Contractors and subcontractors supplying goods and services to the federal government may need to prepare and submit an incurred cost proposal by June 30 annually if their contract includes the clause at Federal Acquisition Regulation (FAR) 52.216-7, Allowable Cost and Payment, and their fiscal year ends December 31st. The purpose of this clause is to true up provisionally billed amounts to actual costs when required for flexibly priced contracts. This clause requires that contractors submit an “adequate final indirect cost rate proposal” to the contracting officer and the relevant auditor (often the Defense Contract Audit Agency (DCAA)) within six months of the contractor’s fiscal year end.
What Constitutes an “Adequate” Incurred Cost Proposal?
Although incurred cost proposals (ICP), also referred to as incurred cost submissions (ICS),1 have existed for decades, the specific content required for an adequate ICP was placed into FAR 52.216-7(d)(2) in 2018. The clause lists 15 specific schedules, generally labeled from A to O,2 that must be completed by the contractor and included in the ICP submission. In addition, there are 15 supplemental schedules identified that might be necessary during the audit process but are not required for determining adequacy. Accordingly, we do not recommend that contractors include these optional schedules at the time of ICP submission.
Only provide the details necessary for an adequate proposal. Many contractors mistakenly add too much information to their ICP. For instance, companies often include details from all contracts and subcontracts on Schedules H and I instead of only those that contain FAR 52.216-7. In other words, the costs incurred for fixed price contracts as well as most labor hour and commercial contracts should be summarized into a single line on Schedule H; contract level details are not required. Excluding the details saves time and reduces potential audit exposure.
The determination of adequacy has historically been a point of contention between auditors and contractors. However, DCAA is required to determine the adequacy of an ICP within 60 days of receipt. If deemed inadequate, it is returned to the contractor for correction and resubmission. If adequate, DCAA has 12 months from the submission date to complete the audit. If no audit findings are issued within one year of receiving a qualified ICP, the audit is considered complete with no additional work required, meaning the ICP is accepted as submitted.3
An adequate submission is crucial. An ICP deemed inadequate and returned can cause:
- Delay in contract close-out
- Delay in recovery of outstanding working capital
- Additional review and scrutiny of the revised ICP
- Concerns over a contractor’s internal controls
If not corrected and resubmitted, an inadequate submission can result in the contracting officer unilaterally establishing final indirect rates with decrements to ensure unallowable costs will not be reimbursed per FAR 42.703-2(c).
To aid its auditors and promote consistency, the DCAA developed the ICP Adequacy Checklist.4 This checklist contains 47 separate checks across Schedules A through O to help auditors assess whether the contractor’s ICP meets minimum standards.
Conducting a Pre-Submission Review
Contractors should review and understand the checklist to help ensure their ICP is deemed adequate upon submission. By using the checklist, contractors and auditors are essentially playing from the same sheet of music—reviewing the adequacy based on identical criteria and steps.
Before submitting the ICP, consider each of the 47 steps on your own or have an independent party review it. Confirm that amounts on various schedules match, descriptions of adjustments and variances are clear, and claimed amounts reconcile with the books of account. Any inconsistency can lead to an “inadequate” determination.
How Forvis Mazars Can Help
Forvis Mazars has been preparing ICPs for clients for decades. Our team also performs a compliance check covering the points on the ICP Adequacy Checklist. Some of the common exceptions our team has identified over the years include:
- Discrepancies between totals on trial balances and required schedules
- Unexplained adjustments or variances
- Overhead and G&A expenses applied to Schedule H project costs that do not tie to overhead and G&A cost pool totals
- Disagreement between allocations from service centers (Schedule D) and overhead or G&A pools (Schedules B & C)
- Differences in the amounts of nonlabor expenses on T&M contracts between Schedule K and Schedule H
- Missing labor cost reconciliation to IRS Form 941 on Schedule L
- Negative response expected for Schedule M, even in the absence of decisions, agreements, approvals, or other changes
- Misunderstandings regarding the purpose of specific schedules
If you have any questions or need additional information, do not hesitate to reach out to a professional at Forvis Mazars today.
- 1 The terms incurred cost proposal (ICP) and incurred cost submission (ICS) are used in the GovCon market interchangeably. For the purpose of this article, we are using the proper terminology – ICP.
- 2 Schedules A through O were included in DCAA’s “Information for Contractors” and the DCAA Incurred Cost Electronically (ICE) model for many years prior to 2018 when the schedules and the content were incorporated into FAR 52.216-7.
- 3 10 U.S. Code § 3842 - Performance of incurred cost audits.
- 4 Contracting Pricing Proposal Adequacy Checklist, https://www.dcaa.mil/Checklists-Tools/Contract-Pricing-Proposal-Adequacy-Checklist/. At the publication time of this FORsights, DCAA’s published version is 3.4, dated December 2021.