#  **It's The Law**

##  Office of the Assistant General Counsel for Finance and Litigation

**Federal Assistance Law Division**

Vol 6 November 3, 1995

### Say What You Mean

by Joseph Levine

"Say what you mean and mean what you say." A simple prescription for
clarity and understanding, but, as we shall see, often very difficult in
application. On September 13, 1995, the Fifth Circuit Court of Appeals,
in a two to one decision, reversed a District Court's decision granting
summary judgment for the government in the case of *Institute for
Technology Development v. Brown*. Although the unique factual
circumstances involved should minimize the precedential impact of this
decision, it does raise some important issues we need to consider in
crafting award language which deviates from the "norms" set forth in
applicable OMB Circulars. This article is intended to acquaint you with
substance of the Fifth Circuit decision and raise some issues we need to
consider regarding the wording of Department of Commerce special award
conditions.

BACKGROUND:

Between 1985 and 1988, in response to language in its Appropriations
Acts, EDA awarded a series of five grants to the Mississippi Institute
for Technology Development ("ITD"). The grants, made under EDA's
demonstration project authority (42 U.S.C. § 3151(f)), were to "perform
initial Institute staffing, planning and implementation". Each award
incorporated relevant OMB Circulars, including A-122. Each award also
included a clause providing that the award "can be used only for the
research project approved by the Economic Development Administration
(EDA) and in conformity with the approved research budget", and,
consistent with Congressional intent that the funds be used only to pay
for the "start up costs" of ITD, included a clause prohibiting the use
of Federal funds "to pay for capital assets or other items not treated
as expenses under accepted accounting principles".

In response to an OIG audit, EDA disallowed over one million dollars in
costs claimed by ITD. In its appeal, ITD requested that it be allowed to
substitute unclaimed depreciation for much of the disallowed costs (a
recipient may substitute other allowable costs for costs which have been
disallowed, subject to any applicable cost ceiling. *2 United States
General Accounting Office Principles of Federal Appropriations Law
10-75* (2d ed. 1992)). In her final audit appeal determination, the
Assistant Secretary for Economic Development denied this request,
concluding that the above quoted award clauses supported the conclusion
that depreciation was not intended to be an allowable cost under the
awards. ITD filed suit, in U.S. District Court for the Southern District
of Mississippi, seeking review of this conclusion under the
Administrative Procedure Act. Applying the "arbitrary or capricious"
standard set forth in 5 U.S.C. § 706(2)(A), and giving deference to the
agency's decision, the District Court granted summary judgment for the
government. On appeal, in a two to one decision, the Fifth Circuit
reversed.

The majority decision in the Fifth Circuit concluded that the issue was
a question of law (interpreting the terms of the agreement and OMB
Circular A-122, which the Court erroneously described as a
**regulation** of a different agency). Consequently, the majority
concluded that it owed **no** deference to the agency's determination
and it reviewed the matter *de novo*. The majority then decided that
since the award was silent on the question of depreciation (apparently
concluding that the special award conditions quoted above had no bearing
on the issue), A-122 was specifically incorporated into the award, and
A-122 recognized depreciation as an allowable cost, the District Court
decision was incorrect and the case was remanded to that court where ITD
will seek to prove its claims for depreciation.

ISSUES:

It is important to note that the sole issue in this case was the
question of whether ITD was entitled to claim depreciation as a
substitute cost. Not other issues concerning the audit or disallowed
costs were before the Court, nor did the court decide the merits of
ITD's claims for depreciation. It also must be stressed that, although
the Assistant Secretary determined that depreciation was not intended to
be an allowable cost under these awards and cited the above quoted
clauses as support for this determination, depreciation was not
specifically mentioned anywhere in the award documents other than the
above noted reference in A-122. With these points in mind the question
is "What should the Department have done to prevail in this case?"

With the benefit of "20-20 hindsight" it is easy to conclude that the
Department should have specifically prohibited depreciation as an
allowable cost under these awards and specifically noted an exception
from the depreciation provisions of paragraph 9 of Attachment B of
A-122. Unfortunately, few possess the prescience needed to specifically
address such unanticipated issues in award conditions. However, since
this decision clearly indicates that courts are willing to substitute
their judgment for that of the program officials in the interpretation
of award language, it is important that our awards, particularly where
we wish to impose terms that differ from the general principles
contained in the OMB Circulars, use clear language that is unlikely to
be misinterpreted by subsequent tribunals.

Obviously, if program legislation so requires, awards may deviate from
the cost principles established in OMB Circulars. The question as to
what extent agencies may deviate from the cost principles in other
cases, is less clear. The various circulars establishing cost principles
state that they are intended to promote uniformity among agencies and
excerptions are discouraged (see *e.g.,* the preamble to A-122, 45 Feg.
Reg. 66022 (1980), and paragraphs 1, 3 and 8 of that Circular). On the
other hand, paragraph 2.b. of Attachment A speaks of "limitations and
exclusions" in the award, and the Uniform Administrative Requirements,
15 CFR § 24.6 (c) and paragraph \_\_.4 of A-110, both allow agencies to
make case-by-case exceptions.

The best interpretation of these provisions is that while an agency may
not create general exceptions to the cost principles without OMB
approval, it may limit the amounts of particular costs it will pay under
awards (*e.g.* indirect costs may not exceed 100% of direct), and, in
individual awards, create exceptions for sound programmatic reasons.
This conclusion is also supported by paragraph 5. *Policy* of new
Circular A-87 (60 Fed. Reg. 26489 (1995)) which states:

"This Circular establishes principles and standards to provide a uniform
approach for determining costs and promote effective program delivery,
efficiency, and better relationships between governmental units and the
Federal Government. The principles are for determining allowable costs
only. **They are not intended to identify the circumstances or to
dictate the extent of Federal and governmental unit participation in the
financing of a particular Federal award.**" (Emphasis supplied)

Thus, when we are faced with situations where we want to deviate from
the basic

cost principles, it is imperative that we carefully examine the language
of proposed special award conditions to ensure that they are clear,
justified and accomplish the desired objective. In situations such as
that faced by EDA in the award to ITD, where we wish to exclude a
certain category of cost, armed with the knowledge that substitute costs
may raise unanticipated issues (now we know what we meant to say), one
possible solution might be to draft a special award condition
specifically addressing deviations from the applicable Circular
treatment of a specific cost item and/or limiting substitute costs only
to budget categories contained in the approved budget submitted by the
applicant.

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