How to Bill a Cost-Plus Contract

A cost-plus type contract is one where actual costs are billed to the government.

It’s similar to when you submit an expense report to your employer, in the sense that you list your actual expenses and expect to be reimbursed. However, a cost-plus bill is a bit more complicated. With a cost-plus bill, you must bill your direct costs, indirect rates, and a fee. But, you also may need to hold back a portion of the fee.

You’ll also need to report on your cumulative expenditures and compare what you have billed in total to what has been funded on your contract.

Direct Costs

The first step to preparing a cost-plus contract is to bill the amount you spent on an item. But there are a few tricks to this seemingly simple task.

First, you can only bill direct costs related to your contract. Recall that a direct cost is a cost that can be identified to a single contract, the contract you are billing.

Additionally, you cannot bill direct costs incurred on one contract onto the bill for another contract. This might sound a bit obvious, but it’s a common error when preparing this type of contract.  To avoid making this type of error, be sure to review your invoice details carefully.

Second, you must bill the actual cost, not an estimate. Actual costs mean the cost that you paid for an item. This indicates that you can’t get away with a “close enough” guess at the cost, even if your guess is reasonable. The actual cost must be substantiated by a receipt or vendor invoice.

Third, you can only bill a direct cost if it is allowed to be billed on the contract. You may have incurred costs on the contract that are non-billable. Non-billable direct costs result in a contract loss because they cannot be billed out.

Types of Non-Billable Direct Costs

What kind of direct costs could be non-billable?

An item that you did not propose as a cost when you submitted your bid would be one

example. For instance, you should have included supplies in your bid and only included labor, but then realized later that you needed to purchase supplies for the contract. Since your supplies purchase was not proposed, it is non-billable.

When bidding on a cost-plus contract, take time to ensure that you have included all of your costs in the bid. Or, your contract may specifically call out items that cannot be billed. A common example of this is travel. In this example, even if you know you must travel on the contract, your government customer has excluded this cost from your contract in writing. This type of nonbillable direct cost will also result in a contract loss.

Unallowable Costs

FAR 31 lists many types of unallowable costs: entertainment, alcohol, interest expenses, etc.

These unallowable costs cannot be billed directly to a contract or, for that matter, indirectly through your indirect rate pools. Keep FAR 31 handy while coding your accounting and creating your invoices.

You can find these regulations here:

Part 31 – Contract Cost Principles and Procedures | Acquisition.GOV

Cost in Excess of Per Diem

The Joint and Federal Travel Regulations allow reimbursement for travel costs, either directly or indirectly through your indirect pools, for only the costs that do not exceed a per diem threshold.

This relates to lodging as well as meals and incidentals. The amount that exceeds the per diem limitations should be expensed to an Unallowable account and cannot be billed to the government.

Learn more about per diem rates here:

GSA Per Diem Rates

Labor Costs

Billing labor costs for a salaried employee requires that the salaried amount is allocated among all the projects worked during the pay period and the paid leave taken. This allocation is based on the number of hours recorded on the time card for the pay period.

Tarsus typically recommends this method of allocation, known as total time accounting,  in order to avoid uncompensated overtime issues if your employees record all of their time, even if it exceeds 40 hours per week. You should reconcile your allocation (known as a labor distribution) to your payroll register.

Billing Period

You can only bill for direct costs incurred during the billing period. For instance, if you are billing for January, only costs posted to your accounting system during January can be billed. This means you must record your direct costs before creating your Cost Plus invoice.

You also cannot bill future costs. What if you must remember to bill a cost posted in your accounting system before your current billing period? Government customers have different procedures for billing prior period costs, so contacting your customer before submitting your invoice is best.

Payment Within 30 Days

The general rule is to bill only for costs that have been paid for or will be paid within 30 days after receiving government payment. Some contracts require billing only after you have made payment.

Estimates and Service Centers

It is possible to bill an estimated amount through an internal service center using a standard rate.

An example would be using your company’s internal photocopy and printing service that charges a fixed rate per copy. Typically, your customer will approve the rates in advance, and a true up-to-actual cost at year’s end is typically required.

Documentation

Often, you will be asked to submit copies of receipts and vendor invoices along with your invoice. If you fail to keep this documentation, your reimbursement will likely be excluded – which is why it’s so important to keep physical copies of your expenses and transactions.

Overhead

The non-billable direct costs excluded from your bill, and unallowable expenses cannot be charged to your overhead pool. If you do this, the cost would be recovered through your indirect rates, and in essence, you would be billing the government for these items.

Severe financial penalties exist if any discrepancies are discovered during an audit and can result in contract termination and even disbarment from government contracts.