Forward Pricing Rates/Forward Pricing Rate Agreements (FAR 42.17)
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Background
Indirect rates should be based on a well supported basis of estimate for each Fiscal Year of the proposed period of contract performance. Contractors must show how they computed and applied indirect rates while providing supporting trend and budgetary data commensurate with size and complexity of the contractor. Details will vary depending on specific data supporting each Fiscal Year and the size and complexity of the contractor.
Larger Contractors
Proposed indirect rates for first year should be based on a detailed, management approved operating budget and each subsequent period based on adjustments to the operating budget (strategic or long-range forcasts, plant expansions, expected business volume, etc.)
Flat-lining out year rates (with no explanation to support that rates will not change in future periods) is NOT ADEQUATE
Smaller Contractors
Smaller contractors may not have detailed budgets or limited budgetary data. They may use historical costs as a basis for estimate of out years, providing trend data with explanations to support that historical costs are a reasonable estimate for out years.
FAR Procedures[1]
FAR Subpart 42.17 - Forward Pricing Rate Agreements
(a) 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.
(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)).
- FAR 15.407-3(c)
- Contracting officers shall not require certification at the time of agreement for data supplied in support of FPRA’s or other advance agreements. When a forward pricing rate agreement or other advance agreement is used to price a contract action that requires a certificate, the certificate supporting that contract action shall cover the data supplied to support the FPRA or other advance agreement, and all other data supporting the action.
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.
(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.
FAR Guidance
FAR 15.408, Subsection II, Paragraph C of Table 15-2 instructs the contractor to:
- Indicate how you have computed and applied your indirect costs, including cost breakdowns. Show trends and budgetary data to provide a basis for evaluating the reasonableness of proposed rates. Indicate the rates used and provide appropriate explanations.
Related DCAA Memorandum's for Regional Directors
- MRD 10-PSP-021(R)[2] - Budgetary Data Supporting Forward Pricing Rates
- MRD 10-PSP-018(R)[3] - Forward Pricing Rates in Pricing Proposals
