To combat the economic damage of the COVID-19 pandemic, the Federal Government passed the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. As part of the CARES Act, the Paycheck Protection Program (“PPP”) was created to provide loans to businesses, including government contractors adversely impacted by COVID-19. When certain requirements are met, the PPP loans may be forgiven, which contractors must handle in compliance with FAR Part 31.201-1 and 31.205-5, to ultimately ensure that claimed cost to the government and in their Incurred Cost Submissions (“ICS”) are not overstated.

FAR Part 31.205-5 states “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,” and FAR Part 31.201-1 states “total cost is the sum of a contractor’s direct and indirect costs less any credits.” Consistent with these FAR requirements and DCAA guidance provided in MRD 20-PIC-006(R)-Revised dated April 23, 2021, when receiving PPP loan forgiveness, contractors should match the credit with how the loan funds were spent (i.e., the expenses that the loan was used to pay). For example, when developing the ICS if the loan was used to pay employee benefits, included in the Fringe indirect cost pool, then the indirect Fringe pool should receive the credit. Similarly, if the PPP funds were used to pay for a type of direct cost (e.g., direct labor), then the credit should be applied to the same type of direct cost. It is important to note in regard to direct cost, that the direct projects receiving the credit will still need to be allocated their share of indirect costs consistent with the contractors established cost accounting practices (i.e., it will receive its burden of indirect cost).

When developing your ICS, the timing of PPP loan forgiveness will also impact how the associated costs and credits are presented in the ICS. If the loans are not forgiven by the ICS submission date, the costs paid for by the loan would be included in the ICS as an allowable cost. However, once the loan is forgiven it must be credited in the following ICS.  

If you have any questions or need assistance with completing your ICS to properly address PPP loan forgiveness in compliance with FAR Part 31.201-1 and 31.205-5, contact Chess Consulting  at (703) 796-2850.