The Incurred Cost Submission Deadline is Fast Approaching
The deadline for submitting your Incurred Cost Submission is 6 months after your official yearly close.
For those who closed your books on Dec 31, 2018, the deadline is June 30, 2019 and it will be here before you know it. Are you ready to comply with the Allowable Cost and Payment clause (FAR 52.216-7)?
The Compliance Corner:
Tips from Rich Wilkinson on Incurred Cost Submission
People are used to thinking about the incurred cost submission schedules in two categories: mandatory and optional schedules. That has not been the case since 2011. The set of the schedules are mandatory and must be submitted with your initial submission. The second set of schedules are no longer optional, they are supplementary, and they must be provided at time of audit. Beware of this TRAP! If you wait until the time of the audit, which could be 3-5 years from now, those schedules will be hard to produce as you may have implemented system changes and some documents like Board of Directors Minutes might be hard to find. Do the schedules NOW, even if you don’t submit them. Just hold on to them until the audit.
When I talk to small companies about ICS and DCAA compliance, there are 2 responses that make me cringe:
As far as the requirement is concerned, if all your contracts are fixed price there is none. But “Allowable Cost & Payment” is the clause that triggers the submission and it is also in all T&M contracts. If you have even one T&M contract and have applied G&A to the non-labor costs on your invoices, you must do an Incurred Cost Submission to finalize your G&A rate.
Commonly Questioned Costs
As you prepare your submission and to support the subsequent audit, be thinking about these commonly questioned costs.
Consulting – DCAA looks for work product in the file for all consulting invoices you paid. If you hired a consultant, direct or indirect, they will require documentation of the work that was done. Review anything in your ledger you have called ‘consulting’ and make sure you have work product and justification. The invoice is NOT enough.
Travel – Make sure you are complying with per diem rates for your region. In the audit they will spot check your expenses by pulling a sample of reports and pulling time cards for the same people. Travel costs and expense statements must match. In other words, the project charged for the travel costs must match the time entered for the travel dates. If they do not match, DCAA will almost certainly expand the sample to all reports and will often question both the time and the expenses that do not match. If there are prevalent issues, DCAA could question you’re the integrity of either the timekeeping or expense reporting systems (or both). We have seen companies lose their accounting system approval over this very issue.
Executive Compensation – Reporting of executive compensation is mandatory (schedule B of the Supplemental Schedules). The compensation cap for all contractor employees (not just executives) for 2018 is $525K, but keep in mind that executive compensation must be reasonable for the company size. If you are a small Government Contractor, DCAA would consider it unreasonable for any employee to earn up to the ceiling. They will use salary surveys and their own files to develop a position on what would be reasonable for a firm of your size. One rule of thumb is that under 500 employees, DCAA will start to choke at about $200K. Major contractors with over 5000 employees could incur compensation expense above the cap and would have to treat the excess as unallowable. Also keep in mind that the cap applies to ALL compensation, not just salary. The cost of benefits and deferred compensation must be taken into consideration.
Bonuses – There must be an established bonus plan. It does not necessarily have to be written. It can be established based on past practices, proclamations, group emails, etc., or anything else that establishes an expectation by employees that a bonus will be paid. The safest way to ensure allowability of bonus payments is to document the bonus plan in writing.
Paid Time Off – PTO will continue to be more of an issue than previous years because of the paid sick leave mandate that was effective 1/1/2017. DCAA does not audit leave entitlements, but if there is a finding that your company is not paying sick leave in accordance with the requirement, DCAA will make a referral to the Department of Labor. You could then see DOL investigators shortly thereafter. Keep in mind that the DOL has interpreted the entitlement as applying to ALL employees charging to a service contract (containing the clause 52.222-41, Service Labor Standards) and not just those employees subject to the wage determination of the contract.
Helpful DCAA Resources:
Don't Let the Incurred Cost Submission Sneak Up On You!
Don’t let the Cost Incurred Submission surprise your executive team with questioned costs or even penalties. Think about these tips and adjust your practices or submission to minimize the risks. Having a tool like Unanet would help dramatically with documentation and make your audit smoother, easier, and shorter.