Cost Plus type contracts are typically billed at the provisional rates, which is the estimated rate submitted to an external agency such as DCMA. Provisional rates can be based on the prior year's actual rates with management's best estimate for any increases or decreases projected within the new year. As a year progresses, companies will monitor their rates throughout the year and may resubmit their provisional rates if there are significant changes that will affect whether they are undercharging or overcharging rates applied to their cost plus billing.
There is typically a difference between Billings and Revenue at the end of the year due to the differences between the provisional and actual rates. From an accounting reporting perspective, this is expected and corrected since actual rates are often unknown until after the year end close. This may depend on how quickly you can get the actual costs in the system (i.e. expenses, vendor invoices etc.) In order to not hold up billing, you might issue a twelfth invoice at the same indirect rate (assuming monthly invoicing), and then follow up with an invoice (or credit memo) based on calculated actual rates as soon as you have the data to do that calculation.
What’s covered in this document:
- Options for end of year true-up
- When Provisional Rates are greater than Actual Rates
- When Provisional Rates are less than Actual Rates
- Additional Information