Billing rates during the year
Under the allowable cost and payment clause, until final annual indirect cost rates are established for any period, the government reimburses the contractor at billing rates established by the contracting officer or the cognizant auditor, subject to adjustment when the final rates are established 1.
Final rates after year end
Final annual indirect cost rates and the appropriate bases are established in accordance with FAR subpart 42.7 2. A single agency is responsible for establishing final indirect cost rates for each business unit 3, and those final rates are used for contract closeout for the business unit, unless the quick-closeout procedure is used 4.
The contractor starts the process: it submits a final indirect cost rate proposal to the contracting officer (or cognizant federal agency official) and auditor within the 6-month period following the expiration of each of its fiscal years 5, and it supports the proposal with adequate supporting data 6.
Bids2Bank's Deadlines page records any dated obligation, including an "Other" kind for anything else with a date 7, so the six-month date for each fiscal year can sit beside your bid deadlines.
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The certificate and the penalties
The proposal carries a Certificate of Final Indirect Costs stating that the proposal does not include any costs which are expressly unallowable under applicable cost principles of the FAR or its supplements 8. It is signed by an individual at a level no lower than a vice president or chief financial officer of the business segment that submits the proposal 9.
Contractors which include unallowable indirect costs in a proposal may be subject to penalties 10. Where a submitted cost is expressly unallowable under a FAR cost principle, the penalty under FAR 52.242-3 begins with the amount of the disallowed cost allocated to the contract 11. Under 10 U.S.C. 3743, when the cost had already been determined unallowable for that contractor before the proposal was submitted, the penalty is two times the amount of the disallowed cost 12.
The same statute directs the FAR to provide for the penalty to be waived in listed cases 13; one is when the contractor withdraws the proposal before the formal initiation of an audit of the proposal and resubmits a revised proposal 14. Expressly unallowable costs must in any case be identified and excluded from any billing, claim or proposal 15.
Preparing for the audit
Under the audit clause at FAR 52.215-2, the contracting officer or an authorized representative has the right to examine and audit all records and other evidence sufficient to reflect properly all costs claimed to have been incurred or anticipated to be incurred directly or indirectly in performance of the contract 16. At any time before final payment, the contracting officer may have the contractor's invoices or vouchers and statements of cost audited 17. The contractor is responsible for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred 18.
Worked example. Contractor U's fiscal year ends 31 December. In January it closes its books and moves known unallowable costs out of the pools; in March it reconciles each pool to the general ledger and its claimed direct costs to its job-cost ledger by contract; in April its CFO reviews the screening worksheet and signs the certificate; it submits in May, inside the six months, and files the support where the auditor can find it.
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