The federal government awards millions of contracts each year, which requires a fair amount of oversight to ensure that needs are met and that contractors are fairly compensated for their work. Under certain circumstances, particularly with cost plus contracts and time and materials (T&M) contracts, contractors are required to complete what is known as an incurred cost submission (ICS) each fiscal year. Learn more about what an incurred cost submission (ICS) is and who is required to submit an ICS.
What Is Incurred Cost Submission?
When a government agency awards a cost-reimbursable contract to a government contractor, the contractor must submit a report called an incurred cost submission (ICS), sometimes also called an incurred cost proposal (ICP). The report details all indirect expenses that are related to the contract to determine how much the government agency owes the contractor or how much the contractor owes the government agency.
Types Of Contacts That Require Incurred Cost Submission
An incurred cost submission must be submitted by government contractors who are provided with cost plus contracts or time and materials (T&M) contracts by a government contracting agency.
Cost Plus Contracts
Cost plus contracts are cost-type contracts issued by government agencies that involve reimbursement of the costs associated with a project. The most common type of cost plus contracts are cost plus fixed fee contracts. These involve a fixed fee that is paid to the contractor for their work (usually as profit), and the projected expenses are also paid to the contractor at the completion of the project. An accurate and reliable incurred cost submission is required for all cost plus contracts. This ensures that the contractor is adequately compensated for their work.
Time And Materials (T&M) Contracts
Time and materials contracts, also called T&M contracts, are contracts designed to reimburse the contractor for the costs of the time and materials used to complete the contract scope of work. They are often issued when the exact (or tentative) cost of a project is unknown. They are most commonly used for construction projects, but they may be issued to contractors in other industries as well. There are two primary components of a time and materials contract, which are:
- Direct labor hours
- Actual cost for materials
Direct labor hours may include wages, administrative expenses, and profit. It is essential for contractors to submit an incurred cost submission for all time and materials contracts in order to collect the amount they are owed by the government for a specific project.
Frequently Asked Questions About Incurred Cost Submission
The following are common questions asked by government contractors in regard to incurred cost submission. Every situation is unique, and working with a certified public accountant is strongly encouraged.
Do Fixed Price Contracts Require An ICS?
Fixed price contracts, also called firm fixed price contracts, are contracts that include a price that is not adjustable during or after the contract is awarded. This means that the contractor’s profit or loss is dependent upon their ability to control the cost of their goods or services.
This incentivises the government contractor to keep costs low, while still maintaining the required quality standards. The only exception to this are fixed price contracts with economic price adjustments. Since the price is set before the contract is awarded, an incurred cost submission is not necessary, although the contractor may need to provide a “detailed statement of all costs incurred.”
When Is An Incurred Cost Submission Required?
An incurred cost submission should be submitted six months after the end of the fiscal year. For example, if your fiscal year ends on July 1st, then you should submit your incurred cost submission no later than January 1st.
Why Is An Incurred Cost Submission a Requirement?
The simplest way to view an incurred cost submission is in comparison to an income tax return. You submit the ICS once per year and the government compensates you for the amount that you are owed. However, this is not the case for every contractor, much like with tax returns. In some cases, the contractor may owe the government money instead, particularly if they were compensated more than they should have been for the completed contracts in the past fiscal year.
What Are The Most Common Issues To Avoid With Incurred Cost Submission?
The most common mistakes on incurred cost submissions made by government contractors are exceeding the statutory maximum compensation amount, reporting a compensation that is notably higher than industry peers, not properly allocating and segregating costs, making mistakes with bonus and severance costs, and not including all details and costs in the incurred cost submission.
Given the complexities that are often involved with an incurred cost submission, it is strongly advised to work with a certified public accountant who has experience with incurred cost submissions in order to avoid any critical mistakes.
If your government contracting business needs support with completing an incurred cost submission, or to learn more, reach out to the experts at Diener and Associates today.