How to Prepare Your Incurred Cost Submission (ICS): A Step-by-Step Guide

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 the Defense Contract Audit Agency (DCAA) recommends a unilateral rate determination by the contracting officer, one that rarely favors the contractor.

Costs do not have to be unallowable for you to lose them. File late and DCAA recommends a decrement factor against your provisional rates, the contracting officer withholds payment while the submission sits outstanding, and the recovery you gave up was money you had already earned and could have documented. Nothing about the underlying costs changed. Only the filing date did.

In the incurred cost submissions we review, the rejection we encounter most often is not a missing schedule. It is a Schedule I where the cumulative claimed costs do not reconcile to the billing register. That single discrepancy sends the entire submission back and restarts the adequacy clock.

The work that prevents a late or inadequate filing happens in January, not in the last six weeks. The contractors who file clean and on time are invariably the ones who started the general ledger reconciliation at fiscal year close, not the ones assembling everything from scratch in June.

An incurred cost submission (ICS) is required within six months of your fiscal year end under FAR 52.216-7 for contractors with flexibly-priced contracts. FAR 52.216-7(d)(2)(iii) lists 15 required items lettered A through O, covering actual direct costs, indirect pools and bases, and cost pool allocations. DCAA uses the ICS to audit claimed costs and set final indirect billing rates. Late or inadequate submissions trigger payment withholding and prevent contract closeout.

What Is an Incurred Cost Submission?

An incurred cost submission (ICS) is the annual proposal a government contractor files to report actual costs for a completed fiscal year and propose final indirect cost rates. That word trips people up, and reasonably so: the costs already happened, so why is this not a report? Because the costs are not the thing you are asking the government to accept. The rates are, and they are not final until DCAA audits them and the contracting officer agrees.

FAR 52.216-7 calls it a final indirect cost rate proposal throughout, which is also why the deadline sits six months after year end rather than at year end.

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)(i)]. 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 an Incurred Cost Submission, and When Is It Due?

Any contractor holding a contract containing FAR 52.216-7 must file an incurred cost submission. Cost-reimbursement contracts always contain this clause. 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)].

The clause allows extensions, and the language is narrow: reasonable extensions “for exceptional circumstances only” requested in writing by the contractor and granted in writing by the Contracting Officer. In most DoD situations the Administrative Contracting Officer holds that authority under delegation. DCAA does not grant extensions. Request one in writing at least 30 days before the deadline with a specific completion date and a real explanation. Running out of time is not an exceptional circumstance.

What Happens When You Miss the Deadline

Missing the deadline starts a sequence. DCAA recommends the contracting officer apply a decrement factor to your provisional billing rates, reducing your reimbursable indirect costs unilaterally. The contracting officer also has discretion to adjust billing rates or withhold payments until the submission is filed and determined adequate. That rate reduction almost never works in your favor.

The billing rate hit is the immediate pain. The long-term damage is worse. Delinquent ICS status prevents contract closeout, so every physically complete contract stays open, tying up bonding capacity and cluttering your contract portfolio. Contracting officers reviewing your past performance for new awards see open contracts stretching back years, and a delinquent filing tells them your accounting system lacks the discipline to produce timely financial data.

The 15 Required Items: Schedules A Through O

FAR 52.216-7(d)(2)(iii) sets out what an adequate proposal has to contain, and it does so as a lettered list running from (A) to (O). Count the letters and you get 15. So “Schedules A through O” and “15 schedules” are two ways of saying the same thing, and you will meet both phrasings in circulation.

One point of precision worth having. The FAR itself calls these required data, not schedules. The word “Schedule” as a label for A through O comes from DCAA’s ICE Model, whose worksheets follow the same lettering. Both usages are fine. Confusing the ICE worksheet set with the FAR requirement is what causes trouble, because the ICE workbook also contains sub-schedules and optional schedules that FAR 52.216-7(d)(2)(iv) describes as “not required to determine if a proposal is adequate.”

Here is the full set, with what each item is under FAR and when to build it.

A note on fringe. Fringe benefits are not Schedule B. Under FAR, Schedule B is the G&A pool and Schedule E is the claimed allocation bases. In the ICE Model, fringe has its own worksheet, named Fringe, which feeds Schedule A alongside the overhead and G&A pools. If your working papers label the fringe pool as Schedule B, relabel them before an auditor reads them, because the letters carry specific meaning in the adequacy review.

Every item serves a specific audit function, and skipping one triggers an inadequacy determination that sends the whole submission back. DCAA’s Adequacy Checklist lists the exact criteria for each. Download it and use it as your final QA gate before filing.

What the DCAA ICE Model Is, and How to Use It

DCAA publishes the ICE Model (Incurred Cost Electronically), a free Excel workbook available at dcaa.mil, pre-formatted with all the required schedules from A through O. DCAA also publishes the ICE Manual alongside it, the primary-source documentation explaining the purpose of every schedule and how the cross-references calculate. Reading it before opening the model makes the schedule logic click faster.

The ICE Model is not mandatory. FAR 52.216-7 prescribes required data, not a format. But submissions using the ICE Model pass adequacy review at higher rates than custom formats, because the built-in structure prevents the common omission and formatting errors.

The workbook forces you through every required item in sequence. Schedule A rolls up from the pool and base schedules automatically, and cross-references between schedules flag mismatches before you file. If total labor on Schedule G does not match payroll on Schedule L, the workbook highlights the gap.

Download the ICE Model in January, not in the final weeks. Populate it gradually as each month’s preparation concludes. Contractors who open it for the first time six weeks out produce the most errors, because they try to fill 15 schedules at once without verifying the underlying data.

Month-by-Month ICS Preparation Checklist

This timeline assumes a December 31 fiscal year end and a June 30 deadline. Shift the months if your fiscal year ends elsewhere. Each month builds on the one before it, so skipping a month creates a compounding backlog.

On the engagements we run this way, preparation costs roughly 15 to 20 hours a month, varying with complexity. The same work compressed into the last two months costs 80 to 100 hours and still produces more errors, because nothing gets reconciled twice.

Reconciling Your Books Before Filing

Book reconciliation is the foundation of a clean ICS. Every schedule traces back to your general ledger. If the ledger is wrong, every schedule built from it is wrong. The GovCon year-end close feeds directly into ICS preparation, and contractors who treat the two as one continuous workflow produce the fewest adequacy findings.

Three reconciliations matter most.

1. General ledger to job cost ledger. Total direct costs on the G/L must match the sum of all contract-level charges in the job cost system. Discrepancies indicate unposted transactions, misclassified costs, or timing differences from year-end accruals. Complete in February.
2. Payroll to 941 filings. Total wages, employer taxes, and withholdings on the G/L must tie to the four quarterly 941 returns. This also validates the labor numbers feeding the fringe pool and Schedule G direct labor. Complete in February.
3. Provisional rates to actual rates. Calculate actual fringe, overhead, and G&A rates from completed-year data and compare to the provisional rates you billed at. Variances above 5 to 10 percent require explanation. Complete in March.

What Mistakes Get Incurred Cost Submissions Rejected?

DCAA runs every submission through its adequacy checklist before assigning it for audit. Submissions failing that screen come back marked inadequate, and the delinquency clock keeps running. These seven errors account for the majority of rejections we see.

1. Missing or Improperly Signed Certification (Schedule N)

The certification must be signed by a corporate officer at Vice President or Chief Financial Officer level or above. A bookkeeper, controller, or project manager signature does not satisfy it. Schedule N certifies that all claimed costs are allowable under FAR Part 31 and that no expressly unallowable costs are included. If the schedule is missing, blank, or signed by the wrong person, DCAA returns the entire submission on day one.

The clause also carries its own consequence: failure to submit a signed certificate “may result in final indirect cost rates unilaterally established by the Contracting Officer” [FAR 52.242-4(b)]. If you run multiple segments, the signer must sit at that level in the segment submitting the proposal.

2. General Ledger Does Not Tie to Schedule G

Schedule G reconciles the books of account to claimed direct costs by major cost element. A $500 rounding difference is fixable during adequacy review. A $50,000 unexplained variance between the job cost ledger and the G/L tells the auditor your accounting system produces unreliable data. Monthly reconciliation, the February task above, eliminates this at the source.

3. Incomplete Subcontract Disclosure (Schedule J)

Every subcontract and qualifying purchase order awarded during the fiscal year must appear on Schedule J with the subcontractor name, address, point of contact, award type, value, and amount claimed. Contractors routinely omit staffing agency placements, consulting engagements, and purchase orders above the simplified acquisition threshold (currently $350,000). A $200,000 purchase order to a staffing firm is a subcontract under FAR 44.101. Maintain a subcontract log throughout the year.

4. Unallowable Costs Left in Indirect Pools

Entertainment [FAR 31.205-14], alcohol [FAR 31.205-51], and lobbying [FAR 31.205-22] are always unallowable and must be segregated and excluded from every indirect pool. Leaving them buried in the G&A pool does not hide them from the auditor. When expressly unallowable costs are included in a final indirect cost rate proposal on a contract exceeding $1,000,000, the contracting officer assesses a penalty under FAR 52.242-3 [applicability at FAR 42.709-1(b)]. Waiver conditions exist under FAR 42.709-6, including early withdrawal before the Government formally initiates an audit, unallowable amounts of $10,000 or less, and inadvertent error with satisfactory internal controls. Relying on waiver is a poor strategy. Scrub monthly during your regular close.

5. Payroll Does Not Reconcile to 941 Filings

Schedule L requires total payroll per IRS Form 941 to reconcile to the total labor cost distribution. Differences between the payroll system, the general ledger, and the tax filings signal data integrity problems. Reconcile each quarter as it closes. By February, Schedule L becomes a ten-minute verification instead of a multi-day forensic exercise.

6. Intermediate Allocations Not Disclosed (Schedule D)

Contractors with intermediate cost pools such as service centers, IT allocations, or shared facilities must disclose every allocation step. Auditors trace the chain from initial cost capture through each intermediate step to the final pool. Skipping a step, even one that looks immaterial, produces an inadequacy determination.

7. Schedule I Does Not Tie to Cumulative Billed Amounts

Schedule I reports cumulative direct and indirect costs claimed and billed by contract and Contract Line Item Number from inception through the fiscal year end. The recurring failure is cumulative claimed costs that do not match cumulative billed amounts. The two must tie. When they do not, DCAA has no way to tell whether you have been overbilling or underbilling across the life of the contract, which is the question Schedule I exists to answer. The fix is procedural rather than analytical: pull the billing register for every flexibly-priced contract, reconcile it to Schedule I before filing, and document every variance (fee withholdings, billings in transit, modifications in process) in the workpapers.

Adequacy Review Versus the Incurred Cost Audit

Filing a timely, adequate submission is step one. Step two, the audit, arrives 12 to 36 months later. Two different standards apply, and contractors conflate them constantly.

Adequacy means all 15 required items are present, complete, and internally consistent. In our experience the adequacy review runs 30 to 60 days, and it checks schedule completeness, internal cross-references, and the Schedule N certification. An adequate submission joins the audit queue. An inadequate one comes back with specific deficiencies. Adequacy says nothing about whether your costs are allowable.

The audit examines whether claimed costs are allowable, allocable, and reasonable under FAR Part 31. Three areas draw the heaviest scrutiny.

• Labor costs. The auditor compares labor distribution reports to timesheets, payroll records, and the 941 reconciliation. Any gap between hours recorded and hours compensated triggers deeper examination. Compensation reasonableness is tested against Bureau of Labor Statistics data for your geography and labor categories.
• Expressly unallowable costs. DCAA runs your general ledger expense detail against the FAR 31.205 categories. Anything unallowable that reached an indirect pool triggers a rate adjustment, and on contracts over $1,000,000 the FAR 52.242-3 penalty equals the disallowed amount plus interest computed from the midpoint of the fiscal year at the Treasury rate [FAR 42.709-4, FAR 42.709-5].
• Indirect rate consistency. The auditor tests your allocation methodology against prior years and your CAS Disclosure Statement where applicable. Changing an allocation base from direct labor dollars to total direct costs without contracting officer approval is a CAS 402 consistency violation.

Speed through an incurred cost audit comes out of the file room. Contractors who clear quickly keep timesheets, expense receipts, subcontract files, and rate computation workpapers indexed to the specific schedule each one supports, so the auditor’s question gets answered before it is finished.

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 treat preparation as a monthly activity.

Monthly reconciliation is the foundation. Reconcile the job cost ledger to the general ledger every month, and payroll to labor distribution reports every pay period. If those are current, Schedules G and L take hours to prepare rather than weeks.

Quarterly indirect rate tracking prevents surprises. Calculate actual rates at each quarter end and compare to provisional billing rates. A 3 percent variance in Q1 is manageable. Discovering a 15 percent variance while assembling the ICS creates a billing adjustment problem and a cash flow shock at the same time.

Unallowable cost scrubbing belongs in the monthly close. Flag entertainment, meals above per diem, alcohol, lobbying, and other FAR 31.205 categories at the point of entry. Waiting until ICS preparation to scrub a year of expenses invites both errors and penalty exposure.

Maintain a subcontract log all year. Every time you award a subcontract or issue a purchase order above the simplified acquisition threshold, log the Schedule J data: name, address, point of contact, amount, award type, and consent status. Rebuilding that list from purchase order files in the final month is slow and error-prone.

Key Takeaways

• Fifteen items, lettered A through O. FAR 52.216-7(d)(2)(iii) lists them. “15 schedules” and “Schedules A through O” describe the same requirement.
• Schedule B is G&A, not fringe. Schedule E is the claimed allocation bases. Fringe is its own worksheet in the ICE Model. Mislabeled workpapers slow an adequacy review.
• Do not forget Schedule O. Contract closing information for contracts physically completed in the year is a required item, and it is the one most often left out of summaries of the submission.
• Start in January, file in June. Spreading preparation across six months at 15 to 20 hours per month produces cleaner submissions than an 80 to 100 hour sprint.
• Reconcile three things before touching the ICE Model: G/L to job cost ledger, payroll to 941 filings, and provisional rates to actual rates.
• Reconcile Schedule I to the billing register. In our experience this is the single most common cause of a returned submission.
• Get the certification signed by the right person. Schedule N requires VP level or above. The wrong signature returns the submission on day one.

Frequently Asked Questions

Build the Process Before the Deadline Builds It for You

The incurred cost submission is not a paperwork exercise. It 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 standing with contracting officers.

Not sure whether your books produce the data these schedules require? Take the Compliance Readiness Check to identify gaps before the next deadline, or book a discovery call to build an ICS-ready accounting process.