DCAA auditors are not permitted to assist contractors in preparing and developing an incurred cost proposal. Therefore, contractors should know how to submit an incurred cost proposal or work with a certified public accountant to ensure that the Federal Acquisition Regulation (FAR) guidelines are properly followed. This review provides an overview of how to submit an incurred cost proposal and answers frequently asked questions in regard to the submission process.
What Is An Incurred Cost Proposal?
An incurred cost proposal, also called an incurred cost submission or ICS, shows a contractor’s indirect costs spent on government-issued contracts at the end of each fiscal year. An incurred cost proposal is submitted to the Defense Contract Audit Agency (DCAA), and a DCAA auditor reviews the submission and determines whether the government owes the contractor money, the contractor owes the government money, or the costs on both sides have been settled. In some respects, an incurred cost proposal works similarly to a personal income tax return.
When Is An Incurred Cost Proposal Required?
Contractors are required to submit an incurred cost proposal at the end of every fiscal year. You are allowed up to six months after the fiscal year ends to submit your incurred cost proposal to the DCAA auditor. This means that your incurred cost proposal must be submitted within six months of the end of each fiscal year. Auditors are required to assess the ICS within 60 days after receipt of the submission.
Keep in mind that the DCAA does not grant an extension for submitting your final incurred cost proposal. A failure to submit on time could be detrimental to your business’ ability to procure contracts with the Department of Defense (DOD) and other government agencies in the future.
The Different Parts Of The Incurred Cost Proposal
There are fourteen different components to the incurred cost proposal. This includes, but is not limited to, indirect cost pool and base components (Schedule A through E), direct cost by contract at the funding or billing level (Schedule H/H-1), cumulative incurred cost, cumulative billing, and calculation of the over/under billing amount (Schedule I), presentation of time and material contracts and certification of final indirect costs (Schedule K and N), and lastly various supplementary financial records (Schedule F, J, L, and O). A more detailed breakdown is as follows:
- Schedule A — Summary of Indirect Expense Rates
- Schedule B, C, D — Indirect Cost Pools
- Schedule E — Claimed Allocation Bases
- Schedule F — Facilities Cost of Money
- Schedule G — Booked and Claimed Direct Costs
- Schedule H — Direct Costs by Contracts at Claimed Rates
- Schedule H-1 — Government Participation
- Schedule I — Cumulative Direct & Indirect Costs Claimed & Billed
- Schedule J — Subcontract Information
- Schedule K — Hours and Amounts on Time & Material (T&M) Contracts
- Schedule L — Payroll Reconciliation
- Schedule M — Accounting/Organization Changes, etc.
- Schedule N — Certificate of Indirect Costs
- Schedule O — Contract Closing Info
You can learn more about the various schedules involved with the incurred cost proposal on the DCAA’s Incurred Cost Submission (ICS) PowerPoint breakdown.
The Most Common Issues Discovered During An Incurred Cost Proposal Audit
There are certain areas that DCAA auditors will focus on when reviewing an incurred cost proposal. The DCAA states the common deficiencies (slide 20) with incurred cost proposals as:
- Signed certification not included or not signed by at least a Vice President or CFO (Schedule N)
- Lack of subcontractor information (Schedule J)
- Not all intermediate allocations were disclosed (Schedule D)
- Unallowable costs not included in G&A base (Schedule E)
- IR&D/B&P not fully burdened (Schedule B)
- Physically complete contracts not shown on Schedule I & O
- Government participation not calculated for all final indirect rates (Schedule H-1)
One main area is time rates with Time and Material (T&M) contracts. They will also look at the reasonableness of compensation as it relates to industry peers and as the benchmark states in FAR 31.205-6 (compensation for personal services). Other areas the auditor will review include bonus/several costs, allocability (the costs assigned to certain services), and adequacy. You can do an adequacy check to ensure that you provide the auditor with all the necessary information with the incurred cost submission adequacy checklist that is provided by the DCAA.
The Importance Of Properly Submitting Your Incurred Cost Proposal
A failure to properly submit your incurred cost proposal, meaning a failure to provide all the necessary details and follow the DCAA Incurred Costs Electronically (ICE) model or another approved form of submission, could lead to you owing the government money that you otherwise would not owe or a failed audit that could put your standing with government contracting agencies in jeopardy. To ensure optimal accuracy and avoid omitting key details in your incurred cost proposal, it is best to work with a certified public accountant.