The Paycheck Protection Program (PPP) has provided necessary relief for many businesses nationwide, but the lack of initial guidance has led to some potential pitfalls.
Specifically, under the PPP, eligible recipients may have their loan forgiven when at least 75% of the loan was used for payroll purposes, with the remaining funds used to support rent or mortgage-related expenses. While there is still some ambiguity as it pertains to these funds, the Department of Defense (DOD) has made their position well known for contractors working on federal projects.
In releasing Class Deviation 2020-O0013, the DOD noted the following:
Some contractors may receive compensation from other provisions of the CARES Act, or other COVID-19 relief scenarios, including tax credits, and contracting officers must avoid duplication of payments. For example, the Paycheck Protection Program (PPP) established pursuant to sections 1102 and 1106 of the CARES Act may provide, in some cases, a direct means for a small business to obtain relief. A small business contractor that is sheltering-in-place and unable to telework could use the PPP to pay its employees and then have the PPP loan forgiven, pursuant to the criteria established in the interim rule published by the Small Business Administration. In such a case, the small business should not seek reimbursement for the payment from DoD using the provisions of Section 3610.
In summary, to avoid duplication of payment, contractors cannot bill for costs that are also covered by any CARES Act-related funds received and forgiven. This is addressed with the DOD noting the following from its Frequently Asked Questions in the implementation guidance for Section 3610 of the CARES Act:
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 a Payroll Protection Program (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)
In the updated guidance, contractors who do not return PPP funds by the May 14, 2020, deadline will not be penalized if they choose to repay the funds under the normal provisions of the loan.
Avenues of COVID-19 relief for federal contractors
While all of the above references seem only to penalize contractors seeking relief in the COVID-19 environment, there are provisions outlined in Section 3610 to provide aid. Going back to 2020-O0013 and the related FAQ’s, the following provisions are available:
Section 3610 seeks to provide many flexibilities for contracting officers, including the authority to:
- Enable the contractor to stay in a ready state (i.e., able to mobilize in a timely manner) by treating as allowable paid leave costs a contractor incurs to keep its employees and subcontractor employees in such a state.
- Use any “funds made available to the agency” by Congress to reimburse contractors for workers’ lost time, not otherwise reimbursable, between January 31, 2020, and September 30, 2020, if the contractor provides leave to its employees or subcontractor employees “to maintain a ready state, including to protect the life and safety of Government and contractor personnel,” which include, but are not limited to, quarantining, social distancing, or other COVID-19 related interruptions, as discussed in Office of Management and Budget Memorandum M-20-18, Managing Federal Contract Performance Issues Associated with the Novel Coronavirus, dated March 20, 2020;
- Modify contracts to provide for reimbursement of allowable paid leave costs, not otherwise reimbursable, without securing additional consideration; and
- Provide such reimbursement on any contract type.
These provisions are applicable to cost plus and fixed price contracts alike. As noted in the FAQs:
Q22: When can the contractor start billing against any section 3610 costs?
A22: The starting point for a contractor to bill for section 3610 costs is dependent on a number of things. In all cases, the contracting officer has to determine that the requisite conditions for section 3610 recovery are met and confirm the contractor’s status as an “affected contractor.” In a cost-plus context the latter step will take place when the contracting officer transmits his or her written determination required pursuant to DFARS 231.205-79(a)(1)(i), as outlined in the class deviation. In the context of a fixed-price contract or where recovery will take place under a fixed-price line item, a formal contract modification will be required and the execution of such a modification will necessarily entail the “affected contractor” determination. A contractor’s ability to bill will depend upon the terms of that necessary modification, but certainly no billings can be made before such a modification is executed.
Overhead rate impact
In addition to the treatment of PPP funds, there are other considerations for federal contractors when assessing the impact of COVID-19 on the overhead rate. When PPP funds are received and subsequently forgiven, the overhead rate would need to be adjusted to reflect the impact for both non-direct labor in addition to direct labor costs. After assessing the potential impact of any PPP funds on the overhead rate, consider revising your calculation to reflect the impact of COVID-19 for the changes to your direct, indirect and overhead costs, with some examples as follows:
- Additional safety costs
- Office location/work from home costs
- Office cleaning costs
- Changes to your direct and overhead labor based as a result of the availability of work
- Changes to expected insurance costs
For any changes, ensure that you have appropriate documentation to support your change and work with the contracting officer to get formal approval.
PPP for federal contractors: Next steps
Regardless of whether or not PPP funds were received, it is imperative to communicate with your contracting officer(s) early and often. Additionally, while having proper controls over tracking of costs is important, in the COVID-19 environment, it is necessary to ensure COVID-19-related costs are well documented.
While the federal government is working to back the economy in any way possible, this support comes with additional risk of audit. Never before has it been more important to ensure that all the ‘i’s are dotted and ‘t’s are crossed while supporting the federal government’s desire to keep its contractors in a ready state.