Seven Things Government Contractors Need to Know About PPP Loans and Forgiveness
The Paycheck Protection Program (PPP) was established as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act to aid small businesses with keeping their workforce employed during the COVID-19 pandemic. The program is administered through the U.S. Small Business Administration.
As government contractors take stock of their needs prior to the March 31, 2021 deadline for a second draw loan with the Paycheck Protection Program (PPP), many wrestle with more questions than answers. Regarding the first draw, should they seek forgiveness or repay it? What specifically should government contractors expect with current contracts still being fulfilled? Deltek Global Systems Integrator Partner of the Year Baker Tilly addresses the top seven questions they often encounter.
Q: My company performs government contracts and we received a PPP loan. If the SBA forgives our loan, do we have to give the government credits on our contracts?
A: Technically, the cost accounting concept of a “credit” applies only to government contracts that require compliance with the Federal Acquisition Regulation (FAR) Part 31 cost principles. This includes all flexibly-priced contracts as mentioned in recent DCAA audit guidance. Where flexibly-priced contracts are concerned, credits may also be applicable to indirect expenses, such as payroll, rent, utilities, etc., to the extent those particular costs formed the basis of the company’s loan forgiveness application amount. Where possible, consider seeking forgiveness for a mix of direct and indirect payroll (or other permissible expenses) to prevent indirect cost rate distortions.
Q: My company’s PPP Loan amount is $2 million, but we incurred more than $4 million in payroll costs during the 24-week application period. How do I know which payroll costs we need to credit?
A: Baker Tilly recommends specifically identifying which $2 million of the $4+ million payroll dollars should form the basis of loan forgiveness. To the extent possible, these payroll dollars should relate to work on contracts that do not require compliance with the FAR Part 31 cost principles. Doing this may minimize or even eliminate the need to provide credits. If the $2 million of payroll costs were not specifically identified before submitting your company’s forgiveness application, we recommend doing so before submitting and certifying incurred cost proposal(s) to which credits may apply.
<Q: Only 15% of my company’s work is federal government cost-reimbursement contracts; the rest is Labor Hour (LH) and Firm-Fixed Price (FFP) contracts. The DCAA’s audit guidance doesn’t mention those. We didn’t include payroll from the cost-reimbursement work in our forgiveness application. Will the government have an interest in the forgiven payroll costs related to our LH and FFP contracts?
A: DCAA’s audit guidance addresses “credits” applicable to flexibly-priced contracts and notes that they do not apply to commercial work. Although not explicitly mentioned in the context of LH and FFP contracts, DCAA’s audit guidance encourages its auditors to obtain the company’s forgiveness documentation and certification. To obtain forgiveness, the company certified that it used the PPP Loan proceeds to “retain employees.” To the extent employees were working with normal economy and efficiency and not subject to layoff, furlough, or other suboptimal employment arrangement (from the employee’s perspective), then perhaps the PPP loan was not necessary to “retain employees.” In this circumstance, the company may be paid twice for the same payroll costs – once through contract performance/pricing/billing and again through the forgiven PPP loan. Thus, the company may experience higher profits. Baker Tilly recommends that companies who elected to receive forgiveness (rather than loan repayment) should be prepared to address how the PPP Loan was used to “retain employees” and “maintain payroll.” For more discussion on this, see Baker Tilly’s Uncommon Sense article, Paycheck Protection Program Pandemonium.
Q: How should the receipt of the PPP Loan proceeds be recorded in the General Ledger?
A: We recommend that a separate bank account (asset account) be established for the PPP proceeds to show clearly the drawdown of funds and remaining available funds, as well as a distinct PPP Loan liability until forgiveness occurs.
Q: What steps should the company take to determine the best use of the PPP Loan proceeds?
A: The company should first earmark, or budget, the costs that will consume the PPP loan; a step that, ideally, is completed prior to submitting the PPP Loan application. This will involve specifying how many dollars of the PPP Loan will go to pay the various costs eligible for forgiveness, such as payroll taxes, direct labor, indirect labor, etc., taking care to also identify the cost pool and cost base where these costs reside.
Once the eligible costs have been earmarked/budgeted the company should project the impact on rates and revenue to reduce the likelihood of provisional overbillings to the government or over-recognizing revenue.
Q: Can you provide some best practices for how to calculate that projection of impact on rates?
A: We recommend using the purpose-built functionality in a software such as Deltek Costpoint, which reduces the opportunity for human error and prevents duplicate entry of data once earmarked/budgeted forgiveness credits are finalized.
Projection of impact on rates can be done in Costpoint using one of the nine “Allocation Groups” available in the Cost Pool module for just this purpose. In addition, posting the projected costs into an “Adjustment Period” in Costpoint will isolate the credits for financial reporting purposes while still allowing the related costs to be picked up in the Allocation Group process. Once the rates incorporating the impact of the PPP Loan forgiveness are established, they can be used to calculate final indirect cost rates. Estimating the effects of credits on provisional billing rates is recommended only for internal planning and monitoring purposes because PPP loan forgiveness cannot be known with certainty in advance.
Use of the Allocation Group and Adjustment Period functionality in Costpoint significantly reduces the possibility of error.
Q: What about projecting the impact of these higher or lower rates on billing and revenue?
A: The estimated rates (presuming forgiveness) can be used in Costpoint’s Planning module to calculate the impact of credits on revenue. Project Budgets and EACs can have the projected rates assigned to them and projected revenue, cost and profit calculated.
The revised rates (reflecting the impact of credits) can also be used for retroactive billing true-ups. Furthermore, the format of the Allocation Group used to develop the forecast can be copied to Allocation Group 1, where Actual rates are computed.
Make sure to approach a PPP Loan and forgiveness with eyes wide open. Baker Tilly helps government contractors address complex regulatory compliance, audit and other government oversight burdens. Review their library of materials to address the needs of government contractors, including:
- Paycheck Protection Program (PPP) solutions
- SBA releases new PPP IFR, FAQ and loan applications
- IRS requires correct 1099s for CARES Act loans
- Additional PPP guidance, forgiveness and applications released.
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