January 26, 2021
By Paul H. Calabrese, Principal, Outsourced Accounting & Advisory Services
If you are a government contractor with a FAR-based government contract and received a PPP loan, regardless of whether it is forgiven, FAR 31.201-5 – Credits may require you to take an offset against cost incurred under certain circumstances. Now is the time to consider the effectiveness of your current accounting system and whether it supports current and future DoD cost tracking requirements.
Clarification of the offsets
FAR 31.201-5 – Credits states “The applicable portion of any income, rebate, allowance, or other credit relating to any allowable cost and received by or accruing to the contractor shall be credited to the Government either as a cost reduction or by cash refund.” Government contractors should note that because the FAR credits rule states, “any income, rebate, allowance or other credit relating to any allowable cost and received or accruing to the contractor”, it does not matter if the loan is forgiven
As a result, the Defense Contract Audit Agency (DCAA) issued 20-PIC-006(R) – Audit Alert on Coronavirus Legislation and Regulations to discuss: 1) the CARES Act legislation, 2) FAQ on Incurred Cost and 3) FAQ on Forward Pricing. The memorandum clarifies that those with cost reimbursable contracts with an applied indirect cost will have to credit or offset the specific direct or indirect allowable cost for which the Government Contractor (GOVCON) applied the proceeds from PPP loan in accordance with the “Credits” rule contained in FAR 31.201-5.
Exclusion of fixed price contracts
This does not apply to fixed price contracts, commercial or other direct activities not funded by the U.S. Government. FAR 31.102 states, the “application of cost principles to fixed-price contracts and subcontracts shall not be construed as a requirement to negotiate agreements on individual elements of cost in arriving at agreement on the total price. The final price accepted by the parties reflects agreement only on the total price.
On the other hand, cost reimbursable contracts negotiated each element of cost. Please note that you may have to apply a credit to the applicable overhead or G&A if you are projecting an indirect rate for Provisional Billing Rates or Forward Pricing applicable to your fixed priced contracts.
Applying credits to cost reimbursable contracts
For government contractors who tracked where loan proceeds were applied (labor, benefits or rent-related costs), the applied cost will be indirect in almost all situations. For direct personnel in “unproductive” or “idle” status however, the cost treatment specifies their wages would be charged to indirect (i.e. overhead), or to G&A for a small government contractor with no overhead. The associated fringe benefits of that employee would follow them to the indirect cost pool with their “idle” labor cost. Rent and related expenses are also charged to an indirect cost pool.
If the government contractor does not track where the loan proceeds were applied, the credit amount would be to the respective overhead or G&A cost pool. This methodology is used by DCAA for immaterial amounts of uncompensated overtime. The credit through an overhead or G&A is allocated equitably to all cost objectives.
Next steps
In light of continuing COVID-19 relief measures and expanding DoD requirements, government contractors should consider an accounting system assessment to assist with cost tracking and allocation. For more information about the DoD’s Accounting Business Systems requirements, or to schedule an accounting system assessment, contact Paul H. Calabrese, Principal, Outsourced Accounting & Advisory Services at pcalabrese@grfcpa.com. Visit our website to learn more about GRF’s services for government contractors.
