ICS Checklist – 5 Ways to Prep for DCAA Audit Summary
An Incurred Cost Submission is required for all federal contractors holding cost-type or time and materials (T&M) contracts. Our ICS Audit experts identified the key 5-ways to start DCAA audit preparation for the incurred cost audit, while preparing the current annual ICS.ICS Checklist – 5 DCAA Audit preparation tips for the Audit ICS Checklist – 5 Ways to Prep for the Audit
We also invite you to watch two of our ICS Experts Jennifer Rettelle and Marie Salamone as they cover 5 of the most important steps you should take to prep for the DCAA audit while preparing your annual Incurred Cost Audit.
1:36 – Understanding of all of the assumptions upon which the ICS is built will save undue stress upon audit and having this documentation organized is a bonus.
1:56 – The time between the actual preparation and submission of the ICS to when it is actually audited has been shrinking thanks to DCAA’s push to decrease the ICS audit backlog.
2:17 – Without sharing the knowledge wealth organizations create a single point of failure.
4:28 – Larger unexpected fluctuations, and costs year over year at a minimum need to be investigated.
5:29 – Trying to find the source documentation downstream upon an audit can be a challenge…
6:29 – The fastest way for the ship to sink during an audit is to have a misstep or misunderstanding related to audit expectations.
The requirement to submit a final indirect cost rate proposal, more commonly referred to as the Incurred Cost Proposal or Incurred Cost Submission (ICS), is contained in FAR clause 52.216-7(d)(2)(i) – Allowable Cost and Payment which states: “The contractor shall submit an adequate final indirect cost rate proposal to the contracting officer (or cognizant Federal agency official) and auditor within the 6-month period following the expiration of each of its fiscal years.
One of the major historical audit challenges is the delay, sometimes many years, between timely submission under FAR 52.216-7 and the actual audit. DCAA is now required to audit adequate final indirect cost rate proposals within one year, but only time will tell if they can meet that lofty goal.
To help eliminate the future audit risk, Capital Edge’s DCAA Audit Services has identified five ways to start DCAA Audit Preparation for the incurred cost audit, while preparing the current annual incurred cost submission
This point cannot be stressed enough and is the first step to prep for the DCAA audit. The backlog in incurred cost audits only further solidifies the likelihood that the people preparing the Incurred Cost Submission may not be available to support an audit or the data needed to support the audit is difficult to find. The likelihood of an ICS audit year occurring years after submission has historically been high. Be sure to document as much as possible in a way that someone unfamiliar with your organization will understand since you may be long gone by the time an auditor shows up.
We recommend keeping a list of these items so that the preparer of the next incurred cost submission has a head start. Maintaining such a record can also expedite the timeline for incorporating these changes into current or future submissions and provide some, if not all, of the information needed to document the change(s) in preparation for an audit. In addition, these changes may likely be considered a change in cost accounting practice, which has other compliance implications for CAS covered contracts that we won’t delve into here.
We recommend that contractors are careful to spread the wealth of knowledge of the inner workings of their Incurred Cost Submission and preparation methodology with others in the finance or accounting department. Such steps will reduce the risk of substantial knowledge loss in the event employees with major roles in the ICS preparation process move on to other positions before the audit occurs.
Although supplemental schedules are not required to be included with the ICS for adequacy determination purposes, they will likely be some of the first items requested at the beginning of an audit. The process to complete these schedules is more efficient when completed as part of the original ICS preparation and can help identify items which may be questioned by an auditor.
In addition, some of the supplemental schedules have other valuable uses to the company and to the ICS preparation process. For example, the set of Supplement Schedule A’s can be used to evaluate the year after year change in costs by account.
Large fluctuations in costs identified in these schedules can indicate a preparation error in the ICS or simply changes in company spending. These schedules can be used by management to see what is driving the change in rates for a deeper understanding of their business and they can also be used to identify areas where DCAA may focus their audits, especially if certain high-risk accounts such as travel, executive compensation, legal, consulting, etc. have increased significantly year after year.
We recommend maintaining two copies of the ICS when it is completed:
These two files should be marked as FINAL and WORKING COPY in the file name and stored in a properly labeled folder.
The 5th step in the DCAA audit preparation process is understanding the expectations of your auditor will help facilitate a working relationship during the course of the audit. An auditor is likely to expect a turnaround time of three days or less for documentation and answers to questions. It is critical to set a clear understanding with DCAA of when you will be able to provide data and set yourself up for success by under-promising and over-delivering. Additionally, be sure to take a look at the supporting data that DCAA typically reviews and be sure it can be available upon audit initiation.
For many contractors, the deadline for the next Incurred Cost Proposal is June 30th. We recommend getting started soon to be sure that you have adequate time to prepare the submission. Capital Edge has a wealth of resources available to support contractors with preparation and review of their ICS. Whether your organization is large, small, or somewhere in between, we can help take the stress out of this requirement.
Capital Edge Consulting is a professional services company comprised of adept problem solvers who deliver tangible results to address today’s most complex U.S. government contracting challenges. Capital Edge helps clients address the challenging regulatory, contractual, and compliance requirements of U.S. federal contracts and we have experience working with a wide variety of industries that provide goods or services to the federal government including industries such as biotech and healthcare, nuclear energy, education, information technology, non-profit, professional services, defense, and software.
Capital Edge government contract consultants support Government Contractors and Federal Grant Recipients. Our consultants specialize in the regulatory compliance matters you need.
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