Research Administration Office

University of California

Memo

No. 19-76

The University of California

Office of the Vice President--Business & Finance

February 4, 1976

I-1. DHEW Audit Agency Finding on Supporting Documentation for Proposal Budgets

Attachment I is the DHEW Audit Agency's report on supporting documentation for University Of California cost proposal budgets to the Federal government. The report contains recommendations that the University's policies and procedures prescribing the types of documentation necessary to support budget costs in proposals to the Federal government be improved. A January 23, 1976 response to Mr. Jack Seidenberg from Vice President--Business & Finance John A. Perkins (Attachment 2) concurred in the DHEW Audit Agency's findings, except for that portion recommending the increased participation by Contract and Grant Offices in proposal preparation.

Separate from their audit report, the DHEW Auditors issued to the University an unofficial document entitled Guidelines for Proposal Budget Support (Attachment 3)- This document describes the types of material that the Audit Agency will look for during cost proposal audits performed at awarding agency request. Although the criteria specified in this document are not binding on the University, we would appreciate receiving your written opinions by February 13, 1976 on whether or not the specified guidelines appear suitable for inclusion into the revised Contract and Grant Manual.

Refer: W. Archie, 2-2593

Index: Audits Proposals


UNIVERSITY OF CALIFORNIA

BERKELEY, CALIFORNIA

REVIEW OF SUPPORT FOR COST PROPOSALS UNDER FEDERAL AGREEMENTS

ATTACHMENT 1 to C& G MEMO 19-76

INTRODUCTION

Background

The University of California is a nonprofit State educational institution. Education and research activities are conducted at all nine campuses and various off-campus sites. During fiscal year 1974, the University had expenditures of 551 million for Federal agreements, including 325 million in Energy Research and Development Administration funds. The University submits price proposals to Federal Agencies as part of the process of obtaining Federal contract or grant support.

Scope of Audit

Our audit of the University's policies and procedures for preparing price proposals to the Federal government was made in accordance with standards for governmental auditing. The purpose of our review was to determine the University's procedures were adequate to ensure accurate and reasonable cost estimates in proposals submitted to the Federal government.

Support for Cost Proposals

The University needs to improve its procedures for preparation of price proposals to Federal agencies. Our review of a sample of 46 proposals submitted by six campuses of the University to the Federal government during the fiscal year ended June 30, 1975 showed that the University did not have adequate documentation to support costs proposed on 41 proposals. Formal audits had been performed on 21 of these proposals at the request of Federal agencies. Of the $6,445,496 requested under the 21 proposals which were audited, we found that $1,721,041, or 26.7 percent, had to be set aside because adequate supporting documentation was not available. Thus, we could not express an opinion on the reasonableness of 26.7 percent of the total amounts proposed. This occurred because the University did not (i) have written policies describing the types of documentation necessary to support price proposals, and (ii) always Obtain documentation to support the estimated costs. We recommend that the University prepare written policies describing the types of documentation necessary to support proposals, and implement procedures to ensure that the documentation is obtained.

Background

Government procurement regulations require contracting officers to make some form of price or cost analysis of contractors' price proposals in connection with every negotiated procurement action. The cognizant Federal audit agency may be requested to perform audits in those cases where the contracting officer believes that a valid need exists. The contracting officer may limit the scope of audit or waive the audit whenever he determines that information already available is adequate for the proposed procurement.

The DHEW Audit Agency performed a prior audit (Audit Control Number 30014-09) of cost estimating policies and procedures under price proposals at the University during 1972. The audit report, dated October 13, 1972, stated:

"We have concluded that the policies and procedures used by the University of California in preparing price proposals are generally adequate to provide estimates of costs that are reasonable, allowable, and allocable to Federal agreements, and cost and pricing data that are accurate and current for the following cost elements:

Salaries and wages

Employee benefits

Equipment

Travel expense

Indirect expense

"However, improvement was needed in the procedures for making proper estimates and documenting the data used as a basis of the following cost elements:

Materials

Supplies and expense

Computer charges"

Established Procedures

All individual campuses have established procedures either in writing or on an informal basis which govern the preparation and submission of price proposals. However, the procedures do not clearly indicate the nature and extent of documentation required to support the amounts proposed nor the amount of participation in proposal development required by the contract and grant offices. The extent of participation of campus contract and grant offices in the proposal preparation process varied considerably among the six campuses at which the audit was conducted. The participation varied from virtually no review of proposal budgets at one campus to substantial participation in the proposal budget development process at another campus. The Santa Cruz campus, in particular, had good coordination with principal investigators and department business officers in development of proposal budgets. The University should establish written procedures which indicate the type of supporting documentation necessary to support cost proposal budgets and the amount of participation in proposal development by the campus contract and grant offices.

Supporting Documentation on Proposals

We reviewed 21 contract proposals which had been formally audited by DHEW during fiscal year 1975 at the Berkeley, Los Angeles, and San Diego campuses. Of the 21 contract proposals we audited we were unable to express an opinion on a portion of the costs proposed in 17 cases. Of the $6,445,496 requested under the 21 proposals, $1,721,041, or 26.7 percent, was not adequately supported. In. addition, we reviewed 25 grant proposals submitted by 6 of the 9 campuses during fiscal years 1975. The grants, which were selected on a judgmental basis from the University's contract and grant files, ranged in amount from $44,000 to $365,000 and included a variety of cost elements. On 24 of the 25 grant proposals, at least a portion of the cost was not adequately supported.

Generally, there was better support for proposed salaries and wages, employee benefits and indirect costs than for other cost elements. There was considerable variation in the extent of support for equipment, supplies and expense, travel and other direct costs, such as publications, computer charges, and alterations and renovations.

Personnel Costs. Salary and wage and fringe benefit costs were based on the University's approved salary and fringe benefit rates. Improvements should be made in the detail in which salaries and wages are shown in proposals. For instance, proposals generally did not show job title codes or the individual's step within his salary range. Since University salary and wage schedules are arranged by job title code and step, it was difficult to determine individuals' salary rates. In one proposal, salaries were proposed at the highest step within the applicable salary schedule, even though most of the individuals listed in the proposal were not at that step. In another instance, the individual who prepared the proposal could not support the $19,500 proposed for research assistant salaries.

Other Costs. Proposed nonpersonnel costs were frequently not supported by auditable documentation such as vendors' quotes, recent purchase orders, historical cost data and other acceptable pricing data. As a result, we were unable to determine the reasonableness of proposed costs for travel, supplies and expense, equipment, or other direct costs on 39 of the 46 proposals reviewed.

Proposed travel costs were frequently based on unsupported "best estimates." Typically, each proposed domestic trip was calculated at $500, regardless of the location or duration of the trip. There was an implicit assumption that all domestic travel would be to the East Coast. Also foreign travel costs proposed were not always supported. For example, one trip to an overseas symposium was proposed at $1,500 without any detail as to the travel lodging, subsistence and other cost requirements.

Supplies and expense were generally supported by "best estimates," or a lump sum figure without an itemization of major categories of expense. In three cases, we were informed that the figure quoted for supplies and expense was merely intended to bring the total cost proposed up to the maximum available from the awarding agency.

Equipment and other direct costs were also not properly supported. For example, in one proposal, $10,000 was submitted for the fabrication of scientific equipment without any supporting documentation. In another proposal, there was no documentation to support a figure of $17,000 proposed for alterations and renovations. The University should ensure that documentation is obtained to support cost estimates on proposals.

Recommendations

We recommend that the University:

1. Prepare written policies describing the types of documentation necessary to support price proposals and the amount of participation in proposal development by the campus contract and grant offices.

2. Obtain documentation to support estimated costs on proposals.

University's Response

The University concurred With the finding and stated that it would develop improved policies and procedures covering proposal pricing.


ATTACHMENT 2 to C& G MEMO 19-76

SYSTEMWIDE ADMINISTRATION

BERKELEY, CALIFORNIA 94720

January 25, 1976

Mr. Jack Seidenberg

Chief, Financial Advisory Services Branch

Office of Contracts and Grants

National Institutes of Health

Building 31, Room 1B43A

9000 Wisconsin Avenue

Bethesda, Maryland 20014

Dear Mr. Seidenberg:

Subject: Audit Control No. 67003-09, "University of California. Review of Support for Cost Proposals Under Federal Agreements"

This responds to the DHEW Region IX Audit Agency's referenced audit finding and the recommendations contained in the report.

We agree generally with the facts and with the thrust of the recommendations in the referenced report. In response, we intend to develop a new and more detailed general policy for the University of California system which will apply to all campuses and major Laboratories, and which will describe the types of documentation necessary to support the prices and estimated costs shown in proposals to extramural sponsors. We expect to issue this policy through a revision of the University of California Contract and Grant Manual.

I should like to express our disagreement with the recommendation that all campuses (especially the larger campuses) should necessarily increase participation by Contract and Grant Offices in proposal preparation. The University because of its size has perforce a decentralized organization and mode of operation. We do not impose a standard Organization on the campuses, which, as you know, differ significantly in size and in other respects. The responsibility for implementing policy resides with the Chancellors of the campuses and the Directors of the major Laboratories. While we intend to suggest, in the changes to the Contract and Grant Manual, that one mechanism for implementation of the policy regarding documentation of prices and estimated costs in proposals is to increase the degree of participation in proposal preparation and in proposal review by the Contract and Grant Offices, nevertheless it should be realized that the Chancellors and the Laboratory Directors have the latitude to arrange their organizations as they think best, and to insure compliance with policy in whatever manner and by whatever means appear most productive.

Please let me know if you need further information.

Sincerely,

John A. Perkins


ATTACHMENT No. 2 to C& G MEMO No. 8-79

(Previously Attachment No. 3 to C& G Memo 19-76)

GUIDELINES FOR PROPOSAL BUDGET SUPPORT

The following guidelines are intended to-serve as a basis for supporting budgets under cost proposals submitted to Federal awarding agencies by the University of California. The kind of supporting documentation specified will be the type of material that the DHEW Audit Agency will look for during cost proposal audits performed at awarding agency request. The criteria specified is not intended to be binding on the University. The University may maintain other types of supporting documentation provided that it is written and shows clearly and in sufficient detail how the proposed cost element dollar amounts were arrived at.

Salaries and Wages

Supporting documentation should indicate:

1. The names of all persons who will work under the project (if known).

2. The academic rank or title (including step) of each individual

a. e.g. "professor" is not sufficient. Professor (clinical) step III is sufficient.

b. If the individual to fill a particular position is unknown then the position should not be higher than the middle step for that title.

3. The current annual or monthly salary for each position to be filled

a. This should be based on the current published University salary and wage scales.

b. The nature of the appointment should be specified (9 month, 11 month, annual).

4. The number of months of effort on the project and/or the percentage of effort for each position

a. Summer effort should be marked as such

5. Projected cost of living increases and-the period to which they apply

a. Show the new annual or monthly rate for each position and the period to which it applies.

6. Projected merit increases and the period to which they' apply should be specified.

7. Show the new annual or monthly rate for each position and the period to which it applies. University cost-sharing contributions.

a. Indicate the percentage of cost-sharing and dollar amount for each position.

Employee Fringe Benefits

Supporting documentation should indicate:

1. The current fringe benefit rate for each class of employee.

a. The correct rate should be applied to the salary base for each position.

b. Since the rates are different for summer effort, the proper rate should be shown applied to the proper salary base for each position in which summer effort takes place.

Consultants

Supporting documentation should indicate:

1. The names of the consultants (if known).

2. The daily rate of pay-and the number of days of pay for each consultant.

a. Documentation supporting the reasonableness of the daily rate of pay should be provided.

3. The costs of travel for each consultant, including air fare and per diem costs.

Equipment (Purchased)

Supporting documentation should indicate class of equipment item and

1. Prototype of equipment by type, model number, and manufacturer (i.e. similar to XYZ Manufacturing Company, Model X)

2. The current price of the equipment. Estimates should be based on the latest catalog. Avoid specifying a manufacturer's name.

a. Catalogs should be retained as supporting documentation.

b. If catalogs are not available, written vendors quotes should be obtained and retained.

3. How inflationary factors are calculated if they are included.

a. Documentation supporting the estimated inflation factor should be retained.

Equipment (Fabricated)

Supporting documentation should indicate:

1. The nature of the equipment to be fabricated.

2. A cost analysis of the estimated cost for each fabricated item.

a. The analysis should include the cost of labor (rate times hours), cost of materials and indirect costs.

b. If the cost estimate is based on recent historical experience in fabricating similar. items, have documentation available to support this.

Equipment (Rental)

Supporting documentation should indicate:

1. Each item of equipment to be rented by type, model number, and manufacturer.

2. The current rental rate of each item of equipment, supported by vendors catalogs or written quotes.

3. How inflationary factors are calculated if they are included.

Travel

Supporting documentation should indicate:

1. The destination of each trip (if known). If the exact location is not known, the general geographic location should be specified.

2. The number of individuals on each trip.

3. The mode and cost of transportation.

4. The number of days of per diem and the appropriate per diem rate.

The number of days of car rental and the estimated car rental rate.

5. The purpose of the trip (particularly if a foreign trip).

Supplies and Expense

Supporting documentation should indicate:

1. The major subclasses of supplies and expense (such as chemicals, mechanical items, communications, etc.) along with the estimated cost of each subclass.

2. How best estimates or historical estimates were arrived at for estimating supplies and expense costs.

a. Prior year accounting documentation (or other documentation) should be available to support these "best estimates".

Other Direct Costs

A. Publications Costs

1. List the number of pages to be published and the cost per page. cost per page. Have documentation supporting the cost per page.

B. Computer Time

1. List the number of hours of time and the rate per hour. Itemize any special services required. Specify the computer type and location.

C. Alterations and Renovations

1. Have supporting documentation from the campus architects and engineers office showing how the estimate was arrived at.

D. Any other direct costs should be supported in as much detail as possible. Written documentation supporting these costs should be maintained.

Indirect Costs

The appropriate rate and base to which the rate is to be

applied should be indicated. The dollar figure for the indirect cost base should be specified.