Application of PPP Loan Forgiveness and Recent DCAA Guidance
Since the passage of the FFCRA (Families First Coronavirus Response Act) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the Payroll Protection Program (PPP) loans and forgiveness have been rife with more questions than answers. In its wake are firms playing a wait and see game on how best to move forward with the loans they have received. The loans were originated with good intentions, but as with many government programs, things are not always that easy. PPP loan forgiveness is no exception.
DPC & DCAA Guidance
On April 17, 2020, Defense Pricing and Contracting (DPC) issued preliminary guidance (FAQ on PPP loans) with the now infamous Q23 response stating that any loans forgiven are to be treated as a credit or reduction in billing to the Government. The question and answer caused confusion in an already murky maze of guidance. The PPP loans granted in order to help firms became a hindrance with a drastic reduction to overhead if forgiven.
Then, on July 31, 2020, the Defense Contract Audit Agency (DCAA) issued its first FAQ on COVID-19 costs and PPP loans and forgiveness and affirmed that, to the extent that PPP credits are allocable to costs allowed under a [Government] contract, the Government should receive a credit or a reduction in billing for any PPP loans that are forgiven.
At long last, just a short six months later, DCAA finally published more concrete guidance on how consultants should apply or allocate the credits for any PPP loan that is forgiven (MRD 20-PIC-006, Dec. 11, 2020). The Memorandum for Regional Directors (MRD) lays out the background on the CARES Act and FFCRA legislation and a 3-page Q&A on incurred costs/overhead, with additional Q&A guidance for forward pricing agreements (generally directed at large defense contractors). For our purposes, we are focusing on the incurred cost Q&A.
Here are a few highlights on how credits are to be applied:
- Allowable direct costs allocable to the Government should be identified during the covered period
- Allowable direct costs allocable to commercial customers should be identified during the covered period.
- Directly credit contracts that generated the identified PPP costs. If those contracts are no longer active and cannot be billed with a credit reduction, then a credit would be returned to the Government in a manner agreed to by the contracting officer (i.e. cash refund).
- For any remaining costs not identified directly to contracts (allowable indirect labor, health insurance, rent, utilities), credit the overhead pool.
Items to Pay Close Attention To
Not mentioned in the guidance, but important to highlight, is that if a consultant used a portion of the PPP loan proceeds to pay for interest expense on a mortgage or unallowable labor plus the directly associated payroll taxes, then that portion of the loan forgiveness does not result in a credit to the Government since the costs are unallowable and should not be credited to overhead.
It is important to note that DCAA makes a specific distinction in directly identifying costs to commercial contracts/customers if applicable. If a consultant contracts mostly with commercial clients and very little state, local or federal Government clients; and can show that PPP loan costs were used exclusively or almost exclusively on commercial work during the covered period, there would be no credit or refund to the Government. Thus, it is extremely important to look at costs for the entire covered period in which the PPP loans were used to maximize allocations between commercial and government work to reduce the impact on your overhead rate.
Also not mentioned in the guidance, but worth making note of, is that consultants are responsible for establishing and implementing policies and procedures to comply with the numerous legislative requirements under CARES and FFCRA, including the application of credits related to PPP loan forgiveness. Those policies should be followed once implemented. The government may challenge the policies; however, the government should not dictate the policy.
A final note, if your PPP loan was forgiven in 2020, then the credits will be applied against 2020 contracts and overhead costs. However, if the loan is forgiven in 2021, as we expect most will be, the credits will be applied to any active open contracts that generated the costs from the prior year if applicable, and remaining costs, if any, will be applied to overhead as explained previously. If the contracts that generated the loan forgiveness of direct costs are no longer active, a discussion with the contracting officer will be necessary to determine how to refund the government. It would NOT be appropriate to credit overhead for costs generated as a result of direct labor because they are not allocable to overhead and would artificially reduce overhead costs into future periods.
The bottom line – consultants are required to comply with the provisions of FAR 31.201-1, Composition of total costs, and FAR 31.201-5, Credits. Effective policies implemented to comply with the recent legislation along with proper identification and allocation of PPP loan costs will ensure that a consultant is meeting the FAR requirements and limiting the impact on overhead costs.
We realize that this is an extremely complex situation and are committed to providing you with information and insight to help you stay compliant and maximize the benefits of all available resources. Please reach out to Stambaugh Ness should you have any questions on how the DCAA guidance impacts PPP loan forgiveness.