Provisional Billing Rates vs. Final Rates: The Year-End True-Up Explained

A provisional billing rate is an estimate you bill on all year. A final indirect rate is what actually happened. The gap between the two, settled after your fiscal year closes, is the true-up.

Every contractor on a cost-reimbursement contract bills its indirect costs (fringe, overhead, and G&A) using a rate nobody has actually confirmed yet. That is not a workaround. It is how the regulation is built. FAR 42.701 defines a billing rate as an indirect cost rate "established temporarily for interim reimbursement of incurred indirect costs" and "adjusted as necessary pending establishment of final indirect cost rates." The estimate and the true-up are not a flaw in the system. They are the system.

What a provisional billing rate actually is

Final indirect rates cannot be known until your fiscal year ends, every cost is recorded, and an indirect cost rate proposal has been reviewed. Until then, you still need to bill the government for the indirect costs you are incurring right now. Provisional billing rates solve that: an estimate of what your final rates will turn out to be, used to invoice throughout the year.

Under FAR 42.704(a), the contracting officer or cognizant auditor is officially responsible for setting these rates. In practice, the contractor usually starts the process, submitting a provisional billing rate proposal before the fiscal year begins, or when a cost-reimbursable contract is first awarded. Government payment offices can hold up invoices until rates are established, so waiting for the government to act first is rarely the better option.

The tension in that proposal is built in. You want rates set high enough to actually recover your anticipated indirect costs, and defensible enough to survive scrutiny. The government wants rates close enough to the eventual actual number that neither side ends the year with a large imbalance. Both sides are forecasting the same unknown a year in advance.

How the true-up works

Throughout the year, you bill direct costs at actual amounts from your general ledger, and indirect costs using your provisional rates. The difference between what you actually incurred and allocated to a contract, and what you billed using the provisional estimate, is the indirect rate variance. It runs one of two directions:

• Indirect rate variance receivable: actual indirect costs incurred exceeded what you billed on a provisional basis. The government owes you the difference.
• Indirect rate variance payable: what you billed on a provisional basis exceeded actual indirect costs incurred. You owe the difference back.

That variance gets finalized at the close of your fiscal year and settled at contract close-out. Once your books are closed for the year and final indirect rates are determined, subject to government review of your incurred cost proposal, you record the variance in your general ledger as a receivable or payable, and the true-up is complete for that year.

A worked example

Here is how it plays out on one contract, one pool, one fiscal year, so the arithmetic stays visible. Your fiscal year opens with a provisional overhead rate of 26%, proposed from the prior year's actuals and a documented budget. The contract runs $400,000 of direct labor over the year, so you bill overhead at 26% of that labor as you invoice.

At year-end your books close and the actual overhead rate for the year comes out at 28%, because a facility cost you budgeted conservatively came in higher than expected. The rate moved and the base did not, so the gap is the variance:

Illustrative overhead true-up on one contract, one fiscal year.

Line	Calculation	Amount
Direct labor charged to the contract (allocation base)	From the general ledger	$400,000
Overhead billed during the year, at the 26% provisional rate	$400,000 × 26%	$104,000
Overhead actually allocated to the contract, at the 28% final rate	$400,000 × 28%	$112,000
Indirect rate variance	$112,000 − $104,000	$8,000 receivable

You under-billed overhead by $8,000 on this contract over the year. Because actual costs exceeded what you billed provisionally, the variance is a receivable: the government owes you the difference. Had the final rate landed at 24% instead, the same arithmetic would have produced an $8,000 payable, money billed that you have to give back.

Try it with your own numbers. Change the base or either rate and the calculator shows which way the variance runs:

Fringe and G&A are trued up the same way, each against its own base, and the receivable and payable amounts across the pools net against each other. Two things drive the result: the rate you proposed before the year started, and the costs that actually landed in each pool during it. For how pools and bases produce a rate in the first place, see How Cost Pools Become Rates.

What triggers a mid-year adjustment

You do not have to wait for year-end if a large variance is already visible. FAR 42.704(c) allows billing rates to be revised prospectively or retroactively, by mutual agreement between the contractor and the contracting officer or auditor, at either party's request, specifically to prevent a substantial overpayment or underpayment. If the two sides cannot agree, the contracting officer can revise the rates unilaterally.

The practical guidance is simple: if you can reasonably see a significant variance coming, ask for a revision before it compounds for the rest of the year. Waiting until the fiscal year closes to discover a large payable variance means writing a check you could have avoided by adjusting sooner. The same logic runs the other direction: a large receivable variance sitting unbilled all year is cash you did not need to leave on the table.

The final indirect cost rate proposal deadline

The true-up does not happen automatically. It runs through a specific submission with a hard deadline. Under FAR 52.216-7(d)(2)(i), the contractor must submit an adequate final indirect cost rate proposal to the contracting officer and the cognizant auditor within six months of the close of its fiscal year. Extensions exist, but only for exceptional circumstances, requested in writing and granted in writing by the contracting officer, not assumed.

That proposal has to be based on your actual cost experience for the year, not a refreshed estimate, and it has to include specific supporting schedules: a summary of all claimed indirect rates, detailed G&A and overhead expense schedules by element of cost, occupancy expense allocation, the allocation bases used, and a reconciliation of your books of account to your claimed direct costs. Once submitted, the government evaluates risk and decides whether the proposal warrants a full audit before the rates are finally settled. That audit is covered in The Incurred Cost Audit, Explained for Small GovCons.

This is also where your interim discipline pays off. The DCAA pre-award survey audit program, the same one used to evaluate accounting system adequacy under the SF-1408, specifically checks whether interim indirect expense rates can be readily calculated from your books of account and are routinely monitored throughout the year. We walk through that program in The DCAA Pre-Award Accounting System Review. A contractor who has been tracking the variance all along walks into the six-month deadline with a proposal that is mostly assembly, not discovery.

What this means for your books during the year

Everything above depends on one thing: knowing, at any point in the year, what your actual rates are running at. You cannot compare an actual rate to the provisional rate you are billing on unless labor cost is distributed to the right contracts and pools, expenses sit in the pool they belong to, and all of it is posted to the general ledger as the year goes, not reconstructed once the six-month clock is already running.

How WiseCost helps

WiseCost keeps those numbers current on top of QuickBooks Online. It records daily time by employee, project, and cost category with manager approval and an immutable audit trail, distributes each employee's labor cost across contracts and indirect pools, and posts the result into QuickBooks Online as journal entries. From the expenses assigned to each pool it calculates the fringe, overhead, and G&A rates for any period you choose, and shows the accounts and transactions behind each one. Run that report mid-year and you are looking at your actual rate to date, which is the number to compare against the provisional rate you have been billing on. It also allocates indirect costs to contracts, which produces a fully loaded profit and loss by contract. The mechanics are in How to Calculate Indirect Rates in QuickBooks Online.

The provisional billing rate proposal and the final indirect cost rate proposal are still yours or your CPA's to put together. What WiseCost provides is the data behind them, current and reconciled, so the proposal becomes an assembly job rather than a reconstruction, and a large variance shows up in time to request a rate revision under FAR 42.704(c) instead of at close.

FAQ

The Bottom Line

A provisional billing rate is a forecast, not a promise, and the true-up is the mechanism that reconciles it against what actually happened. The contractors who handle year-end cleanly are the ones who monitored the variance all year instead of discovering it at the six-month deadline. That takes current, reconciled labor and cost data throughout the year, not a rebuild once the fiscal year closes.

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WiseCost offers a 14-day free trial, no credit card required. You can also run our free DCAA Readiness Self-Assessment to see whether your books could produce interim rates on demand, or book a demo to see the indirect rate report built from your own QuickBooks Online data.