Most businesses don’t wake up one day and decide it’s time to change their accounting support. The need shows up more subtly; decisions take If you are a government contractor working on cost reimbursable or time and material T&M contracts, chances are you have heard of the Incurred Cost Submission (ICS). If your contract includes FAR clause 52.216-7 Allowable Cost and Payment, submitting an ICS is not optional. This clause requires contractors to submit their final indirect cost rate proposal within six months after their fiscal year ends. The ICS is essentially the government’s way of saying, “Show us what you spent, and prove it makes sense.”
An Incurred Cost Submission can feel like assembling a 1,000 piece puzzle with no picture on the box. The ICS includes multiple schedules that must tie back to your accounting records and your job cost system. If your books are not clean, the ICS will make that very obvious, very quickly. That is why many contractors end up scrambling right when the deadline is approaching.
At Cheryl Jefferson and Associates, we help government contractors stay audit ready and FAR compliant all year long. We work with small businesses, 8(a) firms, and established contractors in industries like defense, IT, and professional services in STEM. Our goal is to make compliance less stressful and a lot more manageable. Think of us as your accounting cleanup crew before the auditors show up.
Below are the most common Incurred Cost Submission mistakes and how you can avoid them before they turn into expensive headaches.
Job Cost Errors That Create ICS Problems
Job cost accounting is the backbone of your ICS. If job costs are wrong, the indirect rates will be wrong, and your submission will not hold up under review. Contractors must classify costs correctly as direct, indirect, fringe, or unallowable. When those buckets get mixed up, everything downstream gets messy.
One of the most common issues is failing to separate allowable and unallowable costs. FAR Part 31 outlines cost principles and makes it clear that unallowable costs should not be included in indirect pools. These expenses might include entertainment, lobbying, fines, or certain travel costs. If unallowable costs end up in the wrong place, your indirect rates may be inflated and penalties may apply.
Another big issue is when the job cost ledger does not reconcile to the general ledger. This is the accounting version of your left hand not talking to your right hand. DCAA and other reviewers want to see that your job cost reports tie back to the financial statements. If they do not, it raises questions about the reliability of your accounting system.
Some of the most common reconciliation errors include not assigning direct costs to a specific job, posting costs to a customer instead of a contract number, or accidentally charging indirect expenses to direct job codes. These errors distort indirect cost pools and can impact key ICS schedules like Schedule G. The longer these issues go unnoticed, the harder they are to fix later. Year end is not the time you want to be untangling months of miscodes.
Documentation is another area where contractors run into trouble. DCAA wants to see proof behind the numbers, not just a spreadsheet that looks nice. Payroll records, timekeeping reports, vendor invoices, and allocation bases must support the costs claimed. If the backup is missing, auditors may label costs as questioned or determine the submission is inadequate.
Invoicing Errors That Show Up on Schedule I
Most growing businesses don’t struggle with cash because revenue is not successful. The real issue is visibility. Money is coming in; money is going oInvoicing mistakes are extremely common, especially for contractors managing multiple contract types. If your invoices do not align with allowable costs and billing requirements, Schedule I will highlight it. Schedule I reconciles what you billed the government with what you actually incurred. It is basically the “let’s see if your math matches reality” schedule.
Time and material contracts can be tricky because they often require billing at negotiated labor rates. Contractors sometimes bill using actual payroll rates instead of the negotiated contract rates. This creates discrepancies that must be explained and reconciled later. It is a common reason contractors see large adjustments in their incurred cost submission.
Another issue is lump sum labor billing. Many agencies expect labor to be billed by labor category, rate, and hours worked. If invoices are vague or summarized too heavily, it can trigger questions. When the government cannot clearly see how you calculated your labor charges, you can expect follow up requests.
Cost reimbursable contracts have their own billing challenges. These contracts require billing based only on allowable costs incurred, not estimates or assumptions. If provisional billing rates are not monitored, contractors can end up with major differences once final indirect rates are calculated. Large year end true ups can disrupt cash flow and create unwanted attention.
Overbilling occurs when cumulative billings exceed allowable costs based on final indirect rates. Underbilling occurs when contractors have billed less than what is allowable and may be owed additional reimbursement. Either way, it is not fun to discover this late in the year. Staying on top of billing rates throughout the year helps reduce these surprises.
How to Avoid ICS Mistakes Without Losing Your Mind
The best way to avoid Incurred Cost Submission problems is to treat compliance like an ongoing process, not a last minute emergency. Monthly reconciliations between job cost reports and the general ledger can catch errors early. Regular reviews of cost coding help ensure costs are being allocated correctly. A little cleanup each month prevents major disasters later.
Contractors should also have clear internal policies for allowable and unallowable costs. Everyone involved in expense coding should understand FAR Part 31 rules. Timekeeping practices should be consistent, documented, and enforced. Strong internal controls make your accounting system more reliable and your ICS much easier to prepare.
At CJA, our subscription services help contractors build systems that support FAR and DCAA expectations. We assist with indirect rate calculations, billing rate monitoring, documentation practices, and full ICS preparation. Our goal is to help contractors stay audit ready and reduce risk before it becomes an expensive problem. When your accounting system is strong, your ICS becomes a routine process instead of a stressful event. his hire if margins tighten?” become common, the issue isn’t ambition, it’s that forecasting hasn’t evolved alongside the business.
