DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: Humanics Associates
Docket No. 86-159
Audit Control No. 04-23432
Decision No. 860
DATE: May 1, 1987
DECISION
Humanics Associates (Humanics or Appellant) appealed the determination
of
the Regional Director, Region IV, upholding an earlier determination
by the
regional Division of Cost Allocation (Agency) which set an
indirect cost rate
for Humanics, a nonprofit corporation, for fiscal
years 1981 through 1983.
Humanics received grants from the Office of
Human Development Services (OHDS)
to provide training and technical
assistance to other grantees under the Head
Start program. The dispute
between Humanics and the Agency concerns
whether certain cost items
should be included in the indirect cost pool for
Humanics for the period
in question. 1/
Indirect costs are those costs of a grantee's activities which are
not
readily identifiable with a particular project or program. An
indirect
cost pool consists of the indirect costs which are to be
distributed
among benefitting cost objectives -- including, for example, one
or more
federal grants -- by an indirect cost rate. This rate is the
ratio,
expressed as a percentage, between the indirect costs and a direct
cost
base. In practical terms, the indirect cost rate is a device used
to
assign indirect, "overhead" type costs.
The Agency disallowed several items which Humanics sought to include
in
its indirect cost pool and the Board here considers whether each
of
these disallowances was proper. The major component of the
disallowance
was legal expenses of $69,114; the Region also disallowed
certain
conference expenses, food and drink costs, and other
miscellaneous
expenses which totalled $30,081 for the three years in
dispute.
As explained in our decision below, we uphold the disallowances in
full.
In section I, we discuss the Agency's disallowance of $20,208 for
fees
incurred in defense of a grand jury investigation into the misuse
of
federal funds. In section II, we address the Agency's
determination
that $48,906 paid to a law firm to represent Humanics in a
civil lawsuit
against a rival entity should be disallowed. We then
discuss the
remaining items in dispute, including several items which were
not
specifically contested by Humanics here on appeal (Sections III-V).
I. Legal Expenses Incurred in Defense of a Grand Jury Investigation
Appellant included in its indirect cost pool $20,208 in legal
expenses
incurred in defending Appellant and its president in a federal
grand
jury investigation. The Regional Director found that these grand
jury
proceedings arose out of improper claims in the amount of
$10,417.39,
"submitted by Humanics for payment under the 1981 grants for
amounts
paid to a consultant . . . who did no work under the grants programs
as
claimed in the payment vouchers submitted by the grantee, but was
hired
for the purpose of getting new business for Humanics that was
not
related to the existing grants." Regional Director's decision, pp.
2-3
(Appellant's Ex. D). After quoting from applicable cost principles,
the
Regional Director concluded:
From the examination of the underlying
facts of this case, it is
also clear
that the attorney's fees incurred in connection
with
the defense of the grand jury
proceedings are not allowable,
reasonable in nature, or allocable to the grants for training
and
technical assistance to Head Start
grantees. The improper
submission
of claims in the amount of $10,417.39 under the
1981
grant, when it was known that the
work performed by [the
consultant] was
to solicit new business having no relationship
to
the grant, was contrary to proper
administration of the grants
and
detrimental to the grants program. Thus, legal
expenses
incurred in defense of the
grand jury investigation into the
improper submission of claims in 1981 cannot be
considered
ordinary and necessary
business expenses incurred in connection
with the day-to-day business operations of Humanics Associates
in
administering grants, have no
connection with the 1983 grants for
providing training and technical assistance to Head
Start
agencies, and conferred no benefit
on the grants program.
Regional Director's decision, pp. 6-7.
On appeal to the Board, the Appellant did not contest the
Regional
Director's findings on the underlying facts concerning the 1981
claims
for consultant's fees. Rather, the Appellant alleged that the
grand
jury investigation had exonerated the Appellant from any
wrongdoing,
that attorney's fees are allowable unless within certain
exclusions
which do not apply here, that such attorney's fees are considered
an
ordinary cost of doing business, and that decisions by the
Armed
Services Board of Contract Appeals (ASBCA) based on similarly
worded
cost principles supported the Appellant's position. For the
reasons
explained below, we uphold the Regional Director's determination
based
on an analysis of the underlying facts and of the legal
expenses
themselves.
While we agree with the Appellant that the Agency may not simply
infer
criminal intent from the fact of a criminal investigation, we do
not
think that the Agency is precluded from making its own judgment
about
the nature of a grantee's activities regardless of the outcome of
the
grand jury proceedings. The undisputed fact that the
Appellant
submitted vouchers for services which were not performed for the
grants
programs as claimed, which provided no benefit to the federal
grants,
and which were instead performed in pursuit of the Appellant's own
ends,
shows at the very least a disregard for the plain terms of the
grants
and a dereliction of the Appellant's duty to ensure that its claims
are
proper. But for the Appellant's own improper claiming,
the
investigation would not have occurred and the legal expenses would
not
have been incurred.
The Regional Director correctly concluded that the legal expenses
were
unallowable because they were associated with the
unallowable
consultant's fees. His decision can also be supported on
the basis that
the legal expenses themselves were not reasonable and did not
benefit
the federal grants because the Appellant did not incur the
legal
expenses as part of its "overall operation" as an
organization
administering federal grants, as required by the applicable
provisions
of OMB Circular A-122, Cost Principles for Nonprofit
Organizations.
As the Regional Director concluded, even though the cost principle
on
allowability of professional fees does not specifically
exclude
attorney's fees under the circumstances here, that principle is
subject
to general requirements concerning reasonableness and allocability
of
costs.
Finally, we conclude that the ASBCA decisions do not bind this Board
and
are in any event distinguishable from this case.
Below, we first discuss the findings regarding the improper charges
in
1981. We then discuss the cost principle on attorney's fees and
general
principles of reasonableness and allocability. Finally, we
address the
ASBCA decisions and a tax case the Appellant also
cited. A. The
legal expenses arose
because of improper charges.
The Regional Director's decision was based primarily on his
findings
concerning the underlying activities which gave rise to the
legal
expenses at issue here. In our view, given his findings regarding
the
underlying facts, he appropriately concluded that the legal
expenses
were unallowable. They were associated with clearly
unallowable charges
to federal grants and would not have been incurred but
for the improper
actions of the Appellant.
The legal expenses were incurred in 1981-1983 in connection with a
federal
grand jury investigation involving allegations of misuse of
federal funds and
violations of false claims provisions at 18 U.S.C.
1001. On July 22,
1983, the U.S. Attorney informed Humanics' attorney
as follows:
I would like to advise you that the
investigation has been
completed.
It reveals that some improper charges were made
to
the aforesaid contract by Humanics
Associates agents and
representatives
involving travel, salary, fringe benefits,
and
indirect costs amounting to
$10,417.39. We do not feel these
charges rise to the level of criminal conduct. Thus, it is
the
decision of the United States
Attorney's Office not to seek
criminal
charges against ... any agent or representative
of
Humanics Associates for such
payments. We do, however, strongly
urge your client contact the HHS contracting officer at
your
convenience and make proper
restitution.
Agency's Ex. 1. 2/ Subsequently, the Appellant did reimburse
the
federal government for the $10,417.39.
The major focus of Appellant's arguments here was that Humanics
was
"completely exonerated of any allegations of wrongdoing during
the
course of the grand jury investigation," and, therefore, it
was
"patently unfair and misleading for the HHS Regional Director to
claim
that the final resolution of HHS' and Humanics contractual dispute is
an
admission of liability or of 'admittedly improper charges' to
the
Government by Humanics." Appellant's Reply Brief, p. 4. According
to
the Appellant, the record does not show, contrary to the
Agency's
contention in its brief, any finding by the U.S. Attorney that
Appellant
made improper charges to the federal government, nor does the
record
show "any comparable finding by cognizant HHS representatives
charged
with responsibility for administering Humanics' Head Start
contract."
Appellant's Reply Brief, p. 3. The Appellant's view of the
U.S.
Attorney's letter is that it "simply encouraged Humanics to
pursue
administrative resolution of what was viewed essentially as
a
contractual matter." Appellant's Reply Brief, p. 3.
The Agency's view that the U.S. Attorney found that Appellant had
made
improper charges to federal funds is supported by the plain wording
of
the U.S. Attorney's letter, quoted above. Even if it were not,
however,
the lack of any finding of wrongdoing by the U.S. Attorney would
not
dispose of the issues here. The Regional Director's decision did
not,
as Appellant implied, simply treat the reimbursement of the
$10,917.39
as an admission by the Appellant. 3/ Rather, as shown by the
language
quoted at page 2 above, the Regional Director found, based on
an
examination of the underlying facts, that the Appellant
submitted
payment vouchers claiming that the consultant performed work under
the
grant program when it was known that the work was to solicit
new
business having no relationship to the grant. The Appellant did
not
assert that this was incorrect, but would have us conclude that
there
were no improper charges to the 1981 grant solely on the basis that
no
indictment was returned.
We do not agree that the Agency must establish criminal intent in order
to
judge the allowability of the costs for the consultant or the
associated
legal expenses. We think it is fair to infer that Appellant
was
derelict in its duty to ensure that its claims were proper, under
the
particular circumstances here. First, the costs at issue were
incurred
by a consultant, not by an employee of Humanics. 4/ Second,
the claim
for the consultant's services was over $10,000, a sum which
indicates that
the consultant's activities were substantial and ongoing,
rather than an
isolated, casual incident. Third, the Appellant provided
training and
technical assistance to other grantees, indicating some
degree of
sophistication in the operation of grant programs and a
presumed
understanding that consultant costs claimed under a grant must
be
demonstrated to benefit the purposes of the grant.
Further, we reject Appellant's view that the Appellant was exonerated
of
any wrongdoing. The U.S. Attorney simply found no criminal
conduct.
His findings were not inconsistent with those of the Regional
Director.
Nor do we think it significant that the record does not show that
Head
Start officials directly responsible for administering the 1981
grant
made no findings about the propriety of the $10,417.39 charge.
Since
the Appellant voluntarily repaid that amount, there was no need
to
pursue recovery of those funds through administrative
proceedings.
Findings were made by the Regional Director and Appellant did
not
dispute them.
Thus, regardless of the outcome of the criminal investigation, the
record
supports the Regional Director's conclusion that the legal
expenses were
unallowable because associated with, and arising from,
improper charges to
federal grant funds.
B. The legal expenses were not "allocable."
OMB Circular A-122 provides that, to be allowable, costs must be
allocable
to a grant project. The Circular provides:
A cost is allocable to a particular cost
objective, such as a
grant, project,
service, or other activity, in accordance
with
the relative benefits
received. A cost is allocable to a
Government award if it is treated consistently with other
costs
incurred for the same purpose in
like circumstances and if it:
(1) Is incurred specifically for the award.
(2) Benefits both the award and
other work and can
be
distributed in reasonable proportion to the
benefits
received.
(3) Is necessary to the overall
operation of the
organization,
although a direct relationship to any particular
cost
objective cannot be shown.
OMB Circular A-122, Att. A, section A.4.a. 5/
The Appellant relied on subparagraph (3) of this provision,
arguing
essentially that it was necessary for the Appellant to defend itself
in
the criminal investigation in order to protect itself from a fine and
to
ensure its continued existence as an institution.
We do not agree with the Appellant that the legal expenses here
are
allocable to the grants on the basis that they were "necessary to
the
overall operation of the organization." This language in clause (3)
of
the standard is followed by the words "although a direct relationship
to
any particular cost objective cannot be shown." Here, the
legal
expenses may be considered directly related to the cost objective of
the
consultant's services, namely, increasing Appellant's client
base.
Since the Regional Director found the costs associated with
this
objective unallowable, we conclude that he also properly found that
the
legal expenses could not be allocated to the federal grants based
on
clause (3) of the allocability standard. See Dynalectron Corp.
v.
United States, 545 F.2d 736 (Ct.C1. 1976). 6/ As the
allocability
standard recognizes, the relationship of the legal expenses to
the
objective of the consultant's activities provides a basis for
treating
the legal expenses as a direct cost of that objective, rather than
as an
indirect cost. See Dynalectron, supra; cf. Oregon Research
Institute,
Inc., Decision No. 34, March 9, 1977; LEGIS 50/The Center
for
Legislative Improvement, Decision No. 48, September 26, 1978.
Moreover, even indirect costs must bear a relationship to the grants
by
being necessary to overall operation of the institution; as the
Regional
Director concluded, these legal expenses were not incurred as part
of
the day-by-day operation of the organization. Thus, the
Regional
Director's decision is supportable because the legal expenses
were
identifiable with a specific cost objective, the Appellant's
own
activity of increasing its client base, and, in any event, are not
the
type of indirect costs considered as benefitting federal grants.
C. The legal expenses were not "reasonable."
OMB Circular A-122 provides that "reasonableness" is a factor to
be
considered in determining the allowability of costs and
defines
"reasonable costs" as follows:
Reasonable costs. A cost is
reasonable if, in its nature or
amount,
it does not exceed that which would be incurred by
a
prudent person under the circumstances
prevailing at the time the
decision was
made to incur the cost.
* * *
In determining the reasonableness of a
given cost, consideration
shall be given
to:
a. Whether the cost is of a type
generally recognized
as
ordinary and
necessary for the operation of the
organization
or
the performance of the award.
b. The restraints or requirements
imposed by such factors
as
generally
accepted sound business practices, arms
length
bargaining, Federal and State laws and regulations, and
terms
and
conditions of the award.
c. Whether the individuals
concerned acted with prudence in
the
circumstances, . . . .
d. Significant deviations from the
established practices of
the
organization
which may unjustifiably increase the
awarded
costs.
OMB Circular A-122, Att. A, section A.3.
Considering the particular circumstances of this case, we agree with
the
Regional Director that the legal expenses were not reasonable.
The
legal expenses would not have been incurred but for the Appellant's
own
improper claiming of the consultant's costs, as set out above.
We reject the Appellant's argument that the legal expenses here
were
ordinary and necessary business expenses, as shown by the decisions
of
the ASBCA, and, therefore, should be considered reasonable under the
OMB
Circular A-122 standard. As discussed below, we do not think that
the
ASBCA decisions are controlling here. Moreover, the
Appellant's
argument misconstrues the reasonableness standard. When
read in
connection with the rest of the Circular, the provision is clearly
not
intended to imply that all ordinary and necessary business expenses of
a
grantee institution are allowable. For a cost to be reasonable, it
must
be of a type generally recognized as ordinary and necessary for
the
operation of the institution. Costs such as the costs of
organization,
reorganization, and fundraising may be ordinary and necessary
business
expenses, but they are clearly unallowable under the specific
provisions
of the cost principles. The Regional Director reasonably
determined
that the costs here were not incurred "in the day-to-day
business
operations of Humanics Associates in administering grants" because
they
are not the type of administrative costs associated with the
ongoing
functioning of the organization.
D. The cost principle on professional fees does not
conclusively
establish allowability.
The Appellant's primary argument before the Board was that the
legal
expenses at issue here were allowable because the cost
principle
specifically directed at professional fees provides that attorney's
fees
can be allowable, unless within specific exclusions, which do not
apply
here. OMB Circular A-122, Att. B, paragraph 34. We reject
this
argument. The cost principle prohibits reimbursement for legal
costs
incurred in connection with organization and reorganization, defense
of
antitrust suits, the prosecution of claims against the
federal
government, and patent infringement litigation, but does
not
specifically exclude reimbursement for defense of a
criminal
investigation. OMB Circular A-122, Att. B, paragraph
34.d. From this,
the Appellant concluded that the legal expenses in
question here are
"expressly allowable" under this cost principle.
The Appellant's argument ignores the following:
o The standards for selected items of cost (including
professional
fees) set out in OMB Circular A-122 are explicitly made subject
to
general principles of reasonableness and allocability. OMB
Circular
A-122, Att. A, section A.2.a.
o The fact that a specific cost item is not mentioned is not
intended
to imply that it is either allowable or unallowable.
Determination of
allowability in each case should be based on the treatment
or standards
provided for similar or related items of cost. See OMB
Circular A-122,
Att. B, introductory sentence.
o Professional fees not mentioned as specifically excluded are
not
automatically allowable under paragraph 34 but are still subject
to
factors concerning allowability listed in paragraph 34.b, which must
be
considered.
As we addresed above, the Regional Director reasonably concluded that
the
legal expenses in question here were neither allocable nor
reasonable charges
to federal grants. Moreover, the Regional Director
based his decision
in part on the fact that the related claims which
gave rise to the
criminal investigation were clearly unallowable.
E. The ASBCA and tax cases do not control here.
The Appellant relied in large part on ASBCA decisions, arguing that
the
cases were analogous and were decided under a "virtually identical
cost
principle." Appellant's Reply Brief, p. 5; citing Hayes
International
Corporation, ASBCA No. 18447, 75-1 BCA Para. 11,076
(involving the
legal defense of an employment discrimination suit); John Doe
Co., Inc.,
ASBCA No. 24576, 80-2 BCA Para. 14,620 (involving grand
jury
investigation into possible fraud). The Appellant also cited to a
U.S.
Supreme Court decision which held that legal expenses incurred
in
defending a criminal proceeding were ordinary and necessary
business
expenses, and therefore an appropriate tax deduction. Appellant's
Reply
Brief, p. 5; citing Commissioner v. Tellier, 383 U.S. 687 (l966).
This Board has previously held that we are not bound by Board of
Contract
Appeal decisions, even though they decide issues concerning
contract
provisions containing the same wording as grants provisions;
special
considerations may apply in grants administration which do not
apply to
procurement contracts. See Florida Farmworkers Council, Inc.,
Decision
No. 202, July 31, 1981. We would not in any event follow the
cited
ASBCA decisions here, since we conclude that they do not support
the
Appellant's position, for the following reasons:
o Hayes involved civil litigation, not a criminal investigation.
o In Hayes, the alleged improper activities there were of a type
on
which reasonable minds could differ (employment discrimination
and
defective pricing) and there was no basis in the record on which
the
ASBCA could conclude that those activities had actually occurred.
Here,
there is a basis in the record for concluding that the activity
which
gave rise to the investigation was a clear violation of the
cost
principles and that the Appellant knew that its claims were not
as
submitted.
o In Doe, which did involve a criminal investigation, the ASBCA ruled
only
on the narrow issue of whether the government could properly
disallow costs
solely on the basis that they were incurred in defense of
a criminal
investigation, without regard to the outcome, where there was
no evidence
that the costs were otherwise unreasonable. The ASBCA
rejected the
contractor's argument there that expenses of defending
against criminal
investigations must be allowable in nature,
notwithstanding the circumstances
in which incurred or the fraud that
may have been committed.
We further conclude that the tax case, Tellier, is distinguishable
from
the case here. The fact that defense of a criminal investigation
may
lead to costs deductible for income tax purposes is irrelevant to
the
issue of whether the federal government will participate in such
costs
under federal grant programs. Congress may have intended to
promote the
constitutional right to counsel through the tax code by
permitting such
costs as a deduction, but we do not think that Congress
intended that
federal grant funds be diverted from project purposes to cover
such
costs under the circumstances here. Moreover, as discussed above,
the
grant cost principles contemplate reimbursement of ordinary
and
necessary business expenses as an indirect cost only when necessary
to
the overall operation of the institution.
Accordingly, we uphold the Regional Director's decision excluding
the
$20,208 in legal expenses from the Appellant's indirect cost pool.
II. Legal Expenses Incurred During Civil Litigation
Against a
Competing Entity
Humanics incurred legal expenses of $48,906 in the pursuit of a
lawsuit
against a former officer of Humanics who formed another entity he
named
"Humanics Limited." The suit concerned several allegations,
including
unfair competition by Humanics Limited and the misuse by
Humanics
Limited of Humanics' trade name. For the reasons discussed
below, we
uphold the Agency here and conclude that these legal expenses
are
unallowable.
The cost principle specifically addressing the allowability of
legal
expenses provides that "costs incurred in connection with defense
of
antitrust suits" are unallowable, as well as costs "incurred
in
connection with patent infringement litigation." OMB Circular
A-122,
Att. B, paragraph 34.d. OMB Circular A-122, Attachment B, also
provides
that the cost principles pertaining to individual items of cost were
not
intended as an exclusive description of what may or may not
be
allowable, but that the principles should be used in
analogous
situations to those specifically mentioned.
Failure to mention a particular
item of cost is not intended to
imply that it is unallowable; rather determination as
to
allowability in each case
should be based on the treatment
or
principles provided for similar
or related items of cost.
(Introductory paragraph to Attachment B). As explained below,
we
conclude that the legal expenses incurred in a private lawsuit against
a
competing entity concern the same type of controversy as antitrust
or
patent infringement disputes and that the allowability of these
expenses
was intended to be prohibited by the cost principles.
Both antitrust and patent infringement litigation concern
disputes
involving the economic viability of one entity vis-a-vis the
activities
of competing entities. While antitrust and patent
infringement suits
are under statutes, and Humanics' lawsuit concerned
primarily common law
tort claims, the overwhelming purpose of both types of
litigation is the
same: to protect the competitiveness of the entity against
other
organizations in the same market. We find that the apparent
rationale
for the cost principle's prohibition against allowing these
legal
expenses is that such litigation, by its nature, concerns the
livelihood
of the grantee organization itself, rather than its overall
operation,
and is unrelated to the federal grant.
Humanics argued that the lawsuit "was necessary in order to
enable
Humanics to remain a viable business entity and to continue
performing
and fulfilling the terms of its HHS grants and contracts."
Appellant's
Reply Brief, p. 6. However, Humanics presented no evidence
nor did it
argue how the terms of its OHDS grant were frustrated by the
competition
with Humanics Limited. The clear purpose of the OHDS grant
was to
assist in the provision of services to Head Start children. If
an
entity other than the Appellant ultimately provided technical
assistance
to Head Start agencies, the purpose of the Head Start funding
would not
be frustrated. The only harm that Appellant has arguably
demonstrated
here was to Appellant itself; we do not see how the Head Start
program
itself was affected.
Another argument of Appellant was that the costs were an "ordinary
and
necessary business expense" which, like other types of
unavoidable
administrative expenses, should be allowed whether or not they
can be
shown to benefit the grant. Appellant's Reply Brief, p. 7.
This
reasoning, however, ignores the cost principles' recognition
that
certain types of litigation expenses, by their nature, are so
unrelated
to the interests of the federal government as to merit special
treatment
that they be per se unallowable.
Appellant provided for the record in this appeal pleadings from
the
lawsuit and some evidence of the substance of a sealed
settlement
agreement reached in the case, intending to show that the merit of
the
lawsuit against Humanics, Limited in turn demonstrated that
the
associated legal expenses should be allowed. Given our analysis
above,
we do not find the merits or disposition of the litigation
relevant
here. 7/ Even if Humanics had received a favorable judgment
from the
court, this would not alter our analysis of the cost
principles'
prohibition of these types of litigation expenses. We do
not question
whether Humanics' lawsuit was meritorious, but conclude that
legal
expenses incurred in disputes involving unfair competition, such as
the
one at issue here, are unallowable under the cost principles.
III. Conference Expenses
Humanics included in the indirect cost pool $3,423 incurred during
fiscal
years 1982 and 1983 for "exhibition and display booths" at
various
conferences attended by its employees. The Agency excluded
these costs
from the indirect cost pool for those years since they were
in the Agency's
view "advertising costs," which OMB Circular A-122
provides are
unallowable. As explained below, we uphold the Agency's
determination
that these costs are unallowable advertising expenses.
OMB Circular A-122, Attachment B, paragraph 1 provides:
Advertising costs.
a. Advertising costs mean the
costs of media services
and
associated
costs. Media advertising includes
magazines,
newspapers, radio and television programs, direct
mail,
exhibits,
and the like.
b. The only advertising costs
allowable are those which
are
solely for
(i) the recruitment of personnel . . . ; (ii)
the
procurement
of goods and services; (iii) the disposal
of
surplus
materials acquired in the performance of the award
.
. . ; or (iv)
specific requirements of the award.
The Agency argued that the conference exhibition and display booths
at
issue in this case were the type of "exhibits" which paragraph
1.a
included in the definition of unallowable advertising costs, since
they
were intended to "attract new business for [Humanics] and market
its
publications." Agency's Brief, p. 14. Humanics agreed with
the
Agency's characterization of the use of exhibition booths and
displays
as "primarily for the purpose of soliciting new business."
Appellant's
Ex. C (letter requesting reconsideration of unilateral
rate
determination), p. 6. Humanics, however, argued that as a matter
of law
such costs were allowable as costs of attendance at these
conferences,
since OMB Circular A-122 considers generally allowable the costs
of
attendance at meetings and conferences, unless they are categorized
as
entertainment costs.
We agree with the Agency that the costs of exhibition booths should
be
considered unallowable advertising costs under the cost principle
of
paragraph 1. Paragraph 1 specifically mentions "exhibits" as one
type
of unallowable advertising and the admitted purpose of the booths
here
was identical to the other types of advertising mentioned by the
cost
principle. The exhibition booths were clearly designed to enhance
the
marketing of the organization's services, in the same way that any
other
type of advertising would, and were not necessary to attendance at
the
conferences.
Humanics cited in support of its position paragraph 25.c of OMB
Circular
A-122, Attachment B, which provides that "[c]osts of attendance
at
meetings and conferences, sponsored by others when the primary
purpose
is the dissemination of technical information, are allowable.
This
includes costs of meals, transportation and other items incidental
to
such attendance." Humanics also noted that Circular A-122
considers
allowable the costs of meetings and conferences "held to conduct
the
general administration of the organization." Id., Paragraph
24.c.
Humanics also cited "by analogy" a procurement regulation which
provides
that allowable costs include "meals, transportation, rental
of
facilities for meetings, and costs incidental thereto, when the
primary
purpose of such costs is the dissemination of technical information
or
stimulation of production." Federal Procurement
Regulations
1-15.205-43(c); cited in Appellant's Ex. C, p. 6.
Humanics maintained
that this principle was fulfilled here since the purpose
of the
exhibition booths was the "stimulation of production."
We find that Humanics' reliance on these cost principles is
misplaced.
Paragraph 25.c of Circular A-122 does not provide that all
costs
relating to meetings and conferences other than entertainment
expenses
are allowable. It provides that the costs of attendance at
meetings are
generally allowable. Humanics did not explain how the
expense of
exhibition booths designed to "solicit new business" was a
necessary
"cost of attendance" or was a "cost incidental to such attendance"
like
meals and transportation. Also, the conferences at issue here
were
clearly not held to "conduct the general administration of
the
business," since they were all held by organizations other than
Humanics
and at which Humanics was one of many participants. See
Agency's Ex.
3.
Humanics' reliance on a procurement regulation which considers
as
allowable the costs of conferences whose purpose is "the
dissemination
of technical information or stimulation of production" also
does not
provide a basis for allowing the exhibition booth costs.
Assuming that
this regulation should serve as authority before the Board
(which
Appellant did not specifically demonstrate), the "purpose" to which
this
regulation clearly refers is that of the conference itself, not that
of
incidental costs. That the exhibition booths might have stimulated
the
business production of Humanics itself does not appear relevant.
IV. Costs of Food and Drinks
The Agency excluded from the indirect cost pool $5,299 spent for
certain
food and drinks by Humanics on the basis that the expenses were
neither
necessary nor reasonable, and that they were "entertainment costs"
which
OMB Circular A-122, Attachment B, paragraph 12, classifies
as
unallowable expenses. See Agency's Ex. 4 for a listing of
the
individual costs. We conclude that the Agency properly disallowed
these
costs.
As the Board found in another decision, "[e]xpenses for meals are
subject
to strict scrutiny in view of the cost principles' prohibition
against paying
for entertainment costs with federal grant funds."
Mid-America Health Systems
Agency, Decision No. 420, April 29, 1983, p.
11. Humanics argued
that one reason the meal costs here were unique was
that they were incurred
by Humanics' employees while on business trips
which had been found generally
allowable by the Agency. See OMB
Circular A-122, Att. B.,
paragraph 50.a. However, the Agency noted
that employees' meals taken
on travel were covered by a per diem
arrangement, and should thus be a direct
cost. The Appellant did not
dispute the existence of the per diem
arrangement, and we thus agree
with the Agency that, insofar as the food and
drink expenses were
incurred as travel costs, they should have been charged
directly to the
appropriate cost objective.
We also reject the Appellant's argument that, even if the food and
drink
expenses were not allowable travel costs, they were
nonetheless
necessary and reasonable business expenses since "[t]here has
been no
allegation that anything other than business purposes were served by
the
meal expenses in question." Appellant's Ex. C (letter
requesting
reconsideration of unilateral rate determination), p. 8. As
the Agency
correctly noted, the burden is on the grantee to document and
justify
all costs. Appellant here has presented no evidence that the
food and
drink expenses were necessary for business purposes, and some of
the
larger individual cost items on their face indicate to us
the
unnecessary nature of the costs: for example, $331.21 for
"Howard
Johnson's--Wedding Party;" $200.00 for "Peachtree Rd. Liquor
Store;"
$752.50 for "Walt Disney World, Orlando, Florida." Agency's Ex.
4.
Another argument of Appellant was that food and drink expenses should
be
allowable as "employee morale costs" under OMB Circular
A-122,
Attachment B, paragraph 11. Paragraph 11 provides:
Employee morale, health, and welfare
costs and credits. The costs
of house
publications, health or first-aid clinics,
and/or
infirmaries, recreational
activities, employees' counseling
services, and other expenses incurred in accordance with
the
organization's established practice
or custom for the improvement
of working
conditions, employer-employee relations,
employee
morale, and employee
performance are allowable. Such costs
will
be equitably apportioned to all
activities of the organization.
Income
generated from any of these activities will be credited
to
the cost thereof unless such income
has been irrevocably set over
to
employee welfare organizations.
The type of expenses described in Agency's Exhibit 4 on their face do
not
appear to be "incurred in accordance with the organization's
established
practice or custom for the improvement of" goals such as
employee
morale. Moreover, Appellant has not offered or demonstrated
any
particular practice of the organization that would explain all the
individual
cost items at issue here. We find that to accept
Appellant's
unsubstantiated claim that all food and drink expenses were
incurred to
further "employee morale" would render meaningless the
prohibition in
paragraph 12 against allowing entertainment costs.
V. Other Miscellaneous Cost Items
The record indicates that Humanics included in its indirect cost pool
a
series of miscellaneous costs which the Agency disallowed. See
Agency's
Exs. 5-7. While Humanics appeared to include all these items
in its
appeal to the Board, Humanics presented no argument to the Board as
to
why the Agency's disallowance of these items was wrong. The
Board
therefore upholds summarily the Agency's disallowance of these
items.
CONCLUSION
As explained above, we uphold the Agency's disallowance of legal
expenses
incurred in defense of a grand jury investigation and during a
civil lawsuit
against a competing business entity. We also uphold
the
Agency's.disallowance of exhibition booth expenses and certain food
and
drink expenses, as well as all other miscellaneous cost items.
_____________________________ Judith
A.
Ballard
_____________________________ Donald
F.
Garrett
_____________________________ Alexander
G.
Teitz Presiding Board Member
1. This dispute arose under the provisions of 45 CFR Part 75,
Subpart
A, pertaining to the resolution of disputes arising in the
negotiation
of indirect cost rates. Under Part 75, a grantee may first
request
reconsideration of an indirect cost rate determination from the
Regional
Director, and may then appeal to the Board under Part 16 of 45
CFR.
2. The reference to the arrangement between Humanics
and OHDS as a
"contract" is also found at times in Appellant's briefing.
However, the
Appellant's request for reconsideration by the Regional Director
was
made under 45 CFR 75.5. Section 75.1 of Subpart A of Part 75 -
Indirect
Cost Appeals - refers to the procedures for resolving disputes in
the
negotiation of indirect cost rates under "grants" awarded by
constituent
agencies of HHS. The Regional Director at the beginning of his
ruling on
the reconsideration request, which was appealed to us, refers to
the HHS
"grants" for fiscal years 1981, 1982, and 1983 (p. 1). However, we
note
that in any event OMB Circular A-122, relied on by both parties,
is
applicable to costs of both grants and contracts with
nonprofit
organizations.
3. The Appellant alleged in its reply brief that
"neither HHS nor
Humanics intended that negative inferences regarding
culpability . . .
be drawn from the resolution or from Humanics corresponding
payment to
the Government" (p. 4), but provided no evidence to support
this
allegation. The letter transmitting the payment neither admits
nor
denies culpability. Agency's Ex. 2.
4. Consultant services require prior approval when
feasible, as well
as other written justification. See OHD Grants
Administration Manual,
Chapter 3, sections F.2 and F.4; 42 Fed. Reg.
21046 (April 22, 1977).
5. OMB Circular A-122 establishes cost principles for
grants with
nonprofit organizations. For part of the first year at
issue in this
appeal, during fiscal year (FY) 1981, these cost principles
were found
at 45 CFR Part 74, Appendix F. Since FY 1981, Part 74 has
incorporated
the principles published as OMB Circular A-122. 46 Fed.
Reg. 30502
(June 9, 1981); see 45 CFR 74.174. The differences between
Appendix F
and OMB Circular A-122 are not significant to this appeal and
throughout
the decision we have followed the parties' practice of quoting
only the
OMB Circular.
6. In Dynalectron, legal fees pertaining to a
separate commercial
venture were held not allocable to government contracts
because they did
not benefit the contracts, and were not necessary to the
"overall
operation of the business," but had a direct relationship to
a
particular cost objective, namely, the separate venture.
7. Since we did not consider the disposition of the
litigation
relevant, we did not need to rule on an objection to an
additional
submission pertaining to the settlement entered in
the