"Incurred Costs" and "Paid Costs" are two different events. We've mentioned this fact in our blog posts a time or two but it is worth repeating because we continue to see and hear of cases where contract auditors and more recently, contracting officers, question costs that were paid "outside" the contract period of performance.
Costs incurred on flexibly-priced Government contracts must have been incurred during the period of performance. There are exceptions to this such as pre-contract costs that have been approved in advance by the contracting officer. But incurred doesn't necessarily mean paid. Consider these events
Payroll. Suppose a contract ends on December 31 and coincides with a payroll period ending on the same date. Work performed on the contract in December has been incurred but the employees have not been paid until sometime after the payroll period ends - like January 5th. These payroll costs as of December 31 have been incurred but not paid.
Subcontractor billings. Subcontractors typically bill after their work is accomplished. Suppose a contract ends on December 31 and a subcontractor submits an invoice the following January. The prime contractor will include it in its own request for reimbursement in January or perhaps February - well after the contract performance period ended. The subcontract costs were incurred in December but not paid. The subcontract costs are still allocable to the contract.
Adjustments for indirect rates. Contractors use provisional indirect billing rates for billing costs on flexibly-priced contracts. Within six months after the close of the fiscal year, contractors are required to submit final indirect expense rates and true-up the billing rates to those final rates. That could occur six months or more after contract performance ends. When contract auditors get around to auditing the final indirect rate submission there may be another adjustment required. That could be several years after the contract performance period.
Materials. Contractor sometimes issue purchase orders for materials and supplies late in the contract. Vendor invoices are sometimes received after the performance period ends. Sometimes terms are "net 30" which means payment is expected within 30 days of invoice date. That could put it close to two months after performance period before a check is cut.
These are just a few examples of costs "paid" after a contract performance period ends but are nevertheless properly allocable, allowable, and reasonable under the contract. Sometimes Government personnel speak with such authority and confidence that unwitting contractors assume they are correct.