42.704 Billing rates
Source: FAR 42.704 on acquisition.gov
FAR 42.704 requires that billing rates for indirect costs be set as close as possible to anticipated final rates, with adjustments for unallowable costs, and allows for revisions to prevent significant payment discrepancies.
Overview
FAR 42.704 outlines the procedures and responsibilities for establishing and revising billing rates for indirect costs on government contracts. Billing rates are provisional rates used for interim reimbursement of indirect costs until final rates are established. The section details how contracting officers or cognizant Federal agency officials (or auditors) determine these rates based on recent reviews, audits, or reliable data, aiming to closely approximate the anticipated final indirect cost rates for the contractor’s fiscal period. The regulation allows for adjustments to billing rates, either prospectively or retroactively, by mutual agreement or, if necessary, unilaterally by the government. It also clarifies that the elements and bases used for billing rates do not dictate the final indirect cost settlement. When a contractor submits a certified final indirect cost rate proposal, billing rates may be revised to reflect proposed rates, adjusted for historically disallowed costs, until the proposal is audited and settled.
Key Rules
- Responsibility for Billing Rates
- The contracting officer, cognizant Federal agency official, or auditor who establishes final indirect cost rates is also responsible for determining billing rates.
- Basis for Establishing Billing Rates
- Billing rates are set using recent reviews, prior audits, or reliable data, and should closely match anticipated final rates, adjusted for unallowable costs.
- Adjustments and Revisions
- Billing rates can be revised by mutual agreement or unilaterally to prevent significant overpayment or underpayment.
- Non-Determinative Nature
- The elements and bases used for billing rates do not determine the final indirect cost allocation or settlement.
- Revisions Upon Submission of Certified Proposal
- Upon submission of a certified final indirect cost rate proposal, billing rates may be revised to reflect proposed rates, adjusted for historically disallowed costs, until audit and settlement.
Responsibilities
- Contracting Officers: Establish, adjust, and, if necessary, unilaterally determine billing rates; ensure rates reflect anticipated final indirect costs; adjust for unallowable costs; revise rates as needed.
- Contractors: Provide accurate data for rate determination; submit certified final indirect cost rate proposals; agree to revisions as appropriate; maintain documentation.
- Agencies: Oversee compliance, ensure proper rate establishment, and audit proposals as required.
Practical Implications
- This section ensures that interim payments for indirect costs are as accurate as possible, minimizing the risk of overpayment or underpayment during contract performance. Contractors must be prepared to provide reliable data and adjust to rate changes. Common pitfalls include failing to exclude unallowable costs, not updating rates when conditions change, or not maintaining adequate documentation for rate proposals and adjustments.
(a) The contracting officer (or cognizant Federal agency official) or auditor responsible under 42.705 for establishing the final indirect cost rates also shall be responsible for determining the billing rates.
(b) The contracting officer (or cognizant Federal agency official) or auditor shall establish billing rates on the basis of information resulting from recent review, previous rate audits or experience, or similar reliable data or experience of other contracting activities. In establishing billing rates, the contracting officer (or cognizant Federal agency official) or auditor should 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. When the contracting officer (or cognizant Federal agency official) or auditor determines that the dollar value of contracts requiring use of billing rates does not warrant submission of a detailed billing rate proposal, the billing rates may be established by making appropriate adjustments from the prior year’s indirect cost experience to eliminate unallowable and nonrecurring costs and to reflect new or changed conditions.
(c) Once established, billing rates may be prospectively or retroactively revised by mutual agreement of the contracting officer (or cognizant Federal agency official) or auditor and the contractor at either party’s request, to prevent substantial overpayment or underpayment. When agreement cannot be reached, the billing rates may be unilaterally determined by the contracting officer (or cognizant Federal agency official).
(d) The elements of indirect cost and the base or bases used in computing billing rates shall not be construed as determinative of the indirect costs to be distributed or of the bases of distribution to be used in the final settlement.
(e) When the contractor provides to the cognizant contracting officer the certified final indirect cost rate proposal in accordance with 42.705-1(b) or 42.705-2(b), the contractor and the Government may mutually agree to revise billing rates to reflect the proposed indirect cost rates, as approved by the Government to reflect historically disallowed amounts from prior years’ audits, until the proposal has been audited and settled. The historical decrement will be determined by either the cognizant contracting officer (42.705-1(b)) or the cognizant auditor (42.705-2(b)).