DCAA and DCMA Issue Implementation Guidance on Blended Rates

“Blended rates were intended to help contractors manage multiple compensation limits, but recent DCAA and DCMA guidance introduces negative consequences.”

On February 19, 2016, the Defense Contract Audit Agency (DCAA) issued a memorandum for regional directors (MRD) to further implement the Director, Defense Acquisition and Procurement Policy (DPAP) memo (October 24, 2014) and Defense Contract Management Agency (DCMA) guidance (January 29, 2016) on a contractor’s use of blended rates. 

Compensation Caps by Year

Awards prior to June 24, 2014

• 2010 – $693,951
• 2011 – $763,029
• 2012 – $952,308
• 2013 – $980,796 (NEW on 3/25/16)
• 2014 – $1,144,888 (NEW on 3/25/16)

Awards after June 24, 2014

• $487,000

Blended rates were intended to help contractors manage multiple compensation limits applicable to their portfolios of negotiated government contracts awarded prior to and after June 24, 2014.  The tone of these memos seems consistent with this intention – blended rates are a “practical and cost effective solution”, will “simplify compliance”, and will “protect the interests of the Government.”  But seller beware: this new DCAA/DCMA guidance creates potential negative financial consequences:

• Provisional billing rates, forward pricing rates, and final indirect rates will use different contract populations as the basis for “blending” allowable compensation.  Current contracts (referred to by DCMA as “backlog”) must be excluded from the blending calculation in forward pricing rates, may be included in the blending for provisional billing rates, and should be included in the blending for final indirect cost rates. 
• As a consequence, and depending on the materiality of a contractor’s pre/post June 24, 2014 backlog, forward pricing rates may be materially different (lower) than provisional billing rates and final rates.  This may create several negative circumstances:
  
• The DCMA/DCAA guidance addresses (logically) only DoD contacts.  Not surprisingly then, the blending approach illustrated in the guidance may be disadvantageous if a contractor has a material mix of civilian agency contracts.
  
• On new negotiated firm-fixed price and fixed unit price contracts (including fixed labor rates on T&M/labor-hour contracts), contractors must price using Forward Pricing Rates that could be materially lower than the blended final cost rates for the same period (which will reduce profit margins).
• On new cost reimbursement contracts, contractors will be entitled to claim their blended final indirect rates, but fixed fee pools will be lower because the contracts will be priced using (lower) forward pricing rates.  Moreover, contracting officers are unlikely to understand that contracts must be bid with blended forward pricing rates, but billed with (different, higher) blended provisional billing rates.  Beware of indirect cost rate caps that are lower than anticipated final rates. 
• Regarding rate performance reviews (i.e., FPRP vs. actuals), year-to-date actual rates should reflect allowable compensation blending based on a contractor’s current contract mix (including backlog contracts), but forward pricing rates will reflect blending excluding backlog contracts (i.e., heavily weighted to post-June 24, 2014 contracts and, thus, lower allowable compensation).  Contractors must now calculate and explain this variance. 
• The “blended cap” approach does not take into account differences in the number of employees to which the cap is applicable for civilian agency contracts awarded between January 1, 2012 and June 23, 2014. 
• Additional, more accurate, blending approaches weren’t mentioned by DCAA, DCMA and DPAP, which may be more advantageous. 

Government contractors turn to Baker Tilly for Candor, Insight, and Results.  Can we help you with blended rates?