Top 10 FAQs on incurred cost audits
In a CohnReznick webinar earlier this year, we provided a deep dive into the overall incurred cost audit process to help government contractors be better prepared to navigate incurred cost audits successfully.
Read on for answers to the Top 10 most frequently asked questions about this process, or watch the full presentation on demand now.
Q1: Do I have to submit an incurred cost submission (ICS)?
A1: Typically, you would have the FAR 52.216-7 “Allowable Cost and Payment” clause in your contract, which directs you to submit an ICS. But even if you don’t, the Christian Doctrine may apply. Basically, if you bill indirect rates to the government, you should be submitting an ICS to true up your rates annually. See the DCAA ICE model template for submissions.
Q2: Who gets audited?
A2: Any company with government contracts that submits an ICS has the potential to be audited. Agencies will go through their own risk assessment processes to determine who will and will not be audited.
Q3: When are the submissions due?
A3: Submissions are due six months after your fiscal year-end. So, if your year-end is Sept. 30, your submission is due March 31, or if your year-end is Dec. 31, it is due June 30.
Q4: How do I make sure that my ICS is adequate?
A4: You should have someone other than the preparer thoroughly review the ICS and perform a math check, internal referencing check, and formula check. You should also visit the DCAA website to check for the latest version of the ICS Adequacy Checklist and perform a self-review.
Q5: What is the statute of limitations for ICS audits?
A5: The statute of limitations ends six years from the date an adequate ICS is submitted.
Q6: Are there any other FAR audit clauses I should be aware of?
A6: Yes. In addition to the FAR 52.216-7 clause, you should also look for the 52.232-7 “Payments under Time-and-Materials and Labor-Hour Contracts” and the 52.215-2 “Audit and Records-Negotiation” clauses. Again, don’t forget the Christian Doctrine. If these clauses should be but are not in your contract, you may still be held accountable to them.
Q7: What documents should I gather for the ICS auditor?
A7: Reference FAR 52.216-7(d)(2)(iv) for the supplemental information. This is a great place to start gathering the additional data that the auditor will request. You should also review your policies and procedures to make sure they are up to date and reflect the actual practices that were in place during the audit period.
Q8: What is the audit scope of an ICS?
A8: Reference the latest DCAA incurred cost audit programs to get a view of what is typically included in an audit and what is and is not typically in scope. The audit program includes planning and fieldwork steps that can help you understand the auditor’s data requests and what is typically included and excluded from the audit scope.
Q9: What is included in the auditable dollar value (ADV)?
A9: This is where the auditor will determine what is auditable and what is not and will develop universes of transactions by cost element (or other homogeneous grouping) for sampling. Auditable direct cost transactions are those on cost type, time-and-materials type, and other flexibly priced contracts. Indirect cost pools that allocate to flexibly priced contracts are also in the ADV. Costs on commercial contracts and firm fixed price contracts are not in the ADV and should be excluded from the sampling universes.
Q10: Where should unbillable and unallowable costs be included in the ICS for allocations?
A10: For unbillable costs, the most common solution that we have seen is to add a column to the Schedule H for the unbillable costs so that they can be accumulated by contract. For unallowable costs, because they are not necessarily associated with a specific contract, we typically see a line added at the bottom of the Schedule H right above or right below the IR&D/B&P (independent research and development/bid and proposal) line called “Unallowable.” These approaches allow you to show the pool allocations to the unbillable costs by contract and the unallowable costs in total at the bottom.
Want more information about indirect rates?
Access our 2023 GAUGE report to see how your indirect rates benchmark against other organizations.
Lori Allen, CPA, Director
2023 GAUGE Report: Lead by Forecasting
Subject matter expertise
CPA, Director, Government Contracting
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