October 15, 2020

Every Federal Government contractor seeking to receive forgiveness for Paycheck Protection Program (PPP) loans under the CARES Act must consider Federal Acquisition Regulation (FAR) 31.201-5 Credits. Members of Congress have expressed their concern that Federal Government contractors may “double dip[1];” however, the credits clause effectively addresses Congress’s concerns. It 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.”

There are three parts of this regulation that Government contractors should consider when determining the amount of any credit accruing to the Government because of PPP loan forgiveness:

  • …income, rebates, allowances, and other credits…
  • …relating to any allowable cost…, and
  • The applicable portion…

Income, Rebates, Allowances, and Other Credits

Many small businesses have lost work due to the pandemic resulting in underutilized employees who would be laid off under normal circumstances. The Government is willing to help defray some of the costs of underutilized labor, benefits, and facilities by making PPP loans to small businesses and subsequently forgiving those loans. Do forgiven PPP loans put companies in the business of employing people who are not working?  Maybe they do, or maybe they give the companies another type of compensated absence. In any event, the forgiveness[2] of the PPP loan will constitute a credit relating to the specified labor, benefits, and facilities.

Relating to Any Allowable Cost

“Cost” is not defined in the regulations (FAR[3] or Cost Accounting Standards[4] (CAS)), but it may be helpful to think of it as the value expended for goods, services, etc. The cost of the pandemic is the value (money) expended for goods and services related to the pandemic that the company would not have paid (or paid to that degree) otherwise. Costs are collected by cost objectives.[5]  The total cost of any cost objective is the sum of the direct and indirect costs allocable to it, plus cost of money, less any allocable credits.[1]  Examples of cost objectives include a project for the cost of effort required by a contract, an indirect cost pool (e.g., G&A), and a project for the cost of performing acquisition due diligence that will be charged to G&A. While total cost includes all allocable costs, allowable costs are limited to the allocable costs that are allowable per FAR Part 31 and terms of the contract[2]

Pandemic costs may be collected in one or more cost objectives, depending upon the costs’ materiality and allocability to other cost objectives. For example, a project or account may be created to show that PPP loan proceeds were spent as required to obtain forgiveness of the loan. Cost objectives may also be required to determine the impact of pandemic costs on revenue recognition, cost recovery, budgets, and estimates of future contract costs. Government contractors should consider collecting the following types of costs:

  • New costs are costs that were not incurred before the pandemic. For example, hand sanitizer, Zoom, costs of employees’ home offices, paid time off for employees who are not working due to the collateral effects of the pandemic, payment of employees who would normally have been laid-off, etc.
  • Increased costs are costs that were incurred before the pandemic but have increased. Again, hand sanitizer, Zoom, costs of employees’ home offices, paid time off for employees who are not working due to the collateral effects of the pandemic, payment of employees who would normally have been laid-off etc.

The cost examples above are the same because many of the following criteria must be considered when deciding how costs will be classified:

  • Were these costs incurred before the pandemic? In other words, are the costs incurred during the pandemic like the costs incurred before the pandemic, and are the circumstances under which the costs are incurred during the pandemic similar enough to the circumstances prior to the pandemic as to treat the costs in the same manner as they have been treated historically?
  • Are the costs significant enough to be worth the effort and expense to identify them as pandemic expenses?
  • Is recoverability of the costs contingent upon identifying them as pandemic expenses?
  • Will the costs continue indefinitely, or is there a plan to discontinue them when things return to normal?

How do these costs affect estimated costs of future work including estimates at completion (EACs) for on-going work and accuracy of cost estimates?

  • Is the contractor’s understanding of the nature of these costs a fact that is required to be disclosed by the Truthful Negotiations Act (TINA)?

Total pandemic costs include all allocable costs. In addition to the labor, benefits, and facilities costs covered by PPP loans, other costs that may be allocable to underutilized staff include payroll taxes, payroll processing, other overhead costs, and G&A costs that are not covered by PPP loans. If the underutilized labor would normally be a part of an allocation base, it will continue to be a part of that allocation base even if the labor cost is paid by the proceeds of a forgiven loan. If the underutilized labor would not normally be a part of an allocation base, but if the labor benefits from or causes other costs, a means must be devised to allocate those costs to the labor in an equitable manner. Likewise, if existing cost pools result in an inequitable allocation to the underutilized labor, a special allocation[1] or new practice must be considered. Note that the cost allocation methods to account for pandemic costs are new cost accounting practices rather than changes to existing cost accounting practices that would require a cost impact on your affected CAS-covered contracts. Fair and equitable collection of pandemic costs will assist in identifying those costs that are defrayed by PPP loans and those costs that are not.

The Applicable Portion

The Government will participate in the PPP loan forgiveness credit to the extent that it participated in the allowable and allocable costs defrayed by the loan. If loan proceeds were used to pay for allowable direct labor costs on a Government cost-type contract, when the loan is forgiven, the Government would be entitled to a credit for the direct labor costs paid by the proceeds of the forgiven loan. If the loan proceeds were used to pay for health insurance costs that are part of a benefits pool that is allocable to Government cost-type contracts, the Government would be entitled to a credit equal to the amount of the benefits pool allocable to its cost-type contracts. If the loan proceeds were used to pay for certain facilities costs of a building that is only allocable to a contractor’s commercial line of business, the Government would not participate in any credit relating to reduction of those costs because the costs reduced were not allocable and allowable to any Government cost-type contract.

Next Steps

Government contractors seeking PPP loan forgiveness should exercise good judgement and carefully follow the steps below. The importance of documentation during this process cannot be overstated.

1. Document what you did and why it was correct. PPP loans are a highly visible issue. There will be audits from multiple agencies, including audits by a Special Inspector General for Pandemic Relief. There will also be litigation. Therefore, create a memo explaining what was done to identify pandemic costs and how those actions resulted in an equitable calculation of the portion of the credit applicable to the Government. Explain in the memo how the cost accounting practices used comply with applicable FAR and CAS. Assume that by the time the costs and credits are in audit or dispute everyone in the organization will have forgotten what was done and why. Obtain an advance agreement, if possible.

2. Many contractors will not receive loan forgiveness in the same fiscal year that they received the loan proceeds. When determining whether to credit the Government by means of a cost reduction or by a cash refund, contractors should determine if amounts allocable to the Government in the year of the loan forgiveness are materially the same as in the year the costs were paid. Discuss your conclusion with your cognizant contracting officer. Document the discussion, and obtain an advance agreement, of possible.

3. Revise policies to reflect both the practices before the pandemic and the new practices resulting from it. The new cost accounting practices may be based on changes in non-accounting policies, e.g. an HR policy regarding when to lay-off employees due to lack of work. Therefore, be sure to change both accounting and non-accounting policies.

4. If the business is required to submit a CAS Disclosure Statement, revise the Disclosure Statement to include the new cost accounting practices. DCAA has stated that revision for new practices, even though the new practices are temporary, is required to make the Disclosure Statements complete. They have also stated that new accounting practices to account for pandemic costs are new cost accounting practices, not changes to accounting practices requiring cost impacts. DCAA has not issued guidance on either of these issues, so prepare the argument for the cost accounting practices being new vs. changed.

5. Finally, consider and document materiality assessments using the criteria in CAS.[1] Some of the issues we have discussed may be important for a large business but a waste of money for a small Government contractor.


While many businesses have greatly benefited from PPP loans, Federal contracts contain hidden minefields of compliance issues such as the FAR 31.2 requirement to refund credits that apply to allocable and allocable costs on Government contracts. To ensure your organization has considered all factors involved in relief credits and PPP loan forgiveness, contact a CPA with expertise in government contracting.

For more information or questions regarding this article, contact questions@grfcpa.com.

About GRF’s Government Contracting Practice

GRF CPAs & Advisors’ (GRF) Government Contracting practice provides clients with experienced auditors, accountants, tax specialists and advisors who have in-depth knowledge of federal government grants and contracts, ensuring your organization is not only compliant but also strategically positioned for new opportunities. Our team offers comprehensive knowledge of relevant regulations and statutes as well as the operations of contracting agencies and DCAA. Members of our team are experts in the government’s Federal Acquisition Regulation (FAR) and Cost Accounting Standards (CAS), as well as USAID compliance and Uniform Guidance audits. We work with a broad range of government-funded


[1]  Receive payment of costs under Federal contracts and receive loans that are subsequently forgiven compensating contractors for the same costs.

[2] Early guidance indicated that award of PPP loans constituted a credit. That guidance has been rescinded.

[3]  See FAR Part 2 (https://www.acquisition.gov/far/part-2 ), and FAR 31.001 (https://www.acquisition.gov/far/part-31#FAR_31_001 )

[4]  See FAR 9903.301 (https://www.acquisition.gov/chapter_99/part-9903-contract-coverage#d1e1714 )

[5]  FAR 31.001 “Cost objective means a function, organizational subdivision, contract, or other work unit for which cost data are desired and for which provision is made to accumulate and measure the cost to processes, products, jobs, capitalized projects, etc. (https://www.acquisition.gov/far/part-31#FAR_31_001 )

[6]  FAR 31.201-1(a) The total cost, including standard costs properly adjusted for applicable variances, of a contract is the sum of the direct and indirect costs allocable to the contract, incurred or to be incurred, plus any allocable cost of money pursuant to 31.205-10, less any allocable credits. In ascertaining what constitutes a cost, any generally accepted method of determining or estimating costs that is equitable and is consistently applied may be used. (https://www.acquisition.gov/far/part-31#FAR_31_201_1 )

[7]  FAR 31.201-1(b) While the total cost of a contract includes all costs properly allocable to the contract, the allowable costs to the Government are limited to those allocable costs which are allowable pursuant to part  31 and applicable agency supplements. (https://www.acquisition.gov/far/part-31#FAR_31_201_1 )

FAR 31.201-2(a)(4) Terms of the contract (https://www.acquisition.gov/far/part-31#FAR_31_201_1 )

[8]  FAR 9904.418-50(f) Special allocation. Where a particular cost objective in relation to other cost objectives receives significantly more or less benefit from an indirect cost pool than would be reflected by the allocation of such costs using a base determined pursuant to paragraphs (d) and (e) of this subsection, the Government and contractor may agree to a special allocation from that indirect cost pool to the particular cost objective commensurate with the benefits received. The amount of a special allocation to any such cost objective made pursuant to such an agreement shall be excluded from the indirect cost pool and the particular cost objective’s allocation base data shall be excluded from the base used to allocate the pool. (https://www.acquisition.gov/chapter_99/part-9904-cost-accounting-standards#d1e15728 )

[9] FAR 9903.305 (https://www.acquisition.gov/chapter_99/part-9903-coverage#d1e2607 )USAID compliance and Uniform Guidance audits. We work with a broad range of government-funded organizations, helping them avoid compliance pitfalls and implement proven best practices to gain a competitive advantage.