We understand the in’s and out’s of PPP loans can be confusing for many Government contractors. That’s why we’ve compiled a list of the most frequently asked questions we receive from our clients to help you better navigate the topic.
Yes. Government contractors must meet the same requirements as other companies in regards to industry, size, and financial impact.
Government contractors are allowed to claim the same eligible costs as all other companies.
- Payroll Costs
- Group Health Benefits Paid by Employer
- Employer State & Local Taxes
- Retirement Plan Contributions
- Business Mortgage Interest
- Covered worker protection and facility modification expenditures, including personal protective equipment, to comply with COVID-19 federal health and safety guidelines
- Expenditures to suppliers that are essential at the time of purchase to the recipient’s current operations
- Covered operating costs such as software and cloud computing services and accounting needs
However, government contractors must account for the costs differently when calculating indirect rates and preparing the incurred cost proposal (ICP). In accordance with FAR 31.201-5, credit must be given to the government for any rebates, refunds, or credits received regardless of the source of those items.
Technically, yes, but we don’t recommend it.
We recommend that clients focus on applying PPP forgiveness (or any COVID-19 relief) to indirect costs. This way, the benefit of the relief is fairly spread across all contracts and clients don’t have to worry about adjusting invoices or claimed direct costs on any specific contract – an activity that’s likely to garner additional scrutiny from DCAA or other government auditors.
If contractors apply PPP forgiveness and other COVID-19 relief to indirect costs, then the credit is fairly spread across all contracts (government and commercial) regardless of contract type. If contractors must apply forgiveness as a credit to any direct costs, they should consider the impact below.
- All contracts/jobs – remember that contractors must report direct costs by cost element for all contracts (government and commercial). For commercial jobs, contractors are allowed to summarize cost elements across all commercial jobs instead of reporting on a job-by-job basis.
- Commercial jobs – impact to government is limited to the effect of reduced direct costs on the calculation of indirect rates. Remember that direct costs on commercial jobs are still part of an entity’s overall indirect rate calculation.
- Fixed-price – the impact is similar to commercial jobs, however, government contractors must report direct costs by contract/job for all government contractors. Luckily, contractors do not have to report billings on fixed-price contracts as part of the ICP.
- Time & Material (T&M) – similar to fixed-price, however, contractors must report hours, rates, and total billings by labor category for T&M jobs on schedule K of the ICP – this means more scrutiny by auditors.
- Cost-type – similar to T&M, contractors must report all direct costs by cost element and all invoicing. Since cost-type jobs are reimbursable by nature, a reduction in direct costs means a reduction in reimbursable expenses. These will get the most scrutiny from government auditors.
Yes. DCAA made clear in FAQ #1 of MRD 2020-PIC-006(R) that credits must be applied in the same manner in which they are received. This means if a contractor used only labor to qualify for PPP forgiveness, then the credit applied for government contracts must be 100% labor. Contractors cannot apply PPP forgiveness to other eligible expenses if they did not claim those expenses in their PPP forgiveness application.
Yes. Here are the basic guidelines we recommend.
- Apply forgiveness as credits to indirect costs as much as possible. Applying forgiveness to direct costs on cost-type contracts is a non-starter in our opinion, as doing so will inherently raise your indirect rates across the board (something most contractors will want to avoid).
- Remember that direct costs are in the base of Fringe, Overhead, and G&A, so a reduction in direct costs will result in an overall increase of indirect rates.
- Many contractors experienced increased indirect rates due to COVID-19 issues, so reducing indirect rates should be a top priority.
- Generally, apply in the order below, but if you do not want to apply PPP funds to eligible non-payroll costs, be aware of impact on indirect rates (see #2).
- Indirect labor (OH labor, G&A labor, IRAD labor, B&P labor)
- Eligible non-payroll costs (rent, utilities, mortgage interest, etc.)
- Commercial direct labor
- FFP direct labor*
- T&M direct labor*
- Cost-type direct labor
*Note: While contractors would technically not have to repay labor on FFP and T&M contracts, they still would have to apply the credits on their ICP if that’s how they calculated forgiveness. This scenario will cause an increase in Fringe (because of the reduction in labor) and an increase in overhead (because of the reduction in direct). However, the increase in overhead will be offset by the reduction in overhead labor.
- Strategize about forgiveness and the effect on indirect rates BEFORE applying for forgiveness. Contractors should compare a few scenarios using an indirect rate calculator to determine the best solution for their particular situation. Use an indirect rate calculator to run the numbers a few ways to determine best way to allocate PPP funds to the categories in #1 above.
- Credits for the ICP must come from the same time period used for forgiveness. You cannot use dollars from a different time period. For example, if you used $100,000 of labor on the forgiveness application, you’ll have to apply it in a manner consistent with labor expenses on the GL during the same period. If you only have $80,000 of indirect labor during that period, then $20,000 is going against direct labor.
No, the tax issues are the same for all companies (government and commercial). Please talk to your accountant or attorney about your specific tax situation.
We recommend that contractors create separate GL accounts for PPP loans, forgiveness income, tax credits, etc. This will aid in the proper reporting of expenses for GAAP, tax, and incurred cost purposes? Contractors should NOT apply these credits as direct offsets to the original accounts in the GL as this will blur the reporting necessary for difference external stakeholders. For the ICP, credits should be listed in the adjustments column with detailed notes for each type of credit.