Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Columbus County Services Management, Inc.
DATE: April 5, 1996
Docket No. A-95-124
Audit Control No. A-04-93-04183
Decision No. 1567
DECISION
The Columbus County Services Management, Inc. (CCSM)
appealed a decision by the Substance Abuse and Mental
Health Services Administration (SAMHSA) Grant Appeals
Committee of the Public Health Service (PHS review
committee), issued pursuant to 42 C.F.R. Part 50, Subpart
D. That decision upheld a determination by the Center
for Substance Abuse Prevention (CSAP) to disallow
$34,758.98 in federal funds claimed by CCSM during the
period September 30, 1991 through April 30, 1993. The
disallowance was based on an audit performed by the
Office of Inspector General (OIG), Office of Audit
Services.
As discussed below, we sustain the PHS review committee
decision. 1/
I. Background
CSAP, established pursuant to the Anti-Drug Abuse Act of
1986 as an office under SAMHSA, awarded CCSM a Community
Partnership Demonstration Program grant for the operation
of the Alcohol and Drug Prevention Coalition in Columbus
County, North Carolina for a five-year project period
with an initial budget period from September 30, 1991
through July 31, 1992. In July 1992, an additional
award, under the same grant number, was made for the
period August 1, 1992 through April 30, 1993.
The OIG performed an audit of costs claimed by CCSM for
the period September 30, 1991 through April 30, 1993.
The stated purpose of the audit was to determine the
allowability of the claimed costs and to perform a review
of questions raised by a former employee. 2/ The audit
determined that CCSM: (1) made unnecessary renovations
to leased office space; (2) claimed an unreasonable
amount for training in a resort location (St. Thomas);
and (3) made unallowable payments to CCSM employees for
consulting and contractual services. As a result, the
audit recommended that certain financial adjustments be
made to CCSM's grant. While CSAP agreed with the areas
targeted by the audit for financial adjustment, CSAP
reduced the recommended adjustments for renovations to
the leased office space and training. 3/
II. Applicable Authority
The cost principles used to determine allowable costs for
CCSM's grant are set forth in the Office of Management
and Budget (OMB) Circular A-122 (A-122). Attachment
(Att.) A of OMB A-122, provides, in relevant part: 4/
A. Basic Considerations
2. Factors affecting allowability of costs. To be
allowable under an award, costs must meet the
following general criteria:
a. Be reasonable for the performance of the
award and be allocable thereto under these
principles.
* * *
3. Reasonable costs. A cost is reasonable if, in
its nature or amount, it does not exceed that which
would be incurred by a prudent person under the
circumstances prevailing at the time the decision
was made to incur the cost. The question of the
reasonableness of specific costs must be scrutinized
with particular care in connection with
organizations or separate divisions thereof which
receive the preponderance of their support from
awards made by Federal agencies. . . .
The PHS Grants Policy Statement provides that "[a]ll
costs must be reasonable and necessary." PHS appeal
file, tab 2 at 7-1.
Grantees are required under 45 C.F.R. Part 74 to maintain
accurate records of the source and application of funds
for all grant-related activities and have available
source documentation to support these accounting records.
45 C.F.R. 74.61(b) and (g). Moreover, this Board has
long held that a grantee bears the burden of documenting
the allowability of costs charged to federal funds. See,
e.g., Ohio Dept. of Human Services, DAB No. 858 (1987);
Rio Bravo Association, DAB No. 1161 (1990).
OMB A-122, Att. B, provides, in relevant part:
38. Rearrangement and alteration costs. Cost[s]
incurred for ordinary or normal rearrangement and
alteration of facilities are allowable. . . .
The PHS Grants Policy Statement provides that alteration
and renovation costs may be charged to PHS grant
supported projects if, among other things, the alteration
and renovation are essential to the project supported by
the grant. In addition, alteration and renovation costs
are allowable without prior approval from the awarding
component if the amount of project funds rebudgeted for
alteration and renovation during a budget period does not
exceed $25,000. Id. at 7-2 and 7-3.
Finally, with regard to consultant services, OMB A-122,
Att. B, provides, in relevant part:
34. Professional service costs.
a. Costs of professional and consultant services
rendered by persons who are members of a
particular profession or possess a special
skill, and who are not officers or employees of
the organization, are allowable . . . .
The PHS Grants Policy Statement, at 7-5 and 7-6,
provides, in relevant part:
A consultant is an individual hired to give
professional advice or services for a fee but not as
an employee of the hiring party. In unusual
situations, a person may be both a consultant and an
employee of the same party . . . . In order to
prevent apparent or actual conflicts of interest,
grantees and third parties must establish written
guidelines indicating the conditions under which the
payment of consulting fees to employees is proper or
improper. . . .
III. Analysis
A. Renovations of leased office space
The auditors determined that CCSM failed to follow the
requirements of OMB A-122 when it expended $10,046 for
renovation of office space leased from a local newspaper
company. The audit report concluded that nonessential
items were installation of chair rail, window valances,
soundproofing wall panels, acoustical tile ceiling, and
wallpaper. CCSM attachment (Att.) J at 3. The auditors
recommended that CCSM refund unnecessary renovation
expenses and take steps to ensure that unallowable costs
of this type are not claimed in the future. CCSM Att. J
at 4.
After review of the audit report, CSAP allowed $4,326.02
expended for the purchase and installation of
soundproofing panels and casing for a back door to comply
with handicap regulations. PHS review committee decision
(PHS dec.) at 5. CSAP disallowed the remaining $5,719.98
as unreasonable charges to the grant: $2,118.25 for
wallpaper, liner, and installation; $80.18 for a picture
frame; $1,361.57 for window valances; $935.58 ($897.37
and $38.21) for building materials; $162.50 for labor to
install chair rail; and $1,061.90 for wallpaper, liner,
and chair rail.
In sustaining CSAP's disallowance, the PHS review
committee stated that, although certain cost categories
may be allowable charges to a grant, the costs themselves
must always meet the test of reasonableness and be
consistent with policies and procedures that apply
uniformly to both federally financed and other activities
of the organization. PHS dec. at 8. The PHS review
committee relied on the PHS Grants Policy Statement and
OMB A-122, Att. A, A.2. and A.3., as support for its
conclusion that CCSM did not submit adequate
justification to substantiate the reasonableness of the
costs. Id.
CCSM has made, essentially, the same arguments to the
auditors, the PHS review committee, and this Board. CCSM
argued that both the PHS Grants Policy Statement and OMB
A-122 provide that renovation costs are allowable. CCSM
further argued that the renovation costs were
"reasonable" and "prudent" and quoted definitions of
these terms from Black's Law Dictionary. 5/
CCSM also asserted:
After consulting the applicable policies, the
decision to keep the working environment in
efficient operating condition and to improve working
conditions and employee morale as cited in A Guide
for Nonprofit Organizations by US Department of
Health and Human Services, May 1983 seemed
reasonable and prudent. This is especially
applicable when combined with the PHS Policy
Statement 7-2 which makes the action allowable.
CCSM Br. at 3. Further, CCSM contended that the
renovation seemed reasonable since the rent it paid for
the space was only one half the market value of
comparable space in the area. Id. Finally, CCSM argued
that it has no money. Moreover, CCSM asserted that it
now has all new board members.
PHS argued before the Board that CCSM still has not
provided any additional information that would support
the reasonableness of the costs in question. PHS
asserted that the definitions quoted by CCSM do not
change the finding at issue here. Instead, PHS argued,
CCSM was required to comply with the applicable
authority, which it did not do. PHS asserted that
whether CCSM acted in good faith is not the standard and
is irrelevant to the issue here.
As previously stated, this Board has long held that a
grantee bears the burden of documenting the allowability
of costs charged to federal funds. CCSM did not meet
this burden here. While CSAP determined that some of the
renovation costs were reasonable because they improved
the environment for CCSM's employees, CSAP reasonably
determined the disallowed renovation costs to be, in
effect, luxury items that were not necessary to carry out
grant activities. Further, contrary to CCSM's argument,
the fact that CCSM's rent was low does not entitle CCSM
to charge to the grant other costs which were not
themselves reasonable or necessary. There is no basis in
the record here to conclude that costs for these types of
decorative items were reasonably related to the project
purposes of developing strategies for the prevention of
drug and alcohol abuse.
Furthermore, while it is unfortunate that CCSM may have
no money to repay the disallowance, the Board does not
have the authority to forgive a disallowance on this
basis. 6/ See Guam Dept. of Public Health and Social
Services, DAB No. 1050 (1989). Nor is the fact that all
of CCSM's board members have been replaced determinative
in this case. CCSM presumably meant that the new board
members would exercise more prudence in incurring costs
in the future. As the Board has previously stated,
however, we decide only the merits of the dispute between
parties. The Board has no authority to waive a
disallowance because improvements have been made in
program administration after the disallowance period.
See, Guam, supra; District of Columbia Dept. of Human
Services, DAB No. 1323 (1992). 7/
B. Training costs
The audit report determined that CCSM failed to follow
the requirements of OMB A-122, Att. A, A.2. and A.3.,
with respect to expenditures for training in St. Thomas.
8/ The auditors found specifically that CCSM claimed
$8,843 for six employees and a consultant to travel to
St. Thomas for a 2-day team building workshop. CCSM Att.
J at 5. The auditors concluded that if CCSM had
conducted the meeting in Whiteville, North Carolina
(CCSM's location), the cost of the training would have
been approximately $1,496. 9/ The auditors recommended a
financial adjustment of $7,347 ($8,843 minus $1,496).
After review of the audit report, CSAP allowed $458 for
the rental of equipment used during the training session.
10/ CSAP disallowed the remaining $6,889 of the
auditors' recommended adjustments as unreasonable charges
to the grant.
In sustaining CSAP's disallowance, the PHS review
committee stated that CCSM did not submit adequate
justification to document the reasonableness of the
costs, e.g., a detailed cost comparison between in-season
and off-season sites including a comparison of costs of
travel by air versus auto. Moreover, the PHS review
committee took specific note of the audit report's
finding that CCSM violated its own travel policies
regarding per diem charges for the St. Thomas trip.
CCSM has made, essentially, the same arguments to the
auditors, the PHS review committee, and this Board. CCSM
maintained that the "team building training in question
was not just a training but was a retreat which is a
special kind of training necessitating a different
environment." CCSM Br. at 4 (emphasis in original).
CCSM argued that long range plans for this training could
not be made because funds were not available until June
and that, by that time, there were no vacancies at nearby
locations. Further, CCSM asserted that recent inquiries
to area locations indicated that lodging costs ranged
between $99 and $279. 11/ Thus, CCSM concluded that,
except for travel, the costs were in line with what CCSM
would have paid to hold the training locally.
PHS argued before the Board that CCSM still has not
provided any additional information that would justify
the reasonableness of the costs in question.
As noted previously, CCSM bears the burden of documenting
the allowability of costs charged to federal funds. OMB
A-122, Att. A, A.2. and A.3., provides that, in order to
be allowable, costs must be reasonable and necessary for
the performance of the award. CCSM has not met its
burden. CCSM did not provide any documentation to
support its assertion that there were no suitable nearby
locations available (which would have made airfare
unnecessary). Moreover, while CCSM argued that, except
for travel (i.e. airfare), the costs of the training were
in line, CCSM did not address PHS' finding that CCSM
violated its own policies regarding per diem charges in
effect at the time. Since the per diem costs for the
trip apparently exceeded what CCSM had determined to be a
reasonable amount, we cannot find that the excess per
diem costs were reasonable within the meaning of OMB
A-122.
CCSM did not dispute the correctness of the $1,496
allowed as representing the costs of such training had
the meeting been held locally. Therefore, the issue here
is not whether the costs associated with management
retreats are allowable. Rather, the issue here is
whether the particular additional costs associated with
holding such a retreat at an off-shore resort were
reasonable. The auditors stated that "CCSM [had not]
acted with prudence when they planned a meeting in an
expensive resort area." CCSM Att. J at 7. The record
before us contains no justification for the additional
costs associated with the resort location. Thus, CCSM
has failed to show that any of the disallowed training
costs were reasonable.
C. Consulting/contractual costs
The audit report determined that CCSM failed to follow
the requirements of OMB A-122 and its own policies when
it paid CCSM board members and employees $22,150 for
consulting or contractual services in addition to any
regular salary payments. The auditors found that CCSM
had not analyzed the need to hire consultants or
contractors and did not use a competitive selection
process or written consulting agreements, as required by
CCSM's policies and procedures manual. In addition, the
auditors found that the employees did not keep records of
the time expended on the consultant activities. CCSM
Att. J at 9-10. CSAP disallowed the $22,150 recommended
by the auditors. The disallowed amount includes $1,080
paid for janitorial services to an employee/officer for a
six-month period. All other consulting costs were for
writing, editing, or typing of grant proposals. 12/
In sustaining CSAP's disallowance, the PHS review
committee stated that CCSM acknowledged that it did not
follow its established policy on hiring consultants or
contractors. The PHS review committee relied on the PHS
Grants Policy Statement and OMB A-122, Att. B, 34.a., as
support for its conclusion that CSAP's disallowance was
correct.
CCSM has made, essentially, the same arguments to the
auditors, the PHS review committee, and this Board. CCSM
argued that it contracted from in-house because it was
more economical. CCSM also asserted that most consulting
costs were caused by an "operational bottleneck while
trying to prepare several bids and proposals" during the
summer of 1992. CCSM Br. at 6. Further, CCSM maintained
that there was a "conflict" between CCSM policy and PHS
policy. 13/ CCSM contended that PHS policy allowed the
use of employees as consultants and that CCSM acted in
good faith when it followed PHS' policy instead of its
own policy. 14/ Finally, CCSM argued that it had
provided "some time sheets and invoices" that supported
its position that the services were performed. CCSM Br.
at 8. See CCSM Att. H.
PHS argued before the Board that there is no information
in CCSM's submission which supports a finding that CCSM
followed its own policy or met the requirements of the
PHS Grants Policy Statement and OMB A-122.
OMB Cir. A-122, Att. B, 34.a., provides that costs of
consulting services are allowable when rendered by
persons who are not officers or employees of the
organization. However, the PHS Grants Policy Statement
provides for a limited exception so that in unusual
situations a person may be both a consultant and an
employee. CCSM has not provided any evidence to show how
its circumstances would qualify as "unusual" so as to
require the hiring of employees as consultants. The mere
allegation that it was more economical to hire employees
is not sufficient to establish that an unusual situation
existed. Moreover, the allegation of an "operational
bottleneck" is too vague and provides no explanation that
would show that the bottleneck was unavoidable. Thus, we
find no merit in CCSM's argument that it followed PHS
policy.
Additionally, however, CCSM failed to justify the use of
consulting or contractual services in general, as
required by its own policy, since CCSM submitted no
contemporaneous analysis of the need to hire any
consultants. CCSM's violation of its own policy would be
an additional basis supporting the disallowance.
In addition, we note that CCSM submitted one vendor/payee
sheet, two monthly time sheets and six invoices to
support its argument that the services were performed and
allowable costs incurred. The vendor/payee sheet listed
four individuals and the amounts paid to each individual.
With the exception of the payment for janitorial
services, all of the payments were for consulting
services in amounts ranging from $470 to $6,000. 15/ The
two monthly time sheets listed by day the hours that one
individual worked, but did not provide any information on
the type of work performed. The six invoices generally
stated only the amount due for developing and/or writing
a particular grant proposal. See CCSM Att. H. Further,
CCSM submitted minutes from its Board of Directors
meeting that approved the payment for the janitorial
services and set the approved fees for proposal writing,
editing and typing services (e.g., approval for a $6,000
fee for writing a large grant proposal). See Att. F.
The documentation submitted by CCSM does not support a
finding that the disputed costs were reasonable or
necessary charges to this grant, one to develop substance
abuse avoidance strategies. Contrary to CCSM's argument,
OMB A-122 does not provide for payment of consulting fees
based on CCSM's belief that its circumstances presented a
need to pay compensation for one time or extra pay shifts
to complete grant proposals. Instead, costs must be
claimed, and determined allowable, within the proper
category in accordance with the applicable cost
principles.
The auditors found that all costs were claimed as direct
costs of this grant. However, the record indicates that
CCSM was confused about the charging of indirect costs.
16/ It appears that CCSM may have originally thought
that these costs could be claimed as indirect even though
they did not meet the allowability requirements in the
cost principles. However, consultant/contractual costs
not meeting the requirements of applicable cost
principles are not allowable as direct or indirect costs.
In addition, we question whether costs to obtain other
grants were reasonable and necessary costs to this grant-
supported project.
Thus, we conclude that CSAP's disallowance of these costs
was proper.
Conclusion
Based on the foregoing analysis, we uphold the
disallowance of $34,758.98.
Judith A. Ballard
Norval D. (John) Settle
Cecilia Sparks Ford
Presiding Board Member
1.
Since the PHS review committee decision is based on the
same authority and reasoning used by CSAP in its
decision, we refer solely to the former decision.
2.
The OIG auditor stated that a former employee raised
questions regarding excessive part-time salaries,
conflict of interest, nepotism, renovation costs and
travel to exotic places by CCSM officials.
3.
The auditors recommended a total of $39,951 for
financial adjustment. However, CSAP allowed $4,784.02 of
the recommended financial adjustment and CCSM repaid
$408, which reduced the recommended financial adjustment
to the current disallowance amount.
4.
OMB A-122 is made applicable to the grant in question
here by 45 C.F.R. 74.174. Prospective applicants were
notified in the PHS request for applications that 45
C.F.R. Part 74 would be applicable to grant awards to
non-profit agencies. Prospective applicants were also
notified that "[g]rants must be administered in
accordance with the PHS Grants Policy Statement (Rev.
January, 1987)." See PHS appeal file, tab 4 at 19-20.
Further, the PHS Grants Policy Statement provides that
OMB A-122 is applicable to this grant. See PHS appeal
file, tab 2, PHS Grants Policy Statement at
7-1.
5.
Specifically, CCSM stated, in relevant part:
reasonable is defined as "...fair, proper, just,
moderate, suitable under the circumstances. Fit and
appropriate to the end in view. Having the faculty
of reason: rational; governed by reason; under the
influence of reason; agreeable to reason. Thinking,
speaking, or action according to the dictates of
reason. Not immoderate or excessive, being
synonymous with rational, honest, equitable, fair,
suitable, moderate, tolerable. . . ."
prudent is defined as "...sagacious in adapting
means to end; circumspect in action, or in
determining any line of conduct. Practically wise,
judicious, careful, discreet circumspect
sensible. . . ."
CCSM brief (Br.) at 2.
6.
While the Board has no authority to forgive a debt to
the Department, we direct the parties' attention to the
Federal Claims Collection Act regulations at 45 C.F.R.
Part 30 which implement the authority to suspend,
compromise, or terminate debt collection actions.
7.
In the Board's acknowledgment of this appeal, dated
June 2, 1995, the Board informed CCSM of these decisions
and sent copies to CCSM. Additionally, in that
acknowledgment, the Board invited CCSM to comment on the
applicability, if any, of these decisions to this appeal.
CCSM did not address these decisions in its submission.
8.
The auditors also noted that in connection with other
travel CCSM claimed $408 for meals that were provided at
no cost, and CCSM agreed with the auditors. CCSM Att. J
at 7. Thereafter, CCSM repaid the $408 and did not
appeal that amount to the PHS review committee. Before
this Board, CCSM nevertheless argued that OMB A-122 would
permit the charge. Since this amount has been repaid and
was not raised with the PHS review committee, we do not
reach this argument.
9.
The auditors determined that $322 would have been
attributable to costs for the employees and $1,174 to
costs for the consultant. See PHS appeal file, tab 1,
auditor workpaper entitled "REVIEW OF TRAVEL COSTS - ST.
THOMAS TRIP."
10.
Although the auditors did not indicate that the $8,843
included an amount for rental equipment, CSAP
nevertheless determined that this amount was allowable
for costs of rental equipment based on an explanation
from CCSM. See PHS appeal file, tab 1, memo to the file-
-SPO4143, dated 10/17/94.
11.
While CCSM stated that its research indicated a range
for lodging between $99 and $279, CCSM did not indicate
where in this range its costs ranked.
12.
CCSM did not argue that the janitorial services costs
were distinguishable from the disputed consulting costs
for grant proposals. Further, there is no basis in the
record for finding that the grant proposals were related
to the funded project, since a typical title was "FOR
OSAP HIGH RISK YOUTH GRANT WINNERS FOR LIFE: STRATEGIES
FOR SUCCESSFUL LIVING." CCSM Att. H.
13.
The audit report stated that CCSM's policies and
procedures manual, effective in June 1991, requires a
concise written analysis of the need to engage a
consultant or contractual service before engaging these
services. This analysis should contain particular
emphasis on why it is necessary to engage such service
rather than doing the work in-house. CCSM Att. J at 9.
14.
CCSM mistakenly relied, in part, on OMB A-122
provisions on compensation for personal services which
cover employee compensation and do not apply here.
15.
One person received one payment for janitorial services
and two payments for consulting services. The other
three each received two payments for consulting services.
16.
In general, an indirect cost claiming process is used
to distribute to benefiting programs allowable costs not
clearly identifiable with any one cost objective.