February 13, 2026

If you are a government contractor with cost-reimbursable, time-and-material (T&M), or labor-hour contracts, Incurred Cost Submissions (ICS) are mandatory. Complying with the ICS requirements is an essential step necessary for government contractors to receive accurate, on-time reimbursement. Yet, oftentimes, government contractors treat the ICS as a last-minute reporting exercise, only to face adequacy rejections, audit delays, or increased scrutiny from government auditors.

Let’s summarize what the incurred cost submission is, who needs to submit it, and most importantly, when you should start preparing it. Armed with this knowledge, government contractors can understand how to avoid common audit findings, reduce audit risk, and help ensure allowable costs are recovered.

Who is Required to Submit an ICS

Government contractors generally must submit an incurred cost submission if there are:

  • Cost-reimbursable contracts
  • Time and materials or labor-hour contracts that include indirect cost rates
  • Any contracts that require provisional billing rates that must later be finalized

What is an Incurred Cost Submission

The Incurred Cost Submission (ICS) is an annual report that details the actual costs incurred on government contracts during a specific fiscal year. As part of the submission, the ICS reconciles the costs billed to the federal government during the year using approved provisional indirect cost rates with the actual indirect cost rates incurred for the year.

The ICS is submitted to the Defense Contract Audit Agency (DCAA) or the applicable cognizant audit agency and is used for the following:

  • Establishing final indirect cost rates for the year
  • Determining that the costs claimed were allowable, allocable, and reasonable
  • Supporting contract close-outs

Why DCAA Requires an Incurred Cost Submission

Under the Allowable Cost and Payment Clause (FAR 52.216-7), contractors must submit an adequate Incurred Cost Submission within six months of their fiscal year-end (i.e., June 30 for a government contractor with a calendar year-end).

Failure to submit on time can have real consequences, including:

  • Delayed payments: May suspend cost reimbursements and withhold contract payments.
  • Unilateral rate determinations: The government may finalize unfavorable final rates.
  • Increased audit scrutiny: Missing or incomplete submissions may raise red flags.

Submitting a timely, accurate ICS helps protect cash flow, ensures compliance, and builds credibility with contracting agencies.

Identify the Required Schedules for an Adequate ICS

Adequacy reviews of incurred cost proposals focus on whether the submission is complete and accurate. Contractors are encouraged to use the same checklist used by DCAA Auditors to evaluate the adequacy of their ICS before submission. The following schedules are required:

  • Schedules A through E: Summary of claimed indirect costs and base components
  • Schedule H: Contract Direct Costs and Billing Information
  • Schedule I: Cumulative Direct and Indirect Costs Claimed and Billed
  • Schedule K: Summary of Direct and Indirect Costs by Contract
  • Schedule N: Certification of Final Indirect Costs
  • Schedules F, J, L and other supplemental schedules: This includes supporting schedules such as cost of money, subcontractor information, payroll reconciliations, contract close-out data, executive compensation, and other supporting information necessary for the incurred cost audit.

Government auditors expect internal consistency across all schedules. Amounts must reconcile with the general ledger, the trial balance, and the billed amounts.

Avoid the Most Common DCAA Audit Findings

The following issues are what Government Auditors routinely flag during ICS audits:

Unallowable costs: Costs for entertainment, fines and penalties, interest, federal income taxes, lobbying, and unapproved bonuses are not allowed under FAR 31.205.

  • Best practice: Segregate unallowable costs within your accounting system.

Inaccurate or inconsistent indirect rates: Discrepancies between the indirect cost pools or the indirect cost rate bases included in the provisional and final indirect rates may invite closer scrutiny.

  • Best practice: Monitor indirect costs year-round and perform interim reconciliations whenever necessary.

Compensation issues: Compensation and bonuses are frequently scrutinized, with government auditors considering overall reasonableness, underlying documentation (timesheets), and established written policies surrounding compensation.

  • Best practice: Maintain timesheets for all employees, with employees completing timesheets contemporaneously. Establish a written bonus plan for all discretionary compensation. Consider compensation limitations—both statutory and by size—when determining allowable versus unallowable compensation.

Improper cost allocations: Misallocation, or inconsistent treatment, of direct and indirect costs can result in disallowed costs.

  • Best practice: Use a clear, consistent allocation methodology that is well documented.

Missing or incomplete documentation: Government auditors require detailed supporting documentation for all submitted costs.

  • Best practice: Use an accounting system that enables real-time transaction tracking and securely retains all required supporting documentation.

Prepare Early to Reduce Audit Risk and Protect Cash Flow

An ICS is more than a regulatory requirement – it is a reflection of your accounting system, internal controls, and overall contract management. If you are not sure whether your systems are ready – or if this is your first incurred cost submission – it is worth getting guidance early rather than running into problems later.

Best Practice Timeline

  • During the fiscal year:

    • Maintain compliant timekeeping
    • Track unallowable costs monthly
    • Monitor indirect rates and cost pools
  • At fiscal year-end:

    • Close the books, with all accounts properly reconciled
    • Reconcile contract cost reports to the general ledger
  • Within 30–90 days after year-end:

    • Begin assembling ICS schedules
    • Identify gaps or issues early
  • Submission deadline:

    • Typically six months after fiscal year-end

As a government contractor, you must understand the requirements, respect the statutory deadline, and begin preparations early. Doing so will help minimize audit friction and build confidence with both contracting officers and the DCAA, reinforcing your credibility as a reliable government partner.

Conclusion

Preparing an accurate and timely Incurred Cost Submission is critical to protecting your cash flow, maintaining compliance, and avoiding unnecessary audit risk. With the right systems, documentation, and planning, the process can be far more predictable and far less stressful. Rubino works with government contractors to strengthen accounting practices, prepare complete and compliant ICS schedules, and navigate DCAA expectations with confidence. If you want guidance on your upcoming submission or want to ensure your systems are audit–ready, connect with our Government Contracting specialists to get started today. 

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