DOT gives guidance on interaction of PPP forgiveness, indirect cost rates

On June 21, the New Jersey Department of Transportation provided further guidance regarding the treatment of PPP loan forgiveness on indirect cost rates. As has been previously discussed, many state agencies, now including New Jersey, in accordance with FAR 31.201-5, are requiring consultants to credit their ICR for the applicable PPP loan forgiveness amount.

Here are three things to be mindful of:

  • To minimize the application of credits to allowable indirect costs, the entire 24-week covered period should be used;
  • Any forgiveness of PPP loans should first be applied to direct labor of commercial contracts, as long as the loan proceeds were truly spent in such manner;
  • The consultant must provide adequate supporting documentation to NJDOT that identifies these costs as included in its original PPP forgiveness application.

The DOT’s June 21 letter said this documentation should include job cost and labor distribution reports that include project numbers, descriptions and each contract customer. Thereafter, forgiveness could be applied to unallowable indirect costs before being applied to allowable indirect costs.

The letter also discussed unallowed and excluded costs.

“If PPP funds were expended on unallowable indirect costs, the consultant must provide NJDOT with a detailed transaction summary to document that costs were not originally classified as allowable indirect costs,” it said. It also noted, “All excluded direct costs must be supported by consultant schedules detailing transactions by excluded contract, contract client, contract basis of payment, employee name, and hours and wages that reconcile to the PPP loan forgiveness application.”

The letter provided additional clarification on the application of the ICR, including PPP loan credits. Overhead schedules with PPP loan credits included will be utilized for NJDOT settle-up purposes only. Forgiven PPP loan proceeds are to be credited to the ICR for the year in which PPP funds were forgiven.

These reduced rates will only impact cost plus fixed-fee contracts with direct labor paid in the year in which PPP proceeds were forgiven. There will not be any impact on fixed-price contracts or funding for any new contracts.

Please note, if a consultant received an Employee Retention Tax Credit, this must be reflected in full as a credit against the ICR. All consultants are required to submit a NJDOT PPP Certification form with their annual overhead submission. It is advised to pull this documentation together now so that it is ready to be provided to NJDOT.

Although not entirely favorable to firms with NJDOT contracts, this guidance provides enough direction that firms can finally decide on whether to apply for forgiveness of their PPP loans. It is also important to note that firms that elect not to apply for forgiveness and instead repay their PPP loans would not be subject to these recent rulings.

Christina Lazaro, CPA, is a senior manager at Withum.