Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division

DATE: January 5, 1998

SUBJECT: North Carolina Central University

Docket No. A-97-042
Control No. 92-1-HB-NC-012
Decision No. 1640

DECISION

North Carolina Central University (NCCU) appealed a determination of the Office of Audit Resolution and Cost Policy, Office of Grants Management, Department of Health and Human Services (HHS), disallowing $43,362 charged to federal grant funds for costs incurred during the state fiscal years ending June 1993 and June 1994. The disallowance consisted of $5,732 charged to a P.R. Harris Fellowship Program grant (Department of Education), $15,300 charged to a Title III Institutional Aid for Higher Education grant (Department of Education), and $22,330 charged to an Office of Community Services grant (HHS) for which NCCU was a subgrantee. The disallowance was taken as the result of a finding in the State of North Carolina's "Single Audit Report for the Year Ended June 30, 1994" (audit report), prepared by the state auditor's office. The audit found that NCCU was improperly charging certain salary costs to the grants as direct costs while having already included 20 percent of the base salaries for departmental administration in the cost pool used to determine its indirect cost rate, in violation of federal cost principles. See audit report, submitted as HHS Ex. A, p. 238. HHS disallowed the direct charges to the grants.

For the reasons stated below, we uphold in full the disallowance. We conclude that NCCU violated the cost principles of OMB Circular A-21 by direct charging salary costs for general grant administration when such costs were already included in NCCU's indirect cost rate calculation. Moreover, to the extent that HHS gave its permission to charge certain overtime salary costs as direct costs, NCCU did not properly document that the disallowed costs were actually overtime salary costs as required by federal regulations.

REGULATORY BACKGROUND AND COST PRINCIPLES

Cost principles applicable to federal grants are established in circulars issued by the Office of Management and Budget. OMB Circular A-21 establishes the cost principles applicable to federal research grants awarded to institutions of higher education. See 44 Fed. Reg. 12368 (March 6, 1979). Applicable HHS regulations make the cost principles of OMB Circular A-21 applicable to HHS-administered grants. 45 C.F.R. . 74.172 (1993).

OMB Circular A-21 defines both "direct" and "indirect" costs for purposes of charging federal grants. Direct costs are --

those costs that can be identified specifically with a particular sponsored project, and instructional activity, or any other institutional activity; or that can be directly assigned to such activities relatively easily with a high degree of accuracy.

OMB Cir. A-21, . D.1. The circular explains that it is the identification of a cost with the federally-sponsored work rather than the nature of the goods or services that determines whether costs are direct or indirect. Examples of direct costs are compensation and fringe benefits of employees for performance of the work under the sponsored agreement. OMB Cir. A-21, . D.2.

On the other hand, indirect costs are --

those that are incurred for common or joint objectives and therefore cannot be identified readily and specifically with a particular sponsored project, and instructional activity, or any other institutional activity.

OMB Cir. A-21, . E.1. The circular names the usual categories of indirect costs at educational institutions: depreciation and use allowances; general administration and general expenses; sponsored projects administration expenses; operation and maintenance expenses; library expenses; departmental administration expenses; and student administration services. Id.

Because indirect costs cannot be specifically identified with a particular activity, they are accumulated into cost pools according to category and then allocated to the major functions of the university (such as instruction, organized research, other sponsored activities, and other institutional activities) using an appropriate distribution method. Johns Hopkins at 4. An indirect cost rate proposal must be submitted to the cognizant federal agency for approval. The indirect cost rate for the research function generally represents the total indirect costs allocated to that function divided by a distribution base, usually modified total direct costs associated with the research function. The rate is then used to distribute indirect costs to individual research agreements. Id.

OMB Circular A-21 states that where general or departmental administration expenses are charged to grants as direct costs --

expenses applicable to other activities of the institution when incurred for the same purposes in like circumstances must, through separate cost groupings, be excluded from the indirect costs allocable to those sponsored agreements and included in the direct cost of other activities for cost allocation purposes.

OMB Cir. A-21, . E.3.c.2.

The circular contains a simplified method of calculating indirect cost rates, which was available to be used by institutions of higher education receiving less than $3 million annually in federal research grants. Under the simplified cost method, 20% of the salaries of deans and department heads is included for departmental administration in the pool for calculating the indirect cost rate. In other words, this method assumes that 20% of a dean's time is devoted to indirect administrative duties. At all times relevant here, NCCU elected to use the simplified method of calculating indirect costs and included 20% of the departmental administrators' salaries in its indirect cost pool.

The circular also contains provisions specifically addressing compensation for personal services, including salaries, wages and fringe benefits. These costs are allowable as charges to a grant to the extent that the total compensation to individual employees conforms to the established, consistently applied policies of the institution. Compensation for personal services may be charged as direct or indirect costs consistent with other provisions in the circular. OMB Cir. A-21, . J.6.a. Incidental work, or work which is in excess of that normal for an individual and for which additional compensation is paid by the university, may be charged to a grant under certain circumstances. Id. HHS asserted that it has been its position since at least 1980 that incidental work "does not include administrative activities, direct effort on sponsored agreements . . . , or any other activities which are part of an individual's regular assignments." HHS September 18, 1980 letter, submitted to the Board on October 15, 1997. HHS stated that incidental work should represent "an insignificant part of the overall activities of university employees and that the effort devoted to it will be clearly in addition to, and unrelated to, the employee's regular assignments." Id.

ANALYSIS

Below, we discuss the parties' arguments with regard to each disallowance amount, as well as the proper application of OMB Circular A-21.

I. P.R. Harris Fellowship Program ($5,732)
HHS disallowed $5,732 charged to the P.R. Harris Fellowship grant and paid to the Dean of the University College, who also served as the principal investigator. This amount was paid to the Dean in addition to his regular annual salary. HHS found, based on the audit, that the amount paid to the Dean for one month's work was charged as a direct cost to the grant even though 20 percent of his regular annual salary was included in the cost pool NCCU used to calculate its indirect cost rate under the simplified method for small institutions. Initially, HHS disallowed the direct charge to the grant on the principle that general or departmental administration costs must be treated consistently as either direct or indirect costs, under the provisions of OMB Circular A-21.

In its brief, NCCU responded that the Dean was using annual leave for the period of time the grant was being directly charged for his services. Thus, NCCU implied, it was irrelevant that the Dean's regular salary was included in NCCU's indirect cost pool since his regular salary was not paying for any of his work on the grant during the month in question, when the Dean was allegedly on annual leave. According to NCCU, the Dean spent 100 percent of his time during that month (which NCCU clarified in an October 16, 1997 telephone conference as June 1 to July 6, 1993) writing the proposal, establishing contacts, preparing reports and coordinating the grant program. The extra amount paid to the Dean for June 1 to July 6, 1993 was budgeted and charged directly to the grant.

NCCU also argued that, under federal cost principles, whereas administrative costs generally related to all grant programs are captured in the calculation of its indirect cost rate, the costs associated with direct administration of a particular grant are not so captured and can be charged directly to the grant. Thus, according to NCCU, there was no duplicate claiming of costs here.

In response to NCCU's argument, HHS asserted that the state auditors reviewed NCCU's time and leave records for the month at issue and that the records did not confirm that the Dean took any vacation leave during the summer of 1993. Thus, according to HHS, NCCU's argument lacked merit and HHS's finding should be affirmed. NCCU conceded that the Dean neglected to submit a request for annual leave to NCCU's Human Resources Department. However, NCCU submitted copies of a September 29, 1992 memorandum from the Dean to the University Provost requesting additional compensation equal to one month's salary for work on the grant, to be done during the summer of 1993, with the Provost's signature and the word "approved" appearing on the request. NCCU Br., Att. 1. NCCU also submitted a time and effort report signed by the Dean on October 24, 1997 indicating that he spent 100 percent of his time from June 1 through July 6, 1993 working on the grant and an affidavit from the Dean stating that he was on "vacation" and working solely on the grant between June 1 and July 6, 1993. See NCCU Submission of November 7, 1997, Exs. 2 and 3.

We find that it is clear that the Dean was working on administrative functions of the grant during the month in question. NCCU asserted, and its documentation supports, that the Dean was writing the proposal, establishing contacts, preparing reports and coordinating the grant program. These are departmental administrative functions which are accounted for in the indirect cost pool. Thus, there is no merit to the distinction relied on by NCCU for direct charging direct administrative costs.

Moreover, NCCU failed to sufficiently document its assertion that the Dean was working on the grant on his own (i.e., vacation) time. Specifically, NCCU failed to submit any evidence indicating that it deducted the time which the Dean spent working on the grant from any accrued annual leave to which he was entitled. It is well-established that federal grantees bear the burden of properly documenting the allowability of costs charged to a grant. See 45 C.F.R. . 74.61(b) (1993); New York State Department of Health, DAB No. 1636 (1997).

The direct charges to the grant are unallowable under the circumstances presented here. To allow such costs would result in inconsistent treatment of costs since costs attributable to the Dean's administrative activities are also treated as an indirect cost in calculating the indirect cost rate.

NCCU argued alternatively that the direct charges to this grant for the Dean's salary should be allowable since the P.R. Harris Fellowship grant itself was not charged for any indirect costs. Even where a particular grant does provide for recovery of indirect costs, a university must still treat similar costs alike as either direct or indirect costs under the provisions of OMB Circular A-21. Thus, since NCCU included a portion of the Dean's salary for general or departmental administration in its indirect cost pool, it could not also charge a grant directly for administration since that would result in inconsistent treatment of administrative costs.

For the reasons stated above, we conclude that the charges to the P.R. Harris Fellowship program at issue here are not allowable.

II. Title III Institutional Aid for Higher Education ($15,300)

HHS disallowed $15,300 charged directly to the Title III grant for four months of salary payments to a departmental administrator who worked on the grant. HHS disallowed the direct charges for the administrator's salary on the ground that OMB Circular A-21 does not allow salary costs for work performed on a grant to be charged directly to the grant where "100 percent" of the salary is already captured in the indirect cost pool from which the indirect cost rate is calculated. According to HHS, this was a violation of OMB Circular A-21, which requires that a university treat costs incurred for the same purposes in like circumstances in a consistent manner as either direct or indirect costs.

NCCU responded that during the four months at issue, this administrator worked 100 percent of his time on the grant but was paid in part by direct charges to the grant and in part through his regular salary source. NCCU again argued that, whereas administrative costs generally related to all grant programs are captured in the calcu- lation of the indirect cost rate, the costs associated with "direct administration" of a particular grant are not so captured and can be charged directly to the grant. NCCU also argued that, as with the P.R. Harris Fellowship grant, this grant was not charged for indirect costs.

The record does not support HHS's assertion that 100 percent of this departmental administrator's salary was included in the indirect cost pool from which the indirect cost rate was calculated. According to the audit on which this disallowance is based, only 20 percent of his salary was included in the indirect cost pool. This is consistent with the simplified method for calculating an indirect cost rate established in OMB Circular A-21, which both NCCU and the audit report state (and HHS has not disputed) that NCCU was using. Thus, it would be possible to charge up to 80 percent of the departmental administrator's salary to other sources, including directly to the grant for research, for example. A plain reading of OMB Circular A-21 does not prohibit a charging of some salary costs directly to grants and some of the remaining salary costs of the same individuals to the indirect cost pool as long as the university consistently assigns the same type of activities in the same manner.

Nonetheless, we agree that the costs here are not allowable under the cost principles of OMB Circular A-21. Although the affidavit provided by the administrator for this proceeding stated that the administrator spent his time as principal investigator for the grant, the contemporaneous time and effort reports submitted by NCCU indicate that the services provided by the administrator during the four months for which the grant was directly charged were for administrative services, not for direct work on the grant, such as research. Twenty percent of this departmental administrator's salary was already included in the indirect cost pool for departmental administration of federally-sponsored grants. This departmental administration would include the administration of all grants, including the one at issue.

Furthermore, for the reasons stated in the previous section, we find NCCU's argument that direct costs should not be disallowed where the grant is not charged for indirect costs to have no merit. The indirect cost rate may only be applied to grants which allow for indirect costs, and a grantee may not reclassify costs as direct simply because a particular grant does not provide for indirect cost recovery. Accordingly, the full amount of the disallowance must be upheld.

III. HHS Office of Community Services ($22,300)

NCCU was a subgrantee to the UDI Development Corporation under an HHS Office of Community Services grant. NCCU's responsibility under the grant was to provide evening and weekend business classes (the ETI Institute) to small business entrepreneurs in the community. HHS disallowed $22,330 for the salaries of an administrator, a faculty member, and two clerical employees of NCCU, which were charged directly to the grant.

NCCU conceded that it received indirect costs as well as direct costs under this grant. However, according to NCCU, the payments disallowed here were made to these personnel for overtime work beyond the 40-hour work week. NCCU asserted that it had retroactive approval of HHS's Office of Community Services to make the expenditures, citing a letter dated January 19, 1996 from the Office of Community Services. NCCU submitted this letter, along with logs showing the use of classrooms during evening and weekend hours for the ETI Institute and several newspaper articles discussing the program, which included references to it being offered evenings and weekends. See NCCU Br., January 23, 1997, att. 4; NCCU Reply Br., May 14, 1997, Ex. 3.

In response, HHS asserted that while the classroom logs showed usage outside the 9:00 a.m. to 5:00 p.m. workday, these logs did not show that the classroom time was related to the federal grant program. Thus, according to HHS, the question was not whether NCCU had HHS's permission to charge the grant for overtime work put in by these employees, but whether NCCU had documented that the time for which the grant was charged was directly related to the grant program.

We disagree with HHS that NCCU did not prove that the classroom usage was directly related to the grant. The classroom logs, which are all for evening and Saturday classroom hours, are entitled "Log for ETI Spring 1993 Classroom Use." January 23, 1997 Notice of Appeal, Att. 4. It is clear from these logs, as well as from the newspaper articles, that the ETI Institute which NCCU was conducting under this grant (as a subgrantee) was being held during evening and weekend hours.

Moreover, HHS specifically approved NCCU's plan to charge this particular grant with costs of additional compensation to the individuals in question for work performed during evening and weekend hours which benefitted the grant. The letter from HHS's Office of Community Services stated:

It is my understanding that the work performed by the NCCU personnel is in addition to their paid workday as NCCU employees. That is to say that no personnel paid from grant funds is being paid as an NCCU employee for the same hours of work. It is also my understanding that NCCU personnel employed under the grant will be compensated at the rate of pay stipulated in the grant for work performed in addition to their regular duties (and at different times) as NCCU employees.

This office agrees with the payment policy which is stated above.

NCCU Br., Att. 5.

While we find that (1) the ETI Institute was funded by the grant, (2) the ETI Institute was being conducted during weekend and evening hours, and (3) HHS had agreed to allow overtime charges to the grant, we do not find these facts dispositive of this matter. Instead, there is a further issue of whether NCCU has shown the work for which the grant was being charged was performed in addition to the employees' usual work week hours. NCCU did not submit any time and effort reports or other hourly time sheets showing when the two professional staff members and two clerical employees actually performed their work on the grant. While the ETI Institute classes were clearly being held in evenings and on weekends, the evidence in the record also indicates that these classes were taught by various faculty members and outside speakers. There is no evidence that the employees paid by this grant were also working on the grant outside of their regular work hours. For example, there is no indication that the professional staff members whose salaries are at issue were among the Institute's lecturers. Thus, it is equally plausible that these employees' work on the grant was performed during normal business hours. Since a grantee bears the burden of documenting that its costs are allowable, absent time sheets or other evidence showing that these employees worked evening and weekend hours on this grant, NCCU has failed to show that this portion of the disallowance should be overturned.

CONCLUSION

For the reasons stated above, we uphold this disallowance in full.

__________________________
Cecilia Sparks Ford

__________________________
Norval D. (John) Settle

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M. Terry Johnson
Presiding Board Member