By Robert Nichols, Andy Liu, Terri G. O’Brien, and Adrian Wigston

April 3, 2020

Under the Coronavirus Aid, Relief and Economic Security (CARES) Act, the U.S. Small Business Administration (SBA) will manage the Paycheck-Protection Program loans for qualifying organizations with fewer than 500 employees.  The loan amounts are the lesser of 2.5 times average monthly payroll costs or $10 million.  Application for these loans starts on April 3.

Paycheck-protection loans can be applied to qualifying expenses incurred in an eight-week period between Feb. 15 and June 30.  Qualifying expenses consist of payroll costs, health care premiums, rent, the interest portion of mortgage payments, utilities, and other business debts entered into prior to February 15, 2020.  More guidance is expected from the SBA within 30 days.

In a recent article, we discussed the likelihood of increased audits and investigations in the wake of COVID-19.  We expect these loans to be no exception; use of the SBA funds must be tracked carefully and contractors should consult expert advice to ensure the most important risks, exceptions, and caveats are known in advance.  We’re writing this article together with KWC Certified Public Accountants, a firm with extensive experience in SBA loans.  KWC recently deployed a new program in lightspeed to assist clients with CARES Act financial planning.

Although banks will provide the primary administrative push of getting loans submitted and approved, the government contracting community should consider several key points when evaluating strategy for utilizing these funds.

1. The SBA has not finalized guidance and standards completely, but plans to do so within 30 days. This presents a clear timing risk. For example, the SBA is “anticipating” that some portions of the loan used for costs other than payroll will not be forgiven.
2. There are interpretation conflicts between Treasury, the SBA, and the CARES Act. Treasury has stated the loan is due within 2 years, with payment deferral options, while the act allows for payment across 10 years.
3. Contractors must certify that current economic uncertainty makes the loan necessary. This might expose some contractors to risk or possible fraud allegations if they obtain the loan but do not lose any contract revenue or they actually increase contract revenue through new awards to fight COVID-19.
4. By receiving the paycheck protection loan, you lose eligibility for two helpful provisions in the CARES Act: the employee retention credit ( 2301) and deferred payment of employer payroll taxes (§ 2302).
5. We anticipate a significant administrative workload for loan recipients to accurately calculate and support the amount of the loan eligible for forgiveness. Planning in advance to prepare systems and processes could help track these costs more efficiently. For example, we recommend depositing loan proceeds to a separate account such as a payroll account to clearly document how funds are spent.
6. KWC CPA can assist with other technical points such as requirements and definitions for full-time equivalents, restrictions on the use of loan proceeds for sick leave and FMLA leave, etc.

Nichols Liu is tracking all of the developments, guidelines, and regulations relating to the CARES Act, and will continue to post updates on our blog.  We are available to discuss any needs or questions you may have.

KWC Certified Public Accountants is providing services related to the tax and financial issues clients face during the COVID 19 outbreak.  KWC’s website includes a COVID-19 resource and updates page with relevant information on the SBA loan and application process.  For more details please contact:

Terri G. O’Brien, CPA
Principal
terri.obrien@kwccpa.com

By Andy Liu and Adrian Wigston

April 3, 2020

Late on April 2, 2020, the Treasury Department posted a draft Interim Final Rule implementing sections 1102 and 1106 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act” or “the Act”).  Section 1102 created the “Paycheck Protection Program” (“PPP”) loans, which are an addition to the SBA’s existing 7(a) Loan Program, and section 1106 provided for forgiveness of some or all of the loan amounts.  We summarize the most relevant portions of the draft Interim Final Rule for government contractors.

Because the window for applying for the loans has opened, and the loans will be made available on a “first-come, first-served” basis, small businesses are understandably anxious about the relative lack of guidance on how to apply for a loan, and other details regarding the loans.  This draft Interim Final Rule appears incomplete in some areas, and it remains to be seen how close this is to “final.”  Nonetheless, here are 6 key takeaways from the draft Interim Final Rule:

1) Ineligibility

Both the Act and the SBA size standards make clear which types of organizations are eligible for the paycheck protection loans.  The draft Interim Final Rule provides examples of ineligible individuals and organizations:

1. Organizations engaged in any activity that is illegal under federal, state, or local law;
2. Household employers (individuals who employ household employees such as nannies or housekeepers);
3. Organizations with an owner of 20 percent or more of the equity that is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last five years; or
4. Organizations (or their individual owners) that have ever obtained a direct or guaranteed loan from SBA or any other Federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government.

2) Interest Rate

Although the Act permitted a higher interest rate, the SBA determined that a 1% interest rate is appropriate.

3) Maturity Date

Although the Act provided that the loans would have a maximum maturity of up to ten years from the date the borrower applies for loan forgiveness, the SBA determined that a two-year loan term is sufficient.

4) Payment Deferrals and Loan Forgiveness

Borrowers will not have to make any payments for six months following the date of disbursement of the loan.  However, interest will continue to accrue on PPP loans during this six-month deferment.

The PPP loan can be forgiven up to the full principal amount of the loan and any accrued interest.  Loan forgiveness is primarily applicable to payroll costs, but up to 25% of the total loan forgiveness can be used for costs other than payroll.

5) Access and Use of Funds

The loan proceeds are disbursed on a “first-come, first-served” basis.

At least 75% of the PPP loan proceeds shall be used for payroll costs.

6) Certifications

On the application, an authorized representative of the applicant must certify in good faith to all of the following:

1. The applicant was in operation on February 15, 2020 and had employees for whom it paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.
2. Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.
3. The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments.

Nichols Liu is tracking all of the developments, guidelines, and regulations relating to the CARES Act, and will continue to post updates on our blog.  We are available to discuss any needs or questions you may have.

By Robert Nichols and Andrew Victor

March 31, 2020

On March 30, 2020, the Department of Defense published a memorandum addressing how agencies should handle contractor Requests for Equitable Adjustment (REAs) and other performance issues in response to the COVID-19 crisis.

DOD’s guidance addressed ways to provide relief to contractors, such as through the Excusable Delays clause at Federal Acquisition Regulation (FAR) 52.249-14.  DOD also directed contracting officials to consider REAs in light of Section 3610 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which the President signed into law on March 27, 2020.

Section 3610 provides agencies the discretion to use “funds made available to the agency” by Congress to modify any contract or other agreement to reimburse contractors for workers’ lost time up to September 30, 2020, if the contractor provides leave to its employees or subcontractors “to protect the life and safety of Government and contractor personnel.”

In its guidance, DOD highlighted Section 3610 as providing discretion for agencies to modify contracts to reimburse paid leave where contractor employees could not access work sites or telework, but actions were needed to keep such employees in a ready state.  DOD explained that Defense Pricing & Contracting within the Office of the Secretary of Defense would provide implementing guidance for Section 3610 as soon as practicable.

DOD also reiterated that contracting officers are empowered to make difficult decisions on adjusting contracts appropriately.  For example, when reviewing REAs, contracting officers should consider whether the requested costs would be allowable, allocable, and reasonable to protect the health and safety of contract employees as part of the performance of the contract.  Moreover, contract adjustments or reliance on an excusable delay should not negatively affect contractor performance ratings.  Contracting officers must work closely with contractors to ensure continuity of operations and protection of the Defense Industrial Base.

Contractors can cite this memorandum to their government points of contact and contracting officers when discussing COVID-19 impacts on their contracts.  Contractors should also be mindful of further guidance to be issued by Defense Pricing & Contracting.

By Robert Nichols, Andrew Victor, and Adrian Wigston 

March 30, 2020

Recognizing the challenges coronavirus COVID-19 presents to contractors and the U.S. Government, the Office of Management and Budget (OMB) recently issued a memorandum to executive agencies addressing federal contract performance issues.

In the memorandum, OMB strongly encourages agencies to maximize opportunities for contractors to telework and to amend contracts that do not provide for it; if telework is not feasible, agencies should be flexible on delivery dates.  OMB directs agencies to emergency procurement authorities that haven been made available by the President’s declaration of a national emergency under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act), such as increases to the micro-purchase and simplified acquisition thresholds that streamline procurements.  OMB also provides 12 Frequently Asked Questions (FAQs) related to mitigating the impact of COVID-19 on contractors through teleworking, requests for equitable adjustment (REAs), use of the streamlined procurement authorities under the Stafford Act, and tracking contract spending related to COVID-19.

Notably, FAQ 3 addresses REAs submitted by contractors for costs associated with increased safety measures to protect their employees from COVID-19.  OMB instructs agencies to take a case-by-case approach.  Agencies should use their existing practices, taking into account, among other factors, whether the requested costs would be allowable and reasonable to protect the health and safety of contract employees as part of the performance of the contract.  OMB directs agencies to Federal Acquisition Regulation (FAR) § 31.201-3, which provides the standard for what is “reasonable” in the prevailing circumstances, i.e. “what a prudent person would do under the circumstances prevailing at the time the decision was made to incur the cost.”

For example, agencies should consider whether the contractor took actions consistent with Center for Disease Control guidance and whether the contractor reached out to the contracting officer to discuss appropriate actions.  OMB urges agencies to consider REAs for keeping “skilled professionals or key personnel in a mobile ready state for activities the agency deems critical to national security or other high priorities (e.g., national security professionals, skilled scientists).”

Finally, OMB highlights a number of contract clauses that may be helpful in managing COVID-19 issues as they arise.  These contract clauses include the changes clauses (see FAR clauses 52.243-1 through 52.243-3 or clause 52.212-4(c)) or suspending or stopping performance through clause 52.242-14, Suspension of Work, and clause 52.242-15, Stop Work Order.

By issuing the memorandum, OMB has provided guidance to contracting officers and contractors.  In urging agencies to maximize telework, contractors should be able to continue performance and potentially mitigate the need for extensions or REAs.

For contractors that work with multiple agencies, OMB’s guidance should standardize the responses by federal agencies to COVID-19 performance problems.  Moreover, contractors can use the memorandum as evidence that COVID-19 impact on contracts should be borne by the agencies, not contractors.  Indeed, the memorandum encourages agencies to consider granting REAs if the costs are allowable and reasonable.  Contractors are well advised to provide a copy of the memorandum to their government points of contact and contracting officers when discussing COVID-19 impacts on their contracts.

By Robert Nichols and Andy Liu

March 20, 2020

As part of the government’s response to the ongoing COVID-19 crisis, President Trump has signed an Executive Order invoking the Defense Production Act of 1950, as amended (“DPA”).  Specifically, he invoked a provision of the DPA that gives the Federal government the power to prioritize government contracts for “personal protective equipment,” ventilators, and other medical products over commercial or other contracts for such products.  Other DPA provisions—e.g., financial incentives to develop and expand production and capacity—may soon be invoked.  Nichols Liu is already hearing from clients who are being contacted by the Administration for orders under this authority.  We provide this initial guidance for industry.

Overview of the Defense Production Act of 1950

The DPA, 50 U.S.C. § 4501 et seq., dates to the Korean War and is reauthorized regularly.  It authorizes the President to take extraordinary measures with contractors that can provide goods and services needed for the “national defense,” which is broadly defined to include, inter alia, emergency preparedness.  50 U.S.C. §4552(14).  The DPA ties in with Title VI of the Stafford Act, which defines “emergency preparedness” to include “all those activities and measures designed or undertaken to prepare for or minimize the effects of a hazard upon the civilian population, to deal with the immediate emergency conditions which would be created by the hazard, and to effectuate emergency repairs to, or the emergency restoration of, vital utilities and facilities destroyed or damaged by the hazard.”  42 U.S.C. §5195(a)(3).

The DPA’s current authorities include:

• Priorities and Allocations. Authorizes the President to require businesses to prioritize and accept contracts for materials and services necessary to promote the national defense, and to control the general distribution of materials, services and facilities.
• Expansion of Productive Capacity and Supply. Authorizes the President to provide incentives for the domestic industrial base to expand production and supply of critical materials and goods.  Such incentives can include loans, loan guarantees, direct purchase and purchase commitments, and the ability to procure and install equipment in private facilities.
• General Provisions. Provides general provisions relating to the use of DPA authorities and provides additional authorities to the President including the authority to give special preference to small businesses when issuing contracts under DPA authorities.

The DPA previously included additional authorities relating to requisitioning, rationing, wage and price fixing, labor disputes and credit controls and regulation, but those elements of the statute have lapsed.

The March 18, 2020, Executive Order

The President’s March 18, 2020, Executive Order invoked only Title I (Priorities and Allocations) of the DPA.  The Executive Order stated that:

To ensure that our healthcare system is able to surge capacity and capability to respond to the spread of COVID-19, it is critical that all health and medical resources needed to respond to the spread of COVID-19 are properly distributed to the Nation’s healthcare system and others that need them most at this time.

Accordingly, I find that health and medical resources needed to respond to the spread of COVID-19, including personal protective equipment and ventilators, meet the criteria specified in section 101(b) of the Act (50 U.S.C. 4511(b)).

March 18, 2020, Executive Order.

Guidance for Contractors

1. Pursuant to the priority performance authority of Title I, contractors are required to accept prioritized contracts and orders, also called “rated orders,” with some exceptions that have been established through regulations.

If a rated order is placed with a business, it must generally accept that order so long as it can satisfy the delivery terms, and must provide priority treatment to fulfill that order.  It should also place rated orders with subcontractors and suppliers to ensure that it can fulfill the terms of the rated order.

Exceptions to the requirement that a business accept a rated offer are limited and a careful analysis of the DPA and relevant regulations should be undertaken prior to rejecting one.

2. Contractors must place rated orders with its subcontractors and suppliers.

Contractors must use rated orders with its own subcontractors and suppliers in order to obtain the items needed to fill its rated order.  The priority rating included it the rated order must be included in each successive order placed to obtain the items needed.  Subcontractors, in turn, must use rated orders for its own suppliers.

3. Contractors have liability protection when fulfilling rated orders.

Section 707 of the DPA, 50 U.S.C. § 4557, provides liability protection against breach of contract claims for failure to perform non-priority work as a result of having to fulfill rated orders.  Section 707 provides that “No person shall be held liable for damages or penalties for any act or failure to act resulting directly or indirectly from compliance with a rule, regulation, or order issued pursuant to [the DPA], notwithstanding that any such rule, regulation, or order shall thereafter be declared by judicial or other competent authority to be invalid.”

4. There are penalties for not complying with a rated order.

Willful failure to perform any act required by the DPA, or willful performance of an act prohibited by the DPA, is a crime subject to a fine of not more than $10,000 and/or imprisonment for not more than one year.

5. Focusing on recovering costs and reasonable profits is essential.

Just because the government requires a company to be its supplier does not necessarily mean that the company needs to lose money or forego profits.  Handled properly, accepting a DPA order can be remunerative and the beginning of a longer-term supply relationship.  Getting started on the right foot by properly capturing costs and charging a fair and reasonable profit is key.

Rebuilding the Epidemic Industrial Base

The President is missing an opportunity by not immediately invoking the DPA authorities to expand the industrial base for the production of supplies necessary to fight COVID-19 and future pandemics.  The Federal government (as well as state and local governments and everybody else fighting COVID-19) desperately needs ventilators, surgical gowns, and masks, and should have a stockpile going forward for future pandemics.  While it is Federal policy to let the private sector fill these needs as market forces dictate, the global economy has pushed manufacturing to less expensive jurisdictions (e.g., China, India).  Any national stockpile of medical supplies and protective equipment for uses in emergencies is now facing a shortfall, and our industrial surge capacity to ramp up the production of key pandemic supplies is far too limited.

The Administration should seize this opportunity to promote a U.S. industrial base to produce the supplies and expertise we need for emergencies like COVID -19.  This issue is less about nationality of suppliers, and more about ensuring supply to meet our demands.  Having more overall supply from U.S. manufacturers is critical.

The DPA can be used for more than directing companies to produce goods for U.S. government customers.  It also authorizes the Administration to issue loans and loan guarantees to finance increases in private sector production capabilities.  These tools and incentives should be used now to achieve greater preparedness in the near future.  This can be done by assembling an experienced team of government and private experts in the areas of virus-related supplies to identify the needs, current resources, and expanded capabilities.

In the meantime, agencies should use President Trump’s DPA order this week to immediately ramp up discussions with individual suppliers, to issue prioritized contracts, and to start meeting the need for supplies of key equipment.

Using the DPA authority will not eliminate the problem entirely, but invoking and applying its full authorities now will be a big step forward in combatting the impacts of the current pandemic in the United States, as well as future pandemics.