What Does Certifying Your Indirect Rates Mean?

Contractors that have prepared and submitted annual incurred cost proposals are well aware of the requirement to certify indirect costs. The certification is typically embodied in "Schedule N" of the Model Incurred Cost proposal is a name that derives from FAR 52.216-7.(d)(2)(iii), section N. This is the contract clause that delineates items that comprise an adequate incurred cost proposal, a certification being one of the mandatory requirements. Elsewhere in FAR, the Government is prohibited from establishing final indirect cost rates unless the costs have been certified by the contractor (see FAR 42.703-2(a)).

The precise wording of the certification is found in FAR 52.242-4, Certification of Final Indirect Costs. It reads:

This is to certify that I have reviewed this proposal to establish final indirect cost rates and to the best of my knowledge and belief:
     1. All costs included in this proposal to establish final indirect cost rates are allowable in accordance with the cost principles of the Federal Acquisition Regulation (FAR) and its supplements applicable to the contracts to which the final indirect cost rates will apply; and
     2. This proposal does not include any costs which are expressly unallowable under applicable cost principles of the FAR or its supplements.

The certification must be signed by an individual at a level no lower than a vice president or chief financial officer.

There are serious penalties for submitting incurred cost proposals with costs known to be unallowable. 10 USC 2324 (DoD contracts) and 41 USC 256 (non-DoD contracts) are the Statutes upon which penalties can be assessed.  Those statutes state that the submission of a proposal that includes expressly unallowable costs, with the knowledge that the costs are unallowable, are subject to the provisions of 18 USC 287 and 31 USC 3729. The fines imposed by these statutes is up to five years and a million dollars.

Contractors need to take the certification requirements very seriously and question or query whoever is responsible for preparing the submission as to the steps taken to ensure that no unallowable costs have been included in the annual incurred cost proposal. Sometimes, as it appears to us, contractors have not performed due diligence before signing off on the certification.