As May wraps up, there is a deadline looming for many government contractors. Eric Poppe and Javier Diaz, members of Cherry Bekaert’s Government Contractor Services Group talk about preparing and submitting your annual Incurred Cost Submissions (ICS). An ICS is due six months after the end of your fiscal year and is based on the requirement of the Allowable Cost and Payment Clause. Discussion includes items required to compile your indirect rates, documents needed to prepare the submission, the submission process and potential pitfalls so you are on the lookout prior to submission to DCAA.
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HOST: ERIC POPPE: This is Cherry Bekaert's GovCon podcast, where we discuss current government contracting trends, compliance matters, and best practices to guide federal contractors forward.
HOST: ERIC POPPE: My name is Eric Poppe. I'm a senior manager at Cherry Bekaert, and with me today is Javier Diaz, a manager in Cherry Bekaert's Government Contract Services Group. Javi, thanks for joining me.
GUEST: JAVIER DIAZ: Thanks for having me. It's nice to talk to somebody when we're stuck at home during this pandemic.
HOST: ERIC POPPE: Today I was thinking we could talk about incurred cost submissions. We're over halfway through May. A lot of companies come right out of the wintertime into year-end close, then tax season and financial statement reviews and audits. Then they realize there's a deadline looming and they need to submit their annual incurred cost submission.
HOST: ERIC POPPE: Typically it's six months after the end of your fiscal year. A lot of our clients are calendar-year, so it's all due at the end of June. For companies that just got into government contracting or aren't sure if they are required to submit an incurred cost submission, when is it required?
GUEST: JAVIER DIAZ: It's required when you have the Allowable Cost and Payment clause or the T&M payment clause in any of your cost-type or T&M contracts. If those are included, then you must submit an incurred cost submission to your cognizant DCAA office or your DCMA contracting officer.
HOST: ERIC POPPE: Many companies use the model that DCAA puts out, the ICE model. Is that required, or can they create their own Excel model?
GUEST: JAVIER DIAZ: You can create your own Excel model. The ICE model isn't required. What is required is the type of information included in the ICE model. The ICE model facilitates giving information to the government, but you can use a different file or a custom method as long as it contains all the required information.
HOST: ERIC POPPE: You help a lot of our clients put together incurred cost submissions. You used to audit incurred cost submissions. What are the items that are required and what should you start with?
GUEST: JAVIER DIAZ: The most important items are the final trial balance and your general ledger detail. Everything revolves around that. You take information from your books, the general ledger detail, and trial balance to complete all the schedules in the ICE model. It's largely slicing and dicing the numbers and putting everything into the correct pools to provide that information to the government.
HOST: ERIC POPPE: Any other documents that are needed? When I've helped companies, I ask for a current list of your contracts and final invoices for your flexibly priced T&M or cost-plus contracts.
GUEST: JAVIER DIAZ: Yes. You'll also need subcontractor information, including addresses and points of contact, and payroll documentation for year-end. You need to reconcile total payroll to your total labor distribution on Schedule L.
GUEST: JAVIER DIAZ: For payroll you'll need year-end payroll summary reports, W-2 summaries, and 941 tax returns. Use that information to reconcile your labor distribution back to your general ledger. You'll also need job summary reports that break down costs to each job by cost element. This helps with Schedule H when breaking out direct costs and indirect allocations.
HOST: ERIC POPPE: The Allowable Cost and Payment clause lists the schedules you're supposed to have. The ICE model has supplemental and optional schedules as well. Are those required, or truly optional? Should companies prepare those schedules?
GUEST: JAVIER DIAZ: Some should be prepared and submitted with your ICE model. For example, executive compensation should be included. Other items, like contract briefs, I would hold off on submitting with the incurred cost submission. If you're selected for audit in the future, provide those only if the auditor requests them.
GUEST: JAVIER DIAZ: Having contract briefs ready is good practice, but wait for the auditor's request before providing them.
HOST: ERIC POPPE: I would suggest providing the trial balance in every incurred cost submission. That's the first thing the government will look at to see if your trial balance ties to your indirect schedules and whether those reconcile. Executive compensation is also one of the first things auditors request.
HOST: ERIC POPPE: What are some common pitfalls contractors have when preparing and submitting incurred cost submissions?
GUEST: JAVIER DIAZ: The biggest issue is not being prepared. Many start preparing the information only a month or a few days before the submission is due. If you're slicing and dicing information at the last minute, the week before submission will be rough with long hours to get everything ready. Prepare and organize your information so it's easily transferable into an incurred cost submission at year-end.
HOST: ERIC POPPE: If a company is 90–95 percent complete and can't reconcile a couple things, should they submit at the deadline or wait a few days to get it right?
GUEST: JAVIER DIAZ: Definitely get it right before submitting. If completion will take more than a couple of days, call the cognizant DCAA office or your contracting officer and request an extension. It's better to submit something that's correct than to submit something you know is wrong and correct it later. An auditor may compare the updated submission to the original and that can create more questions and a bigger audit burden.
HOST: ERIC POPPE: In that final check before submission, simple things can make a submission inadequate. Make sure you have documentation for adjustments. Perform reconciliations to ensure Schedule E bases tie to Schedule H, and make sure costs are allocated appropriately when tying pools to Schedule H. One issue we often see is the level of detail for contracts on Schedule H not matching Schedule I.
GUEST: JAVIER DIAZ: Before you submit, DCAA's website has an incurred cost submission adequacy checklist. It lays out basic tabs that should reconcile between each other. Use that checklist and go through it quickly before submitting to ensure everything reconciles between the tabs.
HOST: ERIC POPPE: That's a very good suggestion. Going through that checklist is a best practice to understand how the submission fits together and to prepare for an audit.
HOST: ERIC POPPE: We're about up on time. Javi, I appreciate you taking the time to talk today. Thank you to everyone for listening to Cherry Bekaert's GovCon podcast. Please reach out if you have questions.
