Effective June 30, 2011, the FAR Councils modified the requirements for the annual incurred cost proposal required under FAR 52.216-7, Allowable Costs and Payments. Up until now, FAR required contractors to submit a certified incurred cost submission within six months of fiscal year end (e.g. June 30th for calendar year contractors). These submissions are used by the Government to settle indirect rates, as well as other things. With this new change, the requirement was expanded to require an “adequate” certified incurred cost submission. The revised rule also defines what an “adequate” submission must contain.To be considered “adequate”, the annual incurred cost submission must contain the following schedules (as applicable):
- Summary of all claimed indirect expense rates, including pool, base, and calculated indirect rate.
- General and Administrative expenses (final indirect cost pool). Schedule of claimed expenses by element of cost as identified in accounting records (Chart of Accounts).
- Overhead expenses (final indirect cost pool). Schedule of claimed expenses by element of cost as identified in accounting records (Chart of Accounts) for each final indirect cost pool.
- Occupancy expenses (intermediate indirect cost pool). Schedule of claimed expenses by element of cost as identified in accounting records (Chart of Accounts) and expense reallocation to final indirect cost pools.
- Claimed allocation bases, by element of cost, used to distribute indirect costs.
- Facilities capital cost of money factors computation.
- Reconciliation of books of account (i.e., General Ledger) and claimed direct costs by major cost element.
- Schedule of direct costs by contract and subcontract and indirect expense applied at claimed rates, as well as a subsidiary schedule of Government participation percentages in each of the allocation base amounts.
- Schedule of cumulative direct and indirect costs claimed and billed by contract and subcontract.
- Subcontract information. Listing of subcontracts awarded to companies for which the contractor is the prime or upper-tier contractor (include prime and subcontract numbers; subcontract value and award type; amount claimed during the fiscal year; and the subcontractor name, address, and point of contact information).
- Summary of each time-and-materials and labor-hour contract information, including labor categories, labor rates, hours, and amounts; direct materials; other direct costs; and, indirect expense applied at claimed rates.
- Reconciliation of total payroll per IRS form 941 to total labor costs distribution.
- Listing of decisions/agreements/approvals and description of accounting/organizational changes.
- Certificate of final indirect costs (see 52.242-4, Certification of Final Indirect Costs).
- Contract closing information for contracts physically completed in this fiscal year (include contract number, period of performance, contract ceiling amounts, contract fee computations, level of effort, and indicate if the contract is ready to close).
Essentially these schedules mirror what DCAA has been requiring for years. They mirror the form and substance of the model incurred cost submission found in DCAA Pamphlet 7641.90, Information for Contractors and the Excel based version of the pamphlet called ICE (Incurred Cost Electronically). Both the pamphlet and the Excel model are available on the DCAA website.Most government contractors (with cost type contracts) are already well aware of the DCAA incurred cost process/models and will find it easy to comply with the new requirement. Although DCAA never had a regulatory basis to require contractors to follow their models, most contractors found it expedient to do so. With this new regulation, DCAA has the regulatory backing that they have been seeking.
DCAA’s incurred cost models are divided into “required” schedules and “optional” schedules. The optional schedules are listed in the new FAR definition as "not required" but "may be required during the audit process", leaving the decision to provide the optional schedules up to individual contractors. In our practice, we typically leave out the optional schedules. Most of the optional schedules are of little value to an audit and if the information does become necessary, the auditor can develop it during the audit.
After receipt of contractor incurred cost submissions, DCAA performs an “adequacy” review of the submission. It is only after the submission has passed an adequacy review that it gets thrown into the hopper for an eventual audit. During the adequacy review, DCAA typically requests additional documentation. Most often, DCAA requests the trial balance so that it can trace amounts in the submission to the accounting records and copies of the IRS Forms 941 so that it can compare labor cost books with labor costs reported to the IRS. (The labor reconciliation is a required schedule but the actual forms are not required).