Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Traylor Products and Services, Inc.
DATE: May 22, 1992
Docket No. 91-110
Decision No. 1331
DECISION
Traylor Products and Services, Inc. (TPS, the Grantee) 1/ appealed
a
determination by the Grant Appeals Board of the National Institutes
of
Health (NIH), of the Public Health Service (PHS), disallowing
$53,744.65
charged to a Small Business and Innovation Research (SBIR) grant
for the
periods September 30, 1985 through March 29, 1986 (Phase I)
and
September 30, 1986 through December 31, 1987 (Phase II). 2/ As
we
explain more fully below, we sustain the disallowance of
$17,192.10,
subject to downward adjustment should NIH find that
documentation
supports allowing certain expenses as pre-award costs for Phase
II of
the grant; we reverse the disallowance of $36,552.55, subject
to
possible adjustment based on NIH's determination of the amount
properly
allowed for the purchase of Sensory Quills.
Background
On September 30, 1985, the NIH National Eye Institute (NEI) awarded TPS
an
SBIR grant for the development of "tactile paper," a specially coated
paper
which when written on with a pen-like device would produce a
raised, colored
impression that could be felt by a blind or low vision
person and seen by a
sighted person. The grant proposal and NEI review
documents indicate
that if developed, tactile paper would have
significant applications in
communications and teaching for low vision
and blind individuals, and would
be a notable improvement on available
writing devices for producing raised
impressions, including one invented
and marketed by Dr. Traylor, the Sensory
Quill.
The Phase I grant was awarded to determine whether there were
coatings
which when applied to paper would produce the desired raised
impression
upon receipt of appropriate stimuli from the pen, such as
pressure,
heat, electricity or fluid. The purpose of Phase II funding,
according
to the grant application, was to field-test and evaluate the
several
materials which had been developed as prototypes under Phase I
funding.
In a letter dated August 16, 1990, NEI disallowed $24,491.83
and
$47,734.81 for Phases I and II, respectively. The disallowance
was
based on recommendations contained in a February 6, 1990 report of
a
review of grant expenditures conducted by the NIH Division of
Management
Survey and Review (DMSR) which identified those amounts as
expenses
improperly charged to the grant. The Grantee appealed the
disallowance
to the NIH Grant Appeals Board, which in a June 6, 1991 decision
(NIH
Decision) upheld the disallowance with certain exceptions that
were
based on its determination of the amount of professional time
that
should be properly allocated to the grant. The NIH Decision
modified
the disallowance to $16,507.54 for Phase I, and $42,244.65 for Phase
II.
In a notice of appeal to this Board dated July 16, 1991, the
Grantee
appealed $11,500 for Phase I, and the entire amount for Phase
II,
resulting in the total amount at issue, $53,744.65. Case
development
was delayed by a stay of proceedings and several extensions
for
development of the record, to permit the parties to respond to
materials
provided, and for two telephone conferences to discuss the
appeal
process.
The record in this appeal consists of the parties' submissions before
the
Board, including the materials entered before the NIH Board and
cited in the
NIH Decision. These include copies of the draft and final
DMSR review
reports and the Grantee's comments thereto; copies of grant
applications and
notices of grant award; and copies of correspondence
among various parties
associated with the grant award and administration
process. The record
also includes a copy of a brochure for which
printing costs were
disallowed. In his last submission before the
Board, the Grantee
requested that the Board examine copies of the
invoices and canceled checks
that he provided to the DMSR reviewers.
During a telephone conference on
January 7, 1992, the Presiding Board
Member instructed the parties that we
would not request these materials
unless, through the course of our review,
we determined that they would
be necessary for our analysis of particular
items of expenditure. Based
on our review of the record, we conclude
that these materials are not
necessary to our disposition of the
appeal. For those items of
expenditure for which the receipts and
canceled checks might be
relevant, our decision turns on whether the expenses
are allowable as a
matter of law and policy, and not on whether the
expenditures were
actually incurred.
Summary
The Grantee in his notice of appeal challenged NIH's disallowance of
the
following expense items:
Phase I
Indirect Costs $11,500.00
Phase II
Sensory
Quills
$25,276.95 Consultant
11,250.00 Rent
253.70
Telephone
(500.24)
Insurance
865.60
Travel
2,472.85 Meals
1,243.78
Brochures
533.64
Miscellaneous
348.13
For the disallowances of charges for rent, telephone, and insurance,
the
amounts above reflect recalculations ordered by the NIH Decision but
not
completed until after the Grantee filed his notice of
appeal.
Consequently, for rent and insurance, the amounts currently at issue
are
less than the amounts that the Grantee cited in his notice of
appeal.
For telephone charges, NIH's recalculations resulted in allowance of
the
amount that NEI disallowed plus an additional $500.24 as shown
above.
For miscellaneous expenditures, the NIH Decision reduced
the
disallowance to the amount above, but the Grantee's appeal continued
to
reflect the amount originally disallowed by NEI.
Based on our analysis below, we reverse the disallowances for
consulting
services and for the Sensory Quills that the Grantee demonstrated
were
received by the agencies and institutions to which they were to
have
been delivered as part of the evaluation of prototypes of tactile
paper.
We also reverse the disallowance of $25.60 in miscellaneous
expenses.
We sustain the disallowances of the charges for travel
expenses,
insurance, meals, rent, for printing the brochure, and $322.53 of
the
disallowance of miscellaneous expenses. We sustain the disallowance
of
the $11,500 indirect cost award for Phase I, but instruct NIH to
examine
documentation for the expenditures charged to those funds supplied
by
Grantee to determine if they qualify as pre-award expenses for Phase
II.
We determine that the Grantee's appeal of the disallowance of
telephone
expenses is moot, as the disallowance of this item was reversed in
its
entirety as a result of the NIH Decision.
Applicable law and regulations
The notice of grant award stated that the SBIR grant was authorized by
42
U.S.C. . 241, 15 U.S.C. . 638, and 42 C.F.R. Part 52, "Grants for
research
programs." As its "terms of acceptance," the grant award
included
the legislation and regulations cited above; the PHS
Grants
Administration Manual and the PHS Grants Policy Statement in effect
as
of the beginning date of the grant budget period; and 45 C.F.R. Part
74,
"Administration of Grants."
An attachment to the notice of grant award for Phase I stated that
the
allowable costs of activities conducted by for-profit
organizations
would be determined by applying the cost principles for
contracts with
commercial organizations set forth in 41 C.F.R. Part 1-15.2; a
similar
provision is found in 45 C.F.R. Part 74 at section 74.175, which
cites
the Federal Procurement Regulations at 41 C.F.R. Subpart 1-15.2 as
the
cost principles applicable to for-profit organizations other
than
hospitals. Effective April 1, 1984 and applicable to all periods
of
this grant, the Federal Procurement Regulations were incorporated
into
and replaced by the Federal Acquisition Regulation at Title 48 of
the
C.F.R. The cost principles for commercial organizations were
codified
at 48 C.F.R. Subpart 31.2., which was cited in subsequent notices
of
grant award. Under the Federal Acquisition Regulation, a cost
is
reasonable if, in its nature and amount, it does not exceed that
which
would be incurred by a prudent person in the conduct of
competitive
business. 48 C.F.R. . 31.201-3 (1985). In addition to
this standard of
reasonableness, the cited regulations and policies contain
specific
rules governing the allowability of different items of
expenditure.
The PHS Grants Policy Statement applicable to the time period in
this
appeal was issued December 1, 1982. An addendum was issued
effective
for grants with budget periods beginning on or after April 1, 1984,
and
a new PHS Grants Policy Statement was issued January 1, 1987.
Unless
specifically noted, all references to the PHS Grants Policy
Statement
refer to the 1982 version.
Analysis
Phase I
Indirect costs
NIH disallowed $11,500 erroneously awarded for indirect costs for Phase
I
and spent on costs incurred after the end of Phase I but before the
beginning
of Phase II. It is undisputed that the Grantee and NEI
negotiated
funding for $38,500 in direct costs for Phase I of the grant,
with indirect
costs neither requested nor negotiated. NEI subsequently
informed the
Grantee in a letter dated October 9, 1985, that it had made
an award of
$38,500 in direct costs for the Phase I period of the grant.
However, the
Phase I notice of grant award included $11,500 in indirect
costs in addition
to the $38,500 in direct costs, for a total Phase I
grant award of
$50,000.
The $11,500 remained unspent at the end of Phase I. The
Grantee
asserted that he was told in a telephone conversation with the
NIH
financial office to withdraw these monies or else access to funding
for
Phase II would be delayed. He maintained that these
instructions
amounted to an implicit, no-cost extension of the Phase I grant
period,
and that the $11,500 was spent in support of the grant. With
his
October 29, 1991 submission to the Board, the Grantee provided copies
of
65 canceled checks showing payments of $18,506.54 to staff,
telephone
companies, an insurance company, for equipment leasing, and for
office
rent, from March 14 to September 27, 1986.
NIH sustained the disallowance of the $11,500 on the grounds that (1)
the
Grantee did not request indirect costs in the grant application; (2)
the
Grantee did not request or receive authorization from NEI to
transfer amounts
budgeted for indirect costs to absorb increases in
direct costs, as required
by PHS policy; (3) the expenses charged to the
grant occurred outside the
grant period and the Grantee did not request
or receive an extension of the
Phase I grant period, as required by PHS
policy; and (4) the Grantee had not
provided documentation of these
expenses to the NIH Board by the time of its
hearing. NIH assumed that
the Grantee was told to draw out the
remaining $11,500 in a telephone
conversation with staff of the Department of
Health and Human Services
(HHS) Payment Management System.
The PHS Grants Policy Statement provides that:
A noncompeting extension may be requested to extend
the final
budget period of a project period, or any
other budget period where
justified, for up to 12
months beyond the ending date of the budget
period
as shown on the Notice of Grant Award, unless
otherwise
restricted by a program's statute or
governing regulations. Such
an extension may
be made without additional funds or with a minimal
amount of further support, and may be approved by
administrative
action of the Grants Management
Officer of the PHS awarding office
and awarded
without competition. The request for a
noncompeting
extension must be in writing, stating
the reason for the extension,
and the additional
time and funds, if any, being requested, and
should
be made before the expiration of the currently active
budget
period. A non-competing extension of a
budget period or project
period may also be
initiated by PHS. Notice of extension must be
made through issuance of a revised notice of award. PHS Grants
Policy
Statement, at 7. More generally, 42 C.F.R. . 52.6(d) permits
the
carryover of balances remaining unobligated at the end of a grant
period
to a subsequent budget period, providing a continuation award is
made
for that period and the written approval of the Secretary of Health
and
Human Services or his designee is obtained.
The PHS Grants Policy Statement also provides that, for
discretionary
grants under programs that require approval of a categorical
budget as
part of the application process, prior approval must also be
obtained
from the Grants Management Officer of the PHS awarding office for
the
transfer of amounts awarded for indirect costs to absorb increases
in
direct costs. PHS Grants Policy Statement, at 43. Part 74 of
45 C.F.R.
"Administration of Grants," requires that a grantee having an
approved
budget obtain prior approval for any budget revision which will
involve
transfer of amounts budgeted for indirect costs to absorb increases
in
direct costs. 45 C.F.R. . 74.105(a)(1).
Although the Grantee received oral instructions to spend the $11,500,
he
did not have the required written authorization to spend these Phase
I
funds after the end of the Phase I grant period. The Board has
held
that a grantee cannot reasonably rely on oral advice contrary to
written
policy and regulations. Florida Dept. of Health and
Rehabilitative
Services, DAB No. 1303 (1992). Moreover, any claim that
NIH should be
estopped from disallowing improper expenditures based on
erroneous, oral
advice of an employee must fail. The United States
Supreme Court has
held that estoppel is not available against the government,
if at all,
without at least a showing of affirmative misconduct. Office
of
Personnel Management v. Richmond, 110 S. Ct. 2465 (1990), reh.
denied,
111 S.Ct. 5 (1990); Schweiker v. Hansen, 450 U.S. 785 (1981).
Although
the Court has never defined "affirmative misconduct" or outlined
its
essentials, it appears to require something more than failing to
provide
accurate information or negligently giving wrong advice.
Georgia Dept.
of Human Resources, DAB No. 870, at 10 (1987); Shenandoah
Professional
Standards Review Foundation, DAB No. 652, at 10 (1985).
Here, the notice of grant award specifically informed the Grantee of
the
applicable laws and regulations under which the grant would
be
administered, including the PHS Grants Policy Statement, and
provided
that by accepting the awarded funds, he acknowledged that he
would
comply with those provisions. Despite the erroneous advice that
the
Grantee received, he spent these funds during a period when no grant
was
in effect, without authorization for either a noncompeting extension
or
for transfer of indirect to direct costs as required by PHS
policy.
Additionally, although NIH may have contributed to the
misunderstanding
surrounding these expenditures, the Grantee should have been
put on
notice that something was amiss when he received an award in excess
of
what he requested and negotiated, including an award of indirect
costs
he never sought. The Grantee also failed to support his assertion
that
NIH fully intended to award $50,000 for Phase I as that is the
standard
award for grants of this sort. In this respect, NIH's failure
to answer
the Grantee's challenge to provide evidence of other grants with
Phase I
awards less than $50,000 has no bearing on this issue. We
conclude NIH
should not be estopped from enforcing the policy requiring
written
authorization for an extension of the Phase I grant period from
the
Grants Management Officer because of the erroneous oral
information
provided to the Grantee. Therefore, we sustain this portion
of the
disallowance.
However, we note that the evidence that the Grantee provided to the
Board
shows expenditures during the interim between Phases I and II that
may have
been in furtherance of grant activities. Although unallowable
as an
extension of the Phase I budget period, they may be allowable as
pre-award or
start-up costs for Phase II under applicable regulations
and policy.
The PHS Grants Policy Statement provides at page 34 that a
grantee may charge
pre-award expenses incurred before the beginning date
of the budget period of
a noncompeting continuation award that is within
an approved project period
provided (1) the costs concerned are
considered necessary to the conduct of
the project, (2) the costs are
allowable under the continuation award, and
(3) when required for
specific expenditures or activities, prior approval was
obtained. Here,
the Phase I notice of grant award indicates that the
first project
period was coterminous with the Phase I budget period.
However, there
was a subsequent project period which included Phases II and
III of the
grant, and so we conclude that the first project period was
reasonably
related to the subsequent project period such that expenditures
incurred
prior to Phase II could possibly qualify as pre-award
costs.
Consequently, NIH should examine the documentation provided by
the
Grantee to determine if these expenditures are allowable as
pre-award
costs. If the Grantee is dissatisfied with the results of
NIH's review,
he may return to the Board within 30 days after receipt of
NIH's
determination for review of this limited issue.
Phase II
Sensory Quills
The Sensory Quill is a tactile writing device developed, patented
and
marketed by the Grantee that produces a raised line on
plastic-based
paper. The Grantee planned to evaluate tactile paper
prototypes through
comparisons with available technologies for tactile
writing, including
the Sensory Quill. The descriptions provided by both
parties agree that
the Sensory Quill is relatively cumbersome and expensive,
requires
electricity and does not produce a colored line, limiting
its
application. The Grantee has indicated that the successful
development
of tactile paper as proposed by the grant would essentially
render the
Sensory Quill obsolete. NIH disallowed $25,276.95 for the
cost of
Sensory Quills that were purchased from the Grantee's inventory
and
which were to be provided to various agencies, such as schools for
the
blind, that had agreed to participate in the evaluations of
prototype
samples of tactile paper.
After DMSR issued its draft review report, the NEI grants office
commented
that they considered the Sensory Quills a reasonable charge to
the grant that
should be allowed if there was proof of receipt by the
evaluating
agencies. The final DMSR report recommended disallowance on
the grounds
that the quills were still in the Grantee's inventory and
had not been
distributed to the evaluating agencies by the end of the
Phase II grant
period. The report stated that the appropriate time to
purchase the
Sensory Quills would have been when they could be used for
grant purposes,
and not in advance of that time. DMSR deferred to NEI
the determination
of whether the quills were a necessary purchase for
evaluation; if so, it
recommended that the Grantee be instructed to
provide proof of receipt of the
quills by each evaluating organization.
The NEI's August 16, 1990 disallowance letter upheld
DMSR's
recommendations and disallowed the Sensory Quills until the
Grantee
could provide evidence that the organizations participating in
the
evaluation had received them. The Grantee submitted 31
certifications
of receipt before the NIH Board, and the NIH Appeals Office
conducted an
inquiry of a sample of the quill recipients. NEI agreed
after reviewing
the results of the inquiry that the Grantee had indeed
distributed the
quills. (The Grantee subsequently provided three
additional
certifications of receipt to NIH and the Board by letter dated
January
8, 1992; he reported that two of these receipts were included because
he
did not know whether they had been submitted earlier). NIH
then
sustained the disallowance on the grounds that the quills were
not
necessary and allowable charges at the time that they were
purchased.
NIH noted that although the quills could be an appropriate charge
to the
grant, they were purchased in 1987, when there were fewer than
ten
prototype samples of tactile paper, and that sample material was
not
available for evaluation until July, 1989. NIH concluded that
without
samples to evaluate, the purchase of the quills was
unreasonable.
Furthermore, no evaluation had taken place by the time that NIH
met to
consider the appeal.
The Grantee argued that the grant proposal specified the Sensory Quill
as
equipment against which the tactile paper would be evaluated and that
he had
been holding the quills in his inventory until prototype samples
of tactile
paper were available for distribution and evaluation. Quills
were given
to institutions which did not already have them, he stated,
and proof of
shipment and receipt was provided to NIH.
We believe that the development of a new invention is not susceptible
to
accurate scheduling. Consequently, the reasonableness of
this
expenditure should be assessed as of when it was made, and not with
the
benefit of hindsight. Here the record reveals that development of
a
successful prototype took far longer than the Grantee had
anticipated.
NIH found that research with one paper company resulted in
unsuccessful
production runs of tactile paper on two occasions in 1989, and
that
another company had a successful attempt at production of paper in
July,
1989. NIH Decision, at 27. At the time these charges were
made NIH
could not have predicted precisely when production of a
successful
prototype would occur, and thus had no basis to question the
timing of
the decision to purchase the quills for use consistent with the
approved
protocol. Accordingly, we conclude that the Sensory Quills
were a
reasonable charge to the Phase II grant. In making this
determination,
we consider it significant that NEI staff who were involved in
the
administration of this grant believed that the Sensory Quills were
a
reasonable expense in the evaluation of tactile paper
prototypes.
Memorandum from NEI Grants Management Officer to Director, DMSR,
May 10,
1990.
We reverse the disallowance up to the value of the Sensory Quills
for
which the Grantee has provided documentation of receipt. In
this
regard, we note that it is not apparent from the record before us
how
the amount charged to the grant was calculated. NIH's
submission dated
January 21, 1992 refers to four checks written from May
through
November, 1987 which total the amount on appeal, and NIH stated that
it
assumed that the charge represented about 31 quills from the
original
inventory of 51 large units and 17 smaller units, retail priced at
$795
and $425, respectively. NIH Decision, at 24. However, we
note that 31
units would have to cost an average of $815 each to account for
the
$25,276.95 charged to the grant and disallowed by NIH. NIH
should
determine the value of the 31 quills for which the Grantee
provided
evidence of receipt to NIH plus any additional quills represented by
the
receipts provided with his letter of January 8, 1992. NIH also may
wish
to examine the issue of any ongoing interest it may have in the
Sensory
Quills under 45 C.F.R. Part 74, Subpart O, "Property," and under the
PHS
Grants Policy Statement.
Consultant
NIH disallowed $11,250 paid to an accountant for consulting services
the
Grantee described as development and keeping of business records,
and
development of a data base and software to evaluate
questionnaire
information. The disallowed amount comprises one-half of
monthly
payments of $1,500 for the fifteen months of Phase II. NIH
disallowed
that amount on the basis of the consultant's statements to the
DMSR
reviewers that he had been spending 50% of his total work effort
on
grant-related activities through December, 1986 and 95% through
1987,
and that during 1987 he had been very busy because the Grantee
was
raising money from investors. The reviewers assumed that during
1987
the consultant had spent the same time on allowable
grant-related
activities as previously, and that the increase in his time was
the
result of unallowable fund-raising activities. NIH allowed half of
the
Grantee's payments to the consultant on the basis that he had spent
50%
of his time on grant-related activities, and determined that the
DMSR
reviewers' approach was reasonable in the absence of any records.
The Grantee denied that the consultant was paid for
fund-raising
activities from grant funds, and maintained that the payments
charged to
the grant did not amount to full- time compensation for the
consultant,
who was not an employee. He asserted variously that the
consultant
performed the unallowable services as an equity-interest holding
person
whose interest would be satisfied if the business became a success,
that
he received some payment in stock for these services, and that he
also
provided services for others.
NIH accepted and the Grantee did not dispute DMSR's determination that
the
consultant, a Certified Public Accountant, spent one-half of his
total work
time on allowable grant-related activities. The issue before
us is
whether the payments charged to the grant were properly allocated
to the
one-half of the consultant's work time spent on allowable
activities or were
intended to represent the consultant's total,
full-time compensation.
Here, review of the record fails to reveal any
indication or understanding
that the payments to the consultant that
were charged to the grant were
intended to constitute his full-time
compensation on the basis of a 40-hour
work week, and there has not been
any identifiable charge to federal funds
related to time spent on
non-grant activities. See Kuakini Medical
Center, DAB No. 1242, at
13-15 (1991). This is consistent with the
NIH's treatment of the
accountant as a consultant for whom the cost of
insurance was not
allowable. Additionally, the NIH Decision described
office space
furnished to the accountant as part of his reimbursement (NIH
Decision,
at 22) which is inconsistent with the notion that the $1,500 per
month
was 100 percent of his reimbursement for all grant and
non-grant
services.
The $1,500 a month paid to the consultant for 50% of his time
equals
$18.75 per hour on the basis of one-half of a forty hour work week.
3/
We conclude that this is not an unreasonable fee for
part-time
consulting work of the nature performed for this grant, and does
not
exceed that which would be incurred by a prudent person in the
conduct
of competitive business. Federal Acquisition Regulation, 48
C.F.R. .
31.201-3 (1985). Therefore, we reverse the disallowance of the
$11,250
charge to Phase II for payments to the accountant consultant.
Rent
NEI disallowed $2,116.50 of $9,857.50 claimed for office space rent,
based
on DMSR's determination that the charges did not properly reflect
the
proportion of time devoted to grant-related activities by the
Grantee and a
principal employee identified in the Phase II grant
application as the
project coordinator. In his August 18, 1989 comments
on DMSR's draft
review report, the Grantee consented to allocation of
rent charges on the
basis of actual grant usage, but challenged the
reviewers' time
allocation.
NIH, in reviewing NEI's disallowance of personnel costs for Phase
II,
which was not appealed to this Board, rejected the reviewers'
estimates
of time devoted to the grant and accepted the original distribution
of
labor figures from the Grantee's accounting records; these figures
were
then applied to the rental costs. NIH also allowed a portion of
the
rental costs attributable to the consultant accountant on the basis
of
the determination that 50% of his time was devoted to
grant-related
activities. NIH therefore ordered the disallowance of
rent for Phase II
recalculated which resulted in reduction of the
disallowance to $253.70.
The Grantee did not specify the basis for his decision to appeal
$1,772.90
of NEI's original disallowance of $2,116.50, and we find that
he consented to
the disallowance of $343.60, the unchallenged amount.
We therefore uphold the
remaining disallowance of $253.70 on the grounds
that it was not appealed by
the Grantee.
Telephone charges
NIH ordered the recalculation of NEI's disallowance of $132.09
in
telephone expenses charged to the grant, on the basis of the
revised
personnel allocation figures used to reduce the disallowance of
rental
costs. As a result, NIH reversed the $132.09 disallowance, and
allowed
$500.24 in telephone expenses for Phase II beyond what the Grantee
had
claimed. Accordingly, this issue is now moot.
Insurance
As with the office rent and telephone costs, NIH ordered recalculation
of
NEI's disallowance of $1,401.91 for health and life insurance for
the
Grantee, the project coordinator, and the consultant, on the basis
of
the revised personnel allocation determinations. The
recalculation
resulted in the allowance of additional insurance charges
attributable
to Dr. Traylor and the project coordinator. However, NIH
upheld the
disallowance of the costs of insurance for the accountant
consultant, on
the basis that the cost of fringe benefits for consultants is
not
allowable. Pursuant to the recalculations, the disallowance was
reduced
to $865.60. Our review of the materials provided by NIH with
its letter
of January 21, 1992 reporting the Phase II recalculations
indicates that
this amount is attributable to the costs of insurance for the
consultant
charged to the grant, less the increased amount allowed for Dr.
Traylor
and the project coordinator.
The Federal Acquisition Regulation, at 48
C.F.R. .
31.205-6
(1985), "Compensation for personal services," includes
employee
insurance as allowable compensation "for services rendered by
employees
to the contractor." 48 C.F.R. . 31.205-6(a). Similarly,
48 C.F.R. .
31.205-33, "Professional and consultant services," refers to
consultants
as persons who are not officers or employees of the
contractor. Here,
the Grantee acknowledged in his October 19, 1991
submission to the Board
that the accountant was a consultant, and he also did
not take issue
with the statement in the DMSR review report that the
accountant was not
an employee. He asserted in his comments on DMSR's
draft review report
that PHS grant regulations address fringe benefits only
in the context
of indirect costs, whereas insurance for the consultant was
charged as a
direct cost. However, the provisions cited above
specifying when
insurance is allowable make no such distinction. We
conclude that as a
non-employee consultant, the accountant was in the
position of an
independent contractor, and that the payments to him should
have covered
all the costs to the Grantee associated with the services
rendered.
Accordingly, we uphold this portion of the disallowance.
Travel
The Grantee appealed $2,472.85 for expenses associated with trips
to
Birmingham, Alabama; Phoenix, Arizona; and to Beaumont and San
Antonio,
Texas, which NIH disallowed as not related to the grant.
NIH disallowed the trips to Birmingham, Alabama and Beaumont, Texas on
the
basis of expenditure reports completed by the Grantee. According to
the
DMSR review report, the expense reports stated that the purpose of
the
Birmingham trip was to attend a meeting of mathematicians at a
topology
conference, and that during the Beaumont trip the Grantee made
a presentation
to venture capitalists. The Grantee asserted that the
purpose of the
Birmingham trip was to attend an international conference
of
scientists. He stated that it was an opportunity to meet
with
representatives of Oxford University, foremost in research dealing
with
the visually handicapped, and that it was cost effective to attend
a
conference rather than make multiple visits for collaboration.
He
characterized the Beaumont trip as an attempt to locate a
paper
manufacturer for the grant project.
NIH disallowed costs of the trips to Phoenix, Arizona and Los
Angeles,
California, to attend conventions of organizations for the blind, on
the
basis that the Grantee exhibited products he sold in his
non-grant
business, including the Sensory Quill. The DMSR review report
states
that the Grantee reported that he met privately with persons
interested
in the grant work but could not publicly display the results of
grant
work because they involved proprietary information. In response
to the
DMSR draft review and before NIH, the Grantee argued that
the
conventions were a cost-effective means to meet with leaders
of
organizations which serve visually handicapped people. Since he
only
had ten prototypes of tactile paper, he contended, the
conventions
provided an efficient means to show the tactile paper privately
to
potential evaluators.
The Grantee did not dispute the reviewers' findings that the
original
expense reports show that the Birmingham trip was to attend a
conference
in topology, a branch of mathematics, and that the Beaumont trip
was to
make a presentation to venture capitalists. The expense report
for the
Birmingham trip shows no connection to the grant, and the one for
the
Beaumont trip shows a purpose -- raising capital -- that was
unallowable
under the Federal Acquisition Regulation. 48 C.F.R. .
31.205-27.
Although the Grantee later offered reasonable explanations for
these
travel expenses during the review and appeal processes, we believe
that
the expense reports that the grantee completed close to the time of
the
actual trips are of greater probative value than subsequent
explanations
offered in response to the reviewers' inquiries. While we
may accept
non-contemporaneous documentation, the sufficiency of the
documentation
will be carefully scrutinized. Indiana Dept. of Public
Welfare, DAB No.
772 (1986). See also Second Street Youth Center, Inc.,
DAB No. 1270
(1991); Seminole Nation of Oklahoma, DAB No. 951 (1988);
Neighborhood
Services Department, Detroit, Michigan, DAB No. 110
(1980). Such
documentation faces an especially heavy burden of scrutiny
when it
contradicts contemporaneous records; here, the Grantee has presented
no
documentation to refute the statements in the expense reports or to
show
that these two trips were for grant-related activities.
Accordingly, we
uphold the disallowance of these expenses.
We also uphold the disallowance of the expenses for the two trips
to
attend conferences for the blind in Los Angeles and Phoenix.
The
Grantee did not dispute the reviewers' findings that the primary
purpose
of these two trips was to display products sold in his
non-grant
business, and he offered no evidence in support of his assertion
that he
used these conventions to secure potential evaluators for the
tactile
paper. Additionally, the Phase II grant application, which
specified
travel to various institutions for blind persons to monitor and
direct
field testing and evaluation activities, and specified
various
institutions and agencies that would serve as evaluators, made
no
mention of these trips. Accordingly, we conclude that the Grantee
has
failed to show that these trips and their associated expenses
were
reasonable and necessary charges to the grant.
Meals
NIH disallowed $1,243.78 for meals charged to Phase II of the grant,
on
the grounds that meals are unallowable charges to the grant under
the
Federal Acquisition Regulation and the PHS Grants Policy
Statement,
regardless of their relation to furthering the grant
objective. The
Grantee asserted that at each meal business was
transacted or discussed
relating to the grant project. He requested
that the Board examine the
receipts and canceled checks provided to DMSR in
justification of these
expenses.
The Federal Acquisition Regulation, at 48 C.F.R. . 31.205-14
(1986)
"Entertainment Costs," provides that with certain exceptions
not
applicable here, the costs of amusement, diversion, social
activities,
and any directly associated costs such as meals, are
unallowable. The
PHS Grants Policy Statement states that meals are
allowable for subjects
and patients under study; when an organization
customarily provides
meals to employees working beyond the normal workday; as
part of a
formal compensation arrangement; as part of a per diem
allowance
provided in conjunction with allowable travel; or when meals are
a
necessary and integral part of a conference being supported by
a
conference grant, provided they are not duplicating the per diem
or
allowances. Guest meals are not allowable. The Statement
further
provides that out-of-pocket costs for meals at scheduled meetings
are
allowable with the prior approval of the PHS awarding office.
Here, the Grantee has not argued or established that these meals
were
allowable under the relevant provisions, and we therefore sustain
this
portion of the disallowance. We do not believe that it is
necessary for
the Board to examine checks or receipts relating to these
expenses, as
the Grantee requested. NIH did not dispute the Grantee's
statements of
the purpose of the meals, and consequently that is not an
issue.
Instead, we find that the meals were unallowable as a matter of
PHS
policy, regardless of their purpose. The Grantee's arguments
that
business was conducted during the meals appear more appropriate to
tax
standards for business deductions, and, in any event, are unavailing
in
the face of the more narrowly drawn HHS and PHS standards governing
the
allowability of meals.
Brochure
NIH disallowed $533.64 for printing a brochure titled "Business
Plan,
Tactile Imaging Paper" published by TLC Ventures, Inc., a company
owned
by the Grantee, on the grounds that it was a promotional
instrument,
unallowable under the Federal Acquisition Regulation. NIH
determined
that the brochure consisted of a description of tactile paper,
the
potential markets and competition, a marketing strategy, a
manufacturing
and distribution scheme, and financial data, and noted that the
company
for which it was produced was not the grant awardee.
The Grantee argued that the brochure was essential to attract the
interest
of paper manufacturers to continue research into the commercial
production of
tactile paper after completion of the initial research.
He asserted that it
is very difficult to attract the consideration of
commercial paper
manufacturers, and that it is rare for them to produce
any new paper product
that they have not developed themselves. Since
these manufacturers are
commercial, he needed to provide evidence of the
product's commercial
viability. Such companies would not have seriously
considered the
proposal, he asserted, if presented only in a letter. He
stated that
the brochures were a determining factor in causing three
paper companies to
spend hundreds of thousands of dollars in research in
support of the
project.
Our examination of the brochure disclosed little that may reasonably
be
said to have been designed to induce a paper manufacturer to devote
its
time, efforts, and funds in researching or producing the tactile
paper.
To the contrary, the brochure contains no overt solicitation of
paper
manufacturers, and implies that the process of selecting a
manufacturer
was already underway. It notes at page 35 that some paper
companies had
expressed interest in producing tactile paper, and that, once
the
development of tactile paper had been completed, a manufacturer
would
have already been selected from several possible
candidates.
Accordingly, we conclude that it was not an allowable charge to
the
grant.
Our decision is further compelled by the definition of
unallowable
promotional instruments in the Federal Acquisition Regulation,
which is
of sufficient breadth as to encompass the brochure, despite
the
Grantee's characterization. The provisions governing public
relations
that are applicable to Phase II were promulgated April 9, 1986 at
51
Fed. Reg. 12298, and are found at 48 C.F.R. . 31.205-1. They
provide
that unallowable public relations costs include the costs of
promotional
material, such as brochures, that are designed to call
favorable
attention to the contractor. 48 C.F.R. .
31.205-1(f)(5). "Public
relations" means all functions and activities
dedicated to maintaining,
protecting, and enhancing the image of a concern or
its products. 48
C.F.R. . 31.205-1(a)(1). We concur with NIH's
description of the
brochure, and conclude that it falls within unallowable
public relations
activities as defined by the regulation.
Miscellaneous expenses
The Grantee appealed the disallowance of $348.13 in what NIH
characterized
as miscellaneous expenses. These included:
o $180.00 for American Express membership fees.
o $13.45 for purchase of a door sign for TLC Ventures, Inc.
o $33.00 in Federal Express charges
incurred in sending the
disputed brochure.
o $96.08 for business cards for TLC Ventures, Inc.
o $25.60 in postage.
The American Express membership fees were disallowed as not necessary
to
grant work. The Grantee asserted that the cards were reasonable
to
obtain, and that the American Express bill provided an accurate means
of
keeping track of grant-related travel expenses. The reviewers
noted
that the Grantee charged numerous items not related to the grant.
Even if the American Express membership fee could in theory be
allowable
to the extent of the proportion of total charges that were related
to
the grant, in the absence of any showing by the Grantee of
what
percentage of the American Express cards' use was for allowable
expenses
we have no basis for determining how much of the fee is
allowable.
Consequently, we sustain the disallowance. We note that the
Board has
repeatedly held that a grantee bears the burden of documenting
the
existence and allowability of its costs. Nisqually Indian Tribe,
DAB
No. 1210 (1990); La Courte Oreilles Tribe, DAB No. 1132 (1990);
West
Central Wisconsin Community Action Agency, Inc., DAB No. 861 (1987).
The door sign and business cards were disallowed because they were for
TLC
Ventures, which was not the grant awardee. NIH noted that the
Grantee
had not received permission to change the name of the grant
recipient
organization. The Grantee claimed these items were reasonable
charges
to the grant, and noted that the grant was charged only its
pro-rata cost of
the door sign, and that business cards are important as
evidence of an
organization's existence, and are a vehicle to assure
continued
communication. We uphold the disallowance of these items, as
we
conclude that they were not reasonably related to the purpose of
the
grant. We also agree with the DMSR determination that since SBIR
grants
are made to on-going concerns, expenses for the evidence of
existence
are not grant related.
The Federal Express bills were disallowed because they were
associated
with sending the brochure, which was determined to be an
unallowable
charge to the grant. Because we uphold the disallowance of
costs for
printing the brochure, we accordingly uphold expenses associated
with
sending or mailing it as well.
The charges for postage were disallowed because they were incurred
prior
to the beginning of the Phase II grant period. The DMSR review
report
indicates that $22.00 was for postage purchased July 18, 1986, and
$3.60
was for postage purchased September 17, 1986. Dr. Traylor stated
that
much postage was used in support of the project, and that he had
no
understanding as to the reason this particular charge was
disallowed.
Here, NIH did not dispute that the Grantee utilized this sum of
postage
in furtherance of the grant during Phase II. Consequently, we
reverse
the disallowance of this item.
Other issues
The Grantee asserted that HHS is biased against him as a result
of
complaints made by a former subcontractor engaged to perform
research
during Phase I who sued the Grantee after being replaced. The
Grantee
maintained that the bias is evident because a pleading filed in
the
lawsuit contains information concerning an investigation of the
grant
conducted by the HHS Office of Inspector General (OIG); the
Grantee
asserted that the subcontractor could only have obtained
this
information from OIG or DMSR. The Grantee argued that bias
adversely
influenced DMSR's and NEI's determinations of whether costs charged
to
the grant were reasonable, so that they disallowed expenses that
he
asserted were legitimate charges necessary to the grant project.
The
Grantee stated that there has been no reply to his charges of bias
and
asked for an internal review process to deal with these matters.
The record indicates that the Grantee utilized the subcontractor to
do
laboratory work in developing the tactile paper, that there was
some
disagreement between them over the extent of control that
the
subcontractor would have over the project, and that the Grantee
elected
to use a different subcontractor to continue work after completion
of
Phase I. The original subcontractor subsequently raised
numerous
complaints to NIH and to members of Congress. He alleged
improper
conduct, demanded that NIH cease funding the grant, and sued
the
Grantee. The record further establishes that, as a result of
these
complaints and a congressional inquiry, HHS initiated an
OIG
investigation to determine whether improper or illegal expenditures
were
made, as well as the DMSR review which resulted in the disallowance
at
issue here. The record before the Board does not establish that
OIG
ever instituted any further action against the Grantee or prepared
a
report of its investigation, or that any action was taken against
the
Grantee by NIH other than this disallowance.
In response to the Grantee's charge that information was
improperly
disclosed by DMSR or OIG, the Director of DMSR in a letter of
August 3,
1988 denied that any information that DMSR obtained from the
Grantee
during its review had been provided to the subcontractor, and
stated
that it was not DMSR policy to provide information gathered during
the
course of a review to private parties before the review was complete.
The Board's inquiry is whether the questioned costs were or were
not
allowable charges to the grant under applicable law, regulations
and
policy, based on the record before us. The reason that
the
investigation of grant expenses was initiated has no bearing on
the
Federal government's legitimate purpose of determining how its
funds
were spent. Consequently, it is not necessary to resolve the
Grantee's
charges of bias in order to dispose of the disallowance here.
Those
allegations are not properly an issue before the Board, and we make
no
findings as to their merit.
Conclusion
The Board reverses the disallowance of $11,250 charged to the grant
for
consulting services, $25.60 in postage, and $25,276.95 for the
Sensory
Quills, subject to NIH's determination of the value of the 34 quills
for
which the Grantee was able to demonstrate receipt by evaluating
agencies
and institutions. The remainder of the disallowance is
sustained;
however, for the disallowance of $11,500 in indirect costs, NIH
should
examine the documentation provided by the Grantee to determine if
it
accepts that the Grantee incurred allowable pre-award costs for
Phase
II. If the Grantee is dissatisfied with the results of NIH's
review of
the expenditures charged .to the indirect cost award, he may return
to
the Board within 30 days after receipt of NIH's determination for
review
of that limited issue.
Donald F. Garrett
Norval D. (John) Settle
Cecilia Sparks Ford Presiding Board Member
1. As used in this decision, "Grantee" refers to TPS's president
and
the principal investigator for the grant, D. Reginald Traylor, Ph.D.,
as
well as to TPS.
2. Phase III, the final phase of the grant, was from December 1,
1989
through February 28, 1990, and was extended through June 30, 1990.
3. Bills submitted by the consultant for a subsequent period showed
a
rate of $65.00 per hour, although only $500 per month was charged
and
paid by agreement of the