For several years now, many contractors have objected to the DCAA requiring the use of the Incurred Cost Electronic (ICE) model to submit what the DCAA considered an adequate incurred cost submission (ICS). Those complaints can now be directed towards the FAR Councils because, in FAC 2005-52, effective June 11, 2011, they have incorporated the ICE model into the Allowable Cost and Payment clause, FAR 52.216-7
Before discussing the changes made by the FAC, a few words about 52.216-7 are in order. That clause is the only FAR clause that requires submission of an ICS. Thus, if 52.216-7, or a non-standard clause requiring the submission of an ICS, is not in a contract, the contractor has no obligation to submit an ICS.
Regarding the type of contracts in which 52.216-7 may be used, the FAR Part 52 clause matrix indicates that it is authorized for use in almost every type of contract. However, it is most commonly used in cost reimbursement contracts and is mandatory in determining the allowability of the cost of material provided under T&M contracts for non-commercial items. Finally, 52.216-7 is not a clause the FAR requires to be included in subcontracts.
The FAC revised FAR 42.705 substantially, particularly FAR 42.705-1(b), dealing with negotiated final indirect cost rates. Under the revised 42.705, the auditor does not determine whether the ICS is adequate. That determination is made by the contracting officer. Further, this change recognizes that there is no “one-size-fits-all” standard for an adequate ICS. Instead, it states that what constitutes an adequate ICS “will vary depending on such factors as business type, size, and accounting system capabilities.”
This is significant for contractors that have no cost reimbursement contracts but do have T&M contracts. DCAA does not have guidance as to what would be an adequate ICS in this circumstance. Thus, it is probable that an auditor will recommend to the CO that the contractor submit an ICS containing schedules that are appropriate for establishing overhead, G&A and fringe benefit rates although frequently only the G&A rate needs to be adjusted for T&M contracts.
The foregoing changes have a significant impact on the procedure for establishing auditor determined indirect cost rates. Specifically, 42.705-2(b)(1) states “[t]he contractor shall submit … a final indirect cost rate proposal in accordance with 42.705-2(b)(1).” Because 42.705-1(b)(1) assigns the CO the responsibility for determining the adequacy of an ICS, it is the CO who makes the final determination as to the adequacy of an ICS when rates will be audit determined.
This is made clear by the FAR Councils when they stated in response to the public comments on the proposed rule “[t]he rule does not diminish the latitude or the authority that COs have to resolve any and all matters arising under the contract with respect to an indirect cost rate proposal.” As a result of this change, DCAA will no longer be able to return an ICS to the contractor because DCAA considers it inadequate.
To implement the changes to 42.705, the Allowable Cost and Payment clause, FAR 52.216-7, has been amended to include the following new subparagraph (d)(2)(iii):
(iii) An adequate indirect cost rate proposal shall 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 and indirect expense applied at claimed rates, as well as a subsidiary schedule of Government participation percentages in each of the allocation base amounts.
(i) Schedule of cumulative direct and indirect costs claimed and billed by contract and subcontract.
(j) Subcontract information. Listing of subcontracts 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) Summary of each time-and-materials and labor-hour contract information, including labor categories, labor rates, hours, and amounts; direct materials; other direct costs; and, indirect expense applied at claimed rates.
(l) Reconciliation of total payroll per IRS form 941 to total labor costs distribution.
(m) Listing of decisions/agreements/approvals and description of accounting/organizational changes.
(n) Certificate of final indirect costs (see 52.242-4, Certification of Final Indirect Costs).
(o) Contract closing information for contracts physically completed in this fiscal year (include contract number, period of performance, contract ceiling amounts, contract fee computations, level of effort, and indicate if the contract is ready to close).
The foregoing list of data is not mandatory in all cases. Rather, the CO has flexibility in determining what data is necessary for an adequate ICS. Consequently, contractors should coordinate with their ACOs on what will be required for an adequate ICS before making the submission. This is particularly true for contractors that do not have cost reimbursement contracts but do have T&M contracts.
Further, the clause does not prescribe any specific format to be used for presentation of the data. This calls into question DCAA’s ability to insist upon use of the ICE model as the acceptable method of disclosing data in an ICS. The clause seems to imply that contractors can use their own formats.
Although the foregoing data is generally required to be submitted for an ICS to be considered adequate, the revised clause recognizes that it may be necessary to obtain additional data for a complete audit. Accordingly, 52.216-7(d)(2)(iv) identifies other data that may be required to be submitted during the course of the audit of an ICS.
The revised clause does not state who is responsible for making the determination that supplemental data is necessary. However, the thrust of the clause and FAR 42.705 seem to indicate that it is the CO.
Some of the data elements identified in the clause are problematic. Specifically, items (I) “List of all internal audit reports issued since the last disclosure of internal audit reports to the Government” and (J) “Annual internal audit plan of scheduled audits to be performed in the fiscal year when the final indirect cost rate submission is made.”
It has been a long standing desire of DCAA to be able to obtain access to internal audit reports. However, the courts have held that DCAA does not have access to them under the audit clause, or through DCAA’s subpoena power. While the revision to 52.216-7 does not identify internal audit reports as a data item that may be required, it does open the door to DCAA possibly demanding such audit reports.
Similarly, item (O) “Contract briefings, which generally include a synopsis of all pertinent contract provisions, such as: Contract type, contract amount, product or service(s) to be provided, contract performance period, rate ceilings, advance approval requirements, pre-contract cost allowability limitations, and billing limitations”, represents an item of interest to DCAA. The revised clause does not state that contractors are to maintain contract briefs.
Moreover, nothing in 52.216-7 or the audit clause permits the government to require contractors to create records for audit that contractors do not maintain in the normal course of business. Despite this and the fact that the FAR does not otherwise require contractors to maintain or prepare contract briefs, DCAA has determined that contractors have inadequate billing or accounting systems because the contractors do not prepare contract briefs. Thus, it is possible that DCAA will use item (O) as a basis for demanding that contractors prepare contract briefs or risk having their billing and accounting systems deemed inadequate.
In closing on this point, because the revised clause is only to be included in contracts issued on or after June, 11, 2011, it will not have an impact on contractors until they submit their first ICS to establish final indirect cost rates for those contracts. Finally, this change to the FAR has no impact on the establishment of billing rates.