Leveraging the Benefits of Forward Pricing Rates

JEFF ANZESE: Hello, and 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.

My name is Jeff Anzese, and with me today is Jade Casey. We are both from Cherry Bekaert’s Government Contractor Services Group.

Today, we will be talking about forward pricing rates. We will take a deeper dive to explain how forward pricing rates differ from provisional billing rates, forward pricing rate proposals, recommendations, and agreements.

We will also navigate the process of moving from a proposal toward an agreement, what is needed to develop these proposals, and the benefits of having forward pricing rates. Thank you for joining me today, Jade.

JADE CASEY: Thanks for having me.

JEFF ANZESE: 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 (FPRP) that is typically estimated for five years.

Forward pricing rates are often confused with Provisional Billing Rates (PBR), but there are significant differences. Jade, can you explain some of the differences between PBRs and forward pricing rates?

JADE CASEY: By definition, Provisional Billing Rates (PBR) apply to a 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.”

While a PBR might be reasonable for forward pricing, there needs to be a thorough analysis to support that it is 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. A flatline or an escalation of a PBR would not meet those requirements.

Jeff, you mentioned that contractors can submit forward pricing rates on a proposal-by-proposal basis or as a standalone rate proposal. What are the differences?

JEFF ANZESE: Absolutely. Contractors unfamiliar with a Forward Pricing Rate Proposal (FPRP) most likely submit their rates as bid rates on an annual basis or on a proposal-by-proposal basis.

Typical bid rates are developed for each specific proposal action. Contractors usually adjust those rates for the probability of winning that work, affecting both the pool and the base.

Many RFPs require bid rates to demonstrate how they account for the probability of winning that proposal action. This can be cumbersome, especially if there is a high volume of proposals or a tight deadline.

An FPRP is a proposal submitted to a contractor’s cognizant Administrative Contracting Officer (ACO) to gain an agreement for direct and indirect rates for a period of time. This period is usually five years, depending on the contractor’s data and ability to estimate.

The FPRP submission must be supported by sufficient data in a format acceptable to the government. This is usually dictated by the FPRP adequacy checklist found in DFARS, specifically Table 215.403-1.

Once the FPRP is deemed adequate, DCMA policy states the ACO will work toward a Forward Pricing Rate Recommendation (FPRR) within 30 days and a Forward Pricing Rate Agreement (FPRA) within 60 days.

The ACO or cost monitor will begin a cost analysis of the FPRP submission. This involves a detailed review of each cost element, rate, pool, base, and the supporting data.

They will also determine if technical audit support is needed, which is typically a request for an audit performed by DCAA.

This initial analysis helps them issue an FPRR within 30 days of an adequate submission to assist buying commands with negotiating rates.

JADE CASEY: How does a forward pricing rate recommendation differ from a forward pricing rate agreement?

JEFF ANZESE: That is a good question, as many people do not know the differences. An FPRR is exactly what it sounds like: a recommendation.

It is a recommendation on rates provided by the ACO to contracting activities based on the rates submitted by the contractor. In the best-case scenario, both the contractor and the ACO agree on those FPRR rates.

When this occurs, buying commands utilize those rates and bypass negotiations. Procuring Contracting Officers (PCOs) generally dislike negotiating rates because they are not typically experts on direct and indirect rates.

They often request pricing assistance from DCMA or an audit from DCAA to review those rates. Relying on an FPRR agreed upon by both the ACO and the contractor saves significant time.

Conversely, an ACO might issue a unilateral FPRR if they cannot agree with the contractor. Since DCMA tries to issue an FPRR within 30 days, they will issue a unilateral recommendation to buying commands if a compromise isn't reached.

If a contractor does not agree, a negotiation must still take place. After the government conducts its full review and issues the FPRR, the ACO continues working with the contractor to negotiate an FPRA.

An FPRA is a written agreement between the government and the contractor for the rates in the FPRP submission. This usually covers a five-year period but can vary.

Both parties are bound to these rates until the agreement needs to be amended or a new FPRP is submitted. This typically happens annually, with the new proposal projecting another five-year period.

Jade, I mentioned that these proposals are very detailed and must be adequately supported. Can you walk us through some examples of what is typically needed to support an FPRP?

JADE CASEY: When submitting an FPRP, you must include any material known or anticipated changes. You must also include an explanation of the estimating processes, methods, trends, and budgetary data used.

Numbers should reconcile back to the supporting data references. Any escalation should be supported by historical actuals or a market index.

For direct labor, the price must be reasonable, supported by current market rates, prior compensation rates, or public wage records. For materials, the proposed price should be reasonable and supported by vendor quotes or purchase history.

Indirect rates must comply with Cost Accounting Standards (CAS). The proposal should also identify indirect expenses by Burden Center, cost element, year, and current system structure.

Consider if there is a need for a corporate home office or shared services. The development of your allocation base and its reconciliation to the budget or forecast should be clear.

Jeff, why do contractors need to submit an FPRP, other than being required by RFPs? Let’s talk about the benefits.

JEFF ANZESE: Absolutely, Jade. I think the audience picked up on some of those benefits during my description of the process.

One major benefit is that an FPRP saves time by eliminating the need to develop, review, and approve new estimates for every bid. If you currently do this on a proposal-by-proposal basis, it requires significant effort for every action.

RFPs often require including the projected win for each action, which requires a deep dive into the pool and base. Developing an FPRP allows a contractor to commit that time once and use those rates for all actions for the remainder of the year.

This approach is also cost-effective for contractors with a large volume of proposal activity. You save time during both the initial development and the subsequent price negotiation process.

Contracting Officers often rely on DCMA reviews or DCAA audits, which are only recommendations. Without an agreement, lengthy negotiations often follow because contractors may not agree with the government's position.

Another benefit is planning and risk management. Forward pricing rates help lock in prices for future dates, which reduces risk.

This is helpful for budgeting and planning, as it allows contractors to develop pricing strategies based on predictable future revenues.

We could probably talk for hours about how to develop these rates, but that is all the time we have for today.

If you have any questions, please feel free to reach out to Jade Casey or myself, Jeff Anzese. Thank you for tuning in, and please follow us wherever you get your podcasts.