Introduction
Government contractors operate in a highly regulated environment where navigating the complexities associated with regulations can be challenging, especially when it comes to compliance. Government contractors with cost-reimbursable or time and material (T&M) contracts that include the Allowable Cost and Payment FAR clause 52.216-7 are familiar with the requirement to file an Incurred Cost Submission (ICS) annually. For newer contractors or those performing on their first cost-reimbursable contract, preparing an initial ICS can be a daunting task.
This guide provides a brief on the best practices and key elements of an ICS, as well as common mistakes to avoid, to streamline the process for preparation and submission.
Best Practices for the ICS:
- Timing: To avoid a delinquent submission, an ICS must be submitted within six months of the contractor’s fiscal year end. Under exceptional circumstances, a contractor may submit a written request for an extension of time to the Defense Contract Management Agency (DCMA) before the deadline expires. If the extension is not granted, the Defense Contract Audit Agency (DCAA) auditor may provide unilateral rate recommendations.
- Documentation of cost: Under FAR 31.201-2(d) contractors are required to maintain records, including supporting documents to demonstrate allowability and allocability of cost. FAR 31.206 also provides specific documentation requirements for various cost elements such as travel cost, employee compensation, and professional and consultant services.
- Policies and Procedures: The contractor should review the policies and procedures and strive to align them with current cost-accounting practices, updating them if necessary.
- Format: While not required, it is best practice to use DCAA’s Incurred Cost Electronically (ICE) Model (or similar format) as it includes all schedules required for an adequate submission.
- Leverage Enterprise Resource Planning (ERP) systems: A project-cost-based ERP solution designed explicitly for the government contracting industry can help in producing ICE schedules, reconciling to financial and project reports, providing efficiencies, and achieving accuracy and compliance of the ICS process.
- Review for unallowable costs: Prior to submitting an ICS, it is essential to thoroughly review your costs to identify and exclude any unallowable expenses. Failing to do so may result in penalties and the need to repay the government.
- Reconciliations: Prior to submitting an ICS, contractors should review their schedules to align and reconcile with the financial data in the trial balance. The total cost claimed should be reconciled with the total trial balance.
Key Elements of an ICS
Adequacy assessments of contractor-incurred cost proposals include assessments for completeness and accuracy of the submission. Contractors are encouraged to use the same checklist used by DCAA Auditors to access adequacy of their submission. The following schedules are required:
| Schedule A | Summary of all claimed indirect rates, including pool, base, and calculated indirect rate |
| Schedule B, C, D | Final and intermediate indirect cost pools |
| Schedule E | Claimed allocation bases used to distribute indirect cost |
| Schedule F | Facilities capital cost of money factors computation |
| Schedule G | Reconciliation of accounting records and claimed direct cost by major cost elements |
| Schedule H, H1, Summary H | Schedule of direct cost by contract and subcontract and indirect expenses applied at the claimed rates and government participation calculated for each indirect expense pool |
| Schedule I | Outlines the total direct and indirect costs claimed and billed from the start of the contract to the present. It includes calculations for any over or under billing. |
| Schedule J | Subcontract information |
| Schedule K | Hours and amounts on T&M contracts |
| Schedule L | Reconciling total payroll with IRS Form 941, which can often be challenging due to discrepancies that may arise between payroll records and tax filings |
| Schedule M | Accounting or organization changes |
| Schedule N | Certificate of indirect cost |
| Schedule O | Contract closing information |
Common Deficiencies
Many contractors face challenges preparing their ICS, often leading to deficiencies that can result in penalties or repayment obligations. Understanding the following common deficiencies can help contractors avoid pitfalls and maintain compliance.
- Missing or incomplete schedules: The proposal must include all required schedules and meet the requirements outlined in the checklist.
- Errors in indirect cost rates: Errors in calculating the indirect cost rates or inconsistent application of indirect rates across contracts.
- Unallowable expenses: Unallowable expense accounts/amounts not identified as a reduction or adjustment to the expenses in the general ledger.
- Schedule B: Independent research and development (IR&D)/bid and proposal (B&P) not fully burdened.
- Schedule E: Unallowable overhead costs not included in G&A base.
- Schedule G: Job cost ledger not reconciling with general ledger.
- Schedule I: The cost detail is not at the same level used for billing costs, and the claimed fiscal year dollar amounts do not align with Schedule H for cost-type contracts or Schedule K for T&M contracts. Additionally, contract ceilings and limitations are not being applied.
- Schedule N: Signed certification not included or not signed by at least a vice president or CFO.
BDO’s Government Contracting professionals can help you understand the complexities involved in preparing your submission and assist you with preparing an adequate submission.
Reach out to learn more.