What is an Incurred Cost Proposal?

Updated March 18, 2024. Originally Published April 12, 2021.

Incurred Cost Proposals are due within 6 months following the end of a contractor's fiscal year. For many government contractors, the due date is June 30th. In this article we’ll review the basics of this annual report and how it is used to true up final actual indirect rates vs. the billing rates government contractors use to invoice during the year:

What is an Incurred Cost Proposal?

An Incurred Cost Proposal is formally known as a Final Indirect Cost Rate Proposal. Its purpose is to determine the contractor's final indirect cost rates for the year.

Government contractors subject to FAR 52.216-7 are required to submit an adequate final indirect cost rate proposal within six months following the contractor’s fiscal year end. Flexibly priced contracts are billed using provisional indirect rates during the fiscal year. The annual final indirect cost rate proposal is the basis for determining final indirect rates, and thereby quantifying any difference between provisionally billed costs and the contractor’s actual cost experience.

This final indirect cost rate proposal is also commonly known as an:

• Incurred Cost Proposal (ICP)
• Incurred Cost Submission (ICS)
• ICE Report, for DCAA’s ICE model (Incurred Cost Electronically) submission template for the final indirect cost rate proposal

When is an Incurred Cost Proposal required?

FAR 42.705 requires that final indirect cost rates be determined annually. To accomplish this, FAR 52.216-7, the Allowable Cost and Payment Clause, establishes the requirement for the contractor to submit a final indirect cost rate proposal for each fiscal year. For contracts containing FAR Clause 52.216-7, an Incurred Cost Proposal must be submitted annually for the period of performance of the contract.

The Allowable Cost and Payment Clause applies to flexibly priced time and materials (T&M) and cost-reimbursement type contracts. Many SBIR Phase II grants, as well as some subcontracts, include the final indirect cost rate proposal requirement.

Contractors invoice actual direct costs incurred on cost-reimbursement type contracts during the period covered by the billing. Contractors use an estimate, however, to bill indirect costs on a provisional basis. While billing rates should be close to the anticipated final indirect rates, the actual indirect rates will not be known until the contractor’s year has ended and all costs are recorded in the books of the contractor.

Once final indirect rates are determined, actual contract costs allocable to the contract are compared against contract costs billed by the contractor during the year using provisional indirect rates. That variance must ultimately be settled. If your indirect costs for the year are lower than what you invoiced, you will owe that overage back to the government. Unlike fixed-price contracts, if your actual allowable costs are higher than your provisionally billed rate, the government may owe you money.

If you fail to submit an Incurred Cost Proposal within 6 months following the due date, DCAA may recommend a unilateral determination of your final indirect cost rates or contract costs.

What information is required in an Incurred Cost Submission?

FAR 52.216-7(d)(2)(iii) sets forth the specific information required to be included in an adequate final indirect cost rate proposal. The FAR criteria are presented on required schedules:

Required Schedules
Schedule A	Summary of Indirect Expense Rates
Schedule B, C, D	Indirect Cost Pools
Schedule E	Claimed Allocation Bases
Schedule F	Cost of Money
Schedule G	Booked and Claimed Direct Costs
Schedule H	Direct Costs by Contract at Claimed Rates
Schedule H-1	Government Participation by Pool
Schedule I	Cumulative Allowable Cost Worksheet
Schedule J	Subcontract Information
Schedule K	Hours and Amounts on T&M Contracts
Schedule L	Payroll Reconciliation
Schedule M	Accounting/Organization Changes
Schedule N	Certificate of Indirect Costs
Schedule O	Contract Closing Information

Required Schedules
Schedule A: Summary of Indirect Expense Rates
Schedule B, C, D: Indirect Cost Pools
Schedule E: Claimed Allocation Bases
Schedule F: Cost of Money
Schedule G: Booked and Claimed Direct Costs
Schedule H: Direct Costs by Contract at Claimed Rates
Schedule H-1: Government Participation by Pool
Schedule I: Cumulative Allowable Cost Worksheet
Schedule J: Subcontract Information
Schedule K: Hours and Amounts on T&M Contracts
Schedule L: Payroll Reconciliation
Schedule M: Accounting/Organization Changes
Schedule N: Certificate of Indirect Costs
Schedule O: Contract Closing Information

In addition to these required schedules, several optional schedules may be requested. Make sure that your Incurred Cost Proposal file includes an index of schedules.

Maintaining an adequate accounting system is vital to producing this report. Supporting data and documentation is also required to demonstrate the allowability and allocability of costs incurred. For selected cost elements, such as travel costs, FAR 31.205 specifies documentation required to support allowability.

DCAA provides an Excel document known as the ICE model to give contractors an electronic template for completing the required schedules. The ICE model is not required; What is required is an adequate submission including all schedules as specified in FAR 52.216-7.

Contractors using ICAT with QuickBooks can generate all required schedules with their cost data automatically populated directly from their accounting system, then export the report to Excel for submission. ICAT’s Incurred Cost Proposal Workbook complies with the requirements set forth in FAR Clause 52.216-7 for an adequate submission. Instead of manually logging data into the ICE templates, the appropriate fields are populated and crosslinked across schedules, satisfying the requirements while simplifying the report preparation process and reducing the risk of error.

Failure to provide complete information will result in an inadequate submission. Contractors risk penalties for manipulating costs or including expressly unallowable costs in their incurred cost proposal.

After preparing your Incurred Cost Proposal, it is a good idea to perform a self-assessment before submitting your ICP. DCAA’s Guide for Determining Adequacy of Contract Incurred Cost Proposal is a checklist to help you review your submission for adequacy.

How do you submit your Incurred Cost Proposal?

DCAA set up a new Contractor Submission Portal (CSP) to make it easier for government contractors to submit their Incurred Cost Proposal. The CSP is a secure portal on the Procurement Integrated Enterprise Environment (PIEE) platform already used by many contractors. With the CSP, contractors can upload, as well as edit and withdraw, proposal files to ensure DCAA has your current, correct file.

This Incurred Cost Proposal submission option eliminates potential ambiguities and errors that come with submitting your ICP by email. The CSP enables contractors to:

• Easily upload large Incurred Cost Submission files
• Receive formal notification validating the submission was received
• Avoid delays or delivery problems from bounced emails, spam filters, and timestamp issues
• Benefit from centralized file storage and version control

Do you have to use the CSP? DCAA says it is not mandatory, but it’s highly encouraged. (See above advantages!)

For more on the Contractor Submission Portal, visit DCAA’s Website.

Need Assistance?

Reach out if you need help preparing your Incurred Cost Proposal.