Do I need to change my provisional rates for the economic impacts of COVID-19?

April 10, 2020

The famous answer is it depends on the contractor’s specific situation and we cannot answer in a vacuum. While we do not have guidance specific to indirect rate recovery and the current COVID-19 pandemic, we can look to the Federal Acquisition Regulation (FAR) for guidance on the recovery of indirect billing rates during this time.

Our best advice is to follow what is known. FAR 42.704(c) states:

Once established, billing rates may be prospectively or retroactively revised by mutual agreement of the contracting officer (or cognizant Federal agency official) or auditor and the contractor at either party’s request, to prevent substantial overpayment or underpayment. When agreement cannot be reached, the billing rates may be unilaterally determined by the contracting officer (or cognizant Federal agency official).

The key is the prevention of a substantial over or underpayment. Aronson advises federal contractors to monitor indirect cost rates carefully and make adjustments to forward pricing rates and provisional billing rates as necessary. We recommend terminating existing Forward Pricing Rate Agreements (FPRAs) or established provisional billing rate agreements and resubmitting a revised submission to the contractor’s federal cognizant agency when there is an indication of a material change.

Contractors’ indirect cost rates may or may not increase materially due to COVID-19 based on the costs incurred and relief received. (In no circumstance should a federal contractor receive more benefits than costs incurred/billed on federal contracts as explored in our recent blog article, “Paycheck Protection Program and Federal Government Contractors”.)

Below, we walk through a few of the most common scenarios relevant to our client base and share several factors to consider:

Employees are taking leave allowed under the CARES Act, reimbursable by the Treasury via payroll tax credits.

  • No impact on indirect rates, via the fringe pool costs, the payroll tax credits shall be “applied” to the fringe pool, thus the cost is neutralized.
  • There “may” be material impact to the base (total labor) for fringe, if a significant amount of leave is used within an organization as the resulting productive labor base decreases.

Direct employees are impacted for a lack of access to a facility or other delay to a contract.

  • Some contractors will receive relief under section 3610 of the CARES Act, thus there would be no material change. Aronson advises the labor is captured under a separate direct labor account, by qualified contract, to track the Section 3610 labor and bill such labor in accordance with the instructions provided by the contracting officer.
  • Some contractors shall not receive relief under section 3610 of the CARES Act, but could receive an SBA loan through the Paycheck Protection Program (PPP) to keep payroll/workforce stable for eight week, IF the loan is forgiven then the loan forgiveness amount shall be credited back to payroll costs. In this scenario the impact on indirect rates may be immaterial, the pool cost is neutralized, however the overhead base (typically DL and related fringe) may be reduced if the direct work is impacted. However, if the PPP is used and supports indirect labor proportionally, many contractor will see a decrease in indirect labor once the loan forgiveness is applied, thus immaterial impact to indirect rates.

Shifting performance efforts into subsequent periods due to delays may change the size of the relevant cost allocation base.

  • Shifting of new work may have a material impact to the indirect rate base based on the growth projected and should be closely monitored.

Any single event or combination of these events may or may not increase indirect cost rates, but as you can see it is complicated and Aronson advises that you monitor the situation closely.

While some contractors may have applied for loans under the PPP, receipt of and later forgiveness of the loan is not guaranteed unless certain requirements are met. (For more information on the treatment of loan forgiveness, read our recent blog article, “Paycheck Protection Program and Federal Government Contractors”). Another complexity is that loans and loan forgiveness could cross cost accounting periods.

In closing, Aronson’s advice is to monitor costs, monitor budget assumptions used for the development of the organization’s provisional billing rates, and if there is an indication of a material change notify your federal cognizant agency as soon as feasible to prevent a substantial underpayment of indirect rates.

Aronson will continue to monitor this situation and help our clients navigate indirect rates during the ongoing COVID-19 pandemic. For more information, contact Nicole Mitchell at 301.231.6200. For other relevant resources, visit our COVID-19 Government Contracting Resources Hub.