FAR 16.301�3 Requirement:
In part FAR 16.3013 requires that a contractor's accounting system be adequate for determining costs applicable to the contract prior to the award of a cost reimbursable contract.
An adequate accounting system is now determined by the new "Business Systems Rule" which establishes mandatory requirements for "six contractor business systems," through changes to DFARS 242.70 and Fed. Reg. 28,856 for contracts awarded after May 18, 2011.
The two "systems" affected by the contractor's budgets are the Billing System and the Estimating System:
Billing System
An adequate accounting system must provide for an adequate "Billing System" i.e. billings that can be reconciled to the cost accounts for direct and indirect costs. Reimbursement of indirect costs in these interim payments is generally made through provisional billing rates.
What are Provisional Billing Rates?
- Provisional Billing Rates are established to approximate the contractor's final year-end indirect rates for Overhead and General and Administrative costs.
- Provisional Billing Rates are used for interim purposes until settlement is reached on the final indirect rates for the contractor's fiscal year.
The government is allowed to establish the final (audited) indirect rates based on 20/20 hindsight after each year is closed and before they will make final payment on a cost type contract. If the final indirect rates are less than the Provisional Rates the contractor is required to reimburse the government for all prior amounts billed in excess of the amounts that would have been billed using the final rates. Therefore, it is critical that the Provisional Billing rates come as close as possible to the final rates (once the year is closed).
How does this relate to budgets?
The budget is the support for the Provisional (forecasted) Billing Rates.
The budget for the current year is the document the Defense Contract Audit Agency (DCAA) may audit to determine if the Provisional Rates are accurate and reasonable. The budget should use the prior year historical costs to establish the auditable baseline. The budget will provide the assumptions for each line that varies from the historical costs. If the budgeted amounts are accepted by DCAA, the Provision Rates should be accepted by DCAA.
Estimating System
Another criterion for an adequate accounting system is to provide for an adequate "Estimating System" i.e. proposal amounts submitted in response to RFPs must reflect the most current, accurate, and complete data.
Part of the proposal will be the application of the forecasted indirect rates to the applicable bases established in the proposal. The government is allowed to audit these proposed rates during the proposal process. If the proposed rates are not supported adequately the contractor may not be allowed to bid on that contract.
How does this relate to budgets?
The Estimating System is based on the information derived from a proper budget.
For proposals that have a relatively short period of performance, the provisional rates submitted above usually suffice as the most current, accurate, and complete data to establish the indirect rates to be used during the performance of the contract.
For large proposals that may change the structure of the company, new budgets will need to be established that may span several years in the future. These budgets will be established based on the same principles of the Provisional Rate budget above; however, the assumptions and timelines may differ drastically. These budgets may be revised based on the assumption that one or more of the current pending proposals receive contract awards. Again, DCAA may audit these budgets and, again, if the budgeted amounts are accepted, the proposed indirect rates should be accepted by DCAA.
Budgets are critical and mandatory for defense contractors who must have an adequate accounting system. They are also critical (even if not mandatory) for all companies if they want to have an adequate accounting system. The old adage that you cannot manage what you cannot measure makes sense. The budget is the tool to measure cost control performance.
We, at Nperspective, have assisted numerous clients with Provisional Rates and Proposal Rates based on the establishment of budgets with various assumptions and forecasted amounts.
All the budgeted rates we have helped clients establish that were audited by DCAA have been accepted as filed.
The key is providing a rock solid baseline (historical cost data) and reasonable, supportable assumptions for the future periods. Please contact us if you have any questions pertaining to establishing accurate budgets or rates.
