Forward Pricing Rate Agreement

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Contents

Definitions

“Forward pricing rate agreement” means a written agreement negotiated between a contractor and the Government to make certain rates available during a specified period for use in pricing contracts or modifications. These rates represent reasonable projections of specific costs that are not easily estimated for, identified with, or generated by a specific contract, contract end item, or task. These projections may include rates for such things as labor, indirect costs, material obsolescence and usage, spare parts provisioning, and material handling.[1]

A FPRA (Forward Pricing Rate Agreement) is a written agreement negotiated between a contractor and the Government to make certain rates available during a specified period for use in pricing contracts or modifications[2].

A FPRR (Forward Pricing Rate Recommendation) is a set of rates and factors unilaterally established by the ACO for use by the Government in negotiations or other contract actions when forward pricing rate agreement negotiations have not been completed or when the contractor will not agree to a forward pricing rate agreement.[3].

Determining the need for a FPRA

Negotiation of forward pricing rate agreements (FPRA’s) may be requested by the contracting officer or the contractor or initiated by the administrative contracting officer (ACO). In determining whether or not to establish such an agreement, the ACO should consider whether the benefits to be derived from the agreement are commensurate with the effort of establishing and monitoring it. Normally, FPRA’s should be negotiated only with contractors having a significant volume of Government contract proposals. The cognizant contract administration agency shall determine whether an FPRA will be established.[4]


The ACO shall determine whether a forward pricing rate agreement (FPRA) or forward pricing rate recommendation (FPRR) will be established. The ACO shall establish a FPRA or FPRR for all contractors with more than $200 million annual sales unless the ACO makes a written determination that the contractor will not have a significant volume of Government contract proposals in future periods.[5]

Purpose and Applicability

The purpose for rate agreements is to have the same rates bid in all proposals, audited once, thereby reducing the administrative work of repeatedly having them audited with the submittal of each pricing proposal. FPRA agreements facilitate the negotiation of both Prime contracts and Subcontracts expeditiously. It also protects the proprietary nature of the rates when negotiating subcontracts. DCAA or DCMA simply has to verify that the agreed to (approved) rates have been utilized in developing in the bid under review.

Indirect rate agreements are only applicable in a sole source, cost and pricing data environment for Fixed Price type work, and for all Cost type work. In this environment, with the establishment of a rate agreement, the cost elements that make up the rate agreement have already been audited and agreed to, therefore the rates have been deemed “fair and reasonable.” Rate agreements are not applicable in a commercial or competitive environment because fair and reasonable has been determined from external market conditions.


The Forward Pricing Rate Proposal

(b) The ACO shall obtain the contractor’s forward pricing rate proposal and require that it include cost or pricing data that are accurate, complete, and current as of the date of submission (but see 15.407-3(c)). The ACO shall invite the cognizant contract auditor and contracting offices having a significant interest to participate in developing a Government objective and in the negotiations. Upon completing negotiations, the ACO shall prepare a price negotiation memorandum (PNM) (see 15.406-3) and forward copies of the PNM and FPRA to the cognizant auditor and to all contracting offices that are known to be affected by the FPRA.


Forward Pricing Rate Agreement

(c) The FPRA shall provide specific terms and conditions covering expiration, application, and data requirements for systematic monitoring to ensure the validity of the rates. The agreement shall provide for cancellation at the option of either party and shall require the contractor to submit to the ACO and to the cognizant contract auditor any significant change in cost or pricing data used to support the FPRA.

(d) When an FPRA is invalid, the contractor should submit and negotiate a new proposal to reflect the changed conditions. If an FPRA has not been established or has been invalidated, the ACO will issue a forward pricing rate recommendation (FPRR) to buying activities with documentation to assist negotiators. In the absence of an FPRA or FPRR, the ACO shall include support for rates utilized.

(e) The ACO may negotiate continuous updates to the FPRA. The FPRA will provide specific terms and conditions covering notification, application, and data requirements for systematic monitoring to ensure the validity of the rates.

DCMA Forward Pricing Rate Agreement Requirements and Process (DCMA)[6]

The information below is extracted from the DCMA Handbook.

Determine Forward Pricing Rate Requirements

  • 1.3. The FPRA or FPRRs should represent reasonable projections of specific costs that are not easily estimated, identified with or generated by a specific contract end item or task. The FPRA or FPRR could include rates for such things as labor, indirect costs, general and administrative expenses, and cost of money factors. If the contractor uses forward pricing factors (FPFs) to estimate costs, the ACO should establish FPFs as part of the FPRA or FPRR. FPFs are usually expressed as a percentage or ratio that is applied to another cost or estimate to allocate or estimate prices. Labor fringes, escalation factors, scrap, and special tooling are examples of FPFs.


  • 1.4. (ND) Once a decision is made that a FPRA or FPRR is appropriate the ACO will enter the contractor information into the FPRA eTool application and indicate "yes" in the application that the contractor meets the criteria above.

Determine Proposal Review Approach

  • 2.1. Integrated Process Team (IPT) Approach. The ACO should determine if the IPT approach is appropriate. Under the IPT approach, the Government evaluates the basis of estimates as they are developed prior to submission of a comprehensive proposal. When the IPT approach is used, the ACO shall obtain the contractor's comprehensive proposal that includes cost and pricing data that are accurate, complete and current as of the date of submission at the conclusion of the proposal review. FAR 42.1701(b) The IPT approach is appropriate when:
  • 2.1.1. The contractor's estimating system is adequate.
  • 2.1.2. Historically, there have been no significant differences between prior estimated rates and the actual rates.
  • 2.1.3. The contractor agrees to use this approach.


  • 2.2. Complete Proposal Approach. If the ACO determines the IPT approach is not appropriate, the ACO will use the complete proposal approach. Under the complete proposal approach, the ACO shall obtain the contractor's proposal and require that it include cost and pricing data that are accurate, complete and current as of the date of submission. FAR 42.1701(b) The Government then evaluates the basis of estimates and determines whether the supporting cost or pricing data are accurate, complete and current after the contractor submits the proposal.


  • 2.3. Under either approach, the ACO shall not require the contractor to execute a Certificate of Current Cost or Pricing Data as part of the FPRA/FPRR process. FAR 42.1701(b) Contractors certify to the rates as part of results of negotiation of individual contracts and modifications. FAR 15.406-2

Determine Review Team Membership.

The ACO should determine the types of specialists (e.g., price/cost analysts, industrial specialists, engineers) needed to evaluate the contractor's proposal.

  • 3.1. To make a determination, the ACO should consider the:
3.1.1. Materiality of bases and pools;
3.1.2. Status of the contractor's estimating system and other accounting systems and related control systems including any identified deficiencies in the contractor's budgeting system;
3.1.3. Historical differences between the contractor's forecasted and actual rates;
3.1.4. Changes in the contractor's organization, operations, manufacturing processes and practices, business volume, and allocation bases; and,
3.1.5. The mix of Government and commercial business and types of Government contracts, e.g., fixed-price, cost-reimbursement, time-and-materials, labor hour.


  • 3.2. The ACO shall invite DCAA and contracting offices having a significant interest to participate in the review. FAR 42.1701(b)

Obtain Contractor's Proposal

  • 4.1. Continuous Update Approach. If part of an existing FPRA becomes invalid, the ACO should negotiate a continuous update to the existing FPRA instead of invalidating the entire FPRA. FAR 42.1701(e) Under this approach, the ACO shall require the contractor to submit a proposal for the parts of the FPRA that are invalid.


  • 4.2. Complete FPRA/FPRR Approach. If there is no existing FPRA or the preponderance of the existing FPRA is invalid, the ACO shall require the contractor to submit a proposal for the entire FPRA.

Conduct Proposal Review.

The review team will determine whether:

  • 5.1. The contractor's bases of estimates are reasonable;


  • 5.2. The supporting cost or pricing data are accurate, complete and current;


  • 5.3. The contractor's estimating practices comply with the contractor's disclosed or established cost accounting practices;


  • 5.4. Projected business volume, allocation bases, and indirect costs are reasonable and in consonance with contractor and customer business projections;


  • 5.5. Rate data are valid and correct; and,


  • 5.6. Rate computations are mathematically correct.

Develop Pre-negotiation Objectives

  • 6.1. The ACO shall develop the pre-negotiation objectives (PNO). FAR 15.406-1 The PNO represents the ACO's initial negotiation position. The scope and depth of the analysis supporting the PNO should be directly related to the dollar value, importance, and complexity of the contractor's overall rates and individual elements of cost.


  • 6.2. (ND) The ACO shall fully consider the findings and recommendation of DCAA and the technical specialist. However, the ACO should not postpone the establishment of a FPRA or establish FPRRs in lieu of a FPRA pending receipt of a DCAA audit report. FPRAs and FPRRs are living, evolving projections of costs. When the DCAA audit report is not received within a reasonable time, the ACO should continue to pursue negotiation of a FPRA.


  • 6.3. (ND) The ACO shall document in the PNO:
6.3.1. An affirmative statement that the ACO agreed or disagreed with each audit or other specialist's (price/cost analyst, legal) findings and recommendations.
6.3.2. Sound rationale to resolve each audit or other specialist's recommendation. The rationale must demonstrate that the ACO has considered all appropriate FAR, DFARS, and DCMA Instructions related to the issues raised or questioned by DCAA (e.g., cost principles, Cost Accounting Standards).


  • 6.4. The ACO shall invite DCAA and contracting offices having significant dollar interest to participate in the preliminary discussions in the development of a negotiation position. FAR 42.1701(b)


  • 6.5. LATEST CHANGE (ND) The ACO shall obtain approval of the PNO from the CMO Contracts Director and any required Contract Management Boards of Review (BoR) approvals before entering into negotiations. All FPRAs require approval by the Operations Directorate BoR before entering into negotiations.

Negotiate Rates

  • 7.1. The ACO should negotiate rates as soon as possible.


  • 7.2. The ACO shall invite DCAA and contracting offices having significant dollar interest to participate in the negotiations. FAR 42.1701(b)


  • 7.3. If agreement is reached, the ACO should establish a FPRA. The FPRA will:
  • 7.3.1. Specify the agreed upon rates.
  • 7.3.2. Specify bases to which the rates apply.
  • 7.3.3. Provide specific terms and conditions covering expiration, application, and data requirements for systematic monitoring to ensure the validity of the rates. FAR 42.1701(c)and (e)
  • 7.3.4. Require the contractor to periodically:
  • 7.3.4.1. Compare the actual rates with the FPRA and immediately inform the ACO of any:
  • 7.3.4.1.1. Significant variances from actual rates to the FPRA.
  • 7.3.4.1.2. Other conditions that may invalidate the rates.
  • 7.3.4.2. Provide the ACO comparisons of updated projected sales forecasts and other base assumptions to the data used to establish the forward pricing rates in the out years.
  • 7.3.5. Specify other specific reports the contractor will be required to provide the ACO to permit adequate rate monitoring (e.g., direct labor rates, direct labor dollars, indirect expenses, and sales forecasts).
  • 7.3.6. Specify the frequency of the contractor's required reporting and analysis.
  • 7.3.7. Provide for cancellation at the option of either party. FAR 42.1701(c)


  • 7.5. If a rate agreement is not reached, the ACO shall unilaterally establish an FPRR. FAR 42.1701(d) The FPRR should include the recommended rates and the specific bases to which the rates apply.


  • 7.6. (ND) The ACO will enter the details of the FPRA/FPRR in the Forward Pricing Rates eTool application and update the data as appropriate.

Prepare Negotiation Memorandum

  • 8.1. The negotiation memorandum shall include: FAR 15.406-3
  • 8.1.1. The purpose of the negotiation.
  • 8.1.2. The name, position, and organization of each person representing the contractor and the Government in the negotiations.
  • 8.1.3. The current status of any contractor systems (e.g., purchasing, estimating, accounting) to the extent they affected and were considered in the negotiation.
  • 8.1.4. A summary of the contractor's proposal, any field pricing assistance recommendations, including the reasons for any pertinent variances from them, the Government's negotiation objective, and the negotiated position.
  • 8.1.5. The most significant facts or considerations controlling the establishment of the pre-negotiation objectives and the negotiated agreement including an explanation of any significant differences between the two positions.
  • 8.1.6. Address whether the ACO sustained the positions by cost element as identified in the pre-negotiation memorandum. For any pre-negotiation positions not sustained, the negotiated positions will be supported by sound rationale based on additional information that became available during negotiation.
  • 8.1.7. State which cost and pricing data provided by the contractor was relied upon in reaching settlement.


  • 8.2. LATEST CHANGE (ND) For FPRAs, the ACO shall obtain approval of the negotiation memorandum from the HQ BoR before executing the FPRA. For FPRRs, the ACO shall obtain approval of the negotiation memorandum from the CMO Contracts Director. The CMO Contracts Director may delegate this action to a level no lower than the contract team supervisor/leader.

Distribute Rate Agreement and Negotiation Memorandum

  • 9.1. The ACO should promptly distribute a copy of the signed rate agreement to the contractor.


  • 9.2. The ACO shall promptly distribute signed copies of the rate agreement and negotiation memorandum or rate recommendation to DCAA and all contracting offices that are known to be affected by the rates. FAR 42.1701(b)

Monitor Rates

  • 10.1. The ACO or designated cost monitor shall continually monitor the rates and periodically compare and analyze:
  • 10.1.1. The contractor's actual rates versus the forward pricing rates.
  • 10.1.2. Updated projected sales forecasts and other base assumptions versus the data used to establish the forward pricing rates in the out years.
  • 10.1.3. Any other specific reports the contractor will be required to provide the ACO to permit adequate rate monitoring (e.g., direct labor rates, direct labor dollars, indirect expenses, and sales forecasts).


  • 10.2. (ND) If the ACO receives an audit report on the FPRA or FPRR, the ACO shall immediately assess the validity of FPRA or FPRR when the audit report is received. If the ACO determines that the FPRA or FPRR is still valid, the ACO shall prepare a supplemental negotiation memorandum containing:
  • 10.2.1. An affirmative statement that the ACO agrees or disagrees with each audit finding and recommendation.
  • 10.2.2. Sound rationale for resolving each audit finding and recommendation. The rationale must demonstrate that the ACO has considered all appropriate FAR, DFARS, and DCMA Instructions related to the issue raised or questioned by DCAA.


  • 10.3. If the ACO determines that part or all of the FPRA is invalid, the ACO shall request the contractor to submit and negotiate a new proposal to reflect the changed conditions. FAR 42.1701(d).


  • 10.4. If an FPRA has not been established or has been invalidated, the ACO shall issue a FPRR to buying activities with sufficient documentation to assist negotiators. FAR 42.1701(d)

References and Notes

  1. ↑ FAR 2.1
  2. ↑ DCMA Guidebook: Revised: December 2010; http://guidebook.dcma.mil/41/index.cfm
  3. ↑ DCMA Guidebook: Revised: December 2010; http://guidebook.dcma.mil/41/index.cfm
  4. ↑ FAR Part 42; subsection a
  5. ↑ 1.1. DCMA Handbook, sections 1.1 and 1.2 December 2010; http://guidebook.dcma.mil/41/index.cfm
  6. ↑ DCMA website ---http://guidebook.dcma.mil/41/index.cfm
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