On Friday, AASHTO met to provide information and guidance to state departments of transportation on how firms should treat their PPP loan for DOT contracting purposes. At that meeting, I spoke about the FAR credit clause and the recent DCAA guidance. Other topics included the PPP loan program overview, state DOT audit and compliance responsibilities, and the state DOT perspective. Saved for last was the highly anticipated Federal Highway Administration (FHWA) perspective.
For the past few months, I have spoken with many state DOT personnel, and consistently they commented that they were waiting on FHWA guidance. During the AASHTO meeting, there was an agreement among the presenters that the state DOTs needed to establish procedures for recovery of direct labor used on state DOT contracts, but the method was the big question.
FHWA Guidance Revealed
When the FHWA presenter reviewed their draft guidance, to say it was a surprise is an understatement. They examined the various laws and regulations, including 2 CFR 200.317 – Procurement by States. Their guidance is as follows:
- A&E firms should continue to bill costs in accordance with the contract, including both direct and indirect costs.
- A&E firms cannot use PPP loan proceeds to pay for the direct costs on a Federally funded state DOT project. This would result in a donation to the project that would not have been authorized and is a conflict with the contract’s terms and conditions.
- A&E firms cannot bill direct costs to a Federally funded state DOT project and use the PPP loan proceeds to fund employees’ compensation costs and other costs dedicated to the project.
- A&E firms must adjust their indirect cost rates for PPP funds forgiven.
The surprising part of the guidance is the second bullet: “A&E firms cannot use PPP loan proceeds to pay for the direct costs on a Federally funded state DOT project.” This guidance is a little late since the billings have already occurred. They did offer some insight into how to correct the problem, which is workable and very consistent with the advice we have been giving, use commercial projects and overhead for the forgiveness application. The real question is, for firms who have already submitted their application, how do they go back and rewrite history? I don’t believe history can be rewritten, but some GAAP choices will potentially help eliminate this concern.
We will have a future blog post on these options.
There are also some questions left unanswered which involve the credit to overhead for forgiven loans. The FHWA guidance simply states, “A&E firms must adjust their indirect cost rates for PPP funds forgiven.” Taken as a literal statement, it says that the entire loan forgiveness must be credited to overhead. This guidance is contrary to FAR 31.201-5, which states, “The applicable portion of any income, rebate, allowance, or other credit….must be credited to the government.”
Any cost used as a direct cost to a commercial contract should not be reimbursed to the government since they did not benefit from the cost. The Defense Contract Audit Agency confirmed this concept in their Memorandum for Regional Directors dated December 11, 2020, which states: “forgiven loan amounts used solely to pay employees working on commercial effort would not create a credit or refund for the Government.”
I believe the ultimate answer for state DOTs will be a credit to overhead for forgiven funds except costs associated with commercial clients, federal contracts, and unallowable costs.
However, that is my opinion, and we all know the golden rule trumps my opinion: He who has the gold makes the rules.
The credit to overhead will be more manageable without the forgiveness’s commercial component, but it is still an issue. Firms who use their overhead rate to negotiate long-term contracts could eliminate all profit on future contracts unless states revise their contracting practices.
ACEC is working diligently to have congress clarify that PPP funds should not affect a firm’s overhead rate, just like they did with the IRS and the deductibility of forgiven costs, but there is a long way to go for the effort. 2020 overheads, where the firm has received forgiveness, will be the first test of any state policy. As I have said before, firms are responsible for their policies, and treatment of the forgiven loan is a policy that firms must make. Planning will be critical in minimizing the impact of this credit.
As always, our goal is to keep you not only updated on the latest guidance but its potential impact on your firm. Please reach out to us if you need assistance.
Over his 35+ year career, T. Wayne has established himself as a respected thought leader in the architecture and engineering industry. As the founder of T. Wayne Owens & Associates, PC, Wayne honed his skills providing consulting, auditing, and financial management services for firms nationally as well as serving as CFO of an architectural firm. You can frequently find him presenting to national audiences on his favorite industry topics including AE auditing and financial management, the AASHTO Uniform Audit & Accounting Guide, FAR overhead rates, government contracting, and project accounting.