For many people, the month of June signifies family celebrations—weddings, graduations, reunions, Father’s Day.
Although we don’t know precisely what June festivities will look like this year, there’s an important date your firm can’t let slip—the deadline for your incurred cost submission (ICS). If your cost-type or time and materials (T&M) contract with a federal agency has the triggering FAR clause (more below), your ICS is due six months after the close of your fiscal year. For many firms, that deadline falls on June 30. If you haven’t requested an extension from the Contracting Officer or ACO in accordance with the Federal Acquisition Regulations (FAR), that date is still on.
ICS documentation is a detailed and complex undertaking. The following frequently asked questions can help you properly prepare:
What is an ICS?
ICS requirements are part of the FAR. The ICS is a mechanism through which you reconcile your actual Direct Cost and Indirect Rates with the costs that you provisionally billed for during the fiscal year.
Why is an ICS Necessary?
It works this way: When your firm calculates costs incurred under cost-type and T&M federal contracts, you use provisional (estimated) indirect rates. At the close of your fiscal year when you know the actual costs, you can calculate final indirect rates based on those numbers. Through the ICS, you determine if a federal agency owes your firm a refund because you billed less than actual costs, or if your firm owes money to the agency because provisionally billed costs were higher than actual costs.
How Do I Know if My Firm Must Submit an ICS?
If your government contract includes requirements under the Allowable Cost & Payment Clause (FAR 52.216-7) you are required to submit an ICS. In almost all cases, this includes contractors with cost-plus-fixed-fee or other cost-type contracts. Your subcontractor(s) may be subject to the FAR ICS requirements as well if the subcontract has cost reimbursement elements. Consult contract provisions and/or enlist a GovCon accounting specialist when in doubt.
When and Where Does My Firm Submit an ICS?
The ICS is due 180 days after the close of your firm’s fiscal year. For the majority of GovCons, the fiscal year-end is December 31, which means the ICS is due by June 30 of the following year. Only the cognizant (responsible) contract officer can grant an extension. You must submit your ICS to the cognizant Defense Contract Audit Agency (DCAA) branch office for your location, which is usually identified in the contract. If not, use this locator to confirm your DCAA branch.
What Happens After My Firm Submits an ICS?
- DCAA evaluates the submission for adequacy, with a “spot check” to ensure data inputs are complete and appear to be accurate. The agency provides an adequacy checklist to help contractors meet ICS requirements.
- If your submission passes muster, the DCAA will issue a letter stating that your ICS is adequate.
- The agency next considers whether to place your submission in a pool for selection to be audited. If DCAA deems your ICS “low-risk,” the agency may remove you from the audit pool and issue a final indirect rate letter for the fiscal year.
How Should My Firm Prepare if DCAA Selects our ICS for an Audit?
An ICS audit encompasses your submission and any supporting documentation. That means any and all data becomes fair game for DCAA review, including payroll, invoicing, and contract records.
The following tips can help your firm prepare for this comprehensive audit:
- First and foremost, ensure that your accounting systems, policies, and procedures are up to date and fully compliant with FAR and DCAA requirements. Written policies that accurately describe your practices are critical to a compliant accounting system.
- Be aware that relevant subcontractor data, systems, and procedures should also be up to date and compliant, including agreements and modifications.
- Although DCAA operates under a statutory requirement to conduct ICS audits within one year, historically large backlogs mean that you may face an audit on data submitted even further out than a year. Prepare for this possibility by keeping complete records that would be clear to your staff even if those who serviced the contract no longer work for your firm. Software provider Unanet lists the following as areas often subject to DCAA scrutiny:
- Segregation of allowable & unallowable costs
- Separation of direct and indirect costs
- Vendor, subcontractor payments
- Structure & allocation bases of all indirect pools, including both intermediate & final pools
What are the Consequences of Not Filing an ICS?
- You may be disqualified from billing the government.
- You may be subject to administrative, civil, and/or criminal penalties.
- If DCAA finds unallowable costs, it has the authority to not only disallow them but also assess a penalty of up to two times the disallowed amount.
Many GovCons—especially those new to ICS compliance—find consulting an experienced accounting team a worthwhile investment. Feel free to reach out to CAVU’s GovCon experts for support during ICS preparation or incurred cost audits.