House Committee on Science, Space and Technology Hearing on Use of Management Fees

Yesterday (December 3, 2014) the House Committee on Science, Space and Technology held a hearing on two audits conducted by the Defense Contract  Audit  Agency (DCAA) on the National Ecological Observatory Network (NEON). NEON is non-profit organization funded by the National Science Foundation (NSF). Although the reports covered a variety of issues, the primary focus of the questioning related to NEON's use of management fees.

Management fees are amounts negotiated in cooperative agreements that grantees/contractors use to pay for unallowable or non-reimbursable costs. The NSF Inspector General stated that management fees are recognized at non-profits who are almost wholly dependent on Government funding who may need to incur costs that could not be reimbursed by the Government but were otherwise "ordinary and necessary" to maintain the entity's financial viability. Such expenses might include working capital and interest payments. One way to view management fees for non-profit organizations is to consider them analogous to profit earned by commercial organizations.

One of the audits reported that NEON had used management fees to pay for unallowable activities including

• $25 thousand for a Christmas party
• $11 thousand for coffee service
• $3 thousand for alcohol
• $3 thousand for t-shirts
• $83 thousand for business development
• $112 thousand for lobbying

In his opening comments, Chairman Lamar Smith almost accused the IG and DCAA of an attempted cover-up of these issues. The findings were not reported in the final audit report but were raised by a whistleblower.  Chairman Smith stated:

These suspicious taxpayer funded activities were not detailed in the (DCAA) audit submitted to the Inspector General. But to his credit, the principle auditor ... invoked the Whistleblower Protection Act to make sure the Inspector General, Congress, and ultimately the public is aware of the hundreds of thousands of taxpayer dollars being spent on improper activities.

According to both the Inspector General's and the DCAA Director's written comments and testimony, the reason for not taking exception to these costs was the lack of an authoritative basis for doing so. According to OMB Circular A-122, these costs would be unallowable if charged to the agreement/contract as costs. According to the NSF Inspector General and the Director of DCAA however, these costs were not claimed as allowable expenses under the agreement but were charged against the management fee. Both witnesses contend that there is no guidance, regulations, or any other authoritative document that restricts how a firm spends its management fee.

Evidently there is another hearing scheduled for early next year where NSF representatives will appear and explain why they allowed NEON to charge the taxpayers for these nefarious expenses.

To learn more about this hearing and listen to the archived webcast, click here.