Indirect Cost Rates and The Contract Lifecycle

Indirect rates play an integral role in the financial health of a company throughout the contract lifecycle.


Pertinent definitions and relationships include:

  • Forward Pricing Rates - Indirect cost rates used to bid on contracts. Negotiated rates will be set for fixed price contracts. Cost type contracts will be adjusted based on Final Indirect Rates. The Forward Pricing Rate Structure should mirror the Final Indirect Rate Structure.
  • Provisional Billing Rates - Indirect cost rates used to invoice the government on cost-reimbursable contracts. The rates generally differ from actual rates incurred throughout the year. The purpose of this measure is to ensure that the billing rates are as close as possible to the final indirect cost rates anticipated for the contractor’s fiscal period, as adjusted for any unallowable costs (FAR 42.704).
  • Final Indirect Rates - Indirect cost rates agreed upon by the Government and the contractor and are usually established after the close of the contractor’s fiscal year to which it applies. The rates are not subject to change and are used to close contracts for final payment (FAR 2.101).
  • Forward Pricing Rates and Final Indirect Rates - The rate structure proposed with Forward Pricing Rates and Final Indirect Rates should ultimately mirror each other. If Final Indirect Rates have been historically over -proposed when compared to the Forward Pricing Rates, the Forward Pricing Rates will be adjusted.
  • Forward Pricing Rates and Provisional Billing Rates - Forward Pricing Rates and Provisional Billing Rates generally do not match, but in some instances do. The Forward Pricing Rates act as a baseline for the Provisional Billing Rates for the coming year. The cognizant federal official will adjust the Provisional Billing Rates as necessary, based on history and other relevant factors.
  • Provisional Billing Rates and Final Indirect Rates - The purpose of the Provisional Billing Rates is to ensure the billing rates through the year are as close as possible to the Final Indirect Rates. Provisional Billing Rates are influenced by historical Final Indirect Rates.
  • It is imperative that a company have a robust forecasting process and that realistic inputs and assumptions be used to update historical actual indirect rates for use in new proposals and long-term contract proposals.

For more information about government contracting accounting, please contact Ed Ryan, CPA at 703.652.1124 or please feel free to leave us a message below.

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Material discussed in this article is meant to provide general information and should not be acted on without professional advice tailored to your firm’s individual needs.

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