Negotiating Indirect Rates LOWER than Projected Rates


Can we propose lower indirect rates than our projected rates and how would we go about doing it?   

RESPONSE: Generally YES.  There are important issues and guidance you should be aware of and follow as applicable.  Understanding these guidelines will minimize questions and concerns later on. 

The very first issue to consider is the financial impact on your bottom line of making such a choice.  You must be prepared to have good control of your costs during the contract performance period.  For that, you should have a good accounting system, reasonable internal controls, documented policies that are followed, and management that understands and supports following the government guidelines. 

I have identified below the FAR reference (Part 42.707) that outlines the basic guidelines.  You should read and review it several times and go into detail on anything that is unclear.  I have highlighted several issues that should be given additional attention for understanding the process. 

This is an option that every small contractor should be familiar with because often it is necessary to compromise on cost/price to win a contract.  So hold on to this guidance and file appropriately. 

42.707 Cost-sharing rates and limitations on indirect cost rates. 

(a) Cost-sharing arrangements, when authorized, may call for the contractor to participate in the costs of the contract by accepting indirect cost rates lower than the anticipated actual rates. In such cases, a negotiated indirect cost rate ceiling may be incorporated into the contract for prospective application. For cost sharing under research and development contracts, see 35.003(b). 

(b)(1) Other situations may make it prudent to provide a final indirect cost rate ceiling in a contract. Examples of such circumstances are when the proposed contractor— 

(i) Is a new or recently reorganized company, and there is no past or recent record of incurred indirect costs; 

(ii) Has a recent record of a rapidly increasing indirect cost rate due to a declining volume of sales without a commensurate decline in indirect expenses; or 

(iii) Seeks to enhance its competitive position in a particular circumstance by basing its proposal on indirect cost rates lower than those that may reasonably be expected to occur during contract performance, thereby causing a cost overrun. 

(2) In such cases, an equitable ceiling covering the final indirect cost rates may be negotiated and specified in the contract. 

(c) When ceiling provisions are utilized, the contract shall also provide that— 

(1) The Government will not be obligated to pay any additional amount should the final indirect cost rates exceed the negotiated ceiling rates, and 

(2) In the event the final indirect cost rates are less than the negotiated ceiling rates, the negotiated rates will be reduced to conform with the lower rates.