Redstone Government Consulting Blog | Kimberly Basden

It’s that time of year to start thinking about the preparation of the incurred cost proposal if you are a Contractor with flexibly priced contracts. The incurred cost proposal is required for cost type, time, and material contracts subject to 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 listed within the FAR clause 52.216-7(d), thus defining the required schedules for an adequate indirect cost rate proposal.  

As the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) season ramps up we have noticed a trend when it comes to award of SBIRs and Small Business Technology Transfer (STTRs) to small businesses in regard to cost analysis as part of Phase 1 awards, as well as dealing with the administration associated with a Phase 2 cost-reimbursable awards. A significant part of the SBIR process is to educate small businesses on the process and controls required to do businesses with the U.S. Government. The cost-reimbursable nature of phase 2 awards inevitably means that small businesses will have the opportunity to undergo accounting system adequacy determination, develop provisional billing rates, and undergo incurred cost submission review or audit. These are key barriers to entry to many businesses seeking to work with the U.S. Government and the pursuit of SBIR/STTR work not only provided necessary funding for small business research and development (R&D), but also an avenue to clear necessary hurdles when it comes to the back-office compliance. At least that was the case historically.

Recently, our office has become aware of a few instances of auditors misunderstanding the DCAA Headquarters’ guidance pertaining to the treatment of credits associated with PPP Loan Forgiveness.

Contractors with cost reimbursable contracts that include the Allowable cost and payment clause, FAR 52.216-7 or Payments under Time-and-Materials and Labor-Hour contracts clause, FAR 52.232-7, are required to submit an Incurred Cost Proposal for each fiscal year costs were incurred on any cost reimbursable contract. This incurred cost proposal is provided to your Administrative Contracting Officer (ACO) and Defense Contract Audit Agency (DCAA) with a deadline of six months after the Contractor’s fiscal year end. Once the Incurred Cost Proposal is received by DCAA, they review it for adequacy. DCAA provides a notification to the Contractor, typically via email, that the proposal is deemed adequate for audit or outlines changes DCAA believes are necessary. That is great to know it is adequate for audit but what does that mean? This means that DCAA has reviewed the incurred cost proposal and determined that the schedules are properly completed for them to begin the audit potentially.

For our 12/31 year-end contractors, this is a busy time of year.  Year-end books are ending and 2019 budgets are being formed.  This is also the time of year for submitting provisional billing rates or PBRs for contractors that have cost reimbursable type contracts such as cost-type and time and material contracts. 

The objectives of a timekeeping system are to ensure that labor costs are accurately and timely identified as either direct or indirect in the accounting system.  For certain contract types (e.g. cost-type), these accumulated labor costs are reported and billed to the customer.  It is the contractor’s responsibility to ensure that the labor costs posted in the timekeeping system are proper and reliable. 

It has been years since the contract period of performance has ended, DCAA has finally concluded their audit or review of your incurred cost proposal, and you have received the final indirect rate letter from DCAA. Now what? By design, the contract closeout process begins in earnest.   Typically, the Administrative Contracting Officer (ACO) is responsible for initiating administrative closeout of the contract after receiving evidence of its physical completion.

Accounting for independent research and development costs and bid and proposal costs are found in Far 31.205-18 and Cost Accounting Standards 420. Because FAR 31.205-18 incorporates CAS 420, it does not matter if your company has revenue of $50 million or under $5 million; if you have IR&D and B&P costs, this Cost Accounting Standard (CAS) provides the criteria for accumulation and allocation of those costs.

Contractors subject to FAR 52.216-7, “Allowable Cost and Payment” clause are required to submit, to the cognizant contracting officer and DCAA auditor, an electronic final indirect cost rate proposal in accordance with FAR 42.705-1(b)(1) within six months after the end of the contractor’s fiscal period. This final indirect cost rate submission will primarily be used to establish final indirect rates; however, it has evolved to also serve the purpose of establishing total allowable (direct and indirect) contract costs. DCAA has recently released a new version of the ICE Model, which is the electronic version of the “Model Incurred Cost Proposal” which provides contractors with a standard ICE submission for preparing adequate incurred cost proposals in accordance with FAR 52.216-7, “Allowable Cost and Payment.” This version, 2.0.1f (released in October 2016), may be downloaded from the DCAA website. There were no computational changes to the newly released version; only minor changes to headings and abbreviations. The following are the changes:

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.