Every contractor holding a cost-reimbursement, time-and-materials, or other flexibly-priced contract lives with a recurring obligation that arrives long after the work ships: the annual incurred cost submission. The requirement flows from FAR 52.216-7, Allowable Cost and Payment, the clause that governs how the government reimburses actual costs and how it eventually settles final indirect rates. Miss the clause's deadlines or hand the Defense Contract Audit Agency an incomplete package, and the consequences range from delayed payments to a contracting officer unilaterally deciding what you are owed. This guide walks through the mechanics: when the submission is due, what makes it "adequate," how final rates get set, and the closeout clock that runs after settlement.
Background
When you bill a cost-type contract during the year, you invoice using provisional (billing) indirect rates — estimates negotiated up front. Those rates are never the final word. After each fiscal year closes and your books are trued up, FAR 52.216-7 requires you to file a final indirect cost rate proposal built on what actually happened. The clause is explicit on timing: the contractor must submit the proposal "within the 6-month period following the expiration of each of its fiscal years." A December year-end therefore drives a June 30 due date. Written extensions exist, but only the contracting officer can grant one, and only in writing — an internal decision to file late is not an extension.
The proposal's foundation is equally explicit: the proposed rates "shall be based on the Contractor's actual cost experience for that period." This is not a re-estimate or a negotiation position. It is a reconciliation of your general ledger to the direct and indirect costs you charged the government, sorted so an auditor can trace every claimed dollar back to a book entry. The submission is commonly called the "incurred cost submission" or "incurred cost proposal," and DCAA publishes a model spreadsheet — the Incurred Cost Electronically, or ICE, model — that mirrors the clause's required schedules. Using it is not mandatory, but its structure matches what auditors expect to receive.
Key Details
FAR 52.216-7(d)(2)(iii) lists what an "adequate" proposal must contain. DCAA treats this list as a gate: a package missing a required schedule can be returned as inadequate before substantive audit even begins, and the six-month clock is not satisfied by an inadequate filing. The required schedules include a summary of claimed indirect expense rates; separate schedules for general and administrative (G&A), overhead, and occupancy expenses; the claimed allocation bases for each indirect pool; facilities capital cost of money factors; a reconciliation of book costs to the claimed direct costs; a schedule of direct and indirect costs claimed by contract; subcontract information; summaries of time-and-materials contract activity; a payroll reconciliation to the general ledger and to IRS filings; and contract closing information for physically complete contracts.
Two items deserve particular attention. First, the Certificate of Final Indirect Costs — a signed statement by an official of the contractor attesting that the claimed costs exclude anything expressly unallowable. It is not boilerplate; it is the document that exposes a contractor to penalties if unallowable costs are knowingly claimed. Second, the schedule of direct and indirect costs by contract is what lets the government tie your aggregate rates back to specific awards, and it is the piece most often built incorrectly by first-time filers.
Once an adequate proposal is in, final indirect cost rates are established under FAR 42.705 through one of two procedures. Under the contracting-officer determination procedure (42.705-1), the cognizant contracting officer, supported by the DCAA audit, negotiates and sets the rates — the path used for larger or more complex contractors. Under the auditor determination procedure (42.705-2), the cognizant auditor sets the rates directly, typically for contractors whose government business is smaller or concentrated within a single agency. Either way, the output is a rate agreement that becomes binding for billing and closeout, and it replaces the provisional rates you used all year — often triggering an adjustment voucher to reconcile what you billed against what the settled rates actually allow.
Settlement of final rates starts the last clock. Under FAR 42.705, within 120 days after settlement of the final annual indirect cost rates on a physically complete contract, the contractor must submit a completion invoice or voucher reflecting the settled amounts. If you miss that 120-day window, the contracting officer "may determine the amounts due" unilaterally and record the determination in a contract modification — meaning the government, not you, fixes the final number, and your recourse narrows to the disputes process.
What It Means for Contractors
Treat the submission as a year-round accounting discipline, not a June scramble. The schedules in 52.216-7(d)(2)(iii) map directly to how your chart of accounts segregates direct costs, indirect pools, and unallowable accounts. If unallowable costs — interest, most entertainment, certain legal and lobbying expenses — are not screened into dedicated accounts throughout the year, assembling an accurate certificate at deadline is nearly impossible, and a bad certificate carries penalty exposure.
Calendar the deadline off your fiscal year-end, not off memory. Six months after year-end is the hard date; if you genuinely cannot make it, request a written extension from the contracting officer before the date passes, not after. Build the package to DCAA's adequacy checklist item by item, because an inadequate submission does not stop the clock and can cascade into withheld payments under the clause's billing provisions.
Plan for the tail. Rate settlement can lag the submission by years, and when it lands, the 120-day completion-voucher window opens on each physically complete contract. Track which awards are physically complete and stage their closeout vouchers so settlement does not catch you flat-footed. The cost of missing that window is not just administrative: it hands the contracting officer authority to set the final amount unilaterally. Finally, decide early — with your cognizant office — which FAR 42.705 procedure applies to you, because contracting-officer determination and auditor determination differ in who you deal with and how much negotiation to expect.
