GAB Decision 202
July 31, 1981 Florida Farmworkers Council, Inc.; Docket No. 80-127 Ford,
Cecilia; Garrett, Donald Settle, Norval
The Florida Farmworkers Council, Inc. (FFC) requested review of a
July 15, 1980 decision by the Principal Regional Official (PRO), Region
IV, Department of Health and Human Services (Agency). That decision,
issued under 45 CFR Part 75, upheld the determination by the Director,
Division of Cost Allocation (DCA), establishing a final indirect cost
rate of 9.5 percent for FFC for the year which ended December 31, 1978.
Our decision is based on FFC's application for review, the Agency's
response thereto, a hearing held before the Board, and post-hearing
briefs filed by both parties.
Statement of the Case
In January, 1980 FFC submitted an indirect cost proposal (ICP) for
the year which ended December 31, 1978. FFC's proposal contained two
alternatively proposed rates. The first rate of 19.37 percent was
termed applicable to "participating grants." /1/ This rate was computed
by excluding from computation grants which had no provisional rate
clause. The second rate of 17.57 percent was computed using all grants,
and included in the pool costs of overhead paid directly by grants which
had no provisional rate clause. See, FFC Application for Review, p. 2.
After FFC's proposal was submitted to the Agency, and as part of the
negotiations between the Agency and FFC, the 1978 ICP was audited by the
HHS Region IV Audit Agency. The final audit report, Audit Control No.
04-07008, challenged the validity of the two rates proposed by FFC in
its ICP.
The auditors questioned the "participating grants" method on the
basis that its distribution base was improper. The auditors determined
that grants which benefitted from indirect costs were not included in
the base and, therefore, did not receive a proportionate share of the
indirect costs.
(2) The auditors agreed with FFC's "all grants" approach to the
extent that it included in the distribution base the total direct costs
of all FFC grant programs. See, Agency Brief, p. 13. The auditors did,
however, take exception to the reclassivication of costs associated with
FFC's vice presidential and accounting tiers of personnel for purposes
of computing the rate (See p. 3 for further discussion). The auditors
determined these costs were direct as defined in 45 CFR Part 74,
Appendix F. /2/
After negotiations failed to produce an agreement as to the
appropriate final indirect cost rate, the Director, DCA, issued a
decision establishing the final indirect cost rate as 9.5 percent.
Pursuant to the informal appeal procedures at 45 CFR Part 75, FFC
appealed this determination to the PRO. On July 15, 1980 the PRO
affirmed the decision of the Director, DCA.
By letter dated August 11, 1980, FFC appealed the PRO's decision to
this Board pursuant to 45 CFR Part 16.
Discussion
FFC has presented alternative arguments, either of which, if
accepted, would result in a higher rate than that determined by the
Agency. The first argument promotes FFC's so-called "all grants"
approach.The second addresses the adjustments made in the HHS Audit
Report. For purposes of the second argument, FFC does not propose to
reclassify direct costs associated with its vice presidential and
accounting tiers of personnel as indirect for rate computation purposes.
Issue #1. Whether the Methodology of the "All Grants" Approach Is
Correct
FFC allegedly had some grants that reimbursed indirect costs through
use of an indirect cost rate and other grants that required all costs to
be directly charged. See, generally, Transcript of Hearing January 14,
1981 (hereinafter cited as Tr., Jan. 14), pp. 93-96. FFC contends that
the "all grants" approach is an equitable method of distributing costs
among all its grants so that FFC is reimbursed for all allowable,
reasonable, and allocable costs, some of which would not otherwise be
reimbursed because of the inconsistent grant provisions concerning
recovery of indirecct costs.
(3) FFC's proposed solution was an analysis of direct costs
(particuarly staff salaries of its three tiers of administrative
personnel) without regard to how the salaries were to be budgeted, to
determine where the staff actually spent its time; FFC argued this
would produce an equitable distribution of indirect costs. Id. at pp.
98-107. The process of analyzing these costs was described by FFC's
witness at the hearing, a certified public accountant, as follows:
(We) started with the salaries of the people we considered probably
includable within the indirect cost pool, and we created, in effect,
three tiers of people. The first tier is equivalent to the president
/3/ of an organization... They benefit everybody.
The second tier is what we all say is the equivalent of a vice
president, and like in any business, a vice president cannot be involved
with everything. There is just a limit as to how far he can stretch his
duties. We accordingly, then, went through each individual grant...and
determine (sic) which person in that program was in fact functioning in
that capacity. Accordingly, we go through the Head Start grant and pick
out the chief administrative person in charge of that grant. In Head
Start that person had been charged as a direct cost to that program, but
they were functioning at the administrative level of vice presidency.
We go through all the CETA grants and the other and pick up the
equivalent person so we would end up with a complete second tier which
basically represents the listing that we are calling administrative
personnel.
The third category of people is the accounting department. That
department benefits the entire accounting system, and accordingly, they
are also inclued in the administrative category...Id. at p. 103.
FFC argues that this method of reassigning or reclassifying direct
costs associated with FFC's "vice presidential tier" /4/ of employees
as
indirect results in an equitable distribution of costs. FFC Brief, p.
4.
(4) In support of its reclassification of costs under its "all
grants" approach, FFC contends that there is precedent for the viewing
of certain costs billed directly as indirect for rate computation
purposes. FFC notes that the so-called Kirschenmann memorandum /5,/,
Government Exhibit No. 3, authorizes the viewing of direct costs as
indirect for rate computation purposes when computing a rate for
Community Services Administration "01" budget accounts. FFC Brief,
p.
5. FFC argues that the rationale of the Kirschenmann memorandum was
extended to apply to other grants by the Board decision in Economic
Opportunity Corporation of Greater St. Joseph, Decision No. 45, August
29, 1978. Id. p. 5.
FFC also argues that the reclassified costs should be allocable to
all FFC grant programs, because the "all grants" approach produces
an
"equitable relationship" of costs among the various grants in accordance
with Appendix F. FFC Brief, pp. 6-7. FFC concludes that the evidence
shows that general costs equity is achieved by the reclassification and,
therefore, the "all grants" technique is a valid method of computing
an
indirect cost rate. Id. at p. 11.
The Agency argues that Department regulations require that costs are
to be allocated only to those cost objectives which benefit from the
incurrence of such costs. Agency Brief, pp. 6-7. The Agency contends
that HHS auditors found certain costs allocable to one grant and as such
charged those costs directly to the respective cost objective. Id. The
auditors found other costs which, although benefiting more than one
grant, did not benefit the programs in general. Their duties were found
to be limited to specific programs and, thus, were not allocable to all
FFC programs. Id. at pp. 7-8. The Agency argues that FFC's
reclassification of costs associated with the "vice presidential"
tier
does not result in an equitable distribution; on the contrary, (5) the
Agency argues, since the staff activities could be identified with
specific projects, FFC's reclassification of costs results in an
inequitable distribution by shifting costs to programs which do not
benefit from such costs. Id. at p. 14.
The applicable cost principles (45 CFR Part 74, Appendix F) contain
four interrelated concepts labeled "direct costs," "indirect
costs," and
"allocability" (the latter term used similarly, but not identically,
in
two different contexts). These deceptively simple concepts overlap in
usage and implicitly call for discretion in applying broad standards on
a case-by-case basis. The terms may be viewed as part of a progression,
which works as follows:
(1) Otherwise allowable costs must be determined to be "allocable"
to
the particular objects of attention involved - in this case, a number of
Federal grants. The first determination concerns whether a particular
cost (whether it will ultimately be determined to be direct or indirect)
is "assignable or chargeable" to one or more of the grants in question
or to some other effort of the organization. The first determination of
allocability (another such determination related to indirect costs will
be discussed below) is made by looking at "the relative benefits
received or other equitable relationship" to the (grants); a cost may
be allocable if it "is incurred specifically for the grant," if it
"benefits both the grant...and other work and can be distributed to them
in reasonable proportion to the benefits received," or if the cost is
necessary to the overall operation of the grantee institution and cannot
be directly related to a particular cost objective. 45 CFR Part 74,
Appendix F, B.4.
(2) Costs which are generally allocable under (1) are determined to
be either direct or indirect costs. There is, in effect, a presumption
in the regulations that costs which benefit a specific cost objective
are to be treated as direct costs, and only the remaining costs are to
be given indirect cost treatment. The cost principles say that a direct
cost "is any cost which can be identified specifically with a particular
cost objective" (Id., C.1.), and "after direct costs have been
determined...indirect costs are those remaining to be allocated ..."
Id., D.1. (Emphasis added). With a high enough degree of
sophistication in a grantee's accounting system, it is conceivable that
all costs could be directly charged. Therefore, the use of indirect
costs results in part from a recognition that there is a point at which
the amount of work to identify and charge a cost directly is
disproportionate with the benefits received.
(6) (3) The cost principles state that an indirect costs is "one
which, because of its incurrence for common or joint objectives, is not
readily subject to treatment as a direct cost." Id., D.1. As stated,
the indirect costs are those which remain after direct costs are
determined.
(4) Finally, we return to the concept of "allocation," this time
in
the context of allocation of the indirect costs. The cost principles
state that the objective of the process of allocating indirect costs is
"to distribute the indirect costs of the institution to its various
major activities or cost objectives in reasonable proportions with the
benefits provided to those activities or cost objective (sic)." Id., D.
1.
It is important to understand the foregoing four elements because the
record indicates some confusion about them, particularly as regards the
interrelated use of the concept of allocability in two contexts, and the
relationship of direct to indirect costs, where direct costing is
effectively favored.
Since the reclassified salaries were at one time labeled and claimed
as direct costs by FFC and would, therefore, appear to be readily
subject to treatment as direct costs, FFC may fairly be charged with the
obligation to show that (1) the cost of these individuals benefited a
wide range of programs, and (2) that the benefit cannot reasonably be
measured by direct costing. See, generally, Tr., Jan. 14, pp. 202-208.
FFC acknowledged this responsibility. Id. at p. 203. The Board
concludes that, based on the evidence in the record, FFC has failed to
justify indirect cost treatment for the costs generally in question in
the "all grants" approach.
The auditors in addressing the reclassified salaries conluded:
Our review disclosed that the duties and responsibilities of these
personnel were not involved in administering overall FFC operations.
Rather, their duties and responsibilities were limited to specific
programs; therefore, their salary costs are not allocable to all
programs at FFC.
Audit Report, p. 2 of Schedule A, Note 1.
Except for conclusory statements, FFC's only attempt to show the wide
range of benefit of the "vice presidents", and therefore the indirect
nature of these costs, was through testimony of the Director of FFC.
See, generally, Tr., Jan. 15, pp. 154-162. The Director testified that
the duties of the "vice presidents" were administrative in nature
and
this administrative function related to a number of grants within FFC.
Id.
(7) But the unpersuasive nature of the Director's testimony can be
seen in the Director's responses when asked to name the grants upon
which each of the individual "vice presidents" exercised his
administrative responsiblities. In each case, the Director was able to
identify specifically the name and number of the grants, and none of the
vice presidential duties associated with these grants represented
organization-wide responsiblities. Id. The Director identified the
specific cost objectives to which the cost of each of the "vice
presidents" could be charged. This showed that the "vice presidents"
were clearly associated with specific FFC programs. As was stated on
page 6, these costs were at one time claimed as direct costs, and FFC
has not shown why, given that the "vice presidents" were associated
with
specific FFC programs, that indirect cost treatment was proper.
FFC's argument that the reclassification achieved an "equitable"
distribution and that the costs benefited numerous grants also is made
up of no more than conclusory statements. FFC Brief, pp. 5-6, 8. There
is no substantial evidence in the record that these "vice presidents"
benefited a wide range of grants. Based on the lack of any showing that
the costs could not be reasonably allocated directly, and on the
evidence that FFC at one point was able to direct cost the vice
presidential salaries, we find this argument to be unpersuasive.
FFC's sole evidence purporting to show the wide range of benefit of
the third tier, the accounting department, was through the testimony of
its CPA. See, generally, Tr., Jan. 14, pp. 103-104, 138-140. The CPA
testified that the accounting department "benefits the entire accounting
system, and accordingly, they are also included in the administrative
category." Id. at p. 103. The CPA based this determination on
observation of daily work routines and dealings with the accounting
personnel on a day-to-day basis. Id.
The CPA's testimony concerning the accounting personnel is completely
conclusory. No attempt is made to show the wide range of benefit of
their individual services; it is simply stated as such. Id. The Board
finds such conclusory statements unpersuasive, especially in light of
FFC's obligation to show that these costs benefit a wide range of
programs, and that the benefit cannot reasonably be measured by direct
costing. See, generally, Tr., Jan. 14, pp. 202-208.
Assuming the correctness of FFC's argument that the Kirschenmann
memorandum, as alledgedly extended by Economic Opportunity Corporation
of Greater St. Joseph, is a basis for viewing certain costs billed
directly as indirect for rate computation puposes /6,/, the Board
(8) finds that FFC's argument would still fail as applied to the
facts of this case. As FFC recognizes in its Brief, the Kirschenmann
memorandum is to be applied to indirect costs which have been charged
directly but are properly classified as indirect. FFC Reply Brief, p.
6. Since the Board has determined that the costs in question should not
have been included in the general indirect cost pool but should have
been charged directly, the Kirschenmann memorandum would not apply.
FFC also argues that its reclassification produces an equitable
relationship of costs among the grants and, therefore, comports with the
allocability requirements of the cost principles. The Board finds that
since FFC has been unable to show that the costs of its "vice
presidents" should be indirect, FFC's method is not an equitable
distribution since it would effectively result in direct costs being
allocated to grants which do not benefit from the particular costs.
Such a result would conflict with the applicable cost principles. See,
45 CFR Part 74, Appendix F, D.1.
In addition, FFC argues that the programs it administers are subject
to the statutory mandate of the Economic Opportunity Act of 1964, as
amended, 42 USC Sec. 2701 et seq. (EOA). As such, the Agency is
required "to assist in combining and coordinating FFC's grant
activities." FFC Brief, p. 10. This requirement, FFC contends, is a
legislative acknowledgement of the mutual benefit of combining grant
programs and that such an acknowledgement implies that such programs
benefit each other. In light of the allocation provisions in 45 CFR
Part 74, Appendix F, FFC states that:
It seems logical that if Congress decrees there is a common benefit
received among programs that it cannot be fairly said that work confined
to say, six of FFC's training programs, is of no benefit to FFC's child
care grants, or vice versa. FFC Brief, pp. 10-11.
The Board does not agree that any work done by an employee of one
grant must necessarily benefit all the grants. Such a benefit is purely
incidental and its extent a matter of speculation. FFC has made no
attempt beyond a description of the interrelationship of grant programs
(See, e.g., Tr., Jan. 14, p. 118) to prove that an actual benefit exists
and that the use of the interrelationship concept as a basis of
allocation would result in a distribution of costs to the cost
objectives in reasonable proportions with the benefits provided to those
cost objectives. See, 45 CFR Part 74, Appendix F, D.1. Without such a
showing the Board is unable to accept FFC's contention. Furthermore we
do not read the quoted section of the Economic Opportunity Act to
require the abandonment of the long-standing and reasonable rule
favoring direct costing.
(9) Issue #2. Whether the Auditors' Adjustments Are Correct
FFC argued that if its "all grants" method is rejected, then a
detailed examination of cost items leads one to conclude that FCC's
proper ICR should be higher than that decided on by the Agency. We
agree, in part.
To support its case FFC used the general method employed by the
Agency to compute an ICR and individually addressed the adjustments
recommended by the auditors and accepted by the Agency in establishing
FFC's final rate. Our analysis follows FFC's order of presentation.
a. Adjustment to Total Direct Cost Base
FFC argues that it operated as a "conduit" organization for $420,000
provided to the State of North Carolina and that virtually no
administrative costs were associated with the transaction. FFC
submitted affidavits attesting to the lack of administrative effort
involved in acting as a conduit in this arrangement. See, FFC
Suplemental Filing. FFC argues that since no indirect or overhead cost
was incurred under this arrangement, the total direct cost base should
not reflect the inclusion of the $420,000.
The Agency earlier contended that the factual situation surrounding
the "conduit" arrangement was not disclosed by FFC's CPA in the indirect
cost proposal. Agency Brief, p. 19. In response to FFC's supplemental
submission, the Agency later stated that there appears to be little
administrative effort connected with the "conduit" arrangement and,
therefore, "(it) appears that it would be appropriate to exclude the
$420,000 from the indirect cost allocation base for indirect cost rate
computation purposes." Agency Response to FFC's Supplemental Filing.
Based on the evidence in the record, the Board finds that the
$420,000 should be subtracted from the base. FFC has shown, and the
Agency has conceded, that at most one person-day of effort was spent
administering the conduit arrangement. /77/ It would be contrary to the
cost principles to allocate indirect costs to a cost objective which did
not benefit from those indirect costs. 45 CFR Part 74, Appendix F, B.4.
(10) b. $37,480 of Allegedly "01" Funds
The auditors recommended an adjustment of $37,480 /78/ which they
found to be indirect in nature; however, since FFC had previously
billed for this amount as a direct cost the auditors excluded it from
the indirect pool to avoid a duplicate billing. The Director, DCA,
found the costs were direct and refused to apply the Kirschenmann
memorandum.
FFC argues that the $37,480 are indirect in nature. In addition, FFC
argues that since these funds were paid direcctly through the "01"
account under a Community Services Administration (CSA) grant, the
indirect cost rate should be calculated in accordance with the
Kirschenmann memorandum. FFC contends that this would result in an
increase of its ICR of about 1 percent. FFC states that the Board
should reject the DCA Director's decision not to apply the Kirschenmann
memorandum because his testimony was contradictory and contrary to
OASC-5 and the Kirschenmann memorandum itself in that both documents
require the formula to be applied to "01" accounts without exception.
The Agency argues that the $37,480 was appropriately classified by
the auditors as indirect costs for CSA. The Agency notes that this
classification was made without benefit or consideration of any "01"
funds under the CSA grant. See, Agency Brief, p.20. With regard to the
application of the Kirschenmann memorandum, the Agency argues that based
on the testimony of the Director, DCA, and the award documents, there is
some question whether FFC qualifies as a Community Action Agency (CAA)
and, therefore, there is a question whether or not the memorandum should
be applied. Id. at p. 16.
(11) The "01" account is a program account designation used in the
CSA grants whereby funds are provided to CAAs to pay for general
administrative costs. See, generally, OASC - 5, Sec. I, p. 5. This is
done to minimize the amount of costs treated as indirect. Id.
The evidence presented by the Agency on this issue is conflicting.
The auditors determined the $37,480 to be indirect in nature, while the
Director, DCA, who has ultimate responsibility for deciding whether or
not the Krishenmann memorandum is to be applied (See, Tr., Jan. 15, p.
94) testified that he "did not agree with the auditor that (the $37,480)
were properly classified as indirect - type costs." Id. at p. 125.
With regard to the question of whether or not the $37,480 was funded
through an "01" account, the DCA Director's testimony was conflicting.
The Director first testified that the Regional Director of CSA in Region
IV informed him that there was no "01" account in the budget. See,
Tr.,
Jan. 14, p. 76. Under later questioning, the Director testified that it
was his understanding that the $37,480 was budgeted and expended under
an "01" account. Id. at p. 127.
The Agency's argument that FFC does not qualify as a CAA and,
therefore the Kirschenmann memorandum is not applicable also conflicts
with the testimony of the Director, DCA. The Director testified:
Well, that (the Kirshenmann memorandum) was designed to accomodate
the payment of a lot of indirect costs as direct and primarily for the
Community Services Administration, but we haven't always restricted the
use to CAP (CAA) agencies.
Tr., Jan. 14, p. 177.
In view of the persuasiveness of FFC's argument and the conflicting
evidence presented by the Agency, we find that the $37,480 to be
indirect in nature, and that the computation of the rate should be in
accordance with the Kirschemann memorandum.
c. Whether $22,325 Was Applicable to Specific Programs
The auditors recommended an adjustment reclassifying $22,325 as a
direct cost. Audit Report, Note 1 of Schedule A, p. 2. The auditors
determined the costs to be "applicable to specific programs" and
chargeable therefore "as a direct cost." Id.
FFC contends that salaries of $20,633 and fringe benefits of $1,692
were incorrectly reassigned from indirect to direct. FFC notes that the
salaries and fringe benefits represent portions of salaries of three
employees (Manpower Coordinator, Youth Coordinator and Energy
Coordinator) listed under Item - Number 1, in the Addendum to
Negotiation Agreement, Tab 1 of the administrative file. FFC Brief, p.
27. FFC argues that the Addendum refers to FFC officials whose time was
considered indirect and, therefore the costs have already been approved
as indirect via the Addendum. Id. at pp. 27 - 29.
(12) The Agency does not dispute which employees' salaries and fringe
benefits are represented by the $22,325 See, Agency Brief, P. 24, but
argues generally that the salaries and fringe benefits are direct costs
as was determined by the auditors. Id. at pp. 24 - 25. In addition, the
Agency states that FFC did not have a labor distribution system, as
required by the regulations, to provide documentation to support the
charging of these individuals as indirect costs. Id. at p. 25.
The Agency has not addressed FFC's main argument regarding these
costs, that the Agency itself has recognized the indirect nature of the
costs in Region IV's final rate decision. See Tab 1 of the
administrative file.
The Negotiation Agreement represents the final rate determined by the
Director, DCA. See, Tab 1 of the administrative file. The Addendum
sets out the administrative people identified in the proposal, and the
percentages of time determined to be appropriately chargeable as
indirect costs. See, Tr., Jan. 14, p. 228.
Since the Director, DCA, determined that these costs are indirect,
and the Agency has failed to show otherwise on appeal, we conclude that
the salaries and fringe benefits should be included in the indirect cost
pool.
Neither party has discussed in any detail the issue of whether FFC
had a labor distribution system. We note that the Director, DCA, was
able to determine the indirect nature of a portion of these salaries.
Without a contrary showing by the Agency, we assume that documentation
existed showing the indirect nature of these costs.
d. Whether the Base Should Reflect In - Kind Contributions
The auditors recommended treating as direct costs $69,564
attributable to in - kind matching contributions provided (or required
to be provided) by FFC during 1978. Audit Report, Exhibit A, p. 2. The
contributions were made up of $51,369 applicable to a Community Services
Administration Grant, and $18,195 applicable to two grants of the
National Council on Aging. Id. The adjustment was based on 45 CFR Part
74, Appendix F, G.9(b), which states:
(13) . . .the fair market value of donated services or goods utilized
in the performance of a direct cost activity . . .shall be considered in
the determination of the indirect cost (rates) and, accordingly, shall
be allocated a proprotionate share of indirect costs. Id. (13) FFC has
not challenged the Agency's reading of the quoted cost principle;
rather, FFC makes two collateral arguments.
FFC's first argument is that the HHS provision is superseded by
allegedly contrary provisions of Office of Management and Budget (OMB)
Circular A - 122. FFC Brief, pp. 20 - 26. The pertient provision of A
- 122 is essentially the same as the section of 45 CFR Part 74 quoted
above, but adds that in-kind contributions of services shall be
allocated a proportionate share of indirect costs --
. . . when the following circumstances exist:
(a) The aggregate value of the services is material;
(b) The services are supported by a significant amount of the indiret
costs incurred by the organization;
(c) The direct cost activity is not pursued primarily for the benefit
of the Federal Government. (Paragraph 10.a.(2)).
A - 122 was issued June 27, 1980 (45 F.R. 46022, July 8, 1980), and
contains a provision (Paragraph 2) stating that the Cicular "supersedes
cost principles issued by individual agencies." Paragraph 9 of the
Circular states:
Effective Date. The provisions of this circular are effective
immediately. Inplementation shall be phased in by incorporating the
provisions into new awards made after the start of the organization's
next fiscal year. Forr existing awards the new principles may be
applied if an organization and the cognizant Federal agency agree.
Earlier implementation, or a delay in implementation of individual
provisions is also permitted by mutual agreement between an organization
and the cognizant Federal agency.
FFC argues that the foregoing phase-in-provision --
. . . fails to address a situation such as . . . in this case -- i.
e. a rate determination involving many grants and subgrants. It fails
also to address the situation in this case where each grant FFC received
had different cost standards because no uniform cost rules applied to
non-profits prior to the promulgation of A-122. FFC Brief, pp. 22 - 23.
(14) Thus, argues FFC, A-122 should apply "immediately." The Board
disagrees with FFC's position for the following reasons:
While one may, as FFC argues, find some scant support in case law for
allowing the retroactive application of administrative rules, we need
not reach that issue as A - 122 has a clear provision in Paragraph 9
providing for a phase-in of the Circular. Paragraph 9 can easily and
reasonably be interpreted to apply to this case, since the grant awards
in question could be considered either existing grant awards or awards
for which FFC asks that there be "earlier implementation" of A-122.
The
Circular does not distinguish between the myriad of types of dealings
one may have under grant award, and so contains nothing that would
require special treatment of a rate determination per se. On the other
hand, FFC's position would require a much more attenuated interpretation
of the Circular. Paragraph 9 apparently deals with special
circumstances by leaving it to Agency discretion whether to apply A-122
to matters arising under existing or past grant awards. There is no
evidence or even allegation in this case of any arbitraty Agency refusal
to consider such an approach here.
Merely because there might be "many grants and subgrants" does not
mean that the scheme in Paragraph 9 is not, or should not be,
applicable. Furthermore, at least as regards the in-kind contributions
(and FFC makes its A-122 argument only in connection with the in-kind
contributions portion of the dispute) there are few grants involving
only two agencies.
While each grant FFC received may have had "different cost standards"
as FFC argues (there is nothing substantial in the record to indicate
one way or the other), there have been nothing more than conclusory
statements that FFC somehow ran afoul of differential standards
concerning the reclassification of in-kind contributions.
Futhermore, even if A-122 were applied, it would not lead us to hold
for FFC. FFC notes that Paragraph 10.a.(2) of the Circular provides
that in-kind contributions only have to be included in the direct cost
base were the aggregate value of the services is "material."
FFC argues that since the value of the in-kind contributions
($69,564) is less than 2% of total Federal costs, it is not "material."
As the Agency points out, however, it is unreasonable to relate the
in-kind contributions to total overall costs, since the in-kind
contributions were used only for certain specified grants, and could not
be "doublecounted" for any other grants. Agency Brief, pp. 22-24.
Thus, the (15) in-kind conributions should be weighed against a much
smaller group of costs, and would yield a higher degree of significance
(perhaps as high as 40%, according to the Agency). Id. at p. 23. Even
if it did not, we would not be inclined to lightly find that almost
$70,000 in in-kind contributions, even if it were expressed as only 2%
of some larger pool of overall cost, was immaterial or otherwise was
reflective of an insignificant amount of indirect costs; there is
considerable room for Agency discretion here in determining what is or
is not immaterial or insignificant.
FFC also argues that, since under 45 C.F.R. 74.4 inconsistent terms
of a particularr grant agreement supersede Part 74 and its appurtenences
such as OASC-5, it is unreasonable to apply Part 74, Appendix F to the
grant of the Community Services Administration, which calls for a
specific amount or percentage of match; FFC alleges that transferring
the in-kind contributions could indirectly cause FFC's required match to
exceed the amount specified in the grant agreement with CSA. This
position, of course, appears highly speculative in the context of the
evidence and submissions of FFC and the Agency, from which, despite the
many opportunities to present evidence and argument in this case, we
cannot definitively determine the precise nature of the FFC matching
obligation to CSA, whether FFC has fully met its matching obligation or
not, and how, if at all, the transfer would affect the match. We do
agree in principle that FFC cannot, based on anything in the record
before us, be compelled to contribute any more to the CSA project than
the amount, if any, specificed as its matching obligation; we leave it
to the Agency to assure that its computations reflect this limitation.
FFC also argues, in order to comport with Paragraph 10.a.(2)(c) of
A-122, that its costs are "pursued entirely for the Federal Government
since they are wholly related to fulfilling federal grant performance."
FFC Post - Hearing Brief, p. 24. This argument approaches absurdity,
since its logical extension is that all Federally-assisted activity
under any grant is "pursued entirely for the Federal Government,"
thus
rendering the provisions of Paragraph 10.a.(2) meaningless. The authors
of A-122 clearly meant to distinguish between most assisted activities -
which are primarily for the benefit of some segment of society - and
activities which specifically benefit the Federal government per se.
e. Whether the Legal Fees Should Be Included in the Pool
The auditors recommended reclassifying as direct costs $15,197 in
legal fees which had been claimed by FFC as indirect costs. The
auditors recommended both that the fees be considered unallowable (as
representing (16) prohibited claims against the Government) and that the
fees be transferred to the direct cost base (because they were
identifiable with a particular program). Audit Report, Schedule A, p.
3.
FFC argues strongly that the costs did not involve prosecution of
claims against the Government. FFC Brief, pp. 29-32. The Agency agrees
that "the issue is one of allocation as opposed to allowability",
Agency
Brief, p. 25, and addressed its post-hearing argument solely to
allocation. Id. at pp. 25 - 26. The Agency position is that the legal
costs are identifiable directly with activities related to one or more
Department of Labor grants, and therefore the costs should be a direct
cost chargeable to the Department of Labor and not an indirect cost
chargeable to other agencies as well. Id. at p. 25.
FFC does not deny that the legal fees in question were incurred in
connection with activities directly involving the Department of Labor.
FFC Brief, pp. 29 - 32; Tr., Jan. 15, p. 71. The legal work dealt with
continued eligibility for Labor Department funds and "a matter involving
FFC's corporate records" (I.e., legal representation in connection with
Labor Department audits and with a grand jury subpoena of FFC records
related to a Labor Department grant). Id. at p. 32; Tr., Jan. 15, p.
71.
FFC's primary argument in support of its position that the legal fees
are appropriately assignable to indirect costs essentially is that the
fees were necessary for the overall operation of the "business" of
the
grantee (FFC's "trade" being that of a federal grantee). FFC Brief,
pp.
32-35. Since FFC's "trade" is that of a Federal grantee, it engages
legal fees in connection with activities allegedly necessary to its
overall operation such as negotitation over records availability for
audits and maintaining eligibility for grant funds of the Department of
Labor. FFC argues at length in support of its argument the case of TRW
Systems Group of TRW, Inc., ASBCA No. 11499, July 11, 1968, 68-2 BCA,
CCH 7117. /79/ That case involved the issue whether a contractor could
allocate to its various governement contracts on a pro rata basis the
costs of its patent program, under which employees were given various
incentives for patents which, in turn, indirectly benefited government
contracts. An element at issue was the meaning of Armed Services
Procurement Regulations (ASPR) 15-201.4, "Definition of Allocability,"
which defined a cost as allocable if, among other things, the ccost "is
necessary to the overall operation of the business, although, (17) a
direct relationship to any particular cost objective cannot be shown."
This definition is virtually identical to that contained in the HHS cost
principles. See, 45 CFR Part 74 Appendix F, B.4. The Government read
the provision narrowly to require a showing that the cost is necessary
to permit day-by-day operation of the business during performance of the
government contracts. The Armed Services Board of Contract Appeals
(ASBCA) found this reading too narrow, and said that the ordinary
meaning of the words of the ASPR provision also included consideration
of elements needed for the continued and future operation of a business.
The ASBCA also went on to point out that merely because and expense is
"necessary" to continued operation does not mean it automatically
also
meets the additional requirement of ASPR 15-201.4 (and also of Appendix
F) that the cost "benefit" the contracts (or grants) in question;
there
may need to be additional evidence of "benefit":
. . . scope must given to the element of a "benefit or other
equitable consideration" when determining the allowability of a
necessary cost under ASPR 15.20.4(iii). Expenses which are absolutely
necessary for the operation of a business are, for that reason alone,
beneficial to or bear an equitable relationship to Government contracts.
As the absolute necessity decreases, the conractor's burden to show some
benefit or other equitable relationship with Government contracts
increases. Id. at p. 32967 (emphasis added).
The ASBCA then went on to a detailed examination of the patent costs
in question, granting the contractor's claim for a portion and denying a
portion.
We note an important difference between the circumstances in the TRW
case and in the instant case. In TRW, the question appeared to be
whether the costs in question could be allocated to certain Government
contracts at all; the issue was on of allcability in terms of
allocability to the federral contracts per se, and thus was a question
related to allowability or the initial allocability determination (See
discussion above the page 5; one may incidently note the Board's use of
the term "allowability" in the material quoted above, which FFC also
quoted). In the case before us, allowability effectively was conceded
by the Agency; the question is which of the Federal grants should bear
the costs. Stated another way, in TRW, the question appeared to be
whether there was any allocability to Federal cost objectives at all,
whereas here the question is whether only one, or more than one, Federal
agency should receive the allocation. In circumstances perhaps more
analogous to those here, there is also a case in which the ASBCA
determined that costs should not be subsumed in a general and
administrative (18) expense pool when those expenses were incurred
wholly in connection with the performance of a particular contract, for
this would unfairly burden other contracts; thus, legal expenses
incurred soley in connection with a single contract might be costed
directly to that contract. Allied Materials and Equipment Co. Inc.,
ASBCA No. 17318, 75-1 BCA 11,150 (1975).
At the same time, it is true that legal fees related to the general
performance of contracts can be chargeable as indirect costs. Hayes
International Corp., ASBCA No. 18447, 75-1 BCA 11,076 (1975). It is
important to observe the distinction between the case before us and the
TRW case cited by FFC because once one goes beyond the definition of
allocability per se as discussed in the TRW case, one finds an
additional (albeit similarly ambiguous) statement of what is reuqired of
an indirect cost in Appendex F, D. 1:
An indirect cost is one which, because of its incurrence for common
or joint objectives, is not readily subject to treatment as a direct
cost . . . the overall objective of the allocation process is to
distribute the indirect costs of the institution to its various major
activities or cost objectives in reasonable proportions with the
benefits provided to those activities or cost objective. (emphasis
added)
In this context, we do not think the rule FFC selects from the TRW
case - that the "necessity" of a cost may translate ipso facto into
its
allocability - can be read to apply as directly to the question of
allocation to direct vs. indirect allowable costs, as it did to the
question of allocation to Federal vs. non-Federal objectives. The
"necessity" of the costs to FFC does not by itself mean that the costs
should be treated as indirect costs under the TRW case, and under the
rule applicable to indirect costs, it is clear that the costs are
"readily subject to treatment as direct costs," since they are very
specifically indentifiable with grants of the Department of Labor.
FFC argues that the costs in question should be placed in the
indirect cost pool because it is necessary for the operation of FFC to
maintain its eligible status for all Federal funding. But FFC has made
no showing that is is necessary for its operation that it receive
specific grants from the Department of Labor; presumably, FFC could
exist as a Federal grantee with or without the Labor grants, as long as
it had other Federal grants. FFC has made no showing that ineligibility
for the Labor grants would have put them out of business on other
grants.
(19) FFC also argues that certain of the legal fees should be treated
as analogous to cost of grant proposals, which may be treated as part of
the indirect cost pool under the cost principles. See, 45 CFR Part 74,
Appendix F, g. 3. That section defines bidding or proposal costs as
"the immediate costs of preparing . . . applications for financial
assistance. . . ." The record nowhere indicates that the fees in
question here included "the immediate costs of preparing" grant
applications. FFC's own presentation clearly indicates that while
certain of the negotiations involving legal counsel concerned
prospective arrangements under hoped-for new awards by the Department of
Labor, these negotiations occurred in the context of litigation and
dealings with the Department of Labor and the State of Florida, all of
which directly or indirectly concerned performance of FFC under prior
Labor awards.
FFC also argues that each new grant it receives benefits all grants,
since the costs of administration of each grant go down as costs are
spread further. While that generally may be true, it has little to do
with resolution of the issue here. It merely is a reason why the cost
principles provide for indirect cost treatment for the costs of
application preparation.
Finally, FFC argues the legal fees should be treated as indirect
costs to comport with the Economic Opportunity Act of 1964, as amended,
which we discussed above in connection with another part of this case.
FFC argues that since the Act mandates undertaking activities in a way
which will encourage combinations and encourage efficiency in
administration, it follows that the legal fees here should be treated as
indirect costs so that all programs share. That argument, however,
appears to go to the validity of direct costing altogether; we do not
read the Act to require an agency to avoid direct costing items which
can clearly be identified with a single "benefitted" program.
Based on the foregoing, we conclude with regard to the facts
presented in this appeal, that the auditors correctly called for
reclassification of the legal fees as direct costs.
Conclusion
Based on the foregoing discussion, this case is remanded to the
Agency for recalculation of the FY 1978 indirect cost rate in a manner
consistent with the decisions herein. In summary, we find as follows:
Reclassified Salaries Under the "All Grants" Approach:
Agency determination that salaries were improperly reclassified as
indirect costs is upheld.
(20) Conduit Principle:
Agency inclusion of $420,000 in base is reversed.
"O1 Funds:
Agency determination that $37,480 are direct costs and Kirshenmann
memorandum does not apply is reversed.
$22,325 of Salaries and Fringe Benefits:
Agency determination that the $22,325 are direct costs is reversed.
In-Kind Contributions:
Agency inclusion of $69,564 of in-kind matching contributions in the
base is upheld.
Legal Fees:
Agency determination that $15,197 in legal fees are direct costs is
upheld. /1/FFC now states that this approach was compiled for
illustration purposes only and is no longer argued for acceptance as a
final rate. See, FFC Post-Hearing Brief (hereinafter cited as Brief), p.
3. /2/The cost principles contained in OASC-5, A Guide for
Non-Profit Institutions, which were cited by the auditors, are set out
in 45 CFR Part 74, Appendix F (1978). For convenience we cite to the
regulations. /3/It is not clear from the record whether or not
salaries of the "presidential tier" are included in the disputed costs.
Neither party has presented arguments addressing the "presidential"
salaries. Therefore, we assume they are not included in the disputed
salaries and render no judgment on them. /4/The general
arguments of both parties concerning the "all grants" method refers
only
to the "vice presidential" tier. However, it is clear that the salaries
of the third tier, the accounting department, are included among the
disputed reclassified costs. See, generally, Tr., Jan. 14, pp. 138-140,
147. These are discussed separately below. /5/ Memorandum dated
September 23, 1975, from Director, Division of Financial Management
Standards and Procedures, OASC, to Assistant Regional Directors for
Financial Management. The memorandum provides a procedure for computing
indirect cost rates for Community Action Agencies which have their
administrative costs reimbursed directly through an "01" program
account. The "01" program account is described in more detail on page
11. The purpose of the computation is to prevent the duplication of
recovery by removing the administrative costs funded by the Community
Services Administration from the indirect cost pool and a proportionate
amount of direct costs from the distribution base. /6/The Board
makes no determination in this Decision as to the validity of this
argument. /7/The Agency has not argued that the administrative
effort of a one person-day should be calculated and a corresponding
amount of the $420,000 be included in the base. Therefore, the Board
agrees that the entire amount should be excluded due to the de minimus
effort associated with a one person-day. /8/FFC contends that the
acutal "01" figure is $40,876, and that the Agency's primary
auditor did not dispute this in his testimony. FFC Brief, p. 15. The
auditor's testimony cited by FFC was in response to a request by FFC's
counsel to hypothetically apply the Kirschenmann memorandum to the
$37,480 figure. See, generally, Tr., Jan. 15, pp. 90-98. The auditor
was not specifically asked to address the correctness of the $40,876
figure. He simply stated that the figures are essentially the same,
except that FFC's CPA identified $2,300 more of administrative costs.
Id. at p. 95. This does not amount to an admission by the auditor to
the correctness of the $40,876 figure. Therefore, since the auditor did
not attest to the correctness of FFC's $40,876 figure, and FFC has made
no attempt to verify it, the Board finds that the auditor's figure of
$37,480 is the appropriate figure for purposes of this adjustment. 9 The
Agency did not respond to this argument of FFC.
OCTOBER 22, 1983