Post on 09-Jul-2020
1government contracting
An Introduction to the Incurred Cost Submission - Part I: Who, What, Where, When, Why...and How?February 28th, 2017
The Fundamentals of Government Contracting Webinar Series
2government contracting
Brad TressDixon Hughes Goodman LLP703.226.0043brad.tress@dhgllp.com
Mike MardesichDixon Hughes Goodman LLP703.970.0508mike.mardesich@dhgllp.com
Your Presenters
3government contracting
@DHG_GovConFundamentals of Government
Contracting – Season 2 Subject Matter
• Season 2 topics will include:
– Year End Closing
– Contract Types and Associated Risks
– Indirect Rates
– Incurred Cost Submissions
– Introduction to the Cost Accounting Standards
– Timekeeping
– Unallowable Costs
– Contractor Compensation
– Labor Law Compliance
– Budgeting and Provisional Rates
– Accounting Systems
– Procurement Systems
– Estimating Systems
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@DHG_GovConAgenda
• What is an ICS?
• Who must submit an ICS?
• Why must I submit an ICS?
• Where do I submit my ICS?
• When must I submit an ICS?
• How do I prepare an ICS?
• How is the ICS evaluated?
• How do I prepare for an ICS audit?
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What is an Incurred Cost
Submission (ICS)?
The Fundamentals of Government Contracting Webinar Series
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@DHG_GovConWhat is an ICS?
Per FAR 52.216-7(d) - Allowable Cost and Payment:
Final annual indirect cost rates and the appropriate bases
shall be established in accordance with Subpart 42.7 of the
FAR in effect for the period covered by the indirect cost rate
proposal.
• The Contractor shall submit an adequate final indirect
cost rate proposal…
• The proposed rates shall be based on the Contractor’s
actual cost experience for that period….
• An adequate indirect cost rate proposal shall include:
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@DHG_GovConWhat is an ICS?
(A) Summary of all claimed indirect expense rates, including pool, base,
and calculated indirect rate.
(B) General and Administrative expenses (final indirect cost pool).
Schedule of claimed expenses by element of cost as identified in
accounting records (Chart of Accounts).
(C) Overhead expenses (final indirect cost pool). Schedule of claimed
expenses by element of cost as identified in accounting records (Chart of
Accounts) for each final indirect cost pool.
(D) Occupancy expenses (intermediate indirect cost pool). Schedule of
claimed expenses by element of cost as identified in accounting records
(Chart of Accounts) and expense reallocation to final indirect cost pools.
(E) Claimed allocation bases, by element of cost, used to distribute
indirect costs.
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@DHG_GovConWhat is an ICS?
(F) Facilities capital cost of money factors computation.
(G) Reconciliation of books of account (i.e., General Ledger) and claimed direct
costs by major cost element.
(H) Schedule of direct costs by contract and subcontract and indirect expense
applied at claimed rates, as well as a subsidiary schedule of Government
participation percentages in each of the allocation base amounts.
(I) Schedule of cumulative direct and indirect costs claimed and billed by
contract and subcontract.
(J) Subcontract information. Listing of subcontracts awarded to companies for
which the contractor is the prime or upper-tier contractor (include prime and
subcontract numbers; subcontract value and award type; amount claimed
during the fiscal year; and the subcontractor name, address, and point of
contact information).
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@DHG_GovConWhat is an ICS?
(K) Summary of each time-and-materials and labor-hour contract information,
including labor categories, labor rates, hours, and amounts; direct materials; other
direct costs; and, indirect expense applied at claimed rates.
(L) Reconciliation of total payroll per IRS form 941 to total labor costs distribution.
(M) Listing of decisions/agreements/approvals and description of
accounting/organizational changes.
(N) Certificate of final indirect costs (see 52.242-4, Certification of Final Indirect
Costs).
(O) Contract closing information for contracts physically completed in this fiscal
year (include contract number, period of performance, contract ceiling amounts,
contract fee computations, level of effort, and indicate if the contract is ready to
close).
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Who must submit an ICS?
The Fundamentals of Government Contracting Webinar Series
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@DHG_GovConContract Clauses Driving the Submission
Clauses commonly found in cost type and time and materials contracts carry
compliance risk.
• FAR 52.216-7(d), Allowable Cost and Payment
– Annual rates and bases “shall be established” based on FAR 42.7
– “Shall” submit an adequate Rate Proposal
– Clause ((d)(2)(iii)) includes list of schedules to meet adequacy
• FAR 42.7, Indirect Cost Rates
– Provides CO with procedures to settle final indirect rates
– Prescribes final vouchering process (within 120 days of final rates)
– Includes “Quick Close-out” (FAR 42.708)
• FAR 52.232-7, Payments under Time-and-Materials and Labor-Hour Contracts
– Labor is excluded from ICS requirement (Hours and Labor Rates)
– The “M” is auditable
– Defines material costs (travel, ODCs, materials, subcontracts, indirect)
– Pass through costs defined by costs accounting practices
Can be found in Prime and Subcontracts
Read and understand your contract!
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@DHG_GovConWho is exempt from an ICS?
• Commercial Contracts
• Labor Hour Contracts (No “M”)
• Fixed Price Contracts
• Contracts closed out under the quick close out
procedure.
– When conditions under FAR 42.708(a) are
satisfied Contracting Officer can settle indirect
costs in advance of final indirect cost rate.
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Why must I submit an ICS?
The Fundamentals of Government Contracting Webinar Series
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@DHG_GovConWhy must I submit an ICS?
• You must submit an ICS because you signed a
contract with the a clause that triggers the ICS.
• The purpose of the ICS is to “true-up” your
Provisional Rates to Actual Rates in order to
settle up on the amount the Government owes
you or the amount you owe the Government
(Schedule I)
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@DHG_GovConThe ICS and the Indirect Rate Cycle
• An ICS is a contractor submission to the Government to “true-up”
Provisional Rates to Actual Rates as a part of the Indirect Rate
Cycle.
• Your ICS rates are comprised of costs which are allocable,
reasonable, and allowable on Government contracts.
- Contractor Indirect Rate Cycleo Bid and bill with Forward Pricing rates
o Monitor the Forward Pricing rates versus
Actual rates periodically.
o Compare the rates at the end of year, at
ICS submittal, and when the ICS is
settled.
o Submit revised rates if there is a material
difference throughout contract
o Submit final rates in ICS
o Settle final rates at contract closeout
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@DHG_GovConIndirect Rate Cycle – Rate Monitoring
• Rates must be monitored by the contractor and
may be adjusted as necessary throughout the year
(FAR 42.704(c) and FAR 52.216-7(e))
– Protects the Contractor and the Government
– Review indirect rates on a regular basis
– Monitoring Over/Under Billings per contract
– Once material rate variances are evident, submit
adjusting invoices timely• Ensures payment to the contractor prior to exhausting of funding
• In current budget environment the contractor is wise to recover actual
costs as quickly as possible
– No cash flow or financial statement surprises if regularly
reviewed
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Where do I submit my ICS?
The Fundamentals of Government Contracting Webinar Series
19government contracting
@DHG_GovConWhere must I submit an ICS?
• To your cognizant DCMA and DCAA
representative
– FAR 52.216-7(d)(1)(2)(i) - The Contractor shall submit
an adequate final indirect cost rate proposal to the
Contracting Officer (or cognizant Federal agency
official) and auditor
• DCMA Points of Contact
– http://www.dcma.mil/DCMAHQ/contact.cfm
• DCAA Points of Contact
– http://www.dcaa.mil/contact_us.html
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When must I submit an ICS?
The Fundamentals of Government Contracting Webinar Series
21government contracting
@DHG_GovConWhen must I submit an ICS?
• 6 months after the Contractor fiscal year end
– FAR 52.216-7(d)(1)(2)(i) - The Contractor shall submit an
adequate final indirect cost rate proposal to the Contracting
Officer (or cognizant Federal agency official) and auditor
within the 6-month period following the expiration of each of
its fiscal years.
• Extensions
– Reasonable extensions, for exceptional circumstances only,
may be requested in writing by the Contractor and granted in
writing by the Administrative Contracting Officer
122 Days and Counting
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@DHG_GovConWhen must I submit an ICS?
• MRD 14‐PPD‐002(R) 2/3/14
– DCAA will provide a single late notification letter when an ICS
is days overdue
– Starting in Jan ‘15, DCAA will send a list annually to the
DCMA of late proposals or inadequate proposals
– DCMA has the option to 1) get adequate proposals or 2)
unilaterally establish rates per FAR 42.703‐2(c)(1) &
42.705(c)(1) with the option of a unilateral cost decrement
• MRD 14‐PPD‐002(R) 2/11/16
– DCMA can unilaterally decrement your rates if adequate
submissions are not submitted timely.
– The current rate, updated in 2016, is 16.4 percent, based on
an Agency-wide analysis.
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How do I prepare an ICS?
The Fundamentals of Government Contracting Webinar Series
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@DHG_GovConICS Project Management
• Establish a project plan for the preparation of your ICS
• Identification of Milestone projects (i.e., each ICS Schedule)
• Identification of key parts of each ICS Schedule and responsible parties
• Milestone dates (beginning and end) for reviewing and completing each project/schedule, and for final review and submission of the ICS
• This webinar should help you get started in preparing your ICS
• Please contact us on detailed questions you may have on certain schedules or any other aspects of the ICS
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@DHG_GovConDCAA ICE Model
• ICE Model (Incurred Cost Electronically)
– Revised Version 2.0.1f (Released October 2016)
– http://www.dcaa.mil/ice_model.html
– The ICE model is intended to aid the contractor in
providing an adequate submission to DCAA, its use does
not guarantee that the submission will be judged
adequate.
• Use of the ICE model is not mandatory
• Contractors may develop their own template for
submission however they must contain the required
data described in FAR 52.216-7 (d)(2)(iii) - Allowable
Cost and Payment
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@DHG_GovConDCAA ICE Model (continued)
• The ICE model can be tailored to match the
indirect rate structure of the contractor.
• Tabs and formulas are linked so care should be
taken to avoid breaking links and formulas.
• Upon completion all should links and formulas
should be double checked.
• Not all schedules are mandatory schedules.
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@DHG_GovConBefore starting ICS prep
• Ensure that your financial reporting can
accurately:
– separate direct costs from indirect costs
– separate direct costs by contract/task
– separate indirect costs by indirect cost pool
• Verify that you have reliable supporting
documentation
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@DHG_GovConReporting and Documentation Required for ICS Prep
• Schedules A-G
– Trial Balance and General Ledger Detail
– Statement of Indirect Expenses / Indirect Rate Calculation
• Schedule H
– Job/Project Summary Reports (at the billing level)
• For government cost reimbursable and T&M
• Contract briefs / Whether the contract is a DoD or Non-DoD prime
or subcontract
• Schedule I
– Contract revenue by contract type and contract ceiling amounts
– Is contract physically complete in the FY of the ICS?
– Is contract subject to the penalty clause FAR 52.242-3?
• Schedule J
– Point of contact information and other contract detail including
costs incurred for flexibly priced subcontracts
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@DHG_GovConReporting and Documentation Required for ICS Prep
• Schedule K
– Final year end invoices with cumulative amounts billed for T&M
contracts including rates and hours billed by labor category
• Schedule L
– Payroll Reconciliation
– Year-end payroll summary report
– 941 Quarterly Tax Filings
• Schedule M
– Listing of Decisions, Agreements, Approvals, and Description of
Accounting/Organizational Changes
• Schedule O
– Is contract physically complete in the FY of the ICS?
– Actual hours incurred for physically complete contracts
– contract fee computations, period of performance and contract
ceiling amounts
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@DHG_GovConICS Preparation
• ICS prep:
– Can be frustrating and time consuming even if the
contractor has experience and adequate financial
reporting and records.
– Requires completion of required schedules
– Requires the preparer to use judgment
• For a walk through of the revised DCAA Incurred Cost
Electronically (ICE) Model and DCAA Adequacy
Checklist please attend Part II of this series on Tuesday,
May 23rd
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How is the ICS evaluated?
The Fundamentals of Government Contracting Webinar Series
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@DHG_GovConICS Evaluation Timeline
1. Contractor submission of ICS
2. DCAA performs adequacy check
3. DCAA informs contractor of ICS adequacy or
inadequacy- In the event of an inadequate submission the Contractor may
correct and resubmit
4. DCAA risk assessment and audit selection- ICS is selected for audit OR
- ICS is dispositioned with a memorandum to the Contracting
Officer
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@DHG_GovConDCAA Adequacy Checklist
MRD August 27, 2015 – 15-PPD-005(R) - Revised
Checklist for Determining Adequacy of Contractor Incurred
Cost Proposal
• Contractors were often concerned that DCAA performs audit steps
in the adequacy review process only to perform them again during
audit, doubling the effort on contractors.
• DCAA deleted some checklist items which were not critical to
determine adequacy and expanded some sections related to
completeness and the overall function and tie-out of the ICS.
• DCAA has also reinforced its position that auditors use professional
judgment when making an inadequacy determination and obligates
them to document and defend an inadequacy determination.
• May result in less duplicative effort by contractors and fewer
inadequacy determinations.
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@DHG_GovConDCAA Adequacy Checklist
• Checklist for Determining Adequacy of
Contractor Incurred Cost Proposal –
Version 3.1 – June 2016:
– http://www.dcaa.mil/incurred_cost_checklist.html
• For a walk through of the revised DCAA Incurred Cost
Electronically (ICE) Model and DCAA Adequacy
Checklist please attend Part II of this series on Tuesday,
May 23rd
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@DHG_GovConDCAA Risk Assessment / Audit Sampling
• DCAA determines whether or not an adequate ICS is low or high risk
• DCAA has a backlog of ICS to audit of over 6 ICS years in some
cases
• MRD 1/7/16 – 16-PPD-001(R) - Audit Guidance on the Impact of the
National Defense Authorization Act on DCAA’s Audit Support to Non-
Defense Agencies
– No Non-DoD Audit Services
• MRD 5/27/16 – 16-PPD-006(R) - Audit Guidance on Revised Policy
and Procedures for Low-Risk Incurred Cost
– Modified Risk Determinations
– Other methods to decrease backlog
• MRD 9/30/16 – 16-PPD-008(R) - Audit Guidance on the Impact of the
National Defense Authorization Act on DCAA’s Audit Support to Non-
Defense Agencies
– DCAA has “caught up” and is back in business
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@DHG_GovConDCAA Risk Assessment / Audit Sampling – con’t
• Less than $5M in ADV (Auditable Dollar Value)
– For all ICS with less than $5 million in ADV, Auditors are required to use the Low Risk
Determination For Contractor Years With Less Than $5M in ADV Tool.
– All ICS with less than $5M in ADV shall be considered low risk unless the following is
documented and the Regional Audit Manager (RAM) approves the performance of an audit.
• Between $5M-$250M in ADV
– Auditors are required to use the Low Risk Determination For Contractor Years With $5M-$250M
in ADV Tool.
– Via the Tool, the Auditor must consider the following significant risk factors in determining and
documenting the risk classification of the adequate ICS.
• ICS deemed low risk are sampled based on ADV.
– If the low risk ICS is not selected it is dispositioned with a memo to the CO.
• Contractors should evaluate their own ICS against these benchmarks and if
“low risk” recommend Quick Closeout procedures (FAR 42.708) to the CO.
Low Risk Adequate Proposals by ADV Low Risk Sampling Percentages
Less than $1 Million Not Subject to Sampling
$1 Million - $50 Million 5%
$50 Million - $100 Million 10%
$100 Million - $250 Million 20% (plus mandatory audit every 3 years)
Greater than $250 Million All adequate submissions will be audited
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How do I prepare for an ICS
audit?
The Fundamentals of Government Contracting Webinar Series
38government contracting
@DHG_GovConPrior to Audit
• During ICS preparation, create an audit package with all ICS supporting schedules and backup documentation as an audit may not occur for many years.
• Document any assumptions or management decisions that are not clear from the supporting schedules as the ICS preparer may no longer be with your company.
• Perform DCAA Adequacy checklist and retain with documentation
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@DHG_GovConPrior to Audit – Frequently Questioned Costs
• Review the submission and ensure the reasonableness and adequate
support of frequently questioned costs:
– Compensation (Not only executive comp)• Document reasonableness
• $952k vs $487k
• Blended rates?
– Bonus
– Employee Morale
– Travel and Entertainment
– Marketing
– Legal
– Business Meetings
– Subcontract costs• Poor SOW documentation
– Direct labor • Labor qualifications for T&M contracts (5-22-14 Audit Alert)
– Labor Categories and Resumes
• Labor Hours - Timekeeping System
– Lack of timesheets / inadequate approvals
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@DHG_GovConAt the time of audit
• Compile the audit package and have the backup data available in hard copy and electronic format.
• Establish a single point of contact for all communication and flow of documentation with the auditor.
• Request a walkthrough of the audit
• Conduct periodic updates on the progress of the audit and any open items
• Be familiar with DCAA Audit procedures– Contract Audit Manual (CAM) Chapter 6 ICS Audit Procedures
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How long is the Statue of
Limitations?
The Fundamentals of Government Contracting Webinar Series
42government contracting
@DHG_GovConStatute of Limitations (SOL)
• In 1994, Federal Acquisition Streamlining Act (FASA) established
a 6 year SOL – FAR 33.206
– The CO shall issue a written decision on any Government claim
initiated against a contractor within 6 years after accrual of the claim,
unless the parties agreed to a shorter time period.
• Does not apply to fraud cases
– Accrual of a claim = the date when all events, that fix the alleged
liability of either the Government or the contractor and permit
assertion of the claim, were known or should have been known.
– Fix the liability = some injury must have occurred (financial or
otherwise)
– Recent Court Cases demonstrate the SOL is being tested at phases
throughout the contract life cycle (Boeing, Raytheon, Alion)
• The date of submission rather than the date of audit starts the SOL clock (date
when claims were known or should have been known) however this is being
tested in the courts.
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@DHG_GovConBacklog Influence on DCAA and Contractors
• The current ICS backlog could cause some ICS years to go
unaudited after the expiration of the SOL
• DCAA is aggressively targeting ICS backlog to minimize SOL issues
– This could influence the DCAA to find a contractors ICS inadequate even at
the last minute and force them to update and recertify which would reset the
6 year SOL clock.
– Contractors should not recertify unless there is a change in their indirect
rates.
• Some contractors have taken bold steps on unaudited ICS over 6
years old, such as:
– Notify DCAA they have 30 days to take what ever action on the old ICS, and
then records will be destroyed
– Refused DCAA access to records on ICS, saying the ICS are no longer
subject to audit
• Consult with your legal and other advisors before taking “bold” steps
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Join us next month for Timekeeping on
Tuesday, April 25th
ICS Part II: Preparation and Adequacy Review on May 23rd
The Fundamentals of Government Contracting Webinar Series
46government contracting
22nd Annual Government Contracting Update
DHG’s 22nd Annual Government
Contracting Update:
shaping today’s challenges into tomorrow’s success
When: May 4th, 2017
Where: The Hyatt Regency in
Tysons Corner, VA
CPE: 8 hours (pending approval)
Visit www.dhgllp.com/govcon to
learn more!