B-157584, JAN 8, 1971

B-157584, JAN 8, 1971

PREDETERMINED INDIRECT COST RATES IN COST-TYPE CONTRACTS AND GRANTS LETTER ADVISING LEGISLATION WOULD BE NECESSARY TO AUTHORIZE THE INCLUSION OF PREDETERMINED INDIRECT COST RATES IN COST-TYPE CONTRACTS WITH NONPROFIT ORGANIZATIONS BECAUSE THE FEDERAL PROPERTY AND ADMINISTRATIVE SERVICES ACT OF 1949, 41 U.S.C. 254, AUTHORIZING THEIR INCLUSION IN CONTRACTS WITH EDUCATIONAL INSTITUTIONS SPECIFICALLY LIMITED THE APPLICATION TO THAT INSTANCE. HOWEVER, IT IS PERMISSIBLE TO USE PREDETERMINED INDIRECT COST RATES IN GRANTS MADE TO NONPROFIT INSTITUTIONS OTHER THAN EDUCATIONAL INSTITUTIONS.

TO MR. SECRETARY:

REFERENCE IS MADE TO LETTER OF AUGUST 26, 1970, FROM THE ASSISTANT SECRETARY, COMPTROLLER, REQUESTING A DECISION WHETHER LEGISLATION WOULD BE NECESSARY TO AUTHORIZE THE INCLUSION OF PREDETERMINED INDIRECT COST RATES IN COST-TYPE CONTRACTS AND GRANTS WITH NONPROFIT ORGANIZATIONS AND INSTITUTIONS.

PREDETERMINED INDIRECT COST RATES ARE EXPRESSLY AUTHORIZED BY STATUTE IN COST-TYPE RESEARCH AND DEVELOPMENT CONTRACTS AND GRANTS WITH EDUCATIONAL INSTITUTIONS. 41 U.S.C. 254(A). IT IS POINTED OUT IN THE ENCLOSURE ACCOMPANYING THE LETTER THAT DESPITE THE RESTRICTION OF PREDETERMINED INDIRECT COST RATES IN 41 U.S.C. 254(A) TO RESEARCH AND DEVELOPMENT CONTRACTS AND GRANTS WITH EDUCATIONAL INSTITUTIONS, THE BUREAU OF THE BUDGET (BOB) (NOW THE OFFICE OF MANAGEMENT AND BUDGET) HAS APPLIED SUCH RATES TO CONTRACTS AND GRANTS FOR OTHER THAN RESEARCH AND DEVELOPMENT ACTIVITIES AND TO CONTRACTS AND GRANTS WITH OTHER THAN EDUCATIONAL INSTITUTIONS. IN THAT CONNECTION, ATTENTION IS DRAWN TO THE FACT THAT BOB CIRCULAR NO. A-87, "PRINCIPLES FOR DETERMINING COSTS APPLICABLE TO GRANTS AND CONTRACTS WITH STATE AND LOCAL GOVERNMENTS," AUTHORIZING THE USE OF PREDETERMINED FIXED OVERHEAD RATES IN GRANTS AND CONTRACTS WITH STATE AND LOCAL GOVERNMENTS, WAS SUBMITTED TO OUR OFFICE FOR REVIEW AND THAT NO OBJECTION WAS EXPRESSED BY OUR OFFICE TO APPLYING PREDETERMINED OVERHEAD RATES IN CONTRACTS AND GRANTS WITH STATE AND LOCAL GOVERNMENTS. FURTHER, IT IS NOTED THAT A REVISION OF BOB CIRCULAR NO. A-21, "PRINCIPLES FOR DETERMINING COSTS APPLICABLE TO RESEARCH AND DEVELOPMENT UNDER GRANTS AND CONTRACTS WITH EDUCATIONAL INSTITUTIONS," EXTENDING THE SCOPE OF THE CIRCULAR TO CONTRACTS AND GRANTS FOR TRAINING AND OTHER EDUCATIONAL SERVICES BY EDUCATIONAL INSTITUTIONS, LIKEWISE WAS REVIEWED BY OUR OFFICE WITHOUT OBJECTION. IN VIEW THEREOF, QUESTION IS RAISED AS TO WHETHER IT IS NOW NECESSARY TO OBTAIN LEGISLATION TO PERMIT THE USE OF PREDETERMINED INDIRECT COST RATES IN CONTRACTS AND GRANTS WITH NONPROFIT ORGANIZATIONS AND INSTITUTIONS.

IN 35 COMP. GEN. 434 (1956), IT WAS HELD THAT THE APPLICATION OF FIXED PREDETERMINED INDIRECT COST RATES TO DIRECT COSTS VIOLATED 10 U.S.C. 2306(A), WHICH PROVIDES THAT THE COST-PLUS-A-PERCENTAGE-OF-COST SYSTEM OF CONTRACTING SHALL NOT BE USED. THERE IS A SIMILAR PROHIBITION IN SECTION 304(B) OF THE FEDERAL PROPERTY AND ADMINISTRATIVE SERVICES ACT OF 1949, 41 U.S.C. 254(B). SECTION 254(A) OF TITLE 41 U.S.C. WAS ENACTED TO PROVIDE A SPECIFIC EXCEPTION TO THE COST-PLUS-A-PERCENTAGE-OF-COST LIMITATION IN THE CASE OF EDUCATIONAL INSTITUTIONS. HOUSE REPORT NO. 1485, ACCOMPANYING THE BILL WHICH BECAME 41 U.S.C. 254(A), STATED THAT "THE PASSAGE OF THIS BILL, OF CORSE, IS NO PRECEDENT FOR FURTHER EXCEPTIONS AND NONE ARE LIKELY UNLESS SOME GREAT NECESSITY DEMANDS."

WHEN THE ABOVE BOB CIRCULARS WERE SUBMITTED TO OUR OFFICE FOR REVIEW, THE QUESTION AS TO THE APPLICATION OF PREDETERMINED INDIRECT COST RATES TO CONTRACTS WITH STATES AND LOCAL GOVERNMENTS OR TO CONTRACTS WITH EDUCATIONAL INSTITUTIONS FOR TRAINING AND EDUCATIONAL SERVICES WAS NOT SPECIFICALLY IDENTIFIED AS AN IMPORTANT ITEM FOR CONSIDERATION. THROUGH INADVERTENCE, WE NEGLECTED TO REVIEW THE CIRCULARS IN THAT CONTEXT. THE DEGREE THAT THE PROVISIONS IN THE CIRCULARS CONSTITUTE AN EXTENSION OF 41 U.S.C. 254(A), AND IN THE ABSENCE OF SOME SPECIAL AUTHORITY THAT WOULD EXEMPT THE CONTRACTS DESCRIBED IN THE CIRCULARS FROM THE STATUTORY PROHIBITION (SEE 39 COMP. GEN. 535 (1960)), THE USE OF PREDETERMINED INDIRECT COST RATES IN THE ABOVE SITUATIONS WOULD BE IN CONTRAVENTION OF THE COST-PLUS-A-PERCENTAGE-OF-COST PROHIBITION. HOWEVER, IT IS PERMISSIBLE TO USE PREDETERMINED INDIRECT COST RATES IN GRANTS MADE TO NONPROFIT INSTITUTIONS OTHER THAN EDUCATIONAL INSTITUTIONS. B-157584, NOVEMBER 26, 1965. ABSENT SOME SPECIAL EXCEPTION PERMITTING THE USE OF PREDETERMINED INDIRECT COST RATES IN COST-TYPE CONTRACTS WITH NONPROFIT ORGANIZATIONS AND INSTITUTIONS, NO LEGAL BASIS EXISTS FOR OUR OFFICE TO AUTHORIZE SUCH CONTRACTING AND LEGISLATION WOULD BE NECESSARY TO PERMIT IT.

FROM A MANAGEMENT STANDPOINT, OUR OFFICE WOULD HAVE NO OBJECTION TO EXTENDING THE USE OF PREDETERMINED INDIRECT COST RATES TO CONTRACTS AND GRANTS WITH NONPROFIT ORGANIZATIONS AND INSTITUTIONS IF SUCH RATES WOULD BE SUBJECT TO THE ROLL FORWARD ARRANGEMENT AUTHORIZED IN CIRCULAR A-21 FOR EDUCATIONAL INSTITUTIONS AND WOULD BE USED ONLY WHERE THE FEDERAL GOVERNMENT HAS A RELATIVELY CONTINUOUS AND STABLE MONETARY LEVEL OF COST- TYPE CONTRACTS AND/OR GRANTS FROM YEAR TO YEAR WITH THE ORGANIZATION AS WILL AVOID FLUCTUATIONS WHICH WOULD SIGNIFICANTLY DISTORT THE INDIRECT COST RATES.