Forward Pricing Rate Agreements (FPRAs): How They Work for Federal Contractors

When you submit a proposal for a cost-reimbursable federal contract, you need to include projected overhead rates — fringe benefits, overhead, and G&A. Where do those rates come from, and how does the government know they're accurate?

For contractors with significant federal cost-reimbursable business, Forward Pricing Rate Agreements (FPRAs) solve this problem. An FPRA is a pre-negotiated agreement between a contractor and the government on the indirect cost rates that will be used for pricing future proposals. Instead of negotiating rates on every proposal, both parties agree to a single set of rates in advance.

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The Problem FPRAs Solve

Without an FPRA, every proposal involving indirect costs requires the contractor to estimate future rates and the government to evaluate those estimates. This creates:

• Repeated negotiations over the same rate structures
• Government skepticism of self-estimated rates
• Inconsistency in how indirect costs are projected across proposals
• Extended proposal review cycles as government auditors evaluate each new estimate

With an FPRA, both parties have agreed in advance on the indirect rates to use for a defined future period. Proposals referencing the FPRA rates are presumed reasonable — no re-negotiation required.

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Types of Rate Agreements

Forward Pricing Rate Agreement (FPRA)

A bilateral (signed by both parties) agreement setting specific indirect cost rates for a future period (typically 1–3 years). FAR 42.1701 defines FPRAs and their use.

FPRAs are binding for proposal pricing — the contractor must use the agreed rates in proposals unless the FPRA is renegotiated or voided.

Who negotiates: For DoD contractors, DCAA (Defense Contract Audit Agency) audits the proposed rates and makes a recommendation; the Administrative Contracting Officer (ACO) from DCMA (Defense Contract Management Agency) negotiates and signs the FPRA.

Forward Pricing Rate Recommendation (FPRR)

When the government wants to use specific rates but won't enter a bilateral agreement, they may issue an FPRR — a unilateral government recommendation. Contractors can use FPRR rates in proposals, but they are not bound to accept them.

Provisional Billing Rates

When no FPRA exists, contractors use provisional billing rates (also called billing rates) for invoicing on cost-reimbursable contracts. Provisional rates are temporary — they are subject to adjustment when actual rates are determined at year-end through the incurred cost submission.

Provisional rates are either:

• Established by mutual agreement between the contractor and ACO
• Based on the prior year's actual rates if no agreement is reached

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What Rates Are Covered in an FPRA?

An FPRA typically covers:

Fringe Benefit Rate: Fringe costs as a percentage of direct labor. Includes FICA, FUTA, health insurance, retirement contributions, PTO.

Overhead Rate: Overhead indirect costs as a percentage of direct labor (or other allocation base). Includes rent, utilities, supervision, and other costs of operating the business that benefit projects.

G&A Rate: General and Administrative costs as a percentage of total cost input (or other base). Includes executive salaries, accounting, legal, corporate facilities, and other enterprise-level costs.

Material Handling Rate: If the company buys significant direct materials, a material handling rate (markup on materials to recover procurement overhead) may be included.

Facilities Capital Cost of Money (FCCM) Rate: Under CAS 414 and FAR 31.205-10, contractors can claim an imputed cost of capital tied to their net book value of assets used in contract performance. The FCCM rate must be included in the FPRA to be billable.

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The FPRA Negotiation Process

Step 1: Contractor Submits Forward Pricing Rate Proposal

The contractor prepares and submits a Forward Pricing Rate Proposal — typically annually — projecting:

• Anticipated direct labor costs and hours by category
• Projected indirect costs (fringe, overhead, G&A) for each pool
• Allocation bases for each rate
• Historical actual rates for comparison

The proposal must be in the format prescribed by FAR 15.408, Table 15-2.

Step 2: DCAA Audit

DCAA reviews the proposed rates for reasonableness and accuracy:

• Are the projected costs consistent with historical actuals?
• Are any unallowable costs included in indirect pools?
• Is the allocation methodology appropriate and consistent with prior practice?
• Are projections supported by booking and staffing forecasts?

DCAA issues an audit report with findings and recommendations on the proposed rates.

Step 3: ACO Negotiation

The Administrative Contracting Officer (ACO) from DCMA reviews the DCAA audit findings and negotiates with the contractor. Common negotiation areas:

• Projected headcount and direct labor hours (revenue forecast)
• Specific indirect cost items that DCAA found unallowable
• Materiality of projected changes

Step 4: FPRA Execution

When both parties agree on rates, the ACO issues the FPRA — a formal document establishing the agreed rates for the prospective period. The contractor is now authorized to use FPRA rates in all proposals during the agreement period.

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When FPRAs Are Most Valuable

FPRAs are most beneficial when:

High proposal volume: If you submit many proposals per year, avoiding individual rate negotiation on each saves significant time.

Large-dollar proposals: Government auditors apply more scrutiny to large proposals. An FPRA removes rate scrutiny from the proposal evaluation process.

Complex indirect structure: Companies with multiple overhead pools, geographic cost centers, or specialized indirect categories benefit more from FPRA certainty.

Time-sensitive procurements: Some SBIR phases and rapid acquisition programs have tight proposal timelines. An FPRA allows you to build a compliant cost proposal quickly without awaiting rate approval.

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When FPRAs Are Less Necessary

Small businesses with limited cost-reimbursable work may not need an FPRA — the investment in negotiations and DCAA audit interactions may exceed the benefit.

Fixed-price contractors don't use indirect rates in their pricing (except for estimating internal costs) — FPRAs are irrelevant.

Companies using the de minimis rate (10%) under 2 C.F.R. Part 200 (grants, not contracts) don't need FPRAs.

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Incurred Cost Submission and Rate Adjustment

FPRAs are forward-looking. After the period covered by an FPRA, the contractor must submit an Incurred Cost Submission (ICS) — also called an Incurred Cost Proposal (ICP) — showing actual indirect costs for the year.

DCAA audits the ICS and compares actual rates to the provisional billing rates used during the year. If actual rates exceeded provisional rates, the contractor is owed additional payment. If actual rates were lower, the contractor owes a refund.

The ICS due date: FAR 52.216-7 requires ICS submissions within 6 months of fiscal year end. Late ICS submissions can result in withholding of indirect costs from invoices.

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Key Takeaways

• FPRAs (Forward Pricing Rate Agreements) are bilateral agreements pre-negotiating indirect cost rates (fringe, overhead, G&A) for use in future proposals — eliminating repeated rate negotiations on each bid.
• DCAA audits proposed rates; the ACO at DCMA negotiates and signs the FPRA for DoD contractors.
• Provisional billing rates are used for invoicing when no FPRA exists — subject to adjustment when actual rates are determined through the annual Incurred Cost Submission.
• FPRAs are most valuable for contractors with high proposal volume, complex indirect structures, or large-dollar cost-reimbursable work.
• FCCM (Facilities Capital Cost of Money) must be included in the FPRA to be billable on cost-reimbursable contracts under CAS 414.
• Annual Incurred Cost Submissions are mandatory within 6 months of fiscal year end — late submissions risk billing rate withholding.

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