Early ICS Preparation Tips for June 30, 2025 Submission
By: Marie Salamone, Partner & Eric Hayman, Director
The annual Incurred Cost Submission (ICS) season is quickly approaching; and those Contractors or Subcontractors with a fiscal year-end of December 31, should be starting the process to prepare for a timely submission of their annual ICS by June 30, 2025. While the deadline for submission may be five (5) months away, preparation of the annual filing takes time, resources, and sufficient data; much of which contractors can begin to prepare now.
What is an Incurred Cost Submission?
The Incurred Cost Submission, also known as an Incurred Cost Proposal (ICP), is an annual filing which details a contractor’s costs for the previous fiscal year to establish actual year-end indirect cost rates. See more details below in section “Supplemental Background Information on Incurred Cost Submissions.”
Who is Required to File and When is the Incurred Cost Submission Due?
In accordance with FAR 16.307 – Contract Clauses, cost-type and time & material contracts (T&M), are required to include FAR 52.216-7 – Allowable Cost and Payment. Contractors performing under a flexibly-priced contract containing Allowable Cost and Payment (or for T&M contacts, FAR 52.232-7 – Payment Under Time and Material Contracts), are required to annually submit an “adequate” ICS within six (6) months after their fiscal year-end.
In accordance with these regulations, most contractor submissions are due no later than June 30 each year. See more details below in section “Supplemental Background Information on Incurred Cost Submissions.”
How Can Contractors Prepare Now for their ICS Deadline?
Typically, contractors with FYE of December 31 begin compiling their ICS towards late March or early April each year. This timing is not merely a coincidence; in fact, it is related to when their externally audited financial statements are generally completed. While audited financials and any related audit adjustments are necessary to properly complete the ICS, many preparation activities can begin now. Common activities Capital Edge recommends, or performs, for contractors include:
- Review prior year data requirements and files produced during preparation of prior year’s ICS to assess if similar reports and files would still be available for current year’s preparation.
- Identify departments and individuals whose input will be necessary to complete the ICS, including:
- Procurement
- Payroll
- Cost Accounting
- Compliance
- Contracts Administration
- Subcontract Administration
- Inform key stakeholders that the ICS preparation process has begun and data will be requested in the upcoming weeks
- Gather current CASB Disclosure Statements (DS-1) to determine and understand changes to the Contractor’s cost accounting practices;
- If DS-1s are not applicable, review Provisional Rate Models or Forward Pricing Rate Models to understand any changes in cost accounting practices;
- Locate the prior year’s ICS, especially Schedules H and I;
- Roll forward prior year’s ICS model for new ICS submission;
- Evaluate new cost elements, new cost centers/organizations/departments, etc. for cost accounting treatment.
- Review project listings and contract briefs to validate contract types;
- Review new contract awards and associated contract briefs;
- Review billing registers to identify the most recent invoices applicable to cost-type and T&M contracts. Often, these invoices are produced during the first month following the end of the fiscal year;
- Obtain labor billing rates and labor hours, by Project Labor Category (PLC), for each T&M contract;
- Identify any employees with labor costs in excess of the annual salary limitation in accordance with the Bipartisan Budget Act of 2013. Generally, the annual compensation cap is published by the White House Office of Federal Procurement Policy (OFPP). Please note, with the recent administration change, OFPP’s site extension is down. Limitations for FY2024 and FY2025 are $646,000 and $671,000, respectively;
- Gather quarterly IRS Form 941’s.
- Identify and review cost elements (accounts) with a higher risk of incurred unallowable costs. Such accounts may include:
- Legal
- Travel
- Miscellaneous Cost Accounts
- Consultants/Professional Services
- Gather a listing of subcontracts and subcontractors performing under the contractor’s flexibly-price contracts. Essential information to gather includes:
- Subcontractor Name, Address, Telephone, and Point of Contact (POC)
- Subcontract Number, Subcontract Type, Period of Performance and Value
- Prime Contract Number and Value
- Subcontractor DUNS number or SAM.gov UEI number
- Review prior ICS audit reports to identify questioned costs or other non-compliances noted by the auditors; and
- Review DCAA’s Adequacy Checklist to understand reconciliation and adequacy requirements.
ICS Preparation Challenges
Data required to prepare a compliant submission is rarely, solely held within the accounting department; and contractors should not underestimate the time, effort, and resources necessary to obtain all information necessary to prepare an adequate and timely submission.
Based on our experience, contractors typically have the most difficulty completing the following schedules:
- Schedule I: Issues stemming from accurate prior year costs, cumulative billings, and billing adjustments; resulting in significant impact to over/under billings.
- Schedule J: Issues determining “subcontractors” from “vendors” or “suppliers.” Additionally, contractors often have difficulty identifying subcontractor values and fiscal year costs incurred at the pricing action level.
- Schedule L: Issues related to identifying and reconciling items down to an acceptable variance, which typically stem from timing differences between IRS Form 941 (cash basis) and general ledger reporting (accrual basis).
The Audit
A clean audit, or one free of questioned costs, is obtainable and should always be the contractor’s goal. However, many ICS audits result in questioned costs. Such costs are removed from the pool(s), and the indirect rates are recalculated for the final report submitted to the ACO for approval.
Should the ACO agree with the auditor’s assertions, contractors may be subject to penalties and interest in accordance with FAR 42.709 – Penalties. Additionally, contractors should expect to comply with any Demands for Payment within 60 days of final indirect rate settlement.
Contractors can prevent audit findings by properly documenting and supporting the ICS during preparation and throughout the year. This documentation includes:
- Well-developed and supported work papers, especially for adjusting items or for “off ledger” transactions, such as Home Office Allocations;
- Well documented unallowable testing/scrubbing activities and results;
- Clear policies and procedures and training documentation;
- Complete journal entry documentation, including adequate notes and workpapers;
- Proper receipt documentation, in compliance with regulation and company policies;
- Proper transactional documentation, to include, agreements, purchase orders, work product, timesheets and accompanying notes, and meeting notes; especially for legal, consultant, and professional services expenses;
- Well documented compensation plans. Historically, compensation has been a focal point for ICS auditors. As with any cost, to be allowable, the cost must be reasonable; and auditors, especially DCAA, have frequently questioned the reasonableness of compensation. Maintaining and following established policies regarding compensation is key to defending against such assertions; and
- Well documented bonus plans. Similar to compensation, auditors routinely question contractor bonus payments. Typically, the auditors point to an impartial reference contained within FAR 31.205-6 (f)– Bonuses and Incentive Compensation; which states such payments are “allowable provided… awards are paid or accrued under an agreement entered into in good faith between the contractor and the employees before the services are rendered or pursuant to an established plan or policy followed by the contractor so consistently as to imply, in effect, an agreement to make such payment.” Typically, the auditors interpret this language to require a “written bonus plan or policy.” While a written plan is not required, contractors routinely have difficulty defending their bonuses without one; especially when bonuses are discretionary. Contractors who clearly document bonus plans and policies or clearly document bonus pool participation in employee agreements often fare better, during audit, than those that don’t.
Final Takeaways
While the number of ICS audits performed has been reduced in recent years, they still represent an area with significant questioned costs by auditors. Contractors are encouraged to take the ICS preparation and submission process seriously. Contractors should focus on the accuracy of the information contained within the ICS and allow sufficient time to complete the submission by the regulatorily required deadline.
Finally, if your organization is in need of ICS preparation or audit support, Capital Edge’s ICS subject matter experts have the skills, knowledge, and experience necessary to mitigate audit risk and ensure an adequate, timely submission.
Supplemental Background Information on Incurred Cost Submissions
What is an Incurred Cost Submission (Continued)?
The Incurred Cost Submission, also known as an Incurred Cost Proposal (ICP), is an annual filing which details a contractor’s costs for the previous fiscal year to establish actual year-end indirect cost rates. Once calculated, these rates will be applied to direct costs incurred under flexibly priced government contracts to report total actual costs incurred under these agreements for the year.
Ultimately, the underlying intent behind the ICS is determine the variance between the contractor’s budgeted or provisional billing rates and their final year-end rates; in order to true-up billings to the Government.
This true-up process happens after the government auditors have completed their review, notified the Contracting Officer of any changes to the proposed rates due to questioned costs, and after the Contractor has received a Final Rate Determination from their Administrative Contracting Officer. In accordance with FAR 42.705 – Final Indirect Cost Rates, contractors must perform their indirect rate true-up billings within 120 days after final determination.
Who is Required to File and When is the Incurred Cost Submission Due Date (Continued)?
Companies with flexibly priced contracts (cost-type and T&M) containing FAR 52.216-7 or 52.232-7 are required to submit an adequate ICS within six (6) months of their fiscal year-end; and should make every effort to adhere to this deadline. Contractors can request submission extensions from their Administrative Contracting Officer (ACO) for exceptional circumstances.
While it is not uncommon for reasonable extensions to be granted, they are becoming more difficult to obtain. If your organization requires an extension, it should be requested in writing; and should document the reason(s) for extension.
Furthermore, contractors should avoid delaying their extension requests until the last minute. Missing the incurred cost submission deadline can alert auditors to potential risk and could result in additional scrutiny of the contractor’s accounting system internal controls. Lastly, if a submission is more than six months late, the auditors have the authority to recommend a decrement factor to the Contracting Officer; potentially reducing costs which are otherwise recoverable.
What is needed for an ICS?
Contractors will need their financial statements, including a detailed trial balance, to which costs within the ICS must be reconciled. Contractors may use DCAA’s Incurred Cost Electronically (ICE) module, or the contractor’s independently developed model for reporting the ICS When utilizing a model developed independently, it must comply with the requirements of FAR 52.216-7(d)(2)(iii)(A)–(O), which includes the following required schedules:
- Schedule A: Summary of all claimed indirect expense rates, including pool, base, and calculated indirect rate;
- Schedule B: General and administrative expenses;
- Schedule C: Overhead expenses;
- Schedule D: Intermediate indirect cost pool; allocations to final indirect cost pools;
- Schedule E: Claimed allocation bases, by element of cost, used to distribute indirect costs;
- Schedule H: Schedule of direct cost by contract, subcontract and indirect expense applied at claimed rates;
- Schedule H-1: Government participation by pool;
- Schedule I: Schedule of cumulative direct and indirect costs claimed and billed by contract and subcontract;
- Schedule J: Listing of subcontracts awarded for which contractor is a prime or upper-tier contract;
- Schedule K: Summary of each T&M and labor-hour contract;
- Schedule L: Reconciliation of total payroll per IRS Form 941 and total labor distribution costs;
- Schedule M: Listing of decisions, agreements, approvals, and description of accounting and organizational changes;
- Schedule N: Certification of final indirect costs; and
- Schedule O: Contract closing information physically completed in this fiscal year.
