Horizon House, DAB No. 350 (1982)

GAB Decision 350

September 30, 1982 Horizon House; Docket No. 82-103 Garrett, Donald;
Teitz, Alexander Settle, Norval


Horizon House appealed a decision by the Alcohol, Drug Abuse and
Mental Health Administration (ADAMHA) Informal Grant Appeals Committee
regarding the request of Horizon House for reimbursement of
approximatley $70,000 in indirect costs associated with a drug abuse
service grant awarded by the National Institute for Drug Abuse (NIDA)
(Agency). The ADAMHA Informal Grant Appeals Committee (Committee) found
that, although indirect costs had been awarded in the 01 year of the
grant under a provisional rate agreement, Horizon House never finalized
the rate and, in additional, waived the costs. Furthermore, the
Committee found that Horizon House "clearly and knowingly waived
indirect costs" for subsequent years. Respondent's submission, Item #1.
The Committee also found that Horizon House never submitted the
necessary information to negotiate a rate, although the Agency had
remined Horizon House during the eight years of the grant the there was
no indirect cost rate in effect, and had given both oral and written
instructions to Horizon House about how to initiate indirect cost rate
negotiations.

This Board has previously upheld a disallowance of indirect costs
where there was no negotiated cost rate agreement. Franklin C. Fetter
Family Health Center, Decision No. 99, May 19, 1980. Since the sole
issue in this appeal by Horizon House appeared to involve the same type
of situation, the Board requested preliminary responses from the parties
which would amplify the facts and the reasons for the ADAMHA Informal
Grant Appeals Committee's decision. On the basis of these responses,
the Board issued an Order to Show Cause rather than initiating the usual
exchange of briefing.

That Order discussed the issue and reached a preliminary conclusion
that Horizon House could not receive reimbursement for indirect costs
because it had never finalized the preliminry indirect cost rate for
year 01 of its grant, never negotiated any rates after year 01, and had
waived any right to such costs. Horizon House submitted a response to
that Order, but presented nothing which could serve as a basis for
altering our preliminary conclusion. Therefore, wer conclude tha
Horizon House is not entitled to retain the unobligated balance as
reimbursement for indirect costs.

(2) Statement of the Issue

Horizon House appealed the ADAMHA Committee's decision not to grant
the request by Horizon House for reimbursement of indirect costs in the
amount of the unobligated balance on the NIDA grant to Horizon House.
Therefore, the issue before this Board is whether that decision should
be sustained. Horizon House asserted that this issue, as addressed in
the Order, was too narrow and stated that it seeks "a formal recognition
that all federal funds received by it were properly expended for valid
purposes under the Grant." Horizon Houe Response to Order to Show Cause
(Response), September 23, 1982, p. 1. In support of that statement,
Horizon Houe alleged that it overmatched federal funds during the eight
years of its grant, incurred "capital-type" expenditures in excess of
$100,000 which were never billed to the Agency, and that it never
received reimbursement for indirect costs incurred. Response, p. 2.
Horizon House asserted that these circumstances "would permit the Board
to determine that absent any programmatic reasons, the Agency should
retroactively authorize the Grantee's use of 'Carryover' funds . . . ."
p. 2. Horizon House compared its appeal to that addressed by the
Board's Decision No. 138, Kent Community Mental Health Center Services
Board, December 1, 1980. In that decision, the Board considered whether
the Agency abused its discretion in denying retroactive approval for the
appellant to "carryover" funds unobligated during the grant years for
which they were awarded and use them to offset overexpenditures in
subsequent years. That decision is not comparable to this appeal,
however. In that decision, only direct costs and funds awarded for
direct costs were involved. Furthermore, the appellant there had
applied the unexpended funds against costs claimed during subsequent
years of its grant, and so indicated on its expenditure reports. Here,
Horizon House has not submitted claims for unreimbursed expenditures for
direct costs to offset the unobligated balance. If it does with to
claim expenditures for direct costs, it must first report those
expenditures to the Agency so the Agency can determine whether the costs
are allowable, allocable, and reasonable, and whether the unobligated
balance could be used to offset such costs. Until that is done, there
is no Agency determination subject to this Board's review. This Board
cannot examine the issue of whether a Grantee should be allowed to
retain carryover funds and to apply them to particular costs, except
where the Board reviews an Agency determinatin concerning such a claim.

(3) Background

Horizon House admitted that it had waived reimbursement for indirect
costs in all the years of its grant except one (year 04), and documents
included in the record corroborate that. /1/ The documents provide the
following information. Under a previous grant, a provisional indirect
cost rate of 24% was reached by agreement between Horizon House and the
Agency, on August 11, 1971, for the period July 1, 1970 "until amended."
/2/ The Agency awarded indirect costs in the amount of $49,281 for year
01 (September 1, 1972 through August 31, 1973), on the basis of the
provisional ageement. Horizon House noted on its Expenditure Report for
that period that it waived reimbursement of its indirect costs for the
01 year. By letter dated May 21, 1973 and in the subsequent grant
application, Horizon House waived indirect costs for year 02 as well.

Horizon House included in its remarks on the Expenditure Report for
the period September 1, 1973 through August 31, 1974 (year 02), that it
was requesting reinstatement of indirect costs previously waived. On
November 1, 1974, the Agency wrote to Horizon House advising it that the
indirect cost rate agreement was delinquent and that Horizon House could
(4) obtain a new agreement through the Regional Office. An Agency
Grants Management Specialist visited Horizon House, and made a report on
November 22, 1974, in which he noted the delinquency in finalizing cost
rates for periods since July 1, 1970. He stated that Horizon House
could not claim indirect cost reimbursements because of that
delinquency. Furthermore, he stated that the reason Horizon House had
waived reimbursement of the costs was taht a local government agency had
paid the administrative costs which Horizon House had incurred;
however, he noted that there was a possibility that the local agency
would no longer pay the costs and that Horizon House wanted to
reestablish a rate. He indicated that he had instructed them how to do
so. He reiterated those instructions in a letter to Horizon House,
dated December 2, 1974. A response from Horizon House dated December 13,
1974, indicated that it was preparing its records in order to apply to
the Regional Office for a rate; the application for year 04 showed that
Horizon House requested 24% as indirect costs, based on the August 1971
agreement. Response, Attachment III. The approved budget stated that
an indirect cost allowance was not included because Horizon House had
not negotiated an indirect cost rate. Agency Submission, August 4,
1982, Appendix, p. 31. Horizon House has not submitted any evidence
that it ever actually attempted to negotiate a rate by following the
prescribed steps.

A report prepared by a program development specialist on July 23,
1975, after a site visit (Agency Submission, Appendix, pp. 27-29),
indicated that the local agency would no longer pay administrative costs
for Horizon House and that the project officer told Horizon House that
it could not receive a larger grant award to incorporate indirect costs.
This statement is further explained in a memorandum dated February 17,
1982, from the Chief of NIDA's Grants Management Branch (Agency
Submission, Item #2), in which he stated that Horizon House had been
informed of the maximum dollar limitation on project costs. The total
amount which Horizon House could receive was based on the number of
clients treated and the average costs per client. This meant that
requesting indirect costs would reduce the amount of funds available for
direct costs. A possible inference from this is that Horizon House
decided not to negotiate a rate since to do so would not increase its
award.

Grant applications, Notices of Grant awards, and Expenditure Reports
pertaining to the grant through August 31, 1980, continued to show that
there was no indirect cost rate that Horizon House waived indirect
costs.

On July 24, 1981, the Executive Director of Horizon House wrote a
letter to the Chief of NIDA's Grants Management Branch, referring to an
unobligated balance on its grant; the Executive director suggested
several reasons why Horizon House should retain funds represented by
that balance. One of the reasons was tht Horizon House had never
claimed indirect costs during the eight years of the grant. The
Executive Director stated that, (5) equitably, Horizon House is entitled
to $338,743 in indirect costs under the 24% rate originally approved.
The Agency responded that Horizon House could not be reimbursed for
indirect costs which it had waived. Agency Submission, Appendix, pp.
58-59. Horizon House continued to puruse the point, apparently in order
to retain the unobligated funds, and appealed the matter of indirect
costs through the PHS informal process, 42 CFR Part 50, Subpart D. It
is the decision resulting from that process which Horizon House appealed
to the Board.

Applicable Policy

The appliable policy about indirect cost reimbursement is found in
the PHS Grants Administrtion Manual (GAM), and in the PHS Grants Policy
Statement. Prior to the publication of the PHS Grants Policy Statement
in 1974, the Guide for Non-Profit Institutions (OASC-5) contained cost
principles and procedures for establishing indirect costs rates. The
GAM, Chapter PHS: 6-150-20, D. (1974) (TN 74.8, 12/18/74) stated:

PHS grantees who failed to submit timely indirect cost proposals in
accordance with the requirements of Chapter PHS: 6-100 shall be deemed
as not having a currently effective indirect cost rate and will not be
reimbursed for indirect costs in future grants awarded by PHS.

If a rate is subsequently established, based on the late submission
of an indirect cost proposal, indirect cost reimbursement will be
limited to the indirect costs applicable to the period subsequent to the
date on which the indirect cost proposal was submitted.

Chapter PHS: 6-150-20, E. stated:

Where a provisional indirect cost rate is used for interim
reimbursement of indirect costs applicable to PHS grants, the grantee is
responsible for adjusting such indirect costs once a permanent indirect
cost rate has been established. . . . Where a PHS grantee fails to
establish a permanent indirect cost rate, the indirect costs previously
reimbursed based on the provisional rate will be disallowed (see
subparagraph PHS: 6-150-50A. 2).

(6) Chapter PHS: 6-150-50A.2 referred to grantees without currently
effective indirect cost rates. It stated:

a.(1) When a currently effective indirect cost rate is not available
at the time of the award because the grantee was delinquent in the
submission of an indirect cost proposal, the award will not include
funds for the reimbursement of indirect costs. If the grantee
subsequently establishes a currently effective rate, the granting agency
may, at its discretion, amend the award to provide an appropriate amount
for indirect cost reimbursement if the amendment can be made within the
same Federal Fiscal year in which the initial award was made.

This amount, however, will be limited to the indirect costs
applicable to the period subsequent to the date of the grantee's
proposal computed in accordance with the formula in Exhibit PHS:
X6-150-2.

Subparagraph b. referred to grantees that have never established
indirect cost rates. It set a deadline of three months from the
effective date of the grant award for submitting indirect cost
proposals. It also stated:

If the grantee does not establish the rate prior to the submission of
the expenditure report, claims for indirect costs reimbursement will be
disallowed.

The PHS Grants Policy Statement, July 1, 1974, p. 24, indicated that
indirect cost proposals should be submitted in a timely manner to assure
recovery of the costs.It also said that where indirect costs are
computed on the basis of a provisinal rate, grantees must report
required adjustments following negotiation of a final indirect cost
rate. The revised Policy Statement, October 1, 1976, added to those
situations in which indirect costs would not be reimbursed, "when the
grantee waives reimbursement in full indirect costs." at p. 30.

Discussion

Horizon House requested reimbursement for indirect costs in the
amount of its unobligated balance. It requested that the waiver of the
costs be ignored and the award in year 01 be reinstated with the 24%
rate. It pointed out that the amount requested (the unobligated balance
of its award) amounts to 4.37% per year. There is no evidence in the
record that Horizon House has ever documented its indirect costs by
submitting information which would be used to establish a rate.

(7) The PHS policy from 1974 forward appears quite clear concerning
reimbursement of indirect costs: there is no reimbursement unless the
grantee has established a rate. Even where a rate is established, costs
may only be reimbursed for periods subsequent to the establishment of
the rate. Provisional rates must be finalized by the grantee or any
indirect costs awarded will be disallowed.

Horizon House never finalized its provisonal rate; thus, under the
policy stated above, the indirect costs awarded in year 01 would have to
be returned to the Agency.

In years subsequent to year 01, Horizon House never established a
rate, despite several reminders from the Agency about the absence of a
rate, and despite instuctions from Agency personnel on how to establish
a rate. Simply noting on a budget request that indirect costs are
requested is not enough to establish a rate under Agency procedures.
Horizon House has not alleged that it was unaware that it did not have
an established rate nor that it did not know how to establish one.
Furthermore, the facts indicate that Horizon House was aware of both
since at least November 1, 1974, when the Agency wrote to Horizon House
about the delinquent indirect cost rate agreement.

Even if one were to give Horizon House the benefit of the provisonal
rate in year 01, Horizon House clearly waived reimbursement for the
costs in that year and every year thereafter, except year 04. The only
discretion provided to the Agency under its policy as stated from 1974
forward appears to be in instances where a grantee establishes a rate
during a grant year. The Agency may allow indirect costs for the year
in which the rate was established. Since Horizon House did not act to
establish a rate in the eight years of the grant, the Agency has no
discretion to reimburse the costs. /3/


Indirect cost rates are not arbitrary awards of fund; rather they
are based on actual costs which are not readily allocable as a direct
cost to one project, such as administrative costs. The process of
establishing a rate or finalizing a provisional rate provides evidence
that the costs used to establish the rate were reasonable and allowable.
Horizon House (8) never followed this step. It may be that Horizon
House had some costs not reimbursed directly and, therefore, potentially
susceptible of treatment as indirect costs; but its administrators
chose not to follow the appropriate process set forth by the Agency for
documenting the costs and, thus, obtaining reimbursement. Furthermore,
there is some evidence in the record that the costs which might be
claimed as indirect costs by Horizon House in the only year for which an
award was made (year 01) were paid for by another source, and could not
be claimed under the grant anyway. Therefore, it would appear that
there is no reasonable basis upon which we can reverse the Agency
determination, which is consistent with clear Agency policy.

Amount at Issue

Horizon House has not requested the $338,743 in indirect costs it
alleged is due; rather, it is seeking to retain the amount of the
unobligated balance of funds awarded to Horizon House by the Agency
during the eight years of funding. The two parties disagreed about what
the correct amount of the unobligated balance is. We compared two
tables, one submitted from each party, which show amounts awarded and
spent, and unobligated balances for the eight years of grant support.
They both show the same amounts awarded and spent, but show different
amounts in the unobligated balance column. It appears that a large of
the remaining balance includes the indirect costs awarded but not spent
during year 01. Horizon House alleged that the amount of the balance is
$64,698, but there is no indication on its table how it obtained that
figure. The Agency alleged that the balance is $70,676. If one
subtracts from the amounts awarded by the Agency the costs reported by
Horizon House as expenditures, about which there appears to be no
disagreement, the figure shown by the Agency is mathematically correct.
Before collecting the unobligated balance, however, the Agency should
provide Horizon House an opportunity to establish the accuracy of the
amount.

Conclusion

We sustain the Agency's determination that Horizon House cannot
retain, as reimbursement for indirct costs, the unobligated balance of
federal funds awarded because Horizon House did not finalize the
provisional rate in effect during year 01 of its grant, did not
establish a rate during (9) any of the subsequent years of its grant,
and waived reimbursement for indirect costs in all years except year 04.
/1/ Horizon House alleged that a factual dispute exists as to
whether it intended to waive reimbursement for indirect costs.
Response, p. 1. However, Horizon House has alleged that it erred in
waiving the costs, but has not denied that it, in fact, waived the
costs. Furthermore, the facts indicate that Horizon House was informed
in 1974 how to negotiate a rate and that it considered doing so. It
seems that Horizon House has now decided that it made the wrong
decision. We need not address errors in judgment made by Horizon House.
/2/ In the Order to Show Cause, the Board stated that the Agency
included, in the signed negotiation agreement for the provisional rate,
a notification that Horizon House had not submitted its indirect cost
rate proposal for fiscal years ended 1971 and 1972 and that no indirect
costs would be awarded after June 6, 1973. The Board's statement was
made on the basis of the copy of the agreement submitted by the Agency
as part of the appeal record. Horizon House responded to the Board's
statement by providing a copy of the agreement which did not show that
notice, and aleged that the notice had been added at a later time and
that Horizon House did not see it. Upon reexamination of the two
submissions, we have revised our previous assumption that Horizon House
signed an agreement which included a notice about its failure to
finalize an indirect cost rate. It appears that the Agency may have
added those remarks for its own use at a later time. We not do pursue
this discrepancy further because the fact of notice at that particular
time is not crucial to the Board's analysis and conclusions. /3/
Horizon House alleged that, in Decmeber 1981, an audit officer stated
that an indirect cost rate would be developed if NIDA was willing, but
acknowledged that that statement was never made to Audit Agency
officials or to Horizon House. Response, September 23, 1982, p. 1.
This does not appear relevant. Agency policies preclude tha Agency from
developing rates for grant years which are closed. The audit officer's
statement did not commit the Agency to anything, and Horizon House
should not have relied on anything he said if he did not make the
statement to them.

OCTOBER 22, 1983