Contractors face contradictions among COVID-19 guidance

The most recent COVID conundrum presented to me is the interplay between Section 3610 and the Paycheck Protection Program or PPP (Sections 1102 and 1106 of the CARES Act).

The former is a cost allowability concept designed for potential reimbursement to government contractors to keep employees who are unable to work as a result of COVID-19 in a “ready state.” The latter is a type of disaster relief measure designed to provide potentially forgivable loans to small businesses in an effort to maintain employees on payroll and relieve financial stress caused by the pandemic. A challenge arises where a contractor receives payments from multiple sources.

Section 3610 contains the following proviso: “That the maximum reimbursement authorized by this section shall be reduced by the amount of credit a contractor is allowed pursuant to [the tax credit provisions of the previous law providing for paid leave] and any applicable credits a contractor is allowed under this Act.” Putting aside the tax credit issue, that suggests that if you recover amounts for paid leave under Section 3610 you cannot also receive without a credit to the government the same amounts provided under other parts of the CARES Act – for example PPP.

Agency guidance also suggests that receipt of funds from other government responses to the COVID-19 pandemic should result in a similar credit if funds from Section 3610 were also used for the same purpose. For example, in its April 8 Class Deviation, DoD stated that where a small business receives a loan under PPP, it “should not seek reimbursement for the payment from DoD using the provisions of Section 3610. The accompanying new DFARS 231.205-79(b)(6) states that “Costs made allowable by this section are reduced by the amount the contractor is eligible to receive under any other federal payment, allowance, or tax or other credit allowed by law that is specifically identifiable with” the COVID-19 pandemic.

In its April 17 guidance memo, OMB, also looking to avoid federal funds from “being used to make multiple payments for the same purposes,” cautioned agencies that, as part of maintaining adequate documentation for COVID-related expenses, “it is important to secure fully supported documentation from contractors regarding other relief claimed or received, including credits allowed, along with the financial and other documentation necessary to support their requests for reimbursement under section 3610.” OMB followed by stating: “Fully supported documentation, which may involve representations, will help to prevent incidence of double-dipping, as would be the case, for example, if a federal contractor that was sheltering-in-place and could not telework were to use the PPP to pay its employees, have the loan forgiven pursuant to the criteria established in the interim rule published by SBA and then seek reimbursement for such payment from a federal contracting agency under section 3610.”

All of this may appear redundant because, as noted in my April 28 commentary, there are already many FAR provisions intended to prevent double dipping. For example, FAR 31.201-1 provides that the composition of total costs subject to allowability would be “less any allocable credits.” FAR 31.201-5 (known as the Credits Clause) goes on to state that credits are to be counted as a “cost reduction” to the government. In short you cannot be reimbursed for a cost not incurred or a cost that is otherwise credited to you. That should include any forgiven PPP loan amounts under CARES or any other loan program.

But does that mean that all PPP amounts received by a contractor and ultimately forgiven are to be applied as credits against any amounts reimbursed under Section 3610? Or is there at least a partial apples-to-oranges argument to be made? Section 3610 provides for reimbursement only of paid leave while PPP is designed to provide relief for both payroll costs (with the requirement that the recipient allocate at least 75 percent to compensation costs for the loan to be forgivable) and other expenses (such as utilities, rent and mortgage interest where the required allocation is no more than 25 percent). To the extent there is a clear overlap of those costs, then double dipping should be avoided. But if 25 percent of the PPP amounts are spent on non-payroll items then arguably there is no overlap for this portion and therefore no double dipping with Section 3610 payroll-related amounts.

Greg Bingham, a partner and GovCon forensic accountant with the Kenrich Group, agrees. “Where you have different cost categories, one being direct labor and the other indirect non-payroll expenses such as rent and utilities that are not covered by Section 3610 there may be a good argument that at least some portion of the PPP funds were used to cover different types of expenses than those covered under Section 3610 and so there should be no credit afforded to the Government for that portion of the PPP funds.” 

To even further cloud the waters, DoD seems to be taking the position that the PPP loan amounts are to be credited toward any Section 3610 reimbursement even if that loan is not forgiven. In its April 17 FAQ update (Question # 23), DoD stated that “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, regardless of whether the PPP loan is forgiven.” 

So even if the PPP loan is paid back in full with interest, under the DoD guidance it still counts as a credit toward Section 3610 amounts. How is that fair? It isn’t and DoD is wrong both in applying basic cost principles including FAR 31.201 and in not applying common sense. Says Bingham, “This Q&A is just incorrect. Even the phrase ‘the Government should receive a credit or reduction’ would depend on the facts and circumstances such as contract type.”

This is an example where you have multiple agencies interpreting the same statutory provisions with different conclusions. And the credit issue is not the only difference in how agencies are reading Section 3610. That one I’ll examine in a later commentary.

Stay safe.