In recent weeks we’ve been updating you via our blogs as we become aware of new guidance or positions being taken, which could negatively affect an AE firm’s FAR overhead rate. As mentioned in last week’s blog, FHWA Clarity Getting Closer: Draft Guidance Update, we are now providing you strategies that can be applied to your forgiveness applications to minimize overhead rate impact.
The FHWA guidance provided to-date stated that “A&E firms cannot use PPP loan proceeds to pay for the direct costs on Federally funded state DOT projects,” and further, “A&E firms must adjust their indirect cost rates for PPP funds forgiven.” We believe that the current FHWA guidance does not comply with FAR 31.201-5 or the CARES Act. The government should only receive a benefit from forgiven costs used on government contracts and overhead. The proper allocation of labor costs is key to the forgiveness application.
The Forgiveness Application
When compiling your eligible costs, each firm should be taking advantage of the full 24-week covered period. This move will allow you to maximize your commercial (non-DOT/government) direct labor and eliminate any reductions from Full-Time Equivalents (FTE) or wage decreases. You should also make sure to include any FAR unallowable costs like interest expense. Remember that related party rent (which is limited under FAR) is not allowed for PPP Forgiveness, but the underlying mortgage’s interest is.
Your 24-weeks of payroll will include both direct and indirect labor. The total of all costs should well exceed the loan amount and the ultimate forgiveness credit you will receive. Evaluate any reductions from wages and FTE’s in accordance with the instructions on the application.
Allocating the Forgiveness Cost Pool
Once your cost pool (interest expense and labor) is established, you need to identify the labor costs you will submit with your forgiveness application. The interest is easy to allocate, but you need to identify the types of direct and indirect labor you want to include in your forgiveness. This process will require you to run a report from your project system that can identify the types of contracts and provide the detail by employee (e.g., Labor distribution report) for the same 24-week period. This report’s total labor cost should agree to the total payroll previously identified above from the payroll registers. You may need to factor in your labor variance account if it’s not included in the labor distribution report. As a result, your FAR Auditor will know that your application’s costs fell within the covered period.
The next step is to breakdown the labor distribution into buckets of Overhead, Government, and Commercial labor.
Your focus should be on maximizing the commercial direct labor. Once the commercial pool of direct labor is established, it needs to be summarized by employee and evaluated for employee’s who are over the limits of $100,000 annualized. If the entire loan can be covered with the pool of commercial direct labor and interest expense, there is no need to refund any amounts previously invoiced or apply any credits to overhead.
In some cases, when there is not enough commercial labor or interest expense to cover the loan, it may be necessary to identify FAR unallowable overhead labor for inclusion in the forgiveness calculation. Once these items are exhausted, costs will need to be allocated to federal government contract direct labor, overhead labor, then DOT contract direct labor. Depending on the contracting agency you are reporting to, they will either allow you the flexibility afforded under FAR 31.201-5 by refunding any direct labor that was previously invoiced or applying the forgiveness earned on the government direct labor and overhead labor as a credit to overhead.
This approach is consistent with FAR cost principles as each firm can set policies on how to treat PPP eligible costs upon applying for forgiveness.
Loan payments are not due until ten months after the covered period ends. If the application for forgiveness is submitted within this 10-month window, and before the first payment is due, there will not be any payments due on the loan until after the SBA notifies of forgiveness or not (if not, payments begin immediately). However, forgiveness can be requested until the maturity date of the loan. It may be wise to remain patient and wait to see if Congress will rescue the AE industry and provide guidance on how PPP forgiveness will be exempt from FAR 31.201-5. Later this week, we will post another blog with a detailed example of the potential adverse long-term effects on firms.
Please note, our examples have not included consideration of credits that companies receive from the Employee Retention Tax Credits (ERTC).
The ERTC complicates things because any wages used to receive the ERTC are not eligible for PPP forgiveness and would need to be removed. This situation is something that needs to be considered when evaluating your pool of costs. For much more information on the ERTC, register for our webinar this Thursday, February 11, and, as always, please reach out to SN for expert assistance with PPP forgiveness or ERTC eligibility.
Steve Snyder, CPA, CCIFP | Director, AEC Group
As Director, Steve’s concentration is on assisting clients within the architecture, engineering, construction and real estate development industries to improve internal processes and maximize profitability. Clients also benefit from his extensive experience auditing employee benefit plans ranging from 100 to 5,000 employees. In addition to his technical competence, Steve is an avid Penn State football fan and expert tailgate. Connect with Steve on LinkedIn.