Indirect Rates – The Close Out Process: Part Three

It’s year end and your company has closed out its fiscal year. What should you do from an indirect rate standpoint? Listen to Eric Poppe, Senior Manager in Cherry Bekaert’s Government Contracting practice and Rich Wilkinson, Director of Product Marketing at Unanet discuss the importance of indirect rates and the close out process.

Rate variance is consequential. It has a half-life of about a year. If the government owes you $1K in rate differential at the end of the year and you bill it immediately, you can normally expect to collect it all. If you wait until next year, however, some projects may be out of funding. A project office may push back on what they now see as a “late invoice.” The Defense Contract Audit Agency will often refuse to sign-off on it saying that the rate differential invoices should wait until contract close out (which could be three or four years).

On average, at the one-year mark, that $1k in rate variance is probably worth $500 or less. After another year, the collectability falls still further. It’s now probably worth $250 or less. The $1k example is bad enough, but what if the variance is $1M – or more? 

By the way, this cycle isn’t over. There is still the dreaded Incurred Cost Submission to do to finalize the rates. But the pressure of negotiating final rates is eased a great deal if most of the variance was collected at year end. Remember, it’s a never-ending cycle. As one-year ends, another begins.

Steps for closing out the rate year:

1. Calculate the (near) final rates as soon as practical after the close of the last month.
2. Immediately submit a request for revised provisional rates equal to the actual rates for the year.
3. Immediately bill the rate differential as a separate invoice between the last (provisional) rate billing of the year and the first vouchers of the new year.

If you haven’t already, catch up on part one and two of the series where we discuss why government contracting firms need indirect rates and where and when to start, as well as monitoring and best practices in calculating your rates:

• Indirect Rates – More than Just a Math Exercise: Part One
• Indirect Rates – Monitoring and Best Practices in Calculating Your Rates: Part Two 

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