Incurred Cost Submissions: Requirements for Cost-Type Contractors

Federal cost-type contracts obligate contractors to submit detailed annual incurred cost proposals that reconcile estimated costs used during contract performance against actual costs incurred. These submissions are the primary mechanism through which the government audits contractor expenditures, settles final indirect rates, and recovers any overbillings. Understanding the regulatory triggers, submission timing, content requirements, and audit implications is essential for any contractor operating under cost-reimbursement contract vehicles.

Definition and scope

An incurred cost submission (ICS), sometimes called an incurred cost proposal, is an annual report that documents all costs a contractor actually incurred during a fiscal year on cost-type federal contracts. The requirement originates in Federal Acquisition Regulation (FAR) 52.216-7, titled "Allowable Cost and Payment," which is incorporated into cost-reimbursement contracts by default. Under this clause, contractors must submit a final indirect cost rate proposal within 6 months of the close of each fiscal year.

The scope of an ICS covers all direct and indirect costs charged to government contracts during the applicable fiscal year, including overhead pools, general and administrative (G&A) expenses, fringe benefit pools, and any other indirect cost pools used in the contractor's accounting structure. The submission applies specifically to contractors that hold flexibly priced contracts — including cost-plus-fixed-fee (CPFF), cost-plus-award-fee (CPAF), cost-plus-incentive-fee (CPIF), and time-and-materials (T&M) contracts.

Fixed-price contractors generally are not subject to the ICS requirement unless their contracts include cost-reimbursable line items or they operate under an indefinite-delivery indefinite-quantity (IDIQ) vehicle with cost-type task orders.

The Defense Contract Audit Agency (DCAA) audits the majority of ICS filings for Department of Defense contractors. DCAA's audit program evaluates whether claimed costs comply with cost accounting standards (CAS) and FAR Part 31 allowable cost principles.

How it works

The ICS process follows a structured sequence from submission through rate settlement:

1. Fiscal year close — The contractor closes its books for the fiscal year. The 6-month submission window begins on the last day of the fiscal year (e.g., a December 31 year-end produces a June 30 deadline).
2. Proposal preparation — The contractor compiles the required schedules using DCAA's Model Incurred Cost Electronically (ICE) tool, which contains 19 standard schedules covering all pools, direct costs, and contract-level data.
3. Submission to the Administrative Contracting Officer (ACO) — The completed proposal is submitted to the ACO at the cognizant contract administration office, typically the Defense Contract Management Agency (DCMA) for DoD contractors.
4. Adequacy review — DCAA performs an adequacy check within 60 days of receipt, per DCAA guidance, to determine whether all required schedules are present and internally consistent. An inadequate submission restarts the submission clock.
5. Audit — DCAA conducts a full incurred cost audit, which may span 12–36 months depending on contractor size, risk profile, and DCAA workload.
6. Rate negotiation and settlement — The ACO negotiates final indirect cost rates with the contractor. Settled rates replace the billing rates used during performance.
7. Contract closeout — Once rates are settled for all open years, individual contracts can proceed to closeout.

The Defense Contract Audit Agency maintains a backlog metric that it reports publicly; in prior years, this backlog has encompassed billions of dollars in unaudited costs, underscoring why timely submission is operationally critical.

Common scenarios

Scenario 1 — Late submission penalty risk. FAR 52.216-7(d)(2) authorizes the contracting officer to unilaterally establish final indirect cost rates if a contractor fails to submit within the required timeframe. Unilaterally set rates may not reflect the contractor's actual cost structure, resulting in permanent underpayment of indirect costs.

Scenario 2 — Multiple fiscal years simultaneously open. A contractor that missed a prior-year submission may face 2 or 3 open fiscal years under audit simultaneously. DCAA resources each audit year separately, and unsettled rates on older years block closeout of contracts that span those years, delaying final payment of any retained amounts.

Scenario 3 — Subcontractor cost passthrough. Prime contractors that flow cost-type subcontracts must include subcontractor costs in the applicable direct cost schedules and obtain subcontractor ICS data sufficient to support audit. FAR 52.215-2 (Audit and Records — Negotiation) preserves the government's access to subcontractor records in this context.

Scenario 4 — Forward pricing rate agreement alignment. Contractors holding forward pricing rate agreements (FPRAs) must reconcile the rates used for forward pricing against the actuals disclosed in the ICS. Material divergence can trigger a reopening of pricing on affected contracts.

Decision boundaries

Two critical distinctions govern whether and how a contractor must comply:

Cost-type vs. fixed-price distinction. Contractors working exclusively on firm-fixed-price (FFP) contracts have no ICS obligation under FAR 52.216-7 because FFP contracts do not reimburse costs — the price is final regardless of actual cost incurrence. A contractor with even a single active cost-reimbursement contract triggers the annual filing requirement for that fiscal year.

Exemption thresholds. FAR 42.705-1 permits the ACO to waive the audit of a contractor's final indirect cost rates where the total amount subject to audit is below a threshold established in the contract administration office's procedures. In practice, low-dollar contractors may receive rate agreements without full audit, but this waiver is at the ACO's discretion and is not guaranteed.

Billing rate vs. final rate. During contract performance, contractors bill at provisional (estimated) indirect rates. The ICS establishes what the final rates actually were. If final rates are lower than provisional billing rates, the contractor must refund the difference. If final rates are higher, the government pays the additional amount — provided the costs are allowable under FAR Part 31. This asymmetry makes accurate provisional rate-setting a risk management priority for cost-type contractors navigating the broader federal acquisition regulation framework.

The government contractor authority resource index provides orientation to related compliance areas that intersect with incurred cost requirements, including accounting system adequacy and contractor invoicing and payment obligations that run throughout contract performance.