UPDATE: Critical PPP issues for contracting authorities | Bradley Arant Boult Cummings LLP

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We recently reported on a number of issues with the Paycheck Protection Program (PPP) that specifically affect government contractors. As mentioned earlier, it is of particular concern to government contractors that agencies may apply for credit or deductible amendments from contractors receiving PPP loans. We made it clear that the DoD’s implementation of the CARES Act guidelines on this point is instructive.

On April 17, 2020, the DoD released an update on its Answers to Frequently Asked Questions (FAQ) about the CARES Act, which in part states:

Question: Please confirm that neither the FAR credits provision, FAR 31.201-5, the credit provision in the Acceptable Costs and Payments clause, FAR 52.216-7 (h) (2), nor any other FAR or DFARS Provision imposes an obligation on a contractor to credit any amount of a Payroll Protection Program (PPP) loan granted to any government contract or subcontract with flexible rates. We assume that a contractor who received a PPP loan would use the loan proceeds like any other funds in their corporate coffers to pay for business expenses.

Answers: We do not believe that a given PPP loan can be treated as if it is owned by the company to use as it sees fit. FAR 31.201-1, Composition of Total Costs, states that Total Cost is the sum of the direct and indirect costs attributable to the contract, minus attributable credits. Therefore, to the extent that PPP loans are a result of contractually permissible costs, the government should receive credit or a reduction in settlement for PPP loans or loan payments, regardless of whether the PPP loan is waived. [bold in original, italics added]

In other words, the DoD took the position that the government should get a PPP loan from state contractors – even if they have to repay their PPP loan with interest. As we noted earlier, this seems to create a situation where the government – not the contractor – would be the one to go double down.

However, on April 24, 2020, the DoD updated the answer to this FAQ as follows:

Question: Please confirm that neither the FAR credits provision, FAR 31.201-5, the credit provision in the Acceptable Costs and Payments clause, FAR 52.216-7 (h) (2), nor any other FAR or DFARS Provision imposes an obligation on a contractor to credit any amount of a Payroll Protection Program (PPP) loan granted to any government contract or subcontract with flexible rates. We assume that a contractor who received a PPP loan would use the loan proceeds like any other funds in their corporate coffers to pay for business expenses.

Answers: We disagree [sic] Any PPP loan that has been necessarily made can be treated as if it were owned by the company to be used as it sees fit. FAR 31.201-1, Composition of Total Costs, states that Total Cost is the sum of the direct and indirect costs attributable to the contract, minus attributable credits. Therefore, to the extent that PPP loans are attributable to a contractually acceptable cost, the government should receive credit or a cut in settlement for PPP loans or loan payments they are taken. In addition, any refunds, tax credits, etc. from any source that contractors receive for paid COVID-19 vacation expense should be treated in a similar manner and disclosed to the government. (Updated: April 24, 2020) [bold in original, italics added]

As can be seen, at least for now, the DoD has withdrawn its position that the government should get a PPP loan from state contractors who will repay their PPP loans. Rather, this updated FAQ shows that the DoD believes it should only get PPP loan from contractors who have had their loans waived.

The DoD’s recent clarification in this regard is a welcome development for government contractors. However, the DoD’s guidelines still appear to be inconsistent with CARES law and the idea of ​​a forgivable loan. That said, if the proceeds from properly used PPP loans ultimately have to be repaid to the government by contractors, those loans are not really forgivable. Federal contractors seeking support under the PPP should be aware of the positions the DoD and other agencies are making in handling PPP-related funds so they can budget and plan accordingly.

Bradley will continue to monitor and report on critical PPP issues for government contractors.

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