GAB Decision 328
June 30, 1982 Marshalls Community Action Agency; Docket No. 81-190
Ford, Cecilia; Settle, Norval Garrett, Donald
Marshalls Community Action Agency appealed the final decision of the
Regional Administrator, Office of Human Development Services, to
disallow $121 in expenditures charged to appellant' Head Start grant.
The amount of $121 was disallowed as interest expense incurred due to
late payment of an account payable.
This decision is based on the written record. For reasons discussed
below, we sustain the Regional Administrator's final decision to
disallow $121.
Background
In response to the Presiding Board Member's request for a written
statement concerning why the decision to disallow $121 was wrong,
appellant stated that $121 was added as a late payment charge to a bill
from a company from whom appellant purchased supplies. Appellant stated
that late payment charges "piled up" due to the fact that the former
Executive Director failed to take timely action on the bill.
Appellant appealed the decision on two bases. The first was that
appellant's experience with American business is limited, since local
companies do not add late payment charges on bills; and the second was
that appellant has taken steps to prevent any similar occurences in the
future. Appellant's Brief. /1/
(2) The basis of the disallowance
The Agency stated that the interest expense of $121, incurred due to
late payment of an account payable, was disallowed because under the
provisions of 45 CFR Part 74, Appendix F, section G.18(a), /2/ "costs
incurred for interest are unallowable." That section states: Interest
and other financial costs (a) Costs incurred for interest on borrowed
capital . . . however represented, are unallowable.
Agency letter dated January 26, 1982, p. 3.
Late payment charge as interest on borrowed capital
Respondent argued that section G.18(a) of Appendix F would bar
appellant from paying for the late charge at issue out of its federal
Head Start (3) grant funds if the late charge was considered interest.
Respondent suggested that appellant's delay in paying its debt for the
supplies constituted a type of borrowing of the owed amount and
therefore, the late charge was a cost incurred for interest on borrowed
capital. Respondent argued that the phrase in the above-cited section,
"however represented," was intended to extend the scope of this section
to a variety of circumstances which could not be expressly enumerated or
anticipated. Respondent's Brief, p. 3.
The respondent's argument that the payment of the late charge in
question constituted a constructive borrowing is a reasonable
construction of the term "interest on borrowed capital . . . however
represented." Furthermore, appellant has not argued or provided evidence
that would rebut the Agency's characterization of the late payment
charge as "interest." On this basis, we conclude that the late payment
charge here was interest, and adopting the respondent's argument, the
$121 was interest on borrowed capital, an unallowable cost under the
above-cited provision.
Interest cannot be assessed against the Federal government
Respondent further argued that section B.3.(b) of 45 CFR Part 74,
Appendix F provides that allowability determinations should take into
consideration "the restraints or requirements imposed by such factors as
. . . Federal . . . laws . . . ." Respondent contended that if the late
payment charge is characterized as "interest," the settled principle
of
federal law that interest cannot be assessed against the federal
government in the absence of a contract or a statute providing for such
interest, would preclude the payment of the late charge out of federal
grant funds. Respondent contended that there is no express provision
for payment of interest expenses out of Head Start grant funds.
Respondent's Brief, pp. 2 and 3; Respondent's Exhibit B, pp. 3-6.
Respondent set forth this same argument in another case before the
Board which dealt with the same issue. California Department of Social
Services, Decision No. 297, May 21, 1982. The Board found that
respondent's argument did not clearly control the issue before it,
stating that "the issue is not . . . one of whether interest may be
assessed against the United States, but whether an interest expense . .
. is an allowable cost" under a Federal grant. The Board determined
that the cases cited by respondent did not reach this issue.
We conclude that the rationale cited by the Board in California
Department of Social Services, supra, is also applicable here.
(4) Allowability of costs
Respondent argued that the cost principles of 45 CFR Part 4, Appendix
F, set forth basic considerations to be followed in determining the
allowability of individual items of cost. The provisions of section B
of Appendix F indicate that one of the factors to be considered in
determining whether a cost is allowable is whether the cost is
reasonable. That section sets forth certain tests to be used to
determine if the cost is reasonable. One test of reasonableness is that
the cost "does not exceed that which would be incurred by an ordinarily
prudent person in the conduct of competitive business." 45 CFR Part 74,
Appendix F, B.3. Another is "whether the cost is of a type generally
recognized as ordinary and necessary for . . . the performance of the
grant." Supra, at B.3.(a).
Using these tests, respondent argued that the late payment charge
arising from appellant's failure to pay a bill when due is not a cost
"which would be incurred by an ordinarily prudent person in the conduct
of a competive business," nor could such a cost be considered as
"ordinary and necessary for the . . . performance of the grant."
Respondent's Brief, p. 1 and 2. We agree. /3/ The circumstances cited
by appellant do not overcome these tests. Accordingly, there is no
basis, under the allowability tests of 45 CFR Part 74, Appendix F,
section B, for costs arising out of appellant's oversight to be charged
to appellant's Head Start grant.
Conclusion
We uphold the disallowance in the amount of $121 on the basis that
the late payment charge is an unallowable cost under the provisions of
45 CFR Part 74, Appendix F, section G.18(a). In response to
respondent's (5) other arguments, we determine that even if it were not
for the specific provisions of section G.18(a), the late payment charge
would be an unallowable cost under the reasonableness tests contained in
Appendix F, section B. /1/ By letter date February 4, 1982, the
Presiding Board Member informed appellant that if it wished to
pursue its appeal it should submit to the Board, within 30 days of
receipt of the February 4, 1982 letter, a written statement concerning
"appellant's complete argument about why the decision is wrong." By
letter dated March 24, 1982, the Board issued a Notice of Case Closing
in this matter when it had not received, allowing reasonable time for
mail delay, appellant's submission. On March 26, 1982, the respondent
informed the Board that appellant had sent a letter, dated March 9,
1982, to the Presiding Board Member but misaddressed the letter to the
Agency's Regional Office in California. Because of this mix-up, the
Board, by letter dated April 21, 1982, reinstated this case on its
docket. In that letter, the Board informed appellant that it considered
appellant's March 9, 1982 submission as it "complete argument." The
Board then informed the respondent that it should submit its response to
the Board and the appellant within 20 days of the receipt of the Board's
letter. The letter also stated that appellant "will then have the
opportunity to reply to respondent's argument within 10 days after the
appellant receives respondent's brief." The respondent's submission was
dated May 17, 1982. When the Board had not received a reply from
appellant within the alloted time, it contacted respondent to inquire
whether the "return receipt" from appellant had been received.It had
not. Respondent then volunteered to send a telegram to appellant asking
whether grantee had received the respondent's submission and whether it
intended to reply. The telegram was sent on June 21, 1982 and
respondent received a response on June 24, 1982, stating that appellant
had received the respondent's submission but it was unaware that a
further response was necessary. Since the time for submission of
appellant's reply has elapsed and since appellant did not reply, even
though given the opportunity, the appellant's March 9, 1982 letter is
its complete submission in this appeal. /2/ Except as noted in
45 CFR 1301.10(b) (1979), 45 CFR Part 74 applies to this grant by virtue
of 45 CFR 74.4 (1979) (unless grantee is a foreign government, federal
agency, international organization or individual). The cost principles
set forth in Appendix F to Part 74 are made applicable to appellant's
grant by 45 CFR 74.174 (1979). /3/ Although respondent's
argument was not given as the basis for the disallowance here, appellant
was put on notice by respondent's submission of this argument.
Appellant was given the opportunity to submit a reply to respondent's
submission. It did not. In any event, the cost principles contained in
45 CFR Part 74, Appendix F apply to all Head Start grants and appellant
was on notice that the cost principles were applicable to its grant.
See, footnote 2.
OCTOBER 22, 1983