GAB Decision 034
March 9, 1977 Oregon Research Institute, Inc.; Docket No. 76-2 Benstein,
Bernice; York, Edward Yourman, Edwin
ISSUES
The Oregon Research Institute, Inc. (ORI) appeals the elimination of
expenditures for legal services as a basis for the computation of
indirect cost rate for the calendar years 1973 and 1974. The
expenditures omitted were (1) the $400 monthly retainer paid to a lawyer
($4,500 for 1973 and $4,800 for 1974) and (2) legal fees of $3,072 (out
of a total of $4,766) paid in 1974, based on hourly charges which the
lawyer made in addition to the retainer paid him. The lawyer also
served as a member of ORI's Board of Directors and as its controller and
secretary-treasurer.
The Regional Director disallowed the retainer payments as not
reasonably necessary. He disallowed $3,072 of the hourly charges for
1974 because they were directly identifiable as relating to negotiations
and contracts for the sale of computer software by ORI, an activity not
of benefit to grants and contracts.
On September 14, 1976, the Chairman of the Board issued an order to
the parties to show cause. That order first described the facts and
issues as reflected by the record and directed the parties to show cause
by identifying the extent to which the order's statement of facts and
issues was incomplete or inaccurate and the reasons, if any, why, on the
issue of the legal retainer fee, the appeal should not be, on the one
hand, (1) rejected on the ground that the cost of the retainer is an
expense which an ordinarily * prudent person would not have incurred in
the conduct of a competitive business where government reimbursement was
not anticipated, or, on the other hand, (2) granted at least in part, on
the ground that the retainer fee constituted compensation for controller
services which could properly have been charged to the grant as
compensation for personal services."
It further directed ORI to "show cause in writing why the appeal
should not be rejected on the issue of billed legal costs related to
computer software sales on the ground that they are specifically
identifiable with a particular cost objective and on the ground that its
computer software sales were of no benefit to Federal grants and
contracts."
The Regional Director responded to the Order to Show Cause in a
memorandum dated October 5, 1976. He reaffirmed the prior position he
had taken but conceded that the cost of comptroller services "could be
compensated at the value of similar services in other organizations."
ORI's response to the order was made by a letter dated October 8,
1976, signed by its attorney as "Secretary-Treasurer." He asserted
that
the retainer fee did include (but did not assert it was solely for) the
cost of his services as controller and secretary-treasurer. He provided
documentation to show that the approval action by the Board of Directors
was based on an investigation and report may by a committee composed of
several of its members.A description of the experiences and
qualification of individual members of the committee and of other
members of the Board was submitted and their approval was cited as
evidence of the reasonableness of the legal services arrangement.
The response defended the $40 per hour charge as reasonable in light
of the attorney's experience and as equivalent to the charge he makes
for office time which he considers to be the "least demanding or lowest
class of legal service."
ORI elected not to submit anything further on the elimination of
legal services costs which related to sale of computer software, saying
that the order accurately reflects ORI's position and its uniform
practice.
We find that no material fact is in dispute and that the parties have
had full opportunity to present their views and arguments. The matter,
therefore, is now ripe for decision.
DISCUSSION
(a) Retainer Payments
The retainer payments should be included as an element of indirect
costs only to the extent that they fairly represent reasonable
compensation for administrative work as controller, secretary-treasurer
or otherwise. We conclude that the Regional Director should allow the
reasonable value of such services as have not been paid for by other
means, such as through the $40 per hour charge.
We note the statement in the Regional Director's memorandum of
October 5, 1976 that the services "could be compensated at the value of
similar services in other organizations." For clarification, we point
out that the value of these services should not automatically be limited
to what other organizations pay regular employees for performing similar
services. Use of an outside professional, who is independent of ORI
officials, to perform the administrative duties involved here may make
the services more valuable and the determination of that added value
will have to involve a subjective judgment which takes into account any
special needs of the organization and the experience and other
qualifications of the professional. We are not now deciding whether
there is a justification for paying more than would normally be paid
employees for performing such duties and, if so, how much more. That
determination should be made in the first instance by the Regional
Director after ORI has had an opportunity to make its position known.
To the extent that the monthly retainer relates to legal services, it
should not be considered as part of ORI's indirect costs. The
attorney's charges of $40 per hour for legal services is equivalent to
what he charges others for similar services since the services here are
basically in the category of "office services." /1/ We cannot accept
the
argument that the retainer is (1) compensation for time the attorney
spends in keeping abreast of legal developments in a highly specialized
field, (2) to assure immediate availability of services and (3) for the
attorney's loss of employment in conflicting situations.
Addressing the first assertion, there is no indication that the
problems are more novel than those encountered in general office
practice, particularly in light of the attorney's familiarity with the
entire area in which ORI operates as a result of his roles as a member
of the Board of Directors, and as controller and secretary-treasurer.
Moreover, the substantial volume of hourly legal services rendered in
itself assists him in developing a special competence for ORI problems.
As to availability of service, there is no showing that ORI has greater
need of immediacy than do clients generally. Finally, no facts are
given concerning the sacrifice of conflicting employment and we see no
reason to assume that these services would produce more conflicts than a
general office practice.
Each party submitted surveys of practices of other organizations in
paying retainer fees and on costs of legal services to them. We do not
give much weight to either survey. The survey submitted by the Regional
Director indicates that five other organizations with similar or larger
expenditures spend much less on legal services than ORI. This, however,
is not shown to be the typical situation but only that of the five
surveyed. ORI surveyed organizations, some public and some private,
non-profit which it claims shows that some organizations incur greater
legal services expenses than it does. It is not possible to ascertain
from the data compiled whether these organizations stand in the same
position as ORI with respect to their need for legal services or whether
the arrangements are comparable.
We believe this decision turns on the criteria for the "ordinarily
(sic) prudent person" concept as set out in A Guide for Non Profit
Institutions (OASC-5, Revised August 1974) and quoted in the Chairman's
September 14, 1976 Order to Show Cause. /2/ Where a grantee or
contractor pays the going hourly rate for legal services, it must show
unusual compelling reasons for paying in addition a monthly retainer for
those services. /3/ As stated above the reasons advanced by ORI here to
support the retainer as necessary to obtain legal services are not
compelling. Moreover, under the cited provision of the Guide,
consideration should be given to the fact that the arms-length
relationship is weakened because the attorney also is a member of the
Board of Directors and an official of ORI.
ORI also points out that retainer payments were included as allowable
indirect costs for prior years without a question having been raised.
If so, the inclusion was the result of agency oversight or error. In
either case it does not control the action here. Finally, we do not
read G31(c) on page 29 of the Guide (OASC-5) that retainer fees to be
allowable "must be reasonably supported by evidence of bona fide
services available or rendered," as obviating the need for establishing
that the basic arrangement itself is reasonable. The Guide does not
authorize payment for availability, when payment for that availability
is not reasonable.
(b) Hourly Charge as Indirect Costs
Desirably every expenditure would be related to a specific cost
objective. This becomes impracticable in the case of some expenditures
which have joint cost objectives and for these an allocation by formula
is permitted. Guide (OASC-5) section D; 45 CFR Part 74, appendix F,
section D.
The expenditures excluded from allocation here were clearly
identifiable, and identified, as being for a specific cost objective and
they should be so charged. ORI contends that the fact that most of the
legal srvices were for objectives not supported by Federal payments was
peculiar to 1974 and that in other years the opposite was true. This
does not place ORI under any disadvantage. It will receive appropriate
recognition for any expenditure it makes for a federally assisted
objective. Allocation to the objective involved is more precise and
realistic than assuming, contrary to known facts, that an expenditure
relates to all objectives of the organization.
On the other hand, some of the hourly charges for legal services do
relate to multiple cost objectives and have been included as indirect
costs.
CONCLUSION
The legal retainer payments are not allowable expenditures for legal
services but are allowed as administrative costs to the extent that they
paid for the performance or the functions of controller and
secretary-treasurer or other administration. The agency is directed to
make a determination of the amounts involved, subject to ORI's right to
further appeal.
The hourly charges of $3,077 for legal services in 1974 which relate
specifically to computer software sales are properly charged to that
cost objective rather than as indirect costs. * The word "ordinarly"
appears in the source document OASC-5 /1/ There were a few court
appearances for which the "minimum bar fee schedule" charge rather
than
an hourly charge was made. /2/ The prior issuance of the Guide,
dated August 1970, contained an identical provision as does 45 CFR Part
74, appendix F which was published September 19, 1973. /3/ The
audit report does not show the total hourly charges for 1973. For 1974
they were $4,766 at $40. per hour. Thus if an additional $4,800 is
added for retainer, the hourly cost of legal services would average
almost $80 per hour or twice what is described as the usual rate.
OCTOBER 04, 1983