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.

Don't Want to Certify Your Indirect Rate Proposal? FAR Provides for Waivers

That's right, FAR (Federal Acquisition Regulations) does provide a process for waiving the certification process but don't count on any success. We've never seen a waiver requested, much less granted.

The indirect rate certification requirement is a statutory requirement found in 10 USC 2324(h)(1) for DoD contracts and in 41 USC 256(h)(1) for non-DoD contracts. According to those provisions, a proposal shall not be accepted by the Government, and no agreement shall be made to establish final indirect cost rates unless the costs have been certified by the contractor.

The very next sections of the respective statutes however provides for waivers of the indirect rate certification requirement:

For DoD Contracts:

The head of the agency or the Secretary of the military department concerned may, in an exceptional case, waive the requirement for certification under paragraph (1) in the case of any contract if the head of the agency or the Secretary determines in such case that it would be in the interest of the United States to waive such certification and states in writing the reasons for that determination and makes such determination available to the public.

For non-DoD Contracts:

An executive agency may, in an exceptional case, waive the requirement for certification under paragraph (1) in the case of any contract if the agency determines in such case that it would be in the interest of the United States to waive such certification and states in writing the reasons for that determination and makes such determination available to the public.

The question then is what are "exceptional cases" contemplated by this provision? FAR 42.703-2(b) gives us a clue. The regulations states that waivers may be appropriate for contracts with:

• A foreign government or international organization, such as a subsidiary body of NATO.
• A state or local government subject to OMB Circular A-87.
• An educational institution subject to OMB Circular A-21.
• A nonprofit organization subject to OMB Circular A-122.

We don't see any run-of-the-mill Government contractors in the foregoing listing. So the chances of securing a waiver by the typical Government contractor seems remote. Actually, the mere inquiry by a contractor as to the availability of a waiver would probably raise a red flag among the contracting officer and contract auditor. They might wonder what the contractor was trying to hide.