Provisional Billing Rate

A provisional billing rate is a temporary, government-approved indirect cost rate that contractors use to invoice the federal government on cost-reimbursable contracts during the performance period, before actual annual rates have been calculated and agreed upon.

What is a Provisional Billing Rate?

On cost-reimbursable contracts, the government reimburses a contractor's allowable direct costs plus a share of allowable indirect costs such as fringe benefits, overhead, and general and administrative (G&A) expenses. Because actual indirect costs are not known until a fiscal year closes, the FAR (Part 42.704) provides for the use of provisional rates as billing proxies throughout the year.

Contractors submit proposed provisional rates to their cognizant audit agency, typically DCAA, or directly to their administrative contracting officer (ACO). The rates are derived from the contractor's budget and indirect rate structure forecast. Once approved, these rates are applied to direct costs on invoices submitted through the government's payment systems. At year-end, the contractor submits an incurred cost proposal reconciling actual costs against the provisional amounts, resulting in either a billing adjustment or a refund to the government.

Provisional rates typically cover fringe benefit rates, overhead rates, and G&A rates. The difference between provisional and final rates triggers a final billing rate settlement, which may take one to three years after year-end.

Why provisional billing rates matter for government contractors

Without approved provisional rates, contractors cannot invoice for indirect costs and face serious cash flow constraints. Setting rates too low creates underbillings that stress working capital; setting them too high triggers government scrutiny and potential refund demands. Accurate rate estimation, grounded in the cost pool structure, is a core GovCon financial management discipline.

Example

A professional services contractor budgets $2M in G&A costs and $10M in total direct labor for the coming year, producing a provisional G&A rate of 20%. DCAA approves this rate. Throughout the year, the contractor invoices the government by applying the 20% G&A rate to each month's direct labor charges. At year-end, actual G&A costs come in at $1.9M against $10.5M in direct labor, yielding a final rate of approximately 18.1%. The contractor refunds the overage to the government during incurred cost settlement.

Frequently Asked Questions

Who approves provisional billing rates?

The Administrative Contracting Officer (ACO), typically with DCAA audit support, approves provisional billing rates. For contractors audited by agencies other than DCAA, the cognizant federal agency official (CFAO) performs this role.

What happens if a contractor bills at a rate higher than the final rate?

When the final rate is lower than the provisional rate used for billing, the contractor must refund the difference. This is resolved through the incurred cost audit and final rate settlement process under FAR 42.705.

Are provisional rates the same as forward pricing rates?

They overlap in concept but differ in purpose. Forward pricing rates (FPRs) are used in pricing future contract actions and proposals. Provisional billing rates are used specifically for invoicing on existing cost-type contracts during performance.

How long does it take to settle provisional rates with final rates?

The FAR requires contractors to submit incurred cost proposals within six months of fiscal year-end. DCAA then audits the submission, a process that can take one to five years depending on the contractor's risk profile, dollar values, and DCAA backlog.