Cost Accounting Standards (CAS), promulgated by Part 30 of the Federal Acquisition Regulation (https://www.acquisition.gov/far/part-30#FAR_30_101), maintains specific requirements for a US Government Contractor when they apply to a US Federal Government Contract.

A CAS Covered Contract is one that meets specific qualifications that trigger CAS Coverage. The qualifications, exceptions, and other conditions that determine CAS Applicability, Coverage Type, and Disclosure Requirements can be confusing. Our blog post: What Are CAS Covered Contracts?  lists these qualifications and additional detail on the matter. To provide added clarity for the visual learner, we’ve put it all into one clean illustration:

Download the CAS Flowchart Here: CAS Applicability Flowchart.

Cost Accounting Standards (CAS) 401 and 402 are all about a U.S. Government contractor’s consistency in its cost accounting practices. While CAS 401 dictates the requirements for contractors to “bid, book, and bill” consistently, CAS 402 focuses on how a contractor ensures that contracts are not inequitably charged for similar costs incurred in like circumstances..

CAS 401 – Consistency in Estimating, Accumulating and Reporting Costs.

The purpose of CAS 401 as stated: “is to ensure that each contractor’s practices used in estimating costs for a proposal are consistent with cost accounting practices used by [the contractor] in accumulating and reporting costs.”

In its simplest sense the federal government wants to ensure that a contractor can prove that the costs it estimates can, in some meaningful way, be tied to the actual costs they incur. Without this consistency, there is risk a contractor may estimate costs one way without any capability to evidence that their estimated costs were reasonable. An example follows:

Example: A contractor estimates engineering labor hours for five (5) separate engineering labor categories. However, the contractor does not separately track engineering labor hours for its employees in any of its books and records. In such a scenario, a contractor cannot demonstrate the actual number of hours incurred for the labor categories that they estimated.

The key question a contractor should ask themselves is “can I reproduce this cost estimate with actuals once the contract begins?”. Of significance in answering this question is the CAS definition for “accumulating costs”, as follows:

“Accumulating costs means the collecting of cost data in an organized manner, such as through a system of accounts.” (48 CFR 9905.501-30)

CAS 401 Practice:

Please note that the definition provides for collecting cost data in an “organized manner”. That does not mean that you can’t have supplemental records that corroborate your cost estimates. Extending our example above for cost accounting standard 401, it’s possible the contractor does not differentiate its engineering labor in its General Ledger (G/L). However, it may well have work orders or project accounting records that provides such visibility.

There are even instances where a contractor may maintain the records outside its accounting software. Hence, the CASB DS-1 section 1.5.0 “Identification of Differences Between Contract Cost Accounting and Financial Accounting Records.” The federal government requirements understand that financial accounting and federal cost accounting are not one and the same.

The key is that they be equitable and reconcilable with the ability to reproduce actuals consistent with how you estimated. Best practice is certainly to have your financial accounting and federal cost accounting match one-to-one, but that’s not always practical. Understanding CAS 401 is key to how you establish your cost accounting and cost estimating practices. 

CAS 402 – Consistency in Allocating Costs Incurred for the Same Purpose

The purpose of CAS 402 as stated: “is to require that each type of cost is allocated once and on only one basis to any contract or other cost objective.” Certain types of costs, such as project management, equipment, project accounting personnel, etc., are prone to inconsistent cost accounting practices where a federal contract may be charged twice for the same, or similar cost, without any additional benefit received.

They key words in Cost accounting standards 402 are that “All costs incurred for the same purpose, in like circumstances, are either direct costs only or indirect costs only with respect to final cost objectives.” This can be tricky given the innumerable circumstances in which a cost may be incurred (e.g., on-site, remote, etc.). An example follows:

Example: A contractor has a procurement department that supports all purchasing efforts, direct and indirect of the business. The department’s costs are included entirely in G&A. However, it has a new contract award that it bids procurement personnel as direct labor for.

This example is a classic CAS 402 example. The obvious conclusion is that this is a CAS 402 non-compliance because a federal contract would be incurring cost directly for the direct labor of the new procurement individual, as well as the G&A (which includes procurement personnel) resulting in double charging (bad words in government contracting!). Are there examples by which this may be compliant? Beauty is in the eye of the beholder.

Some contractors may be able to demonstrate that the nature of the procurement is different. Perhaps its local procurement overseas whereby they’re purchasing small dollar items for contract-specific needs. This may not in and of itself make it ‘unlike’, but it might. There are many variables to properly defining each cost as direct or indirect.

The question we most often ask a way of translating this is “Is the contract benefitting from both the direct activity and the indirect activity?” This might not answer the question completely, but it’s a start. CAS 402 is one of the most common, if not the most common CAS non-compliance during CAS audits.

Benefits of CAS 401 and CAS 402 Compliance

Complying with CAS 401 and CAS 402 have benefits to contractors that can significantly impact their bottom lines. CAS compliance can lead to:

• More reliable cost estimating and bidding, resulting in better proposals;
• Better coordination with bidding and proposal teams, accounting staff, and project teams, leading to a smoother project setup and audit process;
• More reliable comparisons of incurred costs (“actuals”) to estimated costs;
• Compliant and consistent indirect cost allocations and profitability measures;
• More accurate comparisons between projects to better understand which are most profitable;
• Easier change order negotiations; and
• More streamlined process for conformity with contract requirements for pricing claims and requests for equitable adjustments (REAs).

A CASB Disclosure Statement is a form whereby a US Government Contractor discloses its cost accounting practices, for which it is required to demonstrate CAS compliance for the life of its active CAS (Cost Accounting Standards) covered awards. The CASB Disclosure Statement, otherwise known as DS-1, has a very rigid format with eight different parts:

• Part I – General Information
• Part II – Direct Costs
• Part III – Direct vs. Indirect Costs
• Part IV – Indirect Costs
• Part V – Depreciation and Capitalization Practices
• Part VI – Other Costs and Credits
• Part VII – Deferred Compensation and Insurance Cost
• Part VIII – Home Office Expenses

Each part has numerous sections called items which vary in applicability to the contractor, depending on the contractor’s cost accounting practices. While each item is generally constituted by selection boxes and multiple-choice questions, certain responses require the contractor to detail information in longer narrative form, on “continuation sheets”.

When is a CASB Disclosure Statement Required?

The requirement to submit a CASB Disclosure Statement depends on the CAS covered contracts a contractor maintains. In a nutshell, CAS is applicable to individual contracts and the applicability of CAS is triggered based on dollar thresholds. Whether or not CAS is applicable to a given contract is determined by the contract type, the size of the business receiving the contract, and the amount awarded. A CASB Disclosure Statement is required if Full-CAS coverage applies to a contractor. [Click here] to learn more about types of CAS coverage and CAS applicability.

Any CAS-covered contract of $50 million or more requires a Disclosure Statement prior to the contract award. CASB DS-1 should not be submitted prior to Full-CAS coverage applicability. The solicitation usually provides clarification on when exactly the Disclosure is required. Typically, if the requirement is in the solicitation, and it is the Contractor’s first Disclosure, then submission is due at the time of the proposal.

If a CAS-covered contract under $50 million is awarded, and the Contractor received net CAS-covered awards in the prior accounting period totaling more than $50 million, then the Contractor is required to file a Disclosure Statement prior to the contract award. However, if the award is within the first 90 days of the proceeding accounting period, then the contractor is not required to file until the end of the 90 days.

If a contractor anticipates future Full-CAS coverage, it is prudent to have the Disclosure Statement prepared and ready (i.e., not submitted to the Government).

CASB Disclosure Statement Adequacy and Compliance

When a CASB Disclosure Statement is required, it must be submitted to the Contracting Officer (CO) and the Cognizant Federal Agency Official (CFAO). All Disclosure Statements will be reviewed and audited based on two major factors (1) adequacy, and (2) compliance.

CASB Disclosure Statement Adequacy

The adequacy of a CASB Disclosure Statement is determined by how the DS-1 is formatted and filled out based on the applicability of the 19 Cost Accounting Standards to the contractor. For example, if a contractor accumulates Home Office expenses and allocates such expenses to various business segments, but it does not complete Part VIII of the Disclosure Statement, the Disclosure Statement would be deemed inadequate.

Ensuring adequacy on a CASB Disclosure Statement is not easy, and it can be a grueling process to pass adequacy with DCAA. DCAA’s adequacy checklist evaluates the DS-1 for completeness and proper formatting, oftentimes resulting in many rounds of back and forth before a Disclosure Statement is accepted for audit.  This erodes auditor confidence and burns costly time on behalf of the Government and the contractor.

Our experience suggests that at least 50% of inadequacies can be avoided simply by filling the DS-1 out with all the required information in proper format.  As a result, we designed a proprietary software – CASB DS-Done – to facilitate an adequate Disclosure Statement.  The software is built with control integrity to hit on all the required fields and continuation sheets with user-friendly prompts avoiding the countless hours of formatting and inadequacy rejections.  [Click here to learn more about DS-Done].

Contractor Compliance With Disclosed Accounting Practices and Procedures

The Defense Contract Audit Agency (DCAA) maintains eight types of noncompliance based on CASB rules, regulations, and standards, and FAR Part 31:

1. Disclosed practices not compliant with CAS;
2. Disclosed practices not compliant with FAR;
3. Actual practices of estimating costs not compliant with CAS;
4. Actual practices of estimating costs not compliant with FAR;
5. Actual practices for estimating costs not compliant with the practices disclosed in the Disclosure Statement;
6. Actual practices for accumulating or reporting costs not compliant with CAS rules and regulations;
7. Actual practices for accumulating or reporting costs not compliant with FAR; and
8. Actual practices for accumulating or reporting costs not compliant with the practices disclosed in the Disclosure Statement.

What Are the Penalties of CASB Disclosure Statement Inadequacies or Noncompliance?

Inadequate formatting of CASB DS-1 greatly hampers the progress of a contractor’s Government Contracts program from an operational, accounting, and billing standpoint. To ensure all contract estimates, procurements, and billings are conducted properly under CAS rules, regulations, and standards, and FAR part 31, the accounting practices of Full-CAS covered contracts or companies/business segments are audited via initial Disclosure Statement audit.

Such audits will only be initiated once the CFAO has deemed the CASB DS-1 to be adequate. Delays in Disclosure Statement adequacy translate to delays in Disclosure Statement audits, and delays in Disclosure Statement audits degrade both contractor and Government confidence in the contractor’s cost accounting reliance.  It can also result in delayed contract award, in addition to unnecessary resource consumption on both parties to resolve inadequacies that can be avoided with upfront diligence.

Penalties for Noncompliance

Depending on the nature of the non-compliance there can be a variety of penalties for noncompliance. In its simplest sense, the U.S. Government will be entitled to repayment of any material non-compliance if it resulted in increased cost to the Government. If the CFAO determines that noncompliance is material, the contractor is required to submit a description of any accounting practice change needed to bring the practices into compliance, which the auditor will review for adequacy and compliance. If the proposed change is both adequate and compliant, the contractor must submit a cost impact detailing the effect the non-compliance had on all effected CAS covered awards.

The CFAO will evaluate the cost impact and if the result was increased cost to the Government, the CFAO will administer contract and/or billing adjustments, plus applicable fines and interest to repay the amounts due as a result of the noncompliance. Noncompliant cost impacts take time to develop, negotiate, and are a significant burden and expense to both the contractor and the Government to administer. It can require going back years into your historical contract and accounting records to obtain the necessary information to perform a cost impact analysis.

Adding to the risk of CAS non-compliances is the risk of perceived, or actual, False Claim Act (FCA) allegations from the customer.  In many instances, the U.S. Government customer may assert that the contractor was aware, or should have been aware, of the non-compliance and, as such, the Government is entitled to False Claim damages up to treble damages.  In short, CAS non-compliances only come in 2 varieties:  bad and worse.

“CAS noncompliance” is among the short list of bad words you never want associated with your organization; right along with false claims and defective pricing – words that often get attached to CAS noncompliance if the Government feels the noncompliance was purposeful.  Be diligent upfront and ensure you can demonstrate compliance with CAS.

Defining CAS Coverage and What Constitutes a CAS Covered Contract

In its simplest sense, a CAS covered contract is any U.S. Government contract that does not meet an exemption from the Cost Accounting Standards (CAS) and includes the CAS clause (FAR 52-230-2 Cost Accounting Standards). While that sounds simple, what is not is navigating whether a contract meets CAS exemptions, and if it does not, knowing which CAS coverage is applicable to the contract; modified CAS or full CAS.

CAS applicability is one of the most common challenges faced by a growing U.S. Government contractor. Once a contractor has triggered CAS through the award of a CAS covered contract, its compliance profile changes significantly with increased cost accounting requirements and audit interest from the Defense Contract Audit Agency (DCAA).

Compliance with CAS can be complex and confusing to many Contractors, so it is crucial for Contractors to understand CAS applicability and determine whether they have any CAS Covered Contracts. It is also crucial, based on the type of CAS Coverage, to understand CAS implications in their organization. Many contractors lack the formal procedures and internal controls to effectively track their US Government Contract awards against CAS Coverage. This can result in major compliance challenges downstream that are expensive to untangle.

CAS Applicability & Exemptions

CAS is applicable to negotiated contracts greater than $2M, unless the contract meets one of the following CAS exemptions:

• Contract is less than $7.5M and the contractor is not currently performing under any CAS Covered contracts of $7.5M or greater at the time of award
• Contract is awarded to a small business
• Contract is awarded under sealed-bid procedures
• Award is firm-fixed price (FFP) contract for commercial item(s)
• Price is set by law or regulation
• Award is a firm-fixed-price contract awarded on the basis of adequate price competition without submission of cost or pricing data
• Awardee is a foreign concern (must comply with CAS 401 and 402 only)
• If none of the above CAS exemptions apply, then it is a CAS Covered Contract subject to either modified CAS-coverage or full CAS-coverage. This $7.5M award is often referred to as a “trigger contract”. Upon triggering CAS, all future awards greater than the Truthful Cost or Pricing threshold (currently $2M) are then subject to CAS unless they meet an exemption.

The trigger contract often results in contractors amassing multiple CAS covered contracts. Losing track of which contracts are subject to CAS and which are not is significant, as the U.S. Government has certain rights under CAS covered contracts that it does not under non-CAS covered contracts. This includes retroactive price adjustments should a contractor not comply with CAS.

CAS Coverage – Modified vs. Full CAS Coverage

Modified CAS Coverage is triggered when a contractor receives a CAS Covered Contract greater than $7.5M but less than $50M in its current cost accounting period. Modified CAS Coverage requires the contractor to comply with four of the 19 standards (CAS 401, 402, 405, and 406).

Full CAS Coverage, which requires compliance with all 19 standards, is triggered when either:

A.     A contractor receives a CAS covered award over $50M in the current cost accounting period; OR

B.     A contractor received an accumulation of CAS covered awards in the previous cost accounting period that total $50 or more.

As required by cost accounting standards, a CASB disclosure statement is required if full CAS coverage applies (and in some cases, modified coverage). Disclosure Statements are a form whereby a contractor discloses its cost accounting practices, for which it is required to demonstrate compliance throughout the life of its active CAS covered awards.

CAS Exemptions Flowchart

A CAS coverage flowchart that illustrates applicability, coverage, exemptions, and disclosure statement requirements can be found here.

A common misconception held by many contractors is that a contractor is either CAS-covered or not CAS-covered. While a simple way to think of it, it is important to recognize that CAS applies at a contract level, not at a contractor level. Every U.S. Government contract should be evaluated on its date of award to determine if and how CAS applies.

How Long Does CAS Coverage Last?

The CAS applicability on the date of the contract award is the applicability for the life of the contract. Hence, some contractors can have a combination of exempt, modified CAS, and full CAS covered contracts.

The CAS status of a contract or subcontract remains the same throughout its life. For example, if a contractor holds a contract subject to Modified CAS Coverage, and then receives a contract subject to Full CAS Coverage, the initial contract does not become subject to Full CAS, and remains subject to Modified CAS.

Making Cost Accounting Practice Changes Under CAS

Once CAS is triggered, contractors must monitor its cost accounting practices for any changes as they require disclosure to the U.S. Government pursuant to FAR 52.230-3 Disclosure and Consistency of Cost Accounting Practices. Contractors that fail to realize this significant requirement, applicable under both modified and full CAS covered contracts, may make a change that results in increased cost to the U.S. Government for which it will not pay.

Generally, the U.S. Government will not pay increased costs due to changes in a contractor’s cost accounting practices. One of the easiest, and expensive, ways to get in trouble with CAS covered contracts is to make changes to cost accounting practices that seem benign but change the way the U.S. Government participates in cost.  Examples of common changes in cost accounting practice that are natural for a contractor but impact cost allocation include:

• Changing the treatment of a cost from indirect to direct (e.g., program management historically treated as overhead, but growth has resulted in a need to have dedicated program managers who now charge direct)
• Changing the treatment of a cost from direct to indirect
• Facilities allocation changing from headcount to square footage
• Home office allocations change from revenue to 3 factor formula

All changes to cost accounting practice are likely to result in some cost impact to CAS covered contracts. Changes to cost accounting practice require disclosure prior to adopting them. In most instances the U.S. Government will require a contractor to submit a cost impact proposal, either through a Detailed Cost Impact (DCI) or General Dollar Magnitude (GDM).

Not realizing this requirement can result in significant cost impacts to the U.S. Government whereby a contractor may have to pay large sums of money back to the U.S. Government for years of undisclosed changes in cost accounting practice. This is a massive difference from commercial and non-CAS covered contracts. In its simplest sense, once a contractor is CAS covered, it really needs cooperation in order to change its cost accounting practices.

Monitor Your Contracts and Protect Your Organization!

If you are a contractor, it is important to evaluate every award for CAS applicability and maintain a CAS tracker so that you know the CAS applicability at the contract level. And it is something every executive team, not just accounting and contracts, needs to be familiar with. Changes in organizations bring changes to cost accounting; and those changes need to be considered prior to making the change. If the entire organization is not aware of these risks, it can easily result in changes that cost the contractor money.

If a contractor has received a contract containing the Allowable Cost and Payment clause (FAR 52.216-7), the clause requires preparation of an Indirect Cost Rate Proposal (ICRP).  The clause is applicable to all cost-type contracts.  The proposal also goes by the following industry names “Incurred Cost Proposal” (ICP) and “Incurred Cost Submission” (ICS).  The proposal is prepared using the Defense Contract Audit Agency (DCAA) Incurred Cost Electronic (ICE) Model (DCAA > Customers > Checklists & Tools > ICE Model) and is due  six months after the contractor’s fiscal year end.

Under cost-type contracts, contractors utilize a provisional billing rate throughout the year.  The intention of the Incurred Cost Proposal is to true-up a contractor’s provisional billing rate to actual under its cost-type contracts. The actual rate is compared to what was billed and the calculated over/underbill is either credited back to the government or invoiced, respectively.

The proposal includes a series of Schedules from Schedule A through O, including Supplemental Schedules.  Some of the more impactful Schedules Include Schedule A Summary of Indirect Rates, Schedule H Summary of Direct Contract Costs, and Schedule I Cumulative Costs Claimed & Billed.

Upon completion, the Incurred Cost Proposal is submitted to DCAA and your Administrative Contracting Officer (ACO) for audit.  DCAA uses an Incurred Cost Submission Adequacy Checklist (DCAA > Customers > Checklists & Tools > Incurred Cost Submission Adequacy Checklist) to determine if the submission is adequate for audit.  Upon acceptance, DCAA may audit the submission for compliance including accuracy of rate calculations and applications.  This is the most frequent audit performed by DCAA year over year.  Their findings routinely center on unallowable costs pursuant to FAR 31 and exceptions to exceptions to cost accounting practices used by contractors.

The Defense Contract Audit Agency (DCAA) maintains multiple audit programs to monitor and verify government contractor compliance.  DCAA audit programs may occur before, after, or during contract performance through Preaward Audits, Postaward Audits, and Contractor Business System Audits. DCAA is chartered with identifying and evaluating all activities that contribute to or impact proposed or incurred costs of Government contracts.

DCAA’s major areas of emphasis include: DFARS Business Systems such as Accounting Systems, Estimating Systems, and Purchasing Systems; management policies and procedures; accuracy of contractor forward pricing and incurred cost representations; adequacy and reliability of records and accounting systems; and contract compliance with contractual provisions having accounting or financial significance such as the FAR Cost Principles (FAR Part 31), the Cost Accounting Standards (CAS), and clauses pertaining to the Truth in Negotiations Act (TINA).

The timing of DCAA’s audit will depend on the risk profile of your organization and its contracts.  DCAA uses a variety of risk assessment tools to determine which areas of regulatory risk warrant audit attention.  In addition, Contracting Officers have very broad discretion as to where audit resources should be deployed.

For an introduction to incurred cost proposals, please read What is an Incurred Cost Proposal?

There are six main steps to an incurred cost proposal:

1. Gather input data from contractor accounting system, and project files
2. Input data into the rate model
3. Ensure reconciliation of the model to cost data
4. Analyze resulting over/under billings by contract
5. Prepare Incurred Cost Proposal Checklist to ensure adequacy
6. Prepare and submit the Incurred Cost Submission

1. Gathering Input Data

There are many pieces of data needed to complete an incurred cost proposal. The main source of information is the contractor’s cost accounting data. For indirect costs, the right level of detail to identify the contractor’s cost pool accumulation is needed. Some organizations have separate accounts for each cost pool, while others may utilize cost centers to differentiate between overhead pools, for example. For direct costs, a project ledger that reports costs at the level specified within each given contract (usually at the Contract Line-Item Number, or CLIN, level), along with B&P and IR&D costs is needed.

There are a handful of other data sources and reports required for completion of the incurred cost proposal. These are also identified by schedule, in the next section:

• Billing files by contract that show cumulative bill amounts
• Labor distribution(s) for time & material type projects
• Fixed asset schedules to support Net Book Value of assets
• Listing of all subcontracts issued under government contracts
• Organizational or accounting changes that impact the accumulation of direct and indirect costs and/or allocation of indirect costs
• Additional information required by the Contracting Officer, or requested by the DCAA auditor 

2. Inputting Data into the Incurred Cost Proposal

The first objective of the Incurred Cost Proposal is to calculate the actual indirect rates expended during the cost accounting period. Calculation of the indirect rates using the standard ICE model (Incurred Cost Electronically), is most accepted by the Defense Contract Audit Agency (DCAA). The ICE model is an excel workbook with separate Schedules for each rate pool, and subsequent calculations. The following table illustrates each schedule and its purpose within the Incurred Cost Proposal.

Incurred Cost Submission Template

3. Reconciliation of the Incurred Cost Proposal to Cost Data

In addition to the schedules described above, it is very useful to include a separate worksheet that lists all the expense accounts, which rate pools/bases they map to, and subsequent reconciliation to the rate schedules. Contractors may also want to consider including a “Total Cost Reconciliation”, which shows that all contractors books of accounts reconcile to costs used in the rate model. Effectively, the contractor’s expense Trial Balance, plus or minus certain adjustments and unallowables should equal the total costs in the model.

Expert Tip: any adjustments to rate pools should be accompanied with a footnote explaining the reasonings behind them. The most common adjustments are FAR 31 unallowable costs and other common DCAA questioned costs. The footnote may even be a reference to a separate calculation schedule (e.g., Cost of Ownership). This best practice demonstrates understanding of FAR cost accounting.

4. The Annual “True-up”

The main objective of the Incurred Cost Proposals is to calculate the over or underbill positions the contractor is in for each contract, to understand what it owes or is owed by the government or its prime contractors. As described above, this amount is calculated in Schedule I.

Once the incurred cost proposal has been filled out and reconciled, it is important for the contractor to return to Schedule I and review its position on all contracts and subcontracts to ensure that there are no surprisingly over or underbilled contracts, and develop informed billing strategies going forward. For example, if a given contract has a large unanticipated overbill, it might be prudent to double check the data input source for the correct information, or perhaps to stop claiming indirect costs on future bills.

Expert Tip: In addition to Schedule I, it is best practice to compare the current calculated rates to the latest provisional billing rates and previous final rates. This will inform the contractor not only how the rates changed, but provide an understanding of which accounts or direct cost elements and contracts are the main drivers of change. Having this information in your back pocket will allow you to answer auditors with confidence when they ask why certain rates changed materially.

5. Prepare Incurred Cost Proposal Checklist to Ensure Adequacy

Prior to submission of the Incurred Cost Proposal or ICE model, the contractor should fill out a DCAA ICS Adequacy Checklist as a final internal review, and include it with the submission. Before the actual Incurred Cost Audit, the auditor will perform this preliminary adequacy check of the Incurred Cost Proposal that is submitted to ensure the model is adequate for review.

While the auditor will complete this checklist themselves, performing this exercise prior to submission is not only a tool for quality control, but may demonstrate to DCAA that the contractor has an understanding of the review process.

6. Final Preparation and Submission

Once the schedules have been completed and reconciled, and Schedule I has been reviewed for accuracy, the contractor is ready to begin the submission process. The Incurred Cost Proposal is typically included as an attachment to an email addressed to the assigned DCAA auditor. It is prudent to request confirmation of receipt of the submission from the government to remove liability of delinquency in the timing of your submission.

If your Incurred Cost Audit results in no findings, DCAA will issue a formal letter addressed to the certifier in Schedule N, with the final rates.

We understand that preparation and submission of Incurred Cost Proposals is challenging. Please contact us here if you have any general questions, are in need of indirect rate services, or need Incurred Cost Audit support.

If you have a US Government contract containing the Allowable Cost and Payment clause (FAR 52.216-7) you are required to submit an annual Incurred Cost Proposal. This clause applies mostly to cost-reimbursable contracts, such as Cost Plus Fixed Fee (CPFF) and Time and Material (T&M). An Incurred Cost Proposal, also known as an Incurred Cost Submission (ICS), or Indirect Cost Rate Proposal (ICRP), takes all the cost accounting data from a contractor’s expense accounts to calculate the actual indirect rates for the cost accounting period (the fiscal year).

Under cost-type contracts, contractors utilize a provisional billing rate throughout the year.  The intention of the Incurred Cost Proposal is to true-up a contractor’s provisional billing rate to actual under its cost-type contracts. The actual rate is compared to what was billed and the calculated over/underbill is either credited back to the government or invoiced, respectively.

As required by the Federal Acquisition Regulation (FAR), Incurred Cost Submissions must be submitted within 6-months of the contractor’s fiscal year end. For example, a contractor who’s fiscal year is the calendar year, must submit its Incurred Cost Proposal by June 30^th of the following year. While it is not recommended, contractors may request an extension for submission of their rates, which may or may not be honored by DCAA.

The proposal includes a series of Schedules from Schedule A through O, including Supplemental Schedules.  Some of the more impactful Schedules Include Schedule A Summary of Indirect Rates, Schedule H Summary of Direct Contract Costs, and Schedule I Cumulative Costs Claimed & Billed. Please read How to Prepare and Submit an Incurred Cost Proposal for more details on the preparation and submission process.

Upon completion, the Incurred Cost Proposal is submitted to DCAA and your Administrative Contracting Officer (ACO) for audit.  DCAA uses an Incurred Cost Submission Adequacy Checklist (DCAA > Customers > Checklists & Tools > Incurred Cost Submission Adequacy Checklist) to determine if the submission is adequate for audit.  Upon acceptance, DCAA may audit the submission for compliance including accuracy of rate calculations and applications.  This is the most frequent audit performed by DCAA year over year.  Their findings routinely center on unallowable costs pursuant to FAR 31 and exceptions to exceptions to cost accounting practices used by contractors. It is therefore crucial to spend extra time reviewing accounting for FAR allowability, FAR 31 expressly unallowable costs, and other common DCAA questioned costs.

Upon resolution of any findings, DCAA will issue a formal letter establishing the final rates for that year. Based on the results of the Incurred Cost Proposal, final bills or vouchers to the government may be prepared to close out physically complete contracts listed in the Incurred Cost Proposal.

Understanding, preparing, and submitting Incurred Cost Proposals can be challenging. Please contact us here if you have any questions, or need help on your indirect rates, and we will be happy to assist you.