Upcoming ICS Deadline - Mistakes to Avoid

For companies whose fiscal year ends on 12/31, the June 30, 2013 deadline to submit the company's incurred cost submission (ICS) in accordance with the requirements of FAR 52.216-7, Allowable Cost & Payment, is very near. We want to offer a few brief items to consider while preparing your ICS to minimize the likelihood that the submission will be considered inadequate by the auditor.

TOP 5 ICS MISTAKES

These are the most common ICS prep mistakes we encounter:

1. Unallowable costs are not adequately explained and unallowables are not properly included in the applicable base elements.

DCAA will expect to see adequate explanations of the reasons for excluding unallowable costs. Citing the specific FAR Subpart 31 reference as a basis for exclusion, with a brief background explanation, is a recommended approach. Lengthy explanations are not necessarily required.

2. The final year-end trial balance does not properly reconcile to the ICS and/or discrepancies are not accurately explained.

All direct and indirect costs need to reconcile to the final adjusted trial balance. Where reconciliations are necessary, reconciling items should be fully explained and documented.

3. Contracts are not properly classified by type on Schedule H and Schedule I.

Some contracts contain multiple contract pricing arrangements for individual CLINS Task Orders; the presentation in Schedules H and I should properly reflect the type project listed.

4. Indirect Costs are not fully allocated across the contracts listed on Schedule H, creating reconciliation issues and leaving money on the table.

Indirect costs presented in G&A and Final Overhead pools should agree with allocated indirect costs in Schedule H. Reconciliation is a primary, early step performed by the auditor. Reconciliation issues can quickly lead to the auditor concluding that the ICS is inadequate.

5. A final review of the ICS against DCAA's Adequacy Checklist is not performed.

We recommend that contractors review its ICS using the checklist. It is one of the first steps performed by the DCAA once a submission has been received.

The DCAA ICS Adequacy Checklist

Previously, DCAA ICS adequacy checklists have been somewhat "home grown" by individual auditors and DCAA audit offices. However, the adequacy review has become an integral part of the risk assessment DCAA performs to set the scope of an audit of contractors' incurred cost submission. Further, because of the continued withering criticism of the quality of DCAA's performance, the agency's approach to the ICS adequacy review and risk assessment involves significantly more analysis and testing than in previous years. Finally, DCAA is using their new adequacy checklist (dated April 2012) for all current audits of an ICS. For example, the auditor might apply the current 2012 version of the checklist to a 2004 incurred cost submission, which is currently (finally) scheduled for audit. The result is that we have seen an uptick in the frequency with which ICS' have been rejected as inadequate...in some cases the basis for rejection is so immaterial that we wonder if the adequacy review has not become somewhat of a workload management tool. We recommend our clients use the DCAA adequacy checklist to review all outstanding (unaudited) ICS' submission. There are, of course, no guarantees; however, we believe the exercise will increase the likelihood that the ICS will be considered adequate.

As a result of DCAA's significant backlog of incurred cost submissions requiring audit, some contractors are facing audits of ICS' dating back to the 1990's. We believe it is especially important to re-visit those submissions to assess the risk of an inadequate determination.

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