The Coronavirus Aid, Relief, and Economic Security (CARES) Act administered trillions of dollars to assist small businesses. This funding included $349 billion earmarked for PPP, with an additional $310 billion authorized in the second round. These loans are eligible for forgiveness as long as the money is spent for the intended purposes of meeting qualified expenditures (payroll costs, rent, interest, mortgage interest) within the 24 weeks following the disbursement of the funds to the business.
The PPP loan funds assisted many businesses but soon became an issue for government contractors. Since initial guidance indicated that the use of the funds for the same expenses that a government contractor was getting paid for under government contracts would be considered “double-dipping,” the PPP loan funds spent in this way would have to be returned.
On December 11, 2020, the DCAA issued a Memorandum for Regional Directors, Corporate Audit Directors, and Assistant Directors (20-PIC-006(R)), titled Audit Alert on Coronavirus Legislation and Regulations. The guidance stated:
- Under Section 1102, employee eligible wages/salaries are limited to $100,000, which should be prorated based on the period involved.
- Under Section 1106, the PPP loan qualifies for forgiveness if the funds are for:
- Payroll costs (at least 60% of the forgiven amount must be for payroll)
- Interest on mortgages
In the memorandum Q&A section, DCAA indicated that the impact on incurred cost submissions would depend on fund utilization. Contractors can decide to utilize the CARES funds to pay employees for work on commercial customers. In this scenario, forgiven loan amounts used to pay employees working on commercial efforts would not create a credit or refund to the government in the applicable incurred cost submission. Contractors must understand this when choosing how to apply the CARES funds.
On December 20, 2020, the DCAA issued a Memorandum to Auditors before revising it on January 28, 2021, to incorporate the FAR 31.201-5 credit guidance. DCAA directed the following:
- The amount of PPP loan forgiven will apply as a credit or cash refund in how the government contractor used the PPP loan proceeds. If the PPP loan proceeds were used to pay utilities and included in an indirect cost pool, that cost pool should be credited in the period the PPP loan was forgiven.
- A credit is not required for PPP loans used for costs allocable to Firm-Fixed-Price (FFP) contracts.
- Forward Pricing – For incurred costs in calendar years 2020 and 2021, used as a basis of proposals estimates, auditors must understand and determine how those incurred costs were affected by the CARES Act and the effect on future estimates. Government contractors should include cost or pricing data reflecting the prospective cost changes on future business operations. COVID-19 does not eliminate the responsibility of the government contractor to provide sufficient support for its estimates.
On March 23, 2021, the House Small Business, Subcommittee on Contracting and Infrastructure held a hearing entitled, “The Interaction between the Paycheck Protection Program and Federal Acquisition Regulations (FAR): What It Means for Government Contractors.” The hearing centered on PPP loan forgiveness FAR 31.201-5 “Credits” and its effect on government contractors having cost-type contracts.
FAR 31.201-5 states that “the applicable portion of any income, rebate, allowance, or other credit relating to any allowable cost and received by or accruing to the government contractor shall be credited to the government, either as a cost reduction or by cash refund.” This FAR clause applies to
- Pricing of cost-type contracts and contract modifications for cost analysis,
- establishing reimbursements for cost-type contracts and cost reimbursement for time-and-materials contracts, and
- negotiation of indirect rates.
The DOD states that under this rule, government contractors would have to credit back any costs to the government that were both charged to the government and put on the PPP loan application for forgiveness.
Forward pricing rate agreements, forward pricing rate recommendations, or audit reports on forward pricing rates that were final before COVID-19 should be updated if it did not consider the potential impact of the CARES Act and COVID-19 and the amount is significant.
What is important for government contractors to do now?
- Track the use of PPP loan funds and accumulate documentation to support loan forgiveness.
- Prior to submitting the loan forgiveness paperwork, analyze the best strategy for which costs you wish to request reimbursement.
- Ensure the appropriate application of credits in either the year of forgiveness or in the previous year.
- Contact your contracting officer if the forgiveness occurred in 2020 and you did not properly reflect this in your rate calculations so they can determine the best course of action to get the issue corrected.
- Make sure the incurred cost report also accurately reflects the credits in the appropriate year.
For government contractors, properly applying a PPP loan to qualified funds can often be confusing to navigate. By engaging with a team of experienced advisors, you’ll gain deeper insight into how to properly submit and apply funds to eligible expenses. For further information and guidance with your PPP loan, please reach out to CRI’s team of government contracting professionals.