Guide · Three Kinds of Rate
Provisional billing rates, forward pricing rates and final rates
Three different rates, three different purposes, three different approvals. Companies confuse them constantly, and the confusion costs money in both directions. Here is which one you need, when.
- 12 years inside DCAA
- 100+ DoD contractors audited
- CPA led
- Rate submissions and settlements
- Remote, nationwide
The short answer
All three are indirect rates. What separates them is what they are used for and when.
- Provisional billing rates let you invoice indirect cost during the year, before anyone knows the real number. They are estimates, set under FAR 42.704, and they get trued up later.
- Forward pricing rates are used to price future work. They let you bid without re-arguing your rates on every proposal, and at their most formal they become a Forward Pricing Rate Agreement.
- Final indirect cost rates are what actually happened. They come out of the incurred cost submission, get audited and negotiated under FAR 42.705, and close the year.
The distinction matters because they are not interchangeable. You cannot bill at a forward pricing rate, and you cannot price a proposal at a provisional rate without explaining yourself.
Side by side
The three rates compared
| Provisional billing | Forward pricing | Final | |
|---|---|---|---|
| Used for | Invoicing work you are performing now | Pricing work you have not won yet | Settling a year that has closed |
| Looks | At the current year | Forward, often several years | Backward, at one completed year |
| Based on | Your best estimate for this year | A forecast of cost and business volume | Actual recorded cost |
| Authority | FAR 42.704 | FAR 15.407-3 and FAR 42.17 | FAR 42.705 |
| Who sets it | Contracting officer or auditor, on your submission | Negotiated, sometimes into an FPRA | Negotiated after audit of the incurred cost submission |
| Changes during the year | Yes, and should when clearly wrong | Revised when the forecast changes | No. It is the answer |
| If it is wrong | Settled against final rates, you collect or repay | You mispriced the bid and live with it | Nothing to settle, this is the settlement |
Timeline
How a single year actually runs
Take a December year end. Here is where each rate shows up.
Before the year starts
You forecast cost and volume and set forward pricing rates for bidding. If you bid often enough, you may negotiate them into a Forward Pricing Rate Agreement so the same argument is not repeated on every proposal.
January, as the year opens
You submit provisional billing rates for the new year. These are what you will invoice at. They often start from the same forecast as forward pricing, but they are a separate submission for a separate purpose.
Through the year
You bill at the provisional rates every month. If actual experience diverges, you revise them mid-year rather than letting the gap build.
June 30 of the following year
The incurred cost submission is due, six months after year end. It calculates the rates the year actually produced.
After that
Adequacy review, audit, negotiation, and then a final indirect cost rate agreement. The difference between what you billed and what the final rates support is settled, and the year closes.
Two years can be in flight at once. You are billing at this year’s provisional rates while last year’s final rates are still being negotiated. That is normal.
Billing
Provisional billing rates
Without these you cannot bill indirect cost at all. Direct cost invoices itself; overhead and G&A reach the voucher only through a rate.
They are estimates and they are supposed to be. Under FAR 42.704 the contracting officer or auditor establishes them so interim payments approximate final cost. The goal is accuracy, not conservatism.
Setting them low feels safe and is not. A company billing at 60 percent overhead while running at 85 is financing the government’s project with its own cash for a year or more, then waiting on settlement to get it back. Setting them high means repaying. Neither is free.
Revise them during the year when it is clear they are wrong. That is expected and far easier than explaining an eighteen-month gap at settlement. We cover the mechanics in indirect cost rate structure and provisional billing rates.
Pricing
Forward pricing rates
These exist so you can bid. A proposal needs rates for periods that have not happened, and your historical rates may not reflect where the business is going.
Informally, you develop them and support them on each proposal. Formally, you negotiate a Forward Pricing Rate Agreement, which binds both sides for a period and stops the same discussion repeating on every bid. An FPRA is worth the effort once you are bidding frequently enough that rate arguments are consuming real time.
The thing to understand is that a forward pricing rate is a pricing instrument, not a billing one. Winning the work does not mean you bill at that rate; you bill at your provisional rates and settle against final. Our forward pricing rate proposal page covers what a credible submission contains.
Settlement
Final indirect cost rates
These are not estimates. They are what your books produced for a completed fiscal year, calculated in the incurred cost submission, tested in audit, and agreed under FAR 42.705.
Everything settles against them. Billed above final rates and you repay; below and you collect. Contracts cannot be closed out until the covering years have final rates, which is why closeout lags performance by so long.
The practical consequence: the quality of your final rates is decided during the year, not at submission. Unallowable costs that sat in a pool all year are in the final rate calculation too. The incurred cost submission guide covers what the schedules have to show.
Avoidable
What goes wrong
Billing at the proposal rate. The rate used to price the job is not automatically the rate you bill. If you never submitted provisional rates, you may be invoicing a number nobody approved.
Never submitting provisional rates at all. More common than it should be, especially on a first cost-type award. The result is months of direct-only invoices and a large catch-up nobody budgeted.
Letting a bad provisional rate run all year. The variance does not disappear, it just gets settled later and larger, after an audit, when it is somebody else’s turn to ask why.
Different rate structures in different places. The pools and bases in your proposal, your billing and your incurred cost submission have to be the same structure. When they are not, every comparison an auditor makes produces a question.
How we help
What this costs
Building the rate structure, which all three rates depend on, starts at $3,000: pools and bases set up in your general ledger, unallowable accounts separated, rates calculated and documented, and provisional billing rates prepared for submission.
Keeping all three current is part of our Cost-Type plan at $1,500 a month, which recalculates rates monthly and tracks provisional against actual so the settlement is a formality. Forward pricing rate proposals and incurred cost submissions are quoted separately. All on the pricing page.
We reply to every inquiry within one business day.
Questions
Frequently asked
What is the difference between provisional billing rates and final rates?
Provisional billing rates are estimates you invoice at during the year, established under FAR 42.704. Final indirect cost rates are what your books actually produced for a completed year, calculated in the incurred cost submission and agreed under FAR 42.705. Everything billed at provisional rates is settled against final rates, so you either collect a shortfall or repay an overbilling.
Can we bill at our forward pricing rates?
No. Forward pricing rates price future work; provisional billing rates bill current work. Winning a job priced at a forward pricing rate does not change what you invoice at, which is your approved provisional rates, settled later against final.
Do we need a Forward Pricing Rate Agreement?
Only if you bid often enough that re-justifying rates on every proposal is costing real time, and the government is willing to negotiate one. Most small contractors support rates proposal by proposal and never need a formal FPRA.
How do we submit provisional billing rates?
You submit a proposed rate for each indirect pool with the supporting calculation and the basis for the estimate, to the contracting officer or cognizant auditor. Under FAR 42.704 they establish the billing rates, and you invoice at those until they are revised or the year is settled.
What happens if our provisional rates are too low?
You underbill all year and recover the difference at settlement, which can be eighteen months or more after the cost was incurred. The money is recoverable but it is not cash you have, and the financing cost is real.
Can we change provisional rates mid-year?
Yes, and you should when it is clear they are materially wrong. Revising is expected and much easier than explaining a large variance at settlement.
Do all three rates have to use the same pools and bases?
Yes. The structure has to be consistent across pricing, billing and the incurred cost submission. Inconsistent structures make every comparison an auditor runs produce a discrepancy, even when the underlying costs are fine.
More
Related services and guides
Indirect cost rates & provisional billing rates
Pool and base design, provisional rate submissions under FAR 42.704, and final rate settlement.
Forward pricing rate proposals (FPRP & FPRA)
Preparing and negotiating rates you can price future work with.
Guide: how to calculate indirect rates
Fringe, overhead and G&A with a worked example for a ten-person firm.
Guide: incurred cost submission
Due dates, the ICE model schedules, and what the adequacy review checks before the audit starts.
Alexander Mungov, CPA
Founder and principal, M2 CPA
Alexander Mungov spent twelve years at the Defense Contract Audit Agency, in the Denver, European and Afghanistan branch offices, finishing as a Supervisory Auditor leading a team of six. He then built and ran the FAR, DFARS and CAS compliance program inside a defense technology company, as the primary liaison with DCAA and DCMA.
He founded M2 CPA to give small and mid-size contractors the compliance support that large primes take for granted. More about Alex.
Sources: FAR 42.704 (billing rates), FAR 42.705 (final indirect cost rates), FAR 42.17 and FAR 15.407-3 (forward pricing rate agreements and proposals), FAR 52.216-7 (Allowable Cost and Payment). Examples are illustrative. This guide is general information, not advice on a specific contract.
Not sure which rate you are supposed to be using?
Tell us what you are billing at today, what you priced the work at, and whether you have ever submitted provisional rates. We will tell you where the gap is.