In our last newsletter, we focused on some of the unnecessary obstacles small businesses face in the regulatory environment and areas where, in our opinion, Government auditors, particularly DCAA, misinterpret regulatory guidance in their efforts to question costs. We particularly expressed our concerns related to the application of the credits clause to PPP loan forgiveness and the detrimental impact on small businesses with flexibly priced government contracts. Sadly, DCAA’s misinterpretations and efforts to take advantage of small contractors have gotten even worse since our last newsletter!
Now, at least in the Central Region, DCAA has gone totally off the rails and is claiming that not only is the government entitled to a credit for the forgiveness received, but that 100% of the expenses forming the basis for the forgiveness credit must be included in the indirect allocation bases because in DCAA’s opinion that would result in an improper “fragmentation of the allocation base” under the provisions of FAR 31.203(d). Effectively, DCAA is treating the credit as if it represents an unallowable cost.
This interpretation results in a total inconsistency in the application of the guidance. DCAA is demanding a credit to expenses on the basis that because the loan was forgiven, contractors receiving forgiveness did not really incur the expense and then taking a different interpretation for allocation base purposes and saying that the total expense was incurred and must be included in applicable indirect allocation bases to avoid fragmenting those bases. DCAA, effectively, wants to interpret the credits both ways, treating the forgiveness as a reduction of incurred expenses for direct contract cost and indirect cost pool purposes but treating it as fully incurred expenses for allocation base purposes.
DCAA wants it both ways. If the loan forgiveness is not a reduction of contract costs, then the credit clause cannot apply because there was no rebate or credit due to the Government. If the loan forgiveness is considered a rebate or credit of contract costs, then the related contract costs were in effect not incurred and the related credit should be appropriately reflected in the allocation bases.
DCAA not only wants small businesses to lose any benefit of the PPP loans and related forgiveness as we believe was intended by Congress, they want to punish small businesses for receiving the forgiveness by not only taking away the amount of the forgiveness but also by charging the small business for indirect fringe benefits, overhead, and G&A. The lack of DCAA understanding of regulatory requirements, basic accounting rules, and any kind of common sense is truly mind blowing!
According to this approach by DCAA, a small business can now owe the Government more money than it actually received in PPP loan proceeds and forgiveness. DCAA apparently believes small businesses should be penalized for using the PPP loan forgiveness provisions! Clearly a new DCAA low!
Additional details related to the application of credits and their relationship to the indirect allocation base are provided in this article.