Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: The Johns Hopkins University
DATE: February 24, 1993
Docket No. A-92-125
Audit Control No. A-03-91-04018
Decision No. 1393
DECISION
The Johns Hopkins University (JHU) appealed a decision made on behalf
of
the Regional Director, Region III, upholding a determination by
the
Division of Cost Allocation (DCA) to disallow $400,316 in indirect
costs
charged to JHU's federal research projects over a four-year
period. DCA
had based its determination on an audit of JHU's fiscal
year (FY) 1987
indirect costs included in the proposal used to negotiate
rates for the
four-year period.
Below, we first summarize our decision. We then provide a more
detailed
factual background, and our analysis of the legal issues. We
conclude
that the disallowance should be reversed. Our decision is
based on the
parties' submissions, as well as the transcript of a hearing
held by the
Board.
I. Summary of our decision
An indirect cost rate is a percentage rate used by a university to
charge
federal funds for overhead costs which cannot be readily
identified with any
particular research project. In 1988, JHU submitted
to DCA an indirect
cost rate proposal based on actual costs incurred in
FY 1987 and projected
increases in those costs. DCA reviewed the
proposal, conducted an
on-site visit at JHU, and then entered into
negotiations with JHU.
Ultimately, JHU and DCA negotiated predetermined
rates applicable to JHU's
research agreements for JHU's fiscal years
(FYs) 1989 through 1992. The
negotiation agreement stated that the
federal government's acceptance of the
rates was conditioned on JHU's
having included only allowable costs in its
proposal.
Based on a subsequent audit, DCA determined that JHU had
included
unallowable costs in a cost pool (called the DA cost pool) used
to
develop the 1988 proposal. DCA further determined that $122,579
of
those costs had been allocated to federal research for each year of
the
four-year rate agreement and that JHU should refund $490,316 in
federal
funds (minus $90,000 JHU had already voluntarily repaid), charged
over
the four-year period.
DCA based its determination on a revision to Office of Management
and
Budget (OMB) Circular A-21 published on October 3, 1991. Under
the
revised circular, if an audit finds that a university has
included
unallowable costs in a proposal, the federal government may
calculate
how this affected the indirect costs charged by the university,
and
require a refund of the resulting overclaim without reopening the
rate
negotiations. The preamble to the policy states that an offset,
rather
than a refund, would be appropriate to the extent that a
general
reduction, not identifiable to specific issues, was made. DCA
found
that a general reduction had been made in one cost pool (called the
G&A
cost pool), but interpreted the revised circular as not permitting
an
offset of this reduction against unallowable costs in the DA cost
pool.
DCA found that all other reductions to the proposed rates
were
identifiable with specific issues raised by the DCA negotiator.
The
Regional Director's delegate adopted the DCA position.
On appeal, a question arose concerning the applicability of the
revised
circular. We do not reach that question since we conclude that,
under
the revised circular, JHU is not required to make a refund. Each
set of
documents memorializing the parties' negotiations shows a
general
reduction which offsets the unallowable costs. Specifically,
we
conclude:
o A general reduction was made in the G&A cost pool, as DCA
originally
found. This reduction is shown in forms completed by JHU
after the
negotiations, at DCA's request, showing the rate components.
While DCA
questioned at the hearing whether it had ever received the
completed
forms, DCA acknowledged that its own computerized records showed
the
same four percent figure for the G&A component (which is .26% less
than
what JHU proposed). DCA's negotiator did not raise any specific
issues
that would explain this reduction in the G&A cost pool.
o DCA's position that the revised circular precludes offset of
a
general reduction made in one cost pool against unallowable costs
found
in a different cost pool is not based on the wording of the
revision,
nor on an official interpretation promulgated either by OMB or
DCA.
DCA's rationale for its position is illogical. DCA said that
a
reduction in one cost pool would not have been intended as an offset
to
unallowable costs in another cost pool. DCA's own testimony,
however,
indicates that a university might agree to a general reduction
for
reasons other than as an offset to unallowable costs, and this
could
nonetheless qualify as a general reduction. DCA also suggested
that,
since the audit here was limited in scope, there might be
additional
unallowable costs in the G&A cost pool. This is pure
speculation.
Moreover, most audits are limited in scope, and the revised
circular
does not limit offset to any particular type of audit.
o The DCA negotiator's contemporaneous workpapers also show a
general
reduction. His computation of the value of the reductions
related to
specific issues he raised during the negotiations does not fully
account
for the total reductions ultimately agreed to. A .5% reduction
in the
cumulative rates over the four-year period is shown in his workpapers
as
an amount separate from reductions identifiable to specific
issues
raised. His contemporaneous computations reflect his thinking at
the
time of the agreement, and carry more weight than his testimony at
the
hearing that the specific issues he raised supported reductions
greater
than the amounts shown on his workpapers.
o We reject DCA's argument that it is unlikely that JHU would
have
agreed to any general reduction since JHU was aggressive in
pursuing
reimbursement for its indirect costs and the negotiations
were
contentious. The DCA negotiator agreed that the negotiations
focused on
the "bottom line" rates, rather than on the specific issues
raised.
JHU's testimony showed that it was concerned with getting the
rates
resolved before the start of its fiscal year, and DCA acknowledged
that
there was an advantage to JHU in reaching agreement.
o We reject DCA's attempts to justify the disallowance here based
on
DCA's views that JHU had one of the highest rates in the country and
had
recovered substantially more than its actual costs during the
four-year
period. JHU challenged these views, and DCA acknowledged that
it was
relying on preliminary audit results which are disputed. In any
event,
the question here is whether JHU is required to make a refund
for
unallowable costs included in its proposal, not whether the
federal
government unwisely agreed to predetermined rates. The revised
circular
recognizes that, where an offsetting general reduction was made,
no
refund is required for unallowable costs included in a proposal
because
those costs have not been charged to federal funds.
Accordingly, we reverse the disallowance.
II. Background
A. Indirect cost rates in general
OMB Circular A-21 is a directive issued to federal agencies,
establishing
uniform principles for determining costs applicable to
grants, contracts, and
other agreements with educational institutions.
It is made applicable to
awards by this Department through regulations
at 45 C.F.R. . 74.172.
Generally, these principles require that costs charged to federal funds
be
the types of costs considered allowable, and that they be
reasonable,
necessary, and allocable. Direct costs are those costs
which can be
readily identified with a specific cost objective.
Indirect costs are
overhead-type costs that are incurred for common or joint
objectives and
therefore cannot be identified readily and specifically with
a
particular sponsored project, instructional activity, or any
other
institutional activity. For universities, such costs are
normally
classified into the following indirect cost categories:
depreciation
and use allowances, general administration, sponsored
projects
administration, operation and maintenance, library,
departmental
administration, and student services. Indirect costs are
accumulated
into cost pools according to category and then allocated to the
major
functions of the university (such as instruction and research) using
an
appropriate distribution method. The indirect cost rate for
the
research function generally represents the total indirect
costs
allocated to that function divided by a distribution base,
usually
modified total direct costs associated with the research
function. The
rate is then used to distribute indirect costs to
individual research
agreements.
Indirect cost rates are established for each university by a
"cognizant
agency" for a rate year, usually the university's fiscal
year. The
university submits an indirect cost proposal to the cognizant
agency and
then negotiates with that agency to establish a rate. There
are
different types of rates, some of which are subject to adjustment
to
reflect actual indirect costs incurred in the rate period and some
which
are not. Public Law 87-638 specifically authorizes the use
of
predetermined fixed rates in determining the indirect costs
applicable
under research agreements with universities. OMB Circular
A-21
explains:
The stated objectives of the law are to simplify the
administration
of cost-type research [agreements] .
. ., to facilitate the
preparation of their budgets,
and to permit more expeditious
closeout . . . .
. G.4. The circular states that, in view of the advantages of
such
rates, they should be considered "where the cost experience and
other
pertinent facts available are deemed sufficient to enable the
parties
involved to reach an informed judgment as to the probable level
of
indirect costs during the ensuing accounting period."
Id.
Predetermined rates are not subject to adjustment, except in
unusual
circumstances. See A Guide for Colleges and Universities,
OASC-1.
B. The parties' negotiations
This Department is the cognizant agency for negotiating indirect
cost
rates with JHU (except that the Office of Naval Research
separately
establishes a rate for JHU's Applied Physics Laboratory).
Within this
Department, DCA is responsible for negotiating indirect cost
rates. In
January 1988, JHU submitted to DCA a proposal for indirect
cost rates
for its fiscal years (FYs) 1989 and 1990 (July 1 to June
30). The
proposal was in part based on JHU's report of actual costs
incurred in
FY 1987 and in part based on JHU's projected cost increases
because it
was expanding its research facilities. Although JHU's
proposal showed a
58.8% actual rate for FY 1987, JHU proposed a rate of
67.17% for FY 1989
and 73.34% for FY 1990.
The DCA negotiator reviewed JHU's proposal and then visited JHU,
asking
for some additional information and interviewing some of
JHU's
employees. He then had several meetings and telephone
conversations
with JHU's negotiators, between April and June 1988. The
negotiators'
testimony disagrees somewhat on the degree to which the
negotiations
were contentious and on whether they were particularly
lengthy
negotiations. However, their testimony agrees in several
important
respects. The DCA negotiator raised several issues concerning
the 1987
reported costs, including at least whether an adjustment should be
made
for what is called a direct charge equivalent (DCE). The
negotiator
also challenged JHU's projection that its direct cost base for
research
would increase by only 5%, even though JHU was expanding its
research
space. Ultimately, however, the negotiations focused on the
"bottom
line" rates, and the parties never agreed on any of the specific
issues
raised by the DCA negotiator.
The research rates ultimately agreed to were predetermined rates of
61%
for FY 1989, 64% for FY 1990, 65% for FY 1991, and 65% for FY
1992.
These rates were published in a rate agreement signed by both
parties.
1/ The rate agreement states:
Acceptance of the rates is subject to the following
conditions:
(1) Only costs incurred by the
institution were included in its
indirect cost pool
as finally accepted; such costs are legal
obligations of the institution and are allowable under
the
governing cost principles; . . . (3) The
information provided by
the institution which was
used to establish the rates is not later
found to be
materially incomplete or inaccurate.
DCA Ex. G-9.
After the negotiation, JHU negotiators filled out DCA forms which
break
the agreed rates down into their various components. The DCA
negotiator
developed a set of workpapers containing his justification for the
rates
to which he agreed. 2/
C. The revised circular
In 1991, OMB proposed revisions to OMB Circular A-21. These
proposals
resulted in part from an audit by the General Accounting Office
(GAO) of
costs charged by Stanford University as indirect costs of
federal
research and other information which indicated that some
universities
were charging unallowable costs to federal funds. 3/ OMB
determined
that the cost principles needed clarification and reform.
The preamble in the notice of proposed rulemaking describes one of
the
proposed changes as follows:
A new section is added to the Circular to establish
a consistent
policy for adjustment of indirect cost
rates based on a proposal(s)
subsequently found to
have contained unallowable costs.
56 Fed. Reg. 29,530 (June 27, 1991).
The final rule adds a new subsection 9 to section C of the circular,
which
provides:
Adjustment of previously negotiated indirect cost
rates
containing unallowable costs. Negotiated indirect costs
rates
based on a proposal later found to have included costs that
(a)
are unallowable as specified by (i) law or regulation,
(ii)
section J of this Circular, (iii) terms and conditions
of
sponsored agreements or (b) are unallowable because they
are
clearly not allocable to sponsored agreements, shall
be
adjusted, or a refund shall be made, in accordance with
the
requirements of this section. These adjustments or refunds
are
designed to correct the proposals used to establish the
rates
and do not constitute a reopening of the rate negotiation.
The
adjustments will be made regardless of the type of
rate
negotiated (predetermined, final, fixed, or provisional).
56 Fed. Reg. 50,224, at 50,227 (October 3, 1991). The subsection
then
sets out when a refund is appropriate and when an adjustment to a
future
rate is appropriate. Paragraph d. of the subsection states:
The amount or proportion of unallowable costs included in
each
year's rate will be assumed to be the same as the amount
or
proportion of unallowable costs included in the base
year
proposal used to establish the rates.
56 Fed. Reg. at 50,227.
The preamble to the revised circular addresses "numerous
comments
concerning whether offsets could be used rather than refunds if
the
original proposal by a university was higher than the rate
ultimately
negotiated." 56 Fed. Reg. at 50,224. The response was
as follows:
An offset would be appropriate only to the extent that a
general
reduction, not identifiable to specific issues, was
made.
Additionally, a separate refund would not be necessary for
any
unallowable costs that were clearly eliminated during the
rate
negotiation process.
Id.(emphasis added). 4/ This response recognizes that a finding that
a
university included unallowable costs in its proposal does
not
necessarily mean that its indirect cost rate permitted it to
recover
indirect costs that it was not entitled to recover. If offset
were not
permitted where a general reduction was taken, the federal
government
would, in effect, make a double recovery of costs which were
accounted
for during the negotiation process. DCA post-hearing br. at
18.
D. DCA's determination
As a result of the controversy arising from the Stanford case, the
Office
of the Inspector General (OIG), Office of Audit Services, of this
Department
performed audits (called "scrub audits") on indirect cost
proposals submitted
by 14 universities, including JHU. The OIG auditors
questioned the
allowability of certain costs included by JHU in its
proposal. Some of
the questioned costs were included in the general and
administrative
(G&A) cost pool and some were included in the cost pools
for Departmental
Administration and Divisional Administration (which we
refer to collectively
as the DA cost pool, as the parties did). The OIG
auditors found that
JHU had made an adjustment to its reported actual
costs to account for
$97,000 worth of unallowable costs. They offset
this amount against the
questioned costs and recommended a disallowance
for the remaining questioned
costs.
The DCA Director reviewed the audit findings, as well as documentation
and
argument provided by JHU in response to the audit. He agreed with
JHU
on some issues. He found that JHU had included $82,842 in
unallowable
costs in the G&A cost pool, which could be offset by a
general reduction
worth $260,000 in that cost pool. He further found
that JHU had
included $139,295 in unallowable costs in the DA cost pool
of which 88%, or
$122,579, had been allocated to federal research for
each year of the
four-year rate period. He determined that this amount
could not be
offset against the general reduction in the G&A cost pool.
He calculated
a disallowance of $490,316 for the four-year period based
on the proposal,
credited JHU with $90,000 (which JHU had previously
refunded), and determined
that JHU should refund an additional $400,316.
JHU appealed the DCA Director's determination to the Regional
Director,
Region III, under the informal appeals process at 45 C.F.R. Part
75.
The decision issued on behalf of the Regional Director upheld the
DCA
Director's determination, based in part on an affidavit by the
DCA
negotiator. 5/ JHU appealed that decision to this Board, and
we
provided JHU with a hearing on the factual disputes.
III. Analysis
The revised circular was not in effect at the time the parties reached
the
rate agreement in 1988, nor at the time the awards were made under
which JHU
claimed the federal funds for indirect costs which JHU is now
being asked to
refund. DCA argued that it had nonetheless reasonably
applied the
revised circular. DCA contended that the circular revision
at issue
here merely clarified previous policy and therefore was
effective
immediately. DCA also asserted that, under the rate
agreement, it could
have required JHU to reopen negotiations on the
rates for the four-year
period and that this would have been burdensome
on both parties.
JHU did not seek to reopen the negotiations, but argued that, under
the
rate agreement, DCA could take action only if the amount of
unallowable
costs included in a proposal were material and that the amount at
issue
here was immaterial since it amounted to merely .1% of the
negotiated
rate.
We do not entirely agree with either party's arguments concerning
the
applicability of the revised circular and the interpretation of the
rate
agreement. We do not need to reach these issues, however, since
we
conclude that, even if the revised circular applies, it does not
require
JHU to make a refund. We find that JHU did agree to a general
reduction
not identifiable to specific issues, within the meaning of the
revised
circular. On the whole, we give more weight to the
contemporaneous
documentation of the results of the negotiations than to
either party's
testimonial evidence. While the two sets of documents
are not
consistent with each other, each of them can reasonably be read
as
showing a general reduction, not identifiable to specific issues
raised
in the negotiations.
In its post-hearing brief, DCA argued that JHU had the burden of
showing
that a general reduction was made and had not met that burden.
While we
agree that JHU had the burden to show that a general reduction was
made,
the revised circular does not require any specific type of
documentation
of a general reduction. Moreover, at the time of these
negotiations,
JHU did not know that it would ever have to show that it had
agreed to
general reductions, not identifiable to specific issues.
Under these
circumstances, we find that JHU met its burden, even if it did
not
provide documentation specifically designating a reduction as
"general".
6/
Below, we first discuss each alternative basis for our conclusion that
a
general reduction was made. We then discuss why we reject
DCA's
peripheral arguments concerning why we should uphold the
disallowance.
A. Whether JHU took a general reduction
in the G&A cost
pool which may be offset against unallowable costs
in the DA
cost pool
In this section we discuss whether JHU took a general reduction in
the
G&A cost pool which may be offset against unallowable costs allocated
to
the DA cost pool. We first explain the dispute over this
issue. We
then address the factual question of whether such a reduction
was taken,
finding that it was. Finally, we address the legal question
of whether
the revised circular permits this general reduction to be offset
against
unallowable costs in the DA cost pool. We conclude that, in the
absence
of any published interpretation to the contrary, the revised
circular
permits such an offset.
1. The dispute
In his original decision, the DCA Director agreed with JHU that a
general
reduction had been taken, but decided that this reduction was in
the G&A
cost pool and, therefore, could not be offset against
unallowable costs in
the DA cost pool. In its brief, DCA explained that
the DCA negotiator's
workpapers indicated that JHU had recorded a 4.26%
actual 1987 rate for the
G&A cost pool and he had made no adjustment in
that cost pool; however,
DCA had received JHU's "own rate records which
indicated that the final cost
rate negotiated for the G&A pool was four
percent." The DCA
Director also "looked at an office computer record in
which the indirect cost
rates for all universities are eventually
recorded" and these summary sheets
also showed four percent for the G&A
pool. According to DCA, its
Director had therefore given JHU "the
benefit of the doubt and determined
that there was a .26 percent
($260,000) general reduction which therefore
offset the $82,842 in
unallowable costs in this cost pool." DCA br. at
21.
JHU argued that the general reduction should be available to offset
an
additional $188,158 in unallowable costs, which was more than
the
$139,295 in unallowable costs in the DA cost pool. JHU pointed out
that
the revised circular did not state that the general reduction had to
be
in the same cost pool. JHU argued that "not related to specific
issues"
is not the same as "related to the same cost pool," as DCA appeared
to
believe.
At the hearing, the DCA Director indicated that he had made the finding
of
a general reduction based on some conflicts in DCA's recording of
numerical
breakdowns, and in an attempt to achieve a swift resolution of
the audit
findings, without consulting with the DCA negotiator (who was
no longer with
DCA at that time). Tr. at 429-430, 435, 445. He further
indicated
that, if he had consulted with the negotiator, he would have
found that no
general reduction occurred. In its post-hearing brief,
DCA argued that
the record supported a finding that all of the
reductions related to specific
issues. DCA further argued that,
although DCA had erred in finding a
general reduction, JHU should not
complain since that finding had reduced the
amount JHU was required to
refund.
Finally, DCA took the position that, even if the parties had agreed to
a
general reduction in the G&A cost pool, it is not reasonable to
apply
that reduction to the DA cost pool.
2. The facts
Based upon our review of the record, we find no reason to disturb the
DCA
Director's initial finding that a general reduction was made in the
G&A
cost pool. While the DCA negotiator's workpapers do not show such
a
reduction, the DCA negotiator described those workpapers as
his
after-the-fact summary of his final negotiation position. Tr.
at
282-284. The JHU negotiators testified, however, that they had
been
asked to complete and to submit to DCA forms which break down
the
components of the published rates, and that these were the forms
they
submitted to the DCA Director. The DCA negotiator acknowledged
that the
forms were DCA forms, which OMB had asked DCA to use. Tr. at
276. The
DCA Director described the form as "a schedule that is
sometimes or
often sent out by negotiators to firm up," in order to "get
a
concurrence on what each component of the rate will be." Tr. at
426.
Copies of the forms submitted to the DCA Director show 4.0% as
the
component of the published rate attributable to the G&A cost
pool. DCA
Ex. G7. The DCA Director found that the component for
this cost pool
was 4.26% in JHU's report of actual 1987 costs, so the 4.0%
represented
a .26% reduction. DCA did not argue that the DCA Director
did not make
the proper comparison, nor did DCA show any relationship between
this
.26% reduction and any of the specific issues raised. Indeed,
although
DCA argued that all reductions other than those identified with the
DCE,
library, or student services issues were related to the base issue,
the
DCA negotiator testified that he did not view the base issue
as
affecting administrative costs (such as those in the G&A cost
pool).
Tr. at 314-316.
Essentially, DCA would have us determine what happened in the
negotiations
based solely on the DCA negotiator's workpapers and his
testimony.
However, the forms are a contemporaneous record made by JHU
negotiators of
their view of the components of the negotiated rates.
DCA attempted to call
into question the validity of the forms by
presenting testimony by the DCA
negotiator that he did not recall having
received forms from JHU. Tr.
at 277. He also implied that he probably
did not receive them since
they were not in his documentary file. Tr.
at 277. However, DCA
acknowledged that DCA's own computerized summary
sheets showed the same
4.0%. DCA br. at 21; DCA Ex. G6. This is a
clear indication that
DCA did receive the forms, or at least some
information consistent with what
the form showed for the G&A component.
DCA did not claim to have questioned at the time whether the
forms
accurately reflected the negotiations, nor did DCA claim to have
sent
its negotiator's workpapers to JHU for comment. In these
circumstances,
the forms have greater weight than the workpapers on points on
which the
two pieces of evidence conflict. Moreover, as indicated
above, we give
more weight to the contemporaneous documentation of the
negotiations
than to any after-the-fact testimony concerning them.
Thus, we find (as
the two previous decisionmakers did) that a general
reduction, not
related to specific issues, was made in the G&A cost
pool.
3. Legal issue
The preamble to the revised circular permits an offset for a
"general
reduction, not identifiable to specific issues." DCA's
position that
the general reduction must be in the same cost pool as the
unallowable
costs is not supported by anything in the language of the
circular, the
preamble, or in any official interpretation of the
circular. In its
post-hearing brief, DCA gave two reasons for its
position. The first
was that the OIG "scrub audits" were limited in
scope and that the
general reduction may have related in part to "additional
unallowable
costs that the limited scope audit could not identify."
DCA
post-hearing br. at 21. The second reason was based on an
explanation
given at the hearing by the former Director, Office of Grant
and
Contract Financial Management (OGCFM), to the effect that an
indirect
cost proposal is a structured document. Tr. at 144.
Based on this, DCA
argued that 1) it is simply not consistent with the
standard negotiation
procedure to assume that the parties would agree to a
reduction in one
cost pool because of unallowables in a second cost pool; and
2) it is
unlikely that negotiators would agree to a general reduction in the
G&A
cost pool to account for unallowable costs in a completely separate
cost
pool. 7/
DCA's arguments appear to be inconsistent in certain respects
with
testimony DCA presented at the hearing. DCA's witnesses testified
that
the type of general reductions referred to in the preamble to
the
revised circular did not have to be reductions a university
specifically
agreed to in anticipation of having inadvertently included
unallowable
costs in its proposal. See, e.g., Tr. at 150, 188.
DCA's witnesses
indicated that there might be reasons why a university would
simply
agree to a rate lower than that proposed, even before a negotiator
had
raised specific issues. For example, a university might be
under
pressure from its faculty to keep the indirect cost rate low so
more
funds would be available for direct costs, or might simply wish
to
appear efficient. Tr. at 128-129, 295-296. DCA's argument,
however,
presupposes that, in order for the general reduction here to be used
as
an offset, the parties must have agreed to the reduction
specifically
anticipating that there would be unallowable costs in another
cost pool.
This is illogical. If the circular could refer to a general
reduction
made without any anticipation of a university having
included
unallowable costs, we fail to see how it matters if the
general
reduction might have been agreed to based on an erroneous guess
about
which cost pool might contain unallowable costs. In either case,
a
university agreed to a lower rate overall than the rate which would
have
been justified based on the reported costs, adjusted for specific
issues
raised. The DCA Director conceded, in fact, that a point taken
off the
research rate in one cost pool has the same effect as a point taken
off
the rate in another cost pool. Tr. at 478-479.
Moreover, DCA's argument appears to misconstrue somewhat the testimony
of
the former Director, OGCFM, on structured negotiations. That
testimony
was based primarily on an opinion that reductions in a
specific cost pool
would likely be tied to specific issues and that the
circular was referring
to general reductions in the overall rate. Tr.
at 139-150. There
are two reasons why we do not adopt this position.
First, the revised
circular does not limit offset to general reductions
made to an overall
rate. Second, the forms used at the time for
recording the rate
agreement require a breakdown by component, so there
is no place to reflect a
general reduction to the overall rate.
We also reject DCA's argument that it is inappropriate to use
the
remaining part of the general reduction in the G&A cost pool to
offset
the unallowable costs found in the DA cost pool because the scope of
the
audit here was limited. The revised circular does not limit the
offset
to any particular type of audit. Most audits have some
limitations.
The suggestion that JHU might have included other unallowable
costs in
the G&A cost pool in its proposal is pure speculation. If
DCA had any
reason to think that other unallowable costs were included, it
could
have requested that the scope of the audit be expanded.
In sum, we conclude that a general reduction worth $260,000 was taken
in
the G&A cost pool and that the $188,158 part of that reduction
(after
the offset to unallowable costs of $82,842 in the G&A cost pool)
is
available as an offset to the unallowable costs from the DA cost
pool.
In the absence of any promulgation of the interpretation advanced by
DCA
here, we conclude that the revised circular permits such an offset.
B. Whether the negotiator's
workpapers show a general
reduction that may be used as an offset
Much of the hearing in this case focused on whether the DCA
negotiator's
workpapers showed only reductions related to specific issues he
had
raised during the negotiations or also showed a general reduction.
The
JHU negotiators did not directly contradict the DCA
negotiator's
testimony that he had raised three issues related to the
reported 1987
costs regarding a direct charge equivalent, library costs, and
student
services. See, e.g., Tr. at 46-47, 78-80. They also
acknowledged that
he had raised a question concerning the direct cost base
used to project
cost increases for space-related costs anticipated in future
years. Tr.
at 48-49, 81-82. The DCA negotiator's workpapers
confirm that he raised
each of these specific issues. JHU Ex. 1.
The calculations on the first page of the DCA negotiator's workpapers
show
his justification for what his workpapers identify as "negotiated
rates" for
each of the four years. These calculations are consistent
with his
testimony that he considered each one of the four specific
issues he had
raised in calculating rate reductions to reach these
negotiated rates.
We agree with DCA that the workpapers show a
connection between these
reductions and the specific issues raised. The
workpapers do not
specifically compute the value of the issue raised
concerning the direct cost
base. JHU did not, however, present anything
to directly contradict the
DCA negotiator's testimony that reductions to
the space-related cost pools
shown in his workpapers were consistent
with his evaluation that the base
would increase 12 to 15%. Thus, we
reject JHU's argument that some of
these reductions from the proposed
rates to the "negotiated rates" were not
related to specific issues.
On the other hand, JHU pointed to a different reduction which is
clearly
shown in the workpapers' calculations comparing the "negotiated
rates"
to the "published rates" for each of the four years (and
cumulatively
over the four-year period). The "published rates" from the
workpapers
are the rates included in the negotiation agreement. What
the
workpapers show as the "negotiated rates" are, according to the
DCA
negotiator's own testimony, his justification for the rates he
agreed
to, after he had calculated the value of the reductions related to
the
specific issues he had raised. Tr. at 282-284, 287. Yet,
the
cumulative points for the "negotiated rates" over the four-year
period
is 255.5 points, and the cumulative points for the "published
rates"
over the same period is only 255 points, a .5 point difference.
The
parties agree that if this is a general reduction, its value
is
sufficient to offset the disallowance amount.
Even though the DCA negotiator's own workpapers do not tie this .5
point
reduction to any specific issue raised in the negotiations, DCA
argued
that this was not a general reduction. DCA argued that JHU
had
presented no testimony that these figures played any part in
the
negotiations. However, the JHU negotiators testified that
the
negotiations had ultimately become "bottom line" negotiations and
that
it had been a factor in the negotiations that the rates agreed to
were
predetermined rates over the four-year period. The DCA
negotiator's
testimony confirmed, rather than contradicted, this view of
the
negotiations. Tr. at 266-267, 304. Thus, the most
reasonable
explanation of the .5 point reduction is that it is a reduction
which
JHU agreed to in order to get an agreement and not because the
parties
had calculated that reduction as corresponding to any specific
issue
raised.
DCA relied on the DCA negotiator's testimony that the numbers used in
his
comparison between the "negotiated rates" and the "published rates"
merely
represented a justification for agreeing to the 255 points over
four years
and had nothing to do with his bases for reducing the rates
requested, nor
the negotiations which took place. Tr. at 287; DCA
post-hearing br. at
17. DCA further relied on the DCA negotiator's
testimony that, had he
provided the precise calculation of the
reductions that he believed should
have been made in the proposed rates,
the final number would have been only
244 points over four years. Tr.
at 289. DCA argued that if the
"workpapers reflected the appropriate
adjustments, they would have shown an
increase of 11 percent, rather
than a decrease of .5 percent." DCA
post-hearing br. at 17.
We reject this argument. Essentially, DCA would have us accept
the
workpapers as accurately representing that the reductions to
particular
rate components were related to specific issues, but reject
the
workpapers as accurately representing the value of those
reductions.
DCA cannot have it both ways. Simply because DCA's
negotiator asserted
at the hearing that greater reductions for specific
issues should have
been made does not mean we should ignore his
contemporaneous recording
of what he then agreed to as the value associated
with each of those
issues. JHU negotiators had contested his initial
position on the value
of the specific issues he raised, and, during the
negotiations, he
clearly receded from his initial position. Under OMB
Circular A-21, he
should not have agreed to predetermined rates unless he had
reached an
informed judgment as to the probable level of indirect costs,
consistent
with those rates.
DCA also argued that the workpapers show that DCA's negotiator
"made
reductions of only 1.8 percent of the 58.8 percent actual indirect
cost
rate that [JHU] claimed it experienced in 1987." DCA post-hearing
br.
at 18. DCA argued that, since the negotiator testified that
these
reductions all related to specific issues raised concerning the
1987
costs and that all of the remaining reductions related to the
projected
costs for future years, "there could have been no general
reduction
which related to the unallowable costs which OIG found based on an
audit
of the 1987 costs." Id.
Contrary to what DCA argued, however, the workpapers do not show that
the
.5 point reduction was related to the projected costs for future
years.
The DCA negotiator described those projections as affecting
space-related
costs, and his workpapers show reductions to the
space-related cost
pools. The workpapers contain absolutely no
explanation for the .5
point reduction. Thus, it is just as logical to
assume that this
reduction was agreed to by JHU in the interest of
ending the negotiation, not
because it was tied to the issue the DCA
negotiator raised concerning
projected costs. DCA's suggestion that the
.5 point reduction cannot be
used as an offset because it was not
specifically associated with the 1987
costs conflicts with the testimony
by DCA's own witnesses. They
indicated that a general reduction need
not have been agreed to as an offset
for unallowable costs in order to
be the type of general reduction referred
to in the preamble to the
revised circular.
Finally, we reject the suggestion by DCA's witnesses that a
private
university as aggressive as JHU in pursuing full reimbursement for
its
indirect costs would never agree to a general reduction. The
JHU
negotiators testified that, if they had not reached a rate agreement
at
the start of the university's fiscal year, it would have been
disruptive
and could have meant that some indirect costs would never be
recovered.
Tr. at 45-46, 70, 227. A DCA witness acknowledged that
failure to reach
an agreement may have meant that JHU had to use the 59% rate
from
previous years until an agreement was reached. Tr. at 167.
This would
mean that project awards made during this period would use the 59%
rate
to obligate funds, and, even if JHU ultimately had a higher
rate
approved, JHU could not recover the difference if the awarding
agencies
had already obligated all available funds.
In sum, we find that the workpapers show a general reduction of .5
points
over the four-year period, which was not related to a specific
issue and
which is more than sufficient to offset the unallowable costs.
C. Whether the disallowance is
warranted on other grounds
alleged by DCA
DCA also attempted to justify the disallowance here by stating that
JHU
had one of the highest indirect cost rates of any university in
the
country and that JHU had recovered substantially more than its
actual
costs by using the predetermined rates negotiated for the
four-year
period.
JHU challenged these assertions, arguing that its rate was lower
than
seven other schools and far below the leader. See JHU Ex.
10. The DCA
Director said JHU's information was for 1993 rates, and his
information
showed JHU as second highest. Tr. at 454. However,
since JHU's direct
cost base apparently did not include all subcontract costs
up to
$25,000, as OMB Circular A-21 permits, JHU's rate cannot fairly
be
compared with rates calculated using a larger base. As DCA
witnesses
testified, an increase in the base would lower the rate. JHU
did not
deny that it had reported actual indirect costs for FY 1990 and FY
1991
lower than what it had recovered under the negotiated rates for
those
years. However, the DCA negotiator's testimony indicated that he
had
contemplated that this might occur and had determined that it was in
the
federal government's interest to agree to rates higher than what
might
have been justified for the early years of the four-year period, so
that
the rate in the last year of the period would not be as high.
See,
e.g., Tr. at 272. JHU presented evidence that its underrecovery in
FY
1992 would more than offset any overrecovery in FYs 1990 and 1991.
Tr.
at 106.
DCA pointed to preliminary audit results which it said indicated
that
downward adjustments should be made to the reported actual costs,
and
that overall, JHU would have an overrecovery of up to $16 million.
Tr.
at 486. DCA's reliance on these preliminary results is
misplaced,
however, since JHU is disputing these results on various
grounds,
including that the auditors used an allocation method different
from
what DCA had agreed to. Tr. at 512-513; see also Tr. at 462.
The
preliminary audit results are likely to be adjusted, like the
audit
results here, in response to documentation and argument presented
by
JHU.
In any event, the revised circular (which DCA determined to apply
here)
adopts a policy of requiring a refund for unallowable costs, rather
than
reopening the negotiations, and permits an offset for a
general
reduction. Thus, even if the DCA negotiator unwisely agreed
to
predetermined rates not subject to adjustment for actual costs,
DCA
cannot fairly rely both on the revised circular policy and on
a
comparison of actual costs to costs claimed under the
predetermined
rates.
The fact that the rates are predetermined, fixed rates has a
further
significance here. Although the revised circular adopts a
policy of
requiring a refund of indirect costs irrespective of the type of
rate,
this policy must be read in context.
The more general provision on collection of unallowable costs in
the
revised circular states:
Costs specifically identified as unallowable.. and charged
to
the government either directly or indirectly will be refunded
.
. . .
. C.8.; 56 Fed. Reg. at 50,227 (emphasis added).
The unallowable costs found in the OIG audit were not themselves
charged
to the federal government during the four-year period, but were
simply
included in a proposal used to negotiate the predetermined rates
for
that period. Thus, to determine whether a refund is warranted based
on
the audit finding it is necessary to inquire whether, by including
the
unallowable costs in the proposal, JHU received a rate which
overstated
its indirect costs, so that we can conclude that unallowable
indirect
costs were in fact charged to the federal government during the
rate
years. The evidence here suggests that, even if these unallowable
costs
had been eliminated before negotiations, it would have had little,
if
any, effect on the rates. The amount is relatively insignificant,
the
specific issues raised by the DCA negotiator were contested,
the
negotiations focused on bottom line rates, and JHU accepted
rates
significantly below what JHU had proposed in order to have
predetermined
rates established prior to the beginning of its fiscal
year.
In sum, there is no basis in the current record to conclude that
JHU
charged unallowable indirect costs to the federal government.
Conclusion
For the reasons stated above, we reverse the disallowance.
____________________________
Cecilia
Sparks Ford
____________________________
Norval
D. (John) Settle
____________________________
Judith
A. Ballard Presiding
Board Member
1. The agreement is dated June 27, 1988, but contains a date
stamp
indicating it was updated August 16, 1988. The negotiators
testified
that, after they thought they had an agreement, an issue
arose
concerning what direct cost base should be used. JHU
negotiators
thought they had agreed to the base set out in OMB Circular A-21,
which
includes subcontracts up to $25,000 each. The DCA negotiator
thought
the base did not include any subcontracts because JHU's base had
not
included any in previous years. The parties resolved this dispute
by
agreeing to a direct cost base which includes subcontracts only if
they
have a total cost of $10,000 or less.
2. The DCA negotiator testified that he did not consider
these
documents to be "workpapers," since he associates that word
with
documents prepared by auditors. Tr. at 282. While we agree
that the
documents he prepared do not have the precision or detail we
generally
see in audit workpapers, we nonetheless refer to them as
"workpapers."
The parties used this term throughout the proceedings, and it
is a
simple shorthand way of referencing the documents and
distinguishing
them from the forms prepared by JHU.
3. During the hearing, JHU objected to being associated with
the
Stanford controversy. DCA acknowledged that the audit here did not
find
the kinds of abusive practices alleged at Stanford.
4. The preamble also responded to comments concerning whether
offsets
could be used rather than refunds if the university could
document
additional costs not originally claimed. The response was that
such an
offset would not be permitted because the provision "was intended
to
correct improper (past year) proposals and not reopen prior years'
rates
to renegotiation." 56 Fed. Reg. at 50,224. The OIG audit
here found
over $252,000 in allowable salary costs which JHU could have
included in
its DA cost pool in its proposal, but did not. Prior to the
revised
circular, nothing precluded DCA from treating these salaries as
an
offset to the unallowable costs in the DA cost pool. Since we
find
evidence of a general reduction which can be used to offset
the
unallowable costs in the DA cost pool, we do not reach issues
concerning
the fairness of DCA precluding an offset for the additional
allowable
salaries found in the OIG audit.
5. JHU attacked the proceeding before the Regional Director's
delegate,
arguing that its due process had been violated since the delegate
(who
called himself a Hearing Official) had engaged in an ex parte
contact
with the DCA negotiator to obtain his affidavit and since JHU did
not
have adequate time to respond to the affidavit. We reject
this
challenge, for reasons stated in our ruling of June 26, 1992.
The
procedures established at Part 75 are informal and contemplate that
the
Regional Director (or her delegate) may consult with agency officials
to
obtain relevant information.
6. We note, however, that we do not find persuasive some of the
reasons
JHU advanced for why we should find a general reduction. We
agree with
DCA that it is not sufficient for JHU merely to show that its
negotiated
rates were lower than its proposed rates. We also reject
JHU's position
that we should find a general reduction in the space-related
cost pools
because the DCA negotiator did not specifically note next to
those
reductions that they related to the direct cost base issue.
Finally, we
find that JHU's reliance on general statements made in GAO
testimony
before Congress and in a letter from OIG to GAO is misplaced.
Those
statements can reasonably be read to be referring to reductions
DCA
negotiators obtain based on issues such as cost allocation methods,
and
do not necessarily imply that DCA agreed to a general reduction to
JHU's
rate, within the meaning of the revised circular.
7. DCA also argued that we should give deference to its
interpretation
of the revised circular. A position advanced in an
adjudication,
however, is not entitled to the same deference as an
interpretation
which has been promulgated as official agency policy.
See Georgetown
Univ. Hospital v. Bowen, 488 U.S. 204