For contractors that keep their books on a calendar year, June 30 marks a deadline that is easy to forget amid fourth-quarter preparations. Contractors holding cost-reimbursement contracts generally must submit a final indirect cost rate proposal within six months after the end of each of their fiscal years. This annual package, commonly called the incurred cost submission, is how provisional billing rates become final and how the government eventually closes out cost-type contracts.
Why the submission exists
During the year, a cost-type contractor bills the government using provisional rates for overhead, fringe and general and administrative expenses. Those rates are estimates. After the fiscal year ends, the contractor knows its actual costs, and the government needs a reliable basis for establishing final rates. The allowable cost and payment clause in cost-reimbursement contracts requires the contractor to submit an adequate proposal for final rates based on actual costs. Once rates are settled, billings are adjusted, and contracts that have completed performance can be closed.
Who has to file
The requirement generally applies when a contractor has contracts or orders that include that clause, such as cost-plus-fixed-fee and other cost-reimbursement arrangements. Depending on their terms, time-and-materials and labor-hour contracts may also be covered by the submission. Firms with only firm-fixed-price contracts are not required to submit. Subcontractors with cost-type subcontracts often submit directly to the government auditor rather than through their prime, which keeps their cost data away from a company that may also be a competitor.
What an adequate submission contains
The FAR lists the supporting information an adequate proposal should include, and the Defense Contract Audit Agency publishes a model format, built around a series of schedules, that many contractors use. In general terms, the package includes:
- The proposed final indirect rates and the calculation of each, from the general ledger through the cost pools and allocation bases
- A reconciliation of total costs to the company’s books and financial statements
- Identification of unallowable costs and their exclusion from the pools
- A schedule of claimed costs by contract, showing direct costs and applied indirect costs
- Information on subcontracts, executive compensation and other items the government reviews closely
- A certification of final indirect costs signed by an appropriate company official
Practical advice for meeting the deadline
Close your books promptly after year-end, so the submission is not waiting on an unfinished ledger. Keep unallowable costs segregated throughout the year rather than hunting for them in May. Assign a single owner for the package and set internal deadlines that leave time for review. If you cannot meet the six-month deadline, the contracting officer may grant an extension in writing, but ask before the deadline passes and explain why.
The certification matters. Including expressly unallowable costs in a submission can result in penalties, so review the pools carefully before signing. Small contractors new to cost-type work should talk with an accountant experienced in government contracting, since a well-prepared first submission sets the pattern for years.
Connecting it to the rest of your year
A timely, adequate incurred cost submission speeds final payment on completed contracts, supports accurate provisional rates for the coming year and demonstrates the kind of accounting discipline agencies look for when awarding cost-type work. The FAR requirements are available at acquisition.gov, and the auditor’s model and guidance are published on its website.