FAR 42.702—Purpose.
Plain-English Summary
FAR 42.702 explains the purpose of two related administrative tools used in cost-reimbursement contracting: final indirect cost rates and billing rates. It says final indirect cost rates are established to promote uniform treatment of a contractor’s indirect costs across multiple contracts or agencies, reduce the administrative burden of settling those costs, and support timely closeout and settlement of cost-reimbursement contracts. It also explains that billing rates are used for interim reimbursement of indirect costs at estimated rates, with later adjustment when actual final indirect cost rates are determined. In practice, this section frames how the government and contractor handle indirect cost recovery during performance and after the end of the fiscal period, and it highlights the balance between paying the contractor promptly and reconciling to actual costs later. The section is purpose-oriented rather than procedural, but it sets the policy basis for rate negotiation, provisional billing, and final settlement.
Key Rules
Uniform indirect cost treatment
Final indirect cost rates are meant to create a consistent approach when a contractor has multiple contracts or works with more than one agency. This helps avoid different indirect cost treatments for the same contractor across separate awards.
Economy of administration
The final-rate process is intended to reduce administrative effort for both the government and the contractor. Instead of resolving indirect costs separately for each contract in an ad hoc way, the parties use a structured rate-setting process.
Timely contract settlement
Final indirect cost rates support prompt settlement of cost-reimbursement contracts. They provide the basis for closing out indirect cost matters after performance rather than leaving them unresolved indefinitely.
Interim reimbursement through billing rates
Billing rates are used to reimburse indirect costs during performance based on estimated rates. They are provisional, not final, and are designed to keep cash flowing while actual costs are still being determined.
Later adjustment to actual rates
Amounts paid using billing rates are subject to adjustment when final indirect cost rates are established. This means interim billings may be increased or decreased to reconcile estimated reimbursement with actual allowable indirect costs.
Responsibilities
Contracting Officer
Use final indirect cost rates and billing rates as the framework for administering indirect cost reimbursement on cost-reimbursement contracts. Ensure interim payments are based on estimated billing rates and that final settlement occurs when actual indirect cost rates are established.
Contractor
Submit indirect cost information needed to support billing rates and final indirect cost rate establishment. Bill using approved or established interim rates, then reconcile those billings to the final rates when they are determined.
Agency
Apply a consistent approach to indirect cost rate administration across contracts and, where applicable, across agencies. Support efficient settlement processes so indirect costs are resolved in a timely manner.
Practical Implications
This section matters most on cost-reimbursement contracts, where indirect costs are not fixed at award and must be estimated, billed, and later trued up.
Contractors should expect interim payments to be provisional; overbilling or underbilling can occur until final indirect cost rates are settled.
A common pitfall is treating billing rates as if they were final rates. They are only estimates and must be reconciled later.
Another risk is inconsistent treatment of indirect costs across contracts or agencies, which can create disputes and delay settlement.
For contracting officers and contractors alike, the key operational takeaway is to maintain good cost data and rate support so final settlement can happen efficiently and with fewer adjustments.
Official Regulatory Text
(a) Establishing final indirect cost rates under this subpart provides- (1) Uniformity of approach with a contractor when more than one contract or agency is involved; (2) Economy of administration; and (3) Timely settlement under cost-reimbursement contracts. (b) Establishing billing rates provides a method for interim reimbursement of indirect costs at estimated rates subject to adjustment during contract performance and at the time the final indirect cost rates are established.