Metropolitan Beaverbrook Mental Health and Retardation Services, Inc., DAB No. 291 (1982)

GAB Decision 291

April 30, 1982 Metropolitan Beaverbrook Mental Health and Retardation
Services, Inc.; Docket No. 81-188 Ford,Cecilia; Teitz,Alexander
Garrett, Donald


Metropolitan Beaverbrook Mental Health and Retardation Services, Inc.
(Appellant) appealed a decision by the Public Health Service (PHS) Grant
Appeals Board (Respondent) upholding the disapproval of its request to
rebudget $60,500, awarded under a Community Mental Health Centers grant,
in order to purchase data processing and office equipment. (PHS
Decision No. 81-2, undated but transmitted to Appellant by letter dated
September 22, 1981.) Appellant submitted its rebudgeting request less
than two weeks before the expiration of both the grant budget and
project periods. The PHS Grant Appeals Board found that the request was
properly disapproved since it was not submitted" . . . in sufficient
detail and in a manner timely enough to permit adequate review for the
purpose of determining whether the equipment would be of benefit to the
project during the period of Federal support." (Decision No. 81-2, p.
6.) As discussed below, we sustain Respondent's decision on the ground
that, even assuming that the rebudgeting request was sufficiently
detailed and timely, expenditures for equipment made immediately before
the expiration of the grant could not have been allocable to the grant.

The September 22, 1981 letter transmitting the PHS Grant Appeals
Board decision advised Grantee that it could appeal to the Departmental
Grant Appeals Board under 45 CFR Part 16. Section 16.5(a)(3) of
regulations in effect until September 30, 1981 (codified at 45 CFR Part
16 (1980)) gave the Departmental Grant Appeals Board jurisdiction in
cases involving "(the) disapproval of a grantee's written request for
permission to incur an expenditure during the term of a grant."
Grantee's appeal was filed on October 28, 1981, after the effective date
of the Board's new regulations, which do not provide for Board
jurisdiction in such cases. However, since Grantee clearly desired
review by the Departmental Grant Appeals Board and PHS did not object to
such review, although given an opportunity to do, the Board Chair has
accepted the appeal and we proceed to decision.

Our decision is based on the written record compiled pursuant to 45
CFR 16.8 of the new regulations. Appellant requested a hearing in order
to present testimony regarding the adequacy and timeliness of its (2)
rebudgeting request as well as the necessity, reasonableness and
allocability of the costs. Appellant had ample opportunity to submit
written briefing on the question of allocability, however, and we have
determined that testimony on that and the other issues identified by
Appellant would not affect the result in this case. Accordingly, the
request for a hearing is denied.

Statement of the Case

The grant in this case was awarded pursuant to section 203(a) of the
Community Mental Health Centers Act, as amended (42 U.S.C. 2689b (a)).
That section authorizes the making of grants to public or nonprofit
private community mental health centers to assist them in meeting their
costs of operation during the first eight years after their
establishment. The grant was the last one for which Appellant was
eligible, although it was only the second Community Mental Health
Centers grant which Appellant had received. (Appellant's brief,
submitted December 18, 1981, Exhibit 6, p. 1.) It was awarded for the
period January 1, 1980 through December 31, 1980, with an approved
budget which included $30,656 for equipment. By letter dated December
18, 1980, Appellant requested that a total of $60,500 originally
budgeted for contractual services and for construction be added to the
equipment line item. /1/ Appellant stated that $20,500 of the amount
rebudgeted for equipment" . . . will be used to complete the Mental
Health Center's office equipment needs (desks, chairs, files, etc.) . .
.," mostly for use at a newly renovated clinical site. Appellant
offered to provide "(a) more detailed listing of this equipment . . .
upon request." Appellant stated that the remaining $40,000 would be used
". . . to purchase date processing hardware and software to allow for
the establishment of an effective and integrated MIS system including
financial, statistical and other information." It stated that the (3)
purchase of such equipment would enable it to reduce its operating
expenses in the upcoming years when federal support would no longer be
available. Appellant also offered to provide" . . . any additional
information as requested with respect to this request."


By letter dated January 19, 1981, the Director, office of Grants
Management, Public Health Service, Region I, denied Appellant's
rebudgeting request. The purchase of data processing equipment was
disapproved on the grounds that: (1) a feasibility study had not been
conducted; (2) there was no evidence that Appellant's advisory board
had approved the purchase of such equipment; and (3) a lease vs.
purchase study and a time-phased plan for implementation of a management
information system was required. The purchase of the office equipment
was disapproved on the grounds that: (1) the need to purchase such
equipment near the end of the grant had not been "justified"; and (2)
there had been no showing that the equipment would be "effectively
utilized." The letter also noted that the grant award had already
budgeted $30,545 (in fact, $30,656) for equipment, and that $97,700 had
been budgeted for equipment in the previous year. In addition, the
letter expressed concern that the rebudgeting request was submitted two
weeks before the expiration of the grant although this was not given as
a basis for disapproval of the request.

Appellant sought review of the Regional Office's determination
pursuant to 42 CFR Part 50, Subpart D. Although the PHS Grant Appeals
Board upheld the Regional Office's determination disapproving the
rebudgeting request, it stated in the letter transmitting its decision
to Appellant that" . . . it did so for a different reason," i.e., that
Appellant ". . . failed to submit its request in sufficient detail and
in a manner timely enough to permit adequate review for the purpose of
determining whether the equipment would be of benefit to the projcet
during the period of Federal support." (This statement also appears in
the text of the decision at p. 6.) With respect to the matter of
timeliness, the decision stated that, while neither Department or PHS
policies set any deadlines for the submission of rebudgeting requests,
". . . it would be fair to expect that a grantee would submit such
requests as soon as it was determined that there was a need and that
there were available funds, and that such requests would be submitted in
time to permit adequate review and processing." The PHS Grant Appeals
Board concluded that these criteria were not met, noting that the
rebudgeting request was not received until December 24, 1980. The
implicit assumption in the decision appears to be that the request could
only have been approved before the expiration of the grant on December
31, 1980.

(4) The PHS Grant Appeals Board also found that Appellant had not
documented the need for equipment in sufficient detail. While it found
no specific requirement for a "feasibility study" or for "lease vs.
purchase studies" with respect to the data processing equipment, it
stated that Appellant should have provided sufficiently detailed cost
data to enable the Grants Management Officer to perform a "cost
analysis" pursuant to Chapter PHS 6-500 of the Grants Administration
Manual. Although that chapter pertains to the evaluation of grant
applications, PHS argues in its brief that "(as) a request for
rebudgeting is an application for use of Federal funds(,) this would
also be subject to procedures similar to those of a regular
application." (Memorandum dated February 22, 1982, . 3.) The decision
does not state that Chapter PHS 6-500 applied to the purchase of the
office equipment, or specify any other requirement for detailed
information which applied to that purchase. The decision does indicate,
however, that the PHS Grant Appeals Board questioned whether any of the
costs could have benefited the grant in view of the fact that federal
support ended on Decmeber 31, 1980, and believed that Appellant did not
provide sufficient information to permit the making of a determination
regarding benefit to the grant, or allocability.

The expenditures proposed by Appellant were never made. However,
that fact does not affect the Board's jurisdiction under 45 CFR 16.5(
a)(3) (1980), which requires that we decide whether Appellant's request
for permission to incur the expenditures was properly disapproved.

Appellant's Arguments

Appellant argued that the PHS Grant Appeals Board decision should be
reversed since the determination that the rebudgeting request was
untimely and not sufficiently detailed was not based on any requirement
in the applicable regulations (including the PHS Grants Administration
Manual and the PHS Grants Policy Statement, made binding by the Notice
of Grant Award). It contended that, under the Grants Administration
Manual, a grantee may rebudget funds within the total amount of the
approved grant budget subject to only three conditions: (1) that the
expenditures are necessary to the successful continuation of the
project; (2) that the expenditures are allowable under 45 CFR Part 74
and any other applicable regulations; and that (3) prior approval is
obtained where required for specific expenditures. (Grants
Administration Manual Chapter 1-510-40(B.)) It further contended that
the procedures for prior approval require only that a rebudgeting
request be submitted in writing to the appropriate Grants Management
Officer, and that the request bear the signature of a responsible
official of the business office of the institution, and that of the
originator of the request, if different. (Grants Administration Chapter
1-510-70; PHS Grants Policy Statement (October 1, 1976, pp. 64-68.)
Appellant (5) suggested that, in the interest of time and administrative
efficiency, the Departmental Grant Appeals Board itself determine
whether the rebudgeting request should have been approved based on the
requirements which were in face applicable, rather than remanding the
case to PHS. (Appellant's brief, submitted December 18, 1981, pp.
10-11.)

Appellant identified as the issues thus before this Board (1) whether
the costs were necessary and (2) whether they were allowable. It argued
that the expenditures for office equipment were necessary since ". . .
an institution cannot continue to function unless its employees have a
place to sit and places to store paperwork and supplies . . . ." and
that the necessity of the data processing equipment was explained in its
rebudgeting request. (Appellants, brief, submitted December 18, 1981,
pp. 23-24.) Appellant further argued that it met the two-pronged test of
allowability established in 45 CFR Part 74, Appendix F: reasonableness
and allocability. With respect to reasonableness, Appellant argued,
inter alia, that the costs were of the type generally recognized as
ordinary and necessary for the operation of the institution, and
resulted from actions which a prudent businessman would take under the
circumstances. (Appellant's brief, submitted December 18, 1981, p. 24.)
With respect to allocability, Appellant argued that, since the Community
Mental Health Centers Act provides that the purpose of the grants is to
assist mental health centers in meeting their costs of operation, any
cost which relates tangibly to the operation of the institution should
be considered allocable to the grant. It cited in support of this
argument TRW Systems Group of TRW, Inc., ASBCA No. 11499, July 11, 1968,
68-2 BCA, CCH 7117, a decision of the Armed Services Board of Contract
Appeals (ASBCA) which interpreted a provision of the Armed Services
Procurement Regulations stating that a cost may be allocable to a
federal contract if it is "necessary to the overall operation of the
institution, although a direct relationship to any particular cost
objective cannot be shown." In TRS, the ASBCA found expenditures for U.
S. patent applications to be allocable to federal contracts because they
were necessary to the contractor's continued business operations.
Appellant asserted that "(the) TRW decision suggests that the costs of
long-term activities or products are allocable to a federal grant, even
if there benefit is not realized immediately." It contended that the
proposed equipment costs were allocable to the grant in this case
"because they were costs of operation and would benefit the continued
and future operation of the institution." (Appellant's brief, submitted
December 18, 1981, pp. 26-27.)

Discussion

The PHS Grant Appeals Board concluded that Appellant's rebudgeting
request was not sufficiently detailed or timely to permit PHS to
determine whether the proposed expenditures would "be of benefit to (6)
the project during the period of federl support." We find, however, that
it was manifestly clear from both the timing of the request and the
nature of the proposed expenditures as described in the request that the
expenditures could not have benefited the grant. We thus concur in the
PHS Grant Appeals Board's decision that the rebudgeting request was
properly disapproved, although our decision is based on a different
rationale.

As previously indicated, the rebudgeting request was submitted less
than two weeks before the expiration of both the grant budget and
project periods. Thus, even had the request been approved and the
equipment been purchased and delivered before the expiration of the
grant, the equipment would have been virtually unused during the period
of federal support. The desks, chairs, files and data processing
equipment specified in the rebudgeting request were clearly durable
goods, not supplies which could have been consumed in a short period.

We fail to see how, in view of these facts, the proposed expenditures
could have been allocable to the grant. The cost principles applicable
to the grant give the following definition of allocability:

A cost is allocable if it is assignable or chargeable to a particular
cost objective, such as a grant/contract, project, product, service,
process, or other major activity, in accordance with the relative
benefits received or other equitable relationship. Subject to the
foregoing, a cost is allocable to a Government grant/contract if it:
(a) Is incurred specifically for the grant/contract; (b) Benefits both
the grant/contract and other work and can be distributed to them in
reasonable proportion to the benefits received; or (c) Is necessary to
the overall operation of the institution, although a direct relationship
to any particular cost objective cannot be shown.

45 CFR 74, Appendix F, .4. Appellant argued that the proposed
expenditures were allocable under B4.(c) as necessary to its overall
operation. Even assuming that the proposed expenditures met this
criterion, however, they must also, under the quoted provision, be
"assignable or chargeable to a particular cost objective such as a
grant/contract, . . . in accordance with the relative benefits received
. . . ." TRS Systems Group of TRW Systems, Inc., cited by Grantee for
(7) a different proposition, stated with respect to a provision of the
Armed Services Procurement Regulation virtually identical to Appendix F,
B.4. that --

. . . the two sentences . . . are not in the disjunctive. On the
contrary, the second sentence begins with the words, "Subject to the
foregoing." These words . . . clearly refer to and incorporate the first
sentence.

TRW Systems Group of TRW Systems, Inc., at 32, 95-66. As we have
already noted, there could have been no benefit to the grant in question
since the equipment would have been essentially unused before the
expiration of the grant. This Board has previously held that costs
incurred for the benefit of one grant are improperly charged to a
succeeding year's grant. Southern Methodist University, Decision No.
41, October 19, 1977; Pinellas Opportunity Council, Inc., Decision No.
80, February 6, 1980; Community Action Agency of Memphis and Shelby
County, Decision No. 103, June 9, 1980. Conversely, it is clear that
costs which would benefit only activities conducted after the expiration
of a grant may not under the circumstances raised by this case properly
be charged to the grant.

Appellant contends, however, that under TRW Systems Group of TRW,
Inc., the proposed expenditures were allocable to the grant even in
their benefit was not realized during the term of the grant. We find
Appellant's reliance on TRW misplaced on several grounds. First, there
is no express finding in that decision that the benefits from the patent
application costs would not be realized until after the expiration of 48
contracts to which the costs were sought to be allocated. Indeed,
benefits from all of the four elements identified in that decision could
conceivably have been realized at the time the patent application costs
were incurred. /2/ In describing the TRW case, Appellant stated that
the ASBCA "expressly rejected the argument that the patent application
costs did not benefit the Government contract because 'the patenting
process is so slow that patent expenditures during any accounting period
are not likely to benefit operations during that period.' Id. at
32,969-70." (Appellant's brief submitted December 18, 1981, p. 26.) The
language quoted by Appellant is taken out of context, however, and is
merely the ASBCA's characterization of the Government's allegation, not
a finding of fact. The TRW case (8)is also distinguishable from the one
before us in that it is implicit that the contractor would continue to
receive government contracts after the expiration of the 48 contracts in
question. TRW Systems Group of TRW, Inc., at 32, 968. Thus, even if
some of the benefits would not have been realized until after the
expiration of the 48 contracts, there would still have been other
federal contracts which benefited. In the instant case, since the grant
project period expired December 31, 1981 and no other federal support
was anticipated (Appellant's brief submitted December 18, 1981, Exhibit
6, p. 4), there would have been no opportunity for the federal
government to benefit from the proposed expenditures.


Appellant also argued that the proposed expenditures could have been
appropriately charged to the grant since they would have advanced the
purpose of the Community Mental Health Centers Act to assist mental
health centers in meeting their costs of operation. The fact that the
federal government encouraged the project does not make any costs
incurred for the project allocable to the period of federal support,
however. This is particularly evident in the case of grants under
Section 203 of the Community Mental Health Centers Act, since the Act
expressly limits financial assistance to a mental health center to eight
one-year grant. 42 U.S.C. 2968b(b).

Conclusion

For the foregoing reasons, we find that the $60,500 which Appellant
proposed to rebudget for equipment would not have been allocable to the
grant, and sustain the determination of the PHS Grant Appeals Board
disapproving Appellant's rebudgeting request. /1/ Respondent asserted,
without objection by Appellant, that prior approval of this
budget revision was required under PHS Grants Administration Manual
Chapter 1-510, Exhibit X1-510-1, Cost Item 3.c. (Memorandum dated
January 22, 1982, p. 3.) That provision indicates that nonprofit
institutions must seek prior approval of the awarding unit when
cumulative expenditures for equipment during the budget period will
cause the amount budgeted for that purpose to be exceeded by $1,000 or
25% of the budget amount, whichever is greater." Exhibit X1-510-1 is
captioned "Prior Approval Reference Summary" and thus does not appear to
constitute an independent requirement for prior approval. However, the
PHS Grants Policy Statement (October 1, 1976) clearly requires prior
approval in the situation described in Exhibit X1-510-1. The Policy
Statement was incorporated by reference in the terms of the Notice of
Grant Award. /2/ Those elements were: (1) stimulation of
inventions, (2) facilitation of recruitment and retention of qualified
personnel, (3) protection from competition enabling management to invest
company resources in the development of new technology, and (4)
protection from claims of interference or infringement. TRW Systems
Group of TRW, Inc., cited above, at 32,968.

OCTOBER 22, 1983