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U.S. SBA Corrects Rulemaking on Paycheck Protection Program Loans for Construction Businesses

In a whirlwind of legislation, rulemaking,  guidance, and answers to FAQs on the CARES Act, inevitably confusion arose related to business eligibility for the Paycheck Protection Program’s (PPP).   Under the PPP, $349 Billion in loan funding is available for businesses impacted by COVID-19.  Eligible businesses can borrow up to 2.5 times their average monthly payroll to cover costs such as payroll (mostly), as well as rent, mortgage interest, and utilities.  And if certain requirements are met by the business, all or almost all of the PPP loan will be forgiven.  Even putting aside the potential forgiveness benefit, the PPP loans offer favorable terms for businesses – low interest, no collateral, and no personal guarantees. Construction businesses clearly have a need for these PPP loans in an effort to blunt the immediate economic impacts of delayed, slowed, or stopped projects.

However, in a seeming contradiction to the CARES Act statutory language, which allowed businesses with 500 or fewer employees to apply for the PPP loans, the U.S. Small Business Administration (SBA) issued its interim final rule on April 2, 2020 appeared to add an additional requirement. Basically the SBA’s interim final rule required an eligible business to have 500 or fewer employees AND be a small business concern as defined in section 3 of the Small Business Act (15 U.S.C. 632) and be subject to SBA’s affiliation rules under 13 CFR 121.301(f).   Because a small business concern is tied to the NAICS codes, and because a construction firm’s size under the NAICS codes is tied to its gross receipts rather than its number of employees, many construction businesses might not be able to meet both of the requirements connected by the “AND” above.  As a result, these many construction businesses  would not be able to qualify for these PPP loans.

The Associated General Contractors of America (AGC) immediately reacted to the SBA interim final rule to highlight this inconsistency and implore the SBA to make a correction.  As the AGC explained: “Such a construction effectively nullifies the 500 or fewer employee test put forth by Congress in the CARES Act and Treasury in its guidance and makes the traditional gross receipts test the only one applicable to the construction industry.” See that letter here.

On April 6, 2020, the SBA addressed the confusion by issuing answers to FAQs and confirming that “borrowers and lenders may rely on the guidance provided in this document.” See the updated FAQs here.   In the answer to FAQ #3, the SBA clearly stated, consistent with the CARES Act, that “In addition to small business concerns, a business is eligible for a PPP loan if the business has 500 or fewer employees whose principal place of residence is in the United States, OR the business meets the SBA employee-based size standards for the industry in which it operates (if applicable).” (emphasis added).  As a result of this quick change back to “OR,” any construction business with less than 500 employees can apply for a loan under the PPP.

This is a welcome and timely correction for construction businesses as companies across the country already began submitting their applications for the $349 Billion in PPP loan funding on Friday, April 3, 2020.   Fortunately more help may be on the way from the PPP —  Treasury Secretary Steven Mnuchin on April 7, 2020 requested that Congress secure another $250 Billion to meet the “surging demand” for these PPP loans.  (See more here.)  A vote is expected this week.

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About this Author

Katharine E. Kohm Construction Litigation Attorney Pierce Atwood Law Firm Rhode Island
Associate

Katharine Kohm focuses her practice on business dispute resolution and construction law. In her construction practice, Katie has represented owners, general contractors, design professionals, and subcontractors in state and federal courts and at arbitration and mediation proceedings throughout New England. In that capacity, Katie has provided advocacy to assert and defend claims involving bid protests, breaches of contract, change orders, cardinal change, default, defective work, delay, design...

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