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Uncommon Sense | Schedule H Madness

It happened again last week. Yet another client faces rejection of its annual Final Indirect Cost Rate Proposal (a.k.a., incurred cost proposal) because Schedule H doesn’t include “billing-level detail.” Although we don’t know how or why this supposed “requirement” became part of DCAA’s Incurred Cost Proposal Adequacy Checklist, we do know that if the auditor checks the box “NO,” then good chance DCAA will bounce the contractor’s proposal. And it makes us nuts.

First, the contract clause controlling a contractor’s final indirect cost rates, FAR 52.216-7, does not require contractors to provide billing-level detail on Schedule H of its incurred cost proposal. Rather, it simply requires a “schedule of direct costs by contract and subcontract and indirect expense applied at claimed rates.” Although the auditors may want more information than this, a contractor is only required to provide what its contract clearly and unambiguously states. 

Second, billing-level detail on Schedule H is not relevant for the purpose of calculating, auditing or settling final indirect cost rates. For sure, Schedule H is an important schedule, insofar as it reconciles direct costs and applied indirect costs by contract to indirect cost pools and allocation bases used to develop the proposed final rates. It shows that a contractor will not over- or under-absorb its allowable indirect costs. But billing-level detail is not necessary to prove this out.

Finally, imposing an extra-regulatory billing-level detail requirement on Schedule H adds significant burden on contractors by making Schedule H unnecessarily complex and cumbersome. Billing-level detail can vary widely among contracts, so aggregating it in a single schedule often becomes a tedious, manual data entry exercise. This increases the risk of mistakes and causes reconciliation challenges. It’s non-value-add busy work that benefits neither the contractor nor the auditor. 

Many contractors face this dilemma. Most acquiesce to the auditor’s demand and spend the time, money and energy to lard-up Schedule H with unnecessary information – because resistance is costly, aggravating and often futile. However, for those contractors unwilling to acquiesce easily, we suggest pursuing a contract change order that adds additional funding to perform this request. Doing so could change the discussion and stop the madness. After all, if government demands performance beyond contract requirements, which it can do, then it should pay for it directly.

Brent Calhoon
Partner, CPA
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