Gab Decision 145
January 29, 1981 Washington State University Docket No. 70-204 Ford,
Cecila; Garrett, Donald Settle, Norval Panel Chairman
This case involves an appeal by Washington State University (WSU,
Grantee) of an October 12, 1979 determination by the National Institutes
of Health (NIH) Grant Appeals Board sustaining a disallowance made by
the Chief of the Audit Resolution Section (ARS), NIH. The NIH/ARS
disallowed $218,764 (subsequently reduced by the NIH Grant Appeals Board
to $218,374) for the fiscal years 1975 and 1976, based on findings of
alleged overcharges to projects for direct labor costs, fringe benefits,
and indirect costs.
We find that the Grantee failed to properly account for its direct
labor costs in accordance with a Federal regulation but that the Agency
has not established the amount of overcharges for fiscal year 1975.
Accordingly, we sustain the disallowance in part and overturn it in part
as indicated below.
This decision is based on the Grantee's application for review, the
parties' responses to an Order to Show Cause issued by the Board
Chairman and a submission by the Grantee commenting on the Agency's
response to the Order to Show Cause.
Statement of the Case
45 CFR Part 74, Appendix D, Section J.7.d. provides that direct labor
costs charged for personal services must be based on an institutional
payroll system and requires the following type of documentation as proof
of actual direct labor costs:
Such institutional payroll systems must be supported by either: (1)
an adequate appointment and workload distribution system accompanied by
monthly reviews performed by responsible officials and a reporting of
any significant changes in workload distribution of each professor or
professional staff member, or (2) a monthly after-the-fact certification
system which will require the individual investigators, deans,
departmental chairmen or supervisors having first-hand knowledge of the
services performed on each research agreement to report the distrbution
of effort. Reported changes will be incorporated during the accounting
period into the payroll distribution system and into the accounting
records. Direct charges for salaries and wages of non-professionals
will be supported by time and attendance and payroll distribution
records.
In 1974, WSU implemented a direct labor distribution "P -- 1" system
to comply with the requirements of Federal Management Circular (FMC)
73-8, Section J. 7.d. /1/ In 1976, the HEW Audit Agency, (HEWAA, now
HHSAA) reviewed WSU's labor distribution system in order to determine if
it supported the direct labor costs charged to Federal projects. The
audit determined that overcharges to Federal projects for direct labor
costs existed and could be extensive for fiscal years 1975 and 1976. As
a result of this audit, the Agency requested WSU to make a review of
fiscal year 1976 and identify overcharges by employee and by project.
The WSU review found $44,059 in labor overcharges. In 1978, HEWAA
reviewed WSU's study of direct labor charges for fiscal year 1976. The
HEWAA's 1978 audit concluded that overcharges for direct labor costs
were actually greater than those found by WSU in its review and found
labor overcharges of $233,760. HEWAA stated that the reason it found
more overcharges than WSU is because WSU made unsupportable adjustments
for errors in its "P-1" system. In December 1978, NIH/ARS issued a
final determination concerning direct labor overcharges for fiscal years
1975 and 1976 which accepted many of the overcharges identified by HEWAA
in its 1978 audit. The disallowance letter also indicated that WSU had
agreed with NIH/ARS that any results obtained from the fiscal year 1976
comparison would be extrapolated to fiscal year 1975. NIH/ARS
determined overcharges of $108,080 for fiscal year 1976 and applied this
same figure to fiscal year 1975. It disallowed a total of $218,764,
determining that for fiscal years 1975 and 1976, WSU overcharged HEW
(now HHS) projects for direct labor costs including fringe benefits and
indirect costs in the amount of $216,160 and finding that $2,604 for
costs transfers for fiscal year 1975 and 1976, were unallowable. (WSU
does not dispute the $2,604 disallowance for the cost transfers.)
Pursuant to the provisions of 42 C.F.R. Part 50, Subpart D and the
regulations of this Board, WSU requested informal review from NIH. In
October 1979, the NIH Grant Appeals Board issued its decision sustaining
the determination of NIH/ARS. NIH, however, adjusted the original
disallowance of $218,764 to $218,374 because of an addition error of
$390 found in the computation of the overcharges pertaining to fiscal
year 1976. Because the NIH Grant Appeals Board failed to make this same
adjustment when it extrapolated the overcharges to fiscal year 1975, we
have deducted $390 for fiscal year 1975. The disallowance should,
therefore, be adjusted to $217,982.
Discussion
Jurisdiction of Departmental Grant Appeals Board
The materials submitted by WSU in support of the Board's jurisdiction
consisted of the notice of grant award for 25 different grants as well
as three negotiated contracts. The grants which are direct,
discretionary project grants, are within the jurisidiction of the Board.
For the reasons discussed in the Order to Show Cause, the amount of the
disallowance attributable to the three negotiated contracts is not
subject to the Board's jurisdiction. The amount attributable to the
contracts for overcharges for direct labor costs, fringe benefits, and
indirect costs for fiscal years 1975 and 1976 is $28,788. /2/ The actual
amount of the disallowance subject to the Board's jurisdiction in this
appeal, therefore, is $189,204 ($217,982 -- 28,778). The Board's
calculations of the amount of the disallowance appears on the following
chart:
*2*COMPUTATION OF DISALLOWANCE Disallowed
Total of direct labor overcharges plus benefits and indirect costs for
fiscal year 1976 Less direct labor overcharges and fringe benefits and
indirect cost under contracts not subject to this Board's review
-14,389 Total for 1976 $93,300 Equal amount for fiscal year 1975
$93,300 Cost Transfer disallowed for fiscal years 1975 and 1976 which
are not disputed by the parties TOTAL $189,204
Fiscal Year 1976 Disallowed
Contracts Identified and Reviewed by HEWAA $6,781
Contracts Identified but not Reviewed by HEWAA 2,502
Subtotal $9,283
Plus Applicable Fringe Benefits and Indirect Cost at 55%
5,106 Total for 1976 $14,389 Equal Amount for Fiscal Year
1975 14,389 TOTAL ATTRIBUTABLE TO
CONTRACTS FOR FISCAL $28,778 YEARS 1975-1976
Compliance with Section J.7.d. and Documentation of Costs.
NIH/ARS determined that WSU was not complying with Section J.7.d. It
determned that WSU was not incorporating into its accounting records the
changes in distribution of effort from the "P-1" system effort reports.
As a consequence, the accounting records, which served as the basis for
WSU's direct labor charges, reflected an amount budgeted for labor costs
rather than an amount derived from documented distribution of effort.
The budgeted amount for labor costs in WSU's accounting records was
higher than its documented labor costs, and NIH/ARS concluded that WSU
had overcharged the Agency for the period in question.
In response to NIH/ARS's determination, WSU contends that the amounts
originally billed for direct labor costs derived from its accounting
records reflect the actual effort on the projects but that there may
appear to be overcharges because of errors in the "P-1" effort reports.
As support for its contention, WSU relies on certifications made by the
principal investigators or other parties from one to three years after
the initial"P-1" effort reports were made.
Section J.7.d. of 45 CFR Part, 74, Appendix D requires a direct labor
distribution system which during the accounting period incorporates into
the payroll distribution system and into the accounting records any
changes reported. Under the provisions of Section J.7.d., a monthly
after-the-fact certification system by the principal investigator would
have been sufficient. That requirement, however, is not satisfied by
certifications made from one to three years after the effort was
expended. As was stated in the Board's decisions in University of
Pacific, Decision No. 15, April 21, 1976, and Head Start of New Hanover
County, Inc., Decision No. 65, September 26, 1979, there is a question
as to the credibility, reliability, and persuasiveness of this kind of
evidence, inasmuch as such documentation has been found to be less
acceptable than records made contemporaneously with the performance of
the services claimed or shortly thereafter. Therefore, we find that
Grantee did not comply with Section J.7.d. since its accounting records
were not adjusted to reflect the "P-1" system effort reports and that
evidence submitted was inadequate to prove that direct labor costs
charged under WSU's institutional payroll system in fact reflected
actual effort.
Use of Extrapolation from Fiscal Year 1976 to Fiscal Year 1975
WSU contends that the Agency's use of extrapolation from fiscal year
1976 to fiscal year 1975 is not proper for the following reasons: (1)
there is no statistical support for the extrapolation, in that
conditions in fiscal year 1975 were materially different than conditions
in fiscal year 1976; and (2) proper auditing techniques would require
at least the making of a statistical sample of fiscal year 1975. WSU
contends that although WSU administrators initially agreed to
extrapolation during a negotiating session with NEW, WSU subsequently
learned that conditions were different in fiscal year 1975 than in
fiscal year 1976. The Board Chair directed the Agency to show cause,
with respect to the use of extrapolation to fiscal year 1975, why the
disallowance should not be reversed.
The Agency in its response did not identify why it would be
reasonable to assume that overcharges in labor costs identified for
fiscal year 1976 would be identical to those for fiscal year 1975. Nor
did the Agency cite Department guidelines or accounting principles which
would justify this type of extrapolation or which could make it
unnecessary to perform a statistical sample for fiscal year 1975. Given
Grantee's assertion that conditions had changed, we believe that the
mere allegation of an agreement between the parties is inadequate to
support the Agency's extrapolation without some independent basis to
support the reasonableness of its application in this instance. There
is no indication from the audit reports or the NIH/ARS disallowance
letter that can justify finding overcharges or that demonstrates that
the amount disallowed for fiscal year 1975 is correct. The only
indication from the record that overcharges exist for fiscal year 1975
is an assumption that the same overcharges must exist for fiscal year
1975 as for fiscal year 1976 because the same direct labor distribution
system was in effect for both years. Accordingly, we are unable to
sustain the disallowance relating to fiscal year 1975. If the Agency
subsequently performs a statiscal sample for fiscal year 1975 or finds
some other basis for sustaining a disallowance for that year, our
present action would not preclude it from taking a later disallowance.
Additional Contentions
Grantee was directed by the Board Chair to show cause why the
disallowance should not be upheld based on its failure to comply with
Section J.7.d. The Grantee's submission was not responsive to the Order
and did not cite any basis in law or fact which would convince this
Board to overturn the disallowance for 1976 in light of prior Board
decisions and the Grantee's non-compliance with Federal regulations.
Instead, WSU raises two new issues in its response to the Order. First,
WSU contends that HEWAA in its audit adjusted the amount of overcharges
for errors in the "P-1" effort reports (such as paperwork and clerical
errors) but did not make equal adjustments in all similar situations in
which these types of errors occurred. Grantee does not demonstrate how
this relates to the amount in dispute here since the total overcharges
found by the Audit Agency in its 1978 audit were not sustained by
NIH/ARS in its later disallowance letter, NIH/ARS having disallowed a
much lower amount than recommended by HEWAA. Although WSU contends that
proper auditing procedures would require such equal adjustments, we find
WSU's citation of United States General Accounting Office publication,
"Standards for Audit of Governmental Organizations, Programs, Activities
and Functions," Part IV, as support for this argument, unpersuasive.
That publication explains general auditing standards but does not
directly refer to or deal with WSU's contention. Furthermore, the
record indicates that the Agency adjusted for errors only where it had
sufficent documentation of actual effort. It is the Grantee's
obligation to accurately and correctly document its costs. Accordingly,
the Agency is under no obligation to look behind each piece of original
documentation for errors and to adjust for them. Such time consuming
verification of original documentation is not required. Therefore, one
cannot conclude that because the Agency made adjustments for some errors
in the "P-1" effort reports that it is under an obligation to find
and
make adjustments for all errors.
Secondly, in its response to the Order to Show Cause, WSU argues that
the Audit Agency, in determining the total amount of overcharges for
fiscal year 1976, incorrectly extrapolated the amount of actual
overcharges where potential overcharges were identified by the Audit
Agency but not reviewed by it. Using WSU's cost sharing reports, HEWAA
identified the potential direct labor overcharges for all WSU projects.
HEWAA reviewed a portion of the potential overcharges for those projects
included in the WSU review and determined the amount actually
overcharged. These actual overcharges were then reflected as a
percentage rate (Actual Overcharges divided by Reviewed Potental
Overcharges = Percentage Rate) which was applied in order to project the
actual overcharges for the potential overcharges which had been
identified but not reviewed. NIH/ARS used this same formula to
determine its later disallowance, making adjustment for the fact that it
subsequently disallowed less (Actual Overcharges) than initially
questioned by the Audit Agency and revising its percentage rate
accordingly. We find WSU's general objection to this projection
unpersuasive since WSU failed to institute an appropriate direct labor
distribution system and in the Board's view the Agency acted reasonably
in an effort to compute the resulting overcharges.
Conclusion
The Board finds that the Grantee has violated the provisions of 45
CFR Part 74, Appendix D, Section J.7.d. and has failed to provide
credible, convincing evidence to refute the findings of NIH/ARS as
supported by HEWAA audits. The Board, therefore, upholds the
disallowance of $95,904 -- that portion of the disallowance which
relates to fiscal year 1976 -- plus unallowable cost transfers for
fiscal years 1975 and 1976 in the amount of $2,604 as agreed to by the
parties.
The Board finds that the Agency has not adequately explained why
extrapolation of the fiscal year 1976 overcharges to fiscal year 1975 is
proper; therefore, the Board overturns the disallowance as it relates
to fiscal year 1975 inasmuch as the record indicates that there is no
independent basis for that year to justify the disallowance. The
Agency, however, is not precluded from taking a later disallowance for
fiscal year 1975 on other grounds. /1/ The provisions of FMC 73-8,
Section J.7.d., are identical to those of 45 CFR Part 74,
Appendix D, Section J.7.d., effective September 19, 1973 and made
applicable to institutions of higher education by CFR Part 74, Subpart
Q. /2/ Board Computation of Amount of Overcharges under
Contracts. (The Board's Computation is based on the Agency's response
to the Order to Show Cause and has not been reviewed or agreed to by the
parties.)
OCTOBER 04, 1983