The latest updates and analysis from Morrison Foerster
April 01, 2021 - Small Business, Coronavirus

All Is Not Forgiven: PPP Forgiveness and Credits

SBA Issues Final Rule on Appeals Process for PPP Loan Review Decisions

On March 23, 2021, The House Small Business, Subcommittee on Contracting and Infrastructure held a remote hearing titled:  “The Interaction Between the Paycheck Protection Program and Federal Acquisition Regulations:  What It Means for Government Contractors.”  The hearing focused specifically on the interplay between Paycheck Protection Program (PPP) loan forgiveness and Federal Acquisition Regulation (FAR) 31.201-5 “Credits,” and how that interplay impacts federal contractors that perform cost-type contracts.  This meeting highlights an area where contractors have, at best, incomplete guidance.  We will continue tracking these issues as new guidance is issued.

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 contractor shall be credited to the Government either as a cost reduction or by cash refund.”  This provision applies to: (1) the pricing of negotiated contracts and contract modifications whenever cost analysis is performed, (2)  determining reimbursable costs under cost reimbursement contracts and the cost-reimbursement portion of time-and-materials contracts,[1]  and (3) the negotiation of indirect rates.[2]

Thus, to the extent PPP loan proceeds are used by the contractor to cover direct or indirect costs subject to FAR 31.201-5 (e.g., an allowable cost reimbursed by the Government under a cost reimbursement contract), and the loan is subsequently forgiven, the Government is entitled to a credit.  Specifically, the Department of Defense (DoD) has clarified that, to the extent PPP loan proceeds were used to pay for costs otherwise reimbursed under a government contract, and those PPP loan proceeds were ultimately forgiven, then a credit is necessary pursuant to FAR 31.201-5.

On December 20, 2020, the Defense Contract Audit Agency (DCAA) issued guidance to its auditors, as later revised on January 28, 2021, regarding the treatment of the FAR 31.201-5 credit.  As part of that guidance, DCAA instructed the following:

  • The amount of PPP loan forgiven will apply as a credit or cash refund in the same manner the PPP loan proceeds were used by the contractor. If, for example, the PPP loan proceeds were used to pay rent, and rent is 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 loan proceeds used for costs allocable to firm-fixed-price (FFP) contracts. For example, no credit is required for forgiven PPP loan proceeds used to pay employees for work performed on commercial contracts or FFP contracts not subject to the FAR cost principles.
  • With regard to forward pricing, to the extent costs incurred during calendar years 2020 and 2021 are used as part of the basis of estimate for proposals, auditors need to understand how those incurred costs were affected by the Coronavirus Aid, Relief, and Economic Security (CARES) Act as well as the effect on future estimates.

The House Subcommittee noted it had heard from some small businesses advocating for the waiver of the FAR credits clause to forgiven PPP loans.  Understandably, those small businesses complained that application of such a credit is contrary to the intent of the PPP loan to the extent the loan is not truly forgiven if the Government effectively requires repayment of the loan through credits.    Id.

This hearing may have been triggered by draft Department of Transportation (DOT) guidance communicated on January 22, 2021. Carlos A. Penin, P.E. President, CAP Engineering, testified at the hearing that this guidance called for a contractor’s overhead rate to be reduced by the amount of PPP loan forgiveness granted to engineering firms.  Mr. Penin further testified that a reduction to the overhead rate would, in turn, reduce future billing rates and, for many engineering firms, cause a net loss greater than the PPP forgiveness.  Robin S. Greenleaf, P.E., speaking on behalf of the American Council of Engineering Companies, echoed Mr. Penin’s concern, explaining that “[t]he audited indirect cost rate is used for a one-year accounting period but is also the rate used for the duration of the a contract, which is often multi-year.”  Ms. Greenleaf noted that DOT work is generally done under multi-year contracts that lock in the billing rate.

In response to the concerns raised by the small business contractors, the Subcommittee determined that, “[a]t a minimum, it will be important to ensure consistency in the application of the credits clause across agencies so that it doesn’t result in an improper advantage to the government and contractor’s wellbeing is protected.”  The Subcommittee apparently recognized that guidance to reduce a contractor’s overhead rate for the amount of PPP loan forgiveness, and to apply those reduced rates over the life of a multi-year contract was contrary to the FAR 31.205-1 requirement that the “applicable portion” of a credit relating to any allowable cost should be credited to the Government.

On March 24, 2021, the day following the House hearing, the DOT Federal Highway Administration (FHWA) issued a memorandum regarding the “Treatment of Paycheck Protection Program Funds for Architectural and Engineering Consultants Guidance.”  The memorandum recognizes that PPP loan proceeds were intended to “allow businesses to maintain payroll costs, keep employees from loss of work during the coronavirus disease 2019 (COVID-19) pandemic, and cover necessary overhead to continue business operations.”    The memorandum goes on to state, however, that the PPP “was not enacted to provide an economic windfall to the employer (e.g., where costs are reimbursed by the Federal government under a federally funded contract and the PPP loan is also forgiven by the SBA).”  Id.  Therefore, neither the DOT nor DOD guidance waived the credits provision.

The memorandum applies to architectural and engineering services provided under Federal-aid or Federal Lands Highway (FLH) program funded contracts where the consultant seeks partial or complete PPP loan forgiveness.  The guidance recognizes that those contracts include a provision prohibiting unauthorized donations to a project.  Thus, the DOT guidance requires consultants to seek reimbursement from the agency for direct project costs and provides that a consultant cannot use PPP loan proceeds to pay direct project costs even if the costs are not billed to the federally funded project.  The DOT guidance follows:

  • Architectural and engineering (A&E) consultants cannot use PPP loan proceeds to pay for the direct costs on a Federal-aid or FLH-funded contract.
  • A&E consultants cannot bill direct costs and use PPP loan proceeds to fund the compensation costs of direct labor and other direct costs dedicated to federally funded contracts. This practice results in an improper payment for billing the Federal government twice.  A consultant may use the PPP loan as a working capital loan to pay the direct costs of a contract, but must submit a timely claim for reimbursement to the contracting agency, and complete the proper and necessary adjustments to their accounting records once the reimbursement is received.
  • PPP loan proceeds cannot be used to pay the direct project costs even if those costs are not billed to the federally funded contract. This action has the effect of a donation to the project, which was not authorized and conflicts with the terms and conditions of the contract.  A&E consultants should continue to allocate and invoice both direct and indirect costs in accordance with contract terms.
  • A&E consultants may use PPP loan proceeds to pay indirect costs, but an adjustment to the indirect cost rate is required in accordance with [FAR 31.201-5].
  • A&E consultants must adjust their indirect cost rates for PPP funds forgiven to provide the corresponding credit to the Federal government. All credits to indirect costs should be reflected in the subsequent adjusted indirect cost rate.  If an A&E consultant can apply the appropriate indirect cost credit on existing contracts, the contracting agency may allow consultant to do so.
  • All applicable credits (or loan recoveries) are to be applied based on an equitable allocation to all benefitting cost objectives in accordance with [FAR 31.201-4]. The indirect cost rate credit should only be applied until the credit is recovered fully.  If adjustments to an A&E consultant’s indirect cost rate has no bearing on the award or contract type (e.g., firm fixed price or lump sum contract), adjustment to that contract would not be required.

Id. at 2.

The DOT FHWA guidance permits the consultant to use PPP loan proceeds as a working capital loan to pay the direct costs of a contract but the consultant must submit a timely claim to the agency for reimbursement of the direct costs and, upon receiving reimbursement from the agency, complete necessary adjustments to the accounting records.  The consultant does not have the option of using the PPP loan proceeds to pay direct costs and not seek reimbursement from the agency.

The DOT FHWA guidance requires consultants to adjust their indirect cost rates to the extent forgiven PPP loan proceeds were used to pay indirect costs.  The guidance does not, however, require the use of the reduced indirect rates for the entirety of a multi-year contract in that it states that the reduced indirect cost rate should only be applied until the credit is fully recovered.  Thus, consultants may be required to effectively repay the PPP loan through reduced indirect rates but they will not be required to repay the Government more than the PPP loan amount.

This hearing and the DOT FHWA guidance, which appears to have triggered it are unlikely to be the last word on this topic as Congress balances the requirements of the FAR credits provision with the desire to provide government contractors the same benefit from PPP forgiveness as their commercial counterparts.  We will continue to monitor guidance in this area.

[1] FAR 31.201-5 does not apply to time-and-materials contracts when the material is invoiced on a basis other than cost.

[2] FAR 31.103(a), (b)(1), (b)(2).