Thursday, August 5, 2010

Unilateral Determinations for Delinquent Incurred Cost Proposals

Over the past two days, we have been discussing the importance of submitting timely annual incurred cost proposals. We mentioned the inconsistencies within the Government in granting extensions, some contracting officers freely grant extensions while others do not. Our advice is that unless there is some mitigating circumstance, contractors should prioritize work to ensure timely submission. We also cautioned that the contracting officer, based on audit recommendations, is authorized by FAR to reduce billings for contractors who are late in submitting their incurred cost proposals.  Today we want to discuss how the Government determines the deepness of those cuts.

Contracting officers make their unilateral determinations based on advice from the contract auditor (usually DCAA). The basis for the auditor's recommendation depends upon whether there is relevant historical data available for the particular contractor. Where relevant historical data is available, the auditor will develop the rates. However, as a practical matter, this almost never happens because the definition of "recent, relevant historical data" is tough to meet. Recent, relevant historical data exists when all of the following criteria are met:
  1. The prior year has been audited (almost never occurs)
  2. All submissions received have been audited and settled (almost never occurs)
  3. The indirect cost pool and base data for the delinquent year is readily available in the contractor's books and records.
  4. There have been no significant changes in the contractor's business base from the last year audited.
  5. There have been no significant reorganization of the contractor since the last year audited.

Where recent, relevant historical data does not exist, the auditor is directed to Plan B and this is where the auditor usually camps. When a contractor is more than six months delinquent, the auditor is directed by guidance to recommend the ACO apply a 20 percent decrement factor to total contract costs, both direct and indirect, for any physically completed contract and all active contracts. This is quite punitive and would adversely affect most contractors. Obviously, contractors should not let things get this far.


  1. You state "contracting officer, based on audit recommendations, is authorized by FAR to reduce billings for contractors who are late in submitting their incurred cost proposals". Where in the FAR does it state the contracting officer is authorized to reduce billings as a result of late incurred cost proposals? thank you.

  2. See FAR 42.703-2.

    Contractors who do not submit timely proposals may have their billing rates unilaterally "set" (that means 'reduced') by the contracting officer. FAR 42.703-2(c)(2) gives the contracting officer the authority to unilaterally reduce rates when contractors fail to certify their final incurred cost rates. That provision states that rates established unilaterally should be based on audited historical data or other available data as long as unallowable costs are excluded and set low enough to ensure that unallowable costs will not be reimbursed.