Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Acadia-Vermillion
Community Action
Program, Inc.
Docket No. 90-112
Audit Control
No. A-06-89-08081
Decision No. 1201
DECISION
The Acadia-Vermillion Community Action Program, Inc.
(AVCAP/Grantee)
appealed a determination by the Office of Human Development
Services
(OHDS/Agency) disallowing $13,868 in administrative (salary)
costs
charged by AVCAP to its Head Start Grant for the 1987-1988 program
year.
The amount at issue was an increase over the amount for such
costs
contained in AVCAP's approved budget. OHDS found that these
salary
costs were unallowable since AVCAP had neither the requisite time
and
effort reports to document the amount charged as a direct cost nor
an
indirect cost rate to support recovery of administrative costs on
an
indirect basis. AVCAP maintained that it could document the
salary
costs as direct costs, and, alternatively, that it had signed
an
agreement with OHDS which allowed it to charge these costs to the
grant
as indirect costs. AVCAP asserted, however, that OHDS refused to
honor
its agreement and took this disallowance.
The record in this case includes the parties' briefs and
evidentiary
submissions, the tape recording of a September 17, 1990
telephone
conference, and a written summary of an October 3, 1990
telephone
conference. On the basis of the record and the following
analysis, we
sustain the entire disallowance of $13,868.
Applicable Law
The principles governing the allowability of costs charged to
federal
grants by nonprofit organizations are found in Office of Management
and
Budget (OMB) Circular A-122. 1/ The basic principles of
cost
allowability are set out in the Circular's Attachment A.
Charges to a grant are comprised of allowable direct costs and a
portion
of allowable indirect costs as determined by a grantee's indirect
cost
rate. Among other criteria, costs must be reasonable and necessary
to
grant purposes and adequately documented. See OMB Circular
A-122,
Attachment A, A.2.a. and g. The Circular defines direct costs as
--
those that can be identified specifically with a
final cost
objective . . . However, a cost may not
be assigned to an award as
a direct cost if any
other cost incurred for the same purpose, in
like
circumstances, has been allocated to an award as an
indirect
cost . . . .
Id. at B.1.
Indirect costs are defined as --
those that have been incurred for common or joint
objectives and
cannot be readily identified with a
particular final cost objective
. . . A cost may not
be allocated to an award as an indirect cost
if any
other cost incurred for the same purpose, in like
circumstances, has been assigned to an award as a direct cost . .
.
.
Id. at C.1.
OMB Circular A-122, Attachment A., Paragraphs D. and E. set out
the
process for determination and negotiation of an indirect cost rate.
The cost principles are discussed in OHDS Grants Administration
Manual
(OHDS GAM). OHDS GAM Chapter 3, "Cost Principles and
Procedures," is
set out in part at OHDS Exhibit (Ex.) D. Paragraph B.1.
of that chapter
provides --
Recipients must submit indirect cost proposals for
each fiscal year
in which indirect costs are claimed
. . . Grantees that fail to
comply with this
requirement will be deemed as not having a
currently
effective indirect cost rate . . . If a rate is
subsequently established, based on the late submission of
an
indirect cost proposal, indirect cost
reimbursement will be limited
to the indirect costs
applicable subsequent to the date the
proposal is
submitted. Failure to submit a timely proposal
may
also result in the disallowance of indirect
costs previously
reimbursed based on the use of a
provisional indirect cost rate.
Background
The AVCAP Head Start program year at issue ran from August 1, 1987
through
July 31, 1988. The Grantee's approved budget for this period
did not
provide for indirect costs and AVCAP had not submitted an
indirect cost rate
proposal for that program year. Administrative
personnel costs were
included in two budget categories (personnel and
fringe benefits) within
AVCAP's budget. See OHDS Brief (Br.), p. 2
(unnumbered); OHDS Ex. A.
On April 12, 1988, AVCAP submitted a written budget revision to OHDS
for
its approval. Among other items not at issue here, AVCAP sought
to
increase the amount charged to its Head Start grant for
administrative
personnel costs. See AVCAP Reference Item Two. The
budget revision
identified the personnel for whom additional costs would be
charged to
Head Start. However, nothing in that document demonstrated what
the
personnel would do to justify an increase in Head Start funding.
OHDS
Br., p. 3. In a May 16, 1988, telephone conversation with
AVCAP's
Program Coordinator, the OHDS Community Representative for Head
Start
denied the requested budget revision. As documented in an
internal
memorandum from AVCAP's Program Coordinator to the Head Start
Executive
Director on that day, the Agency's rationale for denying the
revision
was that "during the last 2 on-site visits, there was not enough
and/or
adequate documentation to justify the cost charged to the Head
Start
Program." See AVCAP Reference Item Three.
On July 1, AVCAP asked OHDS to reconsider its denial of the
requested
budget revision for personnel costs. AVCAP also indicated
that it would
submit an indirect cost rate proposal in order to recover that
type of
cost. On July 18, 1990 officials from AVCAP and the Regional
OHDS
office met in Dallas. AVCAP asserted in its brief and during
the
telephone conference that it left this meeting with the
understanding
that problems concerning the allowability of the personnel
charges had
been resolved. See AVCAP Br., p. 1. On August 29th AVCAP
submitted an
indirect cost rate proposal to OHDS. The proposal was
approved on
November 11th. A provisional indirect cost rate of 13% was
set for the
period July 1, 1988 through June 30, 1990. See OHDS Br., p.
3; AVCAP
Reference Items Six and Seven. Later a final rate of 0% was
established
for this period, so that, effectively, there was no indirect cost
rate
until the AVCAP fiscal year beginning July 1, 1989. See Affidavit
of
Tom Rubio and accompanying indirect cost rate agreement submitted
with
OHDS Response (August 23, 1990).
There was an independent audit of AVCAP for the 1987-1988 program year
to
assure its compliance with federal fiscal guidelines. The
auditors
questioned $13,868 in administrative salaries charged to the Head
Start
grant "due to [AVCAP's] not having an indirect cost plan in effect
at
the time of incurring these costs." See OHDS Ex. B, p. 107.
The Agency disallowed the $13,868 in questioned administrative
costs,
concluding that AVCAP had not adequately documented the
increased
administrative charges as a direct cost and had no indirect cost
rate
for the time period to support its claim.
Analysis
I. AVCAP did not document the allowability of the questioned costs
as
direct costs.
OMB Circular A-122, Attachment B, paragraph 6.l.(1) requires that
wages
and salaries treated as direct costs be based on documented
payrolls
supported by personnel activity reports. In relevant part
paragraph
6.l.(2) provides that "[r]eports reflecting the distribution of
activity
of each employee must be maintained for all staff members . . .
whose
compensation is charged, in whole or in part, directly to
awards." The
Circular then sets specific requirements for
adequate personnel
activity reports. A grantee must document, for
example, the
after-the-fact actual activity of each employee and account for
the
total time for which an employee is paid.
AVCAP argued that its auditors had determined that AVCAP had
satisfactory
support for these costs See AVCAP Br., p. 2 and AVCAP
Reference Item
Six. AVCAP's Reference Item Six contains an analysis
prepared by its
auditors which developed percentage allocations to the
Head Start program for
the administrative employees at issue. The
auditors based these
allocations on a comparison (apparently using
1986-1987 data) of Head Start
grant funds to the Grantee's overall
funding (for three employees) or on a
comparison of payroll amount and
number of employees per AVCAP program (for
the remaining three
employees). AVCAP's auditors noted that this
allocation method was
suggested due to the complexity of developing an
hour-by-hour allocation
to specific programs.
Before the Board, AVCAP also submitted time and attendance sheets
to
support these costs. The time sheets contain typed or
hand-written
notations purporting to show the percentage of time the
employees spent
on various AVCAP programs, including Head Start. We
note that the
percentages shown on the time and attendance sheets are
different from
the percentages formulated by AVCAP's auditors. The
Grantee did not
specifically explain how these percentages were
developed.
As the Agency noted, its auditors questioned the charge for
administrative
personnel costs because AVCAP had neither time
distribution records nor an
indirect cost rate. See OHDS Ex. B. The
Agency maintained that
the time sheets do no more than verify the
employees' attendance on a given
day. OHDS asserted that absent more
specific documentation such as
activity reports it had no way of
confirming that the employees in issue had
devoted any of their time to
the Head Start program. 2/
Under the regulations and applicable cost principles, a grantee bears
the
burden of documenting the allowability of all charges to federal
funds.
45 C.F.R. 74.61; Pennsylvania Dept. of Public Welfare, DAB No.
1089 (1989);
and New York State Dept. of Social Services, DAB No. 1036
(1989).
Absent adequate documentation, the Agency cannot ensure that
federal funds
are being expended for legitimate program purposes. Here,
the Grantee
submitted time sheets which provide only an unsubstantiated
percentage
allocation for each employee's time. The documentation
submitted is not
adequate in light of the Circular's specific
requirements for time
distribution records. Moreover, given the absence
of a negotiated
indirect cost rate for the time period in question, the
Agency reasonably
rejected the percentage allocations developed by
AVCAP's
auditors. Since AVCAP was treating these administrative costs
as
direct costs, the Agency is not required to agree to an increase
in
administrative costs simply based on a general analysis of a
prior
year's activity.
Given the requirements in the cost principles and the absence of any
time
distribution records, OHDS reasonably concluded that the Grantee
had not
substantiated these charges as direct costs to its Head Start
grant.
II. The administrative personnel costs are not allowable on an
indirect
cost basis because AVCAP did not have an approved rate in place for
the
time period in question.
AVCAP argued that these costs were allowable because it had an
indirect
cost rate in effect for the final month (July) of the 1987-1988
program
year. Additionally, during the September 17th telephone
conference,
AVCAP contended that, at its July 18, 1988 meeting, Regional
OHDS
officials had agreed that the costs at issue would be allowable
as
indirect costs. AVCAP asserted that the Agency had gone back on
this
agreement. Consequently, AVCAP argued, the Agency was responsible
for
this disallowance, since AVCAP was not made aware of the fact that
it
would not receive federal funding for these costs until after the end
of
the program year. AVCAP's arguments fail for several reasons.
An indirect cost rate is established on the basis of a grantee's
indirect
cost rate proposal. A proposal must be submitted for each year
in which
indirect costs are claimed. Grantees failing to comply with
this
requirement will be treated as not having a currently effective
indirect cost
rate. See OHDS GAM excerpt at OHDS Ex. D. Additionally,
this
Department's Guide for Non-Profit Institutions sets out the cost
principles
and procedures for establishing indirect cost rates. That
document
states (at page 3) that "[w]here possible, . . . [indirect
cost rate
proposals] should be submitted prior to the date of the award,
and, in no
event, later than three months after such date." See OHDS
Ex. E.
Finally, if a rate is subsequently established, based on the
late submission
of an indirect cost rate proposal, indirect cost
reimbursement will be
limited to the indirect costs applicable to the
period subsequent to the date
the proposal is submitted. See OHDS Ex.
D.
As OHDS noted, AVCAP's budget for the 1987-1988 fiscal year did
not
provide for recovery of indirect costs. Rather, AVCAP's total
approved
budget was comprised of just over one million dollars in direct
costs.
AVCAP did not submit an indirect cost proposal until August 29,
1988,
one month after the end of the program year in issue. A rate
was
eventually approved in November 1988, effective July 1, 1988. 3/
See
AVCAP Reference Item Seven.
Clearly, AVCAP did not follow the procedures necessary for obtaining
an
indirect cost rate for the 1987-1988 program year. The indirect
cost
proposal was not submitted until after the program year in issue
and,
when approved, was effective only for the final month of that
year. In
its brief, AVCAP appeared to assert that because a provisional
indirect
cost rate was set for July 1988, it could be considered to have been
in
effect for the entire year and thus applicable to support its charge
for
administrative personnel costs.
There is no support in any of the applicable cost principles or
guidelines
for AVCAP's rationale. Moreover, even though a provisional
rate was set for
the final month of the program year, the final rate
ultimately set was
0%. In addition, since the administrative costs were
questioned by the
auditors for the time period ending June 30, 1988, the
existence of an
indirect cost rate (even if more than 0%) for a later
period is
irrelevant.
During the September 17th conference, AVCAP also asserted that it
had
signed an agreement with OHDS which would have made these
charges
allowable as indirect costs. AVCAP contended that the Agency's
failure
to follow this agreement and subsequent notification of the denial
of
federal funding after the close of the program year resulted in
this
disallowance.
The Agency asserted that AVCAP's argument was essentially one
of
estoppel. That is, AVCAP relied on an agreement allegedly reached
in
the July meeting as the basis for the allowability of costs
incurred
prior to that meeting. Essentially, AVCAP asserted that OHDS chose
to
ignore this agreement to AVCAP's detriment and thus should be
prevented
(i.e., estopped) from now denying the allowability of these
costs. As
we explain below, the facts do not support the Grantee's
position.
There can be no estoppel absent the traditional requirements of
a
misrepresentation of fact, reasonable reliance, and detriment to
the
opposing party. Heckler v. Community Health Services of
Crawford
County, Inc., 467 U.S. 51, 59 (1984); see also Tennessee Dept. of
Human
Services, DAB No. 1054 (1989). Moreover, estoppel against the
federal
government, if available at all, is presumably not available
absent
affirmative misconduct by the federal government. Schweiker v.
Hansen,
450 U.S. 785 (1981). 4/ There is no evidence in the
record before us
that the Grantee has satisfied the elements necessary to a
showing of
estoppel.
While AVCAP asserted that it had signed an agreement that would have
made
these costs allowable as indirect costs for the 1987-1988 program
year, there
is no evidence of any such agreement in the record. Thus,
there is no
evidence of misrepresentation by OHDS. Similarly, we do not
find
evidence of affirmative misconduct by the Agency.
Additionally, AVCAP repeatedly asserted that the Agency's failure
to
provide written notification of the denial of the budget revision
until
"after the fact" caused this disallowance. AVCAP also contended
that it
was harmed by the manner in which the Agency did communicate the
denial,
in that the person who was initially informed of the OHDS decision
was
not an officer with authority to affect the Grantee's fiscal
operations.
There is no merit to either argument.
On May 16, 1988, the OHDS Community Representative told the AVCAP
Program
Coordinator, by telephone, that the budget revision was denied.
That same
day, the Program Coordinator summarized the call in a
memorandum to AVCAP's
Head Start Executive Director. That memorandum
indicated that OHDS had
denied the budget revision. See AVCAP Reference
Item Three.
Further, AVCAP sought reconsideration of the OHDS decision
on July 1, 1988.
See AVCAP Reference Item Six. While it may have been
advisable for OHDS
to follow up the May 16th call with written notice of
its determination, it
is clear from AVCAP's actions that it had prompt
actual notice of the Agency
decision.
Finally, the Agency's failure to provide AVCAP with written
notification
of the budget revision denial until, as AVCAP phrased it, "after
the
fact," cannot be viewed as having caused this disallowance. 5/
During
the September 17th conference, the Grantee admitted that it had
incurred
the administrative costs at issue here throughout the 1987-1988
program
year. Late in its program year, AVCAP decided to
increase
administrative charges to Head Start but provided no
supporting
documentation. Consequently, AVCAP had no reasonable basis
for
expecting OHDS to fund undocumented costs, in large part
already
incurred, which exceeded the amount for administrative costs
initially
approved in the budget.
Conclusion
As explained above, in the absence of adequate time distribution
records
or an approved indirect cost rate, we conclude that OHDS
reasonably
determined that the administrative costs at issue were
unallowable
charges to the Head Start program. Consequently, we sustain
the entire
disallowance of $13,868.
Cecilia Sparks Ford
Norval D. (John) Settle
Alexander G. Teitz Presiding Board Member
1. OMB Circular A-122 is made applicable by regulation at 45
C.F.R.
74.174(a) (1987).
2. OHDS reiterated this point during the September 17th
telephone
conference. During that conference, AVCAP stated that the
Board had
enough information before it to reach a decision on the
merits.
However, after further reflection AVCAP notified the Board (on
September
21st) that it had more detailed documentation which it could
provide for
OHDS review. During the October 3rd telephone conference,
the Presiding
Board Member stayed the case to permit further review by
OHDS. By
letter dated October 16, OHDS reported that it had completed
its review
of the additional documentation provided by AVCAP. OHDS asserted
that
AVCAP's documentation did not meet the standards in the regulations
and
cost principles for supporting documentation. Rather, OHDS
asserted
that the documentation was "conclusory in nature" and lacked
the
requisite detail necessary to support AVCAP's position. Based on
our
review of the record, AVCAP has had more than sufficient opportunity
to
present for OHDS review any documentation which could affect the
result
here.
3. During the September 17th telephone conference, the
Board
questioned why the effective date of AVCAP's indirect cost plan was
not
August 1, 1988, the beginning of the month the plan had been
submitted
for Agency approval. OHDS indicated that AVCAP's plan had
been given a
July 1 effective date since the Grantee had first notified the
Agency in
July that it would be submitting an indirect cost proposal.
4. In the recent case of Office of Personnel Management v.
Richmond,
110 S. Ct. 2465 (1990), the court deplored the fact that its dicta
on
affirmative misconduct had "spawned numerous claims for
equitable
estoppel in the lower courts." Id. at 2470. While it
cited with favor
the older cases tending to view estoppel against the
government as
impossible (e.g., Utah Power & Light Co. v. United
States, 243 U. S.
389, 408-409 (1917) and Federal Crop Insurance Corporation
v. Merrill,
332 U.S. 380 (1947), the court said it "would leave for another
day
whether an estoppel claim could ever succeed against the
Government."
Richmond, 110 S. Ct. at 2471. In Richmond the Supreme
Court refused to
apply estoppel because it dealt with a claim for payment of
money from
the public treasury contrary to a statutory appropriation.
5. We note that we are aware of no requirement that a grantee
seek
prior approval for this type of budget revision. See 45 C.F.R.
74.105.
In any event, the critical issue here is whether AVCAP could
document
the amount it charged to Head Start, which, as we discuss above,
it
could