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Get Your Final Indirect Cost Proposals Right for Year-End Reporting

Final Indirect Cost Proposals and Year-End Reporting

As we start a new year, it’s time to “close the books” and prepare for year-end reporting. One area of reporting which contractors should not overlook is the final indirect cost proposal, also known as an incurred cost submission or ICE submission. 

Contractors performing work under flexibly priced contracts are required to submit a final indirect cost proposal to the Contracting Officer (or cognizant Federal agency official) and auditor within six months of the contractor's fiscal year end. Specifically, the requirement to submit a final indirect cost proposal is determined by the allowable cost and payment clause, FAR 52.216-7.

Submitting Your Final Indirect Cost Proposal

Most contractors choose to prepare their final indirect cost proposal electronically, using DCAA's ICE (Incurred Cost Electronically) Model which is available at www.dcaa.mil. The ICE model should be tailored to the rate structure and circumstances specific to the individual contractor.

While overwhelming upon first look, the schedules in the ICE Model can be broken down into a few key categories: 

  1. Final Indirect Rate Calculation - Schedules A-E provide a detailed calculation of the contractor's indirect cost pool and bases. Pool and base costs should be traced directly to the contractor's trial balance.  
  2. Direct Costs and Indirect Cost Allocation - Schedule H (and related sub-schedules) provides a detailed presentation of direct costs and allocated indirect costs, by contract type.  
  3. Billing vs. Actual Comparison - Schedule I summarizes a comparison of total cumulative contract costs to cumulative contract billings over the life of all active (non-closed) contracts. This schedule also calculates cumulative over/under billing by contract type.
  4. Time & Material (T&M) Billings - Schedule K recalculates current year billings for T&M contracts based on direct labor hours incurred times contractually approved bill rates.
  5. Informational and Supplemental Schedules - Informational in nature but are used to provide items such as additional detail for incurred costs, cost reconciliations, and other information used by DCAA auditors and contracting officers. Not all supplemental schedules will be required in all circumstances. 

It is important to note that submission of a final indirect cost proposal does not create final indirect cost rates.

Final Indirect Cost Proposals and “Adequacy”

An indirect cost proposal must first be deemed "adequate" by a cognizant auditor. Adequacy is generally determined once the cognizant auditor completes limited procedures to ensure that the indirect cost proposal is complete, correctly calculated, and generally reconciles to underlying financial records (i.e. the general ledger or trial balance). Adequacy determinations are typically made within 60 days of submission.

If the indirect cost proposal is not deemed adequate, it will be returned to the contractor with instructions for revision.

Once deemed adequate, the indirect cost proposal may be accepted "as is" for use in determining final rates or may be recommended for further audit. This determination is typically made based on the contractor's revenue, risk profile, and results of prior audits.

Audits of proposed final indirect rates may not occur for several years after submission of the indirect cost proposal, so it is important to retain all records that support costs reported in the final indirect cost proposal.

Final Indirect Cost Proposals and Rates

Since the final indirect cost proposal is the basis for establishing final indirect cost rates for contract billing purposes, it’s important to get it right. Preparation is key to an adequate indirect cost proposal. Contractors should consider the following:

  • Review the general ledger for costs which are unallowable per Part 31 of the FAR. Ensure all unallowable costs, and any directly associated labor dollars, are properly recorded in unallowable cost accounts.
  • Ensure that all records of contract funding and ceiling values are updated and accurate through year end.
  • Ensure that all labor hours are properly assigned to jobs or appropriate indirect cost accounts based upon timesheets. Timesheet records should be complete and available for reference.
  • Ensure records for intermediate allocation bases (i.e., facility square footage, headcount, etc.) are updated and accurate.
  • Maintain copies of quarterly payroll tax filings (Form 941).
  • Extensions are available for exceptional circumstances, but remember to request extensions in writing

With some preparation and proactive planning, contractors can prepare adequate final indirect cost proposals and move one step closer to establishing final indirect cost rates.  

Have questions? Contact our Government Contracting Team.

Eileen Gwaltney

Karl Belka