DCAA Incurred Cost Submission: The ICE Model and Annual Filing

If your company holds a cost-type, time-and-materials, or labor-hour contract with the federal government, you are required to submit an annual incurred cost proposal. This is not a suggestion and it is not a best practice. It is a contract clause obligation under FAR 52.216-7, and failure to file it on time triggers consequences that range from withheld payments to unilaterally imposed rates to contract termination proceedings.

The incurred cost submission (sometimes called the incurred cost proposal, or ICS) is the contractor’s formal proposal of final indirect cost rates for the fiscal year. During the year, you bill the government using provisional (estimated) billing rates. After the year ends, you submit the ICS to propose what your actual rates were. DCAA audits the submission, and the contracting officer (ACO) establishes final rates. The difference between provisional and final rates results in either a payment to the contractor or a refund to the government.

What does FAR 52.216-7 actually require?

FAR 52.216-7, “Allowable Cost and Payment,” is the contract clause that governs how contractors are paid on flexibly priced contracts (cost-reimbursement, cost-plus-fixed-fee, cost-plus-incentive-fee, cost-plus-award-fee, time-and-materials, and labor-hour). The clause requires the contractor to submit an “adequate final indirect cost rate proposal” to the contracting officer (or the cognizant auditor, which is DCAA in most cases) within six months after the end of each fiscal year.

The word “adequate” is doing real work in that sentence. An adequate proposal must include enough detail for the auditor to determine whether the proposed costs are allowable, allocable, and reasonable under FAR Part 31. A submission that is incomplete, internally inconsistent, or missing required schedules will be returned as inadequate, and the clock keeps running on the late-filing consequences until an adequate submission is accepted.

The clause also requires the contractor to support the proposed rates with its books and records, and to make those records available to the auditor. In practice, this means the numbers in the ICS must tie to the general ledger, and the contractor must be prepared to produce invoices, timesheets, payroll records, and other source documents when DCAA requests them during audit.

For contractors subject to CAS (Cost Accounting Standards), the incurred cost submission must also be consistent with the contractor’s disclosed practices and CAS board rules. An ICS that allocates costs differently from the contractor’s CAS disclosure statement is a problem that goes beyond the submission itself.

What is the ICE model?

The ICE (Incurred Cost Electronically) model is DCAA’s standardized Excel workbook for submitting the annual incurred cost proposal. DCAA does not technically require contractors to use the ICE model (the FAR clause says “adequate final indirect cost rate proposal,” not “DCAA’s specific spreadsheet”), but in practice, submitting in the ICE format is the path of least resistance. Submissions in non-standard formats are far more likely to be returned as inadequate or to generate rounds of supplemental information requests.

The ICE model is available for download from DCAA’s website. It is a multi-tab Excel workbook with approximately 20 schedules. The workbook includes built-in formulas that link the schedules together, so when you enter direct costs in one schedule and indirect pools in another, the rate computation schedule calculates automatically. That said, the formulas do not substitute for understanding the logic. A contractor who populates the schedules mechanically, without verifying that the numbers reconcile to the general ledger and the allocation bases are correct, will produce a submission that looks complete but is not defensible under audit.

The ICE model is updated periodically, and contractors should download the current version for each year’s submission rather than reusing a prior year’s file. The schedules change slightly from version to version, and using an outdated format can result in an inadequacy determination.

What are the key schedules in the ICE model?

The ICE model contains roughly 20 schedules, some required for every contractor and some applicable only to specific cost structures. The core schedules that every contractor with flexibly priced contracts will complete are described below.

Schedule A: Contract Listing. This schedule lists every contract, subcontract, and agreement the contractor held during the fiscal year. It includes the contract number, contract type (cost-reimbursement, T&M, fixed-price, commercial), awarding agency, and period of performance. The purpose is to give the auditor a complete picture of the contractor’s work, including fixed-price and commercial work that is not directly subject to cost-type reimbursement but affects the allocation bases for indirect costs.

Schedule B: Direct Costs by Contract. This is the summary of all direct costs charged to each contract during the fiscal year. It shows the total direct cost for each contract, broken into categories (labor, materials, subcontracts, travel, other direct costs). The totals on Schedule B must reconcile to the general ledger.

Schedule C: Direct Labor by Contract. Schedule C breaks out the labor dollars and hours charged directly to each contract. For contractors that use direct labor dollars or direct labor hours as the allocation base for overhead, Schedule C is the source of the denominator in the overhead rate computation. If the labor hours or dollars on Schedule C do not match the payroll records and timesheets, the auditor will find the discrepancy.

Schedule D: Consultant and Subcontractor Costs. This schedule details all consultant and subcontractor costs charged directly to contracts. For contractors that exclude subcontractor costs from the G&A allocation base (a common practice, because large subcontract pass-through costs would distort the G&A rate), Schedule D identifies the dollars to be excluded.

Schedule E: Direct Material Costs. Materials charged directly to contracts are listed here by contract. Like Schedule D, this information feeds into the allocation base decisions for indirect rate computations.

Schedule F: Overhead Pool. Schedule F lists every cost in the overhead pool (sometimes called the “indirect manufacturing” or “fringe/overhead” pool, depending on the contractor’s cost structure). Typical costs in this pool include indirect labor (supervisors, quality assurance personnel who support multiple contracts), fringe benefits, facility costs, depreciation on production equipment, and small tools and supplies. The total of Schedule F is the numerator in the overhead rate computation.

Schedule G: G&A Pool. The general and administrative expense pool captures costs that benefit the organization as a whole rather than specific contracts or projects: executive compensation, accounting and legal fees, human resources, corporate insurance, office supplies, and IT infrastructure. The G&A pool total is divided by the G&A allocation base (typically total cost input, which is direct costs plus overhead) to produce the G&A rate.

Schedule H: Indirect Rate Computation. This is the schedule where the rate calculations come together. For each indirect cost pool (overhead, G&A, and any other pools the contractor maintains, such as a separate fringe pool or material handling pool), Schedule H shows the pool total (numerator) divided by the allocation base (denominator) to produce the proposed final indirect rate. If the contractor has multiple overhead pools (for example, an engineering overhead pool and a manufacturing overhead pool with different bases), each pool gets its own rate computation.

Schedule I: Claimed vs. Paid Comparison. Schedule I compares the costs claimed on interim vouchers (invoices submitted during the year at provisional billing rates) to the costs now proposed at the final rates. The difference is the cumulative over- or under-billing. If the contractor billed at provisional rates higher than the proposed final rates, the government is owed a refund. If the provisional rates were lower, the contractor is owed additional payment. This schedule is how the final settlement amount is computed.

Schedule J: Unallowable Costs. Schedule J is one of the most scrutinized parts of the submission. It lists every cost that the contractor has identified as unallowable under FAR 31.205 and excluded from the indirect cost pools. Common unallowable costs include entertainment, alcoholic beverages, contributions and donations, fines and penalties, lobbying costs, certain portions of executive compensation that exceed the FAR compensation cap, bad debt expense, and advertising (with narrow exceptions for help-wanted advertising and certain public relations costs). The schedule must also identify any directly associated costs of unallowable activities.

DCAA auditors pay close attention to Schedule J because understating unallowable costs inflates the indirect rate pools, which directly increases the amount billed to the government. A contractor that fails to identify and exclude unallowable costs on Schedule J faces not only a rate adjustment but potential allegations of a False Claims Act violation if the omission was knowing or reckless.

Supporting schedules. The ICE model also includes schedules for employee compensation (verifying that individual compensation levels are reasonable by position and not exceeding the FAR compensation cap under FAR 31.205-6), pension and deferred compensation costs, insurance costs, and facilities capital cost of money (an imputed cost allowed under CAS 414). Not every contractor completes every supporting schedule. The applicable ones depend on the contractor’s cost structure, size, and the types of costs in its indirect pools.

How do I actually prepare the submission?

Preparing the ICS is a reconciliation exercise. The goal is to take the annual financial data from your DCAA-compliant accounting system, map it into the ICE model schedules, and verify that everything ties. The process, reduced to its core steps:

First, close your books for the fiscal year. The general ledger must be final before you start populating the ICE model. If you are still posting adjustments to the fiscal year while filling in the schedules, the numbers will not reconcile and you will waste time chasing differences.

Second, generate the direct cost detail by contract from your accounting system. Your system should be able to produce a report showing every cost charged directly to each contract during the year, broken into the categories the ICE model requires (labor, materials, subcontracts, travel, ODCs). This feeds Schedules B through E.

Third, compile the indirect cost pools. Pull every cost that was charged to an indirect account (overhead, G&A, fringe, or whatever pool structure you maintain) and organize it by cost element. This feeds Schedules F and G.

Fourth, scrub for unallowable costs. Go through the indirect cost pools and the direct cost charges line by line, identifying any cost that is unallowable under FAR 31.205. Remove those costs from the pools and list them on Schedule J. This step is where most errors occur, because it requires a working knowledge of the FAR cost principles and enough attention to detail to catch costs like a holiday party (entertainment, unallowable), a late-payment penalty on a vendor invoice (fines and penalties, unallowable), or a portion of the CEO’s compensation above the statutory cap.

Fifth, calculate the indirect rates on Schedule H and run the claimed-vs-paid comparison on Schedule I.

Sixth, reconcile everything back to the general ledger. The total costs in the ICE model (direct costs plus indirect pools minus unallowable costs) must equal the total costs on the income statement. If they do not, find the difference before submitting.

Seventh, certify and submit. The ICS requires a signed certification from an authorized official (typically the CFO or controller) stating that the submission is accurate and complete.

What happens if I miss the six-month deadline?

The consequences of a late incurred cost submission are real and escalating. The six-month deadline is not a soft target that gets extended by asking nicely.

Under FAR 52.216-7(d)(2)(ii), if the contractor fails to submit an adequate proposal within the required timeframe, the contracting officer may determine the final indirect rates unilaterally. “Unilaterally” means the government sets the rates without the contractor’s agreement, and those rates are almost always lower than the contractor’s actual rates. The contracting officer has every incentive to be conservative, and without the contractor’s documented proposal to work from, the rates tend to be based on the lowest defensible interpretation of the available data.

For DoD contractors, DFARS 252.242-7006 provides additional teeth. The administrative contracting officer can place the contractor’s accounting system in a disapproved status, which triggers payment withholding on all cost-type contracts (typically 10% of interim payments are withheld until the deficiency is corrected). In extreme cases, repeated failure to submit adequate incurred cost proposals can be cited as a basis for a contractor responsibility determination, affecting the contractor’s ability to win new awards.

The contracting officer also has the authority, in theory, to initiate default termination proceedings if the contractor’s persistent failure to submit the ICS constitutes a material breach of contract. Default termination is a nuclear option and rarely exercised solely for a late ICS, but it is on the table, and the threat of it is used as leverage to compel submission.

There is also a practical consequence that contractors often overlook: the clock on the final rate settlement does not start until you file. Until the ICS is submitted and audited, provisional rates remain open, interim payments remain subject to adjustment, and the contractor cannot close out contracts or recognize final profit. For contractors trying to sell the business, merge, or restructure, open indirect rate years are a significant complication in due diligence.

How do provisional billing rates work with final rates?

During the contract performance year, the contractor does not know what its actual indirect cost rates will be. Costs are still being incurred, employees are still being hired and terminated, and new contracts are starting and ending. The contractor cannot wait until year-end to bill the government, so it bills at provisional (estimated) indirect rates.

Provisional billing rates are typically established at the beginning of the fiscal year based on the contractor’s forward pricing rate proposal or the prior year’s actual rates, adjusted for known changes. The ACO approves (or the contractor and ACO negotiate) the provisional rates, and the contractor uses them on all interim vouchers throughout the year.

After year-end, the contractor submits the ICS proposing final rates based on actual costs. Three scenarios follow.

If the proposed final rates are higher than the provisional billing rates, the contractor under-billed during the year and is owed additional payment. Once the ACO establishes final rates (after the DCAA audit), the contractor submits a final voucher for the difference.

If the proposed final rates are lower than the provisional billing rates, the contractor over-billed during the year and owes the government a refund. The refund is either paid directly or offset against future billings.

If the proposed final rates match the provisional billing rates (unlikely but theoretically possible), no adjustment is needed.

The practical effect is that every cost-type contract has an open receivable or payable hanging over it until final rates are established. For contractors with audit backlogs stretching three, five, or even seven years, this means multiple fiscal years of indirect rate proposals remain open simultaneously, with cumulative over- or under-billings that can be material to the company’s financial position.

What happens during a DCAA incurred cost audit?

Not every incurred cost submission is audited. DCAA uses a risk-based approach to select submissions for audit, and the audit backlog has been significant for years. Some small contractors go years without an incurred cost audit. Others, particularly those with large dollar volumes, history of questioned costs, or CAS-covered contracts, are audited regularly.

When DCAA selects a submission for audit, the process typically unfolds as follows.

The auditor issues an entrance conference notification and requests access to the contractor’s books and records. The contractor is expected to provide the general ledger, trial balance, financial statements, timesheets, payroll records, vendor invoices, subcontractor agreements, travel receipts, and any other documentation supporting the costs in the ICS.

The auditor tests the submission for three things: allowability (are the costs allowable under FAR 31.205?), allocability (are the costs allocated to the correct pools and contracts based on the benefit received?), and reasonableness (would a prudent person have incurred these costs at these amounts in the conduct of competitive business?).

The audit typically focuses on high-risk areas: unallowable costs that may not have been identified on Schedule J, executive compensation that may exceed the FAR cap, labor charges that may not be supported by contemporaneous timesheets, subcontractor costs that may not have been properly vetted for cost or pricing data, and the consistency of the allocation methodology between the ICS and the contractor’s disclosed practices.

When the audit is complete, DCAA issues an audit report to the contracting officer. The report includes any questioned costs (costs the auditor believes are unallowable, unallocable, or unreasonable) and the auditor’s opinion on the adequacy of the submission. The contracting officer then uses the audit report to negotiate final rates with the contractor. The contractor has the right to respond to questioned costs and present additional documentation or arguments before the ACO establishes final rates.

If the contractor and ACO cannot agree on final rates, the ACO issues a contracting officer’s final decision (COFD), which the contractor can appeal to the relevant Board of Contract Appeals or the Court of Federal Claims.

The entire process, from submission to final rate establishment, can take years. The DCAA audit backlog has been a persistent issue, with some contractors waiting five or more years for an audit of a given fiscal year. During that waiting period, the indirect rates for that year remain “open,” meaning provisional rates are still in effect and the final settlement has not occurred.

What are the most common deficiencies in incurred cost submissions?

DCAA publishes guidance on the most frequent reasons for inadequacy determinations and audit findings. The common problems fall into several categories.

Incomplete schedule population is the most basic deficiency. Contractors leave schedules blank or partially completed, omit contracts from Schedule A, or fail to break out costs into the categories the schedules require. An incomplete submission is returned as inadequate, and the contractor must resubmit.

Inconsistent allocation bases are a more substantive problem. The allocation base used in the rate computation on Schedule H must match the contractor’s established accounting practice and CAS disclosure statement (if CAS-covered). A contractor that uses direct labor dollars as the overhead base in its accounting system but switches to total direct cost in the ICS has an inconsistency that the auditor will question. Similarly, the decision to include or exclude subcontractor costs from the G&A base must be consistent with the contractor’s practice.

Failure to identify all unallowable costs on Schedule J is the deficiency most likely to result in questioned costs and potential penalty. The FAR lists dozens of cost categories that are expressly unallowable, and the list includes costs that many contractors incur routinely: business meals beyond a certain threshold, holiday parties, employee morale events with alcohol, donations to charity, late fees on credit cards, interest expense (with limited exceptions), and portions of executive compensation above the annual cap. Missing even one category can result in an audit finding.

Mathematical errors and broken formulas in the ICE model are surprisingly common, especially when contractors modify the standard workbook or add rows without updating the formula ranges. The totals on one schedule do not match the amounts pulled into the rate computation, and the result is an ICS that is internally inconsistent.

Missing certifications will cause a submission to be returned. The certification is not a formality. It is a legally binding statement under penalty of perjury that the submission is accurate and complete, and it exposes the certifying official (and the company) to False Claims Act liability if the submission contains material misstatements.

How long do I need to keep records?

The record retention requirement for incurred cost submissions is more demanding than most contractors realize. The general rule under FAR 4.703 is that contractors must retain records for three years after final payment on the contract. But for incurred cost records, the three-year clock does not start at submission, and it does not start at the end of the contract. It starts when the final indirect cost rates for that fiscal year are settled.

Given the DCAA audit backlog, “settled” can mean years after the submission. If a contractor submits its fiscal year 2025 ICS in June 2026, and DCAA does not audit that year until 2030, and the final rates are not established until 2031, the three-year retention period runs until 2034. That is nine years after the fiscal year in question. For contractors with multiple open years and a slow-moving audit pipeline, record retention obligations can easily extend to ten years or more from the date the costs were incurred.

The practical implication: do not destroy any financial records (general ledger data, timesheets, vendor invoices, subcontractor files, travel receipts, payroll records, bank statements) for any fiscal year with open indirect cost rates. This applies even if the submission has been filed and you have not heard from DCAA. “Not audited yet” does not mean “cleared.” It means the records are still at risk of being requested.

Electronic record retention is acceptable and, for most contractors, the only practical approach given the volume of documentation and the length of the retention period. The records must be accessible, readable, and reproducible, meaning a box of hard drives in a closet does not count if no one can retrieve the data from them when DCAA sends its document request.

What is the certification requirement and what is the False Claims Act exposure?

The incurred cost submission must include a signed certification by an authorized company official (typically the CFO, controller, or president). The certification states that the proposal is current, accurate, and complete, and that the costs are in accordance with the cost principles of FAR Part 31 and the contractor’s CAS disclosure statement (if applicable).

This certification is not a mere cover-page formality. Under the False Claims Act (31 U.S.C. 3729), submitting a false claim to the government, or causing a false claim to be submitted, can result in treble damages (three times the government’s actual damages) plus per-claim penalties that are adjusted annually for inflation. A contractor that certifies an ICS containing costs it knew were unallowable, or costs it identified as unallowable but failed to exclude, has potential FCA exposure.

The FCA does not require intent to defraud. It covers claims submitted with “deliberate ignorance” or “reckless disregard” of their truth or falsity. A contractor that signs the certification without actually reviewing the submission, without scrubbing for unallowable costs, or without verifying that the numbers tie to the accounting system could be found to have acted with reckless disregard.

The practical protection against FCA exposure is straightforward: do the work. Scrub the indirect cost pools for unallowable costs before populating Schedule J. Verify that the ICS numbers reconcile to the general ledger. Review executive compensation against the FAR cap. Ensure the allocation bases are consistent with your established practices. Document the process you followed to prepare the submission. If you identify errors or omissions after submission, file a voluntary correction.

Can I submit the ICS myself, or do I need a CPA?

There is no regulatory requirement that a CPA prepare the incurred cost submission. The contractor is responsible for the submission, and anyone within the company (or an outside consultant) can prepare it. In practice, whether you need outside help depends on the complexity of your cost structure, the number of contracts, the number and type of indirect cost pools, and your internal team’s familiarity with FAR cost principles.

A contractor with a single overhead pool, a straightforward G&A pool, a handful of contracts, and a controller who has been through the process before can reasonably prepare the ICS in-house. A contractor with multiple indirect pools, CAS-covered contracts, significant subcontractor pass-throughs, facilities capital cost of money calculations, and executive compensation near the FAR cap is more likely to need experienced help.

The risk of a self-prepared submission is not the spreadsheet mechanics (the ICE model handles most of that). The risk is the judgment calls: identifying all unallowable costs, selecting appropriate allocation bases, handling unusual cost items (legal settlements, restructuring costs, idle facilities, IR&D and B&P costs), and ensuring CAS compliance. A submission that mishandles these areas will generate questioned costs at audit, and the cost of defending those findings often exceeds the cost of getting the submission right in the first place.

What about contractors with only fixed-price contracts?

Contractors whose entire portfolio consists of firm-fixed-price contracts generally are not required to submit an incurred cost proposal, because FFP contracts do not include the FAR 52.216-7 clause. The government pays the fixed price regardless of the contractor’s actual costs, so there is no indirect rate true-up to perform.

However, there are situations where a contractor with a mostly fixed-price portfolio still needs to file. If even one contract in the portfolio is cost-type, T&M, or labor-hour and includes FAR 52.216-7, the contractor must submit the ICS for the fiscal year. The submission will cover the contractor’s entire cost structure (because indirect rates apply across the whole business, not just the cost-type contracts), even though the final rate adjustment applies only to the flexibly priced contracts.

Contractors with both FFP and cost-type work should also be aware that the ICS gives DCAA visibility into the fixed-price contract costs through Schedule A. The auditor can use this information to assess whether the allocation of costs between FFP and cost-type contracts is appropriate, and whether costs that should be direct-charged to FFP contracts are instead being loaded into the indirect pools and allocated to cost-type work.

How does the incurred cost submission relate to my accounting system?

The ICS is a direct output of your DCAA-compliant accounting system. If your accounting system properly segregates direct and indirect costs, tracks costs by contract, accumulates indirect costs into defined pools, and applies consistent allocation bases, then preparing the ICS is a reporting exercise: extract the data, map it into the ICE model, verify the reconciliation, and submit.

If your accounting system does not do those things, preparing the ICS becomes a reconstruction exercise: pulling data from the general ledger, manually reclassifying costs that were booked to the wrong accounts, building the indirect pools from scratch, and attempting to reconcile the result to financial statements that were not structured to support the reconciliation. This is expensive, error-prone, and visible to DCAA. An auditor who sees an ICS that clearly was not produced from a compliant accounting system will question the system itself, which can trigger an accounting system audit, a disapproval finding, and payment withholding.

The connection between the accounting system and the ICS is why the indirect cost structure matters so much. If the chart of accounts, the cost pool definitions, and the allocation bases are set up correctly from the start, the ICS is a straightforward annual report. If they are not, the ICS becomes the annual event that exposes every structural problem in the accounting system.

What is the relationship between the ICS and contract closeout?

A cost-type contract cannot be closed out until the final indirect cost rates for every fiscal year of contract performance are established. If a contract ran from 2022 through 2025, the contractor must submit incurred cost proposals for fiscal years 2022, 2023, 2024, and 2025, and all four years must be audited (or settled by agreement) before the contract can be closed.

Contract closeout matters for several reasons. Open contracts continue to consume administrative resources (reporting, property management, status tracking). For contractors trying to sell the business or undergo an acquisition, open contracts with unsettled rates create contingent liabilities that affect the purchase price. And the government has its own incentive to close contracts: the Office of Inspector General and congressional oversight committees regularly pressure agencies to reduce their contract closeout backlogs, which means the contracting officer may push harder on contractors who have not submitted their ICS.

The FAR provides for quick-closeout procedures (FAR 42.708) on contracts where the unsettled indirect costs are not significant relative to the total contract value, allowing the contracting officer to negotiate final rates and close the contract without waiting for a full DCAA audit. Quick-closeout is available when the unsettled amount is below a threshold (typically $1,000,000 or less) and the contracting officer determines that a full audit is not cost-effective. Contractors with small cost-type contracts should ask their ACO about quick-closeout eligibility, because waiting years for a full audit on a $200,000 contract benefits no one.

What should I do next?

If you hold cost-type, T&M, or labor-hour contracts, the incurred cost submission is an annual obligation that does not go away and does not get easier to ignore. The best time to prepare is immediately after closing the books for the fiscal year, when the data is fresh and the staff who incurred the costs are still available to answer questions.

• DCAA-compliant accounting system, the system requirements that make the ICS a reporting exercise instead of a reconstruction project
• Government contract direct vs. indirect costs, the FAR 31 cost principles that determine what goes on Schedule J
• Construction job costing, the project-level cost tracking discipline that parallels the contract-level tracking required for the ICS
• Nonprofit Form 990, another annual compliance filing with public disclosure and certification requirements
• Law firm billing and collections, rate reconciliation and true-up mechanics in a different professional services context
• Unallowable costs under FAR 31.205, the complete list of costs that must appear on Schedule J and be excluded from every indirect rate computation in the submission
• Small business government contracting, set-aside programs and the incurred cost submission obligation that applies to small businesses holding cost-type contracts
• Government contractor timekeeping, the daily recording, supervisor approval, and total time accounting requirements that generate the labor cost data reported in the incurred cost submission

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.