Engineering firms with contracts for state infrastructure projects are being told to repay what they say they thought were forgivable federal payroll loans during the COVID-19 pandemic.
The requirement, according to an industry advocacy group, could send smaller firms into bankruptcy just as the federal government needs their services for a new wave of infrastructure projects. But the federal agency that oversees many of their contracts says the repayment is necessary to prevent firms from being compensated twice for the same work.
While nothing in the legislative language establishing the Paycheck Protection Program explicitly calls for engineering firms to return the loans, guidance in August 2020 applied Federal Acquisition Regulation rules to engineering services on federally funded transportation projects.
The guidance was issued by the Defense Department, which, because it is the most active agency in federal procurement, has the most influence on the council that sets acquisition policy. Its decision to apply the rules to the loans set the guidelines for other agencies.
Under those rules, firms with contracts in which expenses are covered to an agreed-upon limit with additional payment for profit must pay back the loans if they were used to pay for contractually covered costs.
That’s different from most federal agencies, which opt instead for lump-sum or fixed-price contracts. The distinction is important: While construction companies that received PPP loans while working on and receiving payments for DOT contracts aren’t on the hook for repayment, engineering companies, which traditionally use cost-plus contracting, are.
But engineers who use such contracts say the law is being implemented in a way that unfairly impacts them. They say they used the federal loans to survive the pandemic, and now they’re being asked to repay them while others are not.
For Robin Greenleaf, a Boston-based CEO of Architectural Engineers, the $590,000 payroll protection loan her company received was a vital source of funding when her business slowed dramatically in March 2020.
Her company employs 34 people, focusing on mechanical and electrical engineering systems design. About 15 percent of her workload comes from the Massachusetts Bay Transportation Authority. But the PPP loan helped supplement the entirety of the company’s business, she said, meaning her work for the transportation authority made what was supposed to be a straightforward government emergency loan “very complicated.”
Her company used the loan primarily to avoid layoffs during a period when every day she was getting calls from clients urging her to “put the pencils down” on projects. Even now, some of the projects that were put on hold or canceled have yet to come back.
Because of how the federal rules are being implemented, she’ll lose at least $129,000 a year, Greenleaf told the House Small Business Committee at a hearing in March, meaning she’ll have to make some of the reductions to her business that she had hoped the PPP loan would help her avoid.
“This is government giving with one hand and taking back with the other,” she testified at the time.
Steve Hall, a senior vice president of advocacy and external affairs at the American Council of Engineering Companies, said ordinarily such interpretation of federal acquisition rules “works great” for avoiding payment duplication.
But the pandemic, he said, requires special consideration. The PPP, he said, was created to save jobs. And for engineers, he said, it did, providing the needed money to pay rent or keep workers on the payroll during dire economic times.
Applying federal acquisition rules to those emergency loans, he said, “negated Congress’ intent to provide forgivable loans.”
“It’s a classic case of unintended consequences,” he said.
The DOT backed up the Defense Department’s decision in a March memo reinforcing the need to apply those regulations to cost-plus contracts.
“While the PPP was enacted to permit an impacted employer to retain its employees on the payroll, it was not enacted to provide an economic windfall to the employer,” the memo read, adding, “should the PPP loan proceeds be applied to costs within the scope of a federally funded contract and the PPP loan is forgiven, appropriate adjustments to the consultant accountant records become necessary to comply with (regulations.)”
According to the Federal Highway Administration, the PPP loan repayment requirement kicks in when one federal fund source is paying for a cost that is reimbursed by another federal fund source.
In this case, the agency argues, firms that qualified for PPP loan forgiveness by claiming the funds were spent on eligible costs — such as indirect labor, rent or utilities — were also reimbursed through FHWA grants. Since two federally funded programs paid for the same costs twice, a credit is due to one or the other, they say. Firms have the option of reducing or applying a credit to the firm’s indirect cost rate or choosing to repay the loan.
Engineers say the move has hit small firms hardest, leaving them in peril months before their services are potentially needed to begin engineering work on projects that the bipartisan infrastructure bill would fund. The House is scheduled to vote by Sept. 27 on legislation that includes $550 billion in new spending and represents plenty of potential new federal contracts.
Congress is aware of and has attempted to change the way the law is implemented. House Small Business held the related hearing in March, and a provision in the original House-passed infrastructure bill included language to limit the damage to engineering firms by requiring them only to credit back amounts equal to federal dollars included in contract payments for labor during the covered loan period in 2020.
But that bill was overwritten in favor of the Senate’s version. Sens. Tammy Duckworth, D-Ill., and Mike Braun, R-Ind., unsuccessfully sought to attach an amendment that would prevent the requirement from applying to forgiven PPP loans. But with their amendment not receiving a vote, the current implementation stands.
Greenleaf questions why engineers will have to pay back the loans while others will not, drawing a comparison to restaurants that got a loan despite having to close for three months.
“Nobody came along and said, ‘Now, discount the prices offered to your customers,’” she said.