Performing Variance Pricing

This chapter provides an overview of variance pricing and discusses how to define variance rates.

Understanding Variance Pricing

This section discusses:

• Variance rates.

• Variance pricing.

When a contract is awarded, a contractor can bill and recognize revenue for direct costs, indirect costs, and possibly fees associated with the performance of the contract. To calculate the indirect (overhead) costs associated with a government contract, a contractor utilizes provisional and forward pricing rates. Provisional and forward pricing rates are estimates of actual costs that are incurred throughout the life of the contract. Provisional and forward pricing rates are regulated and approved by the government, but may be subject to change throughout the life of a contract as a more accurate accounting of costs becomes known. Rate changes may be initiated by the government or the contractor. To manage these possible rate changes, PeopleSoft Contracts uses PeopleSoft Project Costing's variance pricing functionality.

Variance Rates

When managing government contracts, you may need to define costing, billing, and revenue rates to calculate transaction costs, overhead, and revenue for your contract's rate-based contract lines. PeopleSoft Contracts uses rate sets and rate plans to perform this function. Rate sets enable you to define how specified contract-related transactions are priced for costing, billing, and revenue recognition. Rate plans enable you to combine multiple rate sets together to perform more complex pricing scenarios.

Revenue rates are only defined if you have selected the Separate Billing and Revenue check box on the Installation Options – Contracts page.

For government contracts, in addition to setting up rate sets for billing and revenue recognition, you also set up rate sets for costing transactions and calculating overhead amounts. These rate sets are identified by a rate definition type of Cost, or Cost/Billing, and can contain provisional and forward pricing rates.

Note. For rate sets that have a rate definition type of Cost/Billing, Variance Pricing is only applicable to target analysis types that are in the cost analysis group.

The rate set can contain provisional and forward pricing rates:

• Provisional rates are approved by the government and are used to calculate costs and overhead that is billed to the government.

• Forward pricing rates are determined by the contractor and submitted to the government for approval. These rates are used to forecast costs and calculate overhead costs for revenue recognition.

To manage and track any changes to your provisional or forward pricing rates, over the life of the contract, PeopleSoft Contracts uses variance pricing functionality.

See Pricing Rate-Based Contract Lines.

See Also

Rate Setup

Defining Rate Set Categories, Rate Sets, and Rate Plans

Variance Pricing

When rate changes occur, you may need to adjust rates and pricing retroactively for transactions that have already been billed or have had revenue recognized, and apply the new rates to any transactions that have yet to be priced or billed. Variance pricing enables you to capture rate changes for your active contracts that impact indirect costs, and then apply those rate changes to your transactions retroactively for active contract lines. The system calculates the difference between the old and new rate and then applies the difference in rates against historical costs within a specified date range. New transactions are created for the difference in rates.

Rate changes may occur throughout the life of the contract, under the following circumstances:

• Rate reviews: Provisional rates are reviewed and adjusted as needed.

• Forward pricing rate adjustments: Forward pricing rates are adjusted as more accurate cost estimates become known.

• Final audits: Cost estimates are compared to actual costs and indirect costs and adjustments are made to reconcile any cost differences.

Variance Pricing Example

Assume that a project has a provisional indirect cost rate of 30 percent. One month the project accumulates an actual direct labor cost of 100 USD and an actual indirect cost of 150 USD. Payroll sends direct and actual indirect costs to PeopleSoft General Ledger, which results in these accounting entries:

Payroll sends direct costs to PeopleSoft Project Costing. PeopleSoft Project Costing calculates the indirect burden cost to the project as follows:

(Actual direct labor + (Actual direct labor × Provisional indirect cost rate)) =130 USD

PeopleSoft Project Costing sends the indirect burden cost to PeopleSoft General Ledger, which results in these accounting entries:

In this example, the actual indirect labor cost is booked to an asset account at the end of the accounting period. The resulting accounting entries are:

At the end of the year, an evaluation is made to determine if the applied indirect burden cost, based on the provisional indirect cost rate, is in line with the actual indirect cost. In this example, the applied indirect burden cost is 130 USD and the actual indirect cost is 150 USD, which leaves an applied over/under asset account balance of 20 USD.

Based on the account balance, auditors determine that the indirect burden cost should be variance priced. Variance pricing is used to create a retroactive rate adjustment to align the provisional indirect cost with the actual indirect cost. The system calculates a variance pricing rate of 50 percent, calculates the difference between the original provisional indirect rate and the variance pricing rate, and applies it to the original direct cost. The new indirect cost is 20 USD, as follows:

((50 percent − 30 percent) × 100 USD) = 20 USD

The final accounting entry from PeopleSoft Project Costing to PeopleSoft General Ledger at year-end posts the result from the variance pricing process, and brings the balance of the applied over/under asset account to zero. The accounting entries are:

Variance Pricing Rate Stacking Example

When you make a rate change to a cost rate set that is associated with the a rate plan, after variance pricing generates the variance row, the system prices the new transaction row according to the rate plan associated with the costing rate set that is modified.

Step 1: In this example, assume that you have defined a rate plan as follows:

Step 2: A 1,000 USD payroll transaction is entered with the following criteria:

Step 3: The system prices the transaction row using the rate plan defined in Step 1. The results of the process are as follows:

Step 4: After the transaction has been priced and processed through to PeopleSoft Billing and PeopleSoft General Ledger, a rate change occurs in the second provisional rate set (PROV2) which changes the rate from .30 to a new rate of .50. To perform variance pricing, you must access the rate set PROV2, and enter the new rate of .50 on the Rate Variance History page. When you run variance pricing the system creates a new variance row for the difference between the old rate and the new rate. The newly created row is as follows:

The system then continues pricing the new row according to the rate plan defined in Step 1 above. This results in the following new billing row:

Whenever you make a change to a cost rate using the variance pricing functionality, and the rate set is part of a rate plan where rate stacking is defined, the system prices the new variance price row from the point where the change was made on down.

Defining Variance Rates

This section discusses how to:

• Define variance rate sets.

• Define variance rates.

Pages Used to Define Variance Rates

Defining Variance Rate Sets

Access the Rate Sets page (Setup Financials/Supply Chain, Product Related, Contracts, Templates, Rate Sets).

See Defining Rate Set Categories, Rate Sets, and Rate Plans.

Defining Variance Rates

Access the Rate Variance History page (click the History link on the Rate Sets - Target page).

See Entering Price Variances.