Government contractors are heading into another season of contract awards, only this one is the first following a year that included a complete shutdown of our economy due to COVID-19 closures and restrictions.
What a crazy year it’s been.
Since last March, we have seen the rise and fall of many businesses. The federal government stepped in with a quick fix, and now the jury is out on how effective it truly was in creating a viable solution. As the last of the Paycheck Protection Program loans are assigned and paid out, many in the small business community wonder what comes next.
Government Contracting and PPP
Given that government contracting hasn’t suffered downsizing due to COVID-19 on a grand scale like many other industries have, it will be interesting to see how things play out now that the forgiveness program follows. Forgiveness of a loan sounds like a great deal, but is that applicable here? Government contracting is a unique beast, riddled with regulations in place that may impose some changes to your contract negotiations as a result of taking the loan forgiveness option. After all the “good” the PPP loans did to keep people employed and businesses afloat through its COVID-19 response, what is the aftermath going to look like?
FAR Regulations Play a Role
Within the Federal Acquisition Regulation (FAR) Credits provision (FAR 31.201-5) and the Allowable Costs and Payments Clause (FAR 52.216-7(h)(2)), it is established that loan forgiveness will result in the government deserving a credit in return. The FAQ section within the Department of Defense states:
“…to the extent that PPP credits are allocable to costs allowed under a contract, the Government should receive a credit or a reduction in billing for any PPP loans or loan payments that are forgiven.”
This is not only a stipulation that will affect the current contract season but may also trickle into a lowering of prime contractors’ ongoing rates.
The federal payroll forgiveness program provided to PPP loan recipients may cause a decrease in labor rates for government contractors. (Yep, read that again). This decrease will affect contract negotiations and surely the bottom line of everyone involved. So for all the good the loans may have done, is it better to pay them back or suffer what comes if forgiven?
Next Steps for PPP Loan Recipients
It may be wise not to look this gift horse in the mouth. If you received a PPP loan, the next best step may be to seek some consultation on what it would take to pay it back and create a plan that fits into your contract schedule to do so. A CPA with FAR experience is a great resource in creating a cost analysis for this purpose.
Our team at Parabilis partners with many experts and can refer you to a professional who understands the regulations that affect how you negotiate your terms and can help you create a strategy to pay off your debt without having long-term effects on your billable rates.
If you used PPP to stay in the game, don’t allow forgiveness of the loan to take you out of it. And the next time you need access to cash to continue your contract work, schedule a consultation with our team to create a straightforward plan that won’t require a Ph.D. in government regulations. PPP loan forgiveness for government contractors is a classic case of if it looks too good to be true, it probably is!