Incurred Cost Submission (ICS)

An Incurred Cost Submission (ICS) is the annual report that cost-type government contractors must file with the Defense Contract Audit Agency (DCAA) within six months of the close of each fiscal year, documenting all actual indirect costs incurred during the year, the mechanism by which provisional billing rates used throughout the year are reconciled against final actual costs.

What is an Incurred Cost Submission?

On cost-type government contracts (CPFF, CPIF, CPAF, and T&M to a lesser extent), contractors bill the government during the year using provisional billing rates, estimated indirect rates from their forward pricing rate proposal or DCAA-approved billing rate agreements. Because actual costs are not fully known until year-end, provisional rates are used as placeholders. The ICS, submitted after the fiscal year closes, reports what actually happened: the actual costs in each indirect pool and the actual allocation base for each pool, producing the final actual indirect rates for the year.

The ICS package (following DCAA ICE Model guidance) includes: Schedule H (direct costs), Schedule I (indirect expense summary), Schedules J-K (G&A and overhead pool detail), Schedule L (claimed direct labor), Schedule M (subcontract costs), and supporting schedules for each significant cost element. DCAA audits the ICS to verify that all claimed costs are allowable under FAR Part 31, properly allocated, and consistent with the contractor's disclosed cost accounting practices.

After DCAA audit, the final rates are established and used to settle the difference between what the contractor billed during the year (at provisional rates) and what it actually incurred (at final rates). If actual indirect rates are higher than provisional rates, the government pays the contractor an additional amount (within contract ceilings and allowability limits). If actual rates are lower, the contractor issues a credit to the government. This settlement process, called "rate finalization", can take one to five years or more after the year-end submission, leaving contractors with open rate years that create financial uncertainty.

FAR 52.215-18 (Renegotiation of Price) and FAR 42.705 govern the rate finalization process. Contractors who fail to submit the ICS by the six-month due date risk losing cost recovery rights for the year.

Why the ICS Matters for Government Contractors

The ICS backlog, years of submitted but unaudited incurred cost submissions, is one of the most significant financial management challenges for growing government contractors. As of recent DCAA reports, the average wait time for ICS audit is 3-5 years. During this period, provisional rates remain open and final contract closeout cannot occur, preventing release of retained funds and creating balance sheet uncertainty. Contractors can reduce audit wait times by submitting comprehensive, well-organized ICS packages that allow DCAA to complete desk audits efficiently.

Example

A defense services firm with FY 2025 revenue of $62M submits its ICS in June 2026. The submission reports actual fringe costs of $8.3M against a direct labor base of $24.1M (actual fringe rate: 34.4%, versus provisional rate of 33.5%), and actual G&A costs of $8.9M against a total cost input base of $58.7M (actual G&A rate: 15.2%, versus provisional rate of 14.7%). DCAA audits the submission and questions $180,000 of claimed entertainment costs as unallowable under FAR 31.205-14. After the contractor agrees to exclude those costs, the final rates are: fringe 34.3%, G&A 14.9%. The government pays the contractor an additional $420,000 to settle the provisional-to-final rate differential.

Frequently Asked Questions

What happens if the ICS is filed late?

FAR 52.216-7 (Allowable Cost and Payment) requires ICS submission within six months of the contractor's fiscal year-end. Late filing can result in the contracting officer withholding up to 5% of incurred costs pending submission, and the government has the right to close out open cost-type contracts on a unilateral basis using the government's cost estimate if the contractor fails to submit timely. Contractors who anticipate late filing should contact their ACO and DCAA cognizant office to document the reason and negotiate an extension to avoid adverse contract actions.

What is the DCAA ICE Model?

The DCAA Incurred Cost Electronic (ICE) Model is a standardized Excel-based template that DCAA requires (or strongly recommends) contractors use to format their ICS submissions. The ICE Model structures the submission into standard schedules that DCAA auditors can quickly navigate and verify. Submissions formatted according to the ICE Model tend to move through audit faster because DCAA auditors can quickly verify that required schedules are present and properly cross-referenced. Submissions in non-standard formats require additional auditor effort to map to DCAA's review structure.

Can a contractor challenge DCAA's questioned costs in the ICS?

Yes. The rate finalization process involves negotiation between the contractor and the ACO after DCAA issues its audit report. The contractor can accept DCAA's recommended rates, dispute specific questioned costs with supporting rationale, or negotiate a settlement rate that differs from both the contractor's claimed rates and DCAA's recommended rates. If the parties cannot reach agreement, the contractor may submit a certified claim under the Contract Disputes Act and, if necessary, pursue resolution through the Armed Services Board of Contract Appeals (ASBCA) or Court of Federal Claims.

Do small businesses need to file an ICS?

The ICS requirement applies to cost-type contractors regardless of size, if a small business holds cost-type contracts subject to FAR 52.216-7, it must file an ICS. Small businesses with limited DCAA experience often find the ICS preparation and audit process challenging. Working with a CPA firm experienced in government contractor accounting (DCAA accounting) to prepare the ICS is a common approach for small businesses that lack internal resources to manage the submission independently.