New contractors (yes, even veterans) are often confused on the different names of indirect rates commonly bandied about.  What is the difference between proposal rates and final rates?  When is a billing and actual rate used?  How do these differ from rates used for booking inventory costs?  The following list and brief descriptions will hopefully clarify the meaning of these terms.  (Though we have liberally inserted insights from our own experience, we have also used Lane Andersons’ Accounting for Government Contracts, Cost Accounting Standards.)

Contractors develop rates for each indirect cost pool.  Service organizations might have general overhead, material/subcontract handling and/or general and administrative rates while manufacturing organizations may have manufacturing, engineering, materials handling and G&A.  Each rate can change depending on the purpose and time of its use.  

1.  Forward pricing rate.  Forward pricing rates are also known as bidding or proposal rates.  It is the rate used to price a proposal and like the name implies, is used for the future, commonly for one or multiple years.  The government will usually review these estimated rates to determine whether they can be approved for pricing purposes.  A review or audit may be (1) for reasonableness purposes only – does the rate compare with common industry practices (2) cursory – are seemingly unallowable cost deleted or do individual account balances tie to budgeted amounts or (3) detailed – high dollar or “sensitive” cost accounts are examined in depth.

2.  Billing rate.  A billing rate is also known as a provisional or interim rate.  Its is a rate used to bill the government on either cost type contracts and subcontracts or progress payments on fixed type work.  In early contract performance, if there is an agreed to forward pricing rate, the billing rate should be the same as forward pricing rates; if no agreement is made, there still should be no significant difference since if there was, it would indicate something was off.  Rates can and, in fact, should be changed periodically to reflect estimates of actual rates.

3.  Actual rate.  The actual rate is indirect cost rates the contractor actually experienced on contract performance during the year.  Year ending actual costs, adjusted for unallowable costs, will provide the basis for actual rates.

4.  Final rate.  When contractors have flexible contracts and subcontracts (e.g. cost type, time and material, labor-hour) the government will often audit the actual incurred cost for the year.  They will audit what the contractor asserts is their actual rates and will commonly adjust them for questioned costs.  Hence, the final rate is the one the government has agreed is the approved rate for any given year.  This is the rate that results from the government’s review or audit of incurred cost proposals and is used to settle most cost type contracts.  

5.  Booking rate.  A booking, sometimes called a budget or inventory rate, is one that contractors often compute and use internally to estimate or determine its costs for performing a contract.  It is a management tool for the company to track its actual costs or value work-in-process.  It usually does not distinguish between allowable and unallowable costs, which are concepts reserved for government contract accounting, and is not usually reported to the government (though government auditors may ask to examine these rates to compare with other rates described above).

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