DATE:  November 1, 1993

Case No.: 90-JTP-5

In the Matter of:

TEXAS DEPARTMENT OF COMMERCE,
     Complainant,

and

FORT WORTH CONSORTIUM,
     Complainant/Intervenor,

v.

U.S. DEPARTMENT OF LABOR,
     Respondent

BEFORE:  THE SECRETARY OF LABOR

                      FINAL DECISION AND ORDER

     This case arises under the Job Training Partner-ship Act [of
1982](JTPA or the Act), 29 U.S.C. §§ 1501-1791 (1988),
and the regulations issued thereunder at 20 C.F.R. Part 629
(1992).  The Texas Department of Commerce (TDOC or state), the
state's administrative agency for its JTPA grant, and the City of
Fort Worth, the Service Delivery Area (SDA) agency for five
cities in Tarrant County, Texas, through the Fort Worth
Consortium and its administrative agency, the Fort Worth Working
Connection (FWWC), appealed the Administrative Law Judge's (ALJ)
March 16, 1993, Decision and Order (D. and O.) which affirmed the
Grant Officer's disallowance of $385,933 of administrative costs
improperly charged to training costs.  The Secretary asserted
jurisdiction on May 7, 1993.
                                BACKGROUND
     Section 108 of the Job Training Partnership Act specifically
limits the expenditure of funds available to a service delivery
area for the administration of its JTPA title II programs to a
maximum of 15%.  29 U.S.C. § 1518.  To comply with the
imitations on certain costs in the Act, including the limitation
on administrative costs, the implementing regulations at 20
C.F.R. § 629.38(a) identify allowable cost categories for
title II programs as:  training, administration, and participant
support, and require that costs be allocated to a particular cost
category 
[PAGE 2]
to the extent that benefits are received by that category.
     The regulations provide, however, that costs which are
billed as a single unit charge, (generally characterized as fixed
unit price, performance-based contracts),[1]  do not have to be
allocated or prorated between the several cost categories, but
can be charged entirely to training, provided the agreements
include certain required conditions.  20 C.F.R. §
629.38(e)(2).  These requirements are that the agreement:
     (i)  Is for training under title II or for retraining under
title III,...;
     (ii) Is fixed unit price; and
     (iii)(A) Stipulates that full payment for the full unit
price will be made only upon completion of the training by a
participant and the placement of the participant into
unsubsidized employment in the occupation trained for
and at not less than the wage specified in the
agreement;...(emphasis supplied). Id.
     The Department of Labor's Employment and Training
Administration (ETA) did not provide any proposed guidance to
JTPA grantees concerning fixed unit cost, performance-based
contracts until November 1987.  After a six month review of
contracting practices, ETA issued Training and Employment
Guidance Letter (TEGL) No. 3-87.[2]   The TEGL described a series
of problems identified with fixed unit price contracts, as well
as various types of "problem contracts", and requested that the
states and SDAs examine their local contracting practices in this
regard.  ETA publish a Notice in the Federal Register on March
11, 1988, as a followup to the TEGL, soliciting comments
concerning policy considerations in administering JTPA
regulations pertaining to fixed unit cost contracts. 53 Fed. Reg.
7,989 (1988).  ETA published another request for comments on
August 8, 1988, regarding its proposed "official interpretation
of the requirements for writing acceptable fixed unit price,
performance-based contracts which conform to the cost-
classification waiver provisions of 20 CFR 629.38(e)(2) of the
Job Training Partnership Act (JTPA) regulations, and other
pertinent sections of JTPA and the JTPA regulations". 53 Fed.
Reg. 29,961 (1988).[3]   The Department's official interpretation
of these requirements was published in the Federal Register on
March 13, 1989, with an effective date of July 1, 1989. 54 Fed.
Reg. 10,459 (1989).
     The Department of Labor's Office of the Inspector General
audited the Fort Worth Consortium's JTPA programs for Program
Years 1985-1987, covering the calendar period July 1, 1986
through June 30, 1988.  The audit revealed that FWWC had entered
into a series of ten contracts with the Fort Worth Independent
School District, the Texas Employment Commission and Career 
[PAGE 3]
Works, a private non-profit company, characterized as "vendors". 
These vendors were to act on behalf of FWWC soliciting training
and employment opportunities for JTPA eligible participants by
local employers.  In addition, the vendors provided preemployment
assessment and employment placement services for the
participants, but not specific occupational training.  Employment
and on-the-job training (OJT) in employment was to be provided by
others, (the actual employers of the participants), under
separate contracts with FWWC, although the vendors had certain
responsibilities once a participant was placed, such as
monitoring the work sites and assisting the OJT employers with
record management.  The vendors were paid specific "benchmark"
fees as each participant went through the pre-employment process,
and as well as a fee if the participant was placed in an
employment situation, whether additional on-the-job training was
required or not.  In the latter case, the employment was
designated as a "direct placement."  D. and O. at 8-10.
     On September 25, 1989, the Grant Officer issued a Final
Determination which disallowed, inter alia, $385,933 as
misclassified administrative costs charged as training costs
under the ten fixed unit cost contracts.  The Grant Officer's
Finding 3 determined that the ten contracts "were not
specifically for training nor were payments under the contracts
contingent upon completion of training and the placement of the
participants.  Thus, the contracts to not meet the requirements
of 29 CFR 629.38(e)(2)."  Administrative File (A.F.) at 14-15. 
The presiding ALJ determined that although the activities
provided by the vendors under the ten questioned contracts
conformed to the definition for "training" in the Department's
official policy interpretation issued in March 1989, D. and O. at
19, the contracts did not meet the requirements of 20 C.F.R.
§ 629.38(e)(2), and were correctly disallowed by the Grant
Officer.  D. and O. at 22.
                                DISCUSSION
     The regulation pertaining to agreements incorporating single
unit charges that do not have to be allocated or prorated among
the several cost categories requires that the agreements must be
for training and placement of the participants into
unsubsidized employment in the occupation trained for.  The
agreements in question between FWWC and the vendors required
other parties, namely the employers of the participants, to
provide the requisite job training and placement in unsubsidized
employment, therefore the agreements do not conform to the
requirements of 20 CFR § 629.38(e)(2).  The ALJ's
affirmation of the Grant Officer's disallowance of such costs as
misapplied as training costs was correct.  Although the vendors
may have provided a necessary augmentation of FWWC's program
responsibilities, these activities 
[PAGE 4]
were essentially administrative in nature and must be categorized
as such.  The costs were disallowed by the Grant Officer because
they were in excess of the statutory limit for administrative
costs.
     Although the Labor Department failed to provide dispositive
direction to JTPA grantees as to what might be considered
acceptable contract provisions to conform to the cost
classification waiver of § 629.38(e)(2), the plain meanings
of the terms, albeit restrictive in application, are clear. 
Subsection 629.38(e)(2) had been transferred nearly intact from
the Comprehensive Employment and Training Act (CETA) regulations
at 20 C.F.R. § 676.41-2(b)(1990).[4]   The CETA regulation
permitting fixed unit cost, performance-based contracts had been
administratively adopted as a means to provide flexibility to
certain training providers to foster more intensive skill
training to meet known labor market needs for higher paying entry
level jobs.
     The Department assumed, wrongly as it turned out, that this
type of performance-based contracting would continue under JTPA
as it had under CETA, developing additional high quality skills
training.  Instead, Departmental officials recognized that the
use of fixed unit cost contracting had become nearly pervasive
throughout the JTPA system.  It was evident that some grantees
realized that costs which would otherwise be categorized as
administrative costs and therefore subject to statutory and
regulatory expenditure limits, could be folded into the training
cost category under fixed unit costs contracts, and thereby avoid
the restrictive administrative cost limits.  Although
Departmental policy makers were determined not to over-regulate
the JTPA program, and declined to define key terms in the TEGL,
grantees who disregarded the specific requirements of the
regulations, particularly when the regulation delineates an
exception to a general program requirement, do so at their peril. 
The state's and FWWC's contention that they should be held
harmless for the misallocation of administrative expenditures
because of the Department's failure to redefine the meaning of
the word "training" in 20 C.F.R. 629.38(e)(2) is not persuasive,
for the language of the regulations is clear.
     Although the official policy interpretation concerning
§ 629.38(e)(2) contracts includes many of the vendors'
activities as allowable training costs for appropriate training
contractors, it specifically excludes tiered administrative
structures, which involve intermediary administrative entities
such as the vendors in this case, from utilizing fixed unit cost
contracts.  If such an entity is needed, its costs are to be
charged to the administrative cost category.  54 Fed. Reg. at
10,467.
     The state contends that given the ALJ's determination of a 
[PAGE 5]
contractual linkage between the vendors' contracts and the
employers, some of the disallowed costs should be allowed on
behalf of trainees who successfully completed training and were
placed in unsubsidized employment.  TDOC's Initial Brief at 4.  I
note that although the ALJ's finding appears to be contrary to
the official policy concerning the exception of tiered
arrangements using fixed unit cost contracts, the Department did
not except to the ALJ's finding "that the contracts entered into
by the State and the FWWC and the subcontractors [the vendors]
were for 'training' as it was commonly understood pre and post
official policy interpretation by the U.S. Department of Labor"
D. and O. at 19.  The Grant Officer appears to be amenable to
this claim:  "This does not mean that no costs under these
contracts can be charged to the training cost category.  There
are certainly costs of activities that are appropriate and
allowable charges to the training cost categories". Response
Brief at 6.  However, the Grant Officer's Final Determination at
6, A.F. at 15, states:  "[w]hile the documents do show that some
activities under the contracts were properly chargeable to
training under 20 CFR 629.38(e)(1), these are not the costs in
question.  The auditors already made a determination that
approximately $956,000 of the ,482,000 were appropriately
charged to training".  It is unclear from the record before me
whether all of the costs for participants who completed their
training and were placed in unsubsidized employment were credited
before the total of disallowed costs was determined, which is the
implication of the language of the Final Determination, or if
some costs might yet be considered "appropriate and allowable
charges" alluded to in the Grant Officer's Response Brief.
     Further, Fort Worth contends that it offered documentary
evidence to the Grant Officer pertaining to stand-in costs for
the disallowed costs in a timely fashion.  Fort Worth appended
copies of letters to the Grant Officer relating to these
substitute costs in its Reply Brief.  These letters appear to
pertain to the Grant Officer's Final Determination Finding 7,
while the issue before me pertains solely to Finding 3.  It is
unclear whether Fort Worth's presentation directly related to the
Grant Officer's withdrawal of Finding 7, or if it is appropriate
for consideration with regard to Finding 3, as well.
     Finally, I find that the state did not exercise due
diligence in its oversight responsibilities of FWWC's agreements
with its vendors and is not entitled to a waiver of sanctions
pursuant to section 164(e)(2) of the Act.  The state's
supervising agency should have been award of the Department's
concern regarding the types of contractual relationships entered
into between FWWC and its vendors, and should have initiated
appropriate action to warn the parties, if no preclude the 
[PAGE 6]
continuation of these arrangements.
                                   ORDER
     The ALJ's decision is AFFIRMED.  The Grant Officer is
ORDERED, however, to review such records as are made available by
the Complainant and the Complainant/Intervenor to: (1) determine
whether there are additional allowable costs which pertain to
trainees that completed their requisite training and were
successfully placed in unsubsidized employment which should
appropriately be credited to the disallowed costs total; (2)
determine whether allowable stand-in costs for disallowed costs
were timely presented by the Complainant/Intervenor as they
contend; and (3) report back to me as to whether other sanctions
provided for by the Act and regulations in lieu of repayment
might not more appropriately be levied against the State.
     SO ORDERED.

     ROBERT B. REICH
     Secretary of Labor


[ENDNOTES]

[1] Fixed unit cost, performance-based contracts provide that the
contractor will be paid a specific negotiated cost for each
participant who completed training and was placed in unsubsidized
employment.  The fixed unit cost was not allocated by cost
category and the contractor assumed the risk of non-payment for
any participant who failed to complete training or was not placed
in unsubsidized employment.


[2] Training and Employment Guidance Letter (TEGL) No. 3-87, Nov.
18, 1987, "Mounting Concerns Regarding 'Problem Contracts'
Written under 20 CFR 629.38(e)(2)".


[3] A full discussion of the background concerning the
development of the Department's official policy interpretation
can be found at Job Training Partnership Act; Requirements for
Acceptable Fixed Unit Price, Performance-Based Contracts Written
Under 20 CFR 629.38(e)(2); Notice; request for comments. 53
Fed. Reg. 29,961, 29,962 (1988).


[4] 20 C.F.R. § 676.41-2 entitled [a]llocation of fixed
unit charge, provides
     (b) Costs which are billed as a single unit charge do not
have to be allocated or prorated among the several cost
categories but may be charged entirely to training when the
agreement:
      (1)  is for classroom training;
      (2)  is fixed unit priced; and
      (3)  Stipulates that full payment for the full unit price
will be made only upon completion of training by a participant
and placement of the participant into unsubsidized employment in
the occupation trained for and at not less than the wage
specified in the agreement (emphasis supplied).
     The CETA regulations were last published in the C.F.R. in
1990.