What is an Incurred Cost Proposal?
Originally Published April 12, 2021. Updated March 3, 2022.
Incurred Cost Proposals are due within 6 months following the end of a contractor's fiscal year. For many government contractors, the due date is June 30th. In this article we’ll review the basics about this annual report:
- What is an Incurred Cost Proposal?
- What information is required in an Incurred Cost Submission?
- How do you submit your Incurred Cost Proposal?
In addition to regular background information on Incurred Cost Proposals, we continue to include for your reference the additional guidance issued on how to handle CARES Act, PPP, and Section 3610 in 2021 Submissions.
What is an Incurred Cost Proposal?
An Incurred Cost Proposal is formally known as a Final Indirect Cost Rate Proposal. Its purpose is to determine the contractor's final indirect cost rates for the year.
Government contractors subject to FAR 52.216-7 are required to submit an adequate final indirect cost rate proposal within six months following the contractor’s fiscal year end. Flexibly priced contracts are billed using provisional indirect rates during the fiscal year. The annual final indirect cost rate proposal is the basis for determining final indirect rates, and thereby quantifying any difference between provisionally billed costs and the contractor’s actual cost experience.
This final indirect cost rate proposal is also commonly known as an:
- Incurred Cost Proposal (ICP)
- Incurred Cost Submission (ICS)
- ICE Report, for DCAA’s ICE model (Incurred Cost Electronically) submission template for the final indirect cost rate proposal
When is an Incurred Cost Proposal required?
FAR 42.705 requires that final indirect cost rates be determined annually. To accomplish this, FAR 52.216-7, the Allowable Cost and Payment Clause, establishes the requirement for the contractor to submit a final indirect cost rate proposal for each fiscal year. For any contracts containing this clause, the Incurred Cost Proposal must be submitted annually during the period of performance of the contract.
The Allowable Cost and Payment Clause applies to flexibly priced time and materials (T&M) and cost-reimbursement type contracts. Many SBIR Phase II grants, as well as some subcontracts, include the final indirect cost rate proposal requirement.
Contractors invoice actual direct costs incurred on cost-reimbursement type contracts during the period covered by the billing. Contractors use an estimate, however, to bill indirect costs on a provisional basis. While billing rates should be close to the anticipated final indirect rates, the actual indirect rates will not be known until the contractor’s year has ended and all costs are recorded in the books of the contractor.
Once final indirect rates are determined, actual contract costs allocable to the contract are compared against contract costs billed by the contractor during the year using provisional indirect rates. That variance must ultimately be settled. If your indirect costs for the year are lower than what you invoiced, you will owe that overage back to the government. Unlike fixed-price contracts, if your actual allowable costs are higher than your provisionally billed rate, the government may owe you money.
If you fail to submit an Incurred Cost Proposal within 6 months following the due date, DCAA may recommend a unilateral determination of your final indirect cost rates or contract costs.
What information is required in an Incurred Cost Submission?
FAR 52.216-7(d)(2)(iii) sets forth the specific information required to be included in an adequate final indirect cost rate proposal. The FAR criteria are presented on required schedules:
||Summary of Indirect Expense Rates
|Schedule B, C, D
||Indirect Cost Pools
||Claimed Allocation Bases
||Cost of Money
||Booked and Claimed Direct Costs
||Direct Costs by Contract at Claimed Rates
||Government Participation by Pool
||Cumulative Allowable Cost Worksheet
||Hours and Amounts on T&M Contracts
||Certificate of Indirect Costs
||Contract Closing Information
Summary of Indirect Expense Rates
|Schedule B, C, D:
Indirect Cost Pools
Claimed Allocation Bases
Cost of Money
Booked and Claimed Direct Costs
Direct Costs by Contract at Claimed Rates
Government Participation by Pool
Cumulative Allowable Cost Worksheet
Hours and Amounts on T&M Contracts
Certificate of Indirect Costs
Contract Closing Information
In addition to these required schedules, several optional schedules may be requested.
Maintaining an adequate accounting system is vital to producing this report. Supporting data and documentation is also required to demonstrate the allowability and allocability of costs incurred. (For selected cost elements, such as travel costs, FAR 31.205 specifies documentation required to support allowability.) Make sure that your Incurred Cost Proposal file includes an index of schedules.
DCAA provides an Excel document known as the ICE model to give contractors an electronic template for completing the required schedules. The ICE model is not required; What is required is an adequate submission including all schedules as specified in FAR 52.216-7.
Contractors using ICAT with QuickBooks can generate all required schedules with their cost data automatically populated directly from their accounting system, then export the report to Excel for submission. ICAT’s Incurred Cost Proposal Workbook complies with the requirements set forth in FAR Clause 52.216-7 for an adequate submission. Instead of manually logging data into the ICE templates, the appropriate fields are populated and crosslinked across schedules, satisfying the requirements while simplifying the report preparation process and reducing the risk of error.
Failure to provide complete information will result in an inadequate submission. Contractors risk penalties for manipulating costs or including expressly unallowable costs in their incurred cost proposal.
After preparing your Incurred Cost Proposal, it is a good idea to perform a self-assessment before submitting your ICP. DCAA’s Guide for Determining Adequacy of Contract Incurred Cost Proposal is a checklist to help you review your submission for adequacy.
How do you submit your Incurred Cost Proposal?
DCAA set up a new Contractor Submission Portal (CSP) to make it easier for government contractors to submit their Incurred Cost Proposal. The CSP is a secure portal on the Procurement Integrated Enterprise Environment (PIEE) platform already used by many contractors. With the CSP, contractors can upload, as well as edit and withdraw, proposal files to ensure DCAA has your current, correct file.
This Incurred Cost Proposal submission option eliminates potential ambiguities and errors that come with submitting your ICP by email. The CSP enables contractors to:
- Easily upload large Incurred Cost Submission files
- Receive formal notification validating the submission was received
- Avoid delays or delivery problems from bounced emails, spam filters, and timestamp issues
- Benefit from centralized file storage and version control
Do you have to use the CSP? DCAA says it is not mandatory, but it’s highly encouraged.
For more on the Contractor Submission Portal, visit DCAA’s Website.
Additional Guidance on PPP and CARES Act
Government contractors leveraging relief measures in response to the coronavirus pandemic national emergency, including the Paycheck Protection Program (PPP) and Section 3610 of the CARES Act, must be aware of the impact of these measures on their accounting.
DCAA released a revised memo on April 23, 2021 (20-PIC-006(R)-Revised) (an update to the January 2021 revision) providing guidance on the impact of COVID-19 legislation and relief packages on government contractor audits. The audit alert includes an FAQ regarding incurred cost audits as well as forward pricing audits. Questions addressed in the FAQ include:
- How should credits resulting from forgiven PPP loans be applied?
- How would a forgiven PPP loan be presented in the incurred cost proposal?
Additionally, Defense Pricing and Contracting (DPC) has issued guidance on Section 3610, including:
The full repository of DPC COVID-19 Guidance and Resources is
available on their website.
If these provisions apply to your business, make sure you are accurately accounting for them on your Incurred Cost Submission.