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B-117219, DEC 9, 1971

B-117219 Dec 09, 1971
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IS STATED SEPARATELY IN THE CONTRACT FROM THE PROVISIONS FOR REIMBURSEMENT OF COSTS. GAO IS UNABLE TO DETERMINE THE EXTENT TO WHICH THE STATUTE IS APPLICABLE TO NON-PROFIT ORGANIZATIONS. INCORPORATED OF CORNELL UNIVERSITY: REFERENCE IS MADE TO YOUR LETTER DATED APRIL 14. YOU CLAIM THAT THIS REQUIREMENT AND THE RELATED INSTRUCTIONS OUTLINED IN CIRCULAR A-100 ARE INEQUITABLE TO THE CORNELL AERONAUTICAL LABORATORY. SIMILAR NONPROFIT RESEARCH ORGANIZATIONS WHOSE ONLY BUSINESS IS RESEARCH AND BY REASON THEREOF HAVE NO SOURCES OF OUTSIDE FUNDS FROM WHICH TO MEET COST SHARING REQUIREMENTS. YOU FURTHER CLAIM THAT THIS SITUATION WILL SIGNIFICANTLY DETER SUCH ORGANIZATIONS FROM SUBMITTING UNSOLICITED PROPOSALS WITH RESULTING DETRIMENT TO THE NATIONAL INTEREST SINCE MANY IDEAS FOR TECHNOLOGICAL ADVANCEMENT HAVE COME FROM THESE NONPROFIT ORGANIZATIONS.

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B-117219, DEC 9, 1971

CONTRACT - COST-TYPE - MEANING OF "COSTS" DECISION CONCERNING THE PROPER INTERPRETATION OF THE TERM "COSTS" AS USED IN OMB CIR. NO. A-100, REGARDING COST SHARING, AND ITS APPLICABILITY TO NON-PROFIT RESEARCH ORGANIZATIONS. WITH RESPECT TO COST-TYPE CONTRACTS BY THE GOVERNMENT, THE TERM "COST" HAS TRADITIONALLY BEEN CONSIDERED TO MEAN COST TO THE CONTRACTOR, AND THE FEE OR PROFIT, WHERE SO PROVIDED, IS STATED SEPARATELY IN THE CONTRACT FROM THE PROVISIONS FOR REIMBURSEMENT OF COSTS. AT PRESENT, GAO IS UNABLE TO DETERMINE THE EXTENT TO WHICH THE STATUTE IS APPLICABLE TO NON-PROFIT ORGANIZATIONS.

TO CORNELL AERONAUTICAL LABORATORY, INCORPORATED OF CORNELL UNIVERSITY:

REFERENCE IS MADE TO YOUR LETTER DATED APRIL 14, 1971, CONCERNING THE PROPER INTERPRETATION OF THE TERM "COSTS" AS USED IN OMB CIRCULAR NO. A 100 REGARDING COST SHARING.

IN YOUR LETTER, YOU ALLUDE TO SECTION 408 OF THE INDEPENDENT OFFICES AND DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT APPROPRIATION ACT, 1970 (PUBLIC LAW 91-126) WHICH PROVIDES IN PERTINENT PART AS FOLLOWS:

"NONE OF THE FUNDS PROVIDED IN THIS ACT MAY BE USED FOR PAYMENT, THROUGH GRANTS OR CONTRACTS, TO RECIPIENTS THAT DO NOT SHARE IN THE COST OF CONDUCTING RESEARCH RESULTING FROM PROPOSALS FOR PROJECTS NOT SPECIFICALLY SOLICITED BY THE GOVERNMENT; PROVIDED, THAT THE EXTENT OF COST SHARING BY THE RECIPIENT SHALL REFLECT THE MUTUALITY OF INTEREST OF THE GRANTEE OR CONTRACTOR AND THE GOVERNMENT IN THE RESEARCH."

YOU CLAIM THAT THIS REQUIREMENT AND THE RELATED INSTRUCTIONS OUTLINED IN CIRCULAR A-100 ARE INEQUITABLE TO THE CORNELL AERONAUTICAL LABORATORY, INC. AND SIMILAR NONPROFIT RESEARCH ORGANIZATIONS WHOSE ONLY BUSINESS IS RESEARCH AND BY REASON THEREOF HAVE NO SOURCES OF OUTSIDE FUNDS FROM WHICH TO MEET COST SHARING REQUIREMENTS. YOU FURTHER CLAIM THAT THIS SITUATION WILL SIGNIFICANTLY DETER SUCH ORGANIZATIONS FROM SUBMITTING UNSOLICITED PROPOSALS WITH RESULTING DETRIMENT TO THE NATIONAL INTEREST SINCE MANY IDEAS FOR TECHNOLOGICAL ADVANCEMENT HAVE COME FROM THESE NONPROFIT ORGANIZATIONS.

YOUR LABORATORY FOCUSES ITS CONCERN ON THE DEFINITION OF COST AND THE QUESTION OF PROFIT AS REPRESENTED BY THE FEE WHICH IS NORMALLY ALLOWED ON RESEARCH CONTRACTS WITH NONPROFIT ORGANIZATIONS, AND REQUESTS THE VIEWS OF OUR OFFICE ON THESE POINTS. IN THIS REGARD, YOU REFER TO CORRESPONDENCE WHICH YOU HAVE HAD WITH NASA IN WHICH NASA, ON THE BASIS OF INFORMATION IT HAD RECEIVED FROM OMB, STATED THE GAO POSITION AS CITED IN THE SECOND PARAGRAPH OF YOUR LETTER. YOU FURTHER ASSERT THAT PROFIT OR FEE IS A COST THAT IS ESSENTIAL FOR ITS CONTINUANCE AND IS NECESSARY TO ABSORB COSTS THAT ARE NOT ALLOWABLE UNDER RESEARCH CONTRACTS.

THE REVISION OF CIRCULAR A-74, WHICH WAS SUBSEQUENTLY ISSUED AS CIRCULAR A-100 WENT THROUGH SEVERAL DRAFTS WHICH WERE REFERRED TO OUR OFFICE AND OTHER AGENCIES FOR REVIEW AND COMMENT. AN EARLIER DRAFT INCLUDED A STATEMENT THAT "IF THE RESEARCH IS EXPECTED TO BE OF ONLY MINOR VALUE TO THE NONFEDERALLY SPONSORED ACTIVITIES OF THE PERFORMER, IT MAY BE APPROPRIATE TO PAY THE PERFORMER A FEE OR PROFIT. IN SUCH CASES THE TOTAL COMPENSATION TO THE PERFORMER (COST PLUS FEE OR PROFIT) MAY EXCEED TOTAL COSTS OF THE RESEARCH AND THE ORGANIZATION'S SHARING MAY BE REFLECTED IN A REDUCED FEE OR PROFIT." IN COMMENTING ON THIS DRAFT, WE TOOK NOTE OF THIS STATEMENT AND ADVISED OMB (THEN BOB) THAT THE ABOVE STATEMENT IN WHICH THE GOVERNMENT WOULD PAY MORE THAN THE TOTAL COST DID NOT APPEAR TO COMPLY WITH APPLICABLE LEGISLATION. THIS COMMENT IS APPARENTLY THE BASIS FOR THE CITATION IN YOUR LETTER REGARDING THE GAO POSITION.

YOUR RATIONALE APPEARS TO BE THAT THE PROFIT OR FEE SHOULD BE CONSIDERED AS PART OF THE TOTAL COST OF A RESEARCH PROJECT AND THAT COST SHARING SHOULD BE DETERMINED ON THE BASIS OF THIS TOTAL COST. THIS METHOD WOULD AFFORD THE CONTRACTOR THE OPPORTUNITY TO NEGOTIATE COST SHARING IN AN AMOUNT WHICH WOULD NOT BE MORE THAN THE FEE OR PROFIT UNDER THE CONTRACT.

YOUR CONTENTION PRESENTS THE QUESTION WHETHER FOR PURPOSES OF COST SHARING THE LAW INTENDED THAT COST TO THE CONTRACTOR OR COST TO THE GOVERNMENT SHOULD BE THE BASIS FOR DETERMINING COST SHARING. NEITHER SECTION 408 NOR ITS LEGISLATIVE HISTORY CONTAINS ANY INFORMATION INDICATING THE INTENT OF THE CONGRESS ON THIS POINT OR ON THE MATTER OF FEE OR PROFIT. WE BELIEVE, HOWEVER, THAT WITH RESPECT TO COST-TYPE CONTRACTS BY THE GOVERNMENT, THE TERM "COST" HAS BEEN TRADITIONALLY CONSIDERED TO MEAN COST TO THE CONTRACTOR AND THE FEE OR PROFIT WHERE SO PROVIDED IS STATED SEPARATELY IN THE CONTRACT FROM THE PROVISIONS FOR REIMBURSEMENT OF COSTS. THIS DEFINITION OF COST WAS AT THE BASE OF OUR COMMENT ON AN EARLIER DRAFT OF CIRCULAR A-74, AND WAS UNDOUBTEDLY AFFIRMED BY THE OMB IN FINALIZING THE DRAFT WHICH BECAME CIRCULAR A 100. THIS CIRCULAR STATES IN SECTION 6(F) THAT:

"A FEE OR PROFIT WILL USUALLY NOT BE PAID TO THE PERFORMING ORGANIZATION IF THE ORGANIZATION IS TO CONTRIBUTE TO THE COST OF THE RESEARCH EFFORT, BUT THE AMOUNT OF COST SHARING MAY BE REDUCED TO REFLECT THE FACT THAT THE ORGANIZATION IS FOREGOING ITS NORMAL FEE OR PROFIT ON THE RESEARCH. HOWEVER, IF THE RESEARCH IS EXPECTED TO BE OF ONLY MINOR VALUE TO THE PERFORMING ORGANIZATION AND IF COST SHARING IS NOT REQUIRED BY STATUTE, IT MAY BE APPROPRIATE FOR THE PERFORMER TO MAKE A CONTRIBUTION IN THE FORM OF A REDUCED FEE OR PROFIT RATHER THAN SHARING THE COST OF THE PROJECT."

THE UNDERSCORED PART OF THE ABOVE CITATION INDICATES THAT A DISTINCTION IS MADE BETWEEN FEE OR PROFIT AND THE COST OF A RESEARCH PROJECT.

THIS DEFINITION OF COST COULD WORK A HARDSHIP ON ORGANIZATIONS WHOSE ACTIVITIES ARE PREDOMINANTLY RESEARCH AND ARE LARGELY SUBJECT TO THE STATUTORY REQUIREMENT FOR COST SHARING AS STATED IN SECTION 408. HOWEVER, WE ARE PRESENTLY UNABLE TO DETERMINE THE EXTENT TO WHICH THE STATUTE IS APPLICABLE TO YOUR ORGANIZATION.

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