Government contractors as a group are constantly vigilant and monitoring compliance with Federal Acquisition Regulations. They are now faced with unprecedented uncertainty and questions surrounding acceptance and forgiveness of Paycheck Protection Program (PPP) funds and payments under Section 3610 of the CARES Act.
When participating in programs to support our economy during COVID-19, contractors must consider a) the ban against 'double-dipping' of funds and b) must also consider that loan forgiveness under the PPP may be interpreted as a credit due back to the government in accordance with FAR 31.201-1 (a).
Double Dipping: Section 3610 and the PPP
In addition to directly providing many American families with cash stimulus payments and providing PPP funds for small businesses, the CARES Act, through Section 3610, provides funds that federal agencies can use to modify the terms and conditions of a contract to reimburse contractors who provide paid leave, including sick leave, to its employees in order to keep them “on a ready state." Contractors must affirm when receiving funds under 3610 that the contractor has not or will not pursue reimbursement for the same costs under the small business Paycheck Protection Program. What does this mean to federal contractors? Certainly, when applying for loan forgiveness under the PPP, contractors should not include the cost of labor paid with funds received under the provisions of Section 3610 of the CARES Act.
Forgiven PPP Funds as Credits Against Contract Costs
FAR 31.201-1 (a) defines the total cost of a contract is the sum of the direct and indirect costs allocable to the contract.....less any allocable credits. Contractors should be aware the government may take a position that PPP funds must be credited toward the government contracts supported with the funds, and that federal contractors cannot increase profits by receipt of PPP funds. DoD's Defense Pricing and Contracting (DPC) is issuing and updating guidance for federal contractors, most recently on April 24. On that date, Frequently Asked Question #23 related to PPP Loan Forgiveness was updated as follows:
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 light of shifting guidance and current uncertainty, government contractors are urged to carefully track the source and use of funds and maintain clear records related to both PPP and funds received under Section 3610. Consult with advisors and watch guidance carefully.
Government Contracting Accounting System Assessment Tool
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