Guide · Billing a Cost-Type Contract
How to bill a cost-plus contract
What goes on the voucher, where it is submitted, how indirect cost reaches the invoice, what the government withholds, and the three reasons vouchers come back.
- 12 years inside DCAA
- 100+ DoD contractors audited
- CPA led
- Public vouchers and rates
- Remote, nationwide
The short answer
A cost-plus invoice is not a price. It is a claim that you incurred specific allowable cost in a period, supported by your books. Each interim voucher adds up direct cost actually recorded, applies your approved provisional indirect rates to the right bases, adds the fee you have earned, and nets out anything the contract says is withheld.
On most Defense work that claim is submitted as a public voucher on Standard Form 1034, with the detail on SF 1035, filed electronically through the Procurement Integrated Enterprise Environment rather than emailed to anyone.
The thing that separates a smooth billing cycle from a painful one is not the form. It is whether the number on the voucher can be traced back to the general ledger without anyone reconstructing it.
Anatomy
What is actually on the voucher
A worked example for one month on a cost-plus-fixed-fee contract. The numbers are illustrative; the structure is not.
| Line | Basis | Amount |
|---|---|---|
| Direct labor | Hours charged to the contract from the labor distribution, at actual rates | $40,000 |
| Fringe | 35% applied to direct labor | $14,000 |
| Overhead | 60% applied to direct labor plus fringe | $32,400 |
| Other direct costs | Travel, materials, subcontracts, as incurred | $8,000 |
| Subtotal | $94,400 | |
| G&A | 12% applied to total cost input | $11,328 |
| Total cost | $105,728 | |
| Fixed fee earned | Fee is earned as cost is incurred, not billed in a lump | $7,401 |
| Less fee withheld | Held until the contract is complete and rates are settled | ($1,110) |
| Amount claimed | $112,019 |
Your own structure may differ. Some companies run a single overhead pool, others split engineering and manufacturing, and the G&A base may be total cost input or value added. What matters is that the structure is documented, applied consistently, and matches what you told the government when rates were set.
The part that trips people
How indirect cost reaches the invoice
Direct cost bills itself. You worked the hours, you bought the parts, they go on the voucher. Indirect cost is different: it is real cost of performing the work, shared across everything the company does, and it reaches a specific contract only through a rate applied to a base.
That is why you cannot bill overhead until provisional billing rates are in place under FAR 42.704. Without a rate there is no mechanism, and companies in that position quietly fund their own indirect cost for months.
The rates on your voucher are estimates all year. The incurred cost submission trues them to what actually happened, and the difference is settled afterward. Bill low and you lend the government money; bill high and you repay it. Neither is free, so the provisional rate should be your honest expectation rather than a conservative one.
Two rules that keep this clean. Apply the rate to the base you actually agreed, not a convenient approximation of it. And take unallowable costs out of the pool before the rate is calculated, not out of the invoice afterward, because a pool containing unallowable cost produces a contaminated rate on every contract you bill.
Cash
What the government holds back
Fee withholding
On cost-plus-fixed-fee work the contracting officer may withhold part of the fixed fee until the contract is complete and final rates are settled. Under FAR 52.216-8 that withholding is capped, but the practical effect is the same either way: plan on receiving the last of your fee long after the work ends.
The gap between provisional and final
If your provisional rates run below actual, the shortfall sits uncollected until the year is audited and settled. That can be eighteen months or more after the cost was incurred. It is recoverable, but it is not cash you have.
Questioned cost
Anything an auditor questions comes off until it is resolved. The most common causes are cost that is unallowable under FAR Part 31, labor that does not reconcile to a timesheet, and a billing that cannot be traced back to the general ledger.
Rhythm
The monthly cycle
Close the month
Post everything, reconcile the bank and payroll, and make sure job cost ties to the general ledger. A voucher built before the close is a guess.
Review labor
Compare the labor distribution to payroll. Every direct hour on the voucher should trace to an approved timesheet, and the total should reconcile, not approximately match.
Apply rates and build the voucher
Rates to the right bases, other direct costs with support attached, fee calculated on cost incurred, withholding applied.
Submit and track
File through PIEE, then watch for acceptance rather than assuming it. A voucher sitting in a queue is not a paid voucher.
Watch the ceiling
Compare cumulative cost against the funded amount every month. Limitation of Cost and Limitation of Funds require written notice before you reach the threshold, and that obligation is a forecast, not a lookback.
Avoidable
Why vouchers come back
Labor that does not tie. The hours on the voucher do not reconcile to payroll or to signed timesheets. This is the most common reason, and the hardest to fix after the fact because you cannot recreate a contemporaneous record.
Rates that are not the approved rates. Someone billed at the proposal rate, last year’s rate, or a rate that was never submitted. Every voucher should use the rates currently in effect, and a rate change should be deliberate and documented.
Unallowable cost in the pool. Entertainment, certain travel, interest, some legal and lobbying cost are unallowable under FAR Part 31. In the pool they contaminate the rate; on the invoice they are questioned directly.
A fourth, less common but more expensive: billing cost above the funded ceiling without having given notice under the Limitation of Cost or Limitation of Funds clause.
How we help
What this costs
Public voucher and invoice support is included in our Cost-Type plan, which starts at $1,500 a month and also covers monthly indirect rate calculations and provisional billing rates tracked against actuals. Core, at $800 a month, covers the monthly accounting and job costing underneath it. Both are on the pricing page.
If you need the rate structure built before any of this works, that is quoted as a project, and the indirect cost rate page covers what it includes.
We reply to every inquiry within one business day. If a voucher has been rejected or is sitting unpaid, say so on the first call.
Questions
Frequently asked
What form is a cost-plus invoice submitted on?
On Defense contracts, a public voucher on Standard Form 1034 with supporting detail on SF 1035, filed electronically through the Procurement Integrated Enterprise Environment. Civilian agencies vary, and the contract tells you where to send it.
How often can we bill?
Most cost-reimbursement contracts allow interim vouchers, commonly monthly, with a final voucher after the contract is complete and final indirect rates are settled. The contract and the payment clause govern.
Can we bill indirect cost without approved provisional rates?
No. Indirect cost reaches the invoice through a rate applied to a base, so without billing rates in place under FAR 42.704 there is no mechanism to bill it. Submit provisional rates as early as you can; every month without them is a month of overhead you are financing.
How is the fee calculated on each voucher?
Fixed fee is earned as cost is incurred rather than billed in a lump, so each voucher claims the proportion of the fee matching the cost claimed. Part of it may be withheld until the contract is complete and rates are settled.
What happens when our provisional rates turn out to be wrong?
They always are, to some degree. The incurred cost submission compares billed rates to actual and the difference is settled after audit and negotiation. If you underbilled you collect later; if you overbilled you repay. Rates should be revised during the year when it becomes clear they are off, rather than left to the settlement.
Our voucher was rejected. What now?
Find out whether the problem is support, rates or allowability, because the fix differs. Support problems are fixed by producing the reconciliation. Rate problems are fixed by rebilling at the correct rate. Allowability problems mean the cost comes off and should come out of the pool as well, so it does not recur on every future invoice.
Do we need special software to bill cost-plus?
No. QuickBooks configured for job costing, with a labor distribution that reconciles to payroll and a documented rate structure, is enough for most small contractors. What matters is traceability from the voucher back to the general ledger.
More
Related services and guides
The contract brief: what to pull out of the award
What the FAR requires in a contract brief, what DCAA tests when it checks your briefing process, and a free Excel template.
Provisional billing vs forward pricing vs final rates
Three indirect rates, three purposes. Which one bills, which one prices, which one settles, and what confusing them costs.
How much does DCAA compliant accounting cost?
Published numbers for the system build, the monthly work and the incurred cost submission, plus what moves the price.
How to calculate indirect rates for a small business
Fringe, overhead and G&A with a worked example for a ten-person firm, and what must come out of the pool first.
Indirect cost rates and provisional billing rates
Pool and base design, provisional rates under FAR 42.704, and final rate settlement.
Guide: incurred cost submission
Due dates, the ICE model schedules, and what the adequacy review checks before the audit starts.
DCAA compliant accounting system setup
Chart of accounts, job cost, timekeeping and rate structure, built in your own QuickBooks.
DCAA and DCMA audit support
Representation during audits, data requests and findings, including questioned cost.
Alexander Mungov, CPA
Founder and principal, M2 CPA
Alexander Mungov spent twelve years at the Defense Contract Audit Agency, in the Denver, European and Afghanistan branch offices, finishing as a Supervisory Auditor leading a team of six. He then built and ran the FAR, DFARS and CAS compliance program inside a defense technology company, as the primary liaison with DCAA and DCMA.
He founded M2 CPA to give small and mid-size contractors the compliance support that large primes take for granted. More about Alex.
Sources: FAR 52.216-7 (Allowable Cost and Payment), FAR 52.216-8 (Fixed Fee), FAR 42.704 (billing rates), FAR Part 31 (contract cost principles), FAR 52.232-20 and 52.232-22, Standard Forms 1034 and 1035. The worked example is illustrative and does not reflect any client’s rates. This guide is general information, not advice on a specific contract.
Voucher rejected, or not sure what to put on it?
Tell us the contract type, whether you have provisional rates in place, and how your labor is recorded. We will tell you what is missing and what it takes to bill clean.