An Introduction to the Incurred Cost Submission - Part I: … · · 2016-03-08An Introduction to the Incurred Cost Submission - Part I: Who, What, Where, When, Why ... Schedule

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An Introduction to the Incurred Cost Submission - Part I: Who, What, Where, When, Why...and How?February 25th, 2016

The Fundamentals of Government Contracting Webinar Series


@DHG_GovConYour Presenters

David KingDixon Hughes Goodman [email protected]

Mike MardesichDixon Hughes Goodman [email protected]


@DHG_GovConFundamentals of GovernmentContracting at a Glance

• Challenges of Contracting with the Federal Government (November 2015) - Completed

• Contract Types and Associated Risks (December 2015) – Completed

• Year-End Closing (January 2016) – Completed• An Introduction to the Incurred Cost Submission

– Part I: Who, What, Where, When, Why, and How? – You are Here!

– Part II: Preparation and Adequacy Review (March 2016)

• Accounting Systems and Setups (April 2016)


@DHG_GovConFundamentals of GovernmentContracting at a Glance

• Accounting System Adequacy 101 (May 2016)• The Composition of Total Cost (June 2016)• Making Way for 2017 – Budgeting and

Provisional Rates (July 2016)• Procurement Systems: DFARS Business

Systems Rule and Criteria (August 2016)• Exploring the Gray Area of Unallowable Costs

(September 2016)• Policy and Procedures Manual: What’s In It and

Why Do You Need One? (October 2016)


@DHG_GovConAgenda

• What is an ICS?• Who must submit an ICS?• Why must I submit an ICS?• Where do I submit my ICS?• When must I submit an ICS? • How do I prepare an ICS? • How is the ICS evaluated?• How do I prepare for an ICS audit?


What is an Incurred Cost Submission (ICS)?



@DHG_GovConWhat is an ICS?Per FAR 52.216-7(d) - Allowable Cost and Payment:Final annual indirect cost rates and the appropriate bases shall be established in accordance with Subpart 42.7 of the FAR in effect for the period covered by the indirect cost rate proposal.• The Contractor shall submit an adequate final indirect

cost rate proposal…• The proposed rates shall be based on the Contractor’s

actual cost experience for that period….• An adequate indirect cost rate proposal shall include:


@DHG_GovConWhat is an ICS?(A) Summary of all claimed indirect expense rates, including pool, base, and calculated indirect rate.

(B) General and Administrative expenses (final indirect cost pool). Schedule of claimed expenses by element of cost as identified in accounting records (Chart of Accounts).

(C) Overhead expenses (final indirect cost pool). Schedule of claimed expenses by element of cost as identified in accounting records (Chart of Accounts) for each final indirect cost pool.

(D) Occupancy expenses (intermediate indirect cost pool). Schedule of claimed expenses by element of cost as identified in accounting records (Chart of Accounts) and expense reallocation to final indirect cost pools.

(E) Claimed allocation bases, by element of cost, used to distribute indirect costs.


@DHG_GovConWhat is an ICS?(F) Facilities capital cost of money factors computation.

(G) Reconciliation of books of account (i.e., General Ledger) and claimed direct costs by major cost element.

(H) Schedule of direct costs by contract and subcontract and indirect expense applied at claimed rates, as well as a subsidiary schedule of Government participation percentages in each of the allocation base amounts.

(I) Schedule of cumulative direct and indirect costs claimed and billed by contract and subcontract.

(J) Subcontract information. Listing of subcontracts awarded to companies for which the contractor is the prime or upper-tier contractor (include prime and subcontract numbers; subcontract value and award type; amount claimed during the fiscal year; and the subcontractor name, address, and point of contact information).


@DHG_GovConWhat is an ICS?(K) Summary of each time-and-materials and labor-hour contract information, including labor categories, labor rates, hours, and amounts; direct materials; other direct costs; and, indirect expense applied at claimed rates.

(L) Reconciliation of total payroll per IRS form 941 to total labor costs distribution.

(M) Listing of decisions/agreements/approvals and description of accounting/organizational changes.

(N) Certificate of final indirect costs (see 52.242-4, Certification of Final Indirect Costs).

(O) Contract closing information for contracts physically completed in this fiscal year (include contract number, period of performance, contract ceiling amounts, contract fee computations, level of effort, and indicate if the contract is ready to close).


Who must submit an ICS?



@DHG_GovConContract Clauses Driving the Submission

Clauses commonly found in cost type and time and materials contracts carry compliance risk.• FAR 52.216-7(d), Allowable Cost and Payment

– Annual rates and bases “shall be established” based on FAR 42.7– “Shall” submit an adequate Rate Proposal – Clause ((d)(2)(iii)) includes list of schedules to meet adequacy

• FAR 42.7, Indirect Cost Rates– Provides CO with procedures to settle final indirect rates– Prescribes final vouchering process (within 120 days of final rates)– Includes “Quick Close-out” (FAR 42.708)

• FAR 52.232-7, Payments under Time-and-Materials and Labor-Hour Contracts– Labor is excluded from ICS requirement (Hours and Labor Rates)– The “M” is auditable– Defines material costs (travel, ODCs, materials, subcontracts, indirect)– Pass through costs defined by costs accounting practices

Can be found in Prime and SubcontractsRead and understand your contract!


@DHG_GovConWho is exempt from an ICS?

• Commercial Contracts• Labor Hour Contracts (No “M”)• Fixed Price Contracts• Contracts closed out under the quick close out

procedure.– When conditions under FAR 42.708(a) are

satisfied Contracting Officer can settle indirect costs in advance of final indirect cost rate.


Why must I submit an ICS?The Fundamentals of Government Contracting Webinar Series


@DHG_GovConWhy must I submit an ICS?

• You must submit an ICS because you signed a contract with the a clause that triggers the ICS.

• The purpose of the ICS is to “true-up” your Provisional Rates to Actual Rates in order to settle up on the amount the Government owes you or the amount you owe the Government (Schedule I)


@DHG_GovConThe ICS and the Indirect Rate Cycle• An ICS is a contractor submission to the Government to “true-up”

Provisional Rates to Actual Rates as a part of the Indirect Rate Cycle.

• Your ICS rates are comprised of costs which are allocable, reasonable, and allowable on Government contracts.

- Contractor Indirect Rate Cycleo Bid and bill with Forward Pricing rateso Monitor the Forward Pricing rates versus

Actual rates periodically.o Compare the rates at the end of year, at

ICS submittal, and when the ICS is settled.

o Submit revised rates if there is a material difference throughout contract

o Submit final rates in ICSo Settle final rates at contract closeout


@DHG_GovConIndirect Rate Cycle – Rate Monitoring

• Rates must be monitored by the contractor and may be adjusted as necessary throughout the year (FAR 42.704(c) and FAR 52.216-7(e))– Protects the Contractor and the Government– Review indirect rates on a regular basis– Monitoring Over/Under Billings per contract– Once material rate variances are evident, submit

adjusting invoices timely• Ensures payment to the contractor prior to exhausting of funding• In current budget environment the contractor is wise to recover actual

costs as quickly as possible

– No cash flow or financial statement surprises if regularly reviewed


@DHG_GovConIndirect Rate Cycle - Contract Closeout


Where do I submit my ICS?The Fundamentals of Government Contracting Webinar Series


@DHG_GovConWhere must I submit an ICS?

• To your cognizant DCMA and DCAA representative– FAR 52.216-7(d)(1)(2)(i) - The Contractor shall submit

an adequate final indirect cost rate proposal to the Contracting Officer (or cognizant Federal agency official) and auditor

• DCMA Points of Contact– http://www.dcma.mil/DCMAHQ/contact.cfm

• DCAA Points of Contact– http://www.dcaa.mil/contact_us.html


When must I submit an ICS? The Fundamentals of Government Contracting Webinar Series


@DHG_GovConWhen must I submit an ICS?

• 6 months after the Contractor fiscal year end– FAR 52.216-7(d)(1)(2)(i) - The Contractor shall submit an

adequate final indirect cost rate proposal to the Contracting Officer (or cognizant Federal agency official) and auditor within the 6-month period following the expiration of each of its fiscal years.

• Extensions– Reasonable extensions, for exceptional circumstances only,

may be requested in writing by the Contractor and granted in writing by the Administrative Contracting Officer

126 Days and Counting


@DHG_GovConWhen must I submit an ICS?

• MRD 14-PPD-002(R) 2/3/14 – DCAA will provide a single late notification letter when

an ICS is days overdue – Starting in Jan ‘15, DCAA will send a list annually to

the DCMA of late proposals or inadequate proposals– DCMA has the option to 1) get adequate proposals or

2) unilaterally establish rates per FAR 42.703-2(c)(1) & 42.705(c)(1) with the option of a unilateral cost decrement

• Increased contractor risk– DCMA can unilaterally decrement your rates if

adequate submissions are not submitted timely.


How do I prepare an ICS? The Fundamentals of Government Contracting Webinar Series


@DHG_GovConICS Project Management

• Establish a project plan for the preparation of your ICS• Identification of Milestone projects (i.e., each ICS

Schedule)• Identification of key parts of each ICS Schedule and

responsible parties• Milestone dates (beginning and end) for reviewing and

completing each project/schedule, and for final review and submission of the ICS

• This webinar should help you get started in preparing your ICS

• Please contact us on detailed questions you may have on certain schedules or any other aspects of the ICS


@DHG_GovConDCAA ICE Model

• ICE Model (Incurred Cost Electronically)– Revised Version 2.0.1E (Released December 2015)– http://www.dcaa.mil/ice_model.html– The ICE model is intended to aid the contractor in

providing an adequate submission to DCAA, its use does not guarantee that the submission will be judged adequate.

• Use of the ICE model is not mandatory• Contractors may develop their own template for

submission however they must contain the required data described in FAR 52.216-7 (d)(2)(iii) - Allowable Cost and Payment


@DHG_GovConDCAA ICE Model (continued)

• The ICE model can be tailored to match the indirect rate structure of the contractor.

• Tabs and formulas are linked so care should be taken to avoid breaking links and formulas.

• Upon completion all should links and formulas should be double checked.

• Not all schedules are mandatory schedules.


@DHG_GovConBefore starting ICS prep

• Ensure that your financial reporting can accurately: – separate direct costs from indirect costs– separate direct costs by contract/task– separate indirect costs by indirect cost pool

• Verify that you have reliable supporting documentation


@DHG_GovConReporting and Documentation Required for ICS Prep

• Schedules A-G– Trial Balance and General Ledger Detail– Statement of Indirect Expenses / Indirect Rate Calculation

• Schedule H– Job/Project Summary Reports (at the billing level)

• For government cost reimbursable and T&M • Contract briefs / Whether the contract is a DoD or Non-DoD prime

or subcontract

• Schedule I– Contract revenue by contract type and contract ceiling amounts– Is contract physically complete in the FY of the ICS?– Is contract subject to the penalty clause FAR 52.242-3?

• Schedule J– Point of contact information and other contract detail including

costs incurred for flexibly priced subcontracts


@DHG_GovConReporting and Documentation Required for ICS Prep

• Schedule K– Final year end invoices with cumulative amounts billed for T&M

contracts including rates and hours billed by labor category • Schedule L

– Payroll Reconciliation– Year-end payroll summary report– 941 Quarterly Tax Filings

• Schedule M– Listing of Decisions, Agreements, Approvals, and Description of

Accounting/Organizational Changes• Schedule O

– Is contract physically complete in the FY of the ICS?– Actual hours incurred for physically complete contracts– contract fee computations, period of performance and contract

ceiling amounts


@DHG_GovConICS Preparation

• ICS prep:– Can be frustrating and time consuming even if the

contractor has experience and adequate financial reporting and records.

– Requires completion of required schedules

– Requires the preparer to use judgment

• For a walk through of the revised DCAA Incurred Cost Electronically (ICE) Model and DCAA Adequacy Checklist please attend Part II of this series on Thursday, March 24th


How is the ICS evaluated?The Fundamentals of Government Contracting Webinar Series


@DHG_GovConICS Evaluation Timeline

1. Contractor submission of ICS2. DCAA performs adequacy check3. DCAA informs contractor of ICS adequacy or

inadequacy- In the event of an inadequate submission the Contractor may

correct and resubmit

4. DCAA risk assessment and audit selection- ICS is selected for audit OR- ICS is dispositioned with a memorandum to the Contracting Officer


@DHG_GovConDCAA Adequacy Checklist

MRD August 27, 2015 – 15-PPD-005(R) - Revised Checklist for Determining Adequacy of Contractor Incurred Cost Proposal• Contractors were often concerned that DCAA performs audit steps

in the adequacy review process only to perform them again during audit, doubling the effort on contractors.

• DCAA deleted some checklist items which were not critical to determine adequacy and expanded some sections related to completeness and the overall function and tie-out of the ICS.

• DCAA has also reinforced its position that auditors use professional judgment when making an inadequacy determination and obligates them to document and defend an inadequacy determination.

• May result in less duplicative effort by contractors and fewer inadequacy determinations.


@DHG_GovConDCAA Adequacy Checklist

• Checklist for Determining Adequacy of Contractor Incurred Cost Proposal –Version 3.0 – August 2015:– http://www.dcaa.mil/incurred_cost_checklist.html

• For a walk through of the revised DCAA Incurred Cost Electronically (ICE) Model and DCAA Adequacy Checklist please attend Part II of this series on Thursday, March 24th


@DHG_GovConDCAA Risk Assessment / Audit Sampling• DCAA determines whether or not an adequate ICS is low or high risk• DCAA has a backlog of ICS to audit of over 6 ICS years in some cases• MRD January 7, 2016 – 16-PPD-001(R) - Audit Guidance on the

Impact of the National Defense Authorization Act on DCAA’s Audit Support to Non-Defense Agencies– The NDAA prohibits DCAA from providing audit support to non-DoD

customers unless the Secretary of Defense certifies that the backlog for ICS audits is less than 18 months of ICS inventory. As of now, DCAA does not meet the requirement.

• All high risk ICS shall be audited (eventually)• If any of the following are true, the ICS is deemed high risk:

– First ICS from a contractor?– Significant questioned costs in prior year ICS audit?– Known business system deficiencies that would materially impact rates?– Known material risk identified by the Contracting Officer (CO)? – Known fraud?


@DHG_GovConDCAA Risk Assessment / Audit Sampling – con’t

• ICS deemed high risk if significant questioned costs in last ICS audit:– If the last completed incurred cost audit’s ADV (Auditable Dollar Value) is < $1M,

significant questioned cost is > 10% of that year’s ADV – If the last completed incurred cost audit’s ADV is $1M to $5M, significant

questioned cost is > 5% of that year’s ADV or $100K, whichever is greater. – If the last completed incurred cost audit’s ADV is $5M to $250M, significant

questioned costs is >$250K. • ICS deemed low risk are sampled based on ADV.

– If the low risk ICS is not selected it is dispositioned with a memo to the CO.

• Contractors should evaluate their own ICS against these benchmarks and if “low risk” recommend Quick Closeout procedures (FAR 42.708) to the CO.

LowRiskAdequateProposalsbyADV LowRiskSamplingPercentagesLessthan$1Million 0%

$1Million - $50Million 5%$50Million- $100Million 10%$100Million - $250Million 20%(plus anauditevery3years)Greaterthan$250Million 100%


How do I prepare for an ICS audit?



@DHG_GovConPrior to Audit

• During ICS preparation, create an audit package with all ICS supporting schedules and backup documentation as an audit may not occur for many years.

• Document any assumptions or management decisions that are not clear from the supporting schedules as the ICS preparer may no longer be with your company.

• Perform DCAA Adequacy checklist and retain with documentation


@DHG_GovConPrior to Audit – Frequently Questioned Costs• Review the submission and ensure the reasonableness and

adequate support of frequently questioned costs:– Compensation (Not only executive comp)

• Document reasonableness• $952k vs $487k• Blended rates?

– Bonus– Employee Morale– Travel and Entertainment– Marketing– Legal– Business Meetings– Subcontract costs

• Poor SOW documentation– Direct labor

• Labor qualifications for T&M contracts (5-22-14 Audit Alert)– Labor Categories and Resumes

• Labor Hours - Timekeeping System– Lack of timesheets / inadequate approvals


@DHG_GovConAt the time of audit

• Compile the audit package and have the backup data available in hard copy and electronic format.

• Establish a single point of contact for all communication and flow of documentation with the auditor.

• Request a walkthrough of the audit

• Conduct periodic updates on the progress of the audit and any open items

• Be familiar with DCAA Audit procedures– Contract Audit Manual (CAM) Chapter 6 ICS Audit Procedures


How long is the Statue of Limitations?



@DHG_GovConStatute of Limitations (SOL)

• In 1994, Federal Acquisition Streamlining Act (FASA) established a 6 year SOL – FAR 33.206– The CO shall issue a written decision on any Government claim

initiated against a contractor within 6 years after accrual of the claim, unless the parties agreed to a shorter time period.

• Does not apply to fraud cases – Accrual of a claim = the date when all events, that fix the alleged

liability of either the Government or the contractor and permit assertion of the claim, were known or should have been known.

– Fix the liability = some injury must have occurred (financial or otherwise)

– Recent Court Cases demonstrate the SOL is being tested at phases throughout the contract life cycle (Boeing, Raytheon, Alion)

• The date of submission rather than the date of audit starts the SOL clock (date when claims were known or should have been known) however this is being tested in the courts.


@DHG_GovConBacklog Influence on DCAA and Contractors

• The current ICS backlog could cause some ICS years to go unaudited after the expiration of the SOL

• DCAA is aggressively targeting ICS backlog to minimize SOL issues– This could influence the DCAA to find a contractors ICS inadequate even at

the last minute and force them to update and recertify which would reset the 6 year SOL clock.

– Contractors should not recertify unless there is a change in their indirect rates.

• Some contractors have taken bold steps on unaudited ICS over 6 years old, such as:– Notify DCAA they have 30 days to take what ever action on the old ICS, and

then records will be destroyed– Refused DCAA access to records on ICS, saying the ICS are no longer

subject to audit

• Consult with your legal and other advisors before taking “bold” steps


@DHG_GovConQuestions?


Join us next month for An Introduction to the ICS Part II: Preparation and Adequacy Review

on Thursday, March 24th


Documents

An Introduction to the Incurred Cost Submission - Part I: … · · 2016-03-08An Introduction to the Incurred Cost Submission - Part I: Who, What, Where, When, Why ... Schedule