First things first: it is not an “ICE” (Incurred Cost Electronically) Model even though DCAA gives contractors a spreadsheet workbook to use that is called the “ICE model.” it is not an “incurred cost submission” even though DCAA calls it by that name, as do many others. And it is not a “final billing rate submission.” What we are discussing today is the annual proposal to establish final billing rates. That’s a mouthful and there is no good acronym for it, but that’s what it’s called.
It is a proposal.
Like many proposals, it is certified—though the certification is unique to this particular proposal.
It is a proposal to establish a contractor’s final billing rates for that contractor’s most recently completed fiscal year. It is submitted six months after the end of that fiscal year. It is an offer, an invitation, to have DCAA audit those costs.
The timing and content of the proposal is governed by the FAR contract clause 52.216-7, Allowable Cost and Payment. The clause was originally established in the first (1984) version of the FAR and generally stayed the same (with minor revisions) until 2011, when DCAA drove significant modifications to implement in the regulations its version of what an “adequate” proposal to establish final billing rates should look like.
Between 1983 and 2011, the format of the annual proposal was negotiable, and the cognizant Administrative Contracting Officer decided what was acceptable to the government. Then DCAA insisted that it knew better. Today, the ACO can still get involved, but they are not likely to overturn any of the schedules expressly named in the clause as being required.
As DoD insider Dave Capitano wrote in 2013—
The current clause was significantly changed by a June 30, 2011 final rule, which added a myriad of items that must be included in a final indirect cost submission. This, coupled with the fact that DCAA had already fallen significantly behind in performing the required audits, has resulted in a broken process. … By the mid-1990’s, DCAA was current on almost all incurred cost audits. In fact, at one point in time, DCAA had instituted a program entitled ‘Concurrent auditing’, whereby costs were being audited in the same year they were being incurred. This was the pinnacle of efficiency, at least from a timing standpoint, for the incurred cost audit process. Having current incurred cost reviews also facilitated the determination of forward pricing rates, since the most recent years had audited rates to use as reference points.
Unfortunately … DCAA’s decision to perform only full attestation audits for all incurred costs, coupled with adding to the FAR a listing of items that were formally in an internal DCAA guide to contractors, has resulted in an inefficient process that continues to fall further and further behind. As previously noted, this listing of what constitutes an adequate final indirect cost proposal is very extensive, and has resulted in contractors having significant difficulty in submitting ‘adequate’ incurred cost submissions.
What’s changed in the 13 years since Dave wrote that article is that DCAA implemented “risk-based” auditing to better manage their “incurred cost” workload, so now many contractors don’t experience audits. Not sure if that’s a good thing except to DCAA, who got to tout to Congress that the audit backlog was reduced and how the audit agency is now “current” (as DCAA defines “current” which is not exactly how Webster’s Dictionary might define it). So: yay?
End of digression.
Since 2011, the Allowable Cost and Payment clause has directed exactly what schedules constitute an acceptable proposal to establish final billing rates. There are 15 required schedules: Schedule A through Schedule O. (There are also 15 supplementary schedules that need to be prepared, though they don’t need to be submitted with the proposal.)
But that’s about to change again, thanks to the Revolutionary FAR Overhaul.
We haven’t commented too much on the RFO initiative, other than to note that Class Deviations based on initial language without the benefit of public comment could be construed as being illegal, as they might violate 41 U.S.C. § 1707. But recently the FAR Council has released Notices of Proposed Rulemaking in the Federal Register, seeking public input—as they are required to do.
One of those Federal Register Notices was 91 FR 59476, seeking to implement RFO language in FAR Parts 16, 17, 35, and 52 via FAR Case 2026-006. That’s a lot.
Within that large burst of rule-making you will find proposed changes to the clause 52.216-7, Allowable Cost and Payment.
The public comment period recently closed. Forty-three comments were received, which also seems like a lot. Forty-two of those comments were made available on the docket, and we reviewed the majority of them. As you might guess, not very many discussed the proposed changes to 52.216-7. Those that did (including comments from the National Defense Industrial Association and the Public Contract Law Section of the American Bar Association) were supportive, but also noted that the regulatory overhaul didn’t go far enough. More on that in a minute.
First, let’s discuss what the FAR Council proposed to change.
The big changes are (if implemented as drafted and we see no reason why they won’t be) are to paragraph (d) of the clause (“Final indirect cost rates”). At (d)(iii) the required schedules are discussed—and they’ve changed. For reference, we’re going to quote the entire (d)(iii) language in the proposed rule.
(iii) An adequate indirect cost rate proposal must include the following data unless otherwise specified by the cognizant Federal agency official:
(A) Summary of all claimed indirect expense rates, including pool, base, and calculated indirect rate.
(B) General and Administrative expenses (final indirect cost pool). Schedule of claimed expenses by element of cost as identified in accounting records (Chart of Accounts).
(C) Overhead expenses (final indirect cost pool). Schedule of claimed expenses by element of cost as identified in accounting records (Chart of Accounts) for each final indirect cost pool.
(D) Occupancy expenses (intermediate indirect cost pool). Schedule of claimed expenses by element of cost as identified in accounting records (Chart of Accounts) and expense reallocation to final indirect cost pools.
(E) Claimed allocation bases, by element of cost, used to distribute indirect costs.
(F) Facilities capital cost of money factors computation.
(G) Reconciliation of books of account (i.e., General Ledger) and claimed direct costs by major cost element.
(H) Schedule of direct costs by contract and subcontract expense applied at claimed rates. This schedule must include a summary of total labor and nonlabor billed for Time and Materials (T&M) and Labor Hour contracts, including the total cost billed after applying indirect rates. A subsidiary schedule of Government participation percentages in each of the allocation base amounts is also required. For contracts physically completed during the fiscal year, the schedule must include the contract number, level-of-effort information, the contract ceiling amount, and confirmation of whether the contract is ready to close.
(I) Schedule of cumulative direct and indirect costs claimed and billed by contract and subcontract.
(J) Subcontract information. Listing of subcontracts with a value exceeding the threshold for requiring certified cost or pricing data as prescribed in FAR 15.403-3, awarded to companies for which the contractor is the prime or upper-tier contractor (include prime and subcontract numbers; subcontract value and award type; amount claimed during the fiscal year; and the subcontractor name, address, and point of contact information).
(K) Listing of decisions/agreements/approvals and description of accounting/organizational changes.
(L) Certificate of final indirect costs (see 52.242-4, Certification of Final Indirect Costs).
For ease of analysis, the following table compares the old FAR set of required schedules to the new (proposed) set of required schedules.
From our point of view, the big changes are to Schedule H. Yes, it’s good news for everyone that Schedule L is gone. (As we noted years ago, DCAA testified that they don’t use it.) But does it matter that Schedules K and O have been eliminated, if what’s really happened is that they’ve been added to Schedule H?
Let’s look at what Schedule H now requires.
In addition to the old requirement that total contract costs must be presented at claimed rates, at the final cost objective level, Schedule H now asks for: “… a summary of total labor and nonlabor billed for Time and Materials (T&M) and Labor Hour contracts, including the total cost billed after applying indirect rates.”
How does that even work? Let’s remember that T&M contracts are billed at negotiated labor category rates, based on actual labor hours incurred. The “M” portion is reimbursable, yes, but not the labor (the “T” portion). The “T” portion also includes application of appropriate indirect rates (which do not adjust based on actual claimed rates) as well as (often if not always) a profit component. Is the FAR Council asking contractors to deconstruct their labor billing rates, post hoc, to show what those billing rates would have been at claimed rates? Let’s all hope not.
If it doesn’t mean that, then what does it mean? In the best possible light—where billed labor is recorded on the Schedule and reimbursable material/ODC is shown at claimed rates—you are now mixing billed (fixed) items with claimed (negotiable/flexible) items.
Neither NDIA nor ABA pointed out the above in their comments to the FAR Council, so maybe we’re missing something basic. If so, please let us know!
NOTE TO READERS: Long-time friend and colleague, Nathan Geesaman, noted: "... it's only summary level data.... It will likely be 5 columns of new data that was previously reported on K and O. ... It is intended to be a grand total summary of billed labor and nonlabor that would have been reported at the bottom of each Schedule K previously. So 1 number instead of a giant summary of rates x hours plus ODCs." Thanks for the clarification, Nathan! Concerns still remain, though, about the commingling of billed data with actual claimed cost data.
Schedule H also now requires “For contracts physically completed during the fiscal year, the schedule must include the contract number, level-of-effort information, the contract ceiling amount, and confirmation of whether the contract is ready to close.” Which is pretty much exactly what Schedule O previously required. So can we really say Schedule O has been eliminated?
The Public Law Section of the ABA noted the same, suggesting in its comments that—
… the final rule should remove from proposed paragraph (H) the requirement to identify, for contracts physically completed during the fiscal year, level-of-effort information, contract ceiling amounts, and whether each contract is ready to close. Those data concern contract status and closeout. They should be requested through the completion-voucher and closeout process rather than as a recurring condition of annual rate-proposal adequacy.
Both of those entities asserted that the FAR Council didn’t go far enough. NDIA advocated getting rid of Schedule I, as did the ABA. The ABA Section of Public Contract Law further advocated implementation of the Section 809 Panel observation that the annual proposal to establish final billing rates is being forced to serve too many purposes. The ABA wrote—
The Section therefore recommends that the final rule or preamble state expressly that the annual submission required by FAR 52.216-7(d)(2) is a final indirect cost rate proposal. Direct cost information may be required to reconcile the books, establish allocation bases, and demonstrate completeness, but the annual proposal should not serve as a substitute for contract specific billing review, direct-cost audit, or closeout. This distinction does not reduce the Government's audit rights. It places information requests in the process where the information is used and allows audit scope to follow contract terms, risk, materiality, and the contracting officer's needs rather than an annual adequacy checklist.
We hope those comments will be seriously considered by the FAR Council as it prepares its final rulemaking on the required Schedules of an “adequate” contractor proposal to establish final billing rates. In the meantime, if you have a complicated proposal workbook—as so many of the larger contractors do—now would be the time to start mapping out your revisions.
