Federal government prime contractors and subcontractors who 1) have cost-plus contracts, and 2) have applied for (or received) a loan under the Payroll Protection Program (PPP) need to be aware of a possible “gotcha” when requesting loan forgiveness at the end of their eight-week covered period. FAR 31.201-5-5 “Credits” provides the following:
The applicable portion of any income, rebate, allowance, or other credit relating to any allowable cost and received by or accruing to the contractor shall be credited to the Government either as a cost reduction or by cash refund. See 31.205-6 (j)(3) for rules governing refund or credit to the Government associated with pension adjustments and asset reversions.
A strict reading of this provision would appear to require that any amount of loan forgiveness for payroll or other eligible costs would have to be offset against such costs. That offset would result in a reduction of the amount of otherwise allowable costs allocated to cost-plus contracts, with a concomitant decrease in revenue.
This would create a disparity between contractors and subcontractors who have no cost-plus work versus those who do, as those who have no cost-plus work would effectively be able to “bank” the loan forgiveness proceeds with no loss of revenue. On the other hand, a small-business that has cost-plus contracts that might be running up against a revenue-based SBA size standard might benefit from lower 2020 revenue if such lower revenue amount allowed it to keep its five-year average revenue below the size-standard threshold, potentially buying another year of eligibility as a small-business.
The entire PPP is in a state of interpretive flux right now, as SBA has issued only limited guidance to this point, which deals almost exclusively with eligibility issues. The SBA has plenty of time to finalize its rules on forgiveness, and unless and until the FAR Council weighs in on the clause above, contractors with cost-plus contracts will need to tread carefully on PPP loan forgiveness.
For contractors needing help navigating the complexities of COVID-19 relief options and the FAR please call us at (301) 691-3600 or email us at firstname.lastname@example.org.