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.
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:
- Gather input data from contractor accounting system, and project files
- Input data into the rate model
- Ensure reconciliation of the model to cost data
- Analyze resulting over/under billings by contract
- Prepare Incurred Cost Proposal Checklist to ensure adequacy
- 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
| Schedule | Title | Description | Inputs (as applicable) |
| A | Rate Summary | Summary of all calculated final and intermediate rates showing pool and base values, and resulting rate. | Schedules B-E |
| B | General & Administrative (G&A) Pool | Includes account balances for all trial balance accounts containing G&A labor and non-labor expenses, related fringe, intermediate allocations (if applicable), Bid & Proposal (B&P), and Independent Research & Development (IR&D) costs. Unallowable G&A costs within displayed accounts are illustrated and removed using the adjustment column. | Trial Balance, Schedules D(x), Fringe, H and E |
| C(x) | Overhead Pool(s) | The contractor can include as many Overhead (OH) pools as needed labeling the fist as C(1), the second C(2), and so on. Each schedule C should include accounts balances for all trial balance accounts containing OH labor and non-labor expenses, related fringe, and intermediate allocations. Unallowable OH costs within displayed accounts are illustrated and moved to the G&A base. | Trial Balance, Schedules D(x), and Fringe |
| D(x) | Intermediate Pool(s) (as applicable) | Includes account balances for all trial balance accounts containing intermediate expenses (e.g., facilities, IT, etc.), and related fringe. Each of these schedules must also show the allocation base and the resulting intermediate allocations to the G&A and OH pools | Trial Balance, and Fringe |
| Fringe | Fringe (as applicable) | Accumulates all fringe expenses for subsequent allocation to G&A, OH, and/or intermediate pools, unless fringe expenses are included within those pools. | Trial Balance, and Schedule E |
| E | Claimed Allocation Bases | Calculates all allocation bases for each final rate (e.g., G&A, OH) by element of cost used to distribute indirect costs. For example, an Overhead base might include contract labor, IR&D labor, and/or B&P labor. Schedule E will also detail whether the G&A base is total cost input or value-added depending on inclusion or subtraction of direct material and subcontracts from the base calculation. All direct costs come from Schedule H. All overhead costs are included in the G&A base, and IR&D and B&P removed for subsequent inclusion in the pool in Schedule B. | Schedules B, C(x), and H |
| F | FCCOM Rate (as applicable) | If the contractor maintains Facilities Capital Cost of Money (FCCOM) Rates, Schedule F is included in the Incurred Cost Proposal. This schedule lists all facilities capital costs and related accumulation and distribution of Net Book Value of assets. | Schedule F-1 |
| F-1 | Calculation of NBV (as applicable) | Lists all assets by asset class and related distributions. Only applicable if the contractor maintains FCCOM rates. | General Ledger Accounts |
| G | Direct Cost Reconciliation | Reconciles direct costs by major cost element in Schedule H to the contractor’s General Ledger | Schedule H |
| G-1 | Direct Cost Recon 2 | Reconciles direct costs by major cost element in the contractor’s general ledger to its job cost ledger | Schedule G |
| Summary H | Summary of Schedule H | Summarizes direct costs in Schedule H by direct cost element, and details B&P and IR&D costs and applied indirect burdens | Schedules H and E |
| H | Direct Costs by Contract/ Subcontract | Lists all direct costs by contract type (i.e., cost type, other flexibly priced, T&M, fixed price, commercial work), by major cost element (i.e., labor, travel, material, ODC, subcontracts. Schedule H also applies the final rates calculated from Schedule A to calculate total actual cost expenditure by contract by Contract Line Item Number (CLIN). | Contractor Project Ledger |
| H (cont.) | Gov’t Participation in Direct Cost Bases | Lists percentages of each total indirect cost base by contract type. Effectively illustrates percentage of government vs. commercial direct cost by final cost basis. | Schedule H |
| I | Cumulative Government Costs Claimed and Billed | The “true-up” schedule. Schedule I is perhaps the most important schedule of the ICE model in that it informs both the contractor and government whether the contractor has an overbill or underbill position on each contract. This schedule lists the cumulative costs incurred per contract based on current and historic project accounting bookings, as well as the cumulative costs billed per contract based on historic bill files. The two amounts are compared, and the resulting variance indicates whether the contractor owes the government based on an overbill, or whether the government owes the contractor based on an underbill. This schedule effectively tells all parties (a) whether the contractor’s provisional billing rates are a stable estimate of the contractor’s actual costs incurred, and (b) which contracts are physically complete. | Schedules H, K, and Contractor Gov’t Invoices |
| J | Subcontract Information | Lists all subcontracts issued under government contracts, including information such as subcontractor name, DUNS number, value, performance period, etc. Must reconcile to direct subcontract cost amounts listed on Schedule H | Contractor Subcontract Logs |
| K | Time & Material Contract Details | Lists all hours and rates by labor category by Time & Materials contract, and any material and travel costs. Must reconcile to direct cost amounts listed on Schedule H | Contractor Labor Distributions |
| L | Payroll Reconciliation | Reconciles all labor costs (direct and indirect) included in the ICE model to the contractors IRS Form 941s, payroll accruals and adjustments. | Schedules B, C(x), D(x), and H |
| M | Decisions/ Agreements | Lists any decisions/agreements, or approvals affecting the direct/indirect cost structures, and descriptions of accounting or organization changes. | Contractor Accounting Changes |
| N | Certificate of Final Indirect Costs | Certification by signature of the contractor’s designated officer, to establish the final indirect cost rates, and state that all unallowable costs have been removed to the best of their knowledge. | Contractor Signature |
| O | Contract Closing Information | Lists all contracts listed as “physically complete” on Schedule I, and includes period of performance, contract ceiling, fee, and level of effort if applicable. | Schedule I |
| Supplementals | Various | The ICE model contains several supplemental schedules, which are not required for completion, but may be requested by the Contracting Officer or DCAA auditor. | Historic Rate Data, and Contract/ Subcontract Briefings |
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.
If you’re a government contractor, incurred cost submission (ICS) is a critical requirement that can’t be overlooked. Each year, contractors with cost-reimbursement contracts must prepare and file an ICS with the Defense Contract Audit Agency (DCAA).
In this guide, we’ll walk you through ICS preparation, explain what an incurred cost submission is, and provide a step-by-step framework to make the process less daunting.
What Is an Incurred Cost Submission?
At its core, an incurred cost submission is a detailed report of your over/under billings under your cost-type contracts with the U.S. Government. It achieves this by calculating your actual indirect cost rates and reconciling them to your provisional billings. Contractors submit this report to the DCAA so the agency can audit:
- Costs charged to contracts are allowable, allocable, and reasonable.
- Indirect cost rates (like overhead and G&A) are calculated correctly.
- Changes in cost accounting practices, when applicable
- Unallowable costs are properly excluded from claimed costs
Failing to file on time or filing incorrectly can lead to payment delays, disallowed costs, or even suspension of contracts.
Why ICS Preparation Matters
Timely and accurate ICS preparation is crucial because it:
- Is required
- Ensures accurate billings
- Timely identifies over/underbillings
- Avoids penalties – Incomplete submissions risk disallowances and increased audit scrutiny.
- Maintains compliance – A strong ICS builds trust with contracting officers.
- Supports future opportunities – Ongoing compliance is often a prerequisite for new awards.
Given the stakes, it’s no surprise that ICS is a top focus for contractors during the summer months leading up to the typical June 30 deadline.
Key Components of an ICS
The DCAA provides a standard Incurred Cost Electronically (ICE) Model, which outlines the required ICS schedules. While every contractor’s ICS will look slightly different, most include:
- Schedule A–E: Indirect cost pools and allocation bases.
- Schedule F–H: Contract costs by type and funding.
- Schedule I: Cumulative costs by contract.
- Schedule J: Subcontract information.
- Schedule L–N: Reconciliation of books and financials.
The detail required is extensive, which is why many contractors find value in an ICS guide or expert Incurred Cost Submission support.
Step-by-Step ICS Preparation Guide
Preparing your Incurred Cost Submission requires more than completing schedules, it demands accurate financial data, proper reconciliations, and alignment with DCAA requirements. A clear, step-by-step approach helps you minimize errors, strengthen compliance, and ensure your submission is accurate, supported, and audit-ready.
- Gather Financial Records Early
Collect general ledger data, payroll records, and subcontractor invoices well before the typical June 30 deadline. Accurate source data is the foundation of your submission.
- Review Cost Pools and Bases
Confirm that your overhead, fringe, and G&A cost pools are segregated correctly. Misclassifications here are one of the most common audit findings.
- Complete the ICE Model
Work through each schedule carefully. Double-check formulas, allocations, and supporting documentation.
- Reconcile to Your Financial Statements
Helps your ICS ties directly to your trial balance and financial reports. Reconciliation helps prevent audit flags.
- Conduct a Compliance Check
Compare your submission against the Incurred Cost Adequacy Checklist: DCAA > Customers > Checklists & Tools > Incurred Cost Submission Adequacy Checklist This step allows you to review your submission against the same requirements DCAA will review for upon submission.
- Submit and Retain Records
Submit the ICS electronically by the deadline and retain all supporting documentation for potential audit review.
Preparing Your ICS Submission?
Download the free ICS Filing Checklist to help identify missing documentation, reduce filing errors, and prepare for upcoming submission deadlines.
Common ICS Pitfalls to Avoid
For government contractors, your Incurred Cost Submission (ICS) is more than a compliance requirement—it’s a direct reflection of your accounting system’s integrity. When done correctly, it reinforces credibility with the DCAA and protects your ability to win and retain cost-reimbursable contracts. When done poorly, it can trigger audits, delays in indirect rate approvals, payment withholds, and unnecessary scrutiny.
Even experienced contractors stumble during incurred cost submission. Avoid these common ICS mistakes:
- Missing subcontractor details in Schedule J.
- Misallocating indirect costs.
- Failing to exclude expressly unallowable costs.
- Submitting late or without proper reconciliation.
How RKI Accounting Helps Contractors with ICS
Preparing your Incurred Cost Submission (ICS) doesn’t have to feel like a burden. With the right guidance, contractors can stay compliant, reduce audit risk, and protect their government contracts.
At RKI Accounting, we focus exclusively on supporting government contractors through their ICS prep. Our team helps you:
- Manage the full ICS process – from data collection through final submission.
- Conduct audit readiness reviews – making sure your submission is DCAA-ready.
- Optimize indirect rates – while keeping compliance front and center.
We understand the challenges contractors face and provide tailored solutions to help you file with confidence, on time, and without unnecessary stress.
If a contractor has received a contract containing the Allowable Cost and Payment clause (FAR 52.216-7), the clause requires preparation of an Indirect Cost Rate Proposal (ICRP). The clause is applicable to all cost-type contracts. The proposal also goes by the following industry names “Incurred Cost Proposal” (ICP) and “Incurred Cost Submission” (ICS). The proposal is prepared using the Defense Contract Audit Agency (DCAA) Incurred Cost Electronic (ICE) Model (DCAA > Customers > Checklists & Tools > ICE Model) and is due six months after the contractor’s fiscal year end.
Table of Contents
What is an Incurred Cost Submission?
An Incurred Cost Submission (ICS) is a required annual filing for government contractors who have cost-reimbursement contracts or contracts subject to the Federal Acquisition Regulation (FAR) 52.216-7, "Allowable Cost and Payment" clause. It serves as a comprehensive report that reconciles the indirect costs a contractor has billed throughout their fiscal year with the actual costs they’ve incurred.
In short, the ICS helps that only allowable, allocable, and reasonable costs are billed to and reimbursed by the U.S. government.
Why is an ICS Important?
The ICS is critical because:
It enables the Defense Contract Audit Agency (DCAA) or other cognizant audit agencies to review your claimed costs and gives compliance with government regulations.
It provides the government a basis for establishing your final indirect cost rates, which are used to settle your contracts.
Timely and accurate submissions help contractors avoid payment delays, penalties, and increased audit scrutiny.
Contractors must submit their ICS within six months of the end of their fiscal year, and it must meet strict adequacy standards defined by the DCAA.
What Does an ICS Include?
An Incurred Cost Submission is a comprehensive financial package that reconciles the costs billed under your government contracts with the actual costs incurred during your fiscal year. Its purpose is to provide transparency, demonstrate compliance with federal regulations, and support the government’s audit process. Preparing an adequate ICS requires attention to detail and a clear understanding of what must be included.
A typical ICS contains:
Indirect Rate Calculations: Detailed breakdowns of fringe, overhead, and general & administrative (G&A) rates.
Direct Costs by Contract: Schedules showing labor, materials, and other costs applied to specific contracts.
General Ledger Reconciliation: Documentation proving that claimed costs align with your accounting records.
Cumulative Cost Schedules: Totals for each contract, supporting contract closeouts and final rate determinations.
Certificate of Final Indirect Costs: A required certification that costs are accurate and compliant.
Subcontractor Details: Support for any subcontractor costs being claimed.
Labor Distribution: Clear records of labor hours worked by employees and labor category.
Incurred Cost Proposals
Under cost-type contracts, contractors utilize a provisional billing rate throughout the year. The intention of the Incurred Cost Proposal is to true-up a contractor’s provisional billing rate to actual under its cost-type contracts. The actual rate is compared to what was billed and the calculated over/underbill is either credited back to the government or invoiced, respectively.
The proposal includes a series of Schedules from Schedule A through O, including Supplemental Schedules. Some of the more impactful Schedules Include Schedule A Summary of Indirect Rates, Schedule H Summary of Direct Contract Costs, and Schedule I Cumulative Costs Claimed & Billed.
Upon completion, the Incurred Cost Proposal is submitted to DCAA and your Administrative Contracting Officer (ACO) for audit. DCAA uses an Incurred Cost Submission Adequacy Checklist (DCAA > Customers > Checklists & Tools > Incurred Cost Submission Adequacy Checklist) to determine if the submission is adequate for audit. Upon acceptance, DCAA may audit the submission for compliance including accuracy of rate calculations and applications. This is the most frequent audit performed by DCAA year over year. Their findings routinely center on unallowable costs pursuant to FAR 31 and exceptions to exceptions to cost accounting practices used by contractors.
Incurred Cost Audit
An Incurred Cost Audit is a formal review conducted by the Defense Contract Audit Agency (DCAA) or another government audit authority to evaluate the accuracy, allowability, and reasonableness of the costs a contractor has claimed in their Incurred Cost Submission (ICS). This audit helps the government determine final indirect cost rates and makes sure that taxpayer dollars are spent appropriately.
During the audit, the DCAA examines key records such as:
Indirect rate calculations
Labor records and timesheets
Direct and indirect cost allocations
Subcontractor invoices and support
General ledger reconciliations
A successful audit outcome depends on careful ICS preparation and complete documentation. Missing records, improper cost allocations, or inaccuracies can result in audit findings, delays in contract closeout, repayment demands, and potential harm to a contractor’s reputation and future government work.
At RKI we help contractors get audit-ready by reviewing their ICS for adequacy, overlooking if supporting records are in order, and guiding them through the audit process. Whether you are preparing for your first audit or need assistance responding to DCAA inquiries, we help reduce rishk and give you confidence that your submission meets all compliance requirements.
Indirect Cost Rate Preparation Made Easy
Accurate and compliant indirect cost rate preparation is essential for managing government contracts profitably and passing audits. At RKI, we help contractors calculate, document, and support their indirect rates so they can avoid audit findings, protect their margins, and comply with FAR requirements.
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If you have a US Government contract containing the Allowable Cost and Payment clause (FAR 52.216-7) you are required to submit an annual Incurred Cost Proposal, which may subsequently be subject to an Incurred cost audit. This clause applies mostly to cost-reimbursable contracts, such as Cost Plus Fixed Fee (CPFF) and Time and Material (T&M). An Incurred Cost Proposal, also known as an Incurred Cost Submission (ICS), or Indirect Cost Rate Proposal (ICRP), takes all the cost accounting data from a contractor’s expense accounts to calculate the actual indirect rates for the cost accounting period (the fiscal year).
Under cost-type contracts, contractors utilize a provisional billing rate throughout the year. The intention of the Incurred Cost Proposal (ICP) is to true-up a contractor’s provisional billing rate to actual under its cost-type contracts. The actual rate is compared to what was billed and the calculated over/underbill is either credited back to the government or invoiced, respectively.
Key Takeaways
- Incurred Cost Proposals (ICPs) are mandatory for government contractors under cost-reimbursable contracts to reconcile actual costs with provisional billing rates.
- Failure to submit an accurate and timely ICP can result in financial penalties, payment delays, and increased audit scrutiny from the Defense Contract Audit Agency (DCAA).
- FAR 52.216-7 mandates ICP submissions and requires incurred costs to be allowable, allocable, and reasonable per federal regulations.
- Contract clauses play a critical role in ensuring compliance with cost allocation, reporting, and financial accountability.
- Direct and indirect costs must be properly classified to avoid disallowances and help give accurate cost recovery.
- Common ICP challenges include cost misclassification, lack of supporting documentation, incorrect indirect cost rate calculations, and missed submission deadlines.
- Best practices for a successful ICP submission include implementing a robust accounting system, reviewing past ICPs, maintaining organized documentation, conducting internal audits, and engaging expert support.
- DCAA audits require contractors to provide full transparency in cost allocation, with proper supporting documentation and adherence to compliance standards.
When Must ICPs be Submitted?
As required by the Federal Acquisition Regulation (FAR), Incurred Cost Submissions must be submitted within 6-months of the contractor’s fiscal year end. For example, a contractor who’s fiscal year is the calendar year, must submit its ICP by June 30th of the following year. While it is not recommended, contractors may request an extension for submission of their rates, which may or may not be honored by DCAA.
Incurred Cost Submission Schedules
The proposal includes a series of Schedules from Schedule A through O, including Supplemental Schedules, which are critical in preparing for an Incurred cost audit. Some of the more impactful Schedules Include Schedule A Summary of Indirect Rates, Schedule H Summary of Direct Contract Costs, and Schedule I Cumulative Costs Claimed & Billed. Please read How to Prepare and Submit an Incurred Cost Proposal for more details on the preparation and submission process.
Upon completion, the Incurred Cost Proposal is submitted to DCAA and your Administrative Contracting Officer (ACO) for review and Incurred cost audit. DCAA uses an Incurred Cost Submission Adequacy Checklist (DCAA > Customers > Checklists & Tools > Incurred Cost Submission Adequacy Checklist) to determine if the submission is adequate for audit. Upon acceptance, DCAA may audit the submission for compliance including accuracy of rate calculations and applications. This is the most frequent audit performed by DCAA year over year. Their findings routinely center on unallowable costs pursuant to FAR 31 and exceptions to exceptions to cost accounting practices used by contractors. It is therefore crucial to spend extra time reviewing accounting for FAR allowability, FAR 31 expressly unallowable costs, and other common DCAA questioned costs.
Upon resolution of any findings, DCAA will issue a formal letter establishing the final rates for that year. Based on the results of the Incurred cost audit, final bills or vouchers to the government may be prepared to close out physically complete contracts listed in the ICP.
Why Incurred Cost Proposals Matter
Government contractors operating under cost-reimbursable contracts must submit an Incurred Cost Proposal to reconcile provisional billing rates with actual indirect costs incurred. The primary objective is to assist with accurate reimbursement and improve financial transparency between the contractor and the government. Without a properly prepared ICP, contractors risk overbilling or underbilling, leading to financial discrepancies and compliance violations.
Benefits of Submitting an Accurate ICP:
- Helps contractors meet FAR 52.216-7 and DCAA requirements.
- Reduces financial risks associated with overcharging or under-recovering costs.
- Prevents potential penalties for misreported incurred costs.
- Improves relationships with government agencies, leading to better contract opportunities.
By submitting a thorough and timely Incurred Cost Proposal, contractors can avoid audit complications and enhance their standing with federal agencies.
Components of an Incurred Cost Proposal
An adequate ICP typically comprises several key schedules and supplemental information:
- Schedule A: Summary of Indirect Cost Rate Calculation
- Schedule B: General and Administrative Expenses
- Schedule C: Overhead Expenses
- Schedule D: Occupancy Expenses
- Schedule E: Contractor's Fiscal Year
- Schedule F: Cost of Money Factors
- Schedule G: Government Participation
- Schedule H: Direct Costs by Contract/Subcontract
- Schedule I: Cumulative Direct and Indirect Costs Claimed and Billed
- Schedule J: Subcontract Information
- Schedule K: Summary of Hours and Amounts on Time-and-Material Contracts
- Schedule L: Reconciliation of Total Payroll
- Schedule M: Listing of Decisions/Agreements
- Schedule N: Certificate of Final Indirect Costs
- Supplemental Schedules: Additional supporting information as required
Each schedule provides specific details about various cost elements, facilitating a comprehensive review of the contractor's incurred costs. Contractors must make certain that all supporting documentation aligns with contract clauses and provisions to avoid delays or disallowances during an incurred cost audit.
Understanding Direct and Indirect Costs
A key aspect of preparing an incurred cost proposal is properly distinguishing between direct and indirect costs. Misclassification can lead to compliance issues and disallowed costs.
Direct Costs
Direct costs are expenses directly attributable to a specific contract. These costs vary based on the contract’s scope and requirements.
- Labor Costs: Salaries and wages for employees working directly on a contract.
- Materials & Supplies: Equipment and raw materials necessary to fulfill contract obligations.
- Subcontractor Expenses: Payments made to third-party vendors performing contract-specific tasks.
Indirect Costs
Indirect costs are expenses that benefit multiple contracts and must be allocated appropriately.
- Overhead Costs: Costs associated with managing multiple contracts, such as supervisory labor, machinery depreciation, allocable facility maintenance and utilities, and similar.
- General & Administrative (G&A) Costs: Corporate expenses like HR, accounting, and executive salaries.
- Fringe Benefits: Employee-related expenses such as healthcare, retirement plans, and bonuses.
Accurate classification of costs helps meet FAR 31 regulations and supports a successful DCAA audit.
Contract Clauses and Their Importance in Cost Proposals
Government contracts include various contract clauses that dictate how costs should be classified, reported, and audited. These clauses offer consistency, transparency, and accountability in financial reporting. Contractors must carefully review the contract clauses that apply to their agreements to avoid compliance violations and potential penalties.
Key FAR Clauses and Excerpts Related to Incurred Costs
- FAR 52.216-7 – Allowable Cost and Payment
- This clause requires contractors to submit incurred cost proposals to establish final indirect cost rates.
- Only allowable and allocable costs are reimbursed by the government.
- FAR 31.Contract Cost Principles and Procedures (including determination of Cost Allowability)
- Defines what constitutes an allowable cost under federal contracts.
- Requires that costs must be reasonable, allocable, and compliant with contract terms.
- FAR 52.230-2 – Cost Accounting Standards (CAS), when applicable
- Mandates that contractors follow specific cost accounting standards to give uniformity in cost allocation.
- Requires adherence to consistent cost accounting practices across multiple contracts.
- To determine if CAS applies to your contract, please see RKI’s CAS Applicability Flowchart here: CAS Applicability Flowchart (Download Available)
- FAR 42.705-1 – Final Indirect Cost Rates
- Outlines the process for establishing final indirect cost rates used in contract closeouts.
- Contractors reconcile indirect costs with actual expenditures.
How to Stay Compliant with Contract Clauses
- Regularly review contract clauses before and during contract performance.
- Makes accounting systems align with government cost allowability and allocation requirements.
- Maintain proper documentation and internal controls to support incurred costs.
- Work with experienced government contract accountants to navigate compliance challenges.
Understanding and applying contract clauses correctly is essential to avoiding disputes, disallowed costs, and audit findings. Proper adherence to contract provisions improves contract administration and financial integrity.
Common Challenges in Preparing an Incurred Cost Proposal
While the ICP process is crucial, it is not without challenges. Many contractors struggle with ensuring that their cost proposals meet regulatory standards. Some common challenges include:
- Misclassification of Costs
Contractors often misclassify costs, particularly between direct and indirect expenses. Understanding the differences is critical:
- Direct Costs: Expenses directly associated with a specific contract (e.g., labor, materials).
- Indirect Costs: Expenses that benefit multiple contracts, such as rent, utilities, and administrative salaries.
To mitigate this challenge, contractors should implement robust job-cost accounting systems that clearly differentiate between cost types.
- Lack of Proper Documentation
Incurred Cost Proposals require detailed supporting documentation, including invoices, payroll records, and subcontractor agreements. Insufficient documentation can result in audit findings and potential disallowed costs.
- Inaccurate Indirect Cost Rate Calculations
Contractors must assist with their indirect cost rates are calculated correctly using proper allocation bases. Miscalculations can lead to rate disputes and unnecessary financial adjustments.
- Failure to Meet Submission Deadlines
Missing the six-month submission deadline can result in withheld payments and unilateral rate determinations by the Contracting Officer (CO). Contractors should establish internal review schedules for a timely submission.
- Unpreparedness for a DCAA Audit
Many contractors underestimate the complexity of incurred cost audits. The DCAA scrutinizes indirect costs, cost allocation methods, and supporting documentation. Proactive audit preparation minimizes compliance risks.
Regulatory Framework: FAR 52.216-7
The submission of an ICP is mandated by the Federal Acquisition Regulation (FAR) 52.216-7, titled "Allowable Cost and Payment." This clause requires contractors to submit an adequate final indirect cost rate proposal within six months following the end of each fiscal year. The proposal must detail all costs incurred under the contract and is subject to audit by the DCAA (acquisition.gov).
FAR 52.216-7 stipulates that incurred costs must be:
- Allowable: Costs must comply with FAR Part 31 regulations and specific contract provisions.
- Allocable: Costs must be assigned based on the benefit received by the contract.
- Reasonable: Costs must be ordinary and necessary for business operations.
Failure to adhere to these standards can result in penalties, disallowances, or adjustments to the final indirect cost rates, adversely affecting a contractor's profitability.
Best Practices for a Successful Incurred Cost Proposal Submission
To improve compliance with FAR 52.216-7 and avoid audit findings, contractors should adopt the following best practices:
- Implement a Robust Accounting System: Utilize government-compliant accounting software to track costs in real-time.
- Review Prior Year ICPs: Understanding past audit results can help contractors identify and correct recurring issues.
- Maintain Organized Documentation: Keeping invoices, receipts, and payroll records well-documented ensures a smoother audit process.
- Conduct Internal Audits: Regular internal reviews can help contractors identify issues before submission.
- Engage Expert Support: Consulting with an experienced government contract accounting firm can minimize compliance risks.
Improve Compliance with Expert Support
Submitting a compliant incurred cost proposal is critical for government contractors to secure payments, maintain compliance, and avoid financial penalties. By following best practices, contractors can improve their adherence to applicable FAR and CAS requirements and better prepare for incurred cost audits, making the process more efficient.
At RKI Accounting, we specialize in helping contractors develop accurate, audit-ready incurred cost proposals. If you need expert guidance on contract clauses, contract provisions, or DCAA audit preparation, contact us today to improve compliance efforts and reduce costly mistakes.
Need Help with your Incurred Cost Proposal?
Understanding, preparing, and submitting ICPs can be challenging. Please contact us here if you have any questions, or need help on your indirect rates, and we will be happy to assist you.