Mastering the Incurred Cost Submission (ICS) Requirements for DCAA Compliance: Everything U.S. Government Contractors Need to Know to Stay Compliant

ARTICLE | April 01, 2026

Authored by Aprio, LLP

Summary: For U.S. government contractors working under flexibly priced contracts, preparing their annual Incurred Cost Submission (ICS) stands as a cornerstone of the year and rite of passage. Preparing a thorough ICS not only satisfies federal requirements per FAR Clause 52.216-7, Allowable cost and payment, but also ensures contract closeout and claims happen smoothly, and supports a positive outcome during audit.

Why the Incurred Cost Submission (ICS) is important

The ICS demonstrates that the contractor’s claimed costs on flexibly priced contracts are allowable, reasonable, and properly allocated. It is a key step in the government’s annual “true up” process to ensure compliance requirements are met in the following areas:

• Regulatory Compliance: As established in FAR 52.216-7, the ICS enables government agencies to confirm that your claimed costs are allowable, allocable, and reasonable; key criteria for cost-reimbursement contracts.
• Contract Closeout: The ICS forms the foundation for final contract billing, enabling you to receive payment for all allowable costs and giving the government the opportunity to recover any overpayments.
• Audit Preparation: By submitting a complete and accurate ICS, you reduce the risks associated with DCAA and/or other agency audits, including questioned costs and the possibility of triggering other audits (e.g., Post Award Accounting System, Estimating System, Floor Check).
• Contractor Insight: A well-prepared ICS can provide key insights to management about contact performance, billing and rate variances, and cost mix. The ICS also serves as a baseline for budgeted provisional rates.

How to prepare a complete and accurate ICS

1. Understand the FAR requirements: FAR 52.216-7 requires contractors to submit a final indirect cost rate proposal within six months of the close of your fiscal year. Review these requirements thoroughly to ensure your submission meets federal standards.
2. Gather required documentation: Assemble all supporting documents such as the trial balance, general ledger, final year-end invoices, statement of indirect expenses, contract briefs, and executive compensation.
3. Scrub accounts for unallowable costs: Unallowable costs need to be identified and segregated from allowable costs and properly excluded from the indirect pools. While it is common practice to only identify unallowable costs as G&A in nature, unallowable costs should be identified and included based on the nature of the costs and then properly excluded from other indirect pools or as a direct unbillable These costs would still be included in the G&A base.
4. Organize schedules: Complete the incurred cost submission in an Excel workbook to organize all required schedules for easy review.
5. Ensure accuracy and consistency: Reconcile all claimed costs with your accounting records, trial balance, general ledger, statement of indirect expenses, and final year-end invoices. Confirm that indirect rate calculations and allocations align with your policies and contract terms to system generated reports.
6. Submit to the cognizant federal agency: Once finalized, file your ICS through the designated government portal or as specified in your contract. Timely and accurate submission is critical for compliance.

Required ICS schedules and their importance

Each schedule provides specific and critical insight into the allowability, allocability, and reasonableness of claimed costs. Accurate completion of all required submission schedules not only supports regulatory compliance and audit readiness but also facilitates timely contract closeouts and reduces the risk of questioned costs.

The following are the core schedules typically required in an ICS:

Schedule A – Summary of All Claimed Indirect Expense Rates

Presents all claimed indirect rates (e.g., fringe, overhead, G&A) and it is essential for auditors to see how each rate is developed and applied

Schedule B – General & Administrative (G&A) Expense Pool

Details all G&A expenses and their allocation base, supporting the fairness and consistency of G&A application

Schedule C – Overhead Expense Pool

Lists all overhead expenses and the allocation method, providing transparency into costs allocated across contracts

Schedule D – Occupancy Expense Pool (If applicable)

Breaks down occupancy-related costs, ensuring these expenses are properly distributed to benefiting contracts

Schedule E – Claimed Allocation Bases

Shows the total bases (e.g., direct labor, total costs, etc.) used to allocate indirect expenses, allowing verification of allocation accuracy

Schedule F – Facilities Capital Cost of Money (FCCOM)

Documents FCCOM calculations (if claimed), providing required backup for this cost element

Schedule G – Reconciliation of Books of Account and Claimed Direct Costs by Major Cost Elements

Reconciles direct cost per the general ledger to Schedule H

Schedule H – Schedule of Direct Costs by Contract/Subcontract

Breaks out all direct costs by contract and major cost element, enabling auditors to trace charges back to source documents and contract terms

Schedule I – Schedule of Cumulative Direct and Indirect Costs Claimed and Billed by Contract and Subcontract

Provides a reconciliation of the cumulative direct and indirect costs that have been claimed to date against the contractor’s billings to determine whether contracts have been over/underbilled

Schedule J – Subcontract Information

Lists contact information, contract and subcontract information, and costs incurred by the prime contractor issuing subcontracts

Schedule K – Summary of Each Time and Materials and Labor-Hour Contracts Information

Provides T&M and Labor-Hour contract costs by labor categories, labor rates, hours, and amounts, direct materials, other direct costs, and indirect expense applied at claimed rates

Schedule L – Reconciliation of Total Payroll per IRS Form 941 to Total Labor Costs Distribution

Provides a reconciliation of labor costs that were incurred during the fiscal year and compares this to IRS Form 941, Accruals, and Section 125 plans

Schedule M – List of Decisions, Agreements, Approvals, and Description of Accounting/Organizational Changes

Provides the Government with information regarding any accounting or organizational changes and any Government issued decisions, agreements, or approvals that may have occurred during the fiscal year under review

Schedule N – Certificate of Final Indirect Costs

Provides a signed statement certifying the accuracy and completeness of submitted costs, required for regulatory compliance; only a VP or higher role must sign off on this schedule

Schedule O – Contract Closing Information for Contracts Physically Completed in the Fiscal Year

Identifies all physically completed contracts with associated Level of Effort and actual hours (if applicable), contract fee computations, period of performance, and contract ceiling amounts

Supplemental Schedule B

Identifies the executive compensation of a contractor’s top 5 employees and compares it against the executive compensation cap for reasonableness

Trial Balance

Reconciles the ICS to your general ledger, ensuring all costs reported are accurate and supportable

Best practices: how to prepare an adequate ICS

• Start early: Begin your ICS preparation soon after your fiscal year ends. Early preparation gives you time for internal reviews and corrections.
• Use the DCAA’s ICS Adequacy Checklist: Utilize the Incurred Cost Submission Adequacy Checklist or another appropriate model to ensure your ICS meets the minimum requirements to be deemed adequate.
• Conduct internal reviews: Designate a reviewer outside the ICS preparation team who can go over the submission for completeness and accuracy. A fresh set of eyes can help catch errors or omissions.
• Maintain detailed records: Keep your supporting documents organized year-round to simplify submission and audit processes.
• Stay informed: Monitor FAR and DCAA guidance for changes. Regulatory requirements can evolve and staying updated helps ensure ongoing compliance.
• Seek professional guidance: If you are new to government contracting, or your accounting is particularly complex, consider consulting with experienced professionals who have experience preparing ICS filings.
• Request a final audit report: Once an incurred cost submission has been completed and submitted to your contracting officer, you should request a final audit report for your records from them as well.

What to do if your ICS is audited

Audits are a routine part of government contracting. Being prepared can make the process much smoother. In the event of an incurred cost audit, here is what you can do:

• Respond promptly: If you are notified of an audit, reply quickly and provide all requested documentation. Demonstrating a cooperative attitude makes a strong first impression.
• Support your costs: Have supporting backup readily available such as timecards, invoices, purchase orders, and documentation of allocation methodologies. Remember: you need to prove that the contract costs were allowable, allocable, and reasonable.
• Cooperate with auditors: Maintain open and professional communication. Answer questions clearly and provide any explanations needed.
• Seek outside counsel: If you need assistance with developing responses to auditors and contracting officers, request help from an experienced consulting or accounting firm.
• Address audit findings: If auditors raise concerns or question certain costs, work with them and your contracting officer to resolve these issues. Provide additional justification where appropriate and make adjustments as necessary. Auditors will allow you to respond to any findings before issuing a final report to your contracting officer.
• Remember this is more than an administrative process: Lack of response to audit findings or cost allowability issues can lead to penalties or additional audits.

Final thoughts

A well-prepared incurred cost submission is the key to regulatory compliance, smooth contract closeout, and successful audit outcomes. By understanding the process, knowing why the ICS matters, being audit-ready, and following best practices, you can approach this annual requirement with confidence and control. Stay informed, be organized, and your government contracting journey will be built on a solid foundation.

Please connect with your advisor if you have any questions about this article.