Incurred Cost Submission
The incurred cost submission (ICS) is required for all federal contractors holding cost-reimbursable or time and materials (T&M) contracts and is a universal requirement regardless of agency customer. Under cost-reimbursable and T&M contracts when we bill costs incurred, we are using provisional or estimated indirect rates, the ICS allows us to "true-up" the bills using the actual rates. All contracts requiring the incurred cost submission will include the Federal Acquisition Regulations "Allowable Cost & Payment Clause" (FAR 52.216-7) and/or the "T&M Payment Clause" (FAR 52.232-7). Following are answers to frequently asked questions and references to resources to help you.
How Are Provisional Indirect Rate Established?
The Procedure for establishing provisional billing rates is defined in FAR 42.704(b). It is summarized as follows:
- The contracting officer or auditor establishes provisional billing rates (PBRs) based on information resulting from recent reviews, previous rate audits or experience, or similar reliable data or expense of other contracting activities.
- When the contracting officer or auditor determines that the contract value does not warrant submission of a billing rate proposal, PBRs may be established by making appropriate adjustments from the prior year's indirect cost experience to eliminate unallowable and non-recurring costs.
- Also, contractors may voluntarily submit a billing rate proposal to assist the responsible official in establishing rates (preferred)
- Contractors submit provisional billing rates to their DCAA Office or Administrative Contracting Officer.
When Should the Contractor Submit their PBR Proposal?
- Before the beginning of the fiscal year (once budgets are complete) or when the established billing rates are no longer representative of the final year-end rates due to unforeseen events or circumstances
- PBRs should represent a 12-month period (the contractor fiscal year)
- PBRs should be submitted at least annually
- Vouchers and progress payments can be returned/rejected if submitted without properly established billing rates.
What Should Be Provided in the PBR Proposal?
- Proposed billing rate calculations, and indirect rates (pool and base) with a brief rationale
- Prior fiscal year (YR) pool and base
- Current FY-to-date pool and base
- Current FY budget pool and base, if available
- Comparative analysis with an explanation of any significant differences
Do I Submit the Provisional Billing Rate Proposal to the ACO or DCAA Office?
- FAR 42.704 indicates the office responsible for final indirect cost rates also establishes the provisional billing rates
- If final rates are ACO determined, submit them to that office
- If final rates are audit determined, submit them to the local DCAA Office.
What Is Incurred Cost Submission?
The incurred cost submission goes by many names/acronyms including final indirect rate proposal, incurred cost electronic submission, indirect cost rate submission, incurred cost proposal, ICES, ICS, or ICP. Regardless of the name, it is simply the mechanism for the true-up of your actual indirect cost to the indirect costs provisionally billed for in a single contractor fiscal year.
The incurred cost submission (ICS) covers 6 broad areas:
- Schedules A through E: Presentation of indirect cost pool and base components
- Schedule H/H-1/Summary H: Presentation of direct cost by contract at the funding or billing level
- Schedule I: Presentation of the cumulative cost incurred, cumulative billing, and calculation of over or underbilling amount
- Schedule K: Presentation of T&M contract costs
- Schedule N: Certification of Final Indirect Costs
- Schedules F, J, L, O, Supplemental Schedules: Presentation of various supplementary information including cost of money, subcontractor information, reconciliation to payroll information, contract close-out data, executive compensation, and other supporting information necessary for the audit of the incurred cost submission
When Must the Incurred Cost Submission be Filed?
The incurred cost submission is required to be submitted 6 months after fiscal year-end, so if your fiscal year end is 31 December your submission would be due no later than the following June 30 for each fiscal year in which cost is incurred under an applicable contract type. Special considerations must be made when there are circumstances like mergers, acquisitions, or changes in the fiscal year, which may necessitate a partial fiscal year incurred cost submission. In these circumstances, an advanced agreement should be sought with your Administrative Contracting Officer.
When Is an Incurred Cost Submission Required?
An incurred cost submission must be submitted for each business unit of a contractor that holds applicable contracts subject to the Allowable Cost and Payment clause (FAR 52.216-7). Like Cost Accounting Standards (CAS) disclosure statements, an incurred cost submission is also required for Home Office entities or Shared Service Business Units where costs originate and ultimately flow into business units holding applicable contract types requiring an Incurred Cost Proposal (ICP).
Why Is Incurred Cost Submission a Requirement?
Quite simply the incurred cost submission should be thought of like the personal income tax returns required for all Americans. Under cost-reimbursable and T&M contracts when we bill costs incurred, we are using provisional or estimated indirect rates, which is like the withholding process for income tax purposes. Once the fiscal year is closed, we know what actual costs were incurred and can therefore calculate final indirect rates based on those actual costs, rather than the estimated costs used to establish the provisional billing rates. The incurred cost submission is like the IRS Form 1040 for indirect rates; through it, we can calculate if our business is due a refund of indirect costs because we billed less than the actual indirect cost, or if we owe money to the government because our provisionally billed indirect costs were higher than our actual indirect costs.
What Is Required to Prepare the Incurred Cost Submission?
There are several steps that contractors can take in advance to prepare for this important, very detailed task. First, contractors can find a copy of the latest model of the incurred cost proposal on the DCAA's website. A lot of meticulous information is required, and this model, in Microsoft Excel, referred to as the ICE Model, will tell contractors exactly what their submissions should include and how the information should be prepared.
Another important step contractors can take throughout the year is to stay organized. It's key that a contractor knows exactly what kind of contract they have, for example, time and materials or cost-plus fixed fee-and bill in accordance with that contract. Projects should be monitored on a regular basis, to ensure that proposed indirect rates line up with actual rates. Your project management and accounting system should generate project cost reports that help you monitor your rates and aid in preparing the details schedules provided in the ICE Model. And because ICE submissions are cumulative, contractors should keep their historical billing data organized and easily accessible-they'll need it to show the government what they billed in prior years.
A contractor's accounting system should be set up and maintained in the right way to capture all the necessary data. An accounting system should have the ability to track billings and project costs in accordance with indirect rates. Costs must be assigned to the right buckets-typical cost pools might be direct labor, fringe benefits, overhead, general and administrative (G&A), and material handling (M&H).
Some accounting systems have built-in ICE sections that help facilitate this capture of information. For example, AtWork Systems' OneLynk SaaS platform has a set of reports designed specifically to support ICE submissions. It's also possible to design custom reports that would be able to pick up this information. We also provide specialized support to help you evaluate your reports or prepare to help you maximize your accounting system's functionality.
"If all the information comes directly out of your accounting system, you are going to be in great shape," says Mike Bogdon, CPA, VP of Accounting Services, AtWork Systems LLC.
What Are the Top 5 Issues in an ICS Audit?
- Contractor Compensation - FAR 31.205-6 establishes benchmarking for compensation reasonableness to industry peers as well as a statutory maximum compensation amount.
- Contractor Labor Categories - DCAA will frequently review T-rates under T&M contracts to ensure personnel charging to labor rates meet requirements for years of experience, education, and other labor category requirements.
- Allocability - The catch-all in the DCAA audit toolbox that quite simply means a cost is assigned (allocated) to a final cost objective based on a causal or beneficial relationship. The subjective nature of this determination frequently leads to audit issues.
- Bonus/Severance Costs - Also linked to FAR 31.205-6 but the catch here is that DCAA consistently questions the costs of contractors who pay these costs but do not have an established policy or procedure governing the payments based on employee performance.
- Adequacy - Not really an audit requirement as much as a gate to clear before the audit can begin. DCAA offers an incurred cost adequacy checklist available at dcaa.mil which provides information and checks that every contractor should perform before submitting their ICS.
What Resources are Available to Help Me?
AtWork Systems LLC assists clients with the preparation, review, and DCAA audit defense of incurred cost submissions and has almost two decades of experience assisting clients all over the US with the ICS process. We frequently assist with first-time preparation for both traditional and non-traditional contractors utilizing proprietary processes for review designed to insulate clients from audit risks. We maintain a staff of government accounting experts who have expertise in the preparation and defense of incurred cost issues. For more information about our managed services please visit www.atworksys.com/managed-services
AtWork Systems' OneLynk SaaS platform, assists with the preparation of the incurred cost submission in a variety of ways. As the industry's most modern accounting system for government contractors, OneLynk, was built from the ground up to support the ICE Model. OneLynk provides information that contractors need to prepare incurred cost submissions and can generate the list of schedules using data directly from the accounting system. Both the general ledger and project ledger have been optimized to support the ICS submission. Utilizing out-of-the-box reports or customized reporting solutions, OneLynk makes the import and generation of data needed to prepare the incurred cost submissions and to reconcile it to your financial and project records easier and more efficient than any other solution available. In terms of time savings, clients utilizing OneLynk can turn an onerous and difficult process that can span several months into a process of weeks or even days, depending on the complexity of a company's incurred cost submission. Learn more about www.atworksys.com