Businesses that apply for and receive loans through the federal Paycheck Protection Program (PPP) would be wise to comply with spending guidelines that could lead to loan forgiveness. But companies working on federal and state contracts should be aware that any loan forgiveness will have an impact on their overhead rate calculated in accordance with the Federal Acquisition Regulation (FAR). This change could have a significant impact on the bottom line for architectural and engineering firms, as well as other federal and state contractors.
Right now, the consensus opinion is that, for all PPP recipients whose loans are forgiven, the indirect cost pool used to calculate the overhead rate should be reduced by the amount of the loan that is forgiven as a credit to the overhead rate. This position is supported by FAR 31.201-5. Further, it is likely that this credit would be allocated only to the indirect labor rate.
This credit will need to be taken at the time the loan is forgiven, which will affect 2020 overhead rates for A&E firms. As a result, the true impact will be felt on invoices during 2021 and the first half of 2022. The magnitude of the impact on A&E profits will depend on the balance of a firm’s government vs. private work. A higher percentage of government work could even result in a firm “paying back” more than the actual loan forgiveness in reduced overhead rates.
The guidelines and regulations surrounding the PPP program continue to evolve. There is some industry support for legislative relief that would allow A&E firms with government contracts to avoid having to take the loan forgiveness credit. But at this point firms should assume that they will need to take a credit to overhead in the period the loan forgiveness is received.
We will continue to monitor this and other issues surrounding the PPP program. For additional information or if you have a question regarding PPP loan forgiveness, please contact Gray, Gray & Gray’s AED practice group at (781) 407-0300.