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.
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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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