Pricing Cost-Plus Contract Lines

Pricing Cost-Plus Contract Lines

Rate-based contract lines are priced using PeopleSoft Project Costing rate sets and rate plans. Cost-plus contract lines have three cost components that must be calculated and reported to the government for the companies to receive proper payment for their services:

• Direct costs: Direct costs represent the actual costs directly associated with the contract and are generally reimbursed by the government at the actual cost rate.

• Indirect costs: Indirect costs represent overhead costs that are incurred as a result of performing the contract.

  Examples of indirect costs can include general and administrative expenses, fringe benefit expenses, and cost of money. To determine the amount of indirect costs that are eligible for reimbursement by the government and for revenue recognition, the contract uses government approved indirect costing rates. Indirect costs for billing purposes are based on provisional rates and exclude nonbillable costs. Indirect costs for revenue recognition are based on forward pricing rates and include nonbillable costs.

  A contractor could use the same rate for billing and revenue recognition or they may use completely separate rates. If separate rates are used, then the contractor would use variance pricing to balance the amount billed with the amount recognized as revenue, throughout or at the end of, the contract.

• Fees: Fees represent the profit that is received based on the services that are rendered by the government contractor.

  A government contract may include one, or a combination of, the fee types of Fixed, Award, Incentive, or Other. Only one fee type can be assigned to a rate-based contract line at any one point in time. Fees are subject to limits for billing and revenue and may have different limit levels applied for billing and for revenue.

Defining Rate Plans for Cost-Plus Contract Lines

To set up the complex pricing required for cost-plus contract lines, PeopleSoft Contracts uses PeopleSoft Project Costing rate sets and rate plans. If you will be using separate rates to calculate your indirect costs for billing and revenue you must define a billing rate set and a revenue rate set respectively. To calculate direct costs, you must define a costing rate set.

Because PeopleSoft Contracts only allows you to assign one rate set to a contract line at any particular point in time, after you define the rate sets required for your business needs, you must combine the rate sets onto a rate plan. The rate plan is assigned to the cost-plus contract line on the Related Projects page. It is this relationship that enables you to calculate the direct and indirect costs used to bill and recognize revenue for your cost-plus contract lines.

You define your rate sets to apply the rates you define to your source transactions. After you have defined all of the rate sets that you need, you assign the rate sets to a rate plan. The rate plan can contain as many costing rate sets as needed along with your billing and revenue rate sets. The rate plan enables you to stack your rate sets so that you can generate costing rows from your original source transactions and then generate another set of costing rows using the target rows from the previous rate set. You can then bill and recognize revenue based on the resulting target rows.

When you define a rate set, you identify whether the rate set is a standard or contract-specific rate set. Standard rate sets can be used to price transactions for any contract in your organization. Contract-specific rate sets are rate sets designed for a particular contract and cannot be used to price transactions for any other contract except the one that it was built for. When defining rate plans, you identify whether the rate plan is a standard or contract-specific rate plan. Standard rate plans, which can only contain standard rate sets, can be used to price transactions for any contract in your organization. PeopleSoft Contracts enables you to create a contract-specific rate plan using standard or contract specific rate set types, or some combination of both, to provide you with the greatest degree of flexibility when defining your pricing requirements.

Defining Rate Plans for Cost-Plus Contract Lines Example

If you will be setting up complex pricing scenarios that include rate stacking you must define your rate sets accordingly. The following example discusses one possible scenario for setting up rate stacking.

You define a rate plan containing the following rate sets:

According to your rate plan setup and the basis value specified for each rate set, when you run the Pricing Engine, the system applies the cost rates, bill and revenue rates sequentially in the order that you have listed them on the rate plan. After the pricing engine has priced the original contract line transactions using the first provisional costing rate set, PROV1, the Pricing Engine applies the rates from the second provisional costing rate set, PROV2 to the resulting target rows from the first rate set. The results will give you the indirect billing costs using your provisional rates.

To generate your forward pricing revenue costs, the Pricing Engine applies the rates from the first forward pricing rate set, FRDP1, to the contract line's original cost transactions. The Pricing Engine then applies the rates from the next forward pricing rate set, FRDP2, to the resulting target rows from the previous rate set, FRDP1.

By setting the basis for your billing and revenue rate sets to All; when the Pricing Engine generates the billing rows for the contract line, it will use the target rows from both provisional rate sets to generate the BIL rows that are eligible to be passed to PeopleSoft Billing. When the Pricing Engine generates the revenue rows for the contract line, it will use the target rows from both the forward pricing rate sets to generate the REV rows that are eligible for revenue recognition.

To enable the Pricing Engine to stack your indirect costs rates as described, you must define your rate sets properly. In the above example, for the second rate set to use the resulting target rows from the first rate set, you must include the target analysis type from the first rate set in the second rate sets source criteria. For example, your first rate set, PROV1, might include the following values in its source definition:

The rate set's target definition could include the following values:

When the Pricing Engine prices the original cost transactions using the rate set, PROV1, the resulting target rows will be assigned an analysis type of PRV. For the rate set, PROV2, to apply it's rates against the resulting target rows from the rate set PROV1, you must define the source and target definitions to include the following data:

The rate set's target definition could include the following values:

By setting up the rate set, PROV2, as indicated above, the Pricing Engine will apply the rates to all transactions rows with the analysis type of PRV that meet the criteria defined in the rate set PROV2.

When you define your billing rate set to generate billing rows from your provisional indirect costs rates, you must include the target analysis type from your cost rates in your source criteria for your billing rate set. In this example, the rate plan indicates that the Pricing Engine should include all eligible provisional cost target rows when generating billing rows. To enable this to happen, you would set up your BILL rate set source criteria and target definition as follows:

The rate set's target definition could include the following values:

This same methodology described in this section for processing provisional rates and billing rows applies to processing forward pricing rates and generating revenue rows.