Recently, our office has become aware of a few instances of auditors misunderstanding the DCAA Headquarters’ guidance pertaining to the treatment of credits associated with PPP Loan Forgiveness. Specifically, it is the position of the Defense Pricing Center (DPC) and DCAA that any forgiven loan amounts should be treated as credits in accordance with FAR 31.201-5 which states that “the applicable portion of any income, rebate, allowance or other credit relating to any allowable cost and received by the contractor shall be credited to the government as a cost reduction…”
There is a difference between a cost reduction and cost that is unallowable or voluntarily disallowed. Unallowable or voluntarily disallowed costs implies the costs were incurred and should participate in all allocable cost burdens. As an example, the incurrence of unallowable labor would bear all allocable indirect cost (e.g., fringe benefits) the same as allowable labor. Since the labor itself is unrecoverable, the allocable indirect costs would likewise be unrecoverable by the contractor. Therefore, the unallowable costs are included in the base when calculating indirect rates.
A cost reduction because of a credit is a different matter entirely. Credits result in the elimination of costs. Therefore, a credit would be a reduction of the pool and base depending on the type of costs that received the credit. If direct labor was forgiven, then it would not be included in the base of the indirect rate calculation or the allocation base for G&A. Credits for material scrap are generally posted to the material handling pool, credits for insurance rebates or proceeds from the sale of manufacturing equipment is credited to the account in an overhead pool, reducing the costs. These credits are not added back to the allocation base for G&A. In short, the accounting for the forgiveness part of the PPP credit is the same, it is as if the costs never existed, and the result is that there are no allocable indirect costs associated with amounts credited, nor is the forgiven cost (e.g., credit) included in the allocation bases as the cost has been effectively removed from the claimed cost.
For those of you familiar with the ICE model, the proper place to record credits because of PPP loan forgiveness is in the GL column of the applicable schedule, not the adjustment column. The credits that result from PPP loan forgiveness are NOT adjustments related to the cost being unallowable rather it is simply a reduction to cost going into the ICE model.
We have prepared and reviewed many ICE models; I will say presenting credits because of PPP loan forgiveness is not entirely intuitive. The fact that there has been some confusion amongst various DCAA auditors in the presentation is not surprising. We just hope DCAA HQ can remedy this confusion soon through additional guidance to their auditors or encourage field auditors to read the applicable regulation and DCAA memos released during 2020.
Kimberly is a Managing Consultant with Redstone Government Consulting, Inc. based in our Huntsville, Alabama office. Her areas of expertise include working with government contract accounting and contracting issues and audit. Kimberly specializes in assisting government contractors in the unique accounting, pricing, proposal preparation, and compliance requirements of the U.S. Government. Professional Experience Kimberly’s experience includes preparation of complex incurred cost submissions, compliant accounting infrastructure, preparation and evaluation of policies and procedures, contract closeout process, developing provisional indirect rate budgets, monitoring actual indirect rates, and providing audit support to government contractors. Her primary focus is working pro-actively in preparing small contractors for government contract challenges as well as resolving DCAA issues. Kimberly has almost ten years of experience assisting clients with Federal Acquisition Regulations (FAR) and Cost Accounting Standards (CAS) best practices and compliance. She works with government contractors to comply with critical Federal Acquisition Regulations (FAR) requirements related to cost accounting and proposals. Her sundry experience with various government contract issues and successful resolutions provides insight that benefits our clients. Prior to joining Redstone Government Consulting, Inc., Kimberly specialized in assurance and advisory services with a regional firm (Jackson Thornton), working as a staff accountant conducting compilations and reviews, auditing financial statements and assisting with litigations. Education Kimberly earned a Bachelor of Science degree in Commerce and Business Administration from The University of Alabama in 2007. Affiliations National Contract Management Association Women in Defense