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PPP Forgiveness & Other COVID-19 Relief Considerations for Government Contractors

Background

Congress approved multiple COVID-19 relief bills in 2020 to aid businesses and employers struggling with the financial impacts continuing into 2021. The Coronavirus Aid, Relief, and Economic Security Act (CARES) passed in March 2020 included funding for the Paycheck Protection Program (PPP) loans with forgiveness – a mechanism intended to get tax-free money in the hands of small businesses. The CARES Act also included the employee retention credit (ERC) – a refundable tax credit – a mechanism to help employers keep employees on the books. The Families First Coronavirus Relief Act (FFCRA), also passed in March 2020, provided employees with 14 days of emergency paid leave.

Concerns for Government Contractors

All of these forms of relief present reporting and accounting issues for government contractors in addition to any tax forms or other documentation necessary to support the respective programs. Government contractors must consider the impact of PPP forgiveness (and other forms of COVID-19 relief) on their contract billings, indirect rates, and incurred cost proposal. In addition to PPP loan forgiveness, contractors have asked about the proper treatment of employer paid leave, the employee retention credit, and other parts of the CARES and FFCRA Acts. We’re here to address those concerns and answer some of your questions.

Eligible Expenses That Qualify for PPP Forgiveness as a Government Contractor

The list of eligible expenses for government contractors is the same as all other businesses. However, the selection of specific expenses can have a significant impact on indirect rates and reimbursable amounts on cost-type contracts. Whereas most commercial entities simply track and report salaries and wages as a single line item, government contractors must segregate salaries and wages into Direct Labor, Overhead Labor, G&A Labor, and Paid Absences. The segregation of these expenses is critical to the accurate calculation of indirect rates and the respective amounts must be accurately reported on the incurred cost proposal.

Eligible Expenses

  • Payroll Costs
    • Labor/Salaries
    • Group Health Benefits Paid by Employer
    • Employer State & Local Taxes
    • Retirement Plan Contributions
  • Business Mortgage Interest
  • Rent
  • Utilities
  • 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

Since contractors cannot receive payment from the government and PPP loan forgiveness for the same expenses, contractors must carefully select and document the expenses used to claim forgiveness. FAR 31.201-5 clearly states that the contractor must pass on any rebates, refunds, or other credits in the form of reduced costs or cash refunds. By carefully selecting and documenting their forgiveness calculations, government contractors can meet the requirements of FAR 31.201-5 and avoid double-dipping on any government funded payments.

PPP Forgiveness Strategy for Government Contractors

Government contractors should focus on seeking forgiveness of indirect expenses (fringe, overhead, and G&A) without including any direct expenses on government contracts. By claiming forgiveness on indirect expenses, government contractors can still bill the government all direct costs incurred plus the newly adjusted indirect costs.

Rates Before Forgiveness Calculation

Forgiveness 100% Applied to Labor

Rates After – 100% Applied to Labor

Forgiveness 60% Applied to Labor

Rates After – 60% Applied to Labor

Rate Summary

The Impact of Section 3610 Assistance

Section 3610 of the CARES Act allows contractors to ask contracting officers, on a contract-by-contract basis, for additional funding to keep staff in a ready state while idle due to facility closures or other restrictions preventing the completion of work. These funds are to be added to the existing contract as a separate contract line item (CLIN) and could be issued as cost-type or fixed price modifications.

These idle costs are now direct costs for those specific contracts since the readiness is a paid deliverable of that contract.

Contractors may be confused and potentially mischarge labor when idle employees on a contract with 3610 funding are treated as direct while idle employees on a contract without 3610 funding are treated as indirect. This is a situation where terms of the contract supersede the normal treatment of a cost in accordance with the contractor’s standard practices and should be noted in the contract, the project/job, timekeeping, and incurred cost proposal.

Reporting PPP Forgiveness & Section 3610 on the ICP

Adjustments to GL balances are reported in the “Adjustment” column on the incurred cost proposal with a note explaining the adjustment. Since PPP forgiveness will cause adjustments to the fringe, overhead, and/or G&A pools, contractors will want to include a worksheet (preferably as a separate tab) showing the calculation of PPP forgiveness funds applied to each pool.

Section 3610 funds are billable CLINs just like any other CLIN and will be presented on Schedule H as a separate line item (in the appropriate section) for the affected contracts.

Download a copy of our incurred cost proposal template.

The Effect of COVID-19 Relief on Indirect Rates

PPP Forgiveness

PPP loan forgiveness, when applied to indirect costs, will reduce indirect rates. For some contractors, this may be their saving grace. At a time when many contractors shifted direct employees to overhead, an opportunity to reduce overhead expenses may be a breath of fresh air.

Section 3610

Section 3610 should work to reduce indirect rates by increasing the amount of direct costs. Remember that direct costs are in the bases of fringe, overhead, and G&A, and that increases in direct costs work to reduce indirect rates by providing a larger base/denominator over which to apply the pool/numerator.

Other FFCRA & CARES Act Relief

The principles addressed here apply to other forms of relief including employer paid leave, employee retention credits, and deferred payroll taxes. Any cost reimbursed, refunded, or credited through any relief program (regardless of its tax treatment) must be credited back to the government in the form of a cost reduction.

Best Practices

Document, document, document.

As with all things legal and accounting, documentation is key. Contract and incurred cost audits often occur months or years after the fact making the explanation of events more difficult as time passes. Factors necessitating accurate recordkeeping that make accounting documentation in 2020 even more important:

  • Multiple forms of relief
  • Varying and extended eligibility dates
  • Various reporting requirements
  • Differing tax treatments.

The issues discussed in this article will result in different amounts reported for book, tax, and incurred cost purposes. Contractors will want to develop and maintain a worksheet identifying the expenses claimed for each, and a reconciliation between and among the differing reported amounts. We recommend filing a copy of the worksheet and reconciliation with the PPP forgiveness application, financial statements, income and payroll tax returns, Section 3610-affected contracts, and the incurred cost proposal.

Additional Resources

 

Please contact us for help with your PPP loan forgiveness, indirect rates, and incurred cost proposal.

FAQs

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
    • Labor/Salaries
    • Group Health Benefits Paid by Employer
    • Employer State & Local Taxes
    • Retirement Plan Contributions
  • Business Mortgage Interest
  • Rent
  • Utilities
  • 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.