Leveraging the Benefits of Forward Pricing Rates

JEFF ANNESSA: Hello. Welcome to Cherry Bekaert's Government Contractors Podcast, where we discuss current government contracting trends, compliance matters, and best practices to guide federal contractors forward.

JEFF ANNESSA: My name is Jeff Anessa, and with me today is Jade Casey. We're both from Cherry Bekaert's Government Contractor Services Group.

JEFF ANNESSA: Today we'll be talking about forward pricing rates. We'll take a deeper dive to explain how forward pricing rates differ from provisional billing rates, forward pricing rate proposals, recommendations, and agreements, and how to navigate the process from proposal to agreement. We'll discuss what's needed to develop forward pricing rate proposals and the benefits of having forward pricing rates.

JADE CASEY: Thanks for having me.

JEFF ANNESSA: Let's start with a brief overview of forward pricing rates. Forward pricing rates are estimated or forecasted direct and indirect rates used in proposal bids. These can be developed on a proposal-by-proposal basis or as a separate forward pricing rate proposal that is typically estimated for five years.

JEFF ANNESSA: Forward pricing rates are often confused with provisional billing rates, but there are important differences. Jade, can you explain some of the differences between provisional billing rates and forward pricing rates?

JADE CASEY: By definition, provisional billing rates (PBRs) apply to the current fiscal year. There is no assumption that these rates are a reasonable projection of future years' indirect rates. DCAA even states, "the established rate shall not be used for any other purpose than for provisional billing rates."

JADE CASEY: The PBR might be reasonable for forward pricing, but a thorough analysis is needed to support that the PBRs are reasonable for forecasted performance. This is why contractors develop a forecast that is presented for forward pricing rates. Some RFPs even cite a requirement for contractors to demonstrate trends and budgetary data for forecasted rates, so a flatline or an escalated PBR would not meet those requirements.

JEFF ANNESSA: You mentioned contractors can submit forward pricing rates on a proposal-by-proposal basis or as a standalone rate proposal. What are the differences?

JADE CASEY: Contractors unfamiliar with a forward pricing rate proposal (FPRP) most likely submit their rates either as bid rates on an annual basis or on a proposal-by-proposal basis. Typical bid rates are submitted for each specific proposal action, and contractors often adjust those rates for the probability of winning that work in both the pool and the base.

JADE CASEY: Many RFPs require that bid rates demonstrate how the probability of winning is accounted for. That can be cumbersome for each proposal, especially with a high volume of proposals or when a proposal must be prepared quickly.

JADE CASEY: An FPRP is a proposal submitted to a contractor's Cognizant Administrative Contracting Officer (ACO) to gain an agreement for both direct and indirect rates for a period of time, usually five years, though the period can vary based on the contractor's data and estimating ability. The FPRP submission must be supported by sufficient data in a format acceptable to the government, which is usually dictated by an FPRP adequacy checklist, often referenced in DFARS table 215.43-1.

JADE CASEY: The ACO or their cost monitor will check the FPRP against that adequacy checklist to determine if everything is included. Once the FPRP is deemed adequate, DCMA policy states that the ACO will work toward issuing a Forward Pricing Rate Recommendation (FPR) within 30 days and working toward a Forward Pricing Rate Agreement (FPRA) within 60 days of the adequate submission.

JADE CASEY: The ACO or cost monitor begins the process by performing a cost analysis of the FPRP submission. This means a detailed review of each cost element of each rate, both pool and base, and the data that supports it. At this time, they will also determine if technical audit support is needed, which typically results in a request for an audit performed by DCAA.

JADE CASEY: Performing these initial analyses allows DCMA to work toward issuing the FPR within 30 days of an adequate submission to assist buying commands with negotiating a contractor's rates.

JEFF ANNESSA: How does a Forward Pricing Rate Recommendation differ from a Forward Pricing Rate Agreement?

JADE CASEY: The FPR is exactly what it sounds like: a recommendation from the ACO to contracting activities on the rates submitted by the contractor. In the ideal scenario, both the contractor and the ACO agree on the FPR rates. When this happens, buying commands are more likely to utilize those FPR rates and bypass further negotiations.

JADE CASEY: Contracting officers, including Procuring Contracting Officers (PCOs), generally do not want to negotiate rates and dig into both pool and base elements, since they are often not experts on direct and indirect rates. They frequently request DCMA pricing assistance or a DCAA audit to review rates. The ability to rely on an FPR agreed to by both the ACO and the contractor saves significant time.

JADE CASEY: On the other hand, the ACO might issue a unilateral FPR if the contractor and the ACO cannot agree on FPR rates. DCMA aims to issue that FPR within 30 days; if negotiations with the contractor stall, a unilateral FPR may be issued as a recommendation to buying commands, but negotiations may still be required if the contractor disagrees.

JADE CASEY: After the government conducts its full review of the FPRP and issues the FPR, the ACO should continue working with the contractor to negotiate an FPRA. The FPRA is a written agreement between the government and the contractor for the rates in the FPRP submission. That agreement typically covers a five-year period but can vary. The government and the contractor are both bound to using those rates until the FPRA is amended or the contractor submits a new FPRP, which is typically done annually with sufficient data to project another five-year period.

JEFF ANNESSA: Jade, you mentioned that FPRPs are detailed and must be adequately supported for government review. What typically needs to be included to support an FPRP?

JADE CASEY: The FPRP must include any material known or anticipated changes, an explanation of estimating processes and methods, and trends and budgetary data used. The numbers should reconcile back to the supporting data references.

JADE CASEY: Any escalation should be supported by historical actuals or a market index. For direct labor, prices need to be reasonable, supported by current market rates, prior compensation rates, or public wage records. For materials, the proposed prices should be reasonable and supported by vendor quotes or purchase history.

JADE CASEY: Indirect rates need to comply with Cost Accounting Standards (CAS). The proposal should identify indirect expenses by burden center or cost center, by cost element, and by year, and it should describe the current system structure. Ask questions such as: Is there a need for a corporate or home office allocation or a shared service? Are there intermediate pools? The development of your allocation base and how it reconciles back to the budget or forecast should be clear and explained.

JEFF ANNESSA: Why should contractors submit an FPRP other than because an RFP requires it? Let's talk about the benefits.

JADE CASEY: One key benefit is time savings. An FPRP can eliminate the need to develop, review, and approve new estimates for every bid. If you currently prepare rates on a proposal-by-proposal basis, a significant amount of time goes into developing, reviewing, and approving rates for each proposal.

JADE CASEY: Many RFPs require contractors to include projected win probabilities, which demands deeper analysis of both pool and base. Developing an FPRP allows a contractor to invest time up front once, then use those rates for multiple proposal actions throughout the year.

JADE CASEY: FPRPs can be cost-effective for contractors that anticipate a large volume of proposal activity. You save time in proposal development and in subsequent price negotiations. Contracting officers often rely on DCMA reviews or DCAA audits, which can prolong negotiations. Having an FPRP that has been reviewed and recommended saves that negotiation time.

JADE CASEY: From a planning and risk management perspective, forward pricing rates can help lock in future prices for future dates to reduce risk. This is helpful for budgeting and planning, as it allows contractors to develop pricing strategies based on more predictable future revenues.

JEFF ANNESSA: There are additional benefits and nuances to developing an FPRP, and a deeper dive could cover many more topics, but that's all the time we have today.

JEFF ANNESSA: Please reach out to Jade Casey or me, Jeff Anessa, with any questions. Thank you for tuning in, and please follow us wherever you get your podcasts.