The Paycheck Protection Program (PPP) provides cash-flow assistance through federally guaranteed loans to employers who maintain their payroll during the coronavirus pandemic. While I am not a subject matter expert on the PPP, I am a subject matter expert in cost recovery on federal contracts with over 20 years of experience in the area. Given these unprecedented times, I want to educate federal contractors on the Federal Acquisition Regulations (FAR) that should be considered, which may impact loans from the federal government during COVID-19 and the forgiveness of those loans at a later time.
While “loan forgiveness” is not explicitly stated as payment the government shall receive from a contractor, it would be prudent for contractors to consider how loan forgiveness very well may be interpreted as a “credit” due back to the government on federal contracts in accordance with the FAR. If the government has a right to receive a loan forgiveness credit, it would point to the FAR Part 31 for ALL negotiated contracts and specifically cite the provision of FAR 52.216-7 for cost reimbursable contracts. Since the Cost Accounting Standards (CAS) incorporate the FAR Part 31, it is my interpretation that all CAS covered contracts are impacted, even those that are firm-fixed-price.
While I do not think this is a deterrent to accepting the loans, nor the forgiveness of the loans, contractors should be aware they cannot “ have their cake and eat it too.” Though the loans serve a major purpose in supporting jobs during this time, a federal contractor cannot “gain” financial performance either (i.e. receive payments from the federal government and have loans forgiven without “crediting back” the fair share on contracts).
Let’s look specifically at the FAR:
FAR part 31, Contract Cost Principle and Procedures, which contains cost principles and procedures for all contracts entered into by negotiations under FAR Part 15, Contracts by Negotiation (basically, contracts outside commercial item acquisition) specifically addresses credits when determining the composition of total cost. FAR 31.201-1 (a), Composition of total cost reads:
(a) The total cost, including standard costs properly adjusted for applicable variances, of a contract is the sum of the direct and indirect costs allocable to the contract, incurred or to be incurred, plus any allocable cost of money pursuant to 31.205-10, less any allocable credits. In ascertaining what constitutes a cost, any generally accepted method of determining or estimating costs that is equitable and is consistently applied may be used.
The provision of FAR 52.216-7, which is required for cost reimbursement contracts, addresses the issue, as well:
The Contractor shall pay to the Government any refunds, rebates, credits, or other amounts (including interest, if any) accruing to or received by the Contractor or any assignee under this contract, to the extent that those amounts are properly allocable to costs for which the Contractor has been reimbursed by the Government. Reasonable expenses incurred by the Contractor for securing refunds, rebates, credits, or other amounts shall be allowable costs if approved by the Contracting Officer. Before final payment under this contract, the Contractor and each assignee whose assignment is in effect at the time of final payment shall execute and deliver.
The next question is how will this credit be applied, and for that we have no guidance. I have a few ideas, but there are many complexities involved. I foresee that the accounting will be disastrous and there will be many unanswered questions, the largest being who gets the credit. Simple answer: it will be the federal government, but it is not yet clear if it will be the agency and contract for which the loan was used. This may result in a benefactor of the credit that could turn out to be disproportionate. Other questions include: Would you offer it on subcontracts to prime contractors? Could they offset it with overruns? Does it go back where it came from to the Treasury? Also, how would this be tracked? I have more questions than answers at this point.
Aronson will continue to monitor this situation and help guide our clients as information becomes available, but buyer beware, loan forgiveness will ultimately be a credit due back to the federal government on federal contracts. For more information, contact Nicole Mitchell.