RGCI-The Rocky Road to COVID-19 Relief SBA and DPC Expectation on PPP Loans-1

UPDATE:  On May 5th, SBA added FAQ #43 extending the safe harbor to May 14, 2020 and stating “SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.

SBA Looking for Some Loans to be Returned

While the Small Business Administration (SBA) and Department of the Treasury have not changed their position, the political winds are howling. Senator Jeanne Shaheen of New Hampshire member of the Small Business Committee stated on CNBC in relation to the Paycheck Protection Program (PPP) that they need to keep businesses that did not need the money as much as others from getting the money. These howling winds have resulted in loan proceeds blowing back to the treasury from companies like Shake Shack ($10M Fox Business reported) and the NBA’s LA Lakers ($4.6M ESPN reported). Both businesses qualified for PPP and certainly have idled/laid off employees that could use paychecks; however, the political view is that they should have sought other sources of funding – if it were needed. “Treasury Secretary Steven Mnuchin told CNBC the government will perform a full audit on any company taking out more than $2 million from the small business loan program” before forgiveness. The CARES Act itself created 3 oversight organizations and funded them: Office of the Special Inspector General for Pandemic Recovery – $25M, Pandemic Response Accountability Committee – $80M, and Congressional Oversight Commission – a blank check, “such sums as may be necessary for any fiscal year.” While the current focus is on “public company with substantial market value and access to capital markets,” we believe contractors with significant continuing contract effort (revenue coming in) are likely to be the next focus area. The SBA Frequently Asked Question 31 below provides that the “borrowers must assess their economic need” and “certify in good faith that their PPP loan request is necessary.” This is a very high bar, for contractors that have not had to idle or lay-off employees, to get over.

On April 23, 2020, the SBA, in consultation with the Department of the Treasury, provided updated guidance to address borrower and lender questions concerning the implementation of the PPP. SBA added Question 31. While the question is targeted at bigger businesses, the “taking into account their current business activity” is likely to get some contractors that have not had to idle workers or who have not had to lay off workers, into trouble. SBA is looking for PPP Loan repayment by May 7, 2020.

  1. Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.

Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.

DPC Expectation of Reduced Contract Cost from PPP

On April 24, 2020 the Defense Pricing and Contracting (DPC) updated its April 17, 2020 update to the Frequently Asked Questions related to Implementation Guidance for Section 3610 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. What we thought was going to be a huge rock in the road to navigating the accounting for proceeds from loans under the Payroll Protection Program (PPP) has been broken down substantially. The Defense Pricing and Contracting (DPC) second update included the following question and answer:

Q: Please confirm that neither the FAR Credits provision, FAR 31.201-5, the credit provision in the Allowable Cost and Payment 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 that is forgiven to any flexibly priced government contract or subcontract. We consider a contractor that has received a PPP loan will use the loan proceeds as it would any other funds in its corporate treasury to pay costs of doing business.

A: We disagree that any PPP loan that has been forgiven can be treated as though it belongs to the company to use as it pleases. FAR 31.201-1, Composition of Total Cost, states that total cost is the sum of the direct and indirect costs allocable to the contract less any allocable credits. Accordingly, to the extent that PPP credits are allocable to costs allowed under a contract, the Government should receive a credit or a reduction in billing for any PPP loans or loan payments that are forgiven. Furthermore, any reimbursements, tax credits, etc. from whatever source that contractors receive for any COVID-19 Paid Leave costs should be treated in a similar manner and disclosed to the government. (Updated: April 24, 2020)

Fortunately, DPC has dropped the previous “regardless of whether the PPP loan is forgiven” statement. We believe this comes into line with the way we would except the PPP loan proceeds to be treated. While in the normal course of Government contract accounting, a loan (the raising of capital) would have no direct impact on the expenses used to develop contract cost. However, in these unusual times, the PPP Loan is not the normal case. The forgivable portion of the PPP loan is based on the contractor using the proceeds to pay for mostly allowable costs that would normally be assigned to contracts; so in this instance, it appears reasonable for the Government to expect an adjustment (reduction) to those same costs.

What to Do

We still believe contractors that have received PPP loans need to be aware of the SBA and DoD positions. Contractors need to carefully consider the planned utilization of PPP loan proceeds and consider whether returning the loan by the May 7, 2020 deadline is appropriate in their specific circumstances. If the contractor has employees that cannot work due to the COVID emergency and the PPP loan proceeds are used to continue to pay these idled employees, it is likely that at least a portion of the loan will be forgiven based on the current interim SBA rule. Remember, the DoD – and likely all of the Federal Government – will expect the contractor to reduce contract costs for the forgiven amount of the PPP loan. It is also likely that additional guidance will be provided in this regard, but as it stands, the expectations provided by SBA is deeply concerning and likely not in line with what most contractors believed when CARES Act was signed into law.

As we discussed at the beginning of this BLOG, the political winds are strong and contractors with other options should consider what is the right path for them, even if they have idled or laid-off employees.

Redstone GCI assists contractors throughout the U.S. and internationally with understanding the Government’s expectations and requirements related to compliance with Government contracting terms and conditions.

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Written by John C. Shire

John C. Shire John is a Director with Redstone Government Consulting, Inc. providing government contract consulting services to our clients primarily related to the DFARS business systems, CAS Disclosure Statements, and DCAA/DCMA compliance preparation, advisory, and defense. Prior to joining Redstone Government Consulting, John served in a number of capacities with DCAA/DCMA for more than 30 years. Upon his retirement, he was based in Texas as an SES-level Corporate Audit Director for DCAA, managing a staff of 300 auditors at one of the largest DOD programs. Professional Experience John began his career in the late 80s working in the Clearwater, FL audit office and over the next three decades he progressed through a number of positions within both DCAA and DCMA with career highlights as DCAA Program Manager at Ft. Belvoir, Chief of Technical Programs Division, Deputy Assistant Director-Policy, Director of the DCMA Cost and Pricing Center, the SES-level Lockheed Martin Corporate Audit Director, and Director of Integrity and Quality Assurance. John’s three decades of experience in performing and leading DCAA auditors and DCMA reviewers provides a wealth of expertise to our clients. John’s role, not only in the performance of audits, but also in the development of audit policy affords him unique insights into the defense of audit findings and the linkage of audit program steps to the underlying regulatory framework. He is an expert in FAR, DFARS, and other agency acquisition regulation, as well as a subject matter expert in the Cost Accounting Standards having reviewed and provided audit feedback on many of the largest and most complex cost accounting practices during his tenure with the DCAA. John’s tenure with DCAA and DCMA came at a critical time during each agency’s history where a number of changes were occurring such as the response to the ICS backlog, development of audit approaches to the DFARS Business Systems and implementation of new audit initiatives as a result of Congressional oversight through the NDAA process. John’s leadership at the DCMA Cost & Pricing center saw oversight of all major DOD pricing actions, leadership of should cost review teams, the Commercial Pricing group and many other areas of strategic value to our clients. His involvement in these and other Agency initiatives is of great value to our clients due to his in depth understanding of DCAA and DCMA’s internal policy directives. Education John holds a Master of Business Administration and a B.A. in Accounting from the University of South Florida. Certifications Certified Information Systems Auditor

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Redstone Government Consultants are a team of the most senior industry veterans and the brightest new talent in the industry. Many have held senior government positions including leadership roles in the DCAA. Our new talents bring significant accounting and software experience along with fresh perspectives, inspiration and energy to our team. Through our leadership and combined experience, we provide a unique perspective, bringing both government and contractor proficiencies to bear and ensuring rock-solid government compliance for our clients.

Topics: DCAA Audit Support, COVID-19