Winning government contracts is a significant achievement, but maintaining DCAA compliance is crucial for long-term success.  Accurate Incurred Cost Submissions (ICS) are essential for demonstrating financial responsibility and ensuring smooth audits.  A key component of a compliant ICS is the proper handling of unallowable costs.  

Let’s break down what you need to know about unallowable costs and ICS submissions, empowering you to avoid costly mistakes and maintain your competitive edge.

What Are Unallowable Costs?

Unallowable costs are expenses that cannot be billed to the government under Federal Acquisition Regulation (FAR) Part 31. These costs, deemed unallowable because they do not directly contribute to contract performance or are considered unreasonable, must be identified and excluded from both direct billing and indirect cost pools. FAR Part 31 provides detailed guidance on which costs are considered unallowable.

Examples of Common Unallowable Costs

• Entertainment: Costs for amusement, social activities, and related expenses (tickets, events, lavish meals).  These are considered unrelated to contract performance. ‍
• Lobbying: Expenses to influence government policies or legislation, especially regarding contracts. The government disallows these to prevent taxpayer funds from being used to lobby for more funds. ‍
• Fines and Penalties: Costs from contractor violations of laws or regulations.  These are the contractor's responsibility, not the government's. ‍
• Alcoholic Beverages: Expenses for alcohol.  Often associated with entertainment, these are generally unallowable. ‍
• Bad Debts: Losses from uncollected receivables.  The government doesn't assume the risk of uncollected debts. ‍
• Donations and Contributions: Charitable gifts or sponsorships.  These are unrelated to contract performance. ‍
• Interest and Financing: Costs linked to loans or financing. While some contract-specific interest may be allowed, general interest is usually not.
• ‍Personal Use of Company Assets: Non-business use of company vehicles or other assets. ‍
• Advertising and Public Relations: Expenses to promote the business itself are generally unallowable.  Advertising to recruit personnel for a specific contract may be an exception.

These costs must be properly segregated from allowable expenses within a contractor’s accounting system to avoid compliance violations.

What Are Incurred Cost Submissions (ICS)

The Incurred Cost Submission (ICS) is a required annual filing for contractors with cost-reimbursable contracts.  This submission demonstrates compliance with cost accounting regulations by accurately reporting allowable costs and ensuring that unallowable expenses are not included.  Understanding unallowable costs is fundamental to this process.  The ICS is a key document used by the DCAA to audit claimed costs.

Who Needs to Submit an ICS?

Government contractors with cost-reimbursable contracts (e.g., CPFF, CPAF) are required to submit an annual ICS within six months of their fiscal year-end. T&M contracts that include cost-reimbursable elements also typically require an ICS. Failure to submit an ICS on time can result in payment withholdings and increased audit scrutiny.

Key Components of an ICS

The ICS is a detailed report with several parts, called "schedules," that give the DCAA specific information about your costs.  These schedules are important for showing that your costs are allowable, reasonable, and assigned to the correct contracts:  

• Schedule A, Indirect Cost Rates:  Summarizes your calculated rates for fringe benefits, overhead, and G&A expenses, which are applied to direct costs. ‍
• Schedule B, Direct Costs by Contract: Lists all costs directly tied to each contract (materials, labor, travel). ‍
• Schedule C, Indirect Cost Pool Calculations: Explains how you calculated the indirect cost rates from Schedule A. ‍
• Schedules D-G, Indirect Expense Details: Detailed breakdown of the expenses in each indirect cost pool. ‍
• Schedule H, Contract Cost Details: Further breakdown of costs for each contract, often by category. ‍
• Schedule I, Cumulative Costs Claimed: Total direct and indirect costs claimed for reimbursement. ‍
• Schedule J, Subcontractor Details: Lists subcontractors and amounts paid. ‍
• Schedules K - O: These additional schedules provide further cost breakdowns and supporting information.  They may include reconciliations (e.g., labor), accounting system descriptions, and other data.  Consult DCAA guidelines for specific requirements.

Common ICS Mistakes That Lead to Compliance Issues

Errors in Incurred Cost Submissions can result in audit findings, payment delays, and even contract disputes. Some of the most frequent mistakes include:

1. Failing to Properly Identify and Exclude Unallowable Costs

One of the biggest compliance risks is charging unallowable costs to the government, whether intentionally or due to poor accounting controls. Contractors must ensure these expenses are clearly segregated and excluded from direct billing and indirect pools.

2. Misclassifying Direct vs. Indirect Costs

Direct costs should be assigned to specific contracts, while indirect costs should be consistently applied across contracts. Misallocations can cause incorrect indirect rates, leading to audit concerns.

3. Using Incorrect or Inconsistent Indirect Cost Rates

Contractors must ensure that their fringe, overhead, and G&A rates are calculated correctly and consistently applied across contracts. Any errors in rate calculations can result in significant cost adjustments during audits.

4. Submitting an Incomplete or Late ICS

Failing to provide all required schedules or missing the submission deadline can trigger increased DCAA scrutiny and potential payment withholdings. Contractors should conduct internal reviews before submitting to ensure all data is complete and accurate.

Best Practices for Compliance

To reduce compliance risks and ensure a smooth audit process, contractors should follow these best practices:

Implement a DCAA-Compliant Accounting System

Using an accounting system designed for government contracts ensures that costs are properly segregated, tracked, and reported. A system with automated cost segregation and built-in compliance checks reduces the risk of errors.

Conduct Regular Internal Audits

Performing self-audits before the ICS submission helps identify and correct potential issues before they become compliance problems. Reviewing timekeeping, cost allocations, and unallowable cost segregation is crucial.

Keep Detailed and Organized Records

Maintaining comprehensive financial documentation ensures that auditors can quickly verify incurred costs. Detailed records of cost pools, labor charges, and contract invoices streamline the audit process and reduce the risk of disputes.

Train Employees on Compliance Requirements

All employees involved in timekeeping, cost tracking, and financial reporting should be trained on FAR Part 31 and DCAA compliance. Proper training reduces errors and ensures that costs are recorded accurately from the start.

Incurred Cost Submission Compliance Made Easy with WrkPlan

Preparing an Incurred Cost Submission (ICS) can be time-consuming, but WrkPlan simplifies the process. Our optional Incurred Cost module generates 16 DCAA-required schedules in minutes using your existing financial data, ensuring consistency and compliance. With WrkPlan, you can reduce manual effort, eliminate errors, and streamline your ICS preparation. Schedule a demo today to see how it works!