What You Need to Prepare for GovCon Incurred Cost: A Guide from a Government Contracts CPA
When it comes to government contracting, one of the most misunderstood and anxiety-inducing responsibilities is the preparation and submission of the Incurred Cost Submission (ICS). Required by FAR 52.216-7, this detailed package must be submitted annually by contractors with cost-reimbursement contracts, and it forms the basis for settling final indirect rates and contract costs with the federal government.
For government contracting, getting the ICS right is critical. It affects everything from cash flow to audit risk to your ability to win future awards. Preparation is not something you do the month before it is due. It is a year-round discipline that requires system integrity, documentation, and a strategic understanding of cost principles and regulations.
Here is what you need to prepare, why it matters, and how to stay ahead.
Understanding the Purpose of the Incurred Cost Submission
The Incurred Cost Submission (ICS) is not just a paperwork requirement. It is the federal government’s primary tool for validating your cost accounting practices and finalizing indirect rates. Understanding its purpose helps you align your financial infrastructure with government expectations and prevent unpleasant surprises.
A properly completed ICS enables agencies like DCAA to evaluate whether the costs charged to your contracts are accurate, allowable, and compliant. It also supports the closeout of contracts and can influence how quickly you are paid and how likely you are to win future awards.
The ICS is used by the government, specifically the Defense Contract Audit Agency (DCAA) and other federal audit agencies, to:
- Determine the final allowable indirect rates.
- Identify over or under payments on contracts.
- Ensure compliance with the Federal Acquisition Regulation (FAR) and Cost Accounting Standards (CAS).
Failing to submit a timely and accurate ICS can delay payments, trigger audits, or even result in being deemed noncompliant, which could put future contracts at risk.
What You Need to Prepare for a Successful ICS
1. Accurate and Segregated Accounting System
Your accounting system should clearly distinguish between direct and indirect costs, making it easier to track contract performance and maintain compliance. This structure must be in place from the beginning of your fiscal year and continuously monitored for accuracy.
Your accounting system must segregate direct and indirect costs, support timekeeping compliance, and produce a clear audit trail. This is the foundation for an acceptable ICS.
2. Current Indirect Rate Structure
You must calculate and apply your indirect rates consistently throughout the year to avoid under or overbilling. These rates should reflect your actual cost structure and be updated as needed to remain aligned with government contract requirements.
You will need to define and document your overhead, G&A, fringe, and other indirect cost pools, and ensure your bases and allocations align with government expectations.
3. DCAA-Compliant Timekeeping System
Your labor charges are often the first thing DCAA auditors examine, so a reliable timekeeping system is essential. It should include daily entries, supervisory reviews, and restricted access to prevent retroactive edits.
Labor is the most scrutinized cost in government contracts. Your timekeeping system must accurately capture labor hours by project, be regularly reviewed, and prohibit unauthorized changes.
4. Schedule Preparation
The ICS includes several interrelated schedules, and even minor discrepancies between them can trigger a request for more information. Each schedule should be consistent with your accounting records and traceable to supporting documentation.
The ICS includes a series of mandatory schedules (Schedules A through N), such as:
- Schedule A: Summary of claimed indirect rates
- Schedule B: Overhead
- Schedule H: Direct contract cost by contract
- Schedule I: Cumulative costs claimed by contract
Each must be accurate, internally consistent, and backed by accounting data.
5. Supporting Documentation
The ICS is only as strong as the records that back it up. Prepare detailed reconciliations between your general ledger and ICS schedules, and document key assumptions used to calculate your indirect rates.
Prepare reconciliations to your general ledger, proof of cost allowability, allocation bases, and explanations for significant changes from prior years.
6. Subcontractor Monitoring
Contractors are expected to demonstrate proper oversight of subcontractor costs to ensure they meet allowability criteria. This includes verifying invoices, tracking deliverables, and maintaining communication records.
Subcontract costs must also be reviewed for allowability, proper billing, and compliance. The government may ask for evidence of subcontractor oversight.
7. Consultant Agreements & Travel Costs
Consultant and travel expenses must meet stringent documentation requirements to be considered allowable. Keep written agreements, proof of services rendered, and receipts that align with federal travel regulations.
These are common areas of disallowance. Make sure you have written agreements, proper approvals, and travel cost documentation that complies with the Joint Travel Regulations (JTR).
8. Initiative-taking Internal Reviews
An internal or third-party review of your ICS before submission can catch inconsistencies and reduce your risk of audit findings. Treat the review process as a mini audit to ensure you are ready for government scrutiny.
Before submission, conduct internal or CPA-reviewed audits to detect errors and identify risk areas. This reduces the likelihood of a DCAA audit triggering cost disallowances.
Submitting a well-prepared ICS shows the government that your company is low risk, which can:
- Expedite indirect rate agreements.
- Reduce audit burden.
- Improve your standing for future awards.
In contrast, sloppy or late submissions can result in questioned costs, penalties, and damage to your reputation.
When your financial systems mirror federal expectations, you are not just checking a compliance box. You are setting your business up for more predictable outcomes, fewer audit complications, and increased credibility with government partners.
With the right tools, expertise, and forward planning, your ICS becomes a strategic lever for minimizing risk and reinforcing your reliability as a government partner. If you would like support ensuring your submission is audit-ready and aligned with federal standards, contact us today.