Many government contractors assume that interim rate variance invoices should be prepared once the incurred costs are submitted and rates are settled with Defense Contract Audit Agency (DCAA), other cognizant audit agency, or an administrative contracting officer (ACO). However, both of these assumptions are not true.
The best time to prepare interim rate variance invoices is at year-end, but will most likely take place during the last month of your fiscal year. But before we dig further into the timing of interim rate variance invoices, let us review the concept of over and underrun:
- When actual rates are higher than the provisional or billing rates at the end of the year, the variance is a cost overrun. In this case, the management may consider billing that variance to the client as soon as all costs are entered for the fiscal year. This would entail preparing and posting another invoice—the thirteenth invoice in the last month of the year using actual rates.
- When actual rates are lower than the provisional rates at year end, the variance is a cost underrun. This means that you owe your customer money.
In both scenarios, there are two caveats to consider: First, as long as funding is available, you can invoice up to the funding. Second, if there are any contractual limitations, such as a ceiling on your indirect rates, then you can only invoice to that ceiling rate.
The Defense Finance and Accounting Services (DFAS) preference is to pass the credit through an active invoice, which would require you to calculate your December—or applicable year-end—invoice at actual rates. This can be done even before the books are closed and audit adjustment entries are posted. Any variances that surface after that will be reflected on the incurred cost submission (ICS) once your audited financial statements have been issued and you have closed the books.
Why wait to collect funds years after the ICS is audited and settled? It is far more beneficial to invoice in real time so you can use those funds to grow your business.
Another benefit of invoicing variances annually is that this allows you to provide your customers with the true burn rate, which could potential bringing in additional funds to be used in the upcoming year.
When you wait and pay back DFAS years later, these funds do not go to your project. It does not help your customer, and DFAS oftentimes does not know where to record the funds. That is why reducing the last monthly invoice for the year by the amount owed to a client is the cleanest solution.
Most contractors are afraid to invoice for rate variance, as they believe this means they did not perform well on the job. No sweat. Some variance is expected, and if there are enough funds to cover the amount owed to your business, you should invoice for it. Think of it this way: You are helping your customer burn all of their obligated budgeted dollars.
Rate variances are part of having cost type contracts, and how well you manage them is up to you. Submitting rate variance invoices is an effective way to show you are monitoring your rates on a regular basis, while also increasing your remaining funding or cash flow.
If you are a government contractor and need assistance with the interim or final rate variance invoices and contract close outs, please contact Donna Dominguez at 301.222.8232 and Buyansanaa Skarzynski at 240.364.2598 for more information.