Overview
FAR 42.704 establishes the procedures and responsibilities for determining interim billing rates, which are used to reimburse contractors for indirect costs during a fiscal period until final indirect cost rates are settled. The primary objective is to set rates that closely approximate the anticipated final rates to ensure steady cash flow while preventing significant overpayments or underpayments.
Key Rules
- Responsibility: The same Contracting Officer (CO) or auditor responsible for establishing final indirect cost rates is also responsible for determining the billing rates.
- Basis for Rates: Rates are established using recent reviews, previous audits, or other reliable historical data; they must be adjusted to exclude known unallowable costs.
- Adjustments: If the dollar value of a contract is low, the CO may waive the requirement for a detailed billing rate proposal and instead adjust prior years' experience.
- Revisions: Rates can be revised prospectively or retroactively by mutual agreement to prevent substantial overpayment or underpayment; the CO may also determine rates unilaterally if an agreement cannot be reached.
- Non-binding Status: The elements and bases used to compute billing rates are temporary and do not dictate the final indirect cost settlement or distribution methods.
- Interim Updates: Once a certified final indirect cost rate proposal is submitted, the parties may agree to update billing rates to match the proposed rates, often adjusted by a "historical decrement" based on previous audit disallowances.
Practical Implications
- Cash Flow Management: For contractors, these rates are critical for maintaining liquidity, as they allow for the recovery of overhead and G&A costs on vouchers and invoices throughout the year.
- Monitoring Requirements: Contractors must actively monitor the variance between actual indirect costs and billing rates; significant deviations may trigger a unilateral rate reduction by the Government to avoid overpayment liabilities.