Every government contractor with a flexibly-priced contract (cost-reimbursement, time-and-materials, or cost-plus) must file an incurred cost submission within six months of their fiscal year end. For contractors on a calendar fiscal year, the deadline is June 30. Miss it, and DCAA recommends a unilateral rate determination by the contracting officer, one that rarely favors the contractor.
A $4 million IT services contractor in Northern Virginia lost $380,000 in billable indirect costs last year. Not because the costs were unallowable. Because the incurred cost submission was filed 47 days late, and DCAA applied a decrement factor to their provisional rates while the submission was outstanding.
The contracting officer withheld payments until final rates were established.
The incurred cost submission is the single document DCAA uses to close out your fiscal year costs and finalize your indirect rates. Getting it wrong costs real money. Getting it late costs more.
What Is an Incurred Cost Submission?
An incurred cost submission (ICS) is the annual proposal a government contractor files with DCAA to report all actual costs incurred during a fiscal year and propose final indirect cost rates. FAR 52.216-7, the Allowable Cost and Payment clause, mandates this submission for every contract containing that clause [FAR 52.216-7(d)(2)]. The submission covers every dollar of direct and indirect cost you charged, allocated, or claimed against government contracts during the fiscal year.
DCAA uses the ICS to audit your actual costs against your provisional billing rates. If your actual indirect rates come in lower than provisional rates, the government is owed a refund. If actual rates come in higher, you collect additional payment.
Neither adjustment happens without a completed, adequate ICS.
The ICS is also the gateway to contract closeout. Physically complete contracts remain open, holding both your money and your bonding capacity hostage, until DCAA audits the incurred cost submission and establishes final indirect rates. A $10 million contract sitting in closeout limbo for three years because of a delinquent ICS is common. It should not be.
Who Must File and When
Any contractor holding a contract containing FAR 52.216-7, FAR 52.216-16, or FAR 52.216-17 must file an incurred cost submission. Cost-reimbursement contracts always contain one of these clauses. Time-and-materials contracts frequently do.
Fixed-price contracts do not require an ICS unless they include an economic price adjustment clause tied to actual costs.
The deadline is six months after the end of your fiscal year [FAR 52.216-7(d)(2)(i)]. For calendar-year contractors, the deadline falls on June 30. For contractors with a September 30 fiscal year end, the deadline is March 31.
| Fiscal Year End | ICS Deadline | Late Consequences Begin |
|---|---|---|
| December 31 | June 30 | July 1 |
| March 31 | September 30 | October 1 |
| June 30 | December 31 | January 1 |
| September 30 | March 31 | April 1 |
Extensions exist but only the Administrative Contracting Officer (ACO) grants them [FAR 42.705-1(b)(1)(ii)]. DCAA does not grant extensions.
If you need one, request it in writing well before the deadline. “We were busy” is not grounds for an extension.
The Required Schedules: What Goes Into an ICS
FAR 52.216-7(d)(2)(iii) specifies the data your incurred cost submission must contain, organized across Schedules A through O. DCAA provides a free tool called the ICE Model (Incurred Cost Electronically) that formats these schedules for you. Using the ICE Model is optional but strongly recommended: submissions that follow the ICE format pass DCAA’s adequacy review faster than custom formats.
The schedules break into three groups: indirect cost pools, contract-level costs, and supporting data.
Indirect Cost Pool Schedules
| Schedule | Purpose | What DCAA Checks |
|---|---|---|
| A | Summary of all indirect expense rates (fringe, overhead, G&A) | Rates tie to Schedules B, C, D |
| B | Indirect cost pool detail (fringe benefits pool) | IR&D/B&P fully burdened, pool reconciles to G/L |
| C | Overhead pool detail (one schedule per pool) | Cost elements match G/L, unallowable costs excluded |
| D | Intermediate pool allocations | All intermediate allocations disclosed |
| E | G&A expense pool and allocation base | Unallowable costs included in base, proper base computation |
| F | Facilities Capital Cost of Money (FCCM) | CASB-CMF form, only if contract authorizes COM |
Contract Cost Schedules
| Schedule | Purpose | What DCAA Checks |
|---|---|---|
| G | Direct costs by cost element, reconciled to general ledger | Job cost ledger ties to G/L |
| H | Direct costs by contract with claimed indirect rates applied | Claimed rates match Schedule A |
| I | Cumulative allowable cost worksheet | Cumulative costs match billed amounts |
| J | Subcontract listing | All subcontracts disclosed with consent status |
| K | T&M contract detail (hours, rates, materials) | Labor categories match contract terms |
Supporting Schedules
| Schedule | Purpose | What DCAA Checks |
|---|---|---|
| L | Payroll reconciliation (total labor vs. IRS Form 941) | Total payroll ties to tax filings |
| M | Accounting changes, CO approvals, advance agreements | All changes disclosed and authorized |
| N | Certification of final indirect costs (signed) | Signed by VP/CFO or higher |
| O | Contracts eligible for closeout | Physically complete contracts identified |
Every schedule serves a specific audit function. Skipping one triggers an inadequacy determination, which sends the entire submission back.
DCAA’s Adequacy Checklist lists the exact criteria for each schedule. Download it. Use it as your final QA gate before filing.
5 Mistakes That Get Incurred Cost Submissions Rejected
DCAA reviews every incurred cost submission against its adequacy checklist before assigning it for audit. Submissions that fail this review get returned as “inadequate,” and the clock keeps ticking on your delinquency status. These five mistakes cause the majority of rejections.
1. Missing or Unsigned Certification (Schedule N)
Schedule N must be signed by an officer at the Vice President level or above. A bookkeeper’s signature does not satisfy the requirement. The certification states that all costs claimed are allowable under FAR Part 31 and that no expressly unallowable costs are included.
If this schedule is missing, blank, or signed by the wrong person, DCAA returns the entire submission on day one.
2. Incomplete Subcontract Disclosure (Schedule J)
Every subcontract awarded during the fiscal year must appear on Schedule J, with the subcontractor name, award amount, and whether contracting officer consent was obtained. Contractors routinely forget purchase orders that qualify as subcontracts under FAR 44.101.
A $200,000 purchase order to a staffing agency is a subcontract. Omitting it creates an adequacy finding.
3. Failure to Identify Unallowable Costs
FAR Part 31 designates specific costs as unallowable: entertainment [FAR 31.205-14], alcohol [FAR 31.205-51], lobbying [FAR 31.205-22], and others. Your ICS must show these costs segregated and excluded from your indirect rate calculations.
Leaving unallowable costs buried in your G&A pool does not hide them from the auditor. It triggers FAR 52.242-3 penalties: the disallowed amount plus interest on contracts exceeding $650,000.
4. General Ledger Reconciliation Failures
Schedule G must reconcile to your general ledger. Schedule L must reconcile to your IRS Form 941 payroll filings. When these numbers do not tie, DCAA questions the reliability of your entire accounting system.
A $500 rounding difference is fixable. A $50,000 unexplained variance between your job cost ledger and your general ledger is a systemic finding.
5. Intermediate Allocations Not Disclosed (Schedule D)
Contractors with intermediate cost pools (service centers, IT allocations, shared facilities) must disclose every allocation step in Schedule D. DCAA auditors trace the allocation chain from initial cost capture through every intermediate step to the final indirect cost pool. Skipping an allocation step, even one that seems immaterial, produces an inadequacy determination.
What DCAA Actually Looks for During the ICS Audit
Passing the adequacy review is step one. The audit itself examines whether your claimed costs are allowable, allocable, and reasonable under FAR Part 31. DCAA auditors focus on specific risk areas, not a random sampling of every transaction.
Labor costs receive the heaviest scrutiny. The auditor compares your labor distribution reports to timesheets, payroll records, and the 941 reconciliation. Any gap between hours recorded and hours compensated triggers a deeper examination.
Compensation reasonableness is tested against Bureau of Labor Statistics data for your geographic area and labor categories.
Indirect rate consistency is the second focal point. If your proposed rates deviate more than 5-10% from your provisional billing rates, the auditor examines why. Significant swings indicate either poor budgeting or cost-shifting between pools.
Neither explanation helps your case.
Expressly unallowable costs get a dedicated test. DCAA runs your general ledger expense detail against the FAR 31.205 list of unallowable cost categories. Any unallowable cost that made it into an indirect pool triggers a rate adjustment.
On contracts exceeding $650,000, the penalty clause [FAR 52.242-3] applies: you pay back the disallowed amount plus the interest the government would have earned on that money.
The audit also tests your indirect rate allocation methodology for consistency with prior years and with your CAS Disclosure Statement (if applicable). Changing your allocation base from direct labor dollars to total direct costs without contracting officer approval is a CAS 402 consistency violation.
Building a Year-Round ICS Process
Contractors who treat the ICS as a year-end scramble consistently produce submissions with errors. The firms that file clean, adequate submissions treat ICS preparation as a monthly activity.
Monthly reconciliation is the foundation. Reconcile your job cost ledger to the general ledger every month. Reconcile payroll to your labor distribution reports every pay period.
If these reconciliations are current, Schedule G and Schedule L take hours to prepare, not weeks.
Quarterly indirect rate tracking prevents surprises. Calculate your actual indirect rates at the end of each quarter and compare them to your provisional billing rates.
A 3% variance in Q1 is manageable. Discovering a 15% variance in May when you are assembling the ICS creates a billing adjustment problem and a cash flow shock.
Use our indirect rate calculator to run quarterly rate checks against your current cost pool structure.
Unallowable cost scrubbing belongs in your monthly close process. Flag entertainment, meals exceeding per diem, alcohol, lobbying, and other FAR 31.205 unallowable costs at the point of entry. Waiting until ICS preparation to scrub a year’s worth of expenses invites errors and penalty exposure.
Maintain a subcontract log throughout the year. Every time you award a subcontract or issue a purchase order above the simplified acquisition threshold, log it with the required Schedule J data: subcontractor name, amount, type, and consent status. Rebuilding this list from purchase order files in June is slow and error-prone.
The June 30 Deadline: A Practical Timeline
For calendar-year contractors, June 30 is a hard deadline. Working backward from that date, here is a realistic preparation timeline.
| Month | Action | Risk If Skipped |
|---|---|---|
| January | Close fiscal year books. Finalize all year-end adjustments. | Unstable numbers cascade through every schedule |
| February | Reconcile G/L to job cost ledger. Complete 941 payroll reconciliation. | Schedule G and L failures |
| March | Calculate actual indirect rates. Compare to provisional rates. | Undiscovered billing over/under-recoveries |
| April | Populate ICE Model Schedules A through F (indirect pools). | Pool errors not caught until June |
| May | Complete Schedules G through O. Run DCAA Adequacy Checklist. | Inadequacy findings returned after filing |
| June | Final QA, obtain officer certification (Schedule N), submit to ACO/DCAA. | Late filing, decrement factor applied |
Contractors who start in May and rush to file by June 30 produce the submissions with the highest error rates. The timeline above spreads the work across six months. No single month is overwhelming.
Frequently Asked Questions
What is an incurred cost submission?
An incurred cost submission is the annual proposal a government contractor files with DCAA to report all actual direct and indirect costs incurred during a fiscal year and propose final indirect cost rates. FAR 52.216-7 requires this filing within six months of the contractor’s fiscal year end for all flexibly-priced contracts.
What happens if I miss the incurred cost submission deadline?
DCAA classifies submissions more than six months past due as delinquent and recommends a decrement factor to the contracting officer. The contracting officer applies a unilateral rate determination based on available data, which typically reduces your billable indirect rates. Payments are withheld until the submission is filed and audited.
Do I need to use the DCAA ICE Model for my submission?
No. FAR 52.216-7 does not mandate a specific format. Contractors submit in any format containing the required Schedules A through O. The ICE Model is a free Excel workbook from DCAA that formats all required schedules automatically. Submissions using the ICE Model pass adequacy review faster than custom formats.
What triggers FAR 52.242-3 penalties for unallowable costs?
If DCAA identifies expressly unallowable costs (entertainment, alcohol, lobbying, fines) included in your indirect cost pools or direct charges, the contracting officer assesses a penalty equal to the disallowed amount plus interest. The penalty clause applies to contracts exceeding $650,000. Proper cost segregation at the point of entry prevents this exposure.
Who must sign the ICS certification?
Schedule N requires a signature from a corporate officer at the Vice President level or above, typically the CFO or company president. The signer certifies that all costs are allowable under FAR Part 31 and no expressly unallowable costs are included. A bookkeeper or project manager signature does not meet this requirement.
How long does the DCAA incurred cost audit take?
DCAA’s audit backlog means most incurred cost audits take 12 to 36 months to complete after filing. Adequate submissions with clean reconciliations receive faster processing. Inadequate submissions get returned for correction, restarting the clock. Prioritized audits (for contract closeout) receive faster scheduling upon contractor request to the ACO.
Key Takeaways
- Start ICS preparation in January, not May. Spreading the work across six months produces cleaner submissions and catches reconciliation errors early. Contractors who start in the final 60 days produce the highest rejection rates.
- Run DCAA’s Adequacy Checklist before you file. Every inadequacy finding sends your submission back and adds weeks to the process. The checklist is free and publicly available on dcaa.mil.
- Scrub unallowable costs monthly, not annually. FAR 52.242-3 penalties on contracts over $650,000 apply to any expressly unallowable cost included in your proposal. Monthly scrubbing eliminates this risk at the source.
- Reconcile payroll to 941 filings every quarter. Schedule L failures are among the most common adequacy findings. Quarterly reconciliation makes this schedule a ten-minute exercise instead of a multi-day forensic project.
- Get the certification signed by the right person. Schedule N requires a VP or higher. A submission with the wrong signature comes back immediately.
The incurred cost submission is not a paperwork exercise. It is the mechanism that finalizes your billing rates, closes out completed contracts, and demonstrates your accounting system’s integrity to the federal government. A clean, timely ICS protects your cash flow and your reputation with contracting officers.
Not sure whether your accounting system produces the data these schedules require? Take the Compliance Readiness Check to identify gaps, or review our DCAA compliance services to build ICS-ready processes before the next deadline hits.
