Heart Problems with the Incurred Cost Proposal

The incurred cost proposal is required for cost type and time and material contracts subject to the FAR 52.216-7, “Allowable Cost and Payment.” Cost type and time and material contracts have a cost reimbursable element that needs to be trued up (i.e. final indirect rates), hence the reason for the incurred cost proposal. There are many subsections, which are listed within the clause (52.216-7(d), thus defining the required schedules for an adequate indirect cost rate proposal.

Of the fifteen schedules listed within the clause, all of the schedules basically flow to (I) Schedule of cumulative direct and indirect costs claimed and billed by contract and subcontract, which is the heart of the incurred cost proposal. The purpose of Schedule I is to consolidate the total (direct and indirect) costs of the current fiscal year, plus the prior years for each cost reimbursable contract, to determine the cumulative actual costs claimed. This is then compared to the cumulative billed. The comparison determines the over/under billed for each cost reimbursable contract. This schedule answers the most important question when managing a cost reimbursable contract – do I owe or does the customer owe me?  

DCAA has recently taken a special interest in this schedule when performing a high level review of the proposal for adequacy. Due to recent events and DCAA major back log of audits, we have seen a trend of multiple year incurred cost proposals being audited concurrently. This strategy of multiple year audits will hopefully decrease the back log and get DCAA caught up on audits. Since Schedule I combines current year and prior year data, it ties together current and previous incurred cost proposals and becomes a point of interest. This is especially true in a multiple year audit. The presentation of this schedule is in three sections: (1) prior year data, (2) current year data, and (3) cumulative billed data. The prior year data is further segregated between “settled” and “unsettled” claimed costs. Prior year settled claimed costs represents audited claimed dollars from previous incurred cost proposals that have been reviewed, approved, and finalized by DCAA. Unsettled claimed costs are contract costs that have not been audited by DCAA. Audited amounts are logged in DCAA’s Cumulative Allowable Cost Worksheet which is a summary schedule of contractor costs for each open flexibly priced contract with the most recent settled indirect cost rates.

In June 2016, DCAA changed Incurred Cost Adequacy Checklist to require auditors to ask the question “Are prior year settled total costs the same as the prior year’s Cumulative Allowable Cost Worksheet?” In a perfect world, when DCAA is reviewing FY16 Incurred Cost Proposal, the FY15 Incurred Cost Proposal has been audited and flexibly priced contracts cumulative allowable costs are updated in the Cumulative Allowable Cost Worksheet so that prior year settled column matches to the penny. Unfortunately, this is not a perfect world. DCAA is reviewing incurred cost submission years behind; they may be reviewing a FY16 incurred cost submission, but the most recent settled indirect cost rates are from FY10. That is six years of unsettled costs on Schedule I that should be tied to previous Schedule I’s.

In the DCAA ICE Model, the prior year for settled and unsettled only compose one column. Prior year could mean last year, two years ago, or even five years ago. If a DCAA auditor reviews the lump sum in the “prior year,” there is no way to tell what year costs were incurred. This is a problem for contracts spanning multiple years yet may not have costs in a specific year. If there are no costs incurred for a flexibly price contract, then it is not included in the incurred cost proposal for obvious reasons – no costs, nothing to true up. A DCAA auditor trying to audit multiple years has a challenge when comparing Schedule I side by side because not all “active” projects are presented in this schedule, only projects with current period costs. The one-size fits all approach of the ICE Model has some flaws. DCAA response to questions on presentation for Schedule I cumulative data are vague and varied.

In addition to presentation problems, when it is time to close out a contract, Schedule I has an important role. Schedule I cumulative claimed costs per contract is important during the contract closeout process, as it helps Contracting Officers and Contractors determine a final invoice amount. If there are any differences between the period of performance and time-period that costs were incurred, trying to find the final invoice amount becomes a task of tracking down which Schedule I for the corresponding fiscal year. Further, validating that the information included in the submission years ago is still accurate is time consuming. A contractor will need to verify that all of the costs on Schedule I are accurate with the final indirect rate letters signed, the cumulative billed amount matches to DCMA disbursement records, and the disbursement amounts are the same as invoiced amounts. This is a very time consuming process. Simply depending on Schedule I will not always be the most accurate way to determine the final invoice amount. Contractors may ultimately need to keep an offline version of cumulative allowable costs for cost reimbursable contracts to avoid problems when closing out a contract. Alternatively, coordinate with your DCAA auditor to obtain updated copies of their cumulative allowable cost worksheet (their summarization of your contracts’ allowable costs. We can provide these services to assist contractors.