Critical PPP Issues for Government Contractors | Bradley Arant Boult Cummings LLP
Many federal contractors have already taken advantage of the Paycheck Protection Program (PPP), which was established by the CARES Act to help small businesses and other eligible applicants survive the economic impact of the COVID-19 pandemic. Under the PPP, eligible borrowers receive a government loan that is repayable if they meet certain conditions, namely to use at least 75% of the loan to make payroll for a specified period. The forgiveness component of these loans is what makes them particularly attractive to borrowers, including government entrepreneurs, who are in need of relief. While PPP loans are meant to provide critical relief to eligible borrowers, for government entrepreneurs, these loans may come with more conditions than the plain text of the CARES Act indicates.
What are some of the potential complications for government contractors seeking relief under the CARES Act?
- First, the PPP (codified in §§ 1102 and 1106 of the CARES Act) does not specifically address section 3610 of the CARES Act – which, under certain conditions, allows agencies to reimburse contractors for any paid leave, including sick leave, a contractor plans to keep his employees or subcontractors in a ready state. Some agencies have expressed concerns that the relief provided for in § 3610 may overlap with the relief available to entrepreneurs under the PPP. For example, the Department of Defense (DoD) recently issued a memorandum to agency procurement officials, as well as a new cost principle for the Defense Acquisition Regulation Supplement (DFARS), in which the DoD imposed the following limits on the ability of entrepreneurs to take advantage of both P3s and “other COVID-19 relief scenarios”, including § 3610:
Some entrepreneurs may receive compensation under other provisions of the CARES law, or other COVID-19 relief scenarios, including tax credits, and contracting officers should avoid duplication of payments. For example, the Paycheque Protection Program (PPP) established in accordance with Articles 1102 and 1106 of the CARES Act can, in some cases, provide a direct means for a small business to obtain relief. A small business entrepreneur who takes shelter in place and cannot telecommute could use the PPP to pay his employees and then have the PPP loan canceled, according to the criteria set out in the interim rule issued by the Small Business Administration. In that case, the small business should not seek reimbursement of the DoD payment using the provisions of section 3610. [emphasis added]
In other words, the DoD says contractors cannot “have their cake and eat it too” by both getting a fair contract adjustment under § 3610 to pay workers and having their PPP loans canceled. (Again, the main condition for the cancellation of the PPP is that at least 75% of the loan be used to make the payroll). While this rule may have some meaning, this “fine print” is not found in the sections of the CARES Act that establish the PPP. Instead, it was released a bit quietly after the fact. The DoD guidelines also point out that § 3610 gives agencies the discretion to administer relief to contractors, and agencies may differ in their enthusiasm to provide such relief.
- Second, what is of more concern to public contractors is that agencies can apply for credits or deductive modifications from contractors who receive loans under the PPP. The implementation by the DoD of the guidelines of the CARES law is once again instructive on this point. On April 17, 2020, the DoD released an update to its responses to frequently asked questions about the CARES Act, including:
Question: Please confirm that neither the FAR credit provision, FAR 31.201-5, nor the credit provision of the eligible cost and payment clause, FAR 52.216-7 (h) (2), nor any other FAR or DFARS provision does not impose on a contractor an obligation to credit any amount of a Payroll Protection Program (P3) loan that is canceled to any flexible price government contract or subcontract. We assume that an entrepreneur who has received a PPP loan will use the loan proceeds as they would any other funds in their corporate treasury to pay for the costs of doing business.
Reply: We disagree that any PPP loan that has been canceled can be treated as if it belongs to the company to use as it sees fit. FAR 31.201-1, Composition of Total Cost, states that the total cost is the sum of the direct and indirect costs attributable to the contract minus any attributable credits. Accordingly, to the extent that PPP credits are attributable to the costs authorized under a contract, the government should receive credit or bill reduction for any PPP loan or loan payment, regardless of whether the PPP loan is canceled or not. [emphasis altered]
In other words, the DoD has taken the position that the government should receive PPP credit from federal contractors – even if they have to repay their PPP loans with interest. This seems to create a situation where the government – not the entrepreneur – would be the one to double down. Therefore, federal contractors who not end up seeing their PPP loans canceled should take special note of the DoD’s statement in this regard.
Entrepreneurs who to do seeing their PPP loans canceled should also take note. Indeed, this assertion seems to be incompatible with the very idea of a forgivable loan. That is, if the proceeds of properly used PPP loans ultimately have to be credited back to the government by the entrepreneurs, then these loans are not really forgivable. If so, then the premise that the loans were given to entrepreneurs will have been misleading.
- Third, because government subcontractors are often subject to government audits and because the government, as a client / client, already has federal subcontractors in its direct line of sight, there is greater potential. review of post-PPP loans from government contractors. Such post-loan review of government contractors may include reviewing initial PPP eligibility issues, PPP loan applications and usage, and PPP exemption requests.
In addition, at the contract administration level, the accounting for contractor’s costs and the application of loan proceeds to eligible and chargeable costs may be the subject of future audits. Therefore, federal contractors must be particularly attentive to these realities. They should also take proactive steps to document the accuracy of certifications performed and compliance with PPP loan use and surrender requirements and closely monitor the use of loan proceeds that can be allocated to government contracts.
What are the main points to remember?
While PPP loans can offer welcome relief to many eligible borrowers, government entrepreneurs are likely to face unique challenges in taking full advantage of this program. Government demands for PPP credits, additional control, increased paperwork and red tape, and variable implementation by administering agencies are just a few of the potential hurdles government entrepreneurs may face. Of note: The scenarios discussed above have a unique (and possibly unfair) impact on federal contractors, many of whom provide essential COVID-19-related and other essential services. Public contractors must therefore be particularly careful and vigilant when it comes to PPPs.