Provisional billing rates
Final indirect rates for a fiscal year are not known until well after that year ends. Provisional billing rates are what you bill indirect cost at in the meantime. They are estimates, and the difference between the estimate and the eventual actual is settled — in one direction or the other.
How they get established
FAR 42.704 puts responsibility for provisional billing rates with the same contracting officer or auditor responsible for establishing your final indirect rates. Rates are set on the basis of recent review, prior rate audits, or similar reliable experience, and the objective is that they land as close as possible to the final rates for the period, adjusted for unallowable costs.
In practice, most small contractors submit a proposal in the month before their fiscal year begins — December for a calendar-year company. The package is short:
- A letter proposing the rates for each pool.
- A schedule of estimated pools and bases supporting each rate.
- A brief statement of the basis — the budget, the backlog, headcount assumptions, and any known change from the prior year.
Keep it at summary level. Supporting detail goes in on request. You get back a letter establishing the rates, and you bill indirect cost at them on interim vouchers and progress payments until final rates are settled.
The monitoring obligation
FAR 42.704 allows either party to revise billing rates prospectively or retroactively to prevent substantial overpayment or underpayment. That is a two-way mechanism, and it exists because the alternative — discovering a large variance after the year has closed — is bad for both sides.
compute actual year-to-date rates, compare to provisional, and calculate the cumulative dollar variance across all flexibly priced contracts. One number, one page, every month.
Billing consistently above your actual rates raises questions about the adequacy of your accounting and billing system, not just about the money. Billing below them is a self-inflicted cash problem — you are financing the government at your own expense and you may not be able to recover it if a contract runs out of funding before final rates settle.
Why rates drift
| Cause | Effect on rates |
|---|---|
| Direct labor base comes in below forecast — a delayed award, a task order that did not fund | Rates rise. The pool is fixed in the short run; a smaller base means a higher rate. |
| Indirect headcount added mid-year | Rates rise. The pool grows against an unchanged base. |
| Growth in subcontract volume on a total cost input base | G&A rate falls. The base grows faster than the pool. |
| Health insurance renewal above forecast | Fringe rises, and it stacks — overhead and G&A both move with it. |
| Unallowable costs not screened until year end | Rates fall at settlement, below what you billed at. |
Setting them honestly
Bidding artificially low rates to look competitive creates a problem that compounds. You underbill during the year, and when you try to raise rates later, your own rate history is cited back at you. Worse, the low rates may not fund the indirect infrastructure the company actually needs to grow.
Set rates at your genuine forecast. If the forecast is uncomfortable, the answer is in the cost structure, not in the rate submission.
Frequently asked
When do we submit provisional billing rates?
Most contractors submit in the month before the fiscal year begins — December for a calendar-year company. If you have not submitted and you are billing cost, get the package in; billing without established rates is itself a deficiency.
Who do we send the provisional rate proposal to?
FAR 42.704 puts it with whoever is responsible for establishing your final indirect rates — the contracting officer, the cognizant federal agency official, or DCAA. In practice contractors often copy both the ACO and the cognizant DCAA office.
What happens if our actual rates come in higher than provisional?
You underbilled. Once final rates are settled you can bill the difference on the affected contracts, subject to funding and ceiling limits. If a contract has run out of funding, you may not recover it — which is why monitoring monthly matters.
Can we change provisional rates mid-year?
Yes. FAR 42.704(c) allows either party to revise them to prevent substantial over- or underpayment. If rates are revised, submit adjustment vouchers on the affected contracts.
Related
Indirect rate structure: fringe, overhead, and G&A
How the three-tier pool and base structure works, how the rates stack, and what changes when you use a value-added G&A base.
Read →Billing and invoicing government contracts
How to bill each contract type, what a public voucher has to show, and how to shorten the gap between incurring cost and collecting on it.
Read →The incurred cost submission
Who has to file, the six-month deadline under FAR 52.216-7, the ICE model schedules, and the deficiencies that get submissions returned.
Read →