Government contractors have a unique set of concerns when it comes to the novel Paycheck Protection Program (PPP) passed into law as part of the Coronavirus Aid, Relief, and Economic Security Act and supplemental Interim Final Rule guidance (collectively CARES Act) last month. While many government contractors are small businesses, and thus eligible for the program, the loan forgiveness component of PPP, making it so attractive, may have unintended consequences.
We have cautioned government contractors still operating during this crisis to make sure they can make the required certification of business disruption in good faith: that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Many can, due to disruptions in their commercial business. Even so, the debt forgiveness (even for commercial disruptions) may create a future problem related to their government work, specifically their indirect cost rates, e.g. overhead, general and administrative expenses, etc.
For contractors with cost-reimbursement type contracts, this concern is more immediate. Any payroll paid for by PPP funds for employees who provide services under government contracts creates a duplication of payment if the contractor intends to invoice a governmental customer for these employees’ services. From the government’s perspective, if the contractor receives PPP funds to pay its employees and that loan is forgiven, the government does not want to be charged again under a contract for the same employee costs already paid for under the CARES Act. It creates a double-dipping problem when the loan is forgiven—the government has paid for the same labor twice.
Many federal agencies are now asking contractors to certify or represent whether it has received funds under the CARES Act. If the contractor does not accurately disclose what it has received and how it applied PPP funds to its payroll, it is subjecting itself to False Claims Act liability (see SBA Part Eight). Even if a contractor makes a full disclosure, federal agencies may want to modify the contract to deduct an equivalent amount or, later, government auditors may require repayment of invoiced amounts.
While the cost-reimbursement contract issue is the most obvious example, there is another problem: overhead or indirect cost pools. Any contract which uses overhead or indirect rates to create a cost build-up (charging government agencies at “fully burdened” rates) will also suffer an adverse impact. To the extent that payroll costs for employees who are part of these cost pools are paid for by a forgiven PPP loan, there will be a steep reduction in the indirect cost pool for the periods immediately following the forgiveness. So, for federal contracts over certain dollar thresholds, contractors who provide cost and pricing data will have to demonstrate that they are using the lower rates to reach their price.
This problem is further compounded by a small contractor’s eligibility for reimbursement for employee leave costs to maintain a ready workforce when the employees cannot work remotely, under Section 3610 of the CARES Act. The Department of Defense (DOD) recently issued a new Class Deviation providing some guidance. While this clause and the accompanying DOD memo make clear that decisions will be contract specific, they reinforce that the government wants to ensure that contractors do not receive duplicate payments relating to the same costs.
Clearly, none of these concerns were top of mind when Congress passed the CARES Act or when the SBA and Department of Treasury implemented the PPP. The environmental circumstances and process created urgency and small businesses applied in droves; acting first and then considering the ramifications.
For small contractors who are getting paid for their workforce efforts through public (federal, state or local government) contracts, now is the time to consider their options going forward. The two cleanest options to avoid these problems are as follows:
- The SBA has created a safe harbor, whereby a borrower may return the borrowed funds, no harm, no foul, by May 7, 2020, and voluntarily terminate the loan.
- The contractor may use the funds, as directed under the CARES Act (see SBA Part Six), but not apply for forgiveness, thereby avoiding the issue. Use of borrowed money to pay payroll subject to reimbursement by the government is not a problem, and in fact is common industry practice. The loan will simply remain a loan in accordance with the promissory note terms.
Contractors should carefully consider the business impacts of either option before deciding on a course of action. Please contact one of our Government Contracts attorneys if you need assistance with these matters.
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