The Incurred Cost Submission: Settling Up Your Actual Indirect Rates

The annual reckoning for indirect rates

All year you bill your government contracts using provisional (estimated) indirect rates, because your real rates cannot be known until the year is over. Once it is over, the government wants the truth: what did your overhead and G&A rates actually come to, and does what you billed line up with what you were entitled to? The document that answers that question is the incurred cost submission — often called the incurred cost proposal, or referred to by the spreadsheet model used to prepare it, the ICE (Incurred Cost Electronically) schedules.

For any small business holding a flexibly-priced contract — cost-reimbursement or time-and-materials — this is the one annual compliance deliverable you cannot skip. It is where your provisional billing gets reconciled to reality, where your final rates get established, and where you settle up: either you are owed money, or you owe it back. This article walks through what the submission is, when it is due, what it contains, and why the quality of your everyday bookkeeping decides whether preparing it takes an afternoon or a month. It is general educational information, not compliance or contracting advice — the requirements are detailed and a DCAA-experienced CPA is worth every dollar here.

Where the requirement comes from and when it is due

The obligation lives in the Allowable Cost and Payment clause (commonly cited as FAR 52.216-7), which appears in cost-type and T&M contracts. It requires you to submit an adequate final indirect cost rate proposal — the incurred cost submission — within six months after the end of your fiscal year. If your books close December 31, the submission is generally due by the end of the following June.

Two words in that requirement carry weight. Final means these are your actual, settled rates for the year, replacing the provisional ones you billed with. Adequate means complete — a submission missing required schedules or that does not reconcile to your accounting records can be deemed inadequate and sent back, which starts a clock ticking on getting it right. Late or inadequate submissions are a real problem, not a paperwork nicety.

What actually goes in it

The submission is a set of interlocking schedules — the ICE model organizes them by letter — but for a small contractor the substance comes down to a handful of things that all have to agree with each other:

• Your actual indirect rates. For each pool (overhead, G&A, and fringe if you break it out), the actual pool cost, the actual allocation base, and the resulting rate. These are the real numbers your provisional rates were standing in for all year.
• The pool and base detail. What costs went into each indirect pool and what made up each base — supported by your general ledger, with unallowable costs clearly excluded from the pools.
• A reconciliation to your financial statements. The total costs claimed have to tie back to your books. This is the schedule that catches sloppy accounting fastest: if your claimed costs cannot be reconciled to your trial balance and financial statements, the submission does not hold together.
• Contract-by-contract billing summaries. For each flexibly-priced contract: what you billed, what the costs were, and the direct/indirect breakdown — which is why accumulating cost by contract through job costing all year matters so much.
• The true-up. Applying the actual rates to each contract and comparing to what you billed at provisional rates, producing the amount owed to you or back to the government on each one.

The theme running through all of it is everything must agree. The rates trace to the pools; the pools trace to the ledger; the ledger reconciles to the financial statements; the contract billings trace to the invoices. An incurred cost submission is really a proof that your accounting system tells one consistent story.

Why it is easy or hard depends entirely on your books

Here is the part that decides whether June is calm or brutal: almost none of the work of an incurred cost submission is new work if your books were built right. Every number it asks for is a number your accounting system should already be tracking all year long:

• Actual pool costs? That is just the year-end balance of your indirect-pool accounts — if you segregated them from day one.
• The allocation base? The year-end total of your direct labor (or whichever base), already in the books.
• Costs by contract? Already accumulated if you have been job-costing each contract as you go.
• Unallowables excluded? Automatic if they live in their own walled-off accounts.
• Reconciliation to financial statements? Trivial if your contract cost accounting and your general ledger are the same system, not two spreadsheets that have to be forced to match.

The contractors who dread the incurred cost submission are almost always the ones whose real cost data is scattered across timesheets, a billing spreadsheet, and a commercial accounting file that was never set up to segregate indirect costs. They spend the spring reconstructing a year of cost accounting under deadline. The contractors who barely notice it are the ones whose everyday books already carry the structure — for them the submission is a report run off data that was correct all along, not a forensic project.

The habits that make it a report, not an ordeal

Preparing an incurred cost submission the easy way is really about what you do the other eleven months:

• Segregate direct, indirect, and unallowable costs continuously, not at year-end, so the pools and base are always right.
• Accumulate cost by contract as you bill, so the contract schedules assemble themselves.
• Close the books every month with a real close process, so December's reconciliation is your twelfth clean close, not your first.
• Keep a defensible trail. A tamper-evident audit log means every claimed cost can be traced to when and how it was recorded — which is exactly what makes a submission survive review.

The bottom line

The incurred cost submission is the moment your accounting system is asked to prove, on the record, that it can produce accurate final indirect rates and reconcile a year of billing to actual cost. It is due six months after year-end, it has to be complete and it has to tie to your books, and it settles the difference between what you billed provisionally and what you actually earned.

You do not pass it by scrambling in the spring. You pass it by keeping books all year that already segregate costs, accumulate them by contract, exclude what they must, and reconcile to your financial statements — so that when June comes, the hardest annual deliverable in small-contractor accounting is mostly a matter of hitting print.

Hosting Books keeps your indirect pools, allocation bases, and per-contract costs accumulating in one reconciled chart of accounts all year, with unallowable costs segregated automatically and every entry preserved in a signed, hash-chained audit log — so the numbers your incurred cost submission needs are already sitting in your books, tied out and traceable.

This article is general educational information about government-contract cost accounting and is not compliance, legal, or contracting advice for your specific situation. The incurred cost submission and its requirements are governed by detailed contract clauses and agency guidance — consult a qualified contract accountant or CPA.