At the end of each year, companies having contracts with the federal government budget rates for the upcoming year. These projected or budgeted rates are used for two distinct purposes.
Provisional Billing Rates (PBR) typically encompass indirect rates, only. They are exclusively for use on flexibly priced (e.g., cost-reimbursable) awards. These are the temporary billing rates for invoices throughout the year, to be recalculated – based on actual incurred costs – after year end. If some significant change impacts PBR, new rates are proposed using updated information. Otherwise, the PBR are established once for use throughout the year. (Government) Approved PBR allow the contractor to bill indirect expenses at an estimated rate and, after submission and approval of the ICE or Incurred Cost Submission, credit or debit (i.e., pay or bill) the customer for the dollar difference resulting from Provisional Billing Rates versus actual indirect rates.
Forward Pricing Rates (FPR) typically encompass indirect rates and, often, Direct Labor rates. Sometimes Direct Labor rates are represented as wrap rates, instead of proposing each element separately. FPR are exclusively for use on future cost proposals, throughout the (budget) year. Fixed price awards and fixed price portions of awards are not re-negotiated, after award, for differences in actual incurred costs. (Government) Approved FPR eliminate cost analysis or audit of rates on each (separate) cost proposal. If some significant change impacts FPR, new rates are proposed (for future proposals) using updated information. Otherwise, the FPR are established once for use throughout the year. Although the customer might perform technical evaluations on individual proposals – Forward Pricing Rates are proposed, evaluated, and negotiated/approved just once.
FPR include each indirect rate, such as Fringe and G&A, and often include (employee, but typically not subcontractor) Direct Labor rates. Each of these is proposed and analyzed or audited, separately; however, sometimes, a composite wrap rate is also calculated for each proposed labor category. A wrap rate is simply the Direct Labor (i.e., paycheck) rate plus absorption of applicable indirect-rate expenses. For example, if the labor category Underwater Basket Weaver I consists of employees whose average rate of pay is $40.00; the Fringe Rate is 30%; and the G&A (on Direct Labor and Fringe) is 50% – the total cost per hour is $78.00, as follows:
| Direct Labor – UBW I | $40.00 |
| Fringe | $12.00 |
| G&A | $26.00 |
| Total Cost (wrap rate) | $78.00 |
Sometimes, a wrap rate includes profit. In our example, a proposed Profit of 13% results in a priced wrap rate of $88.14 per hour.
The calculations and support for the proposed calculations are required for each element of the wrap rate. The total cost, or even the total price, wrap rate might be negotiated/approved by the customer; however, the cost analysis or audit of the proposed costs is performed on each separate component.
In summary, recipients of federal government contracts propose two different types of budgeted, or projected, rates for use in the next year. Provisional Billing Rates are indirect rates used for billings on flexibly priced awards. These are temporary “place holders,” which are compared to actual incurred costs after (the subject) year end. The overbilled and underbilled amounts are accounted for, after acceptance of an ICE or Incurred Cost Submission. Forward Pricing Rates are indirect rates and, often, Direct Labor rates for use in cost proposals throughout the next year. Once approved, these rates need no subsequent audit or analysis by the Government, when incorporated in proposals during the (subject) year.