Many federal contractors facing significant COVID-19 related hardships have either already obtained a Paycheck Protection Program (PPP) Loan or are somewhere in the process of applying for one.1 Understandably, the forgiveness component of PPP Loans is particularly attractive to all potential recipients—including federal contractors. However, federal contractors should take note that it is clear now from recently issued Department of Defense (DOD) guidance that PPP Loan forgiveness may be more trouble than it’s worth.2 More specifically, as we discuss below, the new guidance determines that, in certain circumstances, a federal contractor’s PPP Loan forgiveness must be credited back to the government.
We encourage our readers to remember that each federal contractor is unique—having various types of contracts, working for different agencies, etc.—but they all have one thing in common: the privilege of working with the federal government is inextricably linked to their obligation to follow the Federal Acquisition Regulation (FAR). And in the case of PPP Loan forgiveness, no reading of the PPP fairly describes the program itself as responsible for the disparate treatment of federal contractors, which we discuss below; rather, the agreed-upon terms and conditions of the parties’ contract, in conjunction with the FAR, determine how PPP Loan forgiveness plays out for federal contractors.
Finally, we urge our audience here, who may have received or anticipate receiving PPP Loan relief, to consult with a legal professional so that you: (1) have a comprehensive, well-thought-out plan in place to ensure that, while the FAR precludes any windfall, you are at least made whole, and (2) take all prudent steps necessary to prepare you for any post-PPP Loan scrutiny in a government audit.
Briefly, the FAR is a collection of provisions, published within the Code of Federal Regulations, which provide rules for contracting with the federal government. Significantly, “[t]he FAR is the primary regulation for use by all executive agencies in their acquisition of supplies and services with appropriated funds.”3 Both federal government agencies and government contractors are subject to FAR rules and policies.
FAR part 31, Contract Cost Principle and Procedures, contains two especially relevant provisions, clarifying the role of credits in determining the composition of total cost of a contract.
First, according to FAR 31.201-1(a):
The total cost, including standard costs properly adjusted for applicable variances, of a contract is the sum of the direct and indirect costs allocable to the contract, incurred or to be incurred, plus any allocable cost of money pursuant to 31.205–10, less any allocable credits. In ascertaining what constitutes a cost, any generally accepted method of determining or estimating costs that is equitable and is consistently applied may be used.”
Note that the subtraction of “allocable credits” is clearly built into the formula for arriving at the total cost of a contract.
Secondly, according to FAR 31.201-5:
The applicable portion of any income, rebate, allowance, or other credit relating to any allowable cost and received by or accruing to the contractor shall be credited to the Government either as a cost reduction or by cash refund. See 31.205-6(j)(3) for rules governing refund or credit to the Government associated with pension adjustments and asset reversions.”
Thus, in the case of a credit received by a contractor which is related to any allocable cost, such credit must be credited back to the Government. Essentially, if you are already receiving payment for costs of labor and other indirect costs such as rent, you cannot double-dip and receive PPP Loan forgiveness for these same expenses.
Moreover, in the context of cost-reimbursement contracts, FAR 52.216-7(h)(2) provides that:
The Contractor shall pay to the Government any refunds, rebates, credits, or other amounts (including interest, if any) accruing to or received by the Contractor or any assignee under this contract, to the extent that those amounts are properly allocable to costs for which the Contractor has been reimbursed by the Government. Reasonable expenses incurred by the Contractor for securing refunds, rebates, credits, or other amounts shall be allowable costs if approved by the Contracting Officer.”
As with most of the COVID-19 relief provisions and the intended recipients, confusion remains over many issues applicable to federal contractors; however, we now know that a much-anticipated question regarding PPP Loan forgiveness has an answer.
On April 17, 2020, the DOD updated its Frequently Asked Questions (FAQs) as follows:
Q23: Please confirm that neither the FAR Credits provision, FAR 31.201-5, the credit provision in the Allowable Cost and Payment Clause, FAR 52.216- 7(h)(2), nor any other FAR or DFARS provision imposes an obligation on a contractor to credit any amount of [PPP] loan that is forgiven to any flexibly priced government contract or subcontract. We consider a contractor that has received a PPP loan will use the loan proceeds as it would any other funds in its corporate treasury to pay costs of doing business.”
A23: We disagree, any PPP loan that has been forgiven necessarily can be treated as though it belongs to the company to use as it pleases. FAR 31.201-1, Composition of Total Cost, states that total cost is the sum of the direct and indirect costs allocable to the contract less any allocable credits. Accordingly, to the extent that PPP credits are allocable to costs allowed under a contract, the Government should receive a credit or a reduction in billing for any PPP loans or loan payments that are forgiven. Furthermore, any reimbursements, tax credits, etc. from whatever source that contractors receive for any COVID-19 Paid Leave costs should be treated in a similar manner and disclosed to the government. (Updated: April 24, 2020)4
This means that the DOD has determined that when a federal contractor experiences PPP Loan forgiveness, the amount of that forgiveness becomes an allowable cost credit. As an allowable cost credit, FAR credit provisions dictate that the contractor must give such credit back to the government.
For many federal contractors, the knowledge that PPP Loan forgiveness must be credited back to the government will be a deterrent to accepting PPP Loans. Remember, the burden is already on the federal contractor to keep and maintain all records and substantiation of costs incurred and allocability under a contract sans PPP Loan funds. Factoring in the time and costs involved in the PPP Loan application process and the implementation of practices and oversight to ensure forgiveness that will ultimately be handed back to the government—just may not be worth it.
On the other hand, for some federal contractors, there will be a much greater benefit in receiving the funds to support employment during the pandemic which outweighs the drawbacks with crediting forgiveness back. For instance, if you are a contractor providing live events—PPP Loan relief may be best way to keep you afloat when you are completely at loss being entirely precluded from your operations during the pandemic. Or perhaps, you are performing a mix of commercial and government contract work—again, PPP Loan relief may be the best option.
For some contractors, many direct expenses are being demanded due to COVID-19 (like costs for acquiring/providing sanitizer for instance) that were never contemplated in their initial contract. In a situation like that for any changes, you should urgently seek a modification of your contract.
Additionally, federal contractors should consider that if they receive PPP Loan forgiveness, they may need to adjust their overhead rate to reflect the impact on non-direct labor and direct labor costs. With the potential impact of PPP funds on the overhead rate in mind, federal contractors may want to re-calculate for the COVID-19 impact changes to direct, indirect, and overhead costs, such as:
We now know that the DOD has determined that when a federal contractor experiences PPP Loan forgiveness it triggers an allowable cost which the contractor must give back to the government. Federal contractors must engage in a careful cost-benefit analysis now, to determine whether it’s worth their time and effort to acquire PPP Loan relief.
Again, we encourage you to seek experienced counsel to help you in these decisions and ensure that whatever you decide, you are made whole in the end.
Federal contractors may also want to consider eligibility for CARES Act Section 3610 relief-available to maintain a “ready state.” You can read more about it here.