Indirect Rates FAQ
Indirect Rates FAQ
Business Units must configure the indirect rate structure in accordance with applicable CAS provisions and FAR Subpart 31.2 and FAR Subpart 42.7 Indirect Cost Rates. Contractors should maintain an accounting system capable of segregating costs into specific cost objectives: direct costs and allocation bases, allocable pool costs, and identification of unallowable costs (FAR 31.201-6).
What are indirect rates?
An indirect cost rate is used to determine, utilizing sound administrative principles, the proportion of indirect cost each contract should bear. To properly classify as an indirect cost, the expense should be incurred for common or joint objectives and cannot be readily allocated to a particular contract or specific cost objective. An indirect cost rate is the ratio between the total indirect expenses and its allocable cost base. The indirect cost allocation methods used by each organization depend on its own structure, program functions, and accounting system.
When do I need to establish indirect burden rates?
When a business unit is pursuing flexibly priced work, it should establish indirect cost rates for estimating and use in performance of the contract. For commercial, for-profit business units, the Federal agency that provides the most funding is the cognizant agency that will establish the indirect cost rates. Agencies will often require Contractors to submit their rate proposals and supporting information along with their financial proposals, for assistance in determining appropriate indirect cost rates, should the Contractor not have an existing rate agreement with its cognizant agency.
How does a Contractor establish Indirect Burden Rates?
The contractor will establish indirect cost rates with its cognizant Federal agency. The Federal agency that manages the largest aggregate dollar amount of contracts with the Contractor is typically the cognizant agency. The resulting rate agreement, whether a provisional billing rate agreement or Negotiated Indirect Cost Rate Agreement (NICRA), shall be used across all government contracts and Federal agencies for whom the Contractor performs work. Indirect rates are typically based on budgets for an upcoming accounting period. However, Indirect Rates can sometimes be based on allowable costs for a previously completed accounting period.
I am confused as to which indirect burden rates to seek first, what is the difference?
A provisional rate or provisional billing rate is a temporary indirect cost rate applicable to a specified period, typically the contractor’s fiscal year, which the contractor can use for funding modifications, interim reimbursement, and reporting indirect costs on awards, pending the settlement of a final rate for the accounting period (contractor fiscal year). The provisional billing rate should be established at the beginning of the contractor’s fiscal year, prior to the submission of the first invoice for interim reimbursement during that accounting period. During the accounting period, should the contractor experience a material change to the indirect rates after establishment of the provisional billing rates, the contractor must submit an updated provisional billing rate schedule.
A final rate is an indirect cost rate applicable to a specified past contractor accounting period, based on the actual costs of the period. The Contractor typically submits an Incurred Cost Proposal to detail the actual costs in the pools and allocable bases, after all actual costs are incurred during the accounting period but prior to 180 days following the close of that accounting period (FAR 52.216-7). Once established through review and discussion of the Incurred Cost Proposal with the cognizant agency audit office, the contractor should use the final indirect cost rate to adjust the indirect costs claimed/billed.
A Forward Pricing Rate Agreement (FPRA) is an agreement between the contractor and the cognizant government agency establishing indirect rates for a specified future period. Typically, the cognizant government agency would only negotiate with contractors holding a significant volume of Government contracts and proposals. The contractor would the use the FPRA in proposal pricing for new awards and contract modifications, with the purpose of expediting the evaluation process by avoiding the need to analyze the indirect rate portion of the proposal. FAR Subpart 42.17 – Forward Pricing Rate Agreements covers the establishment of a FPRA.
How do I determine an appropriate allocation base?
The contractor has the flexibility to determine their allocation bases, based on their accounting structure and business practices, but must comply with Cost Accounting Standards and Federal Acquisition Regulation. The allocation base should have a causal/beneficial relationship to the indirect cost pool. In addition, the allocation base should result in a reasonable allocation of indirect costs to contracts. Finally, the allocation base should be an adequate measure of resource consumption.
What if I have an indirect cost that benefits more than one of my final indirect cost pools?
If an indirect cost benefits more than one final indirect cost pool, the contractor should create intermediate cost pools or service centers for the allocation of this cost. The intermediate pool or service center should use the allocation base with causal/beneficial relationships to allow the most accurate allocation of costs.
How long does it take to negotiate an indirect cost rate agreement?
The process for establishing a Provisional Billing Rate Agreement or a Negotiated Indirect Cost Rate Agreement (NICRA) can up to take six months (180 days), or more, from the submission date of the Indirect Rate request.
When is an Incurred Cost Proposal required?
An Incurred Cost Proposal must be submitted by every Contractor with a contract subject to the Allowable Cost and Payment Clause (52.216-7) and Payments under T&M and Labor-Hour Contracts (52.232-7b(4) & b(5)).