Pros and Cons of Forward Pricing Rate Agreements

By Sam Davidson and Nonyerem Anyanwu

The decision to enter into a forward pricing rate agreement (FPRA) is one of concern for many contractors. There are a number of factors that you need to consider to evaluate whether an FPRA is right for your business.

What are forward pricing rate agreements (FPRAs)? – They are voluntary agreements entered into by contractors to facilitate the price negotiation of any and all contractual actions to be performed during the period of the FPRA. The establishment of these agreements is covered under the special cost and pricing areas of FAR 15.407-3 and Subpart 42.17.

FPRAs may include rates or allowances for direct labor, indirect costs (e.g., fringe, overhead, G&A, etc.), material obsolescence and usage, spare parts provisioning, material handling and major subcontracting.

When are FPRAs a benefit to the contractor? – Entering into FPRAs are a benefit when you: (1) have a firm business base and supporting historical data on which to project future indirect cost relationships; (2) have a budgeting system that allows accurate expense forecasting and incurred expense control; and (3) have many proposals to address during the year and need to expedite the proposal prep and audit process.

We recommend that FPRAs should be negotiated only with those contractors that have a significant volume of government contract proposals. When an FPRA is not available, there will be the need for frequent DCAA audit of rate proposals.

What are the cons to having an FPRA? – A key consideration in obtaining an FPRA agreement is your need to be able to monitor performance against these rates on a continuing basis to prove that they are still adequate. This can be time consuming.

Also, the contractor has a duty to keep the cost or pricing data regarding the FPRA updated by constant disclosure to the ACO. This data is not certified when the FPRA is executed. Instead, when a contract requiring cost or pricing data is awarded, the certificate for the contract also covers all data relating to the FPRA.

Consequently, contractors must ensure that they have adequate controls to maintain an awareness of what cost or pricing data has been disclosed regarding FPRAs, and whether that data is current, complete and accurate when they sign a certificate relating to a given proposal or contract negotiation. This can potentially expose the contractor to government claims of defective pricing if the contractor is not diligent in this regard.

What if I need to make changes to my FPRA? – While an FPRA can be amended at the request of either party, the amendment can only be accomplished by the administrative contracting officer (ACO) that entered into the agreement. This means that while negotiating a contract price with a PCO, a contractor may be simultaneously negotiating a change to an FPRA with an ACO that would impact contract negotiations. This obviously can cut down on a contractor's flexibility in regard to its proposal pricing strategies.

That said, having an FPRA does not necessarily preclude you from making changes as a result of volume increases, up or down, or economic conditions. In fact it presents an established baseline already agreed to by the government from which to make the change. No matter what type of contract, FFP or cost-type (target cost establishment), FPRAs can facilitate the negotiation process. In those instances only the change would need to be audited by DCAA.

FPRAs can be beneficial to those contractors that are large enough to have a non-volatile business base, are sophisticated enough to be able to accurately forecast indirect costs relative to forecasted volumes, and can monitor their performance. However, if the contractor does not monitor its rates and trends on a continuing basis, it can be stuck with an agreement that does not reflect reality, and they may find themselves in a position of defective pricing exposure.

Sam is a Director with CB&H's Government Contractor Services Group. He can be reached at sdavidson@cbh.com. Nonyerem is a Senior Consultant with the Group, and she can be reached at nanyanwu@cbh.com.