What an Incurred Cost Submission Contains
The exact supporting information can vary based on the contractor's business type, size, and accounting system. FAR 42.7 requires an adequate final indirect cost rate proposal, with FAR 52.216-7 identifying detailed schedules that generally support the submission. :contentReference[oaicite:1]{index=1}
- Indirect rate schedules: Summary of claimed pools, allocation bases, and calculated final rates.
- Expense schedules: General and administrative, overhead, occupancy, and other applicable indirect pools by cost element.
- Allocation bases: Amounts used to distribute indirect expenses across benefiting contracts or activities.
- Cost reconciliations: Reconciliation of general ledger amounts and claimed direct costs by major cost element.
- Contract schedules: Direct and indirect costs claimed and billed by contract and subcontract.
- Certification and closing information: Required certifications and information for contracts that may be ready for closeout.
How the Submission Is Prepared
Preparation starts with the fiscal year's accounting records. Finance teams extract actual expenses, classify costs as direct or indirect, review allowable cost treatment, establish indirect pools, and determine the appropriate allocation bases. The resulting schedules are reconciled back to the general ledger before submission.
Business Expense Incurred records provide the foundation for determining which expenses belong in the fiscal-year cost population. Employee Expense Incurred records can similarly support labor-related costs, travel, and other employee expenses that flow into direct or indirect cost reporting.
Procurement records also matter because purchased goods and services can affect both direct contract costs and indirect pools. Strong procurement controls should connect requisitions, sourcing, approvals, purchase orders, and supporting invoices to the accounting records used in the submission.
Indirect Rates and Worked Example
The basic calculation for an indirect cost rate is:
Indirect Cost Rate = Indirect Cost Pool ÷ Allocation Base × 100
Assume a contractor has $900,000 in allowable overhead expenses and a $4.5M allocation base for the fiscal year. The proposed overhead rate is $900,000 ÷ $4.5M × 100 = 20%.
The final rate is based on actual cost experience for the applicable period. Once final rates are established, the contractor updates billings on affected contracts to reflect the settled rates. FAR 52.216-7 provides for updating the cumulative direct and indirect costs claimed and billed within 60 days after settlement of final indirect cost rates. :contentReference[oaicite:2]{index=2}
Procurement and Payment Records
Procurement documentation provides an important audit trail for expenditures included in the submission. A purchase order can connect an approved purchase to its supplier, contract, cost center, and accounting treatment, while a Purchase Order Inventory Management System can provide visibility into purchase orders, vendor integration, compliance, and cost-control information.
A Duplicaton Check can compare current inventory and existing purchase requests across cost centers to identify duplicate requests before they affect downstream purchasing records. These controls help preserve reliable source data for cost classification and reconciliation.
Payment records should also align with supporting invoices and contractual terms. Reviewing vendor payment activity helps finance teams verify supplier payments, approvals, payment methods, payment timing, discounts, and cash outflows represented in the accounting records.
Review, Validation, and Financial Impact
Before submission, finance teams should perform structured Submission Validation across schedules, account classifications, allocation bases, contract data, and reconciliations. The objective is to ensure that the information presented in the submission can be traced to the underlying accounting records.
Receivables processes are part of the broader financial-control environment. AR Automation Software can automate collection followups and matching of payments with invoices, supporting a 40% DSO reduction and 80% reduction in reconciliation cost. Although these activities are separate from the incurred cost calculation, stronger reconciliation and cash visibility can support broader financial reporting.
Payment timing can also affect cash management. Early Payments Recommendations can review early-payment discounts, vendor terms, and cost of capital to recommend payment timing while supporting payment approvals and processing.
Best Practices for an Incurred Cost Submission
- Reconcile submission schedules to the general ledger and supporting accounting records.
- Document the methodology for each indirect cost pool and allocation base.
- Maintain consistent direct and indirect cost classifications throughout the fiscal year.
- Retain supporting procurement, payroll, subcontract, and contract records for audit support.
- Use Unlimited Access to provide users with ongoing access to financial workflows, role-based configurations, automated onboarding, and 24/7 availability.
FAR 42.7 notes that contractors, contracting officers, and auditors should work together to make the proposal, audit, and negotiation process efficient, while the required content can vary according to the contractor's circumstances. :contentReference[oaicite:3]{index=3}
Summary
An Incurred Cost Submission organizes a contractor's actual fiscal-year costs and supporting schedules to establish final indirect cost rates for applicable government contracts. Accurate cost classification, allocation, procurement records, reconciliations, and validation create a traceable connection between accounting data and amounts claimed or billed. Understanding the relationship between incurred costs and final indirect rates helps contractors support financial reporting, contract administration, and informed financial decisions.