Q.  Our company has two accounts that accumulate costs for Incentive Compensation - Executive Incentive Compensation which is used to pay bonuses to high level executives and corporate officers, and Regular Incentive Compensation which is used to pay bonuses to all other employees.  Both of these accounts are part of our Fringe Pool and that practice was used in computing our 2007 provisional billing rates.  Now that 75% of our year is completed it appears that we are going to significantly over-run Fringe and significantly under-run Overhead and G&A. Would it be feasible for us to move Regular Incentive Compensation to our Overhead Pool and/or move Executive Incentive Compensation to our G&A pool? If feasible could we make this change retroactive to the beginning of the year? Would permission from the government be required? If permission from the government is not required, would we be required to notify them before they find out through a review of our indirect cost submission?

A.  The general rule is you need to be consistent with the way you propose and book costs so the retroactive changes you outline would be a significant uphill battle. You would have a better case making the change prospectively – that is after the current fiscal year. That said, however, I have seen contractors make the type of retroactive change you are proposing by presenting a strong position paper demonstrating the change is “desirable” e.g. represents a significantly better cost allocation method. In such a case, you may or may not have to demonstrate the cost impact of the change. You could argue, for example, that inclusion of the executive bonus in fringe benefits with total labor in the base represents a distortion since the bonus applies only to executives and should be assigned to G&A or similarly, the regular incentive compensation applies only to non-executives and hence is better included in the overhead pool. As for notification, since you are not CAS covered, you need not notify the government of the changes until you submit your incurred cost proposals where you need to clearly identify the changes.  However, contractors usually notify their ACO earlier as a courtesy.  You need to think hard how to handle it.

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