Southern Regional Education Board, DAB No. 455 (1983)

GAB Decision 455

July 29, 1983 Southern Regional Education Board;  Docket No. 83-41
Settle, Norval;  Teitz, Alexander Ford, Cecilia

   The Southern Regional Education Board (SREB) appealed a decision by
the Regional Director, Region IV, sustaining a determination by the
Region IV Division of Cost Allocation (DCA, Agency) which unilaterally
set an indirect cost rate effective date.  /1/ The Board held a
conference call as provided for in 45 CFR 16.12, so that each party
could comment on the other's submission.  We retained the tape of that
conference call for the record.  As explained below, we determine that
DCA incorrectly applied the requirements for the submission of indirect
cost rate proposals and the negotiation of rates.  Accordingly, the
Board sustains the appeal.

Background

   The record shows that it was SREB's practice to submit an indirect
cost rate proposal each year, within six months of the close of its
fiscal year.  (Appellant's Letter, April 13, 1983) /2/ Based on the
proposal submitted on December 10, 1981, DCA and SREB entered into a
Negotiation Agreement dated February 3, 1982 which set a final indirect
cost rate for FY 81 (July 1, 1980 -- June 30, 1981) but set no
provisional rate for FY 82.  Rather, the agreement stated:

   (2) Effective July 1, 1981, this institution does not have active
grants or contracts with the Federal Government which need a negotiated
indirect cost rate.  However, if a grant or contract which requires a
rate is awarded . . . a new rate will be established at that time.

   In fact, however, a grant awarded effective September 1, 1981 by the
United States Department of Education did provide for payment of actual
indirect costs.  The parties both recognize that had this grant been
taken into account, a provisional rate would have been set for FY 82 in
the Negotiation Agreement.

   Although DCA stressed that it was not its responsibility to determine
whether or not a rate is necessary for a paticular time, SREB's
accountant stated that the DCA negotiator had informed him, during their
discussions leading to the February 3, 1982 agreement, that DCA's own
information showed that, as of July 1, 1981, SREB had no grants or
contracts requiring a provisional rate for FY 82.  According to SREB's
accountant, the DCA negotiator suggested that a provisional rate for FY
82 was not necessary;  the DCA negotiator apparently stated that only
final rates were being given, when possible, due to the phase-out of his
office.  SREB's accountant also stated that he had recognized that they
had no grants or contracts requiring a rate as of July 1, 1981, but that
he had mentioned the Education grant to the DCA negotiator and indicated
that, although this grant carried a rate in excess of 90%, he was unsure
whether the rate was predetermined or was to be adjusted to reflect
actual costs.  According to SREB's accountant, SREB received no
guidelines concerning payment of indirect costs under the Education
grant and actually learned some time in March of 1982 that this grant
did provide for payment of actual indirect costs.  (Conference Call
Tape)

   SREB's accountant stated that SREB signed the February 1982
Negotiation Agreement based on (1) its reading of the OASC-5 as
requiring submission of its proposal within six months of the close of
FY 82 in order to obtain a rate for FY 82, (2) the last paragraph in the
DCA letter accompanying the Negotiation Agreement which stated that a
proposal was required to be submitted for each fiscal year for which
indirect costs would be claimed, and (3) the DCA negotiator's knowledge
that the Education grant might require a rate.  (Conference Call Tape)

   On November 18, 1982, SREB submitted an indirect cost rate proposal
for FY 82 (July 1, 1981 -- June 30, 1982).  The letter forwarding this
proposal noted that SREB had received a new grant effective September 1,
1981.  DCA then prepared a Negotiation (3) Agreement setting a
provisional rate effective November 1, 1982 and setting no final rate
for FY 82;  SREB disagreed with the terms of the agreement and appealed
the unilateral determination setting the effective date for a
provisional rate on November 1, 1982 and setting no final rate for FY
82.  SREB asserted that a final rate should have been established for FY
82, effective July 1, 1981, and stated that the absence of a final rate
precluded SREB from recovering $4,887.42 in indirect costs under the
Education grant it received during FY 82.  /3/

Requirements and Policies for Establishing Indirect Cost Rates

   For non-profit institutions, such as SREB, the requirements and
policies concerning the submission of indirect cost rate proposals and
the negotiation of rates are stated in the cost principles in OMB
Circular A-122, the OASC-5 ("A Guide for Non-Profit Institutions"), and
the Grants Administration Manual.

   A provisional rate is a temporary billing rate used as a basis for
estimating and funding indirect costs.  Adjustments are made to reflect
the final rate which is established based on an institution's actual
costs for the accounting period involved.  Institutions routinely
requiring the establishment of rates submit proposals yearly, within six
months of the close of their fiscal year.  Institutions without
previously established rates submit their proposals within three months
of the award of a grant or contract requiring a rate.  The OASC-5
states:

   Requirement for Submission of Indirect Cost Proposals

   Each institution claiming reimbursement for indirect costs must
submit an indirect cost rate proposal to document how it derived the
(rates) it used to compute its claim.

   The failure of an institution to submit timely proposals may result
in the disallowance of costs previously awarded.  Further, awards made
during a period for which an institution does not have a current
indirect cost rate will not (4) include an amount for indirect costs.
If a rate is subsequently established, based on the late submission of
an indirect cost proposal, indirect costs on DHEW awards will be
provided only for the period beginning with the first day of the month
in which the proposal is submitted.

   * * *

   An institution that has not previously established an indirect cost
rate with the Department must submit its initial proposal . . .
immediately after being notified that an award providing reimbursement
for indirect costs will be made.  Where possible, this proposal should
be submitted prior to the date of the award, and, in no event, later
than three months after such date.  If initial proposals are submitted
within the three month period, indirect costs will be reimbursed for the
full award year.  If initial proposals are not submitted within the
three month period, indirect costs will be irrevocably lost for all
months prior to the month that the indirect cost proposal is submitted.
. . .

   An institution that has previously established an indirect cost
(rates) with the Department must submit a new proposal . . . within six
months after the close of each fiscal year in which a grant or contract
is performed. . . .

   (Pages 3-5)

   OMB Circular A-122 provides for the negotiation of indirect cost and
other rates by one designated agency but the use of such rates by other
agencies as well.  The Circular also contains the three and six month
deadlines for proposal submission.  (Attachment A, E.2.a., b., and c.)
The OASC-5 further provides for extensions of time for the submission of
proposals under extenuating circumstances.  Review of the requirements
and policies in general reveals an orderly but flexible process for the
negotiation and establishment of necessary rates.

Analysis

   DCA concluded that by signing the February 3, 1982 Negotiation
Agreement SREB had agreed to the termination of its indirect cost rate
effective July 1, 1981.  Accordingly, reasoned DCA, based on the OMB
Circular and OASC-5, a new rate was required to be established based on
the proposal submitted during November 1982.  DCA stated:

   (5) . . .  Since you failed to submit your proposal within three
months after September 1, 1981, we must comply with . . .  OASC-5 which
provides that indirect costs will be provided only for the period
beginning with the first day of the month in which the proposal was
submitted.  Since your proposal was submitted on November 18, the
effective date of your indirect cost rate must be November 1, 1982.

   (January 12, 1983 letter from DCA to SREB, Attachment D to
Appellant's Letter)

   At the time the Education grant was awarded, SREB was an institution
which had "previously established an indirect cost (rates)", so that its
proposal for FY 81 was due by December 31, 1981.  The Agency admitted
that the proposal submitted December 10, 1981 for FY 81 was timely.
(Respondent's Letter, April 21, 1983) Yet, DCA, using hindsight, applied
a three month deadline ending December 1, 1981, concluded it must
disregard the December 1981 proposal because it resulted in a
Negotiation Agreement which did not set a provisional rate, and
concluded that the proposal it should relate to the Education grant was
the one submitted in November 1982 which, the Regional Director's final
decision stated, was almost fifteen months late.  /4/

   We conclude that in establishing an indirect cost rate based on the
proposal submitted in November 1982, DCA cannot reasonably disregard the
timely submission of the prior year's proposal and decline to set a
final rate for FY 82, effective July 1, 1981.  DCA must recognize that
had the parties considered the Education grant, a provisional rate would
have been set for FY 82 so that a final rate would have been routinely
set based on the November 1982 proposal.  In concluding that it was
necessary to establish a "new" rate which could not be effective prior
(6) to November 1, 1982, DCA mechanically applied time limits to
preclude the establishment of a final rate for FY 82 where the limits
did not clearly govern.

   The Agency relied on Franklin C. Fetter Family Health Center,
Decision No. 99, May 19, 1980.  There the grantee claimed indirect costs
for a time it had no rate but could have established one;  that grantee
argued that it was a hardship to absorb the costs, and, in any event,
its claim was at a rate much lower than its provisional rate established
for several years later.  The Board concluded that equitable arguments
were not a basis for the Board to disregard a legal requirement that
indirect costs be claimed based on a properly established rate.  The
Agency argued that "(while) it is unfortunate that the SREB failed to
seek an FY 1982 provisional rate because of misinterpretation of grant
terms", the legal requirement here is that indirect costs not be allowed
prior to November 1, 1982.  /5/ (Respondent's Letter, April 21, 1983)

   We disagree;  the issue here does not concern whether indirect costs
were claimed based on a properly established rate, but rather concerns
whether the Agency must in fact agree to establish a rate.  Here
provisional and final rates were routinely set for SREB each fiscal year
based on the yearly indirect cost rate proposal.  The circumstances of
the parties' negotiations and SREB's decision to sign the February 3,
1982 agreement lead us to conclude that the agreement does not, in fact,
manifest SREB's intention to terminate its indirect cost rate as of July
1, 1981.  The Agency has pointed to nothing in the OASC-5 or elsewhere
that requires us to conclude that merely because the parties failed to
set a provisional rate, for which they both bear some responsibility, a
final rate may not be set despite SREB's pattern of yearly submitting
proposals and negotiating rates.

   In addition, the language in the February 1982 agreement concerning
establishing a new rate upon the award of a grant or contract requiring
one does not require us to conclude that the Agency need not set a final
rate for FY 82.  This provision was premised on an incorrect
understanding of the actual facts since the contingency it provided for,
i.e., the award of a grant requiring a rate, had already occurred.
Furthermore, the (7) Agency cannot claim that it is surprised or
disadvantaged here since, having set a final rate for FY 81, it knew
what the provisional FY 82 rate would have been.

   In concluding that a final rate should be set for FY 82, we do not
set any general precedents concerning retroactive indirect cost rates or
indirect cost claims for time periods where no rates were established.
We simply conclude that, in the facts of this case, the Agency
incorrectly applied the requirements for the submission of proposals and
negotiation of rates.  Accordingly, this appeal is sustained.  /6/

        /1/ Under the informal grant appeals procedures in Subpart A of
45 CFR Part 75, the Regional Director issued this final decision as a
reconsideration of the determination by the Division of Cost Allocation.
/2/ Appellant discusses the "customary pattern of events" concerning the
submission of proposals and the negotiation of provisional and final
rates in its April 13, 1983 letter to the Board.  Appellant also
submitted its indirect cost rate proposals for FYs 80, 81, and 82 and
the negotiated agreements prepared by DCA for FYs 79, 80, 81, and 82.
(Attachments F -- R to Appellant's Letter) During the conference call
the parties referred to appellant's 10-year long "unbroken string" of
proposals and rates.         /3/ SREB also argued in the alternative
that the effective date should be set on September 1, 1981, the
effective date of the Education grant, or December 1, 1981, the first
day of the month the FY 81 proposal was submitted.  Since we are
sustaining the appeal, we do not discuss these alternate dates.
/4/ During the conference call SREB's accountant stated that SREB was
not notified about award of the Education grant until on or after
September 10, 1981.  Accordingly, we conclude that the December 10, 1981
proposal was made within three months from the time SREB received notice
of the award of the grant.  This is of interest but not directly
pertinent to our analysis since, as stated above, the FY 81 proposal
was, in fact, timely.  In any event, the parties would not have known
during the fall of 1981 to apply the three month deadline because SREB's
status as an institution previously having a rate made its submission
due within six months of the close of the fiscal year, by December 31,
1981.         /5/ Appellant did not agree that it "failed to seek" a
provisional rate, explaining that provisional rates, at the level of the
prior year's final rate, had always been set in the past without an
explicit request and that here the DCA negotiator had "suggested" that
SREB did not need a provisional rate.         /6/ The Board's
regulations at 45 CFR 16.12(d) provide special expedited procedures for
appeals of $25,000 or less where the Board reviews a decision by "a
board or other relatively independent reviewing authority" which
conducts a "formal preliminary review process which results in a written
decision based on a record . . .  after reasonable notice. . . ."
Section 16.12(d) provides, inter alia, that unless the Board makes
certain determinations it will limit its review to whether the decision
reviewed is clearly erroneous.  The Presiding Board Member mistakenly
informed the parties during the conference call that the special
expedited procedures should apply to this appeal.  In fact, final
decisions resulting from the review process in 45 CFR Part 75 have not
generally involved a particular amount in dispute and the Board has not
considered its section 16.12(d) procedures to apply to these disputes.
The parties here had a full opportunity to present their arguments and
we do not believe that the erroneous citation to section 16.12(d) had
any effect on the handling of this case.

NOVEMBER 14, 1984