Incurred Cost Proposal Season is Right Around the Corner

Congratulations! You won a flexibly priced federal contract, obtained provisional billing rates, achieved an adequacy determination on your accounting and timekeeping systems, submitted adequate invoices, and just finished closing your books at the end of your fiscal year. Things are going great! However, the next major task looms on the horizon: the Incurred Cost Proposal.

What is the Incurred Cost Proposal?

The Incurred Cost Proposal calculates and documents a firm’s actual direct and indirect costs and ultimately compares the contractor’s “billed” costs versus “claimed” costs on cost reimbursable type contracts or contract line items. Unlike the commercial world, federal contractors are not necessarily entitled to keep all the funds invoiced on cost reimbursable type federal contracts. The Government may be entitled to recoup some of their payments to the contractor for costs invoiced in excess of actual costs incurred. Conversely, the contractor may be entitled to recoup additional payment from the Government when actual costs incurred exceed the invoiced cost.

Why do I need to complete an Incurred Cost Proposal?

The FAR outlines the requirements and activities you will need to do, and by when. FAR subpart 42.7 “Indirect Cost Rates” outlines the types of indirect rates for contractors performing government contracting, the manner in which the rates are determined, and the purpose of the specific indirect rate type. This subpart will also direct contractors to the “Allowable Cost and Payment” clause at FAR 52.216-7, which provides the specific timing requirement for submission of the incurred cost proposal at six months from the completion of the contractor’s fiscal year. Further, the “Allowable Cost and Payment” clause outlines the various required schedules of direct and indirect costs, as well as other supporting information, required to prepare an adequate incurred cost proposal. The number and complexity of the various required and optional schedules can be overwhelming for new government contractors.

Where do I begin?

Fortunately, there are readily available resources available to help government contractors get started in the right direction. For example, the Defense Contract Audit Agency (DCAA) is tasked with auditing incurred cost proposals for government contractors performing on Department of Defense contracts and as such, the agency provides extremely thorough documentation to explain the required schedules and provide insightful context. Section six of the “DCAA Information for Contractors Manual” covers the requirements, purpose, audit process, and provides explanation of the evaluated cost elements. In addition, the manual introduces government contractors to the DCAA Model Incurred Cost Proposal structure and the Incurred Cost Electronically Model, commonly called the ICE Model. Not only must a new government contractor read and understand all of the documentation, they must apply the one-size-fits-all nature of the regulations and guidance to their unique financial structure.

Growing government contractors typically need help with the practical application of the guidance to their business structure. While the regulation and documentation regarding incurred cost proposals is abundant, their application to a specific government contractor’s situation is not always clear-cut. Furthermore, some of the regulations leave the assessment of reasonableness open to interpretation, and presume contractor understanding of unallowable costs versus expressly unallowable cost. Because of factors such as these, smaller, growing government contractors need specialized assistance to ensure compliance and maintain a solid working relationship with their cognizant audit agency.

For many first-time submitters, the incurred cost proposal represents the first rigorous testing of the firm’s allocation of costs throughout the organization, along with their classification as direct or indirect, and allowable versus unallowable. If the in-depth analysis, planning, and scrubbing of costs were not performed adequately in the development of the provisional billing rates, those weaknesses must be addressed during completion of the Incurred Cost Proposal.

Help is Available!

Consulting firms such as Federal Pricing Group have the expertise to help you prepare timely, accurate, and complete Incurred Cost Proposals that will meet the adequacy requirements of your cognizant audit agency. We guide small, growing government contractors through the Incurred Cost Proposal process. If you are unsure of where you stand with your Incurred Cost Proposal process, or if you are aware of what needs to be done but simply lack the resources, contact Federal Pricing Group today.

About the author: Dan Fox is Partner and Principal Consultant at Federal Pricing Group, a firm focused on providing expert contract pricing to small and mid-sized federal government contractors and cost-related acquisition support services to federal agencies. You can find more resources like this article at https://www.federalpricinggroup.com/blog.