Section 3610 of the CARES Act & Credits and Impact on Government Contractors
Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) gives agencies the authority “to modify the terms and conditions of a contract, or other agreement, without consideration, to reimburse at the minimum applicable contract billing rates not to exceed an average of 40 hours per week any paid leave, including sick leave, a contractor provides to keep its employees or subcontractors in a ready state, including to protect the life and safety of Government and contractor personnel.” On April 17, 2020, the Office of Management and Budget (“OMB”) issued M-22-20, Preserving the Resilience of the Federal Contracting Base in the Fight Against the Coronavirus Disease 2019 (“COVID-19”). As stated by OMB “[t]his memorandum provides guiding principles to help agencies determine the appropriate role of Section 3610 in supporting the needs of their contractors and subcontractors, both small and large.” Of significance, this memorandum discusses the relationship between Section 3610 and the Paycheck Protection Program (“PPP”).
Recognizing that the government has provided various forms of potential relief to contractors, OMB lists actions that agencies are to take to insure that “federal funds are not being used to make multiple payments for the same purpose.” In this regard, Section 3610 specifically requires the government to reduce the maximum reimbursement authorized by the amount of credit a contractor is allowed pursuant to division G of the Families First Coronavirus Response Act and any applicable credits a contractor is allowed under the CARES Act. Note that these credits apply to any contract type, not just contracts subject to the Federal Acquisition Regulation (“FAR”) cost principles. Thus, if a firm fixed price contract for commercial items is adjusted under Section 3610, these credits would apply to that adjustment even though the FAR cost principles do not. Therefore, OMB states that “it is important to secure fully supported documentation from contractors regarding other relief claimed or received, including credits allowed, along with the financial and other documentation necessary to support their requests for reimbursement under Section 3610.”
OMB went on to say “fully supported documentation, which may involve representations, will help to prevent incidence of double-dipping, as would be the case, for example, if a federal contractor that was sheltering-in-place and could not telework were to use the PPP to pay its employees, have the loan forgiven, … and then seek reimbursement for such payment from a federal contracting agency under Section 3610.” Most importantly, it should be noted that the credit mentioned in Section 3610 is separate from, and in addition to, the credit discussed in FAR 31.201-5.
FAR 31. 201-5 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.” The practical implication of this section is that any funds received by a contractor (from PPP or other funds or credits through relief programs from federal agencies) and those proceeds are used to cover costs on a contract where the cost principles are applicable and are allocable to a contract, then a credit should be applied.
To properly track such proceeds at a contract level and to assist in potential loan forgiveness, contractors should implement a mechanism to track allocable proceeds used to support contracts.
At a high level, a contractor should consider the following steps to develop the necessary documentation:
Step 1: Identify contracts that have been impacted by COVID 19 and document the impact.
Step 2: Identify and track the impacts, employees/labor costs impacted by period, etc.
Step 3: Review all indirect personnel and identify the roles you are preserving using PPP or other funding sources and document how this would be impacted without such funds.
Step 4: Use your timekeeping system and labor distributions to help track employees affected at a contract level and by indirect function.
Step 5: Use a mechanism to track posted labor to payroll on what needs to be supplemented by PPP vs. normal operations.
Step 6: Analyze all relief programs available and the potential impacts of each, layered on to determine what steps are required and how credits should be handled. This needs to take into consideration the various types of contracts impacted.
Previously, Cherry Bekaert has provided guidance that there is no requirement for borrowers to establish separate bank accounts or separate general ledger accounts for tracking PPP loan proceeds and qualified expenses. As this still holds true, separate GL account or bank accounts can be used as a tool to assist in this process if helpful, and the contractor should determine the mechanism that is most appropriate for the company.
Developing and tracking costs supplemented by PPP or being funded by normal operations will help to determine credits to be applied to non-affected contracts per FAR 31.201-5 and will also assist in developing support for loan forgiveness.
Because each contractor’s situation is unique in terms of the potential relief measures available to them and how various programs need to be accounted for in order to ensure the contractor is taking advantage of relief available, while also ensuring no instances of double-dipping occur, it is critically important to plan out the specific tracking and reporting that are needed for your company’s specific facts and circumstances.
We offer assistance to companies on identifying the proper treatment of the various programs based on the specific contracts impacted, and which elements of the various relief programs your company wishes to take advantage of, while ensuring you properly account for all aspects based on guidance available.