In federal contracting, accuracy and transparency at every level are paramount. If you have a federal contract containing the Allowable Cost and Payment clause, you’ll need to demonstrate accuracy and transparency by submitting an annual incurred cost proposal. Preparing and submitting these documents can be a daunting task, but we want to help demystify the process of developing compliant incurred cost proposals. Start with these tips.
Importance of Developing Compliant Incurred Cost Proposals
An incurred cost proposal (ICP) is a comprehensive report that federal contractors with cost-reimbursable contracts must submit annually to federal agencies. These proposals serve as the mechanism by which contractors request reimbursement for costs incurred under U.S. Government contracts. They provide a detailed snapshot of all allowable, incurred, and allocated costs, thereby directly influencing the final rates used to price future government proposals. Without an accurate ICP, contractors risk significant losses or even contract termination.
Understanding the Regulatory Framework
The Federal Acquisition Regulation (FAR) and Defense Contract Audit Agency (DCAA) determine guidelines for ICPs. The FAR establishes policies for the acquisition of supplies and services, while the DCAA ensures that those policies are adhered to by conducting audits.
Compliance with the 18 Cost Accounting Standards (CAS) is a must to pass DCAA audits. These standards, administered by the Cost Accounting Standards Board (CASB), standardize costs. Missteps in interpreting and applying these regulations can lead to costly penalties and loss of future opportunities.
Preparing to Develop Your ICP
Before developing compliant incurred cost proposals, ensure that your financial systems and records are compliant and up to date. Start by maintaining an organized accounting system, segregating direct and indirect costs, allocating these costs appropriately, and keeping detailed timekeeping and labor records. Ensuring these foundational elements are in place will help streamline the ICP process and reduce the risk of compliance issues later on.
Creating an Incurred Cost Proposal
Developing compliant incurred cost proposals requires thorough and meticulous attention to detail throughout all process stages.
Data Collection and Analysis
Begin by collecting data from your financial and accounting records. You must have a thorough paper trail of all costs incurred under government contracts, including direct and indirect costs, labor costs, material costs, and other elements specific to your contract.
Allocation and Rate Development
Using the data collected, allocate your indirect costs using an appropriate base, such as direct labor hours or direct labor dollars. This allocation process forms the basis for developing indirect cost rates, including fringe benefits, overhead, and general and administrative expense rates.
Documentation Preparation
Each cost element must be adequately documented. Documentation may include invoices, timesheets, and additional proof of incurred costs. All documentation should be organized and cross-referenced to the cost element it supports.
Report Preparation and Review
Once you’ve analyzed your data, developed rates, and gathered documentation, it’s time to prepare the report. Consistency and clarity in your report are critical. Highlight any unusual or non-recurring costs and provide explanations for significant rate fluctuations.
Submission
Check the submission requirements outlined in your contract. Ensure that all necessary forms are included and the proposal is free from any red flags that may trigger a DCAA audit.
Common Pitfalls
ICPs are often rejected due to common mistakes, such as inadequate or inconsistent documentation, misinterpretation of FAR/DCAA requirements, and missed deadlines. To mitigate these risks, engage in extensive review and cross-checking. One of the biggest mistakes contractors make is rushing the ICP process, leading to errors that could have been prevented with a more thorough review.
Stay Prepared
A smart way to ensure that you’re submitting compliant incurred cost proposals is to work with the experts at GovCon. For over 20 years, GovCon has helped hundreds of clients navigate the complex world of DCAA compliance, streamline their operations, pass audits, and win contracts. We use our real-world experience to simplify your process, reduce the cost of compliance, and improve accuracy. GovCon’s team of experts can prepare or review your annual year-end Incurred Cost Proposal to ensure that your claims are submitted correctly and up to all codes and regulations. We’d love to show you how GovCon can simplify DCAA compliance. Contact us any time.