On March 24, 2021, the US Department of Transportation Federal Highway Administration (FHWA) issued a revised memorandum on the Treatment of Paycheck Protection Program Funds for Architectural and Engineering Consultants Guidance (HCFB-30).  The document intends to clarify FHWA’s interpretation of contractors’ requirements for the treatment of Payroll Protection Program (PPP) loans in calculating indirect cost rates in accordance with FAR Part 31.  Please note that the guidance focuses on PPP loan forgiveness as any loans which a contractor pays-back will not require indirect cost rate adjustments.

Basically, the revised memorandum expands on the earlier guidance issued by the FHWA during the January 2021 American Association of State Highway and Transportation Officials (AASHTO).  FHWA clarified that it expects contractors to adjust their indirect cost rates for PPP loans forgiven by equitably allocating the loan forgiveness (i.e., credit to overhead) in accordance with FAR Part 31.201-4, Determining allocability, and FAR Part 31.201-5, Credits.  To do this, FHWA provided contractors with several key considerations:

• Contract Type – The guidance applies to contractors providing services under Federal-aid or Federal lands highway program funded contracts.  So, in theory, contractors who do not have any contracts that fall into either of those categories should be free and clear.
• Direct Costs – Interestingly, FHWA stated that the PPP loans should not be used to pay for direct project costs as such activity would effectively result in a double-billing to the government and conflict with the T&C’s of the contract.  While helpful, this guidance comes a bit late for companies which have received forgiveness for and billed funds related to 2020.  In such circumstances, the FHWA guidance does suggest solutions for filing reimbursement claims.
• Indirect Costs – To the extent that PPP loan proceeds were used to pay for unallowable costs (e.g., interest expense), then there wouldn’t need to be a credit or reduction to the overhead costs.  On the other hand, if the loan proceeds were used to pay for allowable indirect costs, such as rent, salaries, etc., then a credit to the overhead costs will be expected.
• Time Period – Applying the adjustment/credit to the indirect cost rates depends on when the PPP loan forgiveness occurred.  For instance, if a company receives loan forgiveness prior to preparing its Fiscal 2020 indirect cost rates (as well as the underlying financial statements which reflect the accounting for the forgiveness), the adjustment/credit to overhead should be included in the Fiscal 2020 indirect cost rates.

Based on the above considerations, companies are faced with the critical questions of “How much, if any, should the credit applied to overhead be?  And, when do I apply it?”  A careful review of the underlying contract mix and use of the funds is critical to ensure that companies do not inappropriately provide government agencies with undue discounts.  For example, contractors should consider their contract mix between commercial work and government work to minimize the credit applied to the “government indirect costs.”

Although the FWHA’s guidance appears limited to “Federal-aid or Federal lands highway program funded contracts,” from what we’ve seen, the state DOT’s are certainly expecting that they share in the credit resulting from the PPP loan forgiveness.  While this would make sense where Federal funds were used to fund a State DOT project, what about those State DOT projects where Federal funds weren’t used?  Or, for example, those projects where both Federal and State DOT funds were used?  The answers to these questions and determining their impact on the indirect rate calculations will certainly add a whole new level of complexity.

Please contact us to learn how we can help your company minimize the PPP loan forgiveness credit to overhead and how to maximize your cost recovery.