As the defense contracting landscape continues to evolve, one recent legislative change is expected to have a significant impact on procurement teams across the industry. The FY2026 National Defense Authorization Act (NDAA) introduced statutory exemptions for qualifying Nontraditional Defense Contractors (NDCs), creating new opportunities for commercial suppliers while shifting additional responsibilities onto prime contractors.

For Contracts and Procurement departments, this means preparing for an increasing number of suppliers asserting NDC status during the procurement process. While these exemptions can streamline negotiations and reduce administrative burden, they also require organizations to implement consistent, compliant procedures for evaluating and documenting supplier assertions.

Companies that establish repeatable processes now will be better positioned to accelerate procurement while reducing downstream compliance risk.

The FY2026 NDAA may simplify compliance for qualifying Nontraditional Defense Contractors (NDCs), but it places new responsibilities squarely on prime contractors. As more suppliers begin asserting NDC status, Contracts and Procurement departments will become the first line of defense for ensuring those assertions are reviewed consistently, documented properly, and administered in compliance with evolving regulations.

What Is a Nontraditional Defense Contractor?

A Nontraditional Defense Contractor is generally defined as an entity that has not performed under a fully CAS-covered Department of Defense contract for at least one year before the solicitation.

This definition includes many organizations that primarily serve commercial markets, including:

• Technology companies
• Software developers
• Commercial manufacturers
• Engineering firms
• Innovative startups
• Commercial service providers

Historically, many of these companies avoided defense contracts because of the significant compliance requirements associated with traditional government contracts. Congress designed the NDC exemptions to encourage greater commercial participation in the defense industrial base by lowering those barriers.

For qualifying Department of Defense contracts, the FY2026 NDAA provides statutory exemptions from certain requirements related to:

• Truthful Cost or Pricing Data (formerly TINA)
• FAR Part 31 Cost Principles
• DFARS Business Systems

Although these statutory changes are effective, regulatory implementation within the DFARS remains ongoing, making proper internal administration especially important.

Why Procurement Teams Should Expect More NDC Assertions

The new statutory exemptions create meaningful incentives for suppliers to identify themselves as Nontraditional Defense Contractors.

From a supplier's perspective, qualifying as an NDC can significantly reduce the amount of documentation and administrative effort required during negotiations. Less cost information may be required, compliance obligations are reduced, and contract administration becomes more efficient.

As awareness of these benefits grows throughout the defense industry, procurement professionals should expect suppliers to begin proactively asserting NDC status during subcontract negotiations.

This creates new challenges for prime contractors.

Instead of simply accepting or rejecting supplier assertions, procurement personnel must determine whether:

• The supplier appears to qualify under the statutory definition.
• Appropriate supporting documentation has been obtained.
• Internal approvals have been completed.
• Procurement files adequately support the decision.
• Future audits can demonstrate a consistent review process.

Without standardized procedures, organizations may find different buyers handling identical situations differently, increasing compliance risk and creating inconsistencies across programs.

The Opportunity for Prime Contractors

While the influx of NDC assertions introduces additional responsibilities, it also presents meaningful opportunities to improve procurement efficiency.

Organizations that establish a structured review process can realize several important benefits.

Accelerated Procurement Cycles

Reducing unnecessary cost analysis allows buyers to move negotiations forward more quickly, helping organizations meet aggressive acquisition schedules without sacrificing compliance.

Reduced Administrative Burden

When suppliers legitimately qualify for statutory exemptions, procurement professionals spend less time requesting, reviewing, and documenting detailed cost information.

This allows Contracts and Procurement teams to focus on higher-value acquisition activities rather than unnecessary administrative work.

Greater Supplier Participation

Commercial companies that once viewed defense contracting as overly burdensome may now be more willing to pursue government work.

This broader supplier base can increase competition, encourage innovation, and improve access to emerging technologies that benefit Department of Defense programs.

Improved Procurement Efficiency

Organizations with clearly defined review procedures can process supplier assertions consistently, reducing delays while maintaining confidence that procurement decisions are fully documented.

The Compliance Risks of an Informal Process

Although the exemptions simplify portions of the procurement process, they do not eliminate the need for sound internal controls.

One of the greatest risks organizations faces is inconsistent administration.

For example, one buyer may require extensive documentation before accepting an assertion, while another may approve similar assertions with minimal review. Over time, these inconsistencies can create unnecessary exposure during internal audits, customer reviews, or government oversight.

Potential compliance risks include:

• Accepting unsupported NDC assertions
• Applying exemptions inconsistently across business units
• Inadequate documentation within procurement files
• Insufficient internal approval processes
• Difficulty defending procurement decisions during future reviews

The objective is not simply to approve supplier assertions faster—it is to establish a repeatable process that produces consistent, well-supported decisions every time.

Building a Sustainable NDC Review Process

As more suppliers begin asserting NDC status, organizations should develop standardized procedures that guide procurement personnel through each review.

An effective process often includes several key components.

Standardized Supplier Certifications

Develop a consistent questionnaire or certification form that suppliers complete when asserting Nontraditional Defense Contractor status.

This creates consistency across procurement activities while documenting the supplier's representation.

Defined Documentation Requirements

Determine exactly what supporting documentation procurement personnel should request before accepting an assertion.

Establishing clear requirements prevents unnecessary variation between buyers.

Internal Review and Approval Workflows

Identify who is responsible for evaluating assertions, approving exemptions, and escalating complex situations to Contracts, Legal, or Compliance personnel when appropriate.

Clear accountability improves consistency across the organization.

Procurement Team Training

Buyers, subcontract administrators, contracts managers, and pricing analysts should understand:

• What qualifies as an NDC
• When statutory exemptions may apply
• Required documentation
• Internal approval procedures
• Record retention expectations

Training helps ensure every procurement professional applies to the same standards.

Documentation and Record Retention

Organizations should maintain procurement files that clearly demonstrate how each assertion was evaluated and approved.

Proper documentation supports future audits while reducing questions about procurement decisions months or even years later.

Preparing Before Supplier Assertions Become Routine

Many procurement organizations have not yet updated their policies or procedures to address the expected increase in NDC assertions.

Waiting until suppliers begin regularly requesting exemptions places unnecessary pressure on acquisition teams already managing tight schedules and evolving regulatory requirements.

Instead, organizations should begin preparing now by:

• Reviewing procurement policies
• Updating purchasing procedures
• Creating standardized evaluation checklists
• Developing supplier certification forms
• Training Contracts and Procurement personnel
• Establishing approval workflows
• Reviewing document retention practices

These proactive steps help ensure procurement teams are ready before supplier assertions become commonplace.

RKI Helps Government Contractors Prepare for What's Next

The growing use of Nontraditional Defense Contractor assertions represents one of the latest examples of how government contracting requirements continue to evolve.

While these statutory exemptions can significantly reduce procurement burdens, they also require organizations to implement repeatable, compliant processes that withstand future scrutiny.

RKI Accounting works with government contractors to strengthen procurement processes, improve compliance programs, and develop sustainable internal controls that reduce administrative burden without increasing risk. Whether your organization is preparing for an influx of NDC assertions or reviewing broader procurement policies, our experienced consultants can help you establish procedures that support both compliance and operational efficiency.

Contact RKI Accounting today to learn how your Contracts and Procurement teams can confidently navigate evolving defense contracting requirements while mitigating downstream compliance risk.

Frequently Asked Questions

What is a Nontraditional Defense Contractor?

A Nontraditional Defense Contractor is an organization that has not performed under a fully CAS-covered Department of Defense contract for at least one year before the solicitation.

Why are more suppliers expected to assert NDC status?

The FY2026 NDAA introduced statutory exemptions that reduce compliance requirements for qualifying contractors, making NDC status more attractive to commercial suppliers.

Do NDC exemptions eliminate all procurement requirements?

No. While qualifying contractors may receive statutory exemptions from Truthful Cost or Pricing Data, FAR Part 31 Cost Principles, and DFARS Business Systems requirements for applicable DoD contracts, prime contractors should still maintain documented review procedures and consistent procurement practices.

How should prime contractors prepare for NDC assertions?

Organizations should establish standardized review procedures, define documentation requirements, train procurement personnel, implement approval workflows, and maintain complete procurement records to ensure supplier assertions are handled consistently and compliantly.

Cost Accounting Standards (CAS) 403 governs how home office expenses are allocated to business segments performing government contracts. The purpose of CAS 403 is to establish criteria for allocating home office expenses to the segments of an organization based on a beneficial or causal relationship. The standard requires contractors to allocate home office costs in a manner that reflects the benefit received by each segment, helping ensure consistency, compliance, and equitable cost distribution across the organization.

Key Definitions for CAS 403

To understand CAS 403, it is fundamental to know how CAS defines a home office, an intermediate home office, and a segment.

A home office is an office responsible for directing or managing two or more segments of an organization. For example, a corporate headquarters. A home office usually performs management, administrative, and other back-office functions the benefit one or more segments.

An organization can also have intermediate home offices for each group within the organization that report to one common home office. For example, a company may have an ultimate parent organization that directs strategy of the business with core executive functions and similar.  And intermediate home offices may be back office support organizations that sit beneath the ultimate parent but still perform functions on behalf of multiple segments.

In order to properly comply with CAS 403, a complete cost accounting illustration is necessary to understand the big picture of who supports who and where they sit within the organizational and operating structure of the business.  Just getting this part right at the on-set is a significant advantage to complying with CAS 403, but also to understanding the best way to optimize cost allocations within your business.

A segment is “one of two or more divisions, product departments, plants, or other subdivisions of an organization reporting directly to a home office, usually identified with responsibility for profit and/or producing a product or service.”

CAS 403 focuses on how home office expenses must be allocated to segments, and/or intermediate home offices, as applicable.

Allocation Pool and Base Requirements for CAS 403

CAS 403 requires that home office expenses are allocated on the basis of beneficial or causal relationships.  The allocation methodology is hierarchial in nature, with direct allocations of home/intermediate home office costs

being required to the maximum extent practicable. The concept of ‘direct allocation’ is not to be confused with the concept of ‘direct costs’.  Directly allocated simply means a cost is being assigned directly to the benefiting segment.

For example, if a home office is performing legal work on behalf of an individual segment, however it has responsibility for four (4) segments, the time spent on the matter can be directly identified, and hence directly allocated to the benefitting segment.  When direct allocation is not practical, home office expenses must be grouped into homogeneous expense pools and allocated subsequently.

Homogenous Expense Pools Prescribed by CAS 403

The following are the types of homogenous expense pools prescribed by CAS 403 that can be used:

1. Centralized service functions
2. Staff management of certain specific activities of segments
3. Line management of particular segments or groups of segments
4. Central payments or accruals
5. Independent research and development (IR&D) costs and bid and proposal costs (B&P)
6. Residual expenses

These are referred to as “functional allocations”.  The number of functional allocations an organization has usually depends on the variety and significance of service and management functions performed by the home office. But to avoid having too many groupings, as long as the pooled expenses can be allocated using the same allocation base (e.g., employee headcount), they can be included in the same home office expense pool.

CAS 403 Examples

CAS 403 provides illustrated examples of typical home office allocation pools and bases. For items one through five above, following are some additional examples.

Lastly, if the home office costs cannot be allocated either directly or functionally then CAS provides for the remainder of costs to be treated as “residual expenses”.  Residual expenses are typically those that are not identifiable with specific activities of segments and cannot be more equitably allocated based on a functional allocation.

While it may be compliant to allocate residual expenses in different ways, the most common approach is the Three Factor Formula which is calculated by taking the arithmetical average of the following three percentages for the same period:

1. Percentage of segment payroll dollars to total payroll dollars of all segments
2. Percentage of segment operating revenue to total operating revenue of all segments
3. Percentage of average NBV of the sum of segment tangible capital assets plus inventories to the total average NBV of such assets of all segments

Note that at certain size thresholds contractors are required to use the 3 Factor Formula.  Other contractors sometimes use sales as a simple residual allocation method when not required by CAS to use 3 Factor Formula.  Others still may find that a 2 Factor formula is most equitable given the nature of their business.  For example, it is not uncommon for some businesses to have highly variable fixed assets across their segments which may be distortive to the allocation method.

Congress has approved legislation that would increase CAS applicability and Full CAS Coverage thresholds. As of June 2026, these changes have been enacted but remain pending implementation through rulemaking. Contractors should continue following current CAS requirements until the new regulations take effect. (Effective 6/30/26)

Best Practice Strategies

CAS 403 Challenges

The most common CAS 403 challenges we find working with contractors include:

• Not understanding the operating structure of the business
• Miscommunication or misunderstanding between home offices and their segments on who’s responsible for compliance
• Confusing financial allocations with federal cost accounting allocations (yes, they may and often are different!)
• Home office parents neglecting to understand that they have a responsibility for compliance on behalf of their federal segment (even if they’re 99% commercial)
• Using 3 Factor formula for all home office expenses, skipping the hierarchy required for proper cost accounting allocations
• Insufficient review of cost allocation methodologies available resulting in equitable, or sub-optimal cost accounting illustrations

While CAS 403 is a U.S. Government contract requirement, it’s allocation methodologies are highly leverageable by companies that understand them.  CAS 403 has its own dedicated audit program (DCAA > Customers > Guidance > Directory of Audit Programs)  that DCAA uses when auditing and findings within CAS 403 are some of the most common CAS audit findings.  While they can be a challenge, they can also be a way to ensure alignment between home office parents and their segments.  We have found the contractors with the most success with CAS 403 are those that have strong communication and alignment with their parent organizations.

Frequently Asked Questions

What is CAS 403?

CAS 403 establishes rules for allocating home office expenses to business segments based on beneficial or causal relationships.

Does CAS 403 require the Three Factor Formula?

Not always. The Three Factor Formula is generally used for residual expenses when direct or functional allocation methods are not appropriate.

What is a home office under CAS 403?

A home office is an organization responsible for directing or managing two or more segments.

What is an intermediate home office?

An intermediate home office performs management or support functions for multiple segments while reporting to a higher-level home office.

What are residual expenses under CAS 403?

Residual expenses are home office costs that cannot be directly or functionally allocated and must be distributed using an appropriate residual allocation methodology.

Lastly, Home Office allocations require a Home Office Disclosure Statement.  For more information on preparing compliant Disclosure Statements, please visit:  DS Done -- CAS DS-1 Form completion application (rkiaccounting.com)

Defining CAS Coverage and What is a CAS Covered Contract

In its simplest sense, a CAS covered contract is any U.S. Government contract that does not meet an exemption from the Cost Accounting Standards (CAS) and includes the CAS clause (FAR 52-230-2 Cost Accounting Standards). While that sounds simple, what is not is navigating whether a contract meets CAS exemptions, and if it does not, knowing which CAS coverage is applicable to the contract; modified CAS or full CAS.

CAS applicability is one of the most common challenges faced by a growing U.S. Government contractor. Once a contractor begins performing CAS-covered contracts, its compliance profile changes significantly, bringing increased cost accounting requirements, disclosure obligations, and audit interest from the Defense Contract Audit Agency (DCAA).

Compliance with CAS can be complex and confusing to many Contractors, so it is crucial for Contractors to understand CAS applicability and determine whether they have any CAS Covered Contracts. It is also crucial, based on the type of CAS Coverage, to understand CAS implications in their organization. Many contractors lack the formal procedures and internal controls to effectively track their US Government Contract awards against CAS Coverage. This can result in major compliance challenges downstream that are expensive to untangle.

Table Of Contents:

• CAS Exemptions & Applicability 
• CAS Coverage - Modified vs Full CAS Coverage
• CAS Exemptions Flowchart
• How Long Does CAS Coverage Last?
• CAS Compliance Requirements
• Making Cost Accounting Practice Changes Under CAS
• Contact RKI For CAS Compliance Expertise

CAS Exemptions & Applicability

Cost Accounting Standards (CAS) apply to certain negotiated government contracts unless a specific exemption applies. Recent legislative changes have increased CAS applicability thresholds, making it more important than ever for contractors to evaluate each award individually.

A contract may be exempt from CAS if:

• The contract is awarded to a small business.
• The contract is awarded under sealed-bid procedures.
• The award is for a commercial product or commercial service.
• The price is set by law or regulation.
• The award is a firm-fixed-price (FFP) contract awarded on the basis of adequate price competition without the submission of certified cost or pricing data.
• The awardee is a foreign concern (subject only to CAS 401 and CAS 402 requirements).

If none of these exemptions apply, the contract may be subject to CAS coverage. Contractors should carefully evaluate each award against the applicable CAS thresholds and regulations in effect on the contract award date.

As contractors grow and pursue larger federal opportunities, they often accumulate multiple CAS-covered contracts. Losing track of which contracts are subject to CAS and the level of coverage applicable to each contract, can create significant compliance challenges.

The U.S. Government has rights under CAS-covered contracts that do not exist under exempt contracts, including the ability to seek contract price adjustments when a contractor fails to comply with applicable Cost Accounting Standards.

Because CAS applies at the contract level, every award should be evaluated independently. Maintaining a CAS tracking process is critical to ensuring compliance, understanding disclosure requirements, and avoiding costly downstream issues.

Important: Recent legislative and regulatory changes are increasing CAS applicability thresholds from $7.5M to $35M for modified CAS and from $50M to $100M for full CAS coverage, effective 6/30/26.  Because these requirements continue to evolve, contractors should evaluate each award based on the regulations and thresholds in effect on the contract award date.

CAS Covered Contracts – Modified vs. Full CAS Coverage

When a contract is determined to be CAS-covered, the next step is determining whether it is subject to Modified CAS Coverage or Full CAS Coverage.

Modified CAS Coverage requires compliance with four Cost Accounting Standards:

• CAS 401 – Consistency in Estimating, Accumulating, and Reporting Costs
• CAS 402 – Consistency in Allocating Costs Incurred for the Same Purpose
• CAS 405 – Accounting for Unallowable Costs
• CAS 406 – Cost Accounting Period

Modified CAS Coverage generally applies to contractors that do not meet the thresholds for Full CAS Coverage.

Full CAS Coverage requires compliance with all 19 Cost Accounting Standards and carries additional disclosure and compliance requirements. Full CAS Coverage is generally triggered when a contractor exceeds the applicable CAS thresholds established by statute and regulation. Because these thresholds may change over time, contractors should evaluate coverage requirements based on the regulations and thresholds in effect on the contract award date.

A key requirement under Full CAS Coverage is the submission of a CASB Disclosure Statement (Form CASB DS-1). This document details a contractor's cost accounting practices and serves as the basis for demonstrating ongoing compliance with Cost Accounting Standards. In certain circumstances, contractors subject to Modified CAS Coverage may also be required to submit a Disclosure Statement.

Maintaining consistency between disclosed accounting practices and actual business operations is critical. Failure to comply with applicable CAS requirements can result in audit findings, cost impacts, and contract price adjustments by the U.S. Government.

CAS Exemptions Flowchart

A CAS coverage flowchart that illustrates applicability, coverage, exemptions, and CAS disclosure statement requirements can be found here.

A common misconception held by many contractors is that a contractor is either CAS-covered or not CAS-covered. While a simple way to think of it, it is important to recognize that CAS applies at a contract level, not at a contractor level. Every U.S. Government contract should be evaluated on its date of award to determine if and how CAS applies.

How Long Does CAS Coverage Last?

The CAS applicability on the date of the contract award is the applicability for the life of the contract. Hence, some contractors can have a combination of exempt, modified CAS, and full CAS covered contracts.

The CAS status of a contract or subcontract remains the same throughout its life. For example, if a contractor holds a contract subject to Modified CAS Coverage, and then receives a contract subject to Full CAS Coverage, the initial contract does not become subject to Full CAS, and remains subject to Modified CAS.

CAS Compliance Requirements

Cost Accounting Standards (CAS) compliance is essential for government contractors performing CAS-covered contracts. CAS was established to promote consistency, uniformity, and transparency in how contractors estimate, accumulate, allocate, and report costs to the U.S. Government. Below are several key CAS compliance requirements contractors should understand:

1. CAS Coverage Determination

Contractors should evaluate each contract individually to determine whether it is exempt from CAS or subject to Modified or Full CAS Coverage. CAS applicability is determined at the contract level and is based on the regulations and thresholds in effect on the contract award date.

2. Cost Accounting Practices

Contractors must establish and consistently follow documented cost accounting practices for estimating, accumulating, allocating, and reporting costs. Changes to these practices may require disclosure to the U.S. Government and could result in contract price adjustments.

3. Disclosure Statement Requirements

Contractors subject to Full CAS Coverage are generally required to submit a CASB Disclosure Statement (Form CASB DS-1), which documents their cost accounting practices. In certain circumstances, contractors under Modified CAS Coverage may also be required to submit a Disclosure Statement. Contractors must ensure their actual practices remain consistent with their disclosed practices.

4. Consistent Cost Allocation

CAS requires contractors to consistently allocate costs between direct and indirect cost pools. Costs incurred for the same purpose under similar circumstances must be treated consistently throughout the organization to prevent inequitable cost charging.

5. Recordkeeping and Audit Readiness

Contractors must maintain sufficient documentation to support their accounting practices, indirect rate structures, cost allocations, and contract billings. These records should be readily available to support government audits and compliance reviews.

6. Understanding CAS Exemptions

Not all government contracts are subject to CAS. Certain contracts may qualify for exemptions based on factors such as contractor size, contract type, competition, or the nature of the goods or services being provided. Properly identifying exemptions is an important part of maintaining compliance.

Failure to comply with CAS requirements can result in audit findings, contract price adjustments, increased government scrutiny, and other compliance challenges. Maintaining strong accounting systems, documented procedures, and consistent cost accounting practices is essential to successfully managing CAS-covered contracts.

Making Cost Accounting Practice Changes Under CAS

Once a contractor begins performing CAS-covered contracts, it must monitor its cost accounting practices for changes that require disclosure to the U.S. Government pursuant to FAR 52.230-3 Disclosure and Consistency of Cost Accounting Practices. Contractors that fail to realize this significant requirement, applicable under both modified and full CAS covered contracts, may make a change that results in increased cost to the U.S. Government for which it will not pay.

Generally, the U.S. Government will not pay increased costs due to changes in a contractor’s cost accounting practices. One of the easiest, and expensive, ways to get in trouble with CAS covered contracts is to make changes to cost accounting practices that seem benign but change the way the U.S. Government participates in cost. Examples of common changes in cost accounting practice that are natural for a contractor but impact cost allocation include:

• Changing the treatment of a cost from indirect to direct (e.g., program management historically treated as overhead, but growth has resulted in a need to have dedicated program managers who now charge direct)
• Changing the treatment of a cost from direct to indirect
• Facilities allocation changing from headcount to square footage
• Home office allocations change from revenue to 3 factor formula

NOTE:  Recent changes in legislation now exempt firm fixed price contracts from cost impacts resulting from changes in cost accounting practice.

Impact on CAS Covered Contracts

All changes to cost accounting practice are likely to result in some cost impact to CAS covered contracts. Changes to cost accounting practice require disclosure prior to adopting them. In most instances the U.S. Government will require a contractor to submit a cost impact proposal, either through a Detailed Cost Impact (DCI) or General Dollar Magnitude (GDM).

Not realizing this requirement can result in significant cost impacts to the U.S. Government whereby a contractor may have to pay large sums of money back to the U.S. Government for years of undisclosed changes in cost accounting practice. This is a massive difference from commercial and non-CAS covered contracts. In its simplest sense, once a contractor is CAS covered, it must carefully evaluate, disclose, and coordinate changes to its cost accounting practices before implementation.

Monitor Your Contracts and Protect Your Organization!

If you are a contractor, it is important to evaluate every award for CAS applicability and maintain a CAS tracker so that you know the CAS applicability at the contract level. And it is something every executive team, not just accounting and contracts, needs to be familiar with. Changes in organizations bring changes to cost accounting; and those changes need to be considered prior to making the change. If the entire organization is not aware of these risks, it can easily result in changes that cost the contractor money.

Need Help Navigating CAS Compliance? We're Here to Support You.

Winning and managing CAS-covered contracts can bring major opportunities—but also complex requirements. Whether you're preparing for a new award, updating your cost accounting practices, or responding to an audit, our team understands what it takes to stay on track with CAS compliance.

At RKI, we work with government contractors of all sizes to evaluate readiness, strengthen internal systems, and support disclosure requirements. If you're unsure where to start or need a second set of eyes, we’re here to help you move forward with clarity and confidence.

Don’t let CAS compliance slow you down. Let’s make compliance a strength, not a stressor. Contact us today to get started and ensure your compliance needs are met with precision and expertise.

Frequently Asked Questions

What is a CAS covered contract?

A CAS covered contract is a U.S. Government contract that is subject to the Cost Accounting Standards (CAS) and does not qualify for a CAS exemption. CAS-covered contracts require contractors to follow specific cost accounting rules and maintain consistency in how costs are estimated, accumulated, allocated, and reported.

What is Modified CAS Coverage?

Modified CAS Coverage requires compliance with four Cost Accounting Standards: CAS 401, CAS 402, CAS 405, and CAS 406. It is generally applicable to contractors that do not meet the requirements for Full CAS Coverage but are performing CAS-covered contracts.

What is Full CAS Coverage?

Full CAS Coverage requires compliance with all 19 Cost Accounting Standards and carries additional disclosure and compliance obligations. Contractors subject to Full CAS Coverage are typically required to submit a CASB Disclosure Statement outlining their cost accounting practices.

Does CAS apply to small businesses?

No. Contracts awarded to qualifying small businesses are generally exempt from Cost Accounting Standards. However, contractors should evaluate each award individually to determine whether an exemption applies.

How long does CAS Coverage last?

CAS applicability is determined on the date of contract award and remains in effect for the life of the contract. A contract that is exempt, modified CAS-covered, or full CAS-covered at award generally retains that status throughout its performance period.

What is a CASB Disclosure Statement?

A CASB Disclosure Statement (Form CASB DS-1) is a document that outlines a contractor's cost accounting practices. It provides transparency to the U.S. Government and serves as the basis for evaluating compliance with Cost Accounting Standards. Contractors subject to Full CAS Coverage are generally required to submit and maintain a Disclosure Statement.

What happens if a contractor violates CAS?

Failure to comply with Cost Accounting Standards can result in audit findings, contract price adjustments, increased government scrutiny, and potential repayment of costs to the U.S. Government. Maintaining documented accounting practices and monitoring cost accounting changes are essential to reducing compliance risk.

Can a contractor have both CAS-covered and CAS-exempt contracts?

Yes. CAS applies at the contract level, not the contractor level. A contractor may simultaneously hold CAS-exempt contracts, contracts subject to Modified CAS Coverage, and contracts subject to Full CAS Coverage. Each contract should be evaluated independently based on the rules applicable at the time of award.

A CASB Disclosure Statement (CASB DS-1) is a required disclosure document used by certain government contractors to describe their cost accounting practices under the Cost Accounting Standards (CAS). It helps the Government evaluate whether a contractor's accounting methods are CAS-compliant, consistent, and properly disclosed.

What Is Included in a CASB Disclosure Statement?

A CASB Disclosure Statement consists of eight primary sections that document how a contractor estimates, accumulates, allocates, and reports costs.

• Part I – General Information
• Part II – Direct Costs
• Part III – Direct vs. Indirect Costs
• Part IV – Indirect Costs
• Part V – Depreciation and Capitalization Practices
• Part VI – Other Costs and Credits
• Part VII – Deferred Compensation and Insurance Cost
• Part VIII – Home Office Expenses

Each part has numerous sections called items which vary in applicability to the contractor, depending on the contractor’s cost accounting practices. While each item is generally constituted by selection boxes and multiple-choice questions, certain responses require the contractor to detail information in longer narrative form, on “continuation sheets”.

When is a CASB Disclosure Statement Required?

The requirement to submit a CASB Disclosure Statement depends on the CAS covered contracts a contractor maintains. In a nutshell, CAS is applicable to individual contracts and the applicability of CAS is triggered based on dollar thresholds. Whether or not CAS is applicable to a given contract is determined by the contract type, the size of the business receiving the contract, and the amount awarded. A CASB Disclosure Statement is required if Full-CAS coverage applies to a contractor.

Contractors subject to Full CAS Coverage are generally required to submit a CASB Disclosure Statement. Full CAS Coverage typically applies when a contractor receives a CAS-covered award of $50 million ($100M, effective 6/30/26) or more, or when the contractor receives $50 million ($100M, effective 6/30/26) or more in net CAS-covered awards during its preceding cost accounting period.

CASB DS-1 should not be submitted prior to Full-CAS coverage applicability. The solicitation usually provides clarification on when exactly the Disclosure is required. Typically, if the requirement is in the solicitation, and it is the Contractor’s first Disclosure, then submission is due at the time of the proposal.

If a CAS-covered contract under $50 million ($100M, effective 6/30/26) is awarded, and the Contractor received net CAS-covered awards in the prior accounting period totaling more than $50 million ($100M, effective 6/30/26), then the Contractor is required to file a Disclosure Statement prior to the contract award. However, if the award is within the first 90 days of the preceding accounting period, then the contractor is not required to file until the end of the 90 days. If a contractor anticipates future Full-CAS coverage, it is prudent to have the Disclosure Statement prepared and ready (i.e., not submitted to the Government).

CASB Disclosure Statement Adequacy and Compliance

When a CASB Disclosure Statement is required, it must be submitted to the Contracting Officer (CO) and the Cognizant Federal Agency Official (CFAO). All Disclosure Statements will be reviewed and audited based on two major factors (1) adequacy, and (2) compliance.

CASB Disclosure Statement Adequacy

The adequacy of a CASB Disclosure Statement is determined by how the DS-1 is formatted and filled out based on the applicability of the 19 Cost Accounting Standards to the contractor. For example, if a contractor accumulates Home Office expenses and allocates such expenses to various business segments, but it does not complete Part VIII of the Disclosure Statement, the Disclosure Statement would be deemed inadequate.

Ensuring adequacy on a CASB Disclosure Statement is not easy, and it can be a grueling process to pass adequacy with DCAA. DCAA’s adequacy checklist evaluates the DS-1 for completeness and proper formatting, oftentimes resulting in many rounds of back and forth before a Disclosure Statement is accepted for audit.  This erodes auditor confidence and burns costly time on behalf of the Government and the contractor.

Our experience suggests that at least 50% of inadequacies can be avoided simply by filling the DS-1 out with all the required information in proper format.  As a result, we designed a proprietary software – CASB DS-Done – to facilitate an adequate Disclosure Statement.  The software is built with control integrity to hit on all the required fields and continuation sheets with user-friendly prompts avoiding the countless hours of formatting and inadequacy rejections.  [Learn more about DS-Done].

What Are the Penalties of CASB Disclosure Statement Inadequacies or Noncompliance?

Inadequate formatting of CASB DS-1 greatly hampers the progress of a contractor’s Government Contracts program from an operational, accounting, and billing standpoint. To ensure all contract estimates, procurements, and billings are conducted properly under CAS rules, regulations, and standards, and FAR part 31, the accounting practices of Full-CAS covered contracts or companies/business segments are audited via initial Disclosure Statement audit.

Such audits will only be initiated once the CFAO has deemed the CASB DS-1 to be adequate. Delays in Disclosure Statement adequacy translate to delays in Disclosure Statement audits, and delays in Disclosure Statement audits degrade both contractor and Government confidence in the contractor’s cost accounting reliance.  It can also result in delayed contract award, in addition to unnecessary resource consumption on both parties to resolve inadequacies that can be avoided with upfront diligence.

Penalties for Noncompliance

Depending on the nature of the non-compliance there can be a variety of penalties for noncompliance. In its simplest sense, the U.S. Government will be entitled to repayment of any material non-compliance if it resulted in increased cost to the Government. If the CFAO determines that noncompliance is material, the contractor is required to submit a description of any accounting practice change needed to bring the practices into compliance, which the auditor will review for adequacy and compliance. If the proposed change is both adequate and compliant, the contractor must submit a cost impact detailing the effect the non-compliance had on all affected CAS covered awards.

The CFAO will evaluate the cost impact and if the result was increased cost to the Government, the CFAO will administer contract and/or billing adjustments, plus applicable fines and interest to repay the amounts due as a result of the noncompliance. Noncompliant cost impacts take time to develop, negotiate, and are a significant burden and expense to both the contractor and the Government to administer. It can require going back years into your historical contract and accounting records to obtain the necessary information to perform a cost impact analysis.

Adding to the risk of CAS non-compliances is the risk of perceived, or actual, False Claim Act (FCA) allegations from the customer.  In many instances, the U.S. Government customer may assert that the contractor was aware, or should have been aware, of the non-compliance and, as such, the Government is entitled to False Claim damages up to treble damages.  In short, CAS non-compliances only come in 2 varieties:  bad and worse.

“CAS noncompliance” is among the short list of bad words you never want associated with your organization; right along with false claims and defective pricing – words that often get attached to CAS noncompliance if the Government feels the noncompliance was purposeful.  Be diligent upfront and ensure you can demonstrate compliance with CAS.

Need Help with a CAS Disclosure Statement?

Preparing a CAS Disclosure Statement requires more than simply completing Form DS-1. Your disclosed accounting practices must align with your estimating, accumulating, and reporting processes across CAS-covered contracts.

RKI helps government contractors:

• Prepare CASB Disclosure Statements
• Address DCAA adequacy findings
• Support Full CAS Coverage requirements
• Resolve CAS noncompliance issues
• Maintain ongoing CAS compliance

Contact RKI today to discuss your CAS Disclosure Statement requirements.

Frequently Asked Questions

What is a CASB Disclosure Statement?

A CASB Disclosure Statement (DS-1) is a formal document used by government contractors to disclose their cost accounting practices when subject to Full CAS Coverage.

Who must file a CASB Disclosure Statement?

Contractors subject to Full CAS Coverage generally must submit a CASB Disclosure Statement to the Government.

What happens if my Disclosure Statement is inadequate?

The Government may reject the submission, delaying audits, contract awards, and compliance approvals until deficiencies are corrected.

Does DCAA approve CASB Disclosure Statements?

DCAA typically audits Disclosure Statements for adequacy and compliance, while the Cognizant Federal Agency Official (CFAO) ultimately determines adequacy and resolves findings.

How often must a CASB Disclosure Statement be updated?

Contractors must revise and disclose significant changes to accounting practices when those changes affect disclosed practices.

What is the difference between Modified CAS Coverage and Full CAS Coverage?

Modified CAS Coverage generally applies to certain CAS-covered contracts that do not meet the requirements for Full CAS Coverage. Full CAS Coverage requires contractors to comply with all applicable Cost Accounting Standards and typically requires submission of a CASB Disclosure Statement.

Federal contracting is entering a major shift. With increased pressure to award more firm-fixed-price (FFP) contracts, cost-reimbursement contractors are being forced into a new reality: you now own the risk.

For many contractors, this isn’t just a contract change, it’s a capability gap. And the ones who don’t close that gap quickly will either stop competing or start losing money.

What’s Driving the Shift to Fixed-Price Contracts?

Recent federal acquisition policy direction and executive-level pressure to reduce government cost risk are accelerating the move toward firm-fixed-price (FFP) contracting across agencies. While the goal is greater predictability and efficiency for the government, the operational and financial burden shifts directly to contractors.

Agencies are being pushed to prioritize FFP awards to:

• Lock in predictable costs
• Reduce administrative oversight
• Speed up procurement

On paper, it sounds efficient.

In reality, it assumes contractors can accurately forecast, control, and defend their costs, which most cost-reimbursement contractors were never built to do at this level.

The Real Impact: Risk Has Shifted to You

Under cost-reimbursement contracts, the government carried much of the uncertainty.

Under FFP, you do.

That creates immediate exposure:

1. Pricing Blind = Margin Loss

If your cost data isn’t clean and reliable, you’re guessing. That leads to:

• Underpricing → lost profit
• Overpricing → lost bids

2. No Room for Error

FFP contracts don’t forgive inefficiencies. Poor cost control = direct hits to your bottom line.

3. Contractors Sitting Out

Many firms simply won’t pursue FFP work because they don’t trust their numbers.

For many small and mid-sized contractors, taking on FFP risk without mature cost accounting systems could create catastrophic margin exposure. Some firms may decide not to compete for certain opportunities at all rather than gamble on incomplete cost visibility.

That’s the opportunity, and the warning.

What Happens Next: More UCAs and Incentive Contracts

Even with the push toward FFP, agencies still need flexibility. That’s why we’re seeing a likely increase in:

Undefinitized Contract Actions (UCAs)

• Work starts before pricing is finalized
• Speed is prioritized over certainty
• Final costs still require justification

FFP Incentive Contracts

• Fixed structure with performance-based upside/downside
• Requires tight cost tracking to protect margin

Translation:
The contract type may change, but cost accountability doesn’t go away. It intensifies.

The Biggest Mistake Contractors Are Making

There’s a growing assumption:

“If we’re moving to fixed-price, detailed cost accounting matters less.”

No. It matters more than ever.

Here’s the reality:

• You cannot price FFP work confidently without accurate historical cost data
• You cannot survive UCAs without defensible cost structures
• You cannot maximize incentive contracts without real-time cost visibility

FFP doesn’t eliminate the need for cost accounting—it exposes weaknesses in it.

Your ability to win and survive FFP work depends on whether your accounting system produces defensible, actionable cost intelligence.

This Is Where Most Contractors Break Down

Most cost-reimbursement contractors were built for:

• Tracking costs after the fact
• Billing based on allowable expenses
• Managing compliance, not pricing risk

That model does not translate cleanly into FFP.

What’s missing is:

• Job-level cost visibility
• Accurate indirect rate structures
• Forward-looking cost estimating
• Systems that tie operations to financial performance

Without that foundation, FFP becomes a gamble.

The Contractors Who Will Win

This shift will split the market. The contractors with mature cost systems will adapt. The ones without them will struggle to compete

Contractors Who Struggle

• Avoid FFP work
• Guess on pricing
• Lose margin or lose bids

Contractors Who Win

• Understand their true costs
• Price with confidence
• Protect margins under pressure

The difference isn’t luck.

It’s having the right cost accounting system—and the right partner behind it.

Why Strong Cost Accounting Requires the Right Expertise

Strong cost accounting isn’t just:

• Setting up QuickBooks correctly
• Tracking expenses
• Closing books monthly

It’s about:

• Structuring your cost accounting to match your operating structure
• Forecasting costs reliably, and measuring your success as a feedback loop for future pricing
• Building accurate indirect rate models
• Creating audit-ready, defensible cost data
• Supporting real-world pricing decisions

And that level of precision doesn’t happen internally by accident.

Where RKI Comes In

This is exactly where RKI Accounting becomes critical.

As the market shifts toward FFP, UCAs, and incentive contracts, contractors need more than basic bookkeeping, they need a strategic cost accounting partner.

RKI helps contractors:

• Build and maintain high-visibility cost accounting systems, capable of complying with DCAA audit expectations (when applicable)
• Develop accurate cost structures for confident pricing
• Prepare for and navigate UCAs and contract transitions
• Improve visibility into job-level profitability
• Reduce risk while staying competitive in bidding

We help you move from guessing your numbers → to trusting them.

How to Position Your Business Right Now

If you want to stay competitive, focus here first:

1. Get Your Cost Accounting System Right

If your system e doesn’t provide sufficient cost visibility, it’s already short-changing your ability to forecast profitability and inform short and long term strategy

2. Validate Your Cost Data

Historical accuracy is the foundation of future bids.

3. Work With Experts Who Know GovCon

This isn’t general accounting. It’s government contracting accounting—and the difference matters.

This Shift Will Reward the Prepared

The move toward fixed-price contracting isn’t going away.

But it won’t eliminate cost complexity, it will expose it.

Contractors who invest in strong cost accounting will:

• Win more work
• Price more confidently
• Protect their margins

Those who don’t will either:

• Sit out opportunities
• Or learn the hard way through lost profit

How to Stay Competitive in the New GovCon Environment

If you’re being pushed toward fixed-price contracts or trying to compete in a mix of FFP, UCAs, and cost-type work now is the time to get your accounting foundation right. RKI Accounting helps government contractors build the systems, structure, and visibility needed to compete and win in this new environment.

Alert:  U.S. Army’s $50 billion Marketplace for the Acquisition of Professional Services (MAPS) RFP now allows contractors to earn proposal points for “Third Party CPA Determined Acceptable Accounting Systems”.  This is a significant advantage to contractors who have not had a formal DCAA review.  If you need a review, contact RKI today as we have a long history of performing these reviews and issuing letters for contractors in these environments!  Act fast as proposals are currently due June 22! 

The U.S. Army’s new Marketplace for the Acquisition of Professional Services (MAPS) program is creating major opportunities for government contractors pursuing professional services work. With a ceiling value reportedly reaching $50 billion, contractors across the federal space are preparing proposals ahead of the June 22 submission deadline.

Contractors pursuing the Army MAPS Program may now have an opportunity to strengthen proposal scoring through a third-party CPA accounting system review, even if they have never undergone a formal DCAA audit.

One of the most important updates within the MAPS RFP is the ability for contractors to potentially earn proposal points through a:

“Third Party CPA Determined Acceptable Accounting System.”

For many contractors, this is a significant opportunity. Companies that have not undergone a formal DCAA accounting system audit may still have a path to demonstrate accounting system adequacy and strengthen their proposal competitiveness.

Understanding how the Army MAPS Program works and why accounting system readiness matters could make a meaningful difference in your proposal strategy.

What Is the Army MAPS Program?

The Army MAPS Program, or Marketplace for the Acquisition of Professional Services, is a major contract vehicle designed to support a broad range of professional service needs across the U.S. Army. The program is expected to support areas such as:

• Engineering services
• Financial management
• Program management
• IT and cybersecurity
• Logistics support
• Business operations
• Consulting and advisory services

As agencies continue moving toward faster and more flexible acquisition methods, large-scale contract vehicles like MAPS are becoming increasingly important for contractors seeking long-term federal opportunities.

Because of the program’s size and competitive nature, contractors are looking for every possible advantage to improve proposal scoring and strengthen compliance readiness.

Why the MAPS RFP Matters for Government Contractors

The MAPS RFP is attracting significant attention because it represents access to a potentially substantial pipeline of federal work. For many contractors, securing a position on the vehicle could create opportunities for task orders and long-term agency relationships for years to come.

However, competitive contract vehicles also come with increased scrutiny.

Federal agencies want to reduce risk when evaluating contractors. That includes reviewing whether companies have the operational systems, financial controls, and accounting infrastructure necessary to manage government contracts effectively.

This is especially important for contractors pursuing:

• Cost reimbursement contracts
• Time-and-materials contracts
• Undefinitized contract actions (UCAs)
• Incentive-based contract structures

In these environments, strong accounting systems are critical for supporting compliance, cost tracking, labor distribution, indirect rate calculations, and overall contract management.

What Is a Third Party CPA Determined Acceptable Accounting System?

One of the most notable aspects of the Army MAPS Program is the inclusion of proposal credit tied to a Third Party CPA Determined Acceptable Accounting System.

Traditionally, many contractors associate accounting system adequacy with formal DCAA reviews. While DCAA audits remain important within government contracting, not every contractor has undergone a formal review process.

The MAPS language creates another potential pathway.

A third-party CPA accounting system review may help contractors demonstrate that their accounting system includes appropriate controls and structures to support government contracting requirements.

These reviews often evaluate areas such as:

• Segregation of direct and indirect costs
• Labor distribution systems
• Timekeeping controls
• Indirect rate structures
• Accounting policies and procedures
• Financial reporting capabilities
• Contract cost tracking processes

For contractors that have not yet received a formal DCAA review, this may provide an opportunity to strengthen proposal positioning and reduce perceived risk during evaluations.

How Contractors Can Earn Additional MAPS Proposal Points

The Army MAPS Program is highly competitive, which means contractors are looking for every possible advantage during the proposal process. One important aspect of the current MAPS RFP is the opportunity for contractors to potentially earn additional proposal points by demonstrating accounting system adequacy through a third-party CPA review.

For many contractors, this is a significant development.

Historically, companies without a formal DCAA accounting system audit may have been viewed as less prepared for certain federal contracting opportunities. The MAPS language creates another pathway for contractors to demonstrate operational and financial readiness without needing a completed DCAA review beforehand.

From the government’s perspective, accounting system evaluations help reduce risk during contractor selection. Agencies want confidence that contractors can properly:

• Track contract costs
• Segregate direct and indirect expenses
• Maintain compliant labor tracking procedures
• Support government reporting requirements
• Manage federal funds responsibly

Strong accounting systems also signal operational maturity. Contractors that proactively evaluate their accounting systems may appear better prepared to handle complex contract requirements, especially under cost-reimbursement, time-and-materials, or hybrid contract structures.

For contractors pursuing the Army MAPS Program, a third-party CPA accounting system review may help strengthen proposal competitiveness while demonstrating readiness to support federal contract performance.

How Contractors Without DCAA Reviews Can Still Compete

Many growing government contractors are highly capable operationally but have never undergone a formal DCAA accounting system audit. In some cases, companies simply haven’t needed one yet based on the contracts they previously supported.

That does not necessarily mean they are unprepared for opportunities like the Army MAPS Program.

A properly structured accounting system review can help contractors:

• Identify compliance gaps
• Improve internal controls
• Document accounting processes
• Prepare for future government scrutiny
• Strengthen proposal documentation
• Demonstrate operational maturity

As federal procurement environments continue evolving, agencies are increasingly focused on contractor readiness and risk reduction. Contractors that proactively evaluate and improve their accounting systems may place themselves in a stronger position for both current and future opportunities.

Common Accounting System Gaps That Can Hurt Proposal Readiness

Many contractors pursuing federal work discover accounting system weaknesses only after proposal activity has already begun. Unfortunately, waiting too long can create unnecessary risk and stress near submission deadlines.

Some common issues include:

• Improper segregation of direct and indirect costs
• Weak labor tracking procedures
• Missing or inconsistent timekeeping controls
• Inadequate indirect rate calculations
• Lack of written accounting policies
• ERP or accounting software limitations
• Insufficient documentation supporting contract cost tracking
• No formal accounting system evaluation

Even otherwise qualified contractors can lose competitiveness if accounting systems appear underdeveloped or poorly documented.

Addressing these issues early can help improve both proposal readiness and long-term compliance posture.

Why Accounting System Readiness Is Becoming More Important

The government contracting landscape continues shifting toward faster acquisition timelines and increasingly complex contract structures. Contractors are being asked to move quickly while still maintaining strong financial and operational controls.

At the same time, agencies want confidence that contractors can:

• Properly manage federal funds
• Track contract costs accurately
• Support audits and reporting requirements
• Scale operations responsibly
• Maintain compliance throughout contract performance

As a result, accounting system readiness is no longer just a back-office issue. It has become an important part of overall proposal competitiveness.

For contractors pursuing opportunities under the Army MAPS Program, accounting readiness may directly influence proposal strength and evaluator confidence.

How RKI Helps Government Contractors Prepare

RKI has extensive experience supporting government contractors with accounting system readiness, compliance support, and financial infrastructure reviews.

Our team works with contractors to help evaluate:

• Accounting system adequacy
• Cost accounting practices
• Timekeeping procedures
• Indirect rate structures
• Government contracting compliance readiness
• Internal accounting controls

We have a long history of performing accounting system reviews and issuing letters for contractors operating within government contracting environments.

For contractors pursuing opportunities under the Army MAPS Program, proactive preparation can help identify potential issues before proposal deadlines become critical.

What Contractors Should Do Before the June 22 Deadline

With proposal deadlines approaching quickly, contractors should avoid waiting until the last minute to evaluate accounting system readiness.

Key steps may include:

1. Reviewing MAPS accounting system requirements
2. Evaluating current accounting controls and documentation
3. Identifying potential compliance gaps
4. Conducting an accounting system readiness review
5. Obtaining third-party CPA evaluation support if needed
6. Strengthening proposal documentation before submission

The earlier contractors begin this process, the more flexibility they typically have to address issues and improve proposal positioning.

Strengthen Your MAPS Proposal Before the Deadline

The Army MAPS Program presents a major opportunity for government contractors, but proposal competitiveness increasingly depends on more than technical capabilities alone.

Contractors that can demonstrate strong accounting system readiness may gain a meaningful advantage — especially those leveraging a Third Party CPA Determined Acceptable Accounting System review.

Contractors pursuing the MAPS opportunity should act quickly before the June 22 deadline. RKI has extensive experience performing third-party CPA accounting system reviews and issuing review letters for government contractors operating in these environments.

Contact RKI today to discuss your accounting system readiness and proposal support needs before submissions close.

Undefinitized contract actions (UCAs) allow federal agencies to move quickly when waiting on finalized pricing or contract terms isn’t practical. For contractors, they create an opportunity to start work sooner, strengthen customer relationships, and position themselves for larger long-term awards. Understanding how UCAs work and the risks that come with them is critical for companies pursuing government contracts.

What Is an Undefinitized Contract Action (UCA)?

An undefinitized contract action (UCA) is a contract that allows a contractor to begin work before final terms, pricing, or scope are fully defined (or in government terms “definitized”).

In practical terms, the government needs work to start immediately and cannot wait for a fully negotiated contract. A UCA bridges that gap by authorizing performance upfront.

Why UCAs Are Used

• Urgent mission or operational requirements
• Time-sensitive projects where delays are costly
• Complex work where scope evolves during execution

This approach prioritizes speed and execution, which is why UCAs are becoming more common across government contracts.  With increased and accelerated procurement needs to support the many, and expanding, critical missions of the U.S. Government, they have never been more paramount to getting contractors operating quickly.

Why UCAs Matter for Contractors

UCAs give contractors the ability to get under contract faster, but they require strong financial and operational control.

Key Advantages

• Accelerated contract awards – Help agencies move forward before full contract definitization.
• Immediate project start – begin generating revenue sooner
• Competitive positioning – secure work before others can respond

Undefinitized Contract Action Risks

• UCAs operate like a cost-reimbursement contract until they are definitized.  Because of this, cost accounting requirements apply immediately upon award of the UCA, specifically FAR 31 and CAS (if not exempt).  Most cost-type contractors spend significant resources upfront to ensure they are prepared for this type of contract vehicle.  However, with a UCA oftentimes contractors are on an accelerated procurement path and may not have the systems, or time, to set up the appropriate systems
• Depending on what contract-type the UCA becomes definitized as, poor cost accounting can also compromise the ability to definitize.
• Increased oversight from agencies like the Defense Contract Audit Agency (DCAA)

Bottom line: UCAs create opportunities but only for contractors who are prepared to manage the uncertainty.

How UCA Contracting Works

UCA contracting allows work to begin under a temporary agreement while final contract terms are negotiated and finalized.

The Process

1. Government issues a UCA to initiate work quickly
2. Contractor begins performance immediately
3. Costs are accumulated and invoiced throughout execution
4. Final terms, pricing, and scope are negotiated
5. Audit is performed by USG (often by DCAA)
6. Contract is “definitized” (fully finalized)

Not-to-Exceed (NTE) Limitation

Most UCAs include a Not-to-Exceed (NTE) value, which caps the amount the government will pay before definitization.

If your costs exceed this cap before the contract is finalized, you risk absorbing those costs.

UCA Meaning in Government Contracting

The meaning of UCA goes beyond speed, it represents a shift in responsibility and risk to the contractor.

Under an undefinitized contract action:

• You begin work without fully agreed pricing
• Scope and requirements may evolve
• You must justify and support costs from day one

This makes accurate cost tracking, documentation, and compliance essential to protecting your business.

Biggest Mistakes Contractors Make with UCAs

Most issues with UCAs come from lack of preparation, not the contract structure itself.

Common Pitfalls

• Starting work without proper cost tracking systems
• Underestimating costs due to incomplete scope
• Failing to document assumptions and expenses
• Delaying negotiations for definitization

The Real Risk

If costs are not properly tracked and justified, contractors may not recover their full expenses, especially during audit review.  Or worse they may invoice for costs that are not compliant.

How to Protect Your Business in UCA Contracting

Success with UCAs comes down to discipline in cost control, documentation, and compliance.

Best Practices

• Set up a compliant accounting system before work begins
• Track costs in real time with clear audit trails
• Maintain detailed documentation for all expenses
• Align processes with DCAA expectations
• Push for timely definitization to reduce uncertainty

Contractors that take these steps are far better positioned to protect margins and avoid costly surprises.

When Should You Accept a Undefinitized Contract Action?

You should pursue a UCA when you have the systems, experience, and resources to manage both speed and risk.

Ideal Situations

• You have strong financial controls in place
• Your team can mobilize quickly
• You understand compliance requirements

Situations to Approach Carefully

• Limited experience with government contracts
• Weak accounting or cost tracking systems
• Unclear internal processes

A fast contract is only valuable if you can execute it profitably.

What is definitization?

Definitization is the process of finalizing all contract terms, including scope, pricing, and timelines.

What Contractors Need to Know Before Using UCAs

Undefinitized contract actions (UCAs) are becoming a key tool for getting contractors under contract quickly in government procurement.

They offer:

• Faster access to contract opportunities
• Immediate project starts
• Long-term relationship potential

But they also require:

• Strong cost control systems
• Detailed documentation
• Clear understanding of compliance requirements

Contractors who are prepared can use UCAs as a powerful growth strategy. Those who are not may face financial risk that outweighs the opportunity.

Take the Right Approach to UCAs

If you’re pursuing government contracts or currently working under a UCA, now is the time to ensure your accounting and compliance systems are aligned.

Don’t risk losing margin or creating audit issues. Get expert support to protect your contracts and scale with confidence. Schedule a consultation with us today.

FAQs About Undefinitized Contract Actions

What is a UCA in simple terms?

A UCA is a contract that allows work to begin before all terms and pricing are finalized.

Why are UCAs used in government contracting?

They are used to starting work quickly when delays are not acceptable.

Why should contractors consider using a UCA?

UCAs allow contractors to get under contract quickly, start work sooner, and secure high-value opportunities before competitors, even when final terms are still being negotiated.

What Compliance Risks Exist with UCAs?

Like any contract, it depends on the terms and conditions of the UCA.  While some terms and conditions may not be definitized, some are – including cost reimbursement requirements.  The primary risk with UCA’s on the compliance front is typically cost accounting pursuant to FAR 31 and CAS.

What Are Incurred Cost Submission Schedules?

Incurred Cost Submission Schedules are the schedules utilized in the Incurred Cost Proposal for government contractors. These schedules provide a detailed breakdown of labor, costs, and indirect rates to demonstrate compliance with FAR requirements and audit readiness for DCAA.

For contractors, these schedules are not just a reporting requirement—they are the foundation of audit readiness. When prepared correctly, they validate your financial data, support billed amounts, and reduce audit risk.

These schedules are defined under FAR 52.216-7 and are typically prepared using the DCAA Incurred Cost Electronically (ICE) Model, the standard framework used by contractors to ensure compliance.

Why Incurred Cost Submission Schedules Matter

Accurate incurred cost submission schedules directly impact your ability to:

• Pass DCAA audits
• Avoid questioned costs
• Maintain consistent cash flow
• Support contract billing

Errors or inconsistencies can lead to increased scrutiny, delayed approvals, or even financial penalties. That’s why these schedules must align perfectly with your accounting system, payroll, and contract records.

Key Components of Incurred Cost Submission Schedules

Incurred cost submission schedules are designed to provide a full financial picture of your contracts. They typically include detailed reporting across several key areas:

Direct Costs by Contract

One of the most important elements incurred in cost submission schedules is the breakdown of direct costs. This includes labor, materials, and other expenses tied directly to individual contracts.

This section ensures that every dollar reported can be traced back to a specific project, making it a focal point during audits.

Cumulative Costs and Billing Reconciliation

Another critical component compares total incurred costs against billed amounts. This ensures consistency between what has been invoiced and what has been spent.

Any discrepancies in this area can trigger deeper audit reviews, making accuracy essential.  Think of this schedule as your U.S. Government tax return – how much do I owe the government or how much does it owe me.

Labor and Payroll Reconciliation

Labor is often the largest expense for government contractors. Incurred cost submission schedules must clearly tie labor costs back to payroll records and timekeeping systems.

This includes:

• Employee-level labor tracking
• Timekeeping validation
• Payroll reconciliation

Strong alignment here reduces the likelihood of audit findings related to labor distribution.

Indirect Cost Rate Calculations

Indirect rates such as fringe, overhead, and G&A are the engine of incurred cost submission schedules.

These schedules calculate:

• Cost pools
• Allocation bases
• Final indirect rates

Errors in this area can significantly impact contract profitability and compliance, making precision critical.  The indirect cost rate schedules are lined to establish final claimed costs, which are ultimately compared to invoiced costs.

Identification of Unallowable Costs

A key requirement within incurred cost submission schedules is the proper identification and removal of unallowable costs pursuant to FAR Part 31.

Examples include:

• Entertainment expenses
• Alcohol
• Advertising
• Bad debt
• Certain lobbying or legal costs

Failing to exclude these costs is one of the most common compliance issues contractors faces.

Labor Distribution and Timekeeping Validation

Incurred cost submission schedules also validate how labor is distributed across contracts. This ensures:

• Time is recorded accurately
• Labor is allocated correctly
• Systems are compliant to satisfy DCAA audit interests

Timekeeping remains one of the most scrutinized areas during audits, so this portion of the schedules must be airtight.

Incurred Cost Submission Schedule H

Incurred Cost Submission Schedule H is one of the most heavily reviewed schedules during a DCAA audit.

What It Includes:

• Direct costs by contract
• Labor, materials, and other direct expenses
• Breakdown of costs per project

Why It Matters:

Schedule H ties your costs directly to government contracts. If this schedule doesn’t reconcile with your accounting records, it raises immediate red flags.

Best Practice:
Ensure your direct costs tie exactly to your project ledger and contract records. Regularly reconcile contract-level costs throughout the year to prevent discrepancies during submission.

Incurred Cost Submission Schedule I

Incurred Cost Submission Schedule I complements Schedule H by providing a cumulative view of costs.

What It Includes:

• Total billed costs
• Total costs incurred
• Comparison between billed and actual

Why It Matters:

This schedule ultimately shows the over/underbilling variance resulting from provisional billings to final, actual costs claimed.

Best Practice:
Perform routine reconciliations between billed amounts and incurred costs to catch variances early and avoid significant over/under billings that catch you and/or your customer off guard.

Incurred Cost Submission Schedule K

Incurred Cost Submission Schedule K is required for contractors performing work under Time & Materials (T&M) or Labor-Hour contracts. This schedule provides detailed visibility into how labor and associated costs are billed and applied at the contract level.

What It Includes:

• Labor categories defined within the contract
• Hours worked by labor category
• Billed labor rates and total labor costs
• Materials and Other Direct Costs (ODCs)
• Indirect expenses applied to these costs

Why It Matters:
Schedule K plays a critical role in validating that billed labor aligns with contract terms. Because T&M and Labor-Hour contracts are heavily scrutinized, this schedule is often a focal point during DCAA audits.

Any inconsistencies between labor categories, billed rates, or recorded hours can quickly raise red flags and lead to questioned costs.

Best Practice:
Ensure your timekeeping system, labor distribution, and billing records are fully aligned with contract requirements. Regular internal reviews of T&M and Labor-Hour data can help catch discrepancies early and maintain compliance.

Incurred Cost Submission Schedule L

Incurred Cost Submission Schedule L focuses on payroll reconciliation.

What It Includes:

• Labor costs tied to payroll records
• Reconciliation of labor expenses to financial statements

Why It Matters:

Labor is one of the largest cost drivers for most contractors. Schedule L validates that your labor costs are accurate and fully supported by payroll data.

Best Practice:

Reconcile payroll to your labor distribution system routinely, not just annually, to ensure all labor costs are accurate, complete, and fully supported.

Incurred Cost Submission Schedule O

Incurred Cost Submission Schedule O focuses on contracts that were physically completed during the contractor’s fiscal year. This schedule provides key details needed to support contract closeout and final cost verification.

What It Includes:

• Contracts physically completed during the fiscal year
• Final incurred costs associated with each contract
• Contract status and relevant closeout information

Why It Matters:
Schedule O ensures that completed contracts are properly identified and that all associated costs have been accurately recorded and finalized. This is essential for supporting the contract closeout process and maintaining compliance with FAR requirements.

Incomplete or inaccurate information in this schedule can delay closeouts, trigger additional audit scrutiny, and create reconciliation issues between reported and final costs.

Best Practice:
Maintain a clear record of contract completion status throughout the year and regularly reconcile final costs. This ensures your Schedule O is accurate, complete, and audit-ready when it’s time to submit your ICS.

Handling Unallowable Costs

Properly identifying and excluding unallowable costs is a critical requirement in any incurred cost submission. Under FAR Part 31 cost principles, certain expenses cannot be billed to the government and must be removed before calculating indirect rates.

Common unallowable costs include:

• Entertainment and alcohol
• Fines and penalties
• Certain legal and lobbying expenses
• Advertising

Why It Matters:
 Failing to segregate unallowable costs is one of the most common reasons for audit findings. If these costs are included in your indirect cost pools, it can overstate your rates and lead to questioned costs or penalties.

Best Practice:
Track unallowable costs throughout the year, not just at year-end. Use separate accounts in your general ledger to ensure they are clearly identified, excluded from rate calculations, and fully documented.

Timekeeping & Labor Validation

Labor is often the largest cost for government contractors, making timekeeping accuracy a major focus during DCAA audits. Your incurred cost submission must demonstrate that labor costs are properly recorded, allocated, and supported.

Key components include:

• Accurate daily time entry by employees
• Clear distinction between direct and indirect labor
• Consistent labor distribution across contracts
• Reconciliation between timekeeping records and payroll

Why It Matters:
 Weak timekeeping practices can lead to significant audit issues, including questioned labor costs and system deficiencies. Since labor drives both direct costs and indirect rate calculations, errors here can impact your entire submission.

Best Practice:
 Implement a compliant timekeeping system with:

• Daily time entry requirements
• Supervisor approvals
• Audit trails for changes

Strong labor validation ensures your incurred cost submission is defensible, accurate, and aligned with DCAA audit expectations.

Common Issues with Incurred Cost Submission Schedules

Even well-run organizations encounter issues when preparing incurred cost submission schedules. The most common include:

• Mismatch between general ledger and schedules
• Payroll data not aligning with labor reports
• Incorrect indirect rate calculations
• Failure to remove unallowable costs
• Incomplete or inconsistent documentation

These issues often lead to delays, additional audit requests, and increased compliance risk.

Best Practices for Preparing Incurred Cost Submission Schedules

To ensure your incurred cost submission schedules are accurate and audit-ready, focus on these priorities:

Start Early

Begin preparing shortly after your fiscal year ends to avoid last-minute errors.  Contractors have six (6) months after their fiscal year.  Commencing with preparation of the incurred cost proposal as soon as your financial accounting records are closed and audited (if applicable), allows for efficient and timely preparation and submission.

Reconcile Financial Data

Ensure your general ledger, payroll, and billing systems are fully aligned.

Maintain Accurate Timekeeping

Strong labor tracking supports multiple areas of your submission.

Segregate Unallowable Costs Throughout the Year

Don’t wait until year-end to identify these expenses.

Validate Indirect Rates

Double-check calculations, formulas, and allocation methods.

Conduct a Full Review Before Submission

Every section of your incurred cost submission schedules should tie together seamlessly.

Take a Big Picture Look at the Outcome

Ultimately the incurred cost submission will result in an over/underbilling that primarily is the result of a difference between your provisional and actual indirect cost rates.  Once complete, be sure that the over/underbilling calculation makes sense given that disparity.  It is a simple “gut check” to challenge if the calculation may have errors.

Prepare a DCAA Incurred Cost Submission Adequacy Checklist

DCAA makes it easy to now what they look for before deeming your submission adequate for audit. While not required, contractors are encouraged to prepare the checklist to ensure they identify any incomplete or inaccurate data consistent with the way DCAA will.

Link:  DCAA > Customers > Checklists & Tools > Incurred Cost Submission Adequacy Checklist

Preparing Your ICS Submission?

Download the free ICS Filing Checklist to help identify missing documentation, reduce filing errors, and prepare for upcoming submission deadlines.

Get Expert Help with Your Incurred Cost Submission Schedules

Incurred Cost Submission Schedules are more than a compliance requirement, they directly impact audit outcomes, cash flow, and contract profitability.

When these schedules are done right, they:

• Reduce audit risk
• Prevent questioned costs
• Improve confidence in your financial reporting

When they’re wrong, they create delays, scrutiny, and potential financial exposure.

If you're unsure your schedules will hold up under audit, now is the time to fix it—not after submission.

Schedule a consultation today to review your incurred cost submission and identify gaps before they become problems.

A cost reimbursement contract is a contract type commonly used in government and defense contracting where a contractor is reimbursed for allowable costs incurred, plus an additional fee. For organizations working with federal agencies, understanding how a cost reimbursement contract works is essential for compliance, profitability, and audit readiness.

At RKI, we frequently support contractors navigating cost-reimbursable environments, including FAR compliance, incurred cost submissions, and DCAA audit support. This guide breaks down what you need to know.

What Is a Cost Reimbursement Contract?

A cost reimbursement contract (also known as a cost reimbursable contract) is a contract structure in which the contractor is paid for allowable, allocable, and reasonable costs incurred during project performance, along with a fee or profit component.

In simple terms:

• The contractor tracks actual project costs.
• The government (or client) reimburses those costs.
• The contractor receives an agreed-upon fee.

If you’ve ever asked, “What is a cost reimbursement agreement?” — it’s essentially the formal contract that defines how costs will be reimbursed, what qualifies as allowable, and how fees are calculated.

This structure is commonly used when:

• Project scope is uncertain.
• Technical requirements may evolve.(e.g, Research & Development)
• Costs cannot be accurately estimated upfront.

The Federal Acquisition Regulation (FAR) outlines the rules governing cost-reimbursable contracts in federal projects (see FAR Part 16 – Types of Contracts).

Key Components of a Cost Reimbursement Agreement

A well-structured cost reimbursement agreement includes several critical elements:

1. Allowable Costs

Costs must meet the standards of:

• Allowable pursuant to FAR 31 cost principles
• Allocable
• Reasonable
• Consistent with generally accepted accounting practices (GAAP)

Terms of the contract Common reimbursable costs include:

• Direct labor
• Materials
• Subcontractor costs
• Indirect expenses (overhead, G&A)

Improper cost classification is one of the most common compliance issues we see during DCAA reviews. If your accounting system isn’t structured properly, reimbursement delays or audit findings can follow.

2. Fee Structure

Unlike fixed-price contracts, profit in a cost reimbursement contract is typically defined as:

• Cost-Plus-Fixed-Fee (CPFF) – Fixed fee regardless of performance.
• Cost-Plus-Incentive-Fee (CPIF) – Fee varies based on performance targets.
• Cost-Plus-Award-Fee (CPAF) – Fee based on subjective evaluation criteria.

The chosen structure impacts cash flow, risk allocation, and compliance oversight.

3. Funding Limitations

Most cost reimbursable agreements include a funding ceiling. Contractors must monitor expenditure carefully to avoid exceeding authorized funding without modification.

Failure to properly monitor funding can result in:

• Disallowed costs
• Cash flow interruptions
• Increased audit scrutiny

Strong job costing and real-time financial reporting are non-negotiable.

How a Cost Reimbursable Contract Impacts Your Accounting System

A cost reimbursable environment requires a far more sophisticated accounting infrastructure than fixed-price work.

You must have:

• Segregation of direct and indirect costs
• Timekeeping controls
• Indirect rate calculations
• Proper allocation methodologies
• Audit-ready documentation

For federal contractors, this often means ensuring your system meets the criteria evaluated by DCAA during an accounting system audit. If you’re unsure where you stand, reviewing our guidance on DCAA audit expectations can help clarify expectations.

In some cases, contractors are asked to begin performance before final pricing and contract terms are fully negotiated. If that situation applies to you, our guide to Undefinitized Contract Actions explains how UCAs work, why they often function like cost-type contracts at the outset, and what contractors need to watch before definitization.

Without compliant systems in place, a cost reimbursement agreement can quickly become a liability instead of an opportunity.

Advantages of a Cost Reimbursement Contract

When structured and managed correctly, a cost reimbursement contract offers several advantages:

Reduced Pricing Risk

Since allowable costs are reimbursed, contractors face less risk from unforeseen cost increases.

Flexibility in Scope

These contracts are ideal for R&D or complex technical work where scope evolves.

Government Preference for High-Uncertainty Projects

Federal agencies often prefer cost reimbursable structures when outcomes are difficult to define upfront.

Disadvantages and Risks

Despite the benefits, cost reimbursement contracts carry compliance risk:

Heavy Documentation Requirements

You must maintain detailed records for:

• Labor distribution
• Indirect rate pools
• Expense allocations
• Subcontractor management

Audit Exposure

Cost reimbursable contracts often trigger:

• Incurred cost submissions
• DCAA audits including:
  • Incurred Cost Audit
  • Pre-Award Accounting System Audit
  • Post Award Accounting System Audit
  • Labor charging audits
  • CAS audits (if applicable)

If your books aren’t ready, reimbursement delays or questioned costs are common.

Cash Flow Management Challenges

Reimbursement timing can create working capital strain if billing processes are inefficient.

If you’re preparing for an Incurred Cost Submission (ICS), proactive preparation is critical. You can review a detailed breakdown of the ICS process to better understand the steps, requirements, and common compliance considerations involved.

Fixed-Price vs. Cost Reimbursable Contracts

Understanding the distinction is essential:

For contractors new to government work, jumping into a cost reimbursable agreement without proper accounting controls is a common mistake.

When Should You Use a Cost Reimbursement Agreement?

A cost reimbursement contract makes the most sense when:

• Project scope is undefined or evolving
• Technical risk is high
• Accurate cost estimating is difficult
• Government oversight is expected

However, before pursuing this contract type, evaluate:

1. Is your accounting system compliant?
2. Can you support provisional billing rates?
3. Are your indirect rate calculations defensible?
4. Do you have internal controls over timekeeping?

If the answer to any of these is unclear, strengthening your system should be your first step.

Compliance Drives Profitability

A cost reimbursement contract can be a strategic opportunity, but only if your financial infrastructure supports it. The reimbursement agreement structure shifts risk away from pricing, but it increases compliance expectations.

For government contractors, success under a cost reimbursable structure depends on:

• Clean cost segregation
• Accurate indirect rates
• Timely billing
• Audit-ready documentation

At RKI, we specialize in helping contractors build accounting systems that withstand DCAA scrutiny and support sustainable growth in federal markets.

Not sure if your contract or accounting system is set up correctly? Schedule a consultation with our team to identify gaps, reduce risk, and position your business for compliant, profitable growth.

Incurred Cost Submission Template

For an introduction to incurred cost proposals, please read What is an Incurred Cost Proposal?

There are six main steps to an incurred cost proposal:

1. Gather input data from contractor accounting system, and project files
2. Input data into the rate model
3. Ensure reconciliation of the model to cost data
4. Analyze resulting over/under billings by contract
5. Prepare Incurred Cost Proposal Checklist to ensure adequacy
6. Prepare and submit the Incurred Cost Submission

Incurred Cost Submission Deadline (Don’t Miss This)

Most contractors are required to submit their incurred cost proposal within 6 months after the end of their fiscal year.

Missing this deadline can result in:

• Delayed payments
• Increased audit risk
• Potential contract issues with the government

Example:
If your fiscal year ends December 31, your incurred cost submission is due by June 30.

If you’re unsure whether your submission is accurate or complete, it’s best to review it early to avoid last-minute issues.

1. Gathering Input Data

There are many pieces of data needed to complete an incurred cost proposal. The main source of information is the contractor’s cost accounting data. For indirect costs, the right level of detail to identify the contractor’s cost pool accumulation is needed. Some organizations have separate accounts for each cost pool, while others may utilize cost centers to differentiate between overhead pools, for example. For direct costs, a project ledger that reports costs at the level specified within each given contract (usually at the Contract Line-Item Number, or CLIN, level), along with B&P and IR&D costs is needed.

There are a handful of other data sources and reports required for completion of the incurred cost proposal. These are also identified by schedule, in the next section:

• Billing files by contract that show cumulative bill amounts
• Labor distribution(s) for time & material type projects
• Fixed asset schedules to support Net Book Value of assets
• Listing of all subcontracts issued under government contracts
• Organizational or accounting changes that impact the accumulation of direct and indirect costs and/or allocation of indirect costs
• Additional information required by the Contracting Officer, or requested by the DCAA auditor 

If your contract work began before full pricing or scope was finalized, it is worth understanding whether you were operating under an Undefinitized Contract Action.

DCAA continues to increase focus on real-time accounting accuracy and audit readiness. Contractors should ensure their accounting systems properly track labor distribution, segregate unallowable costs, and maintain detailed documentation throughout the year—not just at submission time.

2. Inputting Data into the Incurred Cost Proposal

The first objective of the Incurred Cost Proposal is to calculate the actual indirect rates expended during the cost accounting period. Calculation of the indirect rates using the standard ICE model (Incurred Cost Electronically), is most accepted by the Defense Contract Audit Agency (DCAA). The ICE model is an excel workbook with separate ICS Schedules for each rate pool, and subsequent calculations. The following table illustrates each schedule and its purpose within the Incurred Cost Proposal.

Incurred Cost Submission Template

3. Reconciliation of the Incurred Cost Proposal to Cost Data

In addition to the schedules described above, it is very useful to include a separate worksheet that lists all the expense accounts, which rate pools/bases they map to, and subsequent reconciliation to the rate schedules. Contractors may also want to consider including a “Total Cost Reconciliation”, which shows that all contractors books of accounts reconcile to costs used in the rate model. Effectively, the contractor’s expense Trial Balance, plus or minus certain adjustments and unallowables should equal the total costs in the model.

Expert Tip: any adjustments to rate pools should be accompanied with a footnote explaining the reasonings behind them. The most common adjustments are FAR 31 unallowable costs and other common DCAA questioned costs. The footnote may even be a reference to a separate calculation schedule (e.g., Cost of Ownership). This best practice demonstrates understanding of FAR cost accounting.

Reconciliation is no longer just a best practice—it’s a primary audit focus. DCAA auditors increasingly expect clear, documented reconciliation between accounting systems, job cost ledgers, and ICE schedules, with minimal manual adjustments.

4. The Annual “True-up”

The main objective of the Incurred Cost Proposals is to calculate the over or underbill positions the contractor is in for each contract, to understand what it owes or is owed by the government or its prime contractors. As described above, this amount is calculated in Schedule I.

Once the incurred cost proposal has been filled out and reconciled, it is important for the contractor to return to Schedule I and review its position on all contracts and subcontracts to ensure that there are no surprisingly over or underbilled contracts, and develop informed billing strategies going forward. For example, if a given contract has a large unanticipated overbill, it might be prudent to double check the data input source for the correct information, or perhaps to stop claiming indirect costs on future bills.

Expert Tip: In addition to Schedule I, it is best practice to compare the current calculated rates to the latest provisional billing rates and previous final rates. This will inform the contractor not only how the rates changed, but provide an understanding of which accounts or direct cost elements and contracts are the main drivers of change. Having this information in your back pocket will allow you to answer auditors with confidence when they ask why certain rates changed materially.

Contractors should monitor over/under billing positions throughout the year, not just annually. Proactive monitoring helps reduce large variances that can raise red flags during audits.

5. Prepare Incurred Cost Proposal Checklist to Ensure Adequacy

Prior to submission of the Incurred Cost Proposal or ICE model, the contractor should fill out a DCAA ICS Adequacy Checklist as a final internal review, and include it with the submission. Before the actual Incurred Cost Audit, the auditor will perform this preliminary adequacy check of the Incurred Cost Proposal that is submitted to ensure the model is adequate for review.

While the auditor will complete this checklist themselves, performing this exercise prior to submission is not only a tool for quality control, but may demonstrate to DCAA that the contractor has an understanding of the review process.

DCAA adequacy reviews are becoming more stringent. Submissions that are incomplete or poorly documented are more likely to be rejected early, delaying the audit process and increasing administrative burden.

Preparing Your ICS Submission?

Download the free ICS Filing Checklist to help identify missing documentation, reduce filing errors, and prepare for upcoming submission deadlines.

6. Final Preparation and Submission

Timing Matters: Submit Before the Deadline

Before submitting your incurred cost proposal, confirm you are within the required 6-month submission window. Late submissions can trigger additional scrutiny from DCAA and delay contract closeouts.

Submitting early also allows time to address any issues identified during internal review.

Once the schedules have been completed and reconciled, and Schedule I has been reviewed for accuracy, the contractor is ready to begin the submission process. The Incurred Cost Proposal is typically included as an attachment to an email addressed to the assigned DCAA auditor. It is prudent to request confirmation of receipt of the submission from the government to remove liability of delinquency in the timing of your submission.

If your Incurred Cost Audit results in no findings, DCAA will issue a formal letter addressed to the certifier in Schedule N, with the final rates.

We understand that preparation and submission of Incurred Cost Proposals is challenging. Please contact us here if you have any general questions, are in need of indirect rate services, or need Incurred Cost Audit support.

How Incurred Cost Submissions Are Changing in 2026

Incurred cost submissions are shifting from a once-a-year task to an ongoing compliance process.

Key trends include:

• Increased reliance on automated accounting systems
• Greater emphasis on audit readiness year-round
• More detailed scrutiny of labor and indirect cost allocations
• Faster audits driven by digitized documentation

Contractors who prepare continuously—not just at year-end—are better positioned to avoid delays and reduce audit risk.

In Need of Incurred Cost Submission Support?

Struggling with incurred cost submission? RKI Accounting is here to help. Our experts specialize in indirect cost rate preparation, ensuring accurate and compliant submissions. Avoid costly mistakes and streamline your process with our professional support. Contact us today to get started and ensure your incurred cost submission is handled with precision and expertise.