Incurred Cost Submissions using Blended Rates but No Advance Agreement Will Get Bounced

Back in April, we published a four-part series on the use of blended labor rates to implement the new $487 thousand compensation cap that applies to all employees charging to Government contracts awarded after June 24, 2014. For a comprehensive look at the blending methodology, refer to that series Part 1, Part 2, Part 3, and Part 4. The Department of Defense came up with the blending methodology as a means of streamlining implementation of the lowered compensation cap while there is a mix of contracts under the old and the new caps. As a prerequisite to using a blended approach, a contractor must enter into an advance agreement with the ACO (Administrative Contracting Officer). The advance agreement includes detailed methodologies to calculate blended rates - which differ for incurred cost proposals and for forward pricing proposals.

DCAA (Defense Contract Audit Agency) is the Government organization tasked with determining whether contractors' annual incurred cost submissions (commonly referred to as ICE) are adequate. (By the way, if you're not familiar with the incurred cost adequacy checklist, download it here). Now that contractors have begun submitting their fiscal year/calendar year 2015 incurred cost proposals, DCAA has noticed that many of them are using a blended approach to cap compensation costs. That would be fine except the Agency is also noting that some of them have been submitted without the requisite Advance Agreement.

DCAA is now instructing its auditors to reject any incurred cost proposal that uses blended rates but lacks an advance agreement:

When the proposal is determined adequate and there is no executed advance agreement, the audit team should return the proposal and require the contractor to resubmit the proposal only after executing an advance agreement with the ACO.

The guidance includes some other steps such as coordination with the contractor and/or the ACO to determine whether an advance agreement is in process and if its issuance is imminent. In that case, the auditor is allowed to wait a little while before rejecting the submission.

Rejected incurred cost submissions run the risk of becoming delinquent. If you are nearing that six-month after year-end due date, you need to request an extension of time from the ACO.