GovCon Year-End Close: From Final Entries to ICS Prep

The government contractor year-end close is not a bookkeeping exercise. It is the opening phase of your incurred cost submission. At Amerifusion Bookkeeping, we treat year-end close and ICS preparation as one unified workflow because every adjusting entry, rate pool reconciliation, and cost reclassification recorded in December through February determines whether your ICS filing six months later holds up under DCAA review.

A 30-person defense contractor in Virginia Beach closed their books on December 31, filed their ICS the following June, and received an inadequacy determination from DCAA within 90 days. The problem was not the ICS schedules. The problem was a $127,000 misclassification in their overhead pool that traced back to a year-end adjusting entry. An employee bonus recorded as indirect labor should have been split: $88,000 to allowable compensation and $39,000 to unallowable costs under FAR 31.205-6(f) because it exceeded the individual compensation cap. That single entry forced a restatement of Schedule B, Schedule H, and every contract-level billing reconciliation in the submission.

Six months is not a generous timeline. It is a tight one. The contractors who file clean, adequate GovCon year-end close packages on time are the ones who designed their close process to produce ICS-ready data from day one.

Why the Government Contractor Year-End Close Is Different

Government contractor year-end close requires every step a commercial close requires (accruals, deferrals, reconciliations, trial balance validation) plus a second layer of GovCon-specific procedures that standard accounting practices do not address. The FAR cost principles [FAR Part 31], CAS requirements, and the FAR 52.216-7 allowable cost and payment clause impose obligations with no commercial equivalent. Ignoring this second layer produces financial statements that look correct to a CPA but fail a DCAA audit.

The core difference: a commercial year-end close produces financial statements. A government contractor year-end close produces financial statements and the validated cost data feeding your ICS schedules. Those ICS schedules determine your final indirect rates, which determine how much the government owes you (or how much you owe back) on every cost-reimbursable contract performed during the fiscal year.

A $2M cost-plus-fixed-fee contract with an overhead rate variance of 3% between provisional and final rates creates a $60,000 settlement adjustment. Multiply that across three or four contracts and the number gets serious. The year-end close is where you control the accuracy of that settlement.

Month-by-Month Timeline: Fiscal Year End to ICS Filing

Contractors with a December 31 government contractor fiscal year end have exactly 182 days between closing their books and the ICS deadline on June 30. This timeline maps the critical activities for each phase. Contractors with a September 30 fiscal year end follow the same sequence, shifted to October through March.

Pre-Close: October Through November (Before Year End)

1. Run preliminary indirect rate calculations. Compare year-to-date actual rates against provisional billing rates. A variance exceeding 10% signals you need to request a mid-year billing rate adjustment under FAR 42.704(b) before year end.
2. Reconcile subcontractor costs. Contact all subcontractors and request final invoicing for work performed through year end. Subcontractor accruals are one of the most common sources of ICS inadequacy findings.
3. Review cost classifications. Run a report of all costs charged to indirect pools and confirm each cost element is in the correct pool and classified as allowable or unallowable per FAR 31.205.
4. Validate timekeeping records. Confirm all labor distribution reports reconcile to payroll. DCAA audits timekeeping as a floor check item under DCAM 6-405. Discrepancies found after close are expensive to correct.

Close Period: December Through January

1. Record all adjusting entries. Accruals for incurred-but-not-invoiced expenses, prepaid expense amortization, depreciation, accrued vacation, and bonus accruals. Each entry must reference the supporting documentation.
2. Segregate unallowable costs. FAR 31.201-6 requires contractors to identify and exclude unallowable costs from any billing, claim, or proposal. This is not optional. Every cost in your indirect pools must be screened against the FAR 31.205 cost principles.
3. Reconcile each indirect rate pool. Tie every dollar in fringe, overhead, and G&A pools back to the general ledger trial balance. The pool totals become Schedule B, C, and D inputs for the ICS.
4. Lock the general ledger. Once all adjusting entries are posted and reviewed, close the fiscal year in your accounting system. No entries should post to the closed year after this point without documented management approval.

ICS Preparation: February Through April

1. Build ICS schedules from the closed trial balance. Schedule A (indirect rate summary), Schedules B/C/D (indirect cost pools), Schedule H (direct costs by contract with applied rates), and Schedule I (cumulative billed versus incurred). Every number traces to the locked trial balance.
2. Reconcile total costs claimed against the trial balance. The total incurred costs across all ICS schedules must equal the total costs in your audited trial balance. A $1 discrepancy triggers an inadequacy finding.
3. Prepare the certificate of final indirect costs. FAR 52.242-4 requires a signed certification that all costs are allowable under the contract terms and applicable cost principles. False certification carries penalties under the False Claims Act.

Submission: May Through June

1. Complete the ICS package. Compile all schedules, the certification, supporting schedules for executive compensation reasonableness, and the reconciliation to audited financials.
2. Submit to your cognizant DCAA office by the deadline. For December 31 fiscal year end, the deadline is June 30. Submit electronically using DCAA’s Incurred Cost Electronically (ICE) tool or a format your cognizant auditor accepts.
3. Retain all workpapers and supporting documentation. DCAA audits ICS submissions an average of 2 to 4 years after filing. The adjusting entries, reconciliations, and pool detail from your year-end close are the primary evidence base.

GovCon-Specific Adjusting Entries That Drive ICS Accuracy

Standard year-end adjusting entries (accruals, deferrals, depreciation) apply to government contractors the same way they apply to commercial companies. The difference is a set of adjusting entries unique to the GovCon operating model. Missing any of these entries produces ICS schedules with inaccurate pool totals, misallocated costs, or unidentified unallowable charges. DCAA flags all of them.

Unallowable Cost Reclassification

FAR 31.201-6(c)(1) requires costs “expressly unallowable or mutually agreed to be unallowable” to be identified and excluded from all billings and proposals. During year-end close, every cost in your indirect pools must be reviewed against the FAR 31.205 catalog. Entertainment [FAR 31.205-14], alcoholic beverages [FAR 31.205-51], and fines and penalties [FAR 31.205-15] are common examples. Reclassify these from the indirect pool to a segregated unallowable account. The unallowable totals carry to Schedule L of the ICS.

Executive Compensation Caps

The allowable compensation cap for contractor employees is $671,000 for calendar year 2025 (updated annually per DCAA 24-PSP-009(R)). Compensation above this cap is unallowable under FAR 31.205-6(p). During close, compare each executive’s total compensation (salary, bonus, deferred compensation, stock options) against the cap. The excess requires a journal entry reclassifying it from the indirect pool to unallowable. Schedule J of the ICS specifically addresses executive compensation.

Provisional-to-Actual Rate Variance

Throughout the year, you billed the government using provisional indirect rates. Year-end actuals will differ. Record the cumulative variance between provisional billings and actual incurred costs as an adjusting entry. This entry feeds directly into Schedule I, which reconciles billed amounts against incurred costs by contract. An unrecorded variance here means Schedule I will not tie to your general ledger, an automatic inadequacy trigger.

Subcontractor Cost Accruals

Subcontractors who performed work before fiscal year end but have not yet invoiced create an accrual requirement. Estimate the uninvoiced amounts based on purchase orders, delivery reports, or subcontractor correspondence. Record the accrual in the appropriate cost pool or direct cost account. DCAA checks whether your direct costs by contract (Schedule H) include all incurred subcontractor costs, not only those invoiced and paid.

Indirect Rate Pool Reconciliation: The Bridge Between Close and ICS

Indirect rate pool reconciliation is the single most important year-end close activity for ICS preparation. Every ICS schedule containing indirect costs depends on accurate, reconciled pool totals. A cost misclassified between overhead and G&A changes both rates. A cost left in the wrong pool inflates one rate and deflates another. Both errors cascade across every contract-level billing calculation in the submission.

The reconciliation process follows three steps for each pool (fringe, overhead, G&A):

1. Tie the pool total to the general ledger. Export every account assigned to the pool. Sum them. Compare the total against the pool total in your rate calculation. The numbers must match to the penny.
2. Verify each cost element’s pool assignment. Check that rent is in overhead (not G&A), that health insurance is in fringe (not overhead), and that executive salaries are in G&A (not overhead). Misassignments between pools are the most common DCAA audit finding on ICS reviews.
3. Confirm the allocation base. Fringe and overhead typically allocate over direct labor dollars. G&A allocates over total cost input. Verify the base calculation matches your disclosed practices in your CAS Disclosure Statement (if applicable) or your established and consistently applied accounting practices.

Use the Amerifusion indirect rate calculator to model your actual year-end rates against your provisional billing rates. A variance exceeding 5% on any single pool warrants a detailed review of cost assignments within that pool before building ICS schedules.

5 Year-End Close Mistakes That Create ICS Problems

These five mistakes appear repeatedly in DCAA inadequacy determinations traced back to the year-end close ICS preparation process. Each mistake is preventable during close. Each becomes expensive to fix after the ICS is submitted.

1. Closing the Books Before Subcontractor Costs Are Reconciled

A government contractor closes their fiscal year on December 31 and locks the general ledger on January 15. A subcontractor invoice for $74,000 in December work arrives on February 3. The cost belongs in the prior fiscal year but the ledger is locked. Recording it in the current year misallocates the cost between fiscal years, distorts both years’ indirect rates, and creates a mismatch between Schedule H (direct costs by contract) and the trial balance. Accrue subcontractor costs in the final quarter. Do not wait for invoices.

2. Failing to Reverse Prior-Year Accruals

Accruals recorded at the end of the prior fiscal year must be reversed in the opening period of the new year. Unreversed accruals double-count expenses: once in the prior year (as the accrual) and again in the current year (when the actual invoice is paid). For government contractors, double-counted costs inflate indirect pools, which inflates indirect rates, which inflates billings to the government. DCAA treats overbillings caused by unreversed accruals the same as any other overbilling: questioned costs subject to refund.

3. Leaving Unallowable Costs in Indirect Pools

Every holiday party, alcohol purchase, country club membership, and lobbying expense must be reclassified from indirect pools to the segregated unallowable account during close. FAR 31.201-6 does not allow contractors to wait until ICS preparation to segregate these costs. The segregation must occur “at the time a cost is incurred” or, at latest, during the year-end close process. Costs discovered in pools during an ICS audit trigger not only the disallowance itself but a penalty equal to the disallowed amount if the contractor previously certified the ICS as complete [FAR 42.709].

4. Inconsistent Allocation Base Calculations

A contractor uses direct labor dollars as the overhead allocation base all year, then switches to total labor dollars (direct plus indirect) in the year-end rate calculation. This inconsistency violates CAS 418 (Allocation of Direct and Indirect Costs) and produces indirect rates that do not match prior-year methodology. DCAA compares your current-year allocation bases against your prior-year submission. Any unexplained change triggers a full cost impact analysis. Maintain the same allocation bases year over year unless you formally revise your accounting practices with notice to the ACO.

5. Not Reconciling the ICS to the Audited Trial Balance

The total incurred costs in the ICS must reconcile to the total costs in the fiscal year trial balance. This seems obvious. Yet DCAA reports that inadequate reconciliation between the ICS and financial records is among the top three reasons for inadequacy determinations. The root cause is typically timing differences: adjusting entries posted after the trial balance was pulled for ICS preparation but before the financial statements were finalized. Lock the trial balance first. Build ICS schedules from the locked version. Do not revise the trial balance after ICS preparation begins.

Frequently Asked Questions

Key Takeaways

• Year-end close and ICS preparation are one workflow, not two. Every adjusting entry and rate pool reconciliation during close produces data the ICS schedules consume. Treating them as separate projects creates gaps, rework, and avoidable DCAA findings.
• Start the process in Q4, before the fiscal year ends. Pre-close activities (preliminary rate calculations, subcontractor reconciliation, cost classification review) reduce the post-close workload and catch problems while corrections are inexpensive.
• Segregate unallowable costs during close, not during ICS prep. FAR 31.201-6 requires identification at the time of incurrence. Costs left in pools that DCAA discovers carry penalty exposure under FAR 42.709 in addition to the disallowance itself.
• Reconcile your ICS to the locked trial balance and do not revise either independently. The total incurred costs in the ICS must equal the total costs in the trial balance. Timing differences between trial balance adjustments and ICS preparation are a top cause of inadequacy determinations.
• The 6-month ICS deadline is a ceiling, not a target. Contractors who close efficiently and begin schedule preparation in February routinely submit by April or May, leaving buffer for review cycles and corrections.

Build a Year-End Close Process That Feeds a Clean ICS

The government contractor year-end close determines the quality of every financial deliverable that follows: your ICS, your final indirect rates, and the settlement on every cost-reimbursable contract you performed during the fiscal year. A disciplined close process, starting in Q4 and running through a locked trial balance, eliminates the scramble that produces ICS deficiencies and audit findings.

Take the Compliance Readiness Check to identify gaps in your year-end close procedures. Use the indirect rate calculator to compare your provisional rates against year-to-date actuals before you finalize adjusting entries.

Amerifusion Bookkeeping is a CPA-managed firm built for government contractors. We manage year-end close, indirect rate reconciliation, and incurred cost submissions as a unified engagement so nothing falls between the handoff. Book a discovery call to get your year-end close working as the first phase of a clean ICS.