If your fiscal year is the same as the calendar year (i.e. 12/31) and you have performed on cost reimbursable and/or time and material contracts that include the Allowable Cost and Payment clause at FAR 52.216-7, then it is time you begin the process of preparing and submitting your incurred cost proposal/submission.
Regulatory Requirements of the Incurred Cost Proposal
The incurred cost proposal, or submission, includes all direct costs incurred during the fiscal year on all contract types both commercial and government, fixed price and cost-type/ time and materials (T&M). It also details the various indirect costs incurred and included in the development of your various indirect rates applied to your direct costs.
The incurred cost proposal together with its supporting data is to be submitted to the cognizant contracting officer within six months of the end of the fiscal year (i.e. 6/30). Not meeting this deadline reflects on the ability of your accounting system to properly and timely record performance on cost-type contracts and can lead to it becoming declared as inadequate, severely limiting or eliminating your ability to propose on and be awarded cost-type (including T&M) contracts.
Purpose of an Incurred Cost Proposal
The primary purpose of an incurred cost submission is to establish your actual indirect rates for the fiscal year, verify their equitable application across all contracts and calculate the amount of cumulative overbilling or underbilling of indirect costs applied to all cost-type and time and material contracts through a comparison of the actual indirect rates to the approved provisional billing rates utilized.
Corrective Actions for Overbilling:
If you overbilled the indirect costs on a cost-type contract because your actual indirect rates when applied to your direct costs are lower than the indirect rates billed, you should immediately contact the cognizant contracting officer to receive directions on how he or she would like for you to refund the amount overbilled – i.e. write the Treasury a check, off-set it in your next invoice on the contract involved or wait to see if it corrects itself in future billing variances.
The completed incurred cost submission is provided to the cognizant contracting officer with a courtesy copy to the Defense Contract Audit Agency (DCAA) who at the contracting officer’s direction, will audit the submission for adequacy and correctness
Corrective Actions for Underbilling:
If your actual rates are over those used for billing purposes you have underbilled and are not recovering all of your indirect expenses incurred. Again, immediately contact the cognizant contracting officer to inform him or her of the underbilling. Send him or her an invoice for the amount of underbilling (government will not pay without an invoice) and a copy of the completed incurred cost submission as support for the amount billed. As a courtesy, a copy of the invoice and the incurred cost submission should be provided to DCAA who will, at the direction of the contracting officer, establish the adequacy of your submission and audit the accuracy of the supporting calculations.
The completed incurred cost submission is provided to the cognizant contracting officer with a courtesy copy to DCAA who at the contracting officer’s direction, will audit the submission for adequacy and correctness. Contractors and subcontractors must be proactive in compliance with the requirements of FAR 52.216-7. Prompt action will protect you from the unfavorable impacts of overbilling and the adverse financial results of not recovering underbillings to which you are due.