GAB Decision 393
March 28, 1983
California Department of Social Services;
Settle, Norval; Teitz, Alexander Garrett, Donald
The California Department of Social Services (State) appealed the
disallowance by the Office of Procurement, Assistance and Logistics
(Agency) of $8,282 in federal financial participation (FFP) under
several titles of the Social Security Act. The funds were claimed as
janitorial costs for the Humbolt County Welfare Department (County) for
the period November 9, 1976 through March 25, 1980. The Agency
disallowed $8,282 because it found that the contract price for the
janitorial services was unreasonable and that the contract violated
California State law.
For the reasons stated below, we sustain the disallowance, but allow
the State to present certain further evidence discussed below.
Background
The Humbolt County Welfare Department entered into a lease agreement
for office space in Eureka, California. The lease did not provide for
janitorial services. The County did not want to use its own employees
to provide these services because it believed it would be more expensive
than dealing with the lessor. /1/ Subsequent to the signing of the lease
on March 30, 1976, the County considered having the lease amended so
that janitorial services for the facility would be provided by the
lessor. According to the State, regional Agency officials advised the
County that amending the lease would involve a lengthy review and
approval process. (State's exhibits, Ex. 6, p. 2) The County,
therefore, separately contracted with the lessor to have janitorial
services provided by the lessor, without amending the lease.
(2) The lessor then invited bids for subcontracting the services
described in the contract. The County did not know that the lessor was
going to subcontract when the lease was signed. The price of the
subcontractor whose bid was accepted was less than the amount agreed to
in the contract between the County and the lessor.
The $8,282 disallowed is equal to the difference between the contract
price and subcontract price for November 1976 -- March 1980.
The County alleged that oral approval of the contract had been given
by the Agency prior to execution. The Agency stated that an Agency
employee had met with County representatives but that the Agency did not
know what had been said.
Unreasonableness of Contract Price
Although the disallowance letter stated that the disallowance was
taken because the contract violated State law requiring competitive
bidding for the provision of these services and because the contract
price was unreasonable, the Agency said, in the telephone conference
convened in this appeal, that the primary basis for the disallowance was
the unreasonable contract price. The Agency argued that the lessor
transferred all his duties under the contract to the provider of
janitorial services through a subcontract. The Agency asserted that the
services to be performed were the same under the contract and the
subcontract. The Agency concluded that the contract price was
unreasonable because the contract price was greater than the subcontract
price, thereby giving the lessor a return on the contract without
performing any service. The Agency further argued that if a subcontract
were contemplated, the County should have ensured that it did not pay
more than the subcontract price.
The State argued that the price of the contract ($1,650 per month)
was reasonable despite the fact that the contract price was higher than
the subcontract price of approximately $1,250 per month. It asserted
that the $400 monthly difference, which represented 24.5% of the monthly
contract price, was a reasonable charge to be paid the landlord for the
performance of administrative and managerial functions relating to the
janitorial services.
The State also argued that the contract with the lessor was much less
expensive than the provision of janitorial services by County employees
would have been. Had the County employees been used, argued the State,
there would have been no disallowance because such an arrangement was
one of the acceptable methods for providing these services. The State
(3) also argued that the County would not have been able to negotiate as
good a price from the subcontractor as a landlord, who had experience
dealing with subcontractors providing these services.
The State also asserted that the County always intended to obtain the
janitorial services through the lessor of the building. If the County
had known that the contract would have caused a disallowance to be
taken, the County would have amended the lease. The State argued (and
the Agency conceded during the telephone conference) that such a lease
amendment (even in the same amount) probably would not have led to a
disallowance.
Analysis
The Agency's position essentially is that the 24.5% differential
between the contract price and the subcontract price demonstrates that
the charge for janitorial services was unreasonable per se. The Agency
argued that the lessor received the differential without having to
perform any services in return.
We agree with the Agency to this extent: that the size of the
differential, on its face, calls into question the reasonableness of the
claimed costs. This effectively imposes a burden on the State to
provide affirmative evidence of the reasonableness of the costs. This
is particularly so given the fact that the contract between the State
and the lessor was not competitively obtained.
The State here argued conclusorily, albeit without substanital Agency
rebuttal, that the landlord had the ongoing responsibility to monitor
and administer the janitorial services, and that in any event, if the
subcontractor had failed to perform or had provided substandard
services, the landlord would have had to fill the gap. The State also
argued, again without substantial Agency rebuttal, that the cost of
furnishing the services using County employees would be higher than the
contract price and that this was at least one basis for the County's
decision to proceed.
While these factors provide some support for the State's position,
they do not, without further development, affirmatively demonstrate the
reasonableness of the claim involved here. As to the suggested
comparison between the projected costs for the County's own employees
and the contract price, the State failed to present any specific
evidence to support such a comparison; and the cost estimate for County
employees is questionable, in our view, since it was three times larger
than the contract price. The State never explained this difference,
nor, in any event, did the State do much to explain how the supposed
differential was material to the issue here: merely because the State
(4) might have paid more in a different context does not mean the Agency
should pay the amount at issue here. Further, although the State
alleged that the 24.5% differential between contract and subcontract
prices could be justified as compensation for administrative and
managerial responsibilities of the landlord, the State did not present
any evidence as to the extent or value of those responsibilities. The
subcontract apparently called for the provision of precisely the same
janitorial services as the contract, so that it is unclear to us what
additional reponsibilities the landlord actually would have fulfilled.
The State would have us assume both obligation and performance; we
think that is unreasonable.
Since the State did not overcome the presumption of unreasonableness
raised by the large differential between the uncompeted contract price
and the subcontract price, we feel compelled to sustain the Agency in
principle. However, the parties did not address the question of the
availability of documentation of the value of the lessor's services,
since their primary focus was on the issues of principle in the case.
Therefore, we believe that the State should be given a reasonable
opportunity to present evidence in support of its claim that the lessor
actually performed services directly related to the contract. Further,
we note that neither of the parties has adequately addressed the precise
nature of what may have led the State to determine that it was dealing
with a reasonable contract price; therefore, we believe the State
ought, at the same time, to have the opportunity to present evidence
that the contract price was reasonable when the contract was executed
(for example, a showing that the contract price was based on the
lessor's routine charge for such services, or that the County would have
been unable to itself contract for janitorial services for a lesser
amount than the contract amount). We have provided 15 days for the
State to present such evidence, if it chooses to do so.
Whether the Contract Violated State Law
As stated above, the Agency's disallowance letter gave two reasons
for the disallowance: (1) unreasonableness of the contract price, and
(2) violation of state law. In the telephone conference convened in
this appeal, the Agency acknowledged that the primary basis for its
position was the unreasonableness of the contract price.Nevertheless,
the Agency did not withdraw the second basis for the disallowance and
the parties provided extensive briefing on the requirements of State
law.
Appendix C, paragraph C.1.b. of 45 CFR Part 74 states that to be
allowable a cost must, " . . . (be) authorized or not prohibited under
State or local law or regulations . . . . " The Agency found that the
contract (5) between the County and the lessor violated the California
Government Code requirement that contracts be competitively bid and that
in this case, the County had not entertained competitive bids for the
provision of the services. The State argued that this contract was
covered by an exception allowing a contract to be awarded without
competitive bidding. The State cited a California court decision which
describes the conditions under which an exception should be recognized.
Although the case, Graydon v. Pasadena Redevelopment Agency, 104 Cal.
App. 3d 631 (1980), was decided after the period involved in this
appeal, the State maintained the decision was an accurate indication of
how a State court would decice whether the contract had violated State
law. The decision states that competitive bidding would not be
necessary where,
" . . . competitive proposals would be unavailing or would not
produce an advantage, and the advertisement for competitive bid would
thus be undesirable, impractical, or impossible . . . " Id. at p.
635-36.
The State argued that this contract fell within these conditions.
The State maintained and the Agency did not dispute that the County and
the Regional Office of the Agency discussed the possibility of providing
janitorial services by amending of the lease or through the use of a
contract. The parties agreed that the County wanted the services
provided through the lessor because of the advantages discussed in the
first part of the decision. /2/ The contract was selected over the
amending of the lease because of the excessive delay involved in
amending the lease. The State asserted that if the County had known
that the Agency would disallow the contract price or that it would have
been required to competitively bid the contract the County would have
chosen to amend the lease to provide janitorial services. In fact, as
stated above, the County did, subsequently, amend the lease to include
the provision of janitorial services by the lessor.
Thus, argued the State, the use of competitive bids would not lower
the price of the contract because the County would not have made an
arrangement for the services with anyone but the lessor.
The Agency submitted two opinions, one by the Legislative Counsel of
California and one by the Humbolt County District Attorney, stating that
the janitorial contract should have been competitively bid except under
conditions not applicable here. The State questioned whether (6) these
legal opinions were an accurate statement of California law. According
to the State, only the Attorney General renders authroitative advisory
opinions concerning State law.
Analysis
Even if these opinions could be used as an indication of the law,
neither dealt with the exceptions described in the decision in Graydon
discussed above. Those opinions, therefore, do not appear to present a
comprehensive analysis of State law on the specific issue raised here.
The counsel for the State, a Deputy Attorney General, argued that
California courts would have applied an exception cited in Graydon to
the statutory provision requiring competitive bidding. While counsel
was merely advocating the State's position in a case before this Board
and not issuing a formal opinion of the Attorney General, we
nevertheless choose not to "second guess" the State on interpretations
of its own law. Where the law of the State reasonably encompasses the
meaning the State attribtues to it, the Board will not substitute its
interpretation for that of the State, absent substantial evidence that
the State's interpretation is unsupportable. Missouri Department of
Social Services, Decision No. 233, November 30, 1981; California
Department of Health Services, Decision No. 182, May 29, 1981.
Accordingly, we are not persuaded that, in this situation, the
County's entering into a contract for janitorial services without
entertaining competitive bids violated State law. But, as noted above,
the absence of competition is a factor to be considered in determining
the reasonableness of a claim for the sum in question here.
Conclusion
For the reasons stated above, we sustain the disallowance of $8,282,
subject to the following conditions:
Not later than fifteen (15) days following receipt of this letter (or
such longer time as the Agency allows), the State, if it wishes to do
so, may submit documentation to show that the lessor performed specific
services directly related to performance of the contract during the
period of the contract or any evidence demonstrating that the contract
price was reasonable at the time the contract was executed. The Agency
should then review the documentation to determine whether it appears
that the lessor did, indeed, perform some reasonable services justifying
part or all of the contract/subcontract differential or that the County
acted reasonably in executing the contract at the price in (7) question.
If the Agency rejects part or all of the claim, the State may return to
the Board, within 15 days after notification of rejection, for a review
solely of the reasonableness of that rejection. The Board will provide
an accelerated review of the dispute. /1/ In a letter of October 28,
1976, the County Welfare Director stated that under the existing
county cost allocation plan, the cost of furnishing janitorial services
using county employees would be approximately $53,000 per year as
opposed to the offer of the lessor of $17,400 per year. /2/
There is no indication in the record that the Agency disapproved either
method although it had the opportunity to do so.
OCTOBER 22, 1983