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Should You Use Forward Pricing Rate Agreements?

handshakeAre forward pricing rate agreements (FPRAs) right for your company? Consider the benefits and challenges before you decide.

As a government contractor, you may be wondering whether forward pricing rate agreements (FPRAs) are right for your business. FPRAs are agreements entered into by contractors to assist in price negotiations for contractual actions performed during a specified period.

These agreements can include rates for indirect costs, such as fringe benefits, overhead, and general and administrative costs, as well as for direct labor and materials. Your company will need to understand how to compute and allocate these indirect costs that cannot be identified to a particular project. FPRAs are covered under the special cost and pricing area of FAR 15.407-3 and FAR subpart 42.1701. One important consideration to note is that a FPRA is not the same thing as a Forward Pricing Rate Proposal (FPRP) for the projecting of provisional indirect rates.

Who should use FPRAs?

Contractors with a projected sales volume of $200 million or greater to the federal government during their next fiscal year must use FPRA’s. Other Contractor’s with certain attributes can benefit from using FPRAs. If your company has a strong business base and supporting data that can be used to project future indirect cost relationships, then you may be a good candidate for FPRA. Additionally, you should have an estimating system that enables accurate expense forecasting and incurred expense control. Finally, your company should have the need to expedite the proposal preparation and audit processes due to multiple proposals lined up for the coming year. Without an FPRA, companies with a significant volume of contracts will require frequent DCAA audits of rate proposals.

What are the challenges of having an FPRA?

While an FPRA can help you ensure a fair and reasonable price for your work, the agreements do present several challenges. You will need to perform the regular, time-consuming task of monitoring performance against the set rates on a continuing basis to prove they remain adequate.

As a contractor entering into an FPRA, you will also be responsible for keeping the cost or pricing data updated through constant disclosure to the administrative contracting officer (ACO). Since this data is not certified at the onset of the FPRA, you must ensure that you have adequate controls to understand what cost or pricing data has been disclosed, and whether the data is current, complete, and accurate. This duty can potentially expose your company to government claims of defective pricing, so you must be extremely diligent.

Can FPRAs be changed?

The contractor or the government can request that the FPRA be amended, but this task can only be completed by the ACO that entered into the agreement or the Defense Contract Management Agency (DCMA). However, if volume increases, or economic conditions change, you can still make the changes that will ensure a fair price. The original FPRA serves as a baseline from which to make the necessary changes, and can enhance the negotiation process with the DCMA.

If your company is capable of estimating both direct and indirect costs, and can monitor their performance during your fiscal year, you may benefit from using FPRAs. However, FPRAs require you to constantly monitor rates and trends, or you could find yourself in an agreement that does not reflect reality. In this scenario, your company could lose money on a contract that costs more than predicted.

To learn more about forward pricing rate agreements 
and if they are right for your company, Contact us!

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