Understanding Incurred Cost Proposals: Avoiding the Top 5 Audit Issues

All federal contractors with cost-type or time and materials (T&M) contracts with cost-type contract line items (CLINS) are required to submit an Incurred Cost Proposal regardless of agency customer.  All contracts requiring an Incurred Cost Proposal will include the Federal Acquisition Regulations Allowable Cost & Payment Clause and/or the T&M Payment Clause.

What is an Incurred Cost Proposal?

The Incurred Cost Proposal is also known as final Indirect Rate Proposal, Incurred Cost Electronic Submission, Indirect Cost Rate Submission, Incurred Cost Submission, ICES, ICRS, ICS, or ICP.  It is the report of your actual costs incurred throughout the year, whether direct or indirect, and reconciles costs provisionally billed to the government in a single contractor fiscal year with costs actually incurred by the contractor.

The Incurred Cost Proposal establishes your actual indirect rates for the fiscal year, verifies their equitable application across all contracts, and calculates the amount of cumulative over-billing or under-billing of indirect costs applied to all cost-type and time and material (T&M) contracts with cost-type CLINS, by comparing the actual indirect rates to the approved provisional billing rates used.

What is its Purpose?

The Incurred Cost Proposal could be compared to income tax returns. Under cost-type contracts and CLINS, when incurred costs are billed, we use provisional or estimated indirect rates, similar to withholding for income tax purposes.

After the fiscal year closes, we can then calculate final indirect rates based on known actual costs, rather than the cost estimates used to establish the provisional billing rates.  The following step is to calculate if a contractor is due a refund or owes money to the government.

What is Included in an Incurred Cost Proposal? 

• Schedules A through E: Presentation of indirect cost pool and its base components
• Schedules H and H-1: Direct cost by contract at actual rates
• Schedule I: Cumulative allowable costs incurred, cumulative billing and calculation of over-billing or under-billing amount
• Schedule K:  Hours and amounts billed on T&M contracts, as well as costs of materials, travel and other direct costs
• Schedule N: Certification of indirect costs
• Schedules F, J, L, O, are all supplemental schedules. They include: cost of money, subcontract information, payroll reconciliation, contract closing information, executive compensation and other supporting documentation required for an audit of the Incurred Cost Proposal.

When is an Incurred Cost Proposal Required?

Final indirect cost rates are determined annually. The Allowable Cost and Payment Clause establishes the requirement for contractors to submit a final indirect cost rate proposal for each fiscal year.

If your contract contains this clause, the Incurred Cost Proposal must be submitted annually.

When is the Incurred Cost Proposal Filed? 

The Incurred Cost Proposal is due 6 months after the fiscal year end. If your fiscal year end is 12/31, your proposal would be due no later than the following June 30 for each fiscal year in which costs are incurred under an applicable contract type.

If an Incurred Cost Proposal is not received within 6 months following the due date, DCAA could recommend a unilateral determination of your final indirect cost rates or contract costs.

How to Submit an Incurred Cost Proposal

DCAA set up a new Contractor Submission Portal (CSP) to make it easier for government contractors to submit their Incurred Cost Proposals. 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.

For more on the Contractor Submission Portal, visit DCAA’s Website.

Guidance on PPP and CARES Act

DCAA released a revised memo April 23, 2021 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.  The FAQ includes:

• How credits resulting from forgiven PPP loans should be applied.
• How a forgiven PPP loan should be presented in the Incurred Cost Proposal.

The full library of Defense Pricing and Contracting (DPC) COVID-19 Guidance and Resources is available on their website.

What are the Top 5 Audit Issues for Incurred Cost Proposals?

1. Contractor Compensation – FAR 31.205-6 establishes benchmarking across industry peers to determine reasonableness of compensation and a statutory maximum compensation amount.
2. Contractor Labor Categories – DCAA reviews T-rates under T&M contracts to ensure labor rate charges meet requirements for years of experience, education, and other labor categories.
3. Allocability – A cost is allocated on the basis of a causal or beneficial relationship. While DCAA provides contractors significant latitude on the basis of the beneficial relationship, the subjective nature of this determination frequently leads to audit issues.
4. Bonus/Severance Costs – DCAA consistently audits costs of contractors who pay bonus and severance costs without an established policy or procedure governing the payments based on employee performance.
5. Adequacy –DCAA posts an incurred cost adequacy checklist. The adequacy checklist ensures the Incurred Cost Model provides the minimum required information and calculations, and determines whether DCAA will accept the Incurred Cost Proposal as submitted. The model is considered submitted only once it’s considered adequate.

If you have questions, or need expertise and help with understanding Incurred Cost Proposals, please contact us.