All is not forgiven: forgiveness and PPP credits | Morrison & Foerster LLP – Public Procurement Overview

On March 23, 2021, The House Small Business, Markets and Infrastructure Subcommittee held a remote hearing titled: “The Interaction Between Paycheck Protection Program and Federal Acquisitions Regulations: What It Means for Government Contractors.” The hearing focused specifically on the interplay between the Paycheck Protection Program (PPP) loan cancellation and Federal Acquisitions Regulation (FAR) 31.201-5 “credits”, and how this interaction affects federal contractors who perform cost type contracts. This meeting highlights an area where entrepreneurs have incomplete directions at best. We will continue to monitor these issues as new guidance is released.

FAR 31.201-5 states that: “The applicable part of any income, rebates, allowance or other credit relating to any eligible cost and received by or accruing to the contractor will be credited to the government either as a reduction in cost or in the form of cash refund. . This provision applies to: (1) the pricing of negotiated contracts and contract modifications each time the cost analysis is performed, (2) the determination of reimbursable costs under cost reimbursement contracts and the reimbursement part of the costs of time and material contracts,[1] and (3) negotiating indirect tariffs.[2]

Thus, insofar as the proceeds of the PPP loan are used by the contractor to cover the direct or indirect costs subject to the FAR 31.201-5 (for example, eligible cost reimbursed by the government under a cost reimbursement contract), and the loan is subsequently canceled, the government is entitled to a credit. Specifically, the Department of Defense (DoD) clarified that, to the extent that the proceeds from the PPP loan were used to pay for costs otherwise reimbursed under a government contract and the proceeds from the PPP loan were eventually canceled, a credit is required in accordance with FAR 31.201-5.

On December 20, 2020, the Defense Contracts Audit Agency (DCAA) issued advice to its statutory auditors, as subsequently revised on January 28, 2021, concerning the processing of the FAR credit 31.201-5. As part of these guidelines, DCAA has issued the following instructions:

  • The canceled PPP loan amount will apply as a credit or cash repayment in the same way that the PPP loan proceeds were used by the contractor. If, for example, the proceeds of the PPP loan were used to pay rent and the rent is included in an indirect cost pool, that cost pool should be credited during the period in which the PPP loan was canceled. .
  • Credit is not required for the proceeds of the PPP loan used for costs attributable to Firm Price Contract (FFP). For example, no credit is required for canceled PPP loan proceeds used to pay employees for work performed under commercial contracts or FFP contracts not subject to DSC cost principles.
  • With respect to forward pricing, as costs incurred in calendar years 2020 and 2021 are used as part of the basis for estimating proposals, auditors should understand how these costs incurred have been affected by Coronavirus Aid, Relief and Economic Security (CARES) Act as well as the effect on future estimates.

The House subcommittee noted that it had heard small businesses advocate for waiving the DSC loan clause to cancel PPP loans. Naturally, these small businesses have complained that applying for such credit is contrary to the intent of the PPP loan in that the loan is not really canceled if the government actually demands repayment of the loan through credits. Identifier.

This hearing may have been triggered by the Department of Transportation (DOT) draft guidelines released on January 22, 2021. Carlos A. Penin, PE President, CAP Engineering, testified at the hearing that these guidelines require that the costs be incurred. overheads of a contractor be reduced by the amount of PPP loan cancellations granted to engineering firms. Mr Penin added that a reduction in the overhead rate would in turn reduce future billing rates and, for many engineering firms, result in a net loss greater than the PPP discount. Robin S. Greenleaf, PE, speaking on behalf of the American Council of Engineering Companies, echoed Mr Penin’s concern, explaining that “[t]The audited indirect cost rate is used for an accounting period of one year, but it is also the rate used for the duration of a contract, which is often multi-year. Ms. Greenleaf noted that DOT’s work is typically done under multi-year contracts that set the billing rate.

In response to concerns raised by small business entrepreneurs, the subcommittee determined that “[a]At a minimum, it will be important to ensure consistency in the application of the credit clause between the agencies so that it does not result in an undue advantage for the government and that the well-being of the contractor is protected. The Sub-Committee apparently recognized that the guidelines to reduce an entrepreneur’s overhead costs for the amount of the PPP loan cancellation and to apply these reduced rates over the term of a multi-year contract were contrary to the requirement. FAR 31.205-1 according to which the “applicable part” of a credit relating to any eligible cost must be credited to the government.

On March 24, 2021, the day after the House hearing, the DOT Federal Highway Administration (FHWA) issued a memorandum regarding “Processing of Paycheck Protection Program Funds for Architectural and Engineering Consultants”. The memorandum acknowledges that the proceeds from the PPP loan were intended to “enable companies to maintain wage costs, prevent employees from losing their jobs during the 2019 coronavirus pandemic (COVID-19), and cover the overhead costs necessary to the continuation of commercial activities . The memorandum, however, goes on to state that the PPP “was not enacted to provide an economic windfall to the employer (for example, when costs are reimbursed by the federal government under a contract financed by the federal government). and that the PPP loan is also canceled by the SBA.). ” Identifier. Therefore, neither DOT nor DOD guidelines waived the credit provision.

The memorandum applies to architectural and engineering services provided under Federal-Aid or Federal Lands Highway (FLH) funded contracts where the consultant seeks partial or full cancellation of the PPP loan. The guidelines recognize that these contracts include a provision prohibiting unauthorized donations to a project. Thus, the DOT guidelines require that consultants seek reimbursement from the agency for direct project costs and provide that a consultant cannot use the proceeds of the PPP loan to pay for direct project costs even if the costs do not. are not billed to the federally funded project. The DOT guidelines are as follows:

  • Architectural and Engineering (A&E) consultants cannot use the proceeds of the PPP loan to pay the direct costs of a contract funded by federal aid or by the FLH.
  • A&E Consultants cannot charge for direct costs and use the proceeds of PPP loans to fund direct labor compensation costs and other direct costs spent on federally funded contracts. This practice results in inappropriate payment for billing to the federal government on two occasions. A consultant can use the PPP loan as a working capital loan to pay the direct costs of a contract, but must submit a timely reimbursement request to the contracting agency and make the appropriate and necessary adjustments in its accounting records an once the refund has been received. .
  • The proceeds of the PPP loan cannot be used to pay for the direct costs of the project, even if these costs are not billed to the federally funded contract. This action results in a donation to the project, which has not been authorized and conflicts with the terms and conditions of the contract. A&E consultants should continue to allocate and invoice direct and indirect costs in accordance with the terms of the contract.
  • A&E consultants can use the proceeds of the PPP loan to pay indirect costs, but an adjustment of the indirect cost rate is required in accordance with [FAR 31.201-5].
  • A&E consultants must adjust their indirect cost rates for canceled PPP funds in order to provide the corresponding credit to the federal government. All indirect cost credits should be reflected in the subsequent adjusted indirect cost rate. If an A&E consultant can apply the appropriate credit for indirect costs on existing contracts, the contracting organization may authorize the consultant to do so.
  • All applicable credits (or loan recoveries) should be applied on the basis of an equitable allocation to all beneficiary cost targets in accordance with [FAR 31.201-4]. Credit at the indirect cost rate should only be applied until the credit is fully recovered. If an A&E consultant’s indirect cost rate adjustments do not affect the award or type of contract (e.g., Firm Fixed Price or Lump Sum contract), the adjustment of that contract will not. will not be necessary.

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The DOT FHWA guidelines allow the consultant to use the proceeds of the PPP loan 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 costs. direct costs and, after receiving reimbursement from the agency. , make the necessary adjustments to the accounting records. The consultant does not have the option of using the proceeds of the PPP loan to pay the direct costs and not request reimbursement from the agency.

DOT FHWA guidelines require consultants to adjust their indirect cost rates to the extent that the canceled PPP loan proceeds have been used to pay indirect costs. However, the guidance does not require the use of the reduced indirect rates for the entirety of a multi-year contract in that they state that the reduced rate for indirect costs is to be applied only until the credit is fully recovered. Thus, the consultants may be required to repay the PPP loan effectively through reduced indirect rates, but they will not be required to repay the government more than the amount of the PPP loan.

This hearing and the DOT FHWA guidelines, which appear to have sparked it, are unlikely to be the final say on this matter, as Congress balances the requirements of the FAR credit provision with the desire to provide government contractors with the same. advantage of the PPP discount than their sales. counterparts. We will continue to monitor directions in this area.

[1] FAR 31.201-5 does not apply to time and material contracts when the material is invoiced on a basis other than cost. [2] FAR 31.103 (a), (b) (1), (b) (2). [View source.]

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