B-157584, NOV. 26, 1965

B-157584, NOV. 26, 1965

TO THE HONORABLE LELAND J. HAWORTH, DIRECTOR, NATIONAL SCIENCE FOUNDATION:

REFERENCE IS MADE TO YOUR LETTER OF AUGUST 26, 1965, REQUESTING A DECISION WHETHER THE NATIONAL SCIENCE FOUNDATION (NSF) MAY DEVELOP PREDETERMINED RATES FOR INDIRECT COSTS FOR USE IN MAKING GRANTS TO NONPROFIT INSTITUTIONS OTHER THAN EDUCATIONAL INSTITUTIONS.

IN 35 COMP. GEN. 434 OUR OFFICE HELD THAT THE USE OF FIXED OVERHEAD RATES ESTABLISHED IN ADVANCE AND APPLIED TO SOME ELEMENT OF DIRECT COST UNDER COST-REIMBURSABLE-TYPE CONTRACTS WAS CONTRARY TO LEGISLATION PROHIBITING A COST-PLUS-A-PERCENTAGE-OF-COST SYSTEM OF CONTRACTING. TO OVERCOME THAT DECISION, PUBLIC LAW 87-638, 76 STAT. 437, WAS ENACTED. THAT LEGISLATION PROVIDED:

"THAT HEREAFTER PROVISION MAY BE MADE IN COST-TYPE RESEARCH AND DEVELOPMENT CONTRACTS (INCLUDING GRANTS) WITH UNIVERSITIES, COLLEGES, OR OTHER EDUCATIONAL INSTITUTIONS FOR PAYMENT OF REIMBURSABLE INDIRECT COSTS ON THE BASIS OF PREDETERMINED FIXED-PERCENTAGE RATES APPLIED TO THE TOTAL, OR AN ELEMENT THEREOF, OF THE REIMBURSABLE DIRECT COSTS INCURRED.'

IN LINE WITH THAT LEGISLATION BUREAU OF THE BUDGET (BOB) CIRCULAR NO. A- 21 (REVISED) DATED MARCH 3, 1965, PROVIDES:

"* * * THE STATED OBJECTIVES OF THE LAW ARE TO SIMPLIFY THE ADMINISTRATION OF COST-TYPE RESEARCH AND DEVELOPMENT CONTRACTS WITH EDUCATIONAL INSTITUTIONS, TO FACILITATE THE PREPARATION OF THEIR BUDGETS, AND TO PERMIT MORE EXPEDITIOUS CLOSE OUT OF SUCH CONTRACTS WHEN THE WORK IS COMPLETED. IN VIEW OF THE POTENTIAL ADVANTAGES OFFERED BY THIS PROCEDURE, CONSIDERATION SHOULD BE GIVEN TO THE NEGOTIATION OF PREDETERMINED FIXED RATES FOR INDIRECT COSTS IN THOSE SITUATIONS WHERE THE COST EXPERIENCE AND OTHER PERTINENT FACTS AVAILABLE ARE DEEMED SUFFICIENT TO ENABLE THE CONTRACTING PARTIES TO REACH AN INFORMED JUDGMENT AS TO THE PROBABLE LEVEL OF INDIRECT COSTS DURING THE ENSUING ACCOUNTING PERIOD.'

YOU STATE THAT IN ACCORDANCE WITH THE BOB CIRCULAR THE FOUNDATION IS DEVELOPING INDIRECT COST RATES WHICH WILL BE USED AS PREDETERMINED FIXED RATES FOR GRANTS TO COLLEGES AND UNIVERSITIES. MOREOVER, YOU INDICATE THAT IT IS THE DESIRE OF THE FOUNDATION TO DEVELOP PREDETERMINED RATES FOR USE IN MAKING GRANTS TO NONPROFIT INSTITUTIONS AS WELL AND YOU INQUIRE WHETHER THE CONCEPT OF PREDETERMINED INDIRECT COST RATES MAY BE APPLIED TO SUCH INSTITUTIONS. IN CONSIDERING THE QUESTION, YOU SAY THAT SEVERAL FACTS ARE TO BE RECOGNIZED:

"* * * FIRST, THE FOUNDATION SUPPORTS BASIC RESEARCH THROUGH GRANTS TO COLLEGES, UNIVERSITIES, AND OTHER NON-PROFIT INSTITUTIONS. SECOND, THE FOUNDATION PROVIDES SUPPORT IN RESPONSE TO PROPOSALS INITIATED INDEPENDENTLY BY INDIVIDUAL SCIENTISTS THROUGH THEIR INSTITUTIONS. THIRD, THE FOUNDATION CONTROLS THE AMOUNT OF FUNDS MADE AVAILABLE. EACH GRANT IS FOR A FIXED AMOUNT AND THE FOUNDATION HAS NO RESPONSIBILITY FOR MAKING ADDITIONAL FUNDS AVAILABLE REGARDLESS OF WHAT THE DIRECT COST MAY BE. FOURTH, IN ALL CASES, THE INSTITUTIONS MUST SHARE SOME PART OF THE COST OF THE PROJECT. THIS IS TO BE DISTINGUISHED FROM DEVELOPMENTAL WORK WHERE THE TOTAL COST IS BORNE BY THE GOVERNMENT SINCE SUCH WORK IS UNDERTAKEN BY THE INSTITUTION AT THE REQUEST OF THE GOVERNMENT IN ORDER TO FULFILL A SPECIFIC GOVERNMENT NEED. IN VIEW OF THESE FACTS, IT IS THE NATIONAL SCIENCE FOUNDATION POSITION THAT BASIC RESEARCH GRANTS WITH PREDETERMINED FIXED OVERHEAD RATES WILL NOT CREATE SITUATIONS EQUIVALENT TO COST-PLUS- PERCENTAGE-OF COST CONTRACTS AND WILL NOT BE CONTRARY TO 10 U.S.C. 2306 (A) WHICH WAS THE SUBJECT OF A DECISION OF THE COMPTROLLER GENERAL, DATED JANUARY 27, 1956 (35 COMP. GEN. 434).'

OUR DECISION CITED ABOVE RULED ONLY THAT CONTRACTS ENTERED INTO ON A COST -PLUS-A-PERCENTAGE-OF-COST BASIS WERE ILLEGAL. WITH RESPECT TO GRANTS WE HAVE TAKEN THE POSITION THAT THE USE OF PREDETERMINED FIXED OVERHEAD RATES SHOULD BE DISCOURAGED IN PROGRAMS WHERE DICTIONARY ADMINISTRATIVE AUTHORITY IS SO BROAD AS TO PERMIT GRANTS OR GIFTS AS IN THE GRANT PROGRAM CONDUCTED BY NSF. SEE B-117219, MAY 15, 1956. WE HAVE NOT RULED THAT SUCH SYSTEM OF PAYMENT FOR OVERHEAD IN GRANTS IS ILLEGAL.

THEREFORE, WHILE IT HAS BEEN OUR OPINION THAT, GENERALLY, INDIRECT COSTS PAID FOR BY THE GOVERNMENT SHOULD BE ACTUAL ALLOWABLE COSTS DETERMINED BY AFTER-THE-FACT AUDIT, WE RECOGNIZE THE DESIRABILITY OF EASING THE ADMINISTRATIVE BURDEN THAT WOULD BE IMPOSED UPON NSF IF IT COULD NOT APPLY THE PREDETERMINED FIXED INDIRECT COST RATES TO THE NONACADEMIC INSTITUTIONS AS IN THE CASE OF THE EDUCATIONAL INSTITUTIONS. WE BELIEVE THAT THE PROCEDURES PROPOSED BY NSF, IF EFFECTIVELY IMPLEMENTED, COULD SERVE TO MINIMIZE POSSIBLE ABUSES. IT IS OUR UNDERSTANDING, HOWEVER, THAT THE PROPOSED PROCEDURES WILL BE USED ONLY FOR BASIC RESEARCH PROJECT GRANTS WHICH ARE FIXED IN AMOUNT WITH NSF HAVING NO RESPONSIBILITY TO MAKE ADDITIONAL FUNDS AVAILABLE REGARDLESS OF WHAT THE TOTAL COST MAY BE AND THAT THE GRANTEES WILL BE REQUIRED TO SHARE SOME PORTION OF THE COST OF EACH RESEARCH PROJECT IN ACCORDANCE WITH GUIDELINES TO BE ESTABLISHED BY THE BUREAU OF THE BUDGET.

ACCORDINGLY, IF THE USE OF PREDETERMINED OVERHEAD RATES IN COST SHARING GRANTS TO NONPROFIT, NONEDUCATIONAL ORGANIZATIONS IS DETERMINED BY YOU TO BE IN THE BEST INTEREST OF THE GOVERNMENT, THE USE OF SUCH PROCEDURES WOULD SEEM APPROPRIATE, AT LEAST ON A TRIAL BASIS, AND WILL NOT BE OBJECTED TO BY THIS OFFICE UNLESS SUBSEQUENTLY FOUND BY US TO BE DISADVANTAGEOUS TO THE GOVERNMENT.