GAB Decision 027
September 27, 1976 Oregon Department of Higher Education; Indirect Cost
Rate Proposal;
Audit Control No. 50012-10; Docket No. 75-9 Malone, Thomas;
DeGeorge, Francis Hastings, Wilmot
This appeal by the Oregon Department of Higher Education ("Grantee")
by letter dated June 4, 1975 ("Appeal"), asks the Departmental Grant
Appeals Board ("Board") of the Department of Health, Education, and
Welfare ("DHEW") to review an adverse determination made by DHEW's
Regional Director, Region X, on May 7, 1975, as to Grantee's
dissatisfaction with a proposed indirect cost rate "Negotiation
Agreement" proposed by DHEW for the University of Oregon Medical School
(the "School").
Pursuant to DHEW policy, the Grantee, on February 25, 1974, submitted
to the Regional Director an indirect cost rate proposal for the School
for FY1973. The DHEW Audit Agency reviewed the proposal and, on
September 6, 1974, issued an audit report thereon (Control No.
50012-10) proposing certain adjustments and disallowances, and
indicating that the same adjustments and disallowances should be made
for the FY1971 and FY1972 indirect cost rate proposals for the School.
After preliminary negotiations with representatives of the Grantee, DHEW
delivered to the Grantee a proposed indirect cost rate "Negotiation
Agreement" for FY1976 which included provisional rates for later periods
and carry-forward adjustments based on the Audit Agency's conclusions
with respect to prior years. The Grantee objected to certain of the
proposed adjustments.
By the conclusion of an informal appeal proceeding before the
Regional Director, all outstanding issues relating to the indirect cost
rate proposal were resolved to the satisfaction of the parties, except
one: whether so-called "non-mandatory cost-shared salaries and wages"
should be included in the allocation base for the School's "Organized
Research" cost objective for indirect cost rate purposes.
Pursuant to DHEW policy, DHEW and the School in 1972 reached an
agreement setting 5% as the minimum level of "cost-sharing" for all
of
the School's research projects sponsored by DHEW. In other words, the
School was to provide from non-Federal sources 5% of the cost of all
DHEW-funded research projects. This computation was to be made
periodically on an aggregate basis, in lieu of a project-by-project
basis. For this purpose, the School established a series of separately
budgeted accounts, which it has funded from grant and gift sources other
than Federal or State appropriations. An amount equal to the wages and
salaries included in this so-called "mandatory" cost-sharing was
included by the School in the wages and salaries base used to allocate
indirect costs related to its Organized Research cost objective between
DHEW and the School.
During its review of the Grantee's indirect cost rate proposal, the
DHEW Audit Agency determined that the School did not require staff
members to identify and report time spent on specific projects or
activities. Thus the School was unable to identify, for cost-sharing
purposes, any specific amount of staff activity expended on the
aggregate of Federally-sponsored projects grouped under the Organized
Research cost objective. Rather, it relied entirely on the mandatory
cost-sharing amount to measure its contribution to its DHEW-sponsored
research efforts. The DHEW Audit Agency reviewed all active DHEW grants
and contracts for FY1973 and determined, based on data in the relevant
applications, that the sum of $225,287 should be added to the mandatory
amount of cost-shared salaries and wages in the allocation base under
Organized Research for indirect cost rate purposes. The Audit Agency's
conclusion was, therefore, that the amount of cost-shared wages and
salaries of staff actually expended in DHEW-sponsored research exceeded
the mandatory level by the amount of $225,287. The addition of this
amount to the Organized Research allocation base used for indirect cost
purposes could significantly affect the allocation of indirect costs in
fact apportioned between the School and DHEW. Since some indirect costs
may be allocated on a basis other than wages and salaries (e.g., a
building use allowance allocated on a square footage basis), an
under-reporting of the total amount of wages and salaries spent on
Federally-supported projects (here, Organized Research) could result in
an over-allocation of indirect costs to those projects and therefore to
DHEW. The School has estimated the adverse financial impact on it of
this inclusion at $94,000 for FY1973. The propriety of including this
additional amount in the Organized Research alllocation base is the
subject of the Appeal.
Section G.2. of 45 C.F.R. Part 74, Appendix D (Federal Management
Circular 73-8) provides in relevant part that indirect costs allocated
to organized research at grantee educational institutions should be
distributed on the basis of direct salaries and wages, which may for
this purpose include that portion contributed to the research by the
institution for cost-sharing purposes. Section D.1 of 45 C.F.R. Part
74, Appendix D, provides that "direct" costs are "those costs
which can
be identified specifically with a particular research project . . . or
any other institutional activity . . . ," and Section D.2 identifies
typical direct costs applicable to research agreements as including "the
compensation of employees for performance of work under the research
agreement . . . ." "Organized research" is defined in Section
B.1. of 45
C.FR. Part 74, Appendix D, as "all research activities of an institution
that are separately budgeted and accounted for."
Much of the debate on the issue involved in the Appeal has centered
on the School's past budgeting and management practices. The parties
appear to agree that some effort budgeted by the School to its
"Instruction and Departmental Research" cost objective has been expended
on the research projects classified by the School as part of its
Organized Research effort. Despite this fact, the Grantee has
vigorously and articulately defended its allocation of all non-mandatory
cost-shared wages and salaries to the School's Instruction and
Departmental Research objective. Its defense of this allocation has
rested on a varity of grounds, but appears to be based primarily on the
argument that the assignment of particular costs among various
institutional objectives depends on a managerial judgment as to which
objective that cost primarily benefits, and that the School has made a
judgment that those salaries which are funded from State sources,
despite the work performed by the staff receiving those salaries on
DHEW-sponsored research, benefit primarily the instructional efforts of
the School and thus should be associated with that cost objective. The
School has also argued that since the non-mandatory cost-shared wages
and salaries are in fact not "separately budgeted and accounted for,"
they do not constitute part of the organized research effort.
Much of the Grantee's argument seems to have relentlessly assumed its
conclusions. The definition of "organized research" in 45 C.F.R. Part
74, Appendix D, relates to a type or class of institutional activity,
not the method used by an institution to allocate costs to that
activity. Clearly the School does maintain an organized research effort
which is separately budgeted and accounted for. The question is what
costs ought to be allocated to that activity for indirect cost rate
purposes. Nor can a management judgment by the School that work by
individual staff members on Federally-sponsored research projects may
benefit primarily the School's instructional, rather than research,
efforts determine what costs should be included in an allocation base
for Federal indirect cost rate purposes. For those purposes, 45 C.F.
R., Part 74, Appendix D, clearly provides that wages and salaries which
can be specifically identified with a particular research project are
allowable direct costs of the project, which in turn form part of the
indirect cost allocation base for the organized research cost objective.
Where appropriate, particular salaries must be split among objectives, a
process recognized as appropriate in general by the Grantee but for some
unexplained reason believed by the Grantee to be inapplicable to those
salaries funded from State sources. As noted earlier, the mandatory
cost-sharing amount of wages and salaries which was included by the
School in its allocation base is funded solely from grants and gifts.
For purposes of allocating costs for indirect cost-sharing purposes,
the Board is unable to find any rational basis for differentiating
between non-Federal sources derived on the one hand from State
appropriations and on the other from grants and gifts, nor any basis of
distinction based on the School's present accounting practices or on its
institutional cost-sharing agreement with DHEW, which is designed to
meet other requirements. All wages and salaries which can be
"identified specifically with a particular research project" included
by
the School within its Organized Research efforts must be included in any
wages and salaries allocation base used for indirect cost purposes,
whatever the funding source. No other result would carry out the
purposes of 45 C.F.R., Part 74, in respect of an equitable and
consistent sharing between DHEW and its grantees of indirect costs.
The Board thus denies Grantee's appeal and remands the case to the
Regional Director, Region X, to resolve the dispute as to the actual
amount of cost-shared wages and salaries which ought to be added to the
mandatory amount for indirect cost rate allocation purposes.
OCTOBER 04, 1983