Acadia-Vermillion Community Action Program, Inc., DAB No. 1201 (1990)

Department of Health and Human Services

DEPARTMENTAL APPEALS BOARD

Appellate Division

SUBJECT: Acadia-Vermillion

Community Action Program, Inc.
Docket No. 90-112
Audit Control No. A-06-89-08081
Decision No. 1201

DATE: October 30, 1990

DECISION

The Acadia-Vermillion Community Action Program, Inc. (AVCAP/Grantee)
appealed a determination by the Office of Human Development Services
(OHDS/Agency) disallowing $13,868 in administrative (salary) costs
charged by AVCAP to its Head Start Grant for the 1987-1988 program year.
The amount at issue was an increase over the amount for such costs
contained in AVCAP's approved budget. OHDS found that these salary
costs were unallowable since AVCAP had neither the requisite time and
effort reports to document the amount charged as a direct cost nor an
indirect cost rate to support recovery of administrative costs on an
indirect basis. AVCAP maintained that it could document the salary
costs as direct costs, and, alternatively, that it had signed an
agreement with OHDS which allowed it to charge these costs to the grant
as indirect costs. AVCAP asserted, however, that OHDS refused to honor
its agreement and took this disallowance.

The record in this case includes the parties' briefs and evidentiary
submissions, the tape recording of a September 17, 1990 telephone
conference, and a written summary of an October 3, 1990 telephone
conference. On the basis of the record and the following analysis, we
sustain the entire disallowance of $13,868.

Applicable Law

The principles governing the allowability of costs charged to federal
grants by nonprofit organizations are found in Office of Management and
Budget (OMB) Circular A-122. 1/ The basic principles of cost
allowability are set out in the Circular's Attachment A.

Charges to a grant are comprised of allowable direct costs and a portion
of allowable indirect costs as determined by a grantee's indirect cost
rate. Among other criteria, costs must be reasonable and necessary to
grant purposes and adequately documented. See OMB Circular A-122,
Attachment A, A.2.a. and g. The Circular defines direct costs as --

those that can be identified specifically with a final cost
objective . . . However, a cost may not be assigned to an award as
a direct cost if any other cost incurred for the same purpose, in
like circumstances, has been allocated to an award as an indirect
cost . . . .

Id. at B.1.

Indirect costs are defined as --

those that have been incurred for common or joint objectives and
cannot be readily identified with a particular final cost objective
. . . A cost may not be allocated to an award as an indirect cost
if any other cost incurred for the same purpose, in like
circumstances, has been assigned to an award as a direct cost . . .
.

Id. at C.1.

OMB Circular A-122, Attachment A., Paragraphs D. and E. set out the
process for determination and negotiation of an indirect cost rate.

The cost principles are discussed in OHDS Grants Administration Manual
(OHDS GAM). OHDS GAM Chapter 3, "Cost Principles and Procedures," is
set out in part at OHDS Exhibit (Ex.) D. Paragraph B.1. of that chapter
provides --

Recipients must submit indirect cost proposals for each fiscal year
in which indirect costs are claimed . . . Grantees that fail to
comply with this requirement will be deemed as not having a
currently effective indirect cost rate . . . If a rate is
subsequently established, based on the late submission of an
indirect cost proposal, indirect cost reimbursement will be limited
to the indirect costs applicable subsequent to the date the
proposal is submitted. Failure to submit a timely proposal may
also result in the disallowance of indirect costs previously
reimbursed based on the use of a provisional indirect cost rate.

Background

The AVCAP Head Start program year at issue ran from August 1, 1987
through July 31, 1988. The Grantee's approved budget for this period
did not provide for indirect costs and AVCAP had not submitted an
indirect cost rate proposal for that program year. Administrative
personnel costs were included in two budget categories (personnel and
fringe benefits) within AVCAP's budget. See OHDS Brief (Br.), p. 2
(unnumbered); OHDS Ex. A.

On April 12, 1988, AVCAP submitted a written budget revision to OHDS for
its approval. Among other items not at issue here, AVCAP sought to
increase the amount charged to its Head Start grant for administrative
personnel costs. See AVCAP Reference Item Two. The budget revision
identified the personnel for whom additional costs would be charged to
Head Start. However, nothing in that document demonstrated what the
personnel would do to justify an increase in Head Start funding. OHDS
Br., p. 3. In a May 16, 1988, telephone conversation with AVCAP's
Program Coordinator, the OHDS Community Representative for Head Start
denied the requested budget revision. As documented in an internal
memorandum from AVCAP's Program Coordinator to the Head Start Executive
Director on that day, the Agency's rationale for denying the revision
was that "during the last 2 on-site visits, there was not enough and/or
adequate documentation to justify the cost charged to the Head Start
Program." See AVCAP Reference Item Three.

On July 1, AVCAP asked OHDS to reconsider its denial of the requested
budget revision for personnel costs. AVCAP also indicated that it would
submit an indirect cost rate proposal in order to recover that type of
cost. On July 18, 1990 officials from AVCAP and the Regional OHDS
office met in Dallas. AVCAP asserted in its brief and during the
telephone conference that it left this meeting with the understanding
that problems concerning the allowability of the personnel charges had
been resolved. See AVCAP Br., p. 1. On August 29th AVCAP submitted an
indirect cost rate proposal to OHDS. The proposal was approved on
November 11th. A provisional indirect cost rate of 13% was set for the
period July 1, 1988 through June 30, 1990. See OHDS Br., p. 3; AVCAP
Reference Items Six and Seven. Later a final rate of 0% was established
for this period, so that, effectively, there was no indirect cost rate
until the AVCAP fiscal year beginning July 1, 1989. See Affidavit of
Tom Rubio and accompanying indirect cost rate agreement submitted with
OHDS Response (August 23, 1990).

There was an independent audit of AVCAP for the 1987-1988 program year
to assure its compliance with federal fiscal guidelines. The auditors
questioned $13,868 in administrative salaries charged to the Head Start
grant "due to [AVCAP's] not having an indirect cost plan in effect at
the time of incurring these costs." See OHDS Ex. B, p. 107.

The Agency disallowed the $13,868 in questioned administrative costs,
concluding that AVCAP had not adequately documented the increased
administrative charges as a direct cost and had no indirect cost rate
for the time period to support its claim.

Analysis

I. AVCAP did not document the allowability of the questioned costs as
direct costs.

OMB Circular A-122, Attachment B, paragraph 6.l.(1) requires that wages
and salaries treated as direct costs be based on documented payrolls
supported by personnel activity reports. In relevant part paragraph
6.l.(2) provides that "[r]eports reflecting the distribution of activity
of each employee must be maintained for all staff members . . . whose
compensation is charged, in whole or in part, directly to awards." The
Circular then sets specific requirements for adequate personnel
activity reports. A grantee must document, for example, the
after-the-fact actual activity of each employee and account for the
total time for which an employee is paid.

AVCAP argued that its auditors had determined that AVCAP had
satisfactory support for these costs See AVCAP Br., p. 2 and AVCAP
Reference Item Six. AVCAP's Reference Item Six contains an analysis
prepared by its auditors which developed percentage allocations to the
Head Start program for the administrative employees at issue. The
auditors based these allocations on a comparison (apparently using
1986-1987 data) of Head Start grant funds to the Grantee's overall
funding (for three employees) or on a comparison of payroll amount and
number of employees per AVCAP program (for the remaining three
employees). AVCAP's auditors noted that this allocation method was
suggested due to the complexity of developing an hour-by-hour allocation
to specific programs.

Before the Board, AVCAP also submitted time and attendance sheets to
support these costs. The time sheets contain typed or hand-written
notations purporting to show the percentage of time the employees spent
on various AVCAP programs, including Head Start. We note that the
percentages shown on the time and attendance sheets are different from
the percentages formulated by AVCAP's auditors. The Grantee did not
specifically explain how these percentages were developed.

As the Agency noted, its auditors questioned the charge for
administrative personnel costs because AVCAP had neither time
distribution records nor an indirect cost rate. See OHDS Ex. B. The
Agency maintained that the time sheets do no more than verify the
employees' attendance on a given day. OHDS asserted that absent more
specific documentation such as activity reports it had no way of
confirming that the employees in issue had devoted any of their time to
the Head Start program. 2/

Under the regulations and applicable cost principles, a grantee bears
the burden of documenting the allowability of all charges to federal
funds. 45 C.F.R. 74.61; Pennsylvania Dept. of Public Welfare, DAB No.
1089 (1989); and New York State Dept. of Social Services, DAB No. 1036
(1989). Absent adequate documentation, the Agency cannot ensure that
federal funds are being expended for legitimate program purposes. Here,
the Grantee submitted time sheets which provide only an unsubstantiated
percentage allocation for each employee's time. The documentation
submitted is not adequate in light of the Circular's specific
requirements for time distribution records. Moreover, given the absence
of a negotiated indirect cost rate for the time period in question, the
Agency reasonably rejected the percentage allocations developed by
AVCAP's auditors. Since AVCAP was treating these administrative costs
as direct costs, the Agency is not required to agree to an increase in
administrative costs simply based on a general analysis of a prior
year's activity.

Given the requirements in the cost principles and the absence of any
time distribution records, OHDS reasonably concluded that the Grantee
had not substantiated these charges as direct costs to its Head Start
grant.

II. The administrative personnel costs are not allowable on an indirect
cost basis because AVCAP did not have an approved rate in place for the
time period in question.

AVCAP argued that these costs were allowable because it had an indirect
cost rate in effect for the final month (July) of the 1987-1988 program
year. Additionally, during the September 17th telephone conference,
AVCAP contended that, at its July 18, 1988 meeting, Regional OHDS
officials had agreed that the costs at issue would be allowable as
indirect costs. AVCAP asserted that the Agency had gone back on this
agreement. Consequently, AVCAP argued, the Agency was responsible for
this disallowance, since AVCAP was not made aware of the fact that it
would not receive federal funding for these costs until after the end of
the program year. AVCAP's arguments fail for several reasons.

An indirect cost rate is established on the basis of a grantee's
indirect cost rate proposal. A proposal must be submitted for each year
in which indirect costs are claimed. Grantees failing to comply with
this requirement will be treated as not having a currently effective
indirect cost rate. See OHDS GAM excerpt at OHDS Ex. D. Additionally,
this Department's Guide for Non-Profit Institutions sets out the cost
principles and procedures for establishing indirect cost rates. That
document states (at page 3) that "[w]here possible, . . . [indirect
cost rate proposals] should be submitted prior to the date of the award,
and, in no event, later than three months after such date." See OHDS
Ex. E. Finally, if a rate is subsequently established, based on the
late submission of an indirect cost rate proposal, indirect cost
reimbursement will be limited to the indirect costs applicable to the
period subsequent to the date the proposal is submitted. See OHDS Ex.
D.

As OHDS noted, AVCAP's budget for the 1987-1988 fiscal year did not
provide for recovery of indirect costs. Rather, AVCAP's total approved
budget was comprised of just over one million dollars in direct costs.
AVCAP did not submit an indirect cost proposal until August 29, 1988,
one month after the end of the program year in issue. A rate was
eventually approved in November 1988, effective July 1, 1988. 3/ See
AVCAP Reference Item Seven.

Clearly, AVCAP did not follow the procedures necessary for obtaining an
indirect cost rate for the 1987-1988 program year. The indirect cost
proposal was not submitted until after the program year in issue and,
when approved, was effective only for the final month of that year. In
its brief, AVCAP appeared to assert that because a provisional indirect
cost rate was set for July 1988, it could be considered to have been in
effect for the entire year and thus applicable to support its charge for
administrative personnel costs.

There is no support in any of the applicable cost principles or
guidelines for AVCAP's rationale. Moreover, even though a provisional
rate was set for the final month of the program year, the final rate
ultimately set was 0%. In addition, since the administrative costs were
questioned by the auditors for the time period ending June 30, 1988, the
existence of an indirect cost rate (even if more than 0%) for a later
period is irrelevant.

During the September 17th conference, AVCAP also asserted that it had
signed an agreement with OHDS which would have made these charges
allowable as indirect costs. AVCAP contended that the Agency's failure
to follow this agreement and subsequent notification of the denial of
federal funding after the close of the program year resulted in this
disallowance.

The Agency asserted that AVCAP's argument was essentially one of
estoppel. That is, AVCAP relied on an agreement allegedly reached in
the July meeting as the basis for the allowability of costs incurred
prior to that meeting. Essentially, AVCAP asserted that OHDS chose to
ignore this agreement to AVCAP's detriment and thus should be prevented
(i.e., estopped) from now denying the allowability of these costs. As
we explain below, the facts do not support the Grantee's position.

There can be no estoppel absent the traditional requirements of a
misrepresentation of fact, reasonable reliance, and detriment to the
opposing party. Heckler v. Community Health Services of Crawford
County, Inc., 467 U.S. 51, 59 (1984); see also Tennessee Dept. of Human
Services, DAB No. 1054 (1989). Moreover, estoppel against the federal
government, if available at all, is presumably not available absent
affirmative misconduct by the federal government. Schweiker v. Hansen,
450 U.S. 785 (1981). 4/ There is no evidence in the record before us
that the Grantee has satisfied the elements necessary to a showing of
estoppel.

While AVCAP asserted that it had signed an agreement that would have
made these costs allowable as indirect costs for the 1987-1988 program
year, there is no evidence of any such agreement in the record. Thus,
there is no evidence of misrepresentation by OHDS. Similarly, we do not
find evidence of affirmative misconduct by the Agency.

Additionally, AVCAP repeatedly asserted that the Agency's failure to
provide written notification of the denial of the budget revision until
"after the fact" caused this disallowance. AVCAP also contended that it
was harmed by the manner in which the Agency did communicate the denial,
in that the person who was initially informed of the OHDS decision was
not an officer with authority to affect the Grantee's fiscal operations.
There is no merit to either argument.

On May 16, 1988, the OHDS Community Representative told the AVCAP
Program Coordinator, by telephone, that the budget revision was denied.
That same day, the Program Coordinator summarized the call in a
memorandum to AVCAP's Head Start Executive Director. That memorandum
indicated that OHDS had denied the budget revision. See AVCAP Reference
Item Three. Further, AVCAP sought reconsideration of the OHDS decision
on July 1, 1988. See AVCAP Reference Item Six. While it may have been
advisable for OHDS to follow up the May 16th call with written notice of
its determination, it is clear from AVCAP's actions that it had prompt
actual notice of the Agency decision.

Finally, the Agency's failure to provide AVCAP with written notification
of the budget revision denial until, as AVCAP phrased it, "after the
fact," cannot be viewed as having caused this disallowance. 5/ During
the September 17th conference, the Grantee admitted that it had incurred
the administrative costs at issue here throughout the 1987-1988 program
year. Late in its program year, AVCAP decided to increase
administrative charges to Head Start but provided no supporting
documentation. Consequently, AVCAP had no reasonable basis for
expecting OHDS to fund undocumented costs, in large part already
incurred, which exceeded the amount for administrative costs initially
approved in the budget.


Conclusion

As explained above, in the absence of adequate time distribution records
or an approved indirect cost rate, we conclude that OHDS reasonably
determined that the administrative costs at issue were unallowable
charges to the Head Start program. Consequently, we sustain the entire
disallowance of $13,868.

Cecilia Sparks Ford

Norval D. (John) Settle

Alexander G. Teitz Presiding Board Member

1. OMB Circular A-122 is made applicable by regulation at 45 C.F.R.
74.174(a) (1987).

2. OHDS reiterated this point during the September 17th telephone
conference. During that conference, AVCAP stated that the Board had
enough information before it to reach a decision on the merits.
However, after further reflection AVCAP notified the Board (on September
21st) that it had more detailed documentation which it could provide for
OHDS review. During the October 3rd telephone conference, the Presiding
Board Member stayed the case to permit further review by OHDS. By
letter dated October 16, OHDS reported that it had completed its review
of the additional documentation provided by AVCAP. OHDS asserted that
AVCAP's documentation did not meet the standards in the regulations and
cost principles for supporting documentation. Rather, OHDS asserted
that the documentation was "conclusory in nature" and lacked the
requisite detail necessary to support AVCAP's position. Based on our
review of the record, AVCAP has had more than sufficient opportunity to
present for OHDS review any documentation which could affect the result
here.

3. During the September 17th telephone conference, the Board
questioned why the effective date of AVCAP's indirect cost plan was not
August 1, 1988, the beginning of the month the plan had been submitted
for Agency approval. OHDS indicated that AVCAP's plan had been given a
July 1 effective date since the Grantee had first notified the Agency in
July that it would be submitting an indirect cost proposal.

4. In the recent case of Office of Personnel Management v. Richmond,
110 S. Ct. 2465 (1990), the court deplored the fact that its dicta on
affirmative misconduct had "spawned numerous claims for equitable
estoppel in the lower courts." Id. at 2470. While it cited with favor
the older cases tending to view estoppel against the government as
impossible (e.g., Utah Power & Light Co. v. United States, 243 U. S.
389, 408-409 (1917) and Federal Crop Insurance Corporation v. Merrill,
332 U.S. 380 (1947), the court said it "would leave for another day
whether an estoppel claim could ever succeed against the Government."
Richmond, 110 S. Ct. at 2471. In Richmond the Supreme Court refused to
apply estoppel because it dealt with a claim for payment of money from
the public treasury contrary to a statutory appropriation.

5. We note that we are aware of no requirement that a grantee seek
prior approval for this type of budget revision. See 45 C.F.R. 74.105.
In any event, the critical issue here is whether AVCAP could document
the amount it charged to Head Start, which, as we discuss above, it
could