The Incurred Cost Submission & Final Indirect Rate Settlement

At a Glance

Who it applies to

Every contractor with a contract containing FAR 52.216-7 — cost-reimbursement and other flexibly priced contracts

The deadline

Within six months after the end of the contractor's fiscal year, under FAR 52.216-7(d)(2)

Governing authority

FAR 52.216-7(d) (submission), FAR 42.705 (final indirect cost rates), FAR 42.703-1 (one agency responsible)

What it produces

Negotiated final indirect cost rates for the year, memorialized in a rate agreement, plus a contract closeout path

The stakes

Late or inadequate submissions delay closeout, freeze fee, and can lead to a unilateral rate determination against you

What It Is

The incurred cost submission is the annual reckoning. The clause at FAR 52.216-7, Allowable Cost and Payment — the clause that makes a cost-reimbursement contract work — requires the contractor to submit an adequate final indirect cost rate proposal to the contracting officer and the cognizant auditor within six months after the end of its fiscal year, together with supporting cost data. What it contains is a set of schedules, familiar to practitioners as the DCAA 'Incurred Cost Electronically' (ICE) model: a summary of claimed indirect rates, the computation of each pool and base, a reconciliation to your books, a schedule of direct costs by contract, a schedule of cumulative direct and indirect costs claimed and billed by contract, a listing of contracts and subcontracts, a schedule of expressly unallowable costs, and executive compensation data. It is signed with a certification that to the best of the signer's knowledge and belief all costs included are allowable. From there, the government reviews or audits it — many small submissions are risk-assessed and accepted without a full audit, others are examined in detail — and the cognizant federal agency official negotiates final indirect cost rates under FAR 42.705, memorializing them in a written indirect cost rate agreement. Those final rates are then applied to the year: each interim voucher billed on provisional rates is trued up, an over-recovery becomes a contract debt and an under-recovery becomes an amount you can bill, and the contracts of that year become eligible for closeout. Two structural points matter. FAR 42.703-1 assigns one agency — the cognizant federal agency — to establish final rates for all your government contracts, so you negotiate once rather than agency by agency. And FAR 42.708 offers a quick-closeout procedure that lets a contracting officer settle indirect costs for a specific physically complete contract before final rates for the year are established, which is often the fastest route to releasing withheld fee on a small contract.

When It Applies

• Annually, within six months of your fiscal year end, for every year in which you had a contract containing FAR 52.216-7.
• As the trigger for truing up every interim voucher billed on provisional rates that year.
• As a prerequisite to contract closeout — a cost-type contract generally cannot close until final rates for its performance years are settled.
• When you want to release fee withheld under FAR 52.216-8 or the contract's fee-withholding terms.
• When you use the FAR 42.708 quick-closeout procedure on a physically complete contract ahead of the full rate settlement.

Key Features

The SDVOSB Angle

For a small SDVOSB the incurred cost submission is less an audit risk than a cash and closeout problem. The typical cost-type contract withholds a portion of fee until final rates are settled, so a firm that lets three fiscal years of submissions pile up is sitting on unreleased fee across every one of those contracts — real money, held because a set of schedules wasn't filed. Backlogs also compound: reconstructing a fiscal year's pools, bases, and unallowable-cost identification two or three years after the fact is far more expensive than producing them from a clean set of books in the ordinary course, and the odds of a costly error rise with every month. Three practical moves. First, treat the six-month deadline as a hard operating milestone in the same category as your tax return, and calendar it the day your fiscal year closes. Second, use the DCAA ICE model as your template rather than inventing a format — submitting in the expected shape is the cheapest way to be found adequate on the first pass. Third, on small physically complete contracts, ask the contracting officer about the quick-closeout procedure under FAR 42.708; it can release withheld fee without waiting for the full-year settlement, which matters far more to a firm with a $2 million revenue base than to a large prime. Finally, remember the certification: the submission is signed, so the discipline of segregating unallowable costs during the year is what makes that signature safe.

How to Comply

1. Calendar the FAR 52.216-7(d)(2) six-month deadline the day your fiscal year closes, and work backward from it.
2. Use the DCAA Incurred Cost Electronically (ICE) schedule set as your template so the submission is found adequate on the first review.
3. Reconcile claimed costs to your general ledger and to your billed amounts, contract by contract — the reconciliation schedules are where inadequacy findings originate.
4. Include the schedule of expressly unallowable costs; omitting it is both an adequacy problem and a penalty exposure.
5. Have the certification signed by an individual with authority, only after the unallowable-cost scrub is complete.
6. Track the resulting variance between billed and final rates and settle the debt or bill the underrecovery promptly.
7. Ask about quick closeout under FAR 42.708 for physically complete contracts to release withheld fee early.

Watch Out For

• Missing the six-month deadline and letting submissions stack up across fiscal years — the backlog compounds cost and error risk.
• Filing an incomplete proposal and assuming the clock stopped; an inadequate submission is returned and you are still late.
• Forgetting that fee withheld on cost-type contracts stays withheld until rates are settled — the delay costs you cash directly.
• Certifying a submission before scrubbing expressly unallowable costs, which is precisely the situation FAR 42.709 penalizes.
• Assuming no audit means no exposure; the government may examine a prior year's submission well after acceptance.
• Letting the government determine rates unilaterally by default because you didn't submit — you then have to challenge a rate someone else set.

Run the Numbers

Frequently Asked

Primary Sources

• FAR 52.216-7 — Allowable Cost and Payment (clause)
• FAR 42.705 — Final indirect cost rates
• FAR 42.703-1 — General (one agency responsible)
• FAR 42.708 — Quick-closeout procedure
• FAR Subpart 42.7 — Indirect Cost Rates

Plain-English reference, not legal, accounting, or tax advice. Cost allowability and accounting determinations are fact-specific, and the FAR, the Cost Accounting Standards, and the statutory dollar thresholds quoted here are amended and escalated for inflation over time. Always read the current FAR text and the cost and payment clauses in your specific contract, confirm the applicable thresholds and your accounting treatment with the contracting officer or cognizant administrative contracting officer, and consult a qualified government-contract accountant or counsel before relying on a cost position, signing a certificate, or submitting a claim.

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