What Is an Incurred Cost Proposal?
An Incurred Cost Proposal (ICP) is an annual submission required from many government contractors that perform work under flexibly priced contracts.
The proposal reports the contractor’s actual costs incurred during the fiscal year and is used to establish final indirect cost rates for that period. Throughout the year, contractors performing cost-reimbursable work often bill the government using provisional indirect rates. Those provisional rates are estimates used for interim billing.
The ICP reconciles those provisional rates with the contractor’s actual indirect costs and allocation bases for the fiscal year.
After the proposal is submitted, the contractor and the appropriate government representative work together to establish the final indirect cost rates based on the contractor’s actual cost experience for the period.
The requirement for submitting a final indirect cost rate proposal is established in the Allowable Cost and Payment clause, FAR 52.216-7.
Does Your Contract Require an ICP?
Not every government contractor must submit an Incurred Cost Proposal. ICP requirements are tied to the contract type and the clauses included in the award.
Contractors generally must submit an ICP when they perform work under flexibly priced contracts, including:
- Cost-reimbursement contracts
- Cost-plus contracts
In addition, some Time and Materials (T&M) contracts include the Allowable Cost and Payment clause (FAR 52.216-7) for the portion of the contract that reimburses materials at actual cost. When that clause applies, contractors may be required to submit a final indirect cost rate proposal.
In contrast, firm-fixed-price contracts typically do not require an ICP because payment is based on the negotiated contract price rather than on reimbursement of actual incurred costs.
Contractors should review the clauses in their contract to determine whether FAR 52.216-7 applies.
Critical Deadlines and Consequences
Contractors required to submit an ICP must follow a specific deadline.
The Allowable Cost and Payment clause requires that the final indirect cost rate proposal be submitted within six months after the end of the contractor’s fiscal year.
For Example:
- Fiscal year ending December 31
- ICP due June 30 of the following year
Meeting this deadline is important for several reasons.
Late or incomplete submissions can delay final indirect rate determination and slow down the contract closeout process. In some cases, the government may establish unilateral indirect cost rates if a contractor fails to submit an adequate proposal.
Submitting an accurate and timely ICP helps prevent these disruptions and keeps contract administration moving forward.
Key Components of an ICP
Many contractors organize their Incurred Cost Proposal using the Incurred Cost Electronically (ICE) model, a structured set of schedules developed to help contractors assemble an adequate submission.
While contractors may use their own internal report formats, the ICE schedules illustrate the information the government typically expects to see in an ICP.
Common components include:
Indirect Cost Rate Schedules: These schedules calculate indirect cost rates by identifying the indirect cost pools and the allocation bases used to distribute those costs.
Direct Cost Schedules: These schedules summarize direct costs incurred on government contracts during the fiscal year.
Schedule J – Subcontract Information: This schedule reports subcontract costs associated with contract performance.
Schedule L – Payroll Reconciliation: This schedule reconciles payroll records to the labor costs recorded in the accounting system.
Schedule N – Certificate of Final Indirect Costs: The proposal includes a certification confirming that the submission accurately reflects the contractor’s final indirect costs for the fiscal year.
Schedule O – Contract Closing Information: This schedule summarizes contract data that may be used during the contract closeout process.
The specific schedules included in an ICP may vary depending on the contractor’s accounting system and contract activity. Still, the proposal must provide sufficient information for the government to evaluate indirect cost rates and supporting cost data.
Understanding FAR Part 31 Cost Allowability
Incurred Cost Proposals rely on the cost allowability framework established in FAR Part 31.
Under these rules, costs charged to government contracts must meet three fundamental criteria
Costs must be:
Reasonable
The nature and amount of the cost must reflect what a prudent person would incur in similar circumstances.
Allocable
The cost must be assignable to the contract based on the benefit received.
Allowable
The cost must comply with the cost principles and exclusions defined in FAR Part 31 and the terms of the contract.
FAR also identifies specific categories of unallowable costs. Examples include:
- Entertainment expenses
- Alcohol
- Certain lobbying costs
Contractors must identify and exclude unallowable costs when preparing their ICP.
Applying these cost principles consistently helps ensure that indirect rates reflect only allowable contract costs.
Common ICP Preparation Challenges
Preparing an Incurred Cost Proposal can be challenging for contractors that do not maintain strong cost accounting processes during the year.
Several issues appear frequently during ICP preparation.
Incomplete Cost Classification
If direct and indirect costs are not clearly separated in the accounting system, preparing indirect rate schedules becomes difficult.
Reconciliation Issues
ICP schedules must reconcile with the contractor’s general ledger and financial records. If accounting records are inconsistent or incomplete, reconciliation can be time-consuming.
Supporting Documentation
Contractors must maintain documentation that supports the costs reported in the proposal. Missing or unclear documentation can complicate the review process.
Compressed Preparation Timeline
Because the ICP is due six months after the fiscal year closes, contractors often have a limited window to gather financial data, reconcile accounts, and complete the schedules.
Maintaining organized accounting records throughout the year makes ICP preparation far more manageable.
How Team 80 Simplifies ICP Compliance
Preparing an accurate Incurred Cost Proposal requires disciplined accounting practices throughout the year.
Indirect cost structures, cost classification, and financial reporting must all support the final rate calculations used in the proposal.
We work with government contractors to implement accounting systems and processes that make ICP preparation far more straightforward.
That includes:
- Establishing cost accounting structures that support indirect rate calculations
- Maintaining consistent cost classification throughout the year
- Monitoring indirect cost pools and allocation bases
- Preparing the required schedules and supporting documentation
When these systems are built correctly, preparing the ICP becomes a structured process instead of a last-minute reconstruction effort.
Our team helps contractors maintain the accounting discipline re
Incurred Cost Proposals Require Preparation Long Before the Deadline
The six-month ICP deadline arrives quickly after the fiscal year closes. By that point, the quality of the submission largely depends on how well costs were tracked, classified, and reconciled throughout the year.
Indirect cost pools, allocation bases, payroll reconciliation, and contract cost reporting all feed into the final indirect rate calculations. When those systems are organized and maintained consistently, preparing the Incurred Cost Proposal becomes a structured reporting exercise rather than a rushed reconstruction of financial records.
Sarah Sinicki
Team 80 CEO
Sarah is a leader focused on serving small businesses in various industries. She has worked with a multitude of companies over the last 25 years and loves helping business owners find success. Sarah is genuinely committed to unburdening Team 80 clients so that they have the freedom to focus on their business. In her free time, you can find her spending time with her husband, two kids, and her Yorkies, Marley and Ziggy. When she is not helping business owners, you can find her in a Reb3l Groove class dancing it out. Sarah is also an avid Colorado Avalanche fan, so if you ever want to talk about hockey, she’s your gal.
