Government contractors that enter into cost reimbursement or time and materials (T&M) contracts may need to submit an incurred cost submission (ICS) to the Defense Contract Audit Agency (DCAA). Small businesses and subcontractors can clarify this process by working with an accounting firm experienced in government contracting financial reporting like Anglin Reichmann Armstrong.
Over the course of these contracts, government contractors will use estimated budget amounts to calculate provisional billing rates they can charge back to the government for costs incurred. However, the actual rates are often different. Actual cost rates must be confirmed through an ICS to determine if the government owes the contractor money or the contractor actually owes the government money for funds already received. Under the Federal Acquisition Regulations (FAR) clause (FAR 52.216-7) known as Allowable Cost and Payment, government contractors must submit an annual final actual cost rate to the government six months after fiscal year-end.
ICS requirements are significant and can be burdensome for small businesses as well as subcontractors. Although the Allowable Cost and Payment clause can apply to both prime contractors and their subs, typically if the prime contractor is responsible, this responsibility will flow through to the subs in their contracts. To help subcontractors plan ahead, Anglin’s government contracting services team can review subcontracts to advise on whether there may be any direct pass-through costs to the government for subs to calculate and report on at year-end.
It’s important to note that the contracting officer can close contracts only after the ICS has been submitted, the rates approved and a final invoice submitted. That means, the longer the ICS is under adequacy review, the longer contractors will wait for payment. For multi-year contracts, final or actual rates for contracts that are still in progress need to be implemented on invoices within 60 days of finalizing the rates in a given year.
DCAA Requirements and Review
Each contractor’s unique contractual requirements, cost structure and cost accounting practices must be considered when submitting an accurate and complete ICS. Each submission must meet DCAA requirements and their adequacy review, and the DCAA prefers use of its Incurred Cost Electronically (ICE) model for submissions. The electronic submission will undergo an adequacy review before approval — and potentially an audit within 24 months of submission.
Some of the data required for the ICS includes the following:
- Summaries of claimed Indirect Expense Rates, properly categorized, including indirect expense pools
- General and Administrative (G&A) expenses
- Overhead expenses
- Occupancy expenses
- Direct costs by contract or subcontract and indirect expense applied at claimed rates
- Cumulative direct and indirect costs claimed and billed
- On T&M/labor hour contracts, a summary of hours and amounts
- Contract closing information for any contracts that were completed in the fiscal year
Preparation for submitting the ICS can include the following:
- Managing indirect rates
- Identifying unallowable costs
- Ensuring consistent cost accounting
If you are concerned about your contractual requirements for existing contracts, contact Michelle Jenkins, CPA, to discuss DCAA and Contracting Officer requirements. It pays to plan ahead. Our consultants have decades of experience in government contractor compliance, including ICS preparation or review. Learn more about these services on our government contracting page.