DAB Decision 41
October 19, 1977 Southern Methodist University; Docket No. 76-8;
Decision No. 41 Bernstein, Bernice L.; DeGeorge, Francis D. Hiller,
Manuel B.
SUMMARY
(The following summary is prepared on the responsibility of the
Executive Secretary of the Board as a convenience to the interested
public. It is not an official part of the decision and has not been
reviewed by the Panel. Similar official summaries of earlier cases
appear in 45 CFR Part 16 Appendix.)
The Board upheld disallowance of student room and board costs charged to
year B of an Upward Bound grant but incurred during year A because this
constituted a violation of the DHEW Grants Administration Manual
provision that a cost is allocable to a grant if it is incurred
specifically for the grant and FMC 73-8 (formerly OMB Circular A-21)
provision that costs allocable to a particular research agreement may
not be shifted to others to meet a deficiency caused by an overrun.
Attempted justification based in part on former practice under OEO
administration of Upward Bound vas rejected. The Board sustained
grantee's appeal of a disallowance of similar costs charged to year B
but incurred in year C because it acted reasonably and prudently in
conforming to OE's written application instructions which apparently
authorized carry over, even though the instructions were not in this
respect consistent with published regulations, since OE was responsible
for the inconsistency.
A determination that costs in excess of the total amount budgeted for
audits of year A and B by an independent firm did not conform to the
approved project proposal and that substantive changes were made in the
program without prior Grants Officer approval was reversed by the Board
because the grant terms and conditions permit transfer of funds among
cost categories in the negotiated budget when necessary to assure
project effectiveness, and the charge was reasonable.
DECISION
This is an appeal by Grantee, Southern Methodist University, from the
decision of the Regional Commissioner of Education, Region VI, dated
January 15, 1976, disallowing several items of cost based upon audit
findings. Grantee held several successive Upward Bound grants
identified Grant No. OEG-0-71-2648 (1972-1973), hereinafter referred to
as 2648, grant No, OEG-6-73-1060 (1973-1974), hereinafter referred to as
1060, and Grant No, OEG-6-73-1060 Extended (1974-1975), hereinafter
referred to as 1060 Extended, The items of disallowance fall into two
categories: (a) room and board charges, and (b) audit costs, and will
be separately considered.
The Regional Commissioner disallowed $8,425 of the former costs charged
to Grant 1060 on the ground that such costs were not incurred during the
1973-1974 budget year to which they were charged. The Regional
Commissioner also disallowed $2,488 expended by Grantee for audits, by
the firm of Ernst & Ernst, of Grantee's 1972-1973 and 1973-1974 budget
periods, as in excess of the total amount budgeted for the purpose,
Room and Board Charges
Of the $8,425 room and board costs which were disallowed, $6,687 was
incurred in the 1972-73 budget period under Grant 2648 (1972-1973), and
$1,738 was incurred in the 1974-75 budget period under Grant 1060
Extended. The costs were initially charged to the respective accounts
for those years and later transferred to the 1973-74 grant account,
1060, This transfer enabled Grantee to avoid overdrawing its grant funds
under 2648 for 1972-73 budget year. (Letter from Grantee dated 5/27/77
to Departmental Grant Appeals Board, item 2).
Grantee contends that the audit report concluded that the costs in
question were found to be allowable, the only question raised was their
proper assignability to the 1060 grant. In support of the propriety of
charging the 1060 grant for costs incurred under 2648 it argue that it
"acted with due prudence in the circumstances, considering their
responsibility to the institution, its employees, its students, the
Government, and the public at large," quoting from FMC 73-8, par. C.3(
c). It also contends
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that the reallocation of costs was in accordance with verbal
instructions received at Regional and National Upward Bound Management
seminars. (Appeal, p.4, item 3).
The Regional Commissioner, in his response of July 23, 1976 to Grantee's
appeal, denies that any such advice was given by anyone in the USOE
Regional Office. In response to this Board's request of May 6, 1977
that Grantee furnish the dates, times and places of the seminars and the
OE officials who on such occasions provided oral instructions or
authority to transfer costs in the manner effected by Southern
Methodist, the Grantee was unable to provide such information.
(Grantee's letter 5/27/77, item I.) In lieu thereof, it stated that it
had been an acceptable practice under the OEO administration of the
program to allow grantees to assign costs incurred during a period when
two grants or budget periods overlapped to either grant or budget year.
This practice, Grantee claims, was reinforced by information exchanged
between SMU's Upward Bound program director and his counterparts at
other institutions.
In that same response, Grantee conceded that funds in 2648 were
insufficient to cover the $6,687.00 of disallowed costs charged to the
1060 grant. It was also stated that $1,738 of costs incurred under 1060
Extended were charged to 1060 since the funds under the latter grant had
not been fully expended and that was in conformity with Grantee's
practice of fully expending former year funds subject to a determination
that there was a balance available.
Whatever may have been the Grantee's practices under OEO administration
of the program, the propriety of the allocation of costs at issue here
must be considered by reference to the grant terms and conditions made
applicable to these grants by the Office of Education. The appeal file
contains the OE Notification of Grant Award on 2648 covering the grant
period 5/1/71 through 6/30/72. It directs that the grant "shall be
administered in accordance with: (1) Special Provisions (attached
hereto), and (2) 1970-71 Upward Bound Guidelines and Supplement #1
thereto."
Appendix B of those Guidelines provides the Grant Terms and Conditions
for Upward Bound Projects. Sec. 3, "Limitations on Costs," provides:
"a. The total cost to the Government for the performance of the
Grant will not exceed the amount set forth in the Notification of
Grant Award or any appropriate modification thereof. The
Government shall not be obligated to reimburse the Grantee for
costs incurred in excess of such amount unless and until the
Grants Officer shall have notified the Grantee in writing that
such amount has been increased and shall have specified in a
revised Grant Award a revised amount which shall thereupon
constitute the revised total cost of performance of the Grant."
Paragraph (e) of that same section further provides that "all costs are
subject to the limitations as specified in the Upward Bound Guidelines
appropriate to the grant period."
'(Page 03 - 41 - 10/19/77)'
Reference to the audit report indicates that the $6,687 amount in
dispute represents room and board charges incurred under the 2648 grant
and charged to the 1060 grant. Although these costs may have been
incurred during a period of overlap of the two grants, (Grantee's letter
of 5/27/77, item 1.) they clearly constitute costs incurred in
performance of the former grant and are, therefore properly allocable to
it. As stated in Exhibit X-2-68-1 of the DHEW Grants Administration
Manual (incorporated by reference in the Guidelines by Sec. 4a. (3) of
Appendix B of the Guidelines a cost is allocable to a Government
contract/grant if it is "incurred specifically for the contract/grant."
Since this item of cost was incurred specifically for the benefit of and
under 2648 it must properly be allocated to it, unless otherwise
specifically authorized. Moreover, the nature of this item being room
and board costs for students under the 2648 grant, it is beyond argument
that any benefit from incurrence of such cost could inure to 1060.
In this connection, we would point out that 1060 represents a new and
discrete grant, rather than an extension or renewal of 2648. It was
made in consequence of an entirely new and unrelated application, the
Notification of Grant Award identifying it as new grant (see Box 7),
assigning to it both a different grant number (See box 2) and a new
Project Number (see Box 3).
In its appeal, Grantee concedes that the 2648 grant funds were
inadequate to cover the room and board expenditures in question but does
not even attempt to justify charging them to 1060 other than to claim
their incurrence during the overlap period. That temporal accident does
not, in the Board's view, provide a basis for allocating any part of
that cost to a new grant which derived no benefit whatever from such
expenditure.
With respect to Grantee' s claim that this was a permissible practice
under OEO and was verbally approved by DE officials, we have already
noted that these grants were made by OE and not OEO, and subject to
terms and conditions prescribed by DE. As indicated above Grantee has
not been able to support its claim of oral instruction or authorization
in a manner adequate to overcome the above-quoted limitation of the
Government' s obligation to the amount of the grant award.
Finally, no consideration of the allocability of a cost would be
complete without reference to Sec. C.4.b. of Appendix A of FMC 73-8
(formerly OMB Circular A-21) which is incorporated by reference in the
Guidelines for this program (1972-1973 Guidelines, page 50) and made
applicable to Educational Services agreements by Appendix B. Grantee
acknowledges that this provision is applicable and has quoted it in its
appeal. It provides:
"Any costs allocable to a particular research agreement... may not
be shifted to other research agreements in order to meet
deficiencies caused by overruns or other fund considerations, to
avoid restrictions imposed by law or by terms of the research
agreement, or for other reasons of convenience."
'(Page 04 - 41 - 10/19/77)'
Because the costs in question were in excess of the grant funds
available, charging them to the 1060 would be in direct contravention of
the above quoted prohibition as a device calculated to meet a deficiency
caused by an overrun.
For the foregoing reasons, the Board denies Grantee's appeal from the
disallowance of $6,687 incurred under 2648 and charged to the 1060
grant.
Turning now to the disallowance of the $1,738 incurred under 1060
Extended but charged to 1060, the situation is somewhat different. For
one thing, Grantee asserts -- and it has not been controverted -- that
sufficient funds were available in 1060 Extended to cover these costs.
Thus, allocating them to 1060 cannot be deemed to have been done to
avoid deficiencies. We next consider whether such action violates the
other aspects of the above quoted provisions in FMC 73-8.
Although as the record on appeal does not so disclose, we are aware that
Grant 1060 was made after application therefor was submitted pursuant to
"Supplemental Instructions to Accompany the Trio Program Manual for the
1973-1974 Program Manual and Application Forms." Those instructions
initiated, for the 1973-1974 funding cycle, a multi-year project
approval system. It stated:
For the purpose of this system, all applications for 1973-1974
funds will be regarded as new applications; therefore, it will be
necessary for applicants to project goals and activities over a
three-year period. A detailed budgetary breakdown for each budget
period is to be made a part of the application, and projects which
are approved for multi-year support will be funded in annual
installments called budget periods. Under this system of
multi-year support, carry-over funds at the end of any budget
period are available for use during the entire life of the
project."
Elsewhere, the Instructions provide that the "grantee is allowed to
incur costs from the Effective Date of the Grant. Thus, reasonable
costs incurred after the grant is awarded but prior to the formal
beginning of the program may be included as items for which
reimbursement is requested.... The grantee, however, will not be allowed
to recover any costs prior to the effective date of the grant."
Unfortunately the term "grant" is not itself defined in the
Instructions. However, in order to give meaning and effect to both of
the quoted portions of the Instructions, it would appear to be necessary
to attribute to the term "grant" as used in the latter context the
status of a new grant. This would accommodate the concept of a project
period, which is defined as:
"11. Project Period: The total time for which a project or
portion thereof is approved for support including any competitive
extensions. The length of the project should be determined
'(Page 05 - 41 - 10/19/77)'
by the operating agency on the basis of two primary
considerations: the length of time required to complete the
project, and the frequency of competing review desirable for
proper management of the grant program. The length of the project
period approved therefore may be less than the period requested by
the applicant."
and the policy of availability of carry-over funds for use during the
entire life of the project.
The Notification of Grant Award dated 5/24/74 covering 1060 Extended,
refers to itself, in Block 9, "Scope of Work", as "this grant
revision
covers the 2nd budget period of this Upward Bound Project." It further
provides that the grant will be administered in accordance with: "45 C.
F.R., Part 100, DHEW, Office of Education, General Provisions for
Programs,...Federal Register... November 6, 1973, Volume 38, Number
213," and General and Special Grant Terms and Conditions, both attached.
Section 4 of the General Grant Terms and Conditions governing allowable
costs provides:
"Expenditures of the grantee may be charged to this grant only if
they: (1) Are in payment of an obligation incurred during the
grant period and (2) conform to the approved project proposal."
A conflict appears to exist between the Instructions pursuant to which
Grantee submitted its applications for both 1060 and 1060 Extended and
the General Terms and Conditions, published, as regulations of OE, in
the Federal Register. Although this Board recognizes that the
regulations have the full force and effect of law which the
administrative instructions are not competent to supersede, we are
constrained to take account of the confusion which such seemingly
inconsistent issuances inevitably generate. At the very least, it is
arguable that the Instructions constituted a blanket authorization in
writing for carrying forward into a succeeding budget year unexpended
funds of a previous budget year in a multi-year project grant.
The very form of application (OE Form 1251, 2/73, approved by OMB No.
51 R0896) calls for budget estimates for the 2nd and 3rd years of the
Activity, in addition to the 1st year's fund request. The application
form supports the multi-year project concept set forth in the
Supplemental Instructions.
In response to the Board's request a copy of Grantee's application dated
3/27/73 was furnished by the Regional Commissioner. (Memo from Regional
Commissioner to the Board dated 7/27/77.) The form calls for requests
for first, second and third years of the project and Grantee supplied
its budget requests or estimates. In the narrative portion of its
application it identified (page 1) the proposed dates of activities as:
"June 1,
'(Page 06 - 41 - 10/19/77)'
1976." It also contained 2nd and 3rd year narrative statements regarding
activities and goals for those years. Clearly, then, Grantee's
application was in conformance with the multi-year project system set
forth in OE's Supplemental Instructions.
In view thereof it is the opinion of this Board that since the 1060
Extended costs were allocated to the 1060 1973-1974 budget year in
accordance with the Instructions issued by the OE, notwithstanding the
limitations contained in the regulations, we sustain Grantee's appeal on
this item. It should be clearly understood, however, that this Board is
not according to the Instructions any status of supremacy over the
regulations. This would be beyond the authority conferred upon this
Board. By this part of our decision, we merely hold that in the
circumstances of this case, we think that the Grantee acted reasonably
and prudently in conforming to the Instructions, although those same
Instructions were not consistent with the published regulations. That
inconsistency was the creature of the Office of Education for which this
Grantee should not be held responsible.
Audit Costs
The matter of audit costs presents a simpler issue. Grantee's budget for
2648 and 1060 each carried an allocation of $356 for audits for the
respective 1972-1973 and 1973-1974 project periods. Grantee engaged the
firm of Ernst & Ernst to perform the audits and was billed a total of
$3,200 for both audits, for which a combined report was issued. The
Regional Commissioner disallowed $2,488 of the audit expenditures, the
amount by which the combined costs exceeded the two budget items. The
basis for the disallowance is set forth in the Regional Commissioner's
Memorandum of July 23, 1976, in the appeal record as follows:
"Justification for the disallowance is contained in the Grant
Terms and Conditions under article 4 (allowable costs) and article
2 (scope of the project). Article 4 states that 'Expenditures of
the Grantee may be charged to this grant only if they.... (2)
conform to the approved project proposal. Article 2 states that
'no substantive changes in the program of a project shall be made
unless the Grantee submits an appropriate amendment thereto, along
with the justification for the change, and this amendment is
approved in writing by the Grants Officer.'
"This office maintains that the amount expended by the Grantee for
the audit does not conform to the approved project proposal and
that the Grantee made substantive changes in the program without
prior Grants Officer approval."
On the other hand, Grantee contends that the budget "seriously
underestimated" the amount necessary. It argues further that because
the costs
'(Page 07 - 41 - 10/19/77)'
were necessary and did not alter the performance of the approved program
or result in cost overruns, the expenditure falls within Article 3.b. of
the Grant Terms and Conditions which permits "transfer of funds among
the various cost categories in the negotiated budget to the extent
necessary to assure the effectiveness of the project." We agree with
Grantee's assertion and reject the Regional Commissioner's contention
that the expenditure of that amount either constituted a substantive
change in the program of the project or that it failed to conform to the
project proposal.
Essentially, then, the issue boils down to the question of whether the
amount was reasonable. In support thereof, Grantee has submitted copies
of invoices rendered to it by Ernst & Ernst for audits conducted in
connection with Department of Commerce, Office of Minority Business
Enterprise grants. The Regional Commissioner stated that he considered
the amounts charged Grantee for auditing these grants to be excessive.
In response to the Board's request for justification for the costs of
the audits, or independent support, Grantee requested Ernst & Ernst to
provide same. Ernst & Ernst attempted to do so by its letter of June 10,
1977, in which it identified three Department of Commerce audits it had
conducted for which it had billed comparable amounts. It further stated
that the audit procedures were in accordance with generally accepted
auditing standards and in compliance with the respective audit
procedures of the two departments, noting that "many of the audit
objectives and procedures performed in connection with the audits
involved were similar in nature." However, no indication is given as to
whether the requirements of the two departmental audit requirements were
comparable. Since the amounts charged for the audits were questioned,
it would have been helpful if Ernst & Ernst had supported its billing by
indicating the amount of time devoted to each of the audits, their
hourly billing rates, etc. Notwithstanding the absence of such specific
information, we think the charge for the audits is reasonable. HEW
experience in the costs of audits of its grant programs is fully
supportive of the reasonableness of the amounts billed. Based on hourly
rates generally charged by certified public accountants and other
professionals, the initial budget allocations of $356.00 per audit
appears to the Board to be unrealistic and totally inadequate.
Accordingly, Grantee's appeal on this item is sustained.
M /1/ We note that although technical questions can be
raised as to which regulatory formulations of the applicable Federal
cost principles is here governing, no issue in this case appears
affected by any variation in such formulations. For convenience we will
refer only to the provisions of 45 C.F.R., Part 74, Subpart Q, and
Appendix D thereto. The text of Appendix D (hereinafter cited simply as
"Appendix D") is derived from OMB (then BOB) Circular A-21, redesignated
as FMC 73-8 and published as 34 C.F.R., Part 254, by the General
Services Administration and subsequently withdrawn from 34 C.F.R. by the
Office of Management and Budget. See also 45 C.F.R. Part 100, Subpart G
(Office of Education grantees).
/2/ We note that this case involves no disputed material underlying
fact and no hearing in respect thereto. No conclusion herein
necessarily applies to any case involving such a dispute.
/3/ "(2) Results of cost analysis studies may be used when they
result in more accurate and equitable distribution of costs. Such cost
analysis studies may take into consideration weighting factors,
population, or space occupied if they produce equitable results. Cost
analysis studies, however, should (a) be appropriately documented in
sufficient detail for subsequent review by the cognizant Federal agency,
(b) distribute the indirect costs to the appertaining cost objectives in
accord with the relative benefits derived, (c) be conducted to fairly
reflect the true conditions of the activity and to cover representative
transactions for a reasonable period of time, (d) be performed
specifically at the institution at which the results are to be used, and
(e) be updated periodically and used consistently. Any assumptions made
in the study will be sufficiently supported. The use of cost analysis
studies and periodic changes in the method of cost distribution must be
fully justified."
May 7, 1992