acquisition Regulation (“FAR”) does not use the term “provisional billing rates” but simply uses “billing rates.”

FAR 42.701 defines “billing rate” as “an indirect cost rate (1) Established temporarily for interim reimbursement of incurred indirect costs; and (2) Adjusted as necessary pending establishment of final indirect cost rates.” It should be noted that this definition does not anticipate or require that billing rates must be used in pricing proposals, although they frequently are.

The procedures for establishing billing rates are described in FAR 42.704. Specifically, the official responsible for establishing final indirect cost rates is also responsible for establishing billing rates. These rates are to be established “on the basis of information resulting from recent review, previous rate audits or experience, or similar reliable data or experience of other contracting activities.” In establishing billing rates, the cognizant Federal agency official or 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. Once established, billing rates may be prospectively or retroactively revised by mutual agreement of the parties at either party’s request, to prevent substantial overpayment or underpayment. When agreement cannot be reached, the billing rates may be unilaterally determined by the government. Finally, when the contractor submits its certified final indirect cost rate proposal, the contractor and the government may mutually agree to revise billing rates to reflect the proposed indirect cost rates, as approved by the government to reflect historically disallowed amounts from prior years’ audits, until the proposal has been audited and settled. The historical decrement will be determined by the official responsible for establishing billing rates.

It should be noted that FAR 42.704 is only guidance to government personnel. It is not binding on contractors and does not require contractors to do anything. In this regard, contractual coverage of billing rates is found in FAR 52.216-7(e), which states:

“Until final annual indirect cost rates are established for any period, the Government shall reimburse the Contractor at billing rates established by the Contracting Officer or by an authorized representative (the cognizant auditor), subject to adjustment when the final rates are established. These billing rates —

(1) Shall be the anticipated final rates; and

(2) May be prospectively or retroactively revised by mutual agreement, at either party’s request, to prevent substantial overpayment or underpayment.”

Again, nothing in this clause requires a contractor to submit a proposal to establish billing rates.

DCAA has recognized this in the MRD, which explicitly states that “FAR 42.704 does not specifically require contractors to submit a billing rate proposal.” However, it goes on to say that auditors “should encourage contractors to submit a billing rate proposal at the end of the fiscal year so that we can establish the rates early in the new fiscal year.” To do this, the MRD requires auditors to notify the contractor that DCAA is beginning the process to establish billing rates and ask the contractor if it wishes to provide any input into that process such as providing updated budgets. Auditors are directed not to delay establishment of billing rates waiting for a response from the contractor.

Have any questions or need additional information on this matter? Contact a member of our GovCon team.

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