Government Contractors: Expect Extra Scrutiny on 2022 Overhead Rates if You Received PPP or ERC Funds
- Apr 14, 2023
By William Ryan III
Architects, engineers, general contractors and specialty contractors who are paid based on overhead rate calculations when doing work for federal or state government agencies should prepare for extra scrutiny on their 2022 overhead rate audits if they received funds from the Paycheck Protection Program (“PPP”) or Employee Retention Credit (“ERC”). While it doesn't explicitly mention the PPP or ERC, FAR 31.201-5 dictates that “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.” Therefore, if you received PPP or ERC funds from the federal government and you are working for federal and state government agencies, overhead rates may need to be adjusted, or else you would be “double dipping,” which is not permissible.
Many government agencies paused their review of overhead rates during the COVID-19 pandemic and relied on overhead rates from prior years; now, they're scrutinizing 2022 overhead rates. Here are a few things government contractors who received PPP and ERC funds should remember when preparing their 2022 overhead rate calculations.
Segregate private and public work. Any contractor working on a job subject to overhead rates needs time records for their employees' labor that identify the projects they're working on. The time records for your PPP forgiveness period should show all the labor incurred on your private and public jobs. We have worked with businesses to identify the work done on government contracts versus private jobs to make sure that PPP and ERC funds were properly allocated to private and public work. Using PPP and ERC funds on private jobs does not appear to be double dipping and should help the contractor keep as much of their PPP and ERC funds as possible without affecting their overhead rates. Note that this won't work in every situation, so it's critical to do your due diligence and have the records to support any position you've taken.
Footnote your overhead schedules. We recommend that businesses add footnotes to their overhead schedules to say they received X dollars in PPP and ERC funds based on certain calculations. This is important because while the needed guidance still needs to be clarified, we believe that contractors should be transparent about their accounting decisions.
Look for unallowable expenses. We expect to see more scrutiny on expenses this year, especially in office expenses, which can act as a "dumping ground" for miscellaneous expenses, meals and travel costs. Agencies will also pay close attention to whether insurance costs have been correctly classified, such as liability versus health. Go through the details in any categories that might contain unallowable expenses so you're confident that you've recorded everything properly in case any expenses are questioned.
Check your overhead rates. Even if a government agency hasn't checked your overhead rates in the past few years due to the pandemic, you should have either obtained an audited overhead rate or self-certified your overhead rate. Look back at these overhead rates and, if they're well supported and consistent with your regular overhead rate, submit them and see if your agency will utilize one of the rates skipped over, at least for the time being. It may require some pushing from your end, as agencies want accurate rates but may be content to keep an old rate.
Now that agencies are reviewing 2022 overhead rates for the first time, government contractors who received PPP and ERC funds need to be even more prepared than they have been. Make certain you still have all the supporting documentation in case there are questions from the agencies that use your overhead rate. You should be confident that your expenses are properly stated and there are no subsequent adjustments.
Contractor’s Edge: May 2023
- How COVID-19 Affected Construction Financial Statements for 2021 and 2022
- Government Contractors: Expect Extra Scrutiny on 2022 Overhead Rates if You Received PPP or ERC Funds
- Construction Work in Progress (“WIP”) Report: Impacts of Over and Underbilling on Bonding
- Tax Strategy Combinations – Cost Segregation & 1031 Exchanges
- How to Account for Contract Change Orders
- 3 Ways Activity-Based Costing Can Benefit Your Construction Company
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William J. Ryan III
William Ryan, Partner, specializes in audits, reviews, compilations, tax services, and business consulting. He serves clients in a variety of industries, including construction, real estate, manufacturing and distribution.
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