DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: Wayne State University
Docket No. 85-247
Decision No. 806
DATE: November 13, 1986
DECISION
Wayne State University (the University) appealed the decision of
the
Regional Director, Region VII, 1/ upholding a unilateral
determination
by the Division of Cost Allocation (DCA, the Agency) of
indirect cost
rates for organized research for fiscal years (FY) 1983 through
1987.
The Regional Director's review, conducted pursuant to 45 CFR Part
75,
found the University's objection to the rate to be without merit.
The
unilateral determination was made when negotiations between the
parties
failed to produce any agreement on indirect cost rates. DCA
established
predetermined rates of 45% for FY 1983, 1984, and 1985, and
41.27% for
FY 1986 and 1987. A predetermined rate is set based on the
actual costs
of a prior period and is not subject to adjustment. On
appeal, the
University stated that it was willing to accept the 45% rate for
FY 1983
through 1985 since additional funds for indirect costs were no
longer
available under the grants for those years. 2/ The University
contended,
however, that a rate of 47% was justified for FY 1986 and
1987. (The
University indicated that even if acceptance of all its
arguments would
result in a rate higher than 47%, no purpose would be served
in
establishing a higher rate in view of the limited availability
of
funds.) For the reasons set forth below, we find
1/ Although the University is located in Region V, responsibility
for
this matter was transferred to Region VII in June 1984 because
of
workload problems in Region V. (Agency's brief dated April 10, 1986,
p.
15)
2/ The University stated that its acceptance of the 45% rate
was
contingent upon the carry forward of any underrecovery of indirect
costs
in FY 1983 through 1985 in determining the applicable rates for FY
1986
and 1987. However, since we have determined that the 47% rate
sought by
the University for the latter years is justified on other grounds,
we
need not consider the University's carry forward argument..- 2 -
that a rate of at least 47% for FY 1986 and 1987 was justified,
and,
accordingly, reverse the Regional Director's decision upholding a
rate
of 41.27% for those years.
How the Rate Was Established
The rate established by DCA for FY 1986 and 1987 was based in part on
an
incomplete audit of the University's indirect cost proposal for FY
1982.
DCA requested the audit based on concerns which it had regarding
the
proposal, but later requested that the audit be discontinued so that
"a
proper rate could be expeditiously negotiated and the parties'
resources
directed towards developing future proposals and improving
the
university's systems." (Agency Response to Board Questions, dated
July
9, 1986, p. 1) The 1982 proposal requested an indirect cost rate
of
80.38% (using a modified total direct cost (MTDC) base). When the
audit
was terminated, the auditors had questioned $3,862,302 of the
$9,351,216
in indirect costs allocated to organized research by the
University's
proposal. The $5,488,914 in indirect costs not questioned
at that point
resulted in a rate of 47.18% of the reported (but unaudited)
MTDC base.
(Agency's brief dated April 10, 1986, p. 22) Taking the 47.18%
rate
recommended by the auditors (audited rate) as a starting point,
DCA
first added 1.07%. This adjustment represents library costs
questioned
by the auditors but later accepted by DCA. DCA also added
2.02%,
representing one-half of the equipment use allowance questioned by
the
auditors. DCA then deducted 8%, representing dental fringe benefits
and
research support costs previously treated as indirect costs;
both
parties had agreed that these costs should be direct-charged
beginning
in FY 1986. 3/
3/ The University did not dispute the 8% deduction for dental
fringe
benefits and research support costs. The Agency at one point in
the
proceedings before the Board appeared to be saying that the MTDC
base
the auditors used to calculate the rate for FY 1986 and 1987 should
be
revised to include dental fringe benefits and research support
costs.
(Agency's letter dated October 8, 1986, pp. 3-4) However, the
Agency
later clarified that it was not contending that a lower rate should
have
been used as the starting point for calculating the rate or that
the
point value of any disputed items should be recalculated using a
larger
MTDC base. (Tape of telephone conference held October 28,
1986).- 3 -
Finally, DCA deducted 1% in exchange for its waiver of the submission
of
indirect cost proposals for FY 1983 through 1985. This resulted in
the
41.27% rate challenged by the University.
On appeal, the University challenged the propriety of the audited rate
on
several grounds and also contested some of the adjustments made by
DCA to the
audited rate in determining the rate for FY 1986 and 1987.
The parties agreed
to point values for each of the disputed cost items,
to be used to increase
the 41.27% rate if we found for the University on
any item. The
disputed items totaled 24.89%, far more than the 5.73%
needed to support the
47% rate the University sought. We consider here
only six of the small
point value items, which involve less complex
issues, and conclude that an
indirect cost rate of at least 47% was
justified for FY 1986 and 1987. 4/
Upward Adjustment in Audited Rate
Subsequent to the DCA's unilateral rate determination and the
Regional
Director's review of that determination, the auditors adjusted
the
audited rate upward by 1.37% to correct mathematical errors. The
Agency
acknowledged that this adjustment was correct, but took the
position
that the indirect cost rates for FY 1983 through 1987 should not
be
increased by this amount because the upward adjustment might be
offset
by findings adverse to the University if the incomplete audit
were
reopened.
We find the Agency's position to be untenable. While it is true that
if
the audit were resumed, there might be adverse findings which
would
offset the 1.37% upward adjustment, the Agency has already chosen
to
discontinue the audit and to issue a unilateral rate
determination.
Since the Agency in
4/ A major point in dispute concerned the auditors' finding
that
certain space-related costs (i.e., depreciation use allowance
and
operations and maintenance costs allocated to organized research on
the
basis of square footage) were improperly allocated to
organized
research. This item has a point value of 16.7%, and involves
a number
of complicated issues regarding the University's space study and
time
and effort reporting system. In view of our conclusion that the
47%
rate sought by the University can be justified on other grounds, we
do
not address this issue..- 4 -
making that rate determination relied on the audited rate, the
University
is entitled to receive the benefit of changes in the audited
rate which the
Agency accepts as correct.
Accordingly, the indirect cost rate for FY 1986 and 1987 should
be
increased by 1.37% corresponding to the auditors' upward adjustment
in
the audited rate.
Proposal Waiver
In exchange for waiving submission of indirect cost proposals for FY
1983
through 1985, the Agency deducted 2% from the indirect cost rate
that would
otherwise have been established for FY 1983 through 1985. On
the same
basis, the Agency deducted 1% from the indirect cost rate that
would
otherwise have been established for FY 1986 and 1987. The
University
contended that there was no authority in the applicable
regulations or
guidelines for reducing a grantee's indirect cost rate
based on a proposal
waiver.
As noted previously, we need not consider the validity of the rate for
FY
1983 through 1985. Even assuming, however, that DCA was authorized
to
reduce the indirect cost rate for FY 1983 through 1985 based on
waiving
proposals for those years, reducing the rate by 1% for FY 1986
and 1987 based
on the waiver was improper.
In the Agency's view, the 1% reduction in the rate for FY 1986 and
1987
was justified for the following reasons. Indirect cost rates
are
generally established for a set period, (usually the
institution's
fiscal year), based on actual costs for a prior period.
In this case,
DCA established rates for FY 1983 through 1987 based on actual
costs
shown in the University's FY 1982 indirect cost proposal (as
audited).
The rates were established as "predetermined" rates not subject
to
adjustment.5/ The Agency asserted that, ordinarily, predetermined
rates.
for FY 1986 and 1987 would have been established on the basis
of
proposals for FY 1983, 1984 and/or 1985. The Agency argued that
the
waiver of the proposals for FY 1983 through 1985 permitted
the
University to rely entirely on the
5/ Other types of rates that could have been established were
(1) a
provisional rate, which is later adjusted based on the actual costs
for
the year to which the rate applies or (2) a fixed with carry
forward
rate, which remains fixed although a subsequent year's rate is
adjusted
to reflect the actual costs for the year to which the fixed
rate
applies..- 5 -
FY 1982 proposal as the basis for the FY 1986 and 1987
predetermined
rate.
The Agency did not explain why the FY 1986 and 1987 rate could not
have
been based on the FY 1982 proposal even if the proposals for FY
1983
through 1985 had not been waived. Thus, denial of a waiver would
not
necessarily have put the University in a worse position for FY 1986
and
1987.
Moreover, we see no relationship between the waiver of these proposals
and
the rate for FY 1986 and 1987. The use of a predetermined rate made
the
submission of proposals for FY 1986 and 1987 unnecessary since the
rate
required no adjustment based on actual costs. However, only
the
submission of proposals for FY 1983 through 1985 was waived. If DCA
had
not issued a unilateral determination encompassing FY 1986 and 1987,
the
University could have still submitted timely indirect cost proposals
for
those years.6/
Accordingly, we find that DCA improperly reduced the indirect cost
rate
for FY 1986 and 1987 by 1% on the basis of proposal waivers.
Equipment Use Allowance
The auditors questioned the 4.05% equipment use allowance claimed by
the
University on the ground that the University had not performed
a
physical inventory of the equipment within the last two years,
as
required by OMB Circular A-21, J.9.e. 7/ At the time of the audit,
the
most recent inventory had been performed in 1976. DCA did not
include
any use allowance in the rate for FY 1983 through 1985 (which is
not
before the Board here), but added to the audited rate for FY 1986
and
1987 approximately one-half of the equipment use
6/ Proposals are due within six months of the close of the
fiscal
year. The University asserted that it had not submitted
proposals for
FY 1983 through 1985 as required because a DCA official in
Region V had
waived the proposals. The University admitted that it
could not
document this assertion, and the DCA official denied it. We
note,
however, that the University asserted that it was justified in
delaying
its preparation of proposals for FY 1983 through 1985 until
DCA
completed its review of the FY 1982 proposal.
7/ The provisions of this Circular were made binding on the
University
by 45 CFR 74.172 (1980)..- 6 -
allowance, or 2.02%. The Agency stated that partial recognition of
the
use allowance was merely a negotiating concession and did not
indicate
the Agency's agreement that the costs were allowable.
The University contended on appeal that it was entitled to the
full
equipment use allowance for FY 1986 and 1987 since it had completed
the
required inventory of its equipment in May 1985. The Agency
asserted,
however, that the 1985 inventory, which it had not reviewed, was
not
relevant because the rates in question were based on FY 1982 costs
and
the equipment included in the 1985 inventory might not be the same
as
the equipment held in FY 1982. The Agency further asserted that even
if
the equipment was the same, the 1985 inventory could not establish
that
the equipment was "usable, used and needed" in FY 1982, in
accordance
with the Circular provision.
We agree with the University that the 1985 inventory satisfied
the
requirements of OMB Circular A-21 for purposes of determining whether
a
use allowance was properly included in the FY 1986 and 1987
rate.
Section J.9.e. states in pertinent part that:
physical inventories must be taken at least once
every two years to
ensure that the assets [for which
a use allowance is claimed] exist
and are usable,
used, and needed.
While the use allowance was claimed as part of the University's FY
1982
indirect cost proposal, that proposal was used as the basis of the
rate
established for FY 1986 and 1987. The inventory performed in May
1985
was performed within two years of the period to which the rate
applied,
i.e., within two years of the period October 1, 1985 through
September
30, 1987.
Moreover, the Agency's objection that the 1985 inventory may not
have
covered equipment which was covered by the use allowance claimed in
the
FY 1982 proposal ignores the fact that use of a predetermined rate
is
based on the assumption that there will be no significant change
that
would affect the indirect costs between the period on which the rate
is
based and the period to which the rate is applied. If the
Agency
believed that there would be a significant change in the equipment
owned
by the University between FY 1982 and FY 1986 and 1987, then it
should
not have established a predetermined rate.
The Agency also objected to reliance on the 1985 inventory on the
ground
that DCA had not reviewed it. However, the.- 7 -
Circular provision quoted above does not require that an inventory
be
reviewed and approved by the cognizant agency, but merely that one
be
performed by the grantee. While this would presumably not preclude
a
determination by the Agency based on review of an inventory that a
use
allowance was improperly claimed, the Agency did not express any
desire
during the proceedings before this Board to review the
inventory,
contending only that such a review would be time-consuming and
delay
finalization of the indirect cost rate. Finally, we note that
the
Agency did not challenge the amount of the use allowance in the
1982
proposal, but denied the allowance based solely on the lack of a
current
inventory. For 1986 and 1987, however, a current inventory
existed;
therefore, it was unreasonable for the Agency to deny the full
allowance
for those years.
Accordingly, we find that the full equipment use allowance should
have
been recognized in the FY 1986 and 1987 rate, resulting in an
increase
in that rate of 2.02%.
Detroit Institute of Technology Operations and Maintenance Costs
The auditors removed operations and maintenance (0 & M)
costs
attributable to the Detroit Institute of Technology from the 0 & M
cost
pool allocated to organized research based on their determination
that
these costs did not benefit organized research. The University
agreed
that there was no benefit, but contended that these costs were not
in
fact included in its FY 1982 indirect cost proposal, so that the
costs
were removed twice. The Agency agreed that the costs were
removed
twice, but declined to increase the indirect cost rate for FY 1986
and
1987 by the .72% involved, contending that that amount "was more
than
offset by the allowance for 1986-1987 of library costs and equipment
use
. . ." as well as by the 1% restored to the rate after 2% was
originally
deducted for the proposal waiver. (Agency's brief dated
April 10, 1986,
p. 48)
The Agency's position is based on the assumption that reducing the
rate
for FY 1986 and 1987 based on the proposal waiver was proper and
that
the University was not entitled to any equipment use allowance, so
that
allowance of a portion of such costs by the Agency was
purely
gratuitous. This assumption is contrary to our findings detailed
above.
Moreover, we see no basis for the Agency's position that the .72%
upward
adjustment involved here is offset by the 1.07% representing
library
costs included in the rate for FY 1986 and 1987. The
auditors
questioned the entire amount of library costs allocated to
organized
research in the University's FY 1982 proposal on the ground that
the
University did not comply with.- 8 -
OMB Circular A-21, F.6.b. This provision requires the allocation
of
library costs among major functions according to usage by
students,
faculty, and other users. The Agency, however, later
recognized the
entire amount based on the University's representation
subsequent to the
audit that it had redetermined the library allocation in
accordance with
the method required by the Circular (with no change in the
amount
allocated). The Agency maintained that it did not thereby agree
that
the library costs were allowable, and asserted that the costs
were
included in the later years' rate only as a part of negotiations.
In
our view, since the Agency chose not to verify the
University's
representation that it had properly reallocated the library
costs, the
Agency is not justified in now using the lack of verification as a
basis
for denying the University an unrelated upward adjustment to which
it
would otherwise clearly be entitled.
Accordingly, we conclude that the indirect cost rate for FY 1986 and
1987
should be increased by .72% corresponding to the erroneous second
deduction
for the Detroit Institute of Technology 0 & M costs.
Internal Billings -- Operations and Maintenance
The auditors removed the overhead costs of services rendered by
the
University's Physical Plant Department from 0 & M costs allocated
to
organized research. Since the direct costs of those services
were
charged to users within the University through the University's
internal
billings system, the Agency maintained that the associated
overhead
costs should also be billed in this manner, rather than being
separately
distributed as indirect costs. The University took the
position that,
unless the Physical Plant Department constituted a specialized
service
facility under J.38 of OMB Circular A-21, the overhead costs of
the
Department need not be included in the direct billings to users.
The
Agency agreed with the University that the Physical Plant Department
was
not a specialized service facility. It was unable to cite any
other
authority for treating these costs as direct costs.
Accordingly, we conclude that the indirect cost rate for FY 1986 and
1987
should be increased by .35% to reflect the inclusion of the
overhead costs in
question in the 0 & M costs allocated to organized
research.
Salary Reimbursements from Local Hospitals
The auditors determined that the salary received by University deans
and
department heads for their work at local hospitals was not but
should
have been included in the distribution base.- 9 -
for departmental administrative costs (departmental administration).
The
auditors concluded that this resulted in an overallocation of
departmental
administration to organized research. The Agency asserted
that since
time and effort reports completed by these individuals
included the time
spent at the hospitals, their work at the hospitals
was considered
University-related, in which case departmental
administration was properly
allocated to such work as well as to other
University activities.
The University took the position that the work performed at the
hospitals
was not University-related. It stated that the hospitals
determined the
amount to be paid to the University personnel for their
in-hospital work; the
hospitals paid the University (rather than the
University personnel directly)
only so that the personnel could be
treated as full-time University personnel
and receive benefits
accordingly. The University asserted that the fact
that the time spent
at the hospitals was included in time and effort reports
was not
significant since OMB Circular A-21, J.6.d.(3), required the
individuals
to account for 100% of their time on such reports. The
University also
contended that none of the services provided by
departmental
administration were required by the University personnel for
their work
at the hospitals. According to the University, these
services included
academic supervision, not required since the personnel were
themselves
deans and department heads; secretarial support, not required
since the
hospitals provided such support; and space costs for
departmental
offices and maintenance of such offices, not required since
the
University personnel also had offices at the hospitals.
We agree with the University that its compliance with the time and
effort
reporting requirement of OMB Circular A-21 is not evidence that
the
activities were University-related. The Circular requires that
an
employee account for 100% of the time for which he or she
is
compensated, without regard to where or how that time is spent.
The
University admitted, however, that general and administrative costs
were
allocated to the hospital activities, although
departmental
administration was not. The Agency argued that this meant
that the
hospital activities were in fact University-related, because
otherwise
the allocation of general and administrative costs to these
activities
would be inappropriate.
Even if the hospital activities were University-related, however,
this
would not be dispositive on the question of whether the
services
provided by departmental administration were required for
these
activities. The Agency did not rebut the University's
specific
assertion, referred to above, that.- 10 -
no such services were required here. Accordingly, we find that
these
activities did not benefit from departmental administration and
were
therefore properly excluded from the distribution base for allocation
of
departmental administration.
Although the University originally indicated that the indirect cost
rate
should be increased by 2.44% if the Board ruled in its favor on
this
issue, the University later agreed with the Agency's assertion that
the
University had miscalculated this amount and that the appropriate
point
value was 1.72%. (Transcript of September 9, 1986 conference
call, p.
76) Accordingly, we find that the indirect cost rate set by the
Agency
should be increased by 1.72% on this basis.
Conclusion
For the foregoing reasons, we reverse the Regional Director's
decision
upholding DCA's unilateral rate determination establishing a rate
of
41.27% for FY 1986 and 1987.
Specifically, we find that the 41.27% rate established by DCA could
be
increased by:
1.37%--upward adjustment in audited rate
l.OO%--proposal waiver
2.02%--equipment use allowance .72%--Detroit
Institute of
Technology 0 & M costs
.35%--internal billings--O & M
1.72%--salary reimbursements from
local hospitals,
which would bring the rate to 48.45%. Accordingly, we conclude that
the
University was entitled to an indirect cost rate of 47% for FY 1986
and
1987.
________________________________ Norval D. (John) Settle
________________________________ Cecilia Sparks Ford
________________________________ Judith A. Ballard
Presiding
Board