DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: West Central Wisconsin Community Action Agency, Inc.
Docket No. 86-216
Audit Control No. 05-65302
Decision No. 861
DATE: April 20, 1987
DECISION
The West Central Wisconsin Community Action Agency, Inc. (West CAP
or
Grantee) appealed the disallowance by the Office of Human
Development
Services (Agency) of $1,037 in costs charged to the Grantee's
Head Start
grant. The Agency disallowed the costs because West CAP
provided no
source documentation to demonstrate that it incurred actual
and
necessary costs in this amount to meet Head Start program
expenses.
Moreover, the Agency concluded in the alternative that the value of
the
services in question would not be reimbursable as a cost to the
grant
under Office of Management and Budget (OMB) Circular A-122 because
the
services had been donated by the providers of the services.
For the reasons discussed below, we conclude that the Agency's
positions
were correct on both counts and uphold the disallowance in
full.
Background
The performance of the Head Start project funded by the subject grant
was
delegated by West CAP to the Head Start Family Education Program,
Inc.
(delegate agency). In 1986, West CAP's accountant performed an
audit of
the Head Start program for the year ending November 30, 1985.
See Agency Ex.
1 (excerpted). In a follow-up letter to West CAP dated
April 28, 1986,
the accountant drew attention to certain findings which
were noted during his
audit of the operations of the delegate agency.
(This audit had not been
conducted concurrently with the audit for the
Head Start program
itself.) The accountant stated the following with
respect to the costs
now under consideration:
The Head Start Program . . . paid the [delegate
agency's] General
Fund $1904 for . . . policy
council dinners. The General Fund
utilized
volunteer labor and only incurred direct costs relating
to
these meals of $867. Although the charge
for the meals appears
reasonable, the General Fund
nevertheless made a $1037 profit at
the expense of
the Head Start Program. . . .
Had we known about the above [item] at the time we
did the Head
Start Program audit we would have
listed [it] as [$1037] of
questioned costs.
Agency Ex. 2.
In subsequent correspondence between the HHS Office of Inspector
General
and West CAP concerning the accountant's findings presented in the
April
28 addendum, West CAP indicated that several members from the
delegate
agency's corporate board had volunteered to prepare meals for
the
delegate agency's policy council. West CAP stated that the
practice
would not cost the Head Start program any more money than
comparable
meals at a restaurant and that the revenues "could be used to
expand the
delegate agency's health service programs." Agency Ex.
4.
After receiving this response from West CAP, the Agency on October 9,
1986
decided to disallow $1,037, which represented the amount of money
charged to
the Head Start program that exceeded the direct costs
incurred for preparing
the meals. (The accountant had characterized
this component of the
charge as a profit; the delegate agency had not
made any payment to the meal
preparers for their time or labor, although
it had paid $867 to them for food
and supplies.) The disallowance
letter repeated the accountant's
characterization of the charge as a
"profit," finding that although the
delegate agency charged Head Start
funds $1,037 for the meals (in addition to
$867 for food and supplies),
it had no actual program expense to support the
$1,037 charge. The
Agency noted that West CAP had requested approval of
its practice and
approval was being denied because "[g]rant related income is
subject to
45 CFR Part 74, Subpart F."
Shortly after West CAP appealed the disallowance to the Board and
before
submission of the initial briefing contemplated by Board procedures,
the
parties entered into discussions by telephone concerning the basis
for
the disallowance and requested that the Board hold a
telephone
conference on procedural matters including briefing
schedules. During
the telephone call, the Presiding Board Member, over
Grantee's
objection, authorized the Agency to revise its justification for
the
disallowance in light of discussions which had transpired with
the
Grantee. The revised determination, issued December 23, 1986,
included
modified findings and justifications for the disallowance.
Both parties
were given the opportunity to submit briefs on the
revised
determination. The revised determination stated as follows:
The grantee requested an approval of the practice whereby
the
delegate board members charge the Head Start grant the
cost of meals
for the policy council comparable to that of
a private vendor and
then donate the "profit" and labor
costs to the delegate corporate
general fund. . . .
We deny approval of this practice to the extent it charges
the Head
Start grant for costs associated with the policy
council meals which
were not actual and necessary to the
provision of the meals. The
actual cost of providing
meals was food and supplies. We understand
that
there was no source documentation that any other actual
cost
was incurred to provide the meals. In order to
be allowable, costs
must be actual and documented.
45 CFR Part 74.61 (f), (g) and
74.174; OMB Circular A-122,
Attachment A, General Principles, A.2.
There is no
substantiation available to us to indicate that the
excess
Federal dollars paid out over and above the actual and
necessary cost of food and supplies were applied to meet Head
Start
program expenses.
Analysis
1. The Grantee has failed to meet its burden to
document the
allowability of the costs
claimed.
The substantive basis for this disallowance is actually quite simple.
The
Grantee has submitted no documentation to demonstrate (1) it
incurred costs
of $1,037 and (2) these costs were allowable. As this
Board has
repeatedly held, the burden to document the existence and
allowability of
costs claimed in grant programs rests with the grantee.
Missouri Department
of Social Services, Decision No. 395, February 28,
1983; New Jersey
Department of Human Services, Decision No. 416, April
29, 1985; California
Department of Health Services, Decision No. 666,
June 28, 1985; City of
Chicago Department of Human Resources Decision
No. 820, December 18,
1986.
Specific documentation requirements are also included in the
regulations
applicable to this grant. OMB Circular A-122, made
applicable here by
45 CFR 74.174, requires adequate documentation as a
prerequisite for the
allowability of claimed costs under a grant award.
Attachment A of the
Circular, General Principles A.2. Regulations
providing financial
management standards for grantees require that accounting
records be
supported by source documentation such as cancelled checks and
paid
bills. 45 CFR 74.61(g); see also 45 CFR 74.61(f).
The record demonstrates that documentation in support of claims for
policy
council meals covered only the food and supplies for the meals
(which the
Agency, in fact, allowed). There is no evidence in the
record of any
charge by the food preparers to the delegate agency for
their labor, no
evidence of any money payment to the preparers from the
delegate agency, and
no documentation of any donation from the food
preparers of the same money
back to the delegate agency. While the
charge of $1,037 for food
preparation may indeed have been proper if
made (ignoring questions raised by
the fact that the food preparers were
the corporate board members of the
delegate agency), the simple fact of
the matter is that we have no
documentation that the food preparers
charged the delegate agency for their
services and were paid by the
delegate agency. In the absence of any
documented charge and payment,
there is no reason why the Head Start program
should have to fund these
alleged costs.
Moreover, there is a compelling program purpose behind this position.
As
the Agency argued, a provider of services or products for the Head
Start
program may, for any number of reasons, decide to offer the
program a
discount or a reduced charge. For example, a provider of
services may
wish to bill the program only for out-of-pocket expenses
incurred in
providing the services; a provider of products may wish to
give the program a
special discount for purchase of the products. Under
these
circumstances, the program rules require that the program should
be the
beneficiary of the discount or the reduction since the program
cannot be
charged for any more than the costs actually incurred, i.e.,
those costs the
program actually pays a provider after receiving a bill.
Grantees are not
given the discretion to determine what might have been
the "full price" and
then charge the grant for the difference between
the "full price" and the
amount actually incurred as a donation from the
provider to cover expenses
outside the scope of the Head Start program.
While this case involves only
relatively small sums for meal
preparation, other cases might involve much
larger implied program
costs.
Throughout this appeal, the Grantee at no time contested that it had
the
burden to document claimed costs, nor did it allege that it had met
that
burden. The Grantee argued instead that the costs were allowable
since
they were reasonable in amount, since meal costs could be funded by
Head
Start grants for policy council dinners, and since preparation costs
are
a reasonable component of meal costs as a whole. These
arguments,
however, altogether miss the point that applicable authorities
require
that costs, in order to be allowable, must be documented as having
been
charged by the provider to the grantee and as having been paid by
the
grantee. We agree with the Agency that the costs here cannot be
viewed
as necessary when no charge was ever submitted by the food preparers
for
their services and no payment ever made by the delegate agency to
the
food preparers.
Accordingly, we uphold the disallowance on this basis.
2. The value of donated services is not allowable.
In a telephone conference where the parties were given opportunity
to
discuss each other's initial briefs (held February 4, 1987), the
Agency
raised an alternate basis for the disallowance. The Agency
stated that
the value of donated services is not allowable pursuant to OMB
Circular
A-122, Attachment B.10.
The Circular provides under the heading "Donations":
a. Services received.
(1) Donated or volunteer services may be furnished to
an
organization by professional and technical personnel,
consultants, and other skilled and unskilled labor. The value
of
these services is not reimbursable either as a direct or
indirect
cost.
This provision clearly provides an alternate basis for this
disallowance
under the existing record since services were furnished without
charge
to the delegate agency and the delegate agency made an
accounting
transfer of funds to its General Fund based on an apparent payment
of
earnings to the Board Members and an apparent donation back to
the
delegate agency. Here, therefore, the Circular clearly applies
since
the value of services was claimed as a grant expense under
circumstances
where the providers of the services were considered to have
donated
their earnings back to the delegate agency. The Grantee
argued,
however, that where money in fact changes hands from a grantee to
the
provider as earnings and then back to the grantee as a donation,
the
Circular provision would not apply as a basis for a disallowance.
We
find that such an interpretation would elevate form over substance
and
would let grantees circumvent the purpose of the rule. Even where
money
actually changes hands and is then donated back to the grantee
under
circumstances such as those here, the net effect would still be
a
donation of services.
Accordingly, we conclude that the Circular provision provides an
alternate
basis for the disallowance under the existing record and that
such provision,
under the circumstances here, could support a
disallowance even if
documentation demonstrated that food preparers were
actually paid for their
services and their earnings were donated back to
the delegate agency.
3. The Grantee's Procedural Objection
In its initial brief, West CAP reiterated its objection to the
Board's
decision not to dismiss this case when the Agency proposed to revise
the
justification for the disallowance. In its original disallowance
the
Agency apparently relied on the characterization given by the
Grantee's
accountant of the costs at issue as a "profit" and originally cited
as a
basis for the disallowance the rules that relate to program
profit. In
discussions with the Grantee before initial briefs were due,
the Agency
determined its basis for the disallowance should be modified
and
proposed to issue a revised disallowance. The Agency proposed to
revise
only the basis for the disallowance; it did not cite a different item
of
claimed costs nor did it change the amount of the disallowance.
The
Presiding Board Member authorized the revision and gave both parties
an
opportunity to submit their primary briefs following receipt of
the
revised determination.
We conclude that the Agency's revision was completely proper under
Board
procedures and did not void the disallowance as Grantee alleged.
Board
procedures give the Board considerable discretion to enable the
parties
to clarify or amend their positions as long as the opposing party
has
the opportunity to respond to any change. The full circumstances
behind
the Grantee's accounting transaction were known initially only by
the
Grantee and the delegate agency. Obviously, as the Agency received
more
information from the Grantee and its accountant concerning the
reasons
for the accounting transaction and the nature of
supporting
documentation, if any, the Agency might need to modify its
justification
for the disallowance accordingly. Modification of
positions on both
sides commonly occur as the record develops during Board
proceedings.
Even if the Agency had withdrawn the disallowance without
prejudice, it
merely could have been required to reissue the disallowance as
soon as
it had made its revisions, which in this case occurred within one
week's
time after the Agency proposed to revise the disallowance. In
any
event, the Grantee has had a full and fair opportunity to respond to
the
revised Agency determination.
Accordingly, we find the Agency's request in the present
instance
altogether proper. Ultimately, the Board's flexibility inures
to the
benefit of both sides to a dispute in that both sides are permitted
to
buttress their positions where developments in the record
reasonably
necessitate such changes. Finally, aside from the factors
cited, we
disagree that there is any substantial financial prejudice to
Grantee
resulting from the revision since Grantee had apparently been paid
for
the claimed costs before Board proceedings began.
4. Other Issues
Although the Grantee protested because the Board permitted the Agency
to
revise the basis of the disallowance and to identify an alternate
basis
for the disallowance, it nevertheless requested that the Board, out
of
fairness, ask the Agency whether the claimed costs "would still
be
subject to some disallowance in the future, even if the money
is
returned to the meal preparers." Grantee's Submission of February
11,
1987. (The Grantee argued that it may be obligated to pay monies to
the
corporate board members if the Board upholds the disallowance.)
The
Agency did address the Grantee's question in a telephone conference
held
on February 24, 1987, and indicated that any renewed claim
following
payment of money to corporate board members would still be
unallowable
because, among other things, the services were characterized
as
volunteer, no charge was presented at the time the services
were
performed and the providers were board members of the delegate
agency.
In its final submission, dated March 6, 1987, the Grantee asked
the
Board not to decide this question in its decision, even though
the
question had been first posed by the Grantee. In view of the
Grantee's
request and the hypothetical nature of the question, we do not
decide
it.
Conclusion
For the reasons stated above, we uphold the disallowance in
full.
________________________________
Judith
A. Ballard
________________________________ Norval D. (John)
Settle
________________________________ Donald F.
Garrett
Presiding Board Member