Incurred Cost

Dealing With Incurred Cost

Are Your Compliant With FAR 52.216-7? Federal government contractors with cost type contracts are required to submit indirect rate reconciliations on an annual basis. FAR 52.216-7, “Allowable Cost and Payment,” is the section of the Federal Acquisition Regulations (FAR) which regulates the requirement to submit final Incurred Cost.

Along with appropriate supporting documentation, within six months after the end of its fiscal year. Failure to comply with this FAR clause places the contractor at risk of contract non-compliance and may result in the federal government forming a unilateral determination on behalf of the contractor.

If you are a federal government contractor whose fiscal year ends December 31st and you have cost reimbursable contracts in place, you MUST submit an Incurred Cost by no later than June 30th.

In the process of preparing the I C can be grueling and somewhat daunting. Successful contractors begin this process early.

Preparation of the ICP should begin after the end of a company’s fiscal year. The following steps should be taken to begin this process:

• Reconcile general ledger accounts and record necessary adjusting entries.
• Ensure proper cost allocation by closely reviewing direct and indirect cost accounts.
• Ensure unallowable expense are excluded from allowable expenses. See FAR 31-205 for details on expressly unallowable expenses.
��������������������� Review contract portfolio to determine which contracts are subject to ICP reporting.
• Calculate and review indirect rate calculations for accuracy.
• Compile billing data generated during the fiscal year for both cost type and Time and Materials Contracts.

Get Expert Assistance. Complying with FAR 52.216-7 is critical. Therefore, it is important to seek expert assistance.

Contractors should also seek expert assistance. Financial Information Technology Services is a dedicated company that focus on supporting federal government contractors lend their expertise to successfully completing the I.C.

Which One Is It?

They both are indirect expenses incurred in running your business. These expenses represent those costs which are not directly associated with a specific contract. Government agencies may review how companies record these costs. Therefore, in federal government contract accounting, it is important to understand the difference between the two. While the terms are often used interchangeably, they are very different.

Overhead expenses represent those costs which are incurred by a company to indirectly support existing contract activity. They are indirect costs which cannot be directly billable to contract activity. These costs generally include such things as program management, recruitment costs and contract administration. It is the company’s responsibility to define those costs which it considers as overhead and consistently apply those costs.

General & Administrative (G&A)
G&A expenses represent the costs incurred to operate the business. They are incurred to “keep the doors open.” These costs are relevant to the support of the entire business. G&A expenses includes such things as accounting, business development, payroll processing and executive support.

To determine whether an item should be classified as overhead or G&A, one should ask themselves these questions: was the cost generated to support existing contract activity? If the answer is yes, it should be classified as overhead. Was the cost generated to keep the company operational? If the answer to this question is yes, it should be classified as G&A.

Allowable and Unallowable Costs
In federal government contracting, it is required to establish policies and procedures which allow for proper identification and recordation of unallowable costs. In order to establish these policies and procedures, one must first understand the meaning of allowable costs versus unallowable costs.

The Federal Acquisition Regulations (FAR) has defined allowable costs as those costs which are reasonable and allocable (chargeable) to a final cost objective (contract). For a cost to be reasonable, it must, among other things, be incurred in normal business practice and must comply with federal, state and local laws. For a cost to be chargeable it must be specifically incurred in direct support of a contract, benefit multiple contracts and other work, or be necessary for the operation of the business. Costs which are considered both reasonable and allocable are considered to be allowable by federal government contracting standards.

So what are unallowable costs? Unallowable costs are those costs which are not otherwise allowable. The government has further determined certain costs to be considered expressly unallowable. These costs include items specifically addressed in the FAR and includes such things as interest expense, bad debt, donations, contributions, alcoholic beverages, executive lobbying expenses, entertainment costs, and penalties and fines. While these costs are considered to be legitimate business expenses, the federal government prohibits contractors from including these costs in pricing and cost reimbursement claims under federal government contracts. Bottom line is the government WILL NOT pay for these costs.

The rule to remember is if the cost is not reasonable or allocable, it should be classified as unallowable. A F.I.T.S representative is available to assist you with Overhead vs. G&A or Allowable vs. Unallowable cost determinations. For additional information contact us at (301) 237-5708.


• Accounting Operations Support
• Regulatory Compliance
• Full Service Payroll Support
• Web-Based Electronic & Government Compliance Timekeeping Services
• Accounting System Design & Implementation
• Virtual CFO Solutions
• Training