GAB Decision 032
January 31, 1977 Action for Boston Community Development, Inc. (ABCD);
Docket No. 76-4 Malone, Thomas; York, Edward Mason, Malcolm
Action for Boston Community Development, Inc., ("ABCD") is a
Community Action agency which for many years has received grants from
the Office of Economic Opportunity and its successor the Community
Services Administration, from the Department of Health, Education, and
Welfare (HEW) and from other Government agencies. HEW is the lead
agency for the determination of indirect cost rates for this grantee.
This is an appeal from such an indirect cost rate determination made
by the Regional Office and affirmed by the Regional Director. The Board
sustains the Regional Director.
For several years (1966-1973) indirect cost rates which excluded from
consideration the value of donated services and space were approved.
For the annual periods beginning September 1, 1973 and 1974 however, the
Department representatives took the position that the indirect cost rate
to be determined must reflect the value of donated services and space.
This view was sustained by the Regional Director, Region I, in a
decision dated December 3, 1975. ABCD appealed to this Board, and
requested an informal conference to clarify the facts and the issues.
The Panel of the Board assigned to the case set the matter down for
the informal conference. The parties were invited to t be prepared to
discuss at the conference a number of specific issues which appeared to
have an important bearing on the result to be reached and to supply
certain information. The parties also were invited to submit
preconference briefs. The conference was held on October 12, 1976 and
was transcribed. The panel has considered the statement of the appeal
and its attachments reflecting the prior negotiations, the Regional
Office response, the preconference briefs, the information and arguments
supplied at the conference, and the postconference brief submitted by
grantee (the Regional Office advised that it did not consider a formal
brief necessary). The facts and issues of law have been clarified.
THE ISSUES
The grantee administers programs of at least three Government
agencies totalling approximately $20,000,000 annually. It receives
donated services and donated space valued at over $2,700,000 annually.
It expends for undistributed indirect cost approximately $1,400,000. An
indirect cost recovery is generally the product of a base times a rate.
The rate is itself a quotient. In determining its indirect cost rate,
grantee proposed to determine the rate as it had in the past as a
quotient of indirect cost over direct costs.
The Regional Office view is that the rate should be determined as a
quotient of indirect cost over the sum of the direct costs and the value
of the donated services and space. This results, of course, in a lower
rate but would have substantially the same impact on the grantee if the
rate were then applied to the donated services and space as well as to
the direct cost activity and fully recovered. That is not the case,
however. A clear rule provides that costs may not be recovered with
respect to donated services or goods and, at the same time, directs that
a portion of the indirect cost shall be allocated to the fair market
value of donated services or goods (45 CFR Part 74, App. F, Section
G.9.b; the term "goods" clearly includes space. See 45 CFR Sec.
74.53). The effect of this rule is that the rate is decreased by
including the value of donated services and space in the divisor under
one part of the rule, while the recovery is limited by excluding the
value of donated services and space in determining the base to which the
rate is applied.
Grantee argues that this creates an inequitable distortion, all the
more objectionable because it claims to have been orally informed by
some of the agencies involved that limitations on their available
funding may cause them to make awards which will not be adjusted by the
amount that this shift of computation would attribute to their programs
as an additional indirect cost burden. (Grantee's Prehearing Brief, pp.
9, 17 and 23; Transcript, pp. 69 and 87.)
DISCUSSION
It is, of course, clear that the Federal Government does not in
general undertake to reimburse grantees for all expenses. (See 45 CFR
Part 74, App. F PA.1; cf. App. E. PI.A; cf. also FMC 73-8, 34 CFR Sec.
254.3, and FMC 74-4, 34 CFR Sec. 255.3, now again administered by OMB as
Circulars A-2u and A-87). OASC-5, p. 5, serves notice on Community
Action Agencies such as grantee that a shift from OEO to HEW supervision
may give them problems precisely in this area, and that the general
policy of reimbursing full indirect costs on even HEW Awards may have to
yield to appropriation restraints or exceptions to the general policy
for special programs or in given situations. Unlike federal procurement
contracts which generaly reimburse the contractor for all costs plus, in
most cases, a profit, federal grants in general reimburse the grantee
for all costs less, in most cases, an element of cost sharing or local
share. Accordingly, there is little weight to an argument that the
grantee will fail to recover its full costs. The imposition of some
share of the burden (generally a minority share) is normal and expected
and the equitable results to be achieved as compared with other grantees
in comparable situations. That the rules impose a burden on the grantee
does not make the result inequitable provided the burden is consistent
with the intent of the program and the stated rules.
Grantee is required to furnish a local matching share in various
amounts towards the expenses of its programs and has counted the donated
services and space as part of that matching share. It may count towards
that local share only those expenses which would have been acceptable as
a reimbursable item had they been paid for. (45 CFR 74.52(b)(3) and
(4)). Thus, the contributed items are an integral part of the program.
Three methods of calculating indirect cost rates are available. One
is the direct allocation method which may be disregarded here, as the
parties have agreed (Transcript, page 16). Another is the multiple
distribution base method which involves establishing appropriate
functional categories or pools of expenses which are then distributed to
direct institutional activities by means of a base which best measures
the relative degree of benefit which each activity derives from that
pool. A third method is the simplified method which is used where all
of an institution's direct program activities receive services from all
of its indirect or administrative activities in approximately the same
degree (or where the amount of federal funds is not material or where
the institution has only a single direct function or activity; neither
is relevant here). The multiple distribution base method is, of course,
more sophisticated and more expensive to apply since it requires much
more detailed information and analysis, as the grantee has noted
(Transcript, p. 44.) The simplified method is a deliberately rough and
ready approximation which disregards many refinements and may therefore
be more or less inequitable in its results. If the inequities are
substantial, then the multiple base method becomes appropriate
notwithstanding its increased cost and complexity. If the inequities
are small enough, the simplified method is advantageous notwithstanding
minor inequities.
Grantee has sought to use the simplified method but argues that
requiring it to add contributed services and space to direct costs in
the divisor leads to inequities because under the circumstances of its
organization, its administrative activities have little or no
application to the contributed items. This argument is unacceptable
since the contributed items are an integral part of the grant supported
activities (and, if they were not, they could not properly be counted as
part of the grantee's matching share). The premise for the use of the
simplified method is that these contributed items receive services from
all of the grantee's indirect or administrative activities in
approximately the same degree as the federally funded items. Grantee
must either cncede that that is so, or acknowledge that the simplified
method is not available to it and it must then resort to the multiple
distribution base method. By using the multiple distribution base
method, grantee will be afforded the opportunity to claim methods of
distribution which best measure the relative degree of benefit which
each activity derives from a particular pool of activities.
Notwithstanding the argument implied by its rhetorical question, "Does
a
distribution base under the multiple distribution method include or
exclude the volunteer in the absence of any significant benefit?"
(Appellant's postconference brief, p. 6; cf. Tr. 54 and preconference
brief p. 20), this does resolve the issue of the appeal. Under the
multiple distribution base method, appellant will be guided by certain
normally used distribution methods -- number iof people in certain
cases, square feet in others, dollar amounts in others, but it remains
free to advance any alternative method that it believes it can show will
more fairly and consistently reflect actual benefits. (OASC-5 p. 17,
Section IV.D.2, p. 18, E.2; cf. Exhibit B-1, Explanation, last
paragraph.) It will thus obtain the benefit of its argument, to the
extent that it may prove factually supportable, that the donated
activites do not benefit at all, or to a substantial degree, from the
administrative activities.
Grantee contends that this disposition does not resolve the
difficulty because it reads the underlying rule for the treatment of
donations as requiring only that the value of donated services or goods
"shall be considered in the determination" of the rate and as not
mandating that they shall be a part of the calculation base. (E.g.
Transcript, p. 23). This contention is also unacceptable. It puts on
the word "considered" a meaning which might be acceptable in ordinary
usage but is clearly contrary to the intent expressed by the rule. That
the value of contributions shall be considered in the determination of
the rate does not mean that they shall be talked about and then
disregarded. As applied to items of cost computation, it means that
they shall enter into the computation. Grantee was asked at the
conference whether it knew of any instance in which such an expression
was used in the permissive sense it was giving the term and to cite
accounting standards or similar professional usage and grantee undertook
to supply such instances (Transcript, pages 37, 38, 40, 40-41). in its
postconference brief, it acknowledged that it had not found any such
instances (p. 4). The term "consider" as used in the cost principles
(OASC 5 "A Guide for Nonprofit Institutions," page 23; 45 CFR Part
74
Appendix F Section G.9.b.) clearly means "must be taken into account,
must be an element in the computation of the base." (Cf. OASC-5, p. 6:
"recognized for computation purposes.")
This interpretation of the expression "shall be considered" in the
determination of the indirect cost rate is put beyond doubt by the rest
of the sentence which grantee has in its argument slurred over. The
fair market value of donated services or goods are to be considered in
the determination of the rate "and, accordingly, shall be allocated a
proportionate share of indirect cost." This latter clause is mandatory
in its terms, and incidentally makes clear that this is regarded as a
consequence flowing from the requirement that they "shall be
considered." Donated services and goods are not allowable costs.
Neither are indirect costs allowable to the extent that they relate to
such donated services and goods. To determine the amount of indirect
costs which relate to donated services and goods, the rule envisages
that in setting the rate, donated services and goods shall be
considered, that is shall be reflected along with federally funded
activities in the divisor that determines the rate, but that the donated
services and goods shall be allocated a proportionate share of indirect
cost, that is, the rate shall be applied only to the federally funded
activities in determining the dollar amount claimable.
If grantee believes that the applicability of its administrative
costs to contributed items is sufficiently different from their
applicability to federally funded items so that it cannot say that the
contribbuted activities benefit "in approximately the same degree,"
then
it must resort to the more sophisticated multiple base distribution
method. If the differences, while they exist, are not significantly
great in amount as to warrant the added cost of the multiple base
method, it may be permitted to utilize the simplified method and accept
the incidental but minor inequities inherent in that method.
Alternatively the possibility of application for a deviation from the
publicly stated rule has been discussed (letter 3/4/75 from Coard,
grantee's Executive Director to Fulton, Regional Director, letter 8/8/75
from Regional Director to grantee's Executive Director.) Procedures for
seeking a deviation with respect to the determination of an indirect
cost rate and with respect to the base to which the rate shall be
applied, are set forth in 45 CFR 74.6 and Grants Administration Manual
Chapter 1-20-80 and 6-150-30.
CONCLUSION
The decision appealed from is sustained. The applicable cost
principles clearly mandate that the value of donated services and goods
(including space) be included with direct costs for purposes of
determining indirect cost rates and that a share of the indirect costs
shall be allocated to such donated services and goods and thus not
recovered by the grantee from the granting agency. To the extent that
this results in less than a full recovery of all costs, that is
consistent with the Federal intent that the grantee contribute to the
costs of the program. As the grantee has chosen to use the simplified
method of calculating indirect cost rates, it cannot be heard to
complain that the full value of the donated services and space is
assigned to pro rata share of the total indirect costs. To the extent
that it claims that substantially different measures of benefit for
contributed activities and others are involved, it may resort to the
multiple base system.
OCTOBER 04, 1983