Government Contract Variance Pricing
Government contractors typically use provisional rates for billing, because provisional rates are the government-approved rates. They use forward pricing rates for revenue recognition, because forward pricing rates represent a more accurate estimate of overhead costs. You may be required to change provisional rates based on a rate review by the government, or you may want to calculate new forward pricing rates based on an internal audit. The adjustments can impact rates and require billing adjustments.
Retroactive rate adjustments, or variance pricing, are required when the government contractor retroactively applies new rates to unprocessed and previously processed transactions. The system applies the difference in rates against historical costs in a specified date range, and creates new transactions for the incremental difference between the old and new rates. For example, assume that since January 1, the overhead rate has been 40 percent. On July 1, the rate changed to 45 percent, retroactive to the beginning of the year. The variance rate, which is the difference of 5 percent, is applied to all costs year-to-date, using standard rate source matching. The system processes the new transaction rows. As part of the Variance Pricing process, the delta rows are priced for revenue and billing based on the rate set or rate plan.
You can use the Variance Pricing feature to capture and process price variances for a particular set of rates for a specific time period. By using the Variance Pricing Application Engine process, you can:
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Process rates that are attached to contract lines or project activities.
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Capture the date and name of the person who made the change.
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Run variance pricing for one or many burden rate types, such as fringe benefits and overhead.
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Run variance pricing on an existing rate set, rate category, or rate plan for a specific contract line or project.
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Capture and process variance pricing for a particular effective dated set of rates.
Note:
You can capture and process variance pricing against all rate definition types.
The Variance Pricing Application Engine process (PC_VAR_PRICING) selects the eligible transactions that match the effective date range and source criteria for the costing rate set.