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What We Currently Know About PPP Forgiveness and Credits for Architecture and Engineering Firms

Thomas C. Yankanich, CPA Director, Audit & Accounting, Leader - Government Contracting, Professional Services, and Architecture & Engineering Industry Groups

Many companies across the country faced economic uncertainty during the pandemic and applied for a Paycheck Protection Program (PPP) loan. Included in this population of companies were architecture and engineering firms, many of whom have flexibly priced contracts with the government or its prime contractors. When these firms applied for PPP loans, there was uncertainty surrounding how forgiveness would impact federal and state consultants’ and contractors’ rates, reimbursements, and associated cost-type contracts.

While it has been a year since the PPP program started, there are still many questions that remain on how consultants and contractors should treat PPP forgiveness in conjunction with cost-type contracts. The following will provide an updated timeline of what we currently know, and we will continue to update and track information and guidance as it is provided.

Before discussing the guidance that has been released, let’s first glance at the Federal Acquisition Regulation (FAR) and look at the clause that is being most discussed when it comes to PPP loan forgiveness and cost-type contracts. FAR 31.201-5 is the “credits” clause and states that “the applicable portion of any income, rebate, allowance, or other credit relating to any allowable cost received by a company shall be credited to the government either as a cost reduction or by cash refund.”

On December 20, 2020, the Defense Contract Audit Agency (DCAA) issued guidance to DCAA auditors, which was later revised on January 28, 2021, regarding treatment of FAR 31.201-5 and PPP loan forgiveness.

The guidance highlighted the following:

  • The amount of PPP loan forgiveness that will apply as a credit or cash refund in the same manner that the PPP loan proceeds were used by the company. For example, if a company used PPP loan proceeds to fund rent, and rent is included in their indirect cost pool, the amount paid towards the covered rent cost should be credited in the period the PPP loan was forgiven.
  • If PPP loan proceeds were used for costs allocable to firm-fixed-price (FFP), T&M, or commercial contracts, a credit is not required.
  • Regarding forward pricing, to the extent costs incurred during calendar years 2020 and 2021 are used as part of the basis of estimates for proposals, DCAA auditors need to have an understanding of how those costs were affected by the CARES Act as well as how they will affect future estimates.

The argument we have heard from consultants and contractors has been that the application of these credits could negate any benefit received from the PPP loan program, which was not the original intent of the program. This leaves consultants and contactors that have a majority of government contracts asking themselves what they should do with the funds. Should they 1) keep the low interest loan, 2) pay back the loan, or 3) apply for forgiveness?

On March 23, 2021, owners of small engineering companies briefed lawmakers on federal regulations that could deny them assistance under the PPP as part of a hearing before the House Small Business Committee’s Subcommittee on Contracting and Infrastructure (Subcommittee). The focus of the hearing shed light on the fact that the FAR credit clause would potentially cause detriment to consultants that used PPP funds to keep their businesses going during the pandemic and could not only reduce future billing rates, but could also cause a consultant and contractor to lose more than the loan amount in the case of multi-year contracts.

In response to these concerns, the Subcommittee determined that it was important to ensure consistency in the application of the credit clause across agencies so the government does not receive an improper advantage. The Subcommittee recognized that the reduction of a consultant’s and contractor’s overhead rate for the amount of PPP loan forgiveness and the application of these rates over the life of multi-year contracts was contrary to the FAR 31.205-1 requirement that the “applicable portion” of a credit relating to any allowable cost should be credited to the government.

On March 24, 2021, the DOT Federal Highway Administration (FHWA) issued a memorandum: “Treatment of Paycheck Protection Program Funds for Architectural and Engineering Consultants Guidance.” While the memo notes that the PPP funds were to be used to maintain payroll and keep employees employed, it also states that the program should not have provided consultants and contractors with an economic windfall in the form of PPP loan forgiveness for cost reimbursable contracts. Based on this fact, neither the Department of Transportation (DOT) nor the Department of Defense (DOD) waived the credits provision to date.

The memo applies to federal aid and federal land program funded contracts in which consultants seek partial or complete PPP loan forgiveness. The DOT guidance requires consultants to seek reimbursement from the agency for direct project costs and provides that a consultant cannot use PPP loan proceeds to pay direct project costs even if the costs are not billed to the federally funded project. Details of DOT guidance are as follows:

  • Consultants cannot use PPP loan proceeds to pay for the direct costs on a Federal-aid or Federal lands highway program funded contract.
    • Consultants cannot bill direct costs and use PPP loan proceeds to fund the compensation costs of direct labor and other direct costs dedicated to federally funded contracts. This practice results in an improper payment for billing the Federal government twice. A consultant may use the PPP loan as a working capital loan to pay the direct costs of a contract, but must submit a timely claim for reimbursement to the contracting agency and complete the proper and necessary adjustments to their accounting records once the reimbursement is received.
    • PPP loan proceeds cannot be used to pay the direct project costs even if those are not billed to the federally funded contract. This action has the effect of a donation to the project, which was not authorized and conflicts with the terms and conditions of the contract. Consultants should continue to allocate and invoice both direct and indirect costs in accordance with contract terms.
  • Consultants may use PPP loan proceeds to pay for indirect costs, but an adjustment to the indirect cost rate is required in accordance with FAR 31.201-5.
    • Consultants must adjust their indirect cost rates for PPP funds forgiven to provide the corresponding credit to the Federal government. All credits to indirect costs should be reflected in the subsequent adjusted indirect cost rate. If a consultant can apply the appropriate indirect cost credit on an existing contract, the contracting agency may allow the consultant to do so.
    • All applicable credits (or loan recoveries) are to be applied based on an equitable allocation to all benefiting cost objectives in accordance with FAR 31.201-4. The indirect cost rate credit should only be applied until the credit is recovered fully. If adjustments to a consultant’s indirect cost rate have no bearing on the award or contract type (e.g., firm fixed price or lump sum contract), adjustment to that contract is not required.

An important item to note based on the above DOT guidance is that while consultants are required to adjust their indirect cost rates to the extent forgiven PPP loan proceeds were used to pay indirect costs, they are only required to do so until the credit is fully recovered by the government, rather than applying it during the life of multi-year contracts.

FHWA has indicated that they will be developing a Q&A document to provide more detailed guidance on implementation. They will be consulting with selected CPAs and State DOT representatives to help with drafting the guidance.

If you have any questions about your firm’s PPP loan forgiveness in light of the issues discussed here, please don’t hesitate to contact me or any member of Kreischer Miller’s Government Contracting Industry Group.

Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.

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Thomas C. Yankanich, CPA

Thomas C. Yankanich, CPA

Director, Audit & Accounting, Leader - Government Contracting, Professional Services, and Architecture & Engineering Industry Groups

Government Contracting Specialist, Architecture & Engineering Specialist, Professional Services Specialist, ESOPs Specialist, Owner Operated Private Companies Specialist, Private Equity-Backed Companies Specialist

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