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For government contractors, an Incurred Cost Submission is where provisional billing meets actual cost.
The annual filing reconciles what was billed during the year with what the contractor actually incurred, and it gives the government the information needed to establish final indirect rates and close contracts.
Done well, it is less a year-end spreadsheet exercise than the product of disciplined accounting throughout the year.
An Incurred Cost Submission (ICS), formally called a final indirect cost rate proposal, is generally required when a contract includes FAR 52.216-7, Allowable Cost and Payment. The clause applies to cost-reimbursement contracts and certain time-and-materials contracts, but only to materials reimbursed at actual cost. Labor-hour contracts are excluded. Contractors must submit an adequate proposal within six months after the end of each fiscal year. Its primary purpose is to establish the contractor’s final allowable indirect cost rates and reconcile them with amounts billed to the government during the year.
A standard ICS is a linked set of schedules, not a single rate calculation
Not every schedule applies to every contractor or accounting system.
In a DCAA audit, the submission becomes the roadmap for testing whether costs charged to government contracts are allowable, allocable, reasonable, and consistently treated. Auditors reconcile amounts to the general ledger and billing records, test labor and other direct costs, evaluate indirect pools and allocation bases, and review whether unallowable costs were excluded. They also assess internal controls and the mathematical accuracy of final rate calculations. DCAA’s audit guidance identifies core objectives, including the propriety of allocation methods, correctness of bases, appropriateness of the cost period, consistency of accounting practices, and accuracy of the computed rates.
Most problems are not exotic. They are reconciliation failures, missing schedules, inconsistent contract detail, unsupported allocations, or unallowable costs left in an indirect pool. Common problems include schedules that do not reconcile to each other or the general ledger, missing explanatory notes, incomplete subcontract information, missing contract ceilings or voucher data, and inconsistencies among Schedules H, I, K, and O. Another recurring risk is charging similar costs differently across government and commercial work. If a cost is expressly unallowable, DCAA guidance says it should be questioned and may trigger FAR 42.709 penalty provisions.
Accuracy starts before year-end. Contractors should reconcile the general ledger monthly, identify unallowable costs when recorded, maintain contract briefs, preserve timekeeping and subcontract support, and review allocation methods whenever operations change. After year-end, reconcile billing history, payroll, direct costs, indirect pools, and claimed rates, then run DCAA’s adequacy checklist. DCAA released ICE Model Version 1.08 in July 2026, so contractors should use current tools and instructions. Transactions such as Transactions such as Business Carve-Outs may require extra attention because historical records and cost-center mappings can sometimes be more difficult to track. An IRS Assessment Statute Expiration Date (ASED) is separate from the Contract Disputes Act’s six-year claims period.
For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Lindsey Sykes, partner in Bennett Thrasher’s Financial Reporting & Assurance practice, or call us at 770.396.2200.
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