By Jacob W. Scott and Alexander Gorelik of Smith, Currie & Hancock LLP
Published July 30, 2020
A recent article in The Wall Street Journal brought attention to concerns raised by some that companies with ongoing government contracts also obtained Paycheck Protection Program (PPP) loans. The underlying notion seems to be that holding a government contract would prevent a PPP loan applicant from certifying in good faith that economic uncertainty made the loan necessary. This idea seems to have gained popularity among private watchdog groups.
Perhaps more troubling is that the Government Accountability Office (GAO), the investigative arm of Congress tasked with auditing the PPP loan program, has not rejected the idea that government contractors are ineligible for PPP loans. Instead, a GAO spokesman said only that the agency is “aware of that potential issue but have not made any final determinations as of yet.”
Despite the assertion that a government contract by itself constitutes economic stability, many government contractors have felt the significant impacts of the pandemic. As one defense trade association’s survey shows, small businesses serving the government have been particularly hard-hit, suffering delayed payments by the government, reductions of billable hours on government contracts, unavailability of workforce, and an inability to perform remotely.
It is not surprising, therefore, that neither the CARES Act, which established the PPP, nor the many iterations of guidance that followed, prohibit federal contractors from applying for relief. Companies seeking PPP loans only had to confirm that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.”
Subsequent guidance from the Department of the Treasury, the Small Business Administration (SBA), the Department of Defense (DOD), and the Office of Management and Budget (OMB) is consistent with that statutory approach. For instance, we wrote earlier about DOD guidance on Section 3610 of the CARES Act that directs federal contractors to identify the amount of any PPP loans received when seeking additional reimbursements under Section 3610. The guidance applies regardless of the contract type, implying that federal contractors can be eligible for a PPP loan.
A recent memorandum from OMB also supports the position that federal contractors are eligible for PPP loans. The memo states that payments obtained by government contractors under the PPP program are not necessarily duplicative of reimbursements under Section 3610 of the CARES Act, but could certainly be so “depend[ing] on how a contractor uses funds received under the PPP.” In short, it presupposes that government contractors could have already received PPP compensation.
Of course, government contractors should remain vigilant to avoid “double dipping” through the PPP program, even if they do not seek any reimbursements under Section 3610. Contractors working under cost reimbursement contracts, for example, must make sure that they have not already received compensation under the PPP program for any costs that they seek under the contract. And all contractors receiving compensation under the PPP program should monitor the way that those amounts will impact their indirect rates. OMB has taken the position that, for any flexibly priced contract subject to Federal Acquisition Regulation Part 31, “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.”
Although use of PPP funds may cause federal contractors some additional administrative and accounting concerns, the idea that government contractors are not eligible for PPP loans seems to lack legal support. We expect any interpretation of the PPP finding otherwise would face significant legal challenges.
Jacob W. Scott is Of Counsel in Smith Currie’s Washington, D.C. office. In serving his extensive national client base, Jake practices government contract law and construction litigation, with a focus on federal construction law, where the intersection of his skill sets in litigation and contracts manifests. He can be reached at jwscott@smithcurrie.com or 202.452.2140.
Alexander Gorelik is an Associate in Smith Currie’s Washington DC office. He is a Certified Professional Contract Manager (CPCM). His practice focuses on government contracts and construction litigation, including the representation of owners, architects, engineers, general contractors, subcontractors, and suppliers. He can be reached at agorelik@smithcurrie.com or 202.735.2446.