Incurred cost submission best practices for government contractors

ARTICLE | March 14, 2024

Authored by RSM US LLP

Federal government contractors are required to submit an incurred cost submission (ICS) report on an annual basis. This is a government contractor’s reconciliation of provisional rates with final indirect rates. The ICS process can be intimidating, but contractors who embrace certain guiding principles are more likely to achieve a successful submission.

Here are some best practices for submitting an ICS.

Establish a plan

Contractors should assign a single point of contact to be responsible for the ICS preparation. This should be someone who has the knowledge, skills and experience to compile schedules and identify the necessary information.

Contractors should also ensure that cross-functional teams are equipped to provide or support the ICS data requirements. Everyone involved in the process needs to understand what data is required and adhere to a schedule.

Ensure policies and procedures are up to date

Auditors will want to obtain relevant policies and procedures, so contractors must be prepared to provide this information. Contractors cannot plead ignorance about their own systems, so they should be aware of any changes to policies and procedures from prior years.

Use a data checklist

Data requests should have established deadlines to ensure time for questions, reconciliations and other issues that may arise during the preparation of the ICS. A data checklist would include, among other items, the following information:

• Year-end final financial statements, including trial balance
• General ledger detail
• Project summary reports
• Contract revenue by contract type
• Year-end invoices
• Project detail labor report with hours and labor categories
• Payroll reconciliation (e.g., quarterly 941s)

Brief your contracts

Contractors should prepare and maintain contract briefs for all awarded contracts and subcontracts. Contract briefs serve as summarized versions of contract information. For example, contract briefs can include contract type, total funding, ceiling amount based on the newest modifications, key clauses and requirements, and cost principles to consider.

Creating Supplemental Schedule (O), Contract Briefings, which includes a synopsis of all pertinent contract provisions, is a good practice for contractors to implement as part of their standing process and controls even though it is not a required form.

Scrub unallowable costs

Contractors should have written policies and procedures in place so that unallowable costs are not invoiced or claimed. Employees should be trained to recognize expressly unallowable costs as well as those that are not expressly unallowable.

Review for adequacy

Before submitting the ICS, contractors should review the Defense Contract Audit Agency ICS Adequacy Checklist. This guide will help contractors assess the state of their submission.

Furthermore, contractors should ensure that their schedules tie and reconcile with the trial balance. Among the reconciliation schedules that contractors should prepare are the following:

• ICS to trail balance: Identify where all costs are captured or reported
• ICS workbook reconciliation: Reconcile Schedule A with pool and base costs listed on Schedules E, H and H-1. This helps identify formula or linking errors.
• Total cost reconciliation: Ensure that the total trial balance expenses (plus or minus certain adjustments) are equal to the total costs within the model. Contractors should remember to add back unallowables.

The takeaway

The ICS process can be challenging for contractors. But organizations that follow ICS best practices can make the process smoother and more efficient.