Final Billing Rate

A final billing rate is the audited indirect cost rate established after a contractor's fiscal year ends, representing the actual ratio of indirect costs to the allocation base. It replaces provisional rates and settles all cost-reimbursable contract billings for that year.

What is a Final Billing Rate?

Under FAR Part 42.705, contractors with cost-reimbursable contracts must submit an incurred cost proposal within six months of their fiscal year-end. This proposal reconciles actual indirect costs, fringe, overhead, and G&A, against the provisional billing rates used to invoice the government during the year.

DCAA or the cognizant audit agency reviews the submission and either audits it in detail or issues a no-further-audit determination based on risk. The result is a set of final billing rates that reflect what the contractor actually spent in each cost pool relative to its allocation base (typically direct labor dollars or direct labor hours). Where provisional rates were too high, the contractor refunds the overage; where too low, the government pays additional amounts owed.

Final rates also establish precedent for evaluating forward pricing proposals in subsequent years. Contractors whose final rates deviate significantly from provisional rates may face closer scrutiny from their ACO and DCAA in future years.

Why final billing rates matter for government contractors

Final rates determine ultimate contract profitability on cost-type work. A contractor that allowed unallowable costs to flow into indirect pools, entertainment, certain lobbying costs, penalties, may face disallowances at final settlement, turning a nominally profitable year into a loss. Understanding final rate mechanics helps contractors manage their indirect rate structure proactively throughout the year.

Example

A defense contractor ends its fiscal year with actual G&A costs of $3.2M and actual total direct costs of $16M, producing a final G&A rate of 20%. The provisional rate used throughout the year was 22%. The contractor submits its incurred cost proposal, DCAA audits and agrees with the figures, and the ACO establishes a final rate of 20%. The contractor refunds 2% of all G&A billed during the year, approximately $320,000, to the government.

Frequently Asked Questions

What is an incurred cost proposal and who must file one?

An incurred cost proposal (also called an incurred cost submission or ICS) is the annual document contractors submit to reconcile actual indirect costs with provisional billing rates. Any contractor with cost-reimbursable contracts that include FAR 52.216-7 (Allowable Cost and Payment) must file one.

Can final billing rates ever favor the contractor?

Yes. If actual indirect costs exceed the provisional rates used for billing, the government owes the contractor additional amounts. This can occur when a company's headcount or overhead spending grows faster than its direct base during the year.

What if a contractor misses the six-month filing deadline?

DCAA can unilaterally establish final rates based on available data if a contractor fails to submit timely. These unilateral rates may not favor the contractor and can be difficult to challenge after the fact. Timely submission is strongly advisable.

How long are final rates kept open?

Once finalized and signed by the ACO, final rates close out the year. However, the government retains audit rights on closed contracts for several years, and criminal fraud statutes have longer limitations periods.