Now is the Time to Start Preparing for Incurred Cost Proposals

 As soon as the accounting books are closed, government contractors should begin planning for completion of their annual incurred cost proposal (ICP) submission.

The Defense Contract Audit Agency (DCAA), the agency which audits contracts for the Department of Defense and other government agencies, requires contractors with cost reimbursable contracts invoking the Allowable Cost and Payment Clause (FAR 52.216-7) to file their final ICP with supporting documentation within six months after the end of the fiscal year (i.e. June 30 for December fiscal year ends).

Although the ICP may be filed in paper form, in recent years the DCAA encourages contractors to complete the submission in an electronic format.

The DCAA has developed an electronic version of the ICP which is referred to as the Incurred Cost Electronically (ICE) which consists of 24 complex excel spreadsheets, called schedules, which are designed in accordance with the Federal Acquisition Regulations (FAR).

The ICP submission computes indirect rates, direct costs by contract, and indirect costs by pool, including unallowable cost. Failure to timely complete and submit the ICP timely can result in delayed or reduced payments on existing contracts, as well as an inability to bid on future contracts.

Contractors have a contractual obligation to submit their incurred cost proposal by the due date whereas DCAA has nothing which binds it to a time-line for completing their audit of the contractors’ incurred cost. In fact, because of limited DCAA resources, many contractors don’t expect a final audit of their rates for some time.

Suffice to say that audits of incurred costs remain a very sensitive matter in spite of the apparent hiatus in DCAA audit activity. In response to the GAO report, the DCAA is revamping its audit procedures. As a result, contractors should expect the DCAA to expand audit testing and spend more time on site during their audit.

If the contractor has made mistakes in his ICP submissions and has overbilled the government, they may be required to refund amounts overbilled with interest and sometimes with penalties once the DCAA completes their incurred cost audit.

The contractor may have the option to settle overbillings by issuing a credit against current billings to the government. Since the DCAA is so far behind in completing audits of incurred costs, cost issues discovered early during a multi-year contract could be repeated in subsequent years resulting in several years of overpayments, interest and penalties.

To avoid such problems, it is imperative that contractors assemble a qualified team that understands reporting requirements of the Federal Acquisition Regulation (FAR). If your company does not have the in-house qualifications, it is imperative that you seek the expertise of a consultant with DCAA experience.

The proper preparation of an ICP starts with a DCAA compliant accounting system that properly segregates direct, indirect, general and administrative (G&A) and unallowable costs.

Contractors must have sound accounting policies that are well documented and followed consistently from contract to contract and from one accounting period to another.

Contractors should compare current years ICP to prior year's submission and review the data for inconsistencies. Inconsistencies most likely cause audit issues, reclassification of costs, or result in certain costs being deemed unallowable for cost reimbursement. Contractors can be proactive should an error be found on a previous ICP submission. Previous ICPs can be corrected, amended and submitted to the DCAA to correct errors and avoid audit by the DCAA when they finally audit the incurred cost. Errors discovered once an ICP has been selected for audit cannot be corrected and become a DCAA audit finding.

In closing, the DCAA audit emphasis has been on the requirement that an adequate ICP be filed within six months after the fiscal year end. It remains to be seen if and when the DCAA will aggressively start pursuing the completion of timely incurred cost audits and to what extent the scope and duration of these audits will be expanded, thanks to the DCAA response to the GAO reports.

The accounting complexities for government contractors subject to DCAA-incurred cost audits continue to increase. Contractors should use the DCAA's complacency to their advantage to review previous submissions for errors or inconsistencies and, when errors are found, be proactive in submitting amended filings before the DCAA comes knocking on the door. The best defense to reduce costly audit disputes and/or findings years down the road is to pay good attention to the preparation of your Incurred Cost Proposal today.