April 23, 2016
You created a bid
and estimated your indirect rates based on potential growth from a Cost Plus
contract award that will increase your headcount significantly. What else
should you know about Cost Plus contracting?
1. Managing indirect
rates is critical to maximizing the profitability of the contract. If you
overrun your actual indirect rates, not only will you use up more of the
contract value that was planned for program activities, but you may run out of
authorized fee pool, reducing overall profit.
2. You may be
required to submit an Incurred Cost Submission certifying your actual indirect
rates six months after the end of your fiscal year. Check your contract for FAR
52.216-7 clause for Allowable Cost and Payment. The Incurred Cost Submission,
also called Incurred Cost Electronically (ICE), has over 20 spreadsheet
schedules with detail of your actual indirect rate pools and bases and
summaries of your actual contracts, subcontracts and billings.
Billing rates should be submitted to DCAA annually at the beginning of your
fiscal year. Once you have estimated your rates for the upcoming fiscal year,
send a letter to your cognizant DCAA auditor stating your provisional indirect
rates. You should receive a letter back from DCAA acknowledging the provisional
rates. You can update your rates during the year if necessary.
4. Create a
spreadsheet to track your Provisional and Actual Rates by Fiscal Year. You will
want it for reference, and it may also need to show rates “Submitted”,
“Unaudited” and “Audited.”
5. DCAA will
typically verify receipt of a properly completed ICE, but may not audit it for
several years. While DCAA has taken action to clear the backlog of Incurred
Cost audits, they may not perform your ICE audit for several years. For small
businesses, they have started a program where they may audit your first ICE and
then just write an approval letter for subsequent approval, if they have
determined the audit risk is low.
6. Issue adjusting
billings at the end of your fiscal year for your best estimate of actual
indirect rates. This billing is frequently referred to as an Indirect Rate
7. Your first year
may have indirect costs that are not as low as the indirect costs that you bid.
You never have control over the timing of the award and the ramp-up time for
the contract. If the contract starts in the 8th month of your fiscal year, it will
bring down the indirect rate rates for that fiscal year, but not as low as the
overall rates you planned in the proposal (which may have intended that the
contract start in the 4th month of your fiscal year.) Be sure to discuss this
with your contracting office and let them know where you expect to be on
indirect rates, since funding may be affected.
8. Track your
billings by month, fiscal year and contract year. In order to provide the
information needed for the ICE, you will need to keep data showing each billing
and the totals for the fiscal year, either in your accounting system or in a
spreadsheet. Be prepared to compare your actual indirect rates and report the
difference between indirect costs billed and indirect costs applied at actual.
9. Some Cost Plus
Contracts have indirect rate ceilings. An indirect rate ceiling is a maximum
value for an indirect rate. The most common type of ceiling is a maximum rate
10. Some Cost Plus
Contracts have exceptions to applying fee. Check your contract and how the fee
pool is stated. A Fixed Fee pool may require delivery of hours or technical
hours. In this case, you may only be able to apply fee based on labor costs,
and not travel and other direct costs.
11. Some Cost Plus
Contracts use a Subs Handling Fee or don’t allow Fee to be applied to
Subcontractors. These rules will be part of the structure of the bid – be sure
that your billing department has this information.
12. Cost Plus
Contracts are typically incrementally funded. Funding Modifications will be
issued to cover three to six months of funding. You’ll need to track cost and
billing and notify your contracting officer when you are at 75% to 85% of
13. Track your
Authorized and Funded Contract Value split into Cost and Fee, including by Base
and Option Years. Plan ahead on how to set up charging and tracking in your
accounting system to provide reporting and billing by your fiscal year and the
14. Some Cost Plus
contracts require a 15% withholding of Fee. The 15% is eligible for billing
after the contract completion. This is also called Retainage. You may have the
option to bill the fee withholding up to a maximum fee withheld of $50K
15. If you are a
subcontractor on a Cost Plus contract, be sure you understand the contract and
terms. Even if you prepare and submit an ICE, your prime contractor does not
have access to your indirect rates. You will need to submit a variance voucher
each fiscal year – don’t let it “roll over” to the end of the contract.
Winning a Cost Plus
contract is a positive milestone – just be sure that you review the contract
issues, ask lots of questions and discuss with others who have experience with