RGCI-Is Six Months Best for Incurred Cost Proposals A New Game is Afoot

As we wrap up another hectic year of working with contractors to prepare, review and submit their Incurred Cost Proposals, it had us questioning…“Why do so many contractors wait until the last minute of their deadline to submit? Is there an advantage to submitting at the last minute or is submitting at the last minute actually a disadvantage?”

FAR 52.216-7(d)(2) requires contractors to submit an adequate final indirect cost rate proposal (ICP) to the administrative contracting officer (ACO) and auditor (most times DCAA) within six months from end of its fiscal year. Based on our client base, most contractors take the full six months, and many would like a little more time if they could get it.

In the “good old days” before DCAA worked off its backlog using low risk sampling, taking as much time as possible was a good strategy. Besides DCAA was not likely to even look at the ICP for years anyway. Ok – “good” is all based on how well or not so well your audits went.

The ICP World Today

Today contractors need to rethink their approach to ICP submission. The 2018 National Defense Authorization Act (NDAA) introduced new requirements for DCAA. DCAA is now required to complete its adequacy review of ICPs within 60 days of receipt. DCAA then must complete any audits within one year of the receipt date of an adequate ICP. DCAA is also required to augment its audit workforce by using independent public accountants (IPAs) to complete a substantial number of ICP audits. DCAA’s 2019 Report to Congress provided no data on DCAA meeting the 60-day adequacy requirement but did report that DCAA was able to meet the one-year requirement for 99% of ICPs DCAA received for DoD contractors. We all know that a major contributor to this success was due to not auditing a majority of the ICPs due to low-risk sampling (see next paragraph), but still, 99% were finalized. The 1% represents a small number of unusual situations, such as on-going investigation by Department of Justice or Defense Criminal Investigation Services. So, good job DCAA.

DCAA Changes

To accommodate these new requirements, DCAA has made some internal adjustments to the way it does business. For one, DCAA has adjusted the sampling percentages for low-risk ICPs – Not publicly available data. But based on DCAA’s 2019 Report to Congress showing that incurred cost audits results in very low percentage of audit exceptions, less than 1% ($2B Exceptions / $240B Examined = .8%), one would presume DCAA is reducing the number of ICPs pulled for audit. Secondly, DCAA redirects a significant amount of its staff to preforming ICP adequacy reviews in the months of July and August. Based on the ICP completion data from the 2019 Report to Congress, DCAA completed approximately 30% of its ICP assignments in the April, May, and June timeframe. It is very possible most of the assignments completed in April, May, and June are the audits DCAA needed complete within the one-year requirement. This tells us that it is very likely DCAA auditors are focused on completing audit and not performing adequacy reviews in April, May, and June.

So, is it to your Advantage to Submit your ICP Early?

As we see it there are a couple advantages:

  • During April, May, and June there are fewer DCAA eyes focused on your ICP but DCAA still needs to complete its adequacy review in 60-days.
  • If your one-year clock starts in April it is very likely that neither DCAA nor an IPA auditor will be assigned to audit your ICP until October, if it happens to be pulled for audit. DCAA is still very fiscal year focused with its resources and as we understand it the IPA outsourced audits are set in a similar way.

The only potential risk to an early submission is that the DCAA sampling pools will be smaller in April, May, and June. However, it appears the sample sizes are so small the risk should be offset.

Get the Clock Started

As we remember from the “troubled times” – the DCAA backlog years, time is not the friend of any ICP. Staff turns over and memories fade, so get the clock started to hopefully reduce the impact and possibly the length of any field work performed by the auditor. For example, if you submit an adequate ICP the beginning of April and DCAA (or IPA) do not start the audit until the end of October the field work is limited to four or five months. Hit the lottery and get a Government fiscal year with no budget for a couple months and the audit could be limited due to available time. Remember, DCAA does not want to report numbers to Congress reflecting that they were not compliant with the one-year requirement for auditing ICPs.

In conclusion, Government contractors may want to reconsider the timing for preparing and submitting ICPs. Not only does submitting early alleviate the stress and rush to make the six month deadline, when putting it off to the last minute, but it may also result in a more limited and compressed timeframe for ICP audit, which we think would only be beneficial to the contractor.

Redstone GCI is available to assist contractor’s in assessing their ICP development processes or direct assistance with the completion of an ICP. Redstone GCI assists contractors throughout the U.S. and internationally with understanding the Government’s expectations in applying FAR and CAS (remember some CAS is incorporated into FAR Part 31, Cost Principles).

White paper: DCAA Rejection of Incurred Cost Proposal Download Now

About Redstone GCI

Redstone Government Consultants are a team of the most senior industry veterans and the brightest new talent in the industry. Many have held senior government positions including leadership roles in the DCAA. Our new talents bring significant accounting and software experience along with fresh perspectives, inspiration and energy to our team. Through our leadership and combined experience, we provide a unique perspective, bringing both government and contractor proficiencies to bear and ensuring rock-solid government compliance for our clients.

Topics: Incurred Cost Submission, Contracts Administration, Defense Contractors, Incurred Cost Proposals, Cost-Type Contracts, FAR