It’s That Time Again…. How to Get a Head Start on your Annual Incurred Cost Submission

calendar iconApril 5, 2023

It’s that time of year. Year-end financial statement audits are going on, you are working with your accountant on your tax returns hoping to complete on time, and just around the corner, you are required to submit your Incurred Cost Submission (“ICS”). Is there time to breathe?

As we know, for companies with a fiscal year ending December 31, the annual ICS will be due by June 30, six months after the close of that fiscal year.

The determining factor which requires companies to submit an ICS is the Federal Acquisition Regulation (“FAR”) Clause 52.216-7, Allowable Cost and Payment. If this clause is included in one of your contracts, you are required to submit an ICS. Additionally, submitting your ICS to the appropriate Government Administrative Contracting Officer and the cognizant Defense Contract Audit Agency (“DCAA”) office on time is very important. Late submissions are subject to a unilateral decision by the Contracting Officer (“CO”) to apply a decrement factor; which will reduce the billed cost.

Throughout the years, we have seen a variety of different hiccups and struggles for companies as they shift out of “busy season,” and there are steps a company can take to help ease the transition and preparation of the ICS. Here are a few things to consider when starting to prepare your ICS during this busy time:

  • Start early. We know the Spring is always busy for the accounting and finance teams but the ICS has numerous schedules, which need to reconcile for the DCAA to consider it adequate. Rushing through the preparation in late June can lead to the ICS being deemed inadequate or to a misrepresentation of costs. Allow sufficient time to compile your company’s financial data and adequate internal review. A good time to collect this is during the financial statement audit.
  • Collect all year-end vouchers. For smaller companies, this may be an easy task. For larger companies, consider tasking this effort in advance to ensure there are no major issues when completing Schedule I and Schedule O. Besides easing the effort in completing a more complicated ICS, the last voucher of the year may reveal many clues that you may not have previously considered. For example, you may be able to determine which contracts on Schedule I are physically complete, and therefore, should also be included on Schedule O.
  • Reconcile your IRS Form 941s. What seems like a simple task can often turn into a tedious exercise. Take the time to reconcile your quarterly 941s back to the general ledger in advance, or take the opportunity to delegate to a junior staff for training opportunities. In the event your company uses a Professional Employer Organization (“PEO”), those 941s may not be available to your company. Consider what alternative reporting your PEO has if they file an aggregate 941 and determine how you can reconcile your 941s for the sake of completing Schedule L. This can also be done as a step during your financial audit.
  • Reconcile your financial statements to your trial balance. If your financial statements are compiled, reviewed or audited, consider taking the time to develop a work paper that reconciles those final statements to your trial balance. As many know, there can be differences between financial statements (i.e., GAAP) and the incurred cost submission (costing). Preparation of this can alleviate issues down the line with the DCAA or other auditors. Where differences exist, this is your opportunity to ensure you have the proper back-up in case you and your team are no longer with the company when the audit comes around. Additionally, for companies where the financial statements roll up a series of more detailed accounts, ensuring that the high level reconciles to the more detailed level provides you and your team additional assurance that you are looking at the right numbers. This also helps your company recoup the proper amount of indirect expense on cost type or time and materials contracts.
  • Complete an Unallowable Cost Scrub. Almost all cost type contracts include FAR 52.242-3, Penalties for Unallowable Costs, which may require companies to pay penalties on expressly unallowable costs when they have been claimed in the ICS. Because of this, it is essential that you take the time to ensure all costs are well supported and properly classified as either allowable or unallowable.

Depending on the size of your company, the process of removing unallowable costs from claimed costs (scrubbing) may be completed throughout the year, or as little as once before the completion of the ICS. Either way, you should focus on high-risk accounts (e.g., travel, consultant costs, business development, executive compensation, etc.) to ensure that the costs being claimed are allowable per FAR 31.205, Selected Costs, and the transactions are adequately supported.

  • Perform the DCAA Adequacy Checklist. While some companies may never have the luxury of working with timely DCAA auditors, the best practice is to ensure your submission complies with the DCAA adequacy checklist. DCAA’s Incurred Cost Electronically Model is not a requirement, but meeting the basis objectives of that model are. Consider finding someone in your organization savvy enough to navigate through an ICS, but who is unfamiliar enough to identify any issues with the model that you may not see while compiling. An adequate submission is key to smooth audits and less scrutiny from DCAA on other engagements. Auditors are quick to deem an ICS inadequate for a variety of reasons. Some of them are:
    • Missing or incomplete cost schedules;
    • Schedules not reconciling within the ICE model;
    • Unallowable expenses are not identified as an adjustment to booked indirect expenses recorded in the General Ledger;
    • Contract Ceilings or Voucher Numbers are not listed on Schedule I;
    • Contracts that have the penalty clause are not identified on Schedule I; and
    • Missing subcontractor information on Schedule J or the amount does not reconcile to Schedule H.

In summary, for companies whose fiscal year ends on December 31, the June 30 deadline to submit the company’s ICS in accordance with the requirements of FAR 52.216-7 is very near.

Cherry Bekaert has the expertise and depth of staff to successfully assist you through the ICS completion process, including initial construction, remediation, or reviews for adequacy.

Related Guidance:
Podcast: The Incurred Cost Submission – When It Is Required, How to Prepare and Best Practices