FHWA Clarity Getting Closer: Draft Guidance Update
In my blog post last week, I discussed the FHWA Draft Guidance and expressed surprise that their position included “A&E firms cannot use PPP loan proceeds to pay for the direct costs on a Federally funded state DOT project.” This guidance could put firms in a tough spot when their payroll included DOT work. The easy solution, consistent with the advice we have been giving, is allocating forgiveness to non-DOT projects.
With the ERP systems typically used by A/E firms, this is a relatively straightforward process. Since the forgiveness is usually based on payroll costs, a labor distribution report will provide the necessary information to segregate the DOT labor and exclude from forgiveness.
The big question is for firms who have already submitted their application, how do they go back and rewrite history? Last week ACEC arranged a meeting with an FHWA representative to discuss firms who have already submitted their application with DOT labor included. The FHWA fully understood the problem. The solution offered was simple and effective, reclassify the DOT labor as overhead. This move is more of a defensive measure versus a planning one.
FAR Overhead Rate Implications
The next big question involves the use of the approved FAR overhead rate. We give an example during our webinars on this topic in which the total forgiveness credited to overhead would create a significant drop in the overhead rate; 34 points in the example. Per 23 USC 112(b)(2)(D), “Once a firm’s indirect cost rates are accepted under this paragraph, the recipient of the funds shall apply such rates for the purposes of contract estimation, negotiation, administration, reporting, and contract payment…”
State departments of transportation must use the approved overhead rate for contract pricing with the “FAR formula” – level of effort (x) direct labor rate (x) FAR overhead rate + fee + FCCM = contract value. Firms who negotiate multi-year contracts using the artificially low overhead rate will be forced to accept CPFL (cost plus fixed loss) contracts during the period of the approved overhead rate.
Should the overhead be reduced by the entire forgiven loan? FAR 31.201-5 states, “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.” The DCAA Memorandum for Regional Directors states, “…forgiven loan amounts used solely to pay employees working on commercial effort would not create a credit or refund for the Government.” Neither Federal Highways nor state DOTs have to follow DCAA guidance; however, this guidance can support a position. In this case, we believe it supports the conclusion that dollars spent on commercial contracts should not be credited to the government through an overhead adjustment.
If firms received forgiveness in 2020, any labor used on DOT projects should be credited to overhead, along with the allowable overhead portion of the forgiveness since the application has already identified the forgiven costs.
Our position is that any forgiven costs incurred for commercial or federal customers should not be included in the credit to overhead. For firms who have not applied for forgiveness, it is critical that they allocate costs on the application, so there is a fair representation of costs to the various cost classifications. Please keep an eye out for our upcoming blog posts that discuss the strategy for forgiveness applications.