Many federal contractors are required to complete, certify and submit an annual incurred cost submission (ICE) to their designated federal audit agency. The submissions are due within six months of the end of the contractor’s accounting year.

Who must file?

      Contractors with contracts and subcontracts subject to Federal Acquisition Regulation clause 52.216-7, Allowable Cost and Payment, must file the submission. This clause is incorporated primarily in cost reimbursement contracts and non-commercial time and materials contracts. If you have these types of contracts, you may be required to file a submission.

      Commercial time and materials contract types include General Services Administration schedule- based contract awards. Those would not require a submission.

Where do I get the submission template?

      The most common federal audit agency, Defense Contract Audit Agency (DCAA), provides a template download from their website www.dcaa.mil.

      This template requires a significant number of schedules because it is tailored for large defense contracts. Templates used by other agencies, including the Health and Human Services Department, require the completion of fewer schedules. All agency templates are downloadable from the agency website.

      In general, the federal audit agencies work together to avoid the duplication of audit procedures. For example, final indirect rates approved by DCAA would generally be accepted by National Institutes of Health.

Verification

      Verify that you are certifying an accurate and compliant submission. The submission must use final year-end financial statements. In years where final audited or reviewed financial statements are delayed, it is recommended that you request a 90-day extension. If the submission is delayed more than six months, the Contracting Officer may impose penalties against the contractor.

• Unallowable direct costs

        Verify that unallowable direct costs and unallowable overhead costs receive the same indirect cost allocations as the allowable costs. Unallowable or non-billable direct costs may be reported on a separate line in the contracts schedule, Schedule H.

• Total allowable costs

        Verify that the total allowable costs in the Profit and Loss statement agree with the total allowable costs in the submission by applying the final indirect rates to the direct contract costs in the submission. The resulting total burdened direct costs in the submission is then compared to total allowable costs in the profit and loss statement. In the DCAA template, total allowable contract costs are found at the bottom of far right column of Schedule H. If the total Schedule H costs agree to the allowable costs in the profit and loss statement, the submission is mathematically correct.

• Cost line items

        Verify that all cost line items that appear in multiple schedules agree by preparing a compliance matrix. For example, the compliance matrix shows that all schedules report the same total direct labor cost. Any variances need to be addressed before finalizing the submission.

      The use of the above verification procedures reduces the likelihood of errors in the submission and will help ensure a smooth audit process.

Common Mistakes

      On Schedule I of the DCAA template, contract-to-date costs are compared to contract-to-date billings to determine whether an over/under billings situation exists. The purpose of Schedule I is to compare the actual contract-to-date costs incurred to the contract-to-date costs billed. This is a comparison of total costs incurred, which excludes fee. Verify that all contract-to-date billing totals exclude fee.

      Schedule I also includes adjustments to actual costs incurred. These adjustments include reductions in costs claimed for amounts in excess of a contract ceiling and reductions in indirect cost allocations where actual indirect rates exceed an indirect rate ceiling. Verify that these adjustments are included in the schedule.

Minimize audits

      The best approach is to submit an accurate submission that is consistent from year to year. The goal is for DCAA to classify your company as a low risk contractor where DCAA audit procedures are limited to procedures performed at the DCAA offices (as opposed to a site audit).

      Another approach is to minimize indirect rate variances on cost- reimbursable type contracts. This is accomplished by managing the indirect rates and/or issuing year-end true up invoices that bill for the variance between actual indirect rates and provisional (billing) indirect rates. The goal is to minimize the contract indirect rate variances so that the contract(s) are eligible for the Quick Close Procedure. This procedure allows the Contracting Officer to close out a contract without an audit of the incurred cost submission. Once a contract is formally closed, a federal audit action will not occur because any excess contractor receipts cannot be recovered from a formally closed-out contract.

Summary

      The above discussion helps the contractor to determine if an incurred cost proposal must be submitted to a federal audit agency and how to avoid common mistakes that increase the contractor’s audit risk.

Wayne Clark is a CPA at Federal Strategies Group LLC.