How to Avoid a DCAA Notification of Inadequacy on Your Incurred Cost Submission

Government contractors with cost-reimbursable and time-and-materials contracts face a hard annual deadline that doesn’t move and doesn’t forgive a rushed approach. The incurred cost submission (ICS) is due June 30 for calendar-year contractors, and the consequences of a late or inadequate filing—withheld payments, unilateral rate determinations, delayed final rate settlements—are concrete and documented. The contractors who move through this process cleanly aren’t the ones who scramble in May. They’re the ones who treat the ICS as a year-round discipline and catch problems before they compound.

What is an incurred cost submission, and who is required to file one?

An incurred cost submission is an annual filing required under FAR clause 52.216-7, Allowable Cost and Payment. It reconciles the provisional billing rates a contractor used throughout the fiscal year against the actual indirect costs incurred, establishing the contractor’s final indirect cost rates for that period.

Any government contractor whose cost-reimbursable or time-and-materials contract includes FAR 52.216-7 is required to file. The ICS isn’t optional—it’s a contractual obligation. The submission documents all direct and indirect costs for the fiscal year, supports final rate calculations, and provides the government with the data it needs to determine whether you overbilled or underbilled relative to your provisional rates. If you overbilled, you owe the government an adjustment. If you underbilled, the government owes you one. Final rate settlement can’t happen without an adequate, accepted submission.

When is the incurred cost submission due?

For calendar-year contractors, the ICS deadline is June 30—six months after the December 31 fiscal year end, as required by FAR 52.216-7. Contractors with a different fiscal year-end have a deadline six months after their own year-end.

Extensions are available, but only under exceptional circumstances and with a written request submitted to the contracting officer before the deadline. We’ve seen contractors assume extensions are routine. They’re not. Missing the deadline without an approved extension puts you at risk of withheld payments, heightened audit scrutiny, and unilateral rate determinations—meaning the government imposes final rates on your contracts rather than negotiating them with you. That’s a position no contractor wants to be in.

What makes an incurred cost submission “adequate” under DCAA standards?

The word “adequate” has a specific meaning in this context. Before your ICS enters the audit queue, the DCAA conducts an adequacy review—typically within the first 60 days after submission—using its published Incurred Cost Submission Adequacy Checklist. Auditors verify that all required schedules are present, reconciliations tie to the general ledger, and documentation is complete.

If your submission doesn’t pass that review, the DCAA issues a Notification of Inadequacy. You must then revise and resubmit before the audit process can begin. That delay pushes back your final rate settlement and extends the period of uncertainty about what you owe the government—or what the government owes you. We’ve seen otherwise solid submissions rejected because a schedule was outdated or a reconciliation didn’t tie. The adequacy review is unforgiving of mechanics.

What is the DCAA ICE model, and why does it matter?

The Incurred Cost Electronically (ICE) model is the DCAA’s standardized Excel-based submission template, available for download directly from the DCAA’s website at dcaa.mil. It contains the required schedules—covering indirect cost rate calculations, direct costs by contract, payroll reconciliations, subcontract listings, and certification of final indirect costs—structured in the format DCAA auditors expect.

Using the current version of the ICE model matters more than most contractors realize. The model changes, and submitting a prior year’s version is one of the most common reasons for a Notification of Inadequacy. Downloading a fresh copy from the DCAA’s site each year before you begin preparing your submission is a simple step that eliminates an avoidable rejection.

What are indirect cost pools, and why do they need to match how your business operates?

Indirect cost pools are the categories your business uses to accumulate costs that can’t be directly charged to a specific contract—typically fringe benefits, overhead, and general and administrative expenses. The pools form the foundation of your indirect cost rate calculations, which in turn drive what you bill the government provisionally throughout the year and what you settle at year-end.

The critical issue is alignment. Your pool structure should reflect how your business actually operates. If your contract mix shifted, you added a service line, or your overhead categories reorganized, a pool structure that doesn’t reflect those changes will generate 12 months of misaligned cost data and a reconciliation problem at ICS time. The beginning of the year is the right time to walk through your pool structure and confirm it still matches reality, not June. If you’re questioning whether your underlying DCAA-compliant accounting system can support that alignment, that’s worth addressing before another year of data accumulates.

What’s the difference between provisional billing rates and final indirect cost rates?

Provisional billing rates are the estimated indirect cost rates you use to invoice the government throughout the year. They’re set at the beginning of the fiscal year based on your projected costs and are approved or negotiated with the contracting officer. Final indirect cost rates are determined after the year closes, based on your actual costs—those are what the ICS establishes.

The gap between provisional and final rates is resolved at rate settlement. If your final rates come in meaningfully higher or lower than your provisional rates, the difference is settled through an adjustment. FAR requires that provisional rates be as close as possible to the final rates. If last year’s rate settlement showed a significant divergence—for example, billing at 45% but settling at 38%—this year’s provisional rates should move closer to reality before you begin invoicing. The math you defer at the start of the year becomes the reconciliation you scramble through at year-end.

What are unallowable costs, and how do they affect the incurred cost submission?

Unallowable costs are categories of expense that FAR Part 31 prohibits from inclusion in government contract billings and indirect cost pools. Common examples include entertainment, lobbying expenses, fines, and penalties. These costs can’t be recovered through either direct charges or indirect rates applied to government contracts.

The ICS requires you to identify, segregate, and exclude all unallowable costs before you submit. FAR carries penalties for contractors who include expressly unallowable costs in their indirect cost pool proposals—and the DCAA’s adequacy review and subsequent audit will look for them. The practical discipline isn’t waiting until December to do this pass. Reviewing for unallowable costs quarterly—particularly in Q2 when you’ve got enough actual data to make the review meaningful—gives you time to reclassify or document without the pressure of a year-end close bearing down on you.

What quarterly steps should government contractors take to prepare for the ICS deadline?

The contractors who submit clean, adequate ICS packages on time are the ones who treat preparation as a year-round discipline rather than a May scramble. The work breaks down naturally by quarter.

In Q1, walk through your indirect cost pool structure and confirm it reflects how your business actually operated last year. Compare your provisional billing rates to last year’s final settlement and adjust if there was a significant divergence. This is also the time to confirm that your SF 1408 pre-award accounting system requirements are still being met if you’re early in your government contracting lifecycle.

In Q2, run a real comparison of your year-to-date indirect rates against what you’re billing. If the gap is widening, that difference will surface at rate settlement—better to see it now. This is also the right time to clean up unallowable costs under FAR Part 31, while you still have time to reclassify them without year-end pressure.

In Q3, begin drafting the ICS schedules that take the most time—indirect cost pool detail, allocation base documentation, and your preliminary contract listing. Review your timekeeping records for the year. Labor costs are a significant component of indirect pools, and gaps in labor documentation—such as corrections not posted or timecards entered incorrectly—are far less expensive to address in September than in December. The DCAA post-award accounting system audit has strict requirements for how labor costs must be documented and approved, and those same standards apply here.

In Q4, complete your unallowable cost review before the fiscal year closes. Collect all year-end vouchers and reconcile them to your books. Reconcile your financial statements to your trial balance and document any gaps between GAAP-basis reporting and your cost accounting treatment. Reconcile your IRS Form 941 quarterly payroll filings to your labor cost records. Then download the current ICE model directly from DCAA’s site—not last year’s version.

What happens if the incurred cost submission is late or rejected for inadequacy?

The consequences are specific and escalate with time. A submission that fails the DCAA’s adequacy review triggers a Notification of Inadequacy, requiring revision and resubmission before the audit can begin, thereby delaying your final rate settlement and extending uncertainty about your contract closeouts.

A submission that’s missing entirely—or more than six months overdue—creates a different set of problems. The DCAA may recommend a unilateral rate determination if a submission is significantly overdue, meaning the contracting officer will impose final indirect cost rates rather than negotiate them with you. Those imposed rates are typically unfavorable. Missing the deadline also signals potential audit risk to the DCAA, which can increase scrutiny across your accounting system more broadly. If that scrutiny reveals deeper systemic issues, an accounting system conversion may be necessary before your compliance posture can be restored.

How can a government contracting CPA help with incurred cost submission preparation?

The ICS involves reconciling multiple interrelated schedules—indirect rate pools, labor distribution records, payroll filings, general ledger data, contract cost detail—against each other and against your billing history. For contractors without dedicated government accounting staff, that reconciliation work compounds quickly, and errors are easy to miss.

Our government contracting team works with contractors through every stage of ICS preparation: reviewing indirect cost pool structures, screening for unallowable costs, preparing ICE model schedules, and supporting you through the DCAA’s adequacy review and audit process. If you want to get ahead of your June 30 deadline or need your indirect rate structure reviewed, contact us to discuss where you stand.

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