Next Door Foundation, Inc., DAB No. 3161 (2024)

DECISION

Next Door Foundation, Inc. (NDF) appeals a decision of the Administration for Children and Families (ACF) to disallow $142,104 in federal funding in connection with an Early Head Start-Child Care Partnership (EHS-CCP) grant.  ACF based its decision on an audit conducted by the Office of the Inspector General (OIG) that found NDF inaccurately characterized its partners as contractors, rather than subrecipients, and therefore claimed unallowable indirect costs during the audit period.  Specifically, the audit found that NDF paid ten partners a total of $1,671,038 under the EHS-CCP grant and claimed $167,104 (10%) for itself in indirect costs associated with those payments.  ACF found that NDF should have classified its ten partners as subrecipients and, based on applicable cost principles, should have claimed indirect costs of only $2,500 for each of the subawards to its ten partners, for a total of $25,000.  ACF concluded that the indirect costs claimed by NDF in excess of that amount ($142,104) must be disallowed.  For the reasons explained below, we uphold the disallowance in its entirety.

Legal Background

The Head Start program, authorized under the Head Start Act, 42 U.S.C. § 9801 et seq., as amended, provides comprehensive early child education, nutrition, and health services to low-income children and their families.  42 U.S.C. § 9831.  The Early Head Start program funds family-centered services for low-income families with very young children to promote their development and to enable their parents to assist them toward self-sufficiency.  Id. § 9840a.  In 2014, Congress allocated approximately $500 million toward new discretionary grant programs, which included Early Head Start-Child Care Partnerships (EHS-CCP).  NDF Ex. C at 4.  EHS-CCP grants are intended for grantees to partner with local child care providers to increase the resources and developmental opportunities for eligible children through these partnerships.  Id. at 4-5.

Head Start and Early Head Start grantees must comply with regulations specific to those programs and with the uniform administrative requirements, cost principles, and audit

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requirements in 45 C.F.R. Part 75.  45 C.F.R. §§ 1303.3, 75.100, 75.101(b)(1).¹  The regulations in Part 75, Subpart E, delineate cost principles that are based on the fundamental premise that the “non-Federal entity,” including an award recipient, “assumes responsibility for administering Federal funds in a manner consistent with underlying agreements, program objectives, and the terms and conditions of the Federal award.”  45 C.F.R. § 75.400(b).²  The accounting practices of the recipient “must be consistent with these cost principles and support the accumulation of costs as required by the principles, and must provide for adequate documentation to support costs charged to the Federal award.”  Id. § 75.400(d).

Costs charged to an award must be allowable.  To be allowable, a cost, among other requirements, must “[c]onform to any limitations or exclusions set forth in these principles [under Part 75] or in the Federal award as to types or amount of cost items.”  Id. § 75.403(b).  If an award recipient fails to comply with federal laws, regulations, or the terms and conditions of its award, the awarding agency may, as appropriate, disallow the cost of the activity or action not in compliance.  Id. § 75.371(b).  “Disallowed costs” are those charges to a federal award that the federal awarding agency determines to be unallowable.  Id. § 75.2.  “Payments made for costs determined to be unallowable by . . . the HHS awarding agency . . . either as direct or indirect costs, must be refunded (including interest) to the Federal Government . . . .”  Id. § 75.410 (emphasis added).

This case involves a disallowance of “indirect costs” that NDF charged to its EHS-CCP award.  NDF Ex. A (Disallowance Letter).  Indirect costs are “costs incurred for a common or joint purpose benefitting more than one cost objective, and not readily assignable to the cost objectives specifically benefitted, without effort disproportionate to the results achieved.”  45 C.F.R. § 75.2.³

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An award recipient may have a negotiated indirect cost rate that, with some exceptions, must be accepted by federal awarding agencies.  Id. § 75.414(c).  When, as here, the award recipient never received a negotiated indirect cost rate, the recipient may, subject to exceptions not applicable here, “elect to charge a de minimis rate of 10% of modified total direct costs (MTDC) which may be used indefinitely.”  Id. § 75.414(f).  MTDC is a defined term, meaning “all direct salaries and wages, applicable fringe benefits, materials and supplies, services, travel, and up to the first $25,000 of each subaward (regardless of the period of performance of the subawards under the award).”  Id. § 75.2 (emphasis added).  MTDC excludes “the portion of each subaward in excess of $25,000.”  Id.  Thus, during the relevant period, an award recipient without a negotiated indirect cost rate could claim indirect costs of up to 10% of the first $25,000 of each subaward made to subrecipients.

The term “subaward” means:

[A]n award provided by a pass-through entity to a subrecipient for the subrecipient to carry out part of a Federal award received by the pass-through entity.  It does not include payments to a contractor or payments to an individual that is a beneficiary of a Federal program.  A subaward may be provided through any form of legal agreement, including an agreement that the pass-through entity considers a contract.

45 C.F.R. § 75.2.  A “pass-through entity” is “a non-Federal entity that provides a subaward to a subrecipient to carry out part of a Federal program.”  Id.  A “subrecipient” is “a non-Federal entity that receives a subaward from a pass-through entity to carry out part of a Federal program; but does not include an individual that is a beneficiary of such program.”  Id.  “Contractor means an entity that receives a contract . . . .”  Id.

The term “contract” means:

[A] legal instrument by which a non-Federal entity purchases property or services needed to carry out the project or program under a Federal award.  The term as used in this part does not include a legal instrument, even if the non-Federal entity considers it a contract, when the substance of the transaction meets the definition of a Federal award or subaward (see Subaward).

45 C.F.R. § 75.2.

The regulations in Part 75, Subpart D, titled “Post Federal Award Requirements,” include provisions requiring that an award recipient (or pass-through entity) that disburses federal program funding must determine whether the party receiving the funds is a subrecipient or contractor.  45 C.F.R. § 75.351.  As further described under section 75.351, “[a]

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subaward is for the purpose of carrying out a portion of a Federal award and creates a Federal assistance relationship with the subrecipient.”  Id. § 75.351(a).  A “contract,” by contrast, “is for the purpose of obtaining goods and services for the non-Federal entity’s own use and creates a procurement relationship with the contractor.”  Id. § 75.351(b) (emphasis added).

Section 75.351 specifies several characteristics to be considered in determining whether a party receiving federal program funds from an award recipient (or pass-through entity) is a subrecipient or contractor:

(a) Subrecipients.  . . .  Characteristics which support the classification of the non-Federal entity as a subrecipient include when the non-Federal entity:

(1) Determines who is eligible to receive what Federal assistance;

(2) Has its performance measured in relation to whether objectives of a Federal program were met;

(3) Has responsibility for programmatic decision making;

(4) Is responsible for adherence to applicable Federal program requirements specified in the Federal award; and

(5) In accordance with its agreement, uses the Federal funds to carry out a program for a public purpose specified in authorizing statute, as opposed to providing goods or services for the benefit of the pass-through entity.

(b) Contractors.  . . .  Characteristics indicative of a procurement relationship between the non-Federal entity and a contractor are when the [contractor]:

(1) Provides the goods and services within normal business operations;

(2) Provides similar goods or services to many different purchasers;

(3) Normally operates in a competitive environment;

(4) Provides goods or services that are ancillary to the operation of the Federal program; and

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(5) Is not subject to compliance requirements of the Federal program as a result of the agreement, though similar requirements may apply for other reasons.

Id. § 75.351(a), (b).

In determining whether an agreement between a pass-through entity and another non-Federal entity casts the latter as a subrecipient or a contractor, the substance of the relationship is more important than the form of the agreement.  All of the characteristics listed above may not be present in all cases, and the pass-through entity must use judgment in classifying each agreement as a subaward or a procurement contract.

Id. § 75.351(c).

Recipients of Head Start and Early Head Start awards are subject to audits to ensure that they operate in compliance with federal regulations and appropriate financial and administrative procedures and controls.  42 U.S.C. § 9842; 45 C.F.R. §§ 75.501, 75.503(b), 75.364(a).  Recipients must promptly follow up and take corrective action on audit findings.  45 C.F.R. §§ 75.508(c), 75.511(a).

Case Background

A. ACF announced a funding opportunity for EHS-CCP grants.

NDF is a Wisconsin nonprofit organization with a history of providing services under Head Start and Early Head Start (EHS) programs in the Milwaukee area.  NDF Br. at 1-2; NDF Ex. B at 60-61, 104.⁴  In August 2014, NDF applied for an EHS-CCP grant in response to a funding opportunity announcement (FOA) issued by ACF’s Office of Head Start (OHS).  NDF Ex. B at 4-96 (Application); NDF Ex. C (FOA).  The FOA announced the availability of approximately $500 million in competitively awarded EHS Expansion and EHS-CCP grants.  NDF Ex. C at 4.  The FOA explained that new or existing EHS grantees, like NDF, “can apply to use funding to partner with local child care providers to provide comprehensive, high-quality services to eligible infants and toddlers through EHS-CC Partnerships.”  Id.  “These Partnerships will enhance and support early learning settings to provide full-day, full-year comprehensive services that meet the needs of low-income working families; enhance access to high-quality, full-time child care; support the development of infants and toddlers through strong relationship-based experiences; and prepare them for the transition into preschool.”  Id.

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The FOA envisioned that, through these partnerships, all infants and toddlers at partner sites would benefit from having “facilities and homes that are licensed and meet [EHS] facility safety requirements,” low adult-child ratios and class sizes, qualified teachers with “ongoing supervision and coaching, curriculum,” and “broad-scale parent engagement activities.”  NDF Ex. Cat 5.⁵  The FOA stated that “priority will be given to applicants proposing to create EHS-CC Partnerships” and that “funding provided under this FOA will allow the EHS-CC Partnership grantees to improve the quality of environments and services for a greater number of low-income children.”  Id. at 5, 7.

The FOA specified that all grantees and their partners “will be required to provide continuous and comprehensive child development and family support services that will enhance the physical, social, emotional, and intellectual development of participating children; support parents’ efforts to fulfill their parental roles; and help parents move toward self-sufficiency.”  Id. at 8-9.  Grantees and their partners will further “be required to implement all Head Start Program Performance [HSPP] Standards for the children funded through this FOA . . . .”  Id. at 9.  The FOA noted that, “[w]hile the full array of services shall be provided, EHS-CC Partnership applicants will propose an approach that identifies which services are to be provided by the grantee, the partner sites, or through referrals to community agencies.”  Id.  In terms of award budgets, the FOA stated that ACF expects “grantees to direct a significant portion of funding to their child care partners.”  Id.

The FOA acknowledged that “[t]he exact role for each partner will vary at the local level,” and that grantees and their partners must “establish clearly defined roles and responsibilities articulated through a contract or other formal agreement.”  NDF Ex. C at 11 (“Defining joint roles and responsibilities, and those that are separate and distinct to the grantee and to the partners, is vital in ensuring accountability for meeting all requirements of the grant.”).  In terms of the respective roles and responsibilities of grantees and their partners, the FOA provided:

All grantees must ensure that every child receives all of the required services set forth in the [HSPP] Standards, whether that is done directly by the grantee or through support or financial assistance to the child care partner.  Partner sites are responsible for providing all of the direct education and health and safety requirements.  Grantees will ensure that all other comprehensive services will be provided directly by the grantee, by the partners, or through community referrals.  Funding provided through this grant will support the implementation of these requirements.

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NDF Ex. Cat 11 (emphasis added).

The FOA further specified certain partner level and grantee level roles and responsibilities.  Id.  Under the program, partners would do the following:  ensure that adult-child ratios and group sizes meet EHS standards or local requirements (whichever are more stringent); implement an evidence-based curriculum; conduct ongoing assessments of children; provide health and nutrition services; and engage parents in child development and family support services.  Id.  Grantees, on the other hand, would be responsible for ensuring:  the provision of all comprehensive services and compliance with applicable regulations; that all administrative and financial management requirements are met; that all teachers meet minimum qualifications; that each child receives a minimum of two annual home visits; that the physical environment and facilities meet HSPP standards; and that children retain services regardless of subsidy status.  Id.  Additionally, grantees would provide professional development, coaching, and supervision for all teachers; employ at least one family worker for every 40 enrolled children; support the inclusion and delivery of services to children with disabilities; and engage parents in program decision-making through the Policy Council.  Id.

B. NDF applied for and was awarded an EHS-CCP grant.

On August 18, 2014, in response to the FOA, NDF applied for an EHS-CCP grant, proposing to serve 344 children through eight partners at ten center-based sites.  NDF Ex. B at 4-5, 15-18, 19, 23.  NDF stated that it would “create and allocate a hub of comprehensive services across Partner sites according to identified gaps in meeting and exceeding Head Start Performance Standards” and “provide program design and management support to incentivize Partners to provide continuity of care, improve child outcomes, and create more efficient operational structures.”  Id. at 23.  NDF proposed that it would “serve as an umbrella of key supports for Partners . . . to ensure their successful implementation of the HSPS [Head Start Performance Standards].”  Id. at 51-52.  NDF requested more than $4.6 million in federal funding for its program and noted that a “significant portion of the cost-per-child (50.81%) will be passed through directly to the Partners to augment and increase program quality through enhanced teacher salaries and benefits, basic supplies and scholarships.”  Id. at 70, 77 (emphasis added); see also id. at 78 (itemizing partner site direct funding of more than $2.3 million).

With its application, NDF submitted a Memorandum of Agreement (MOA) signed by NDF and eight partners.  NDF Ex. B at 89-94.⁶  The MOA outlined the roles and

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responsibilities of both NDF and its partners.  Under the MOA, the partners agreed that “all services will be developed to be fully compatible with the intent and philosophy of the Early Head Start program and will meet at [sic] all Head Start Performance Standards, with special emphasis on Education, Child Health & Safety, Child Health & Development, Nutrition, Mental Health, Disabilities, Transition and ERSEA; as well as Wisconsin Model Early Learning Standards and YoungStar requirements.”  Id. at 89.  The partners agreed to “offer care and education services” 10 hours per day (Monday through Friday) for 48 weeks per year.  Id.

The MOA set forth eligibility criteria for enrollees in the EHS program and further provided that NDF would “work closely with Partners to ensure all children and families enrolled are either income or categorically eligible.”  NDF Ex. B at 89-90.  In terms of eligibility, enrollment, and attendance, partners were required to:  ensure continuity of care (including by providing scholarships if an enrolled child lost a subsidy); maintain documentation of family income at the time of enrollment; maintain the budgeted enrollment level as proposed; ensure that attendance was maintained at 85%; and establish a waiting list to fill open slots within 30 days.  Id. at 90.

In terms of services and operations, partners further agreed to:

• guide children to develop skills in cognition and general knowledge, language development, social and emotional development, physical well-being and motor development, and approaches to learning;
• ensure that each EHS child had two home visits and two parent conferences a year, a medical home, a comprehensive developmental screening, immunization, follow-up treatment, and individualized case management;
• support the work of the family advocate to develop partnership agreements inclusive of family goals, responsibilities, and progress;
• ensure compliance with all local, state, and federal regulations and policies;
• provide NDF with all relevant materials and documentation to allow monitoring of compliance with the MOA;
• employ sufficient, qualified staff to fully implement the education, disabilities, and transition piece of the HSPS;
• provide staff supervision and scheduling to ensure no more than four children per teacher and no more than eight children per classroom;

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• maintain documentation to substantiate all EHS expenses and complete an annual audit;
• attain “full compliance” with all EHS Program Requirements within 18 months of the MOA;
• provide appropriate levels of the non-federal share as required by the grant;
• submit a proposed annual budget to be reviewed and approved by NDF;
• submit invoices for reimbursable expenses by the 10th day of each month to be reviewed and approved by NDF; and
• obtain and maintain required insurance.

NDF Ex. B at 90-92.

For its part, NDF agreed that it would:

• include partners in the decision making, planning, strategizing, self-assessment, and community assessment process of the program;
• work with partners to develop policies and guidelines meeting the criteria for the HSPS;
• ensure that all partner staff are trained and knowledgeable regarding the HSPS regulations and guidelines;
• meet quarterly with partners to review the partnership and involve partners on an annual basis in a self-assessment process;
• work with partners to create professional development plans for all teachers and ensure access to professional development experiences;
• ensure that all administrative and financial management requirements of the grant are met;
• provide financial and program management information to partners on a quarterly basis;
• work closely with partners to establish a partnership budget;

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• determine the appropriate reimbursement rate per enrolled child by means that both parties find acceptable;
• ensure that the non-federal share requirement of the grant is met; and
• review all invoices submitted by partners for reimbursement.

NDF Ex. B at 91-92.

On December 30, 2014, ACF awarded the EHS-CCP grant to NDF in the amount of $5,158,750.  NDF Ex. D (Notice of Award).  The notice of award identified an 18-month budget period from January 1, 2015 through June 30, 2016, and a project period from January 1, 2015 through June 30, 2019.  Id. at 2.  The notice specified that this “grant action” awarded NDF funds under the Consolidated Appropriations Act (2014) for the operation of the Early Head Start program in the designated service area and, specifically, to provide Early Head Start services to 344 children for the initial budget period.  Id. at 3.  The notice further specified that the award was subject to the requirements of the HHS Grants Policy Statement (GPS) and any applicable statutory or regulatory requirements.  Id.  The “approved budget” included a line item of $0 for indirect costs.  Id. at 2.

C. OIG found that a portion of the indirect costs that NDF charged to the EHS-CCP award is unallowable.

In 2018, OIG audited NDF’s grant expenditures for fiscal years 2016 and 2017 (October 1, 2015 through September 30, 2017).  NDF Ex. B at 97-123 (Audit Report); NDF Br. at 7.  OIG determined that NDF failed to comply with regulations applicable to its EHS-CCP grant.  NDF Ex. B at 106.  Specifically, OIG found that NDF claimed $142,104 in unallowable indirect costs because it inaccurately classified its 10 EHS-CCP partners to be contractors, rather than subrecipients, and therefore failed to exclude the portion of each subaward in excess of $25,000.  Id.⁷  NDF does not dispute that it paid more than $25,000 to each of its partners with funds from the EHS-CCP grant.  OIG explained that applicable cost principles under 45 C.F.R. § 75.414(f) allowed NDF to charge only a de minimis rate of 10 percent of MTDC, which excludes, among other things, the portion of each subaward in excess of $25,000.  Id.  OIG further explained:

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According to the terms of NDF’s Memorandum of Agreement (MOA) with its partners, EHS-CCP partners are responsible for adhering to many of the same requirements imposed on NDF by the EHS program (both regulations and other standards), as well as other Federal requirements.  EHS-CCP partners (1) are responsible for adhering to EHS and other Federal requirements, (2) use EHS funds in accordance with the MOA to carry out the EHS program for public purposes, and (3) are not providing goods or services for the benefit of NDF.  . . .  Moreover, NDF’s partners do not provide services to NDF that are like those provided by contractors.  . . .  [P]artners are providing the very services that are established and required by the EHS program.

NDF Ex. B at 106-07 (footnote omitted).

In a letter dated July 22, 2019, NDF argued against OIG’s determination, claiming that its partners were contractors because “[p]artners were not contracted for [NDF’s] own use, rather the intent of the grant was to broaden and strengthen the partner’s services to the community.”  Id. at 116 (emphasis added).  Its partners, NDF argued, should be considered contractors because they operated in early childhood education before working with NDF, served “customers” other than NDF, operated in a competitive environment, and did not determine eligibility.  Id. at 116-17.

On September 27, 2019, OIG issued its final report.  Id. at 97-123.  OIG acknowledged that NDF’s partners operated in a competitive environment and that NDF performed some of the activities required by the EHS program.  NDF Ex. B at 110.  OIG noted, however, that the partners exhibited other characteristics indicative of a subrecipient and that a subrecipient need not “carry out the entire Federal award.”  Id. (“A subaward is for the purpose of carrying out a portion of a Federal Award . . . .  Partners carried out portions of the Federal program.”).  OIG further noted that “[a] contract is for the purpose of obtaining goods and services for the non-Federal entity’s own use[,]” and NDF expressly acknowledged that its “partners were not contracted for [NDF’s] own use . . . .”  Id.  Thus, OIG concluded that NDF’s partners were subrecipients and that the indirect costs claimed by NDF in excess of $25,000 should be disallowed.  Id. at 111.

D. ACF disallowed the questioned indirect costs and NDF appealed.

By letter dated March 16, 2022, ACF notified NDF that it was disallowing $142,104 in  indirect costs under the EHS-CCP award based on the OIG audit findings and recommendation.  NDF Ex. A.  ACF determined that NDF’s partners were subrecipients (not contractors) and, therefore, NDF could not claim indirect costs in excess of $25,000 under the applicable regulations.  Id. at 5-6 (citing 45 C.F.R. §§ 75.351, 75.414(f), 75.2).

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On April 12, 2022, NDF filed a notice of appeal, challenging ACF’s determination that its partners were subrecipients.  On June 28, 2022, NDF filed its appeal brief (NDF Br.) and appeal file, including seven exhibits (NDF Exs. A-G).  On August 29, 2022, ACF filed its response brief (ACF Br.) along with its supplemental appeal file, including four exhibits (ACF Exs. 1-4).  On September 13, 2022, NDF filed a reply brief (Reply) and submitted one additional exhibit (NDF Ex. H).

The parties agree that the question of allowability in this case turns on whether NDF’s partners were appropriately classified as “contractors,” or whether they should have been classified as “subrecipients.”  NDF Br. at 1; ACF Br. at 1-2; Reply at 1.

Standard of Review

We review de novo an agency’s decision to disallow costs charged to a federal award.  Int’l Educ. Servs., Inc., DAB No. 3055, at 8 (2021).  The Part 16 regulations empower the Board to assess all relevant evidence to ascertain facts necessary to determine whether ACF’s decision is sound.  See id. at 16.  Thus, the Board does not “defer” to either parties’ assessment of the evidence; rather, the Board determines the facts de novo, based on the record before it, including evidence from both parties.

The Board must uphold a disallowance if it “is authorized by law and the grantee has not disproved the factual basis for the disallowance.”  Middletown Cmty. Health Ctr., Inc., DAB No. 2754, at 6 (2016) (quoting S.A.G.E. Commc’ns Servs., DAB No. 2481, at 5-6 (2012)).  “[I]t is a fundamental principle of grants management that a grantee . . . bears the burden of demonstrating the allowability and allocability of costs for which it received federal funding.”  Bright Beginnings for Kittitas Cnty., DAB No. 2608, at 6 (2014) (quoting Marie Detty Youth & Family Servs. Ctr., Inc., DAB No. 2024, at 3 (2006)).  In assessing whether there is a basis for the disallowance, the Board is bound by all applicable statutes and regulations.  45 C.F.R. § 16.14; Kids Central, Inc., DAB No. 2897, at 15 (2018).  Moreover, the Board “has no authority to ignore or waive an otherwise applicable grants administrative requirement . . . .”  Teaching & Mentoring Cmtys., Inc., DAB No. 2790, at 11 (2017).

The Board has previously described the parties’ respective burdens in a Head Start disallowance appeal as follows:

[T]he federal agency has the initial burden to provide sufficient detail about the basis for its determination to enable the grantee to respond.  If the agency carries this burden, which the Board has called “minimal,” then the nonfederal party (the grantee, in this case) must demonstrate that the costs are, in fact, allowable.  When a disallowance is supported by audit findings, the grantee typically has the burden of showing that those findings are legally or factually unjustified.

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E Center, DAB No. 2657, at 5 (2015) (internal citations omitted).

Analysis

This case turns on the application of the relevant “characteristics” under 45 C.F.R. § 75.351 to the facts of record.  Neither party has identified any ambiguity in the plain language of section 75.351, and we perceive none.  Therefore, to resolve this case we need not address any arguments about the extent to which either party’s “interpretation” of the regulation is reasonable, unreasonable, or deserving of deference.  See, e.g., ACF Br. at 10; Reply at 2.  By applying the plain language of 45 C.F.R. § 75.351 to the record evidence, we conclude, as explained below, that the disallowance is supported by audit findings, and that NDF has not shown those findings to be legally or factually unjustified.  Nor has NDF established any other valid basis to overturn the disallowance.

I. The disallowance is supported by audit findings, and NDF has not shown that those findings are legally or factually unjustified.

ACF informed NDF that, based on the OIG audit, it determined that NDF “failed to comply with federal regulations by claiming $142,104 in unallowable indirect costs after incorrectly categorizing its 10 EHS-CCP partners as contractors instead of subrecipients.”  NDF Ex. A at 5.  There is no dispute that ACF provided sufficient detail about the basis for its disallowance to enable NDF to respond.  Indeed, NDF does not argue that the disallowance notice contained insufficient detail.  Accordingly, we conclude that ACF carried its initial burden to provide sufficient detail about the basis for its determination.

Having determined that ACF met its initial burden, the burden shifts to NDF to demonstrate that the disallowed costs are, in fact, allowable and that the audit findings are legally or factually unjustified.  E Center at 5.  We turn now to an evaluation of the regulatory characteristics relevant to determining the classification of NDF’s partners as subrecipients or contractors.

A. The regulatory characteristics under section 75.351(a) weigh in favor of classifying NDF’s partners as subrecipients.

A subaward is for the purpose of carrying outa portion of a federal award and creates a federal assistance relationship with the subrecipient.  45 C.F.R. § 75.351(a) (citing to the definition of “subaward” in § 75.2).  Section 75.351(a) enumerates five characteristics that support classifying a non-federal entity as a subrecipient.  Not all characteristics will be present in every case, and the substance of the relationship between the two entities is more important than the form of the agreement between them.  Id. § 75.351(c).  For the reasons explained below, we find that the record evidence weighs heavily in favor of

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classifying NDF’s partners as subrecipients, rather than contractors, and that NDF has not carried its burden of showing that the audit findings are legally or factually unjustified.

1. NDF’s partners determined, in part, who is eligible to receive federal assistance.

The first characteristic supporting the classification of a non-federal entity as a subrecipient is when the entity determines who is eligible to receive what federal assistance.  45 C.F.R. § 75.351(a)(1).  Under the MOA, NDF and its partners shared this responsibility.  The MOA defined eligibility criteria and specifically provided that NDF “will work closely with Partners to ensure all children and families enrolled are either income or categorically eligible” for the EHS program.  NDF Ex. B at 89-90.  The MOA further required that partners ensure “continuity of care” for each enrolled child, even if they lose a child care subsidy, and required that each partner maintain recruitment, enrollment, and intake documentation for eligible children, with such documentation being checked regularly by NDF.  Id. at 90.⁸

Provisions in the renewed MOAs for 2016-2017 that were in effect during the latter part of the audit period further authorized NDF’s partners to suspend or expel children from the EHS program provided such action complied with Head Start Performance Standards.  See, e.g., NDF Ex. B at 145 (“Provider must ensure that their policies on expulsion of children align with the proposed Head Start Performance Standards” and “Provider must consult with the EHS-CCP Director prior to making the decision to terminate the child from the program.”).  Although NDF denies that its partners had authority to terminate children from the program (ACF Ex. 1, at 5), it submitted no evidence supporting its assertion and no evidence that these provisions were amended or rescinded.

Notwithstanding the terms of its partner agreements, NDF contends that it was “solely responsible” for determining which children were eligible for services.  NDF Br. at 12.  In support of this assertion, NDF relies on an unsworn declaration from its “Vice President of Programs” (NDF Ex. E) and its answers to interview questions posed by OHS in August 2015 (NDF Ex. F).  Id.  We find this evidence to be unpersuasive.

As an initial matter, the unsworn declaration of NDF’s vice president, executed in June 2022, failed to comply with 28 U.S.C. § 1746.  NDF Ex. E at 2-5.  Section 1746 provides that for an unsworn declaration to have the same force and effect of a sworn declaration, the declaration must include an attestation in “substantially” the following form:  “I declare (or certify, verify, or state) under penalty of perjury that the foregoing is true and correct.  Executed on (date).  (Signature).”  28 U.S.C. § 1746.  Although the declaration

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purports to have been made “[p]ursuant to 28 U.S.C. § 1746” (NDF Ex. E at 2), the required attestation appears nowhere in the declaration.

Moreover, on the issue of eligibility determinations, the declarant simply states:  “NDF, not its Partners, determines whether children are eligible to receive EHS-CCP services.”  NDF Ex. E at 3 (¶ 10).  No context, explanation, or supporting documentation was provided.  The declarant points to no corroborating evidence and does not explain the contradictory language in the MOA indicating that eligibility determinations are a shared responsibility between NDF and its partners.  Thus, we are presented with an unsworn declaration without the required attestation, executed years after the audit and for purposes of this proceeding, and that is contradicted by NDF’s contemporaneous agreements with its partners and unsupported by corroborating evidence.  For all of these reasons, we afford the declarant’s conclusory assertion little weight.

As to the document summarizing NDF’s “fiscal baseline” interview conducted by OHS in August 2015, it states, without explanation, that the “grantee” has “responsibility for determining eligibility for the program.”  NDF Ex. F at 4.  It does not state that NDF has “sole” responsibility for making eligibility determinations, nor does it address the contradictory terms of the partner agreements.  The interview summary is a form of double-hearsay and does not include any information about the individual who provided the answers to OHS on NDF’s behalf, the extent of their knowledge, or their authority to provide such information.  For all of these reasons, we conclude that this evidence is both unreliable and unpersuasive.

In sum, the audit found that NDF’s partners were involved in eligibility determinations, which is a characteristic of subrecipients.  NDF Ex. B at 107 (finding that the MOAs stipulate that partners “enroll only children who are eligible for the EHS program”).  NDF has not shown that the audit finding is factually incorrect or that NDF has sole responsibility for making eligibility determinations.  NDF provided no persuasive evidence to show that the actual roles of their partners significantly differed from the roles and responsibilities described in the MOAs.  While NDF argued that it was “solely responsible” for eligibility determinations, the weight of the evidence supports OIG’s finding that NDF’s partners determined, in part, which children are eligible to receive EHS services in their respective programs.  Accordingly, this characteristic weighs in favor of finding that NDF’s partners are subrecipients.

2. Each partner’s performance was measured in relation to whether the objectives of the EHS-CCP program were met.

The second characteristic supporting the classification of a non-federal entity as a subrecipient is when the entity’s performance is measured in relation to whether objectives of the federal program were met. 45 C.F.R. § 75.351(a)(2).  Neither party

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directly addressed this characteristic in their briefs.¹⁰  We find that NDF’s partners had their performance measured in relation to whether the objectives of the EHS-CCP program were met.  For instance, under the heading “Scope of Services,” the MOA stated that “Partner assures that all services will be developed to be fully compatible with the intent and philosophy of the Early Head Start program and will meet [] all Head Start Performance Standards.”  NDF Ex. B at 89.  NDF and its partners would meet at least quarterly to “review the partnership” and annually engage in “an intensive self-assessment process” to address, among other things, any compliance issues.  NDF Ex. B at 91 (MOA), 143 (renewed MOA).

Similarly, under the heading “Program Goals,” the renewed MOAs provided that:

The service delivery objectives are designed to effectively and consistently help children maximize their learning and growth potential and include, but are not limited to, developing and providing high quality, individualized, child development services, as evidenced by adherence to the EHS requirements (Head Start Performance Standards “HSPS”).

NDF Ex. B at 141.

Additionally, under the heading “Other EHS Program Requirements,” the renewed MOAs made clear that partners must “maintain full compliance with the EHS Program Requirements” and that NDF “reserves the right to terminate the contract with [the partner] if program requirements are not met.”  NDF Ex. B at 146.  Furthermore, NDF would only reimburse its partners with EHS program funds each month if the partners were current and compliant with EHS requirements.  Id. at 147.  Still further, as NDF noted in its grant application, it retained the right to replace partners whose teachers do not meet the required educational standards or partners that are unable or unwilling to meet Head Start Performance Standards.  NDF Ex. B at 55-56.  We find that the record evidence clearly shows that the performance of NDF’s partners was measured in relation to whether the objectives of the EHS-CCP program were met and that this characteristic weighs in favor of finding a subrecipient relationship between NDF and its partners.

3. NDF’s partners were responsible, in part, for programmatic decision- making.

A third characteristic supporting the classification of a non-federal entity as a subrecipient is when the entity has responsibility for programmatic decision-making. 45 C.F.R. § 75.351(a)(3).  NDF concedes that “[t]he development of both long- and short-term program goals [is] a collaborative process between NDF and its Partners,” though NDF avers that it retained “ultimate oversight and decision-making” roles.  NDF Br.

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at 12 (“Although the Partners have an important role in providing input to assist NDF in shaping the specific goals for their respective sites, NDF has the final say in developing the goals.”).  The development of program goals, however, is just one part of programmatic decision-making.

We find, based on the record evidence, that NDF’s partners shared responsibility for programmatic decision-making.  Under the heading “Program Governance,” the MOA specifically provided that NDF “will include the Partners in the decision making, planning, strategizing, self assessment, and community assessment process of the program.”  NDF Ex. B at 90.¹¹  NDF concedes that its partners were responsible for implementing all of the “direct education and health and safety requirements” under the EHS-CCP award as contemplated by the FOA.  NDF Br. at 16 (citing NDF Ex. C at 11).  In this regard, partners were to develop and provide services to children compatible with the EHS program that met all Head Start Performance Standards, conduct developmental assessments of children, work with NDF to develop policies and guidelines meeting HSPS criteria, meet regularly with NDF to review the partnership, and work closely with NDF to develop a partnership budget.  NDF Ex. B at 89-92 (MOA); see also id. at 139, 142-43 (renewed MOAs).  All of these things, which impact how program services are implemented and delivered, required some level of programmatic decision-making by NDF’s partners.

Still further, partners were responsible for deciding (subject to NDF approval) whom to employ to ensure that the partners have “sufficient, qualified staff to fully implement the education, disabilities and transition piece of the HSPS” and to ensure that the required child-teacher ratio is maintained in each EHS classroom.  Id. at 91.  Notably, section 75.351(a)(3) does not require that an entity have sole responsibility for programmatic decision-making to be classified as a subrecipient.  Accordingly, we find that the record evidence shows that NDF’s partners were responsible, in part, for programmatic decision-making and that this characteristic weighs in favor of classifying NDF’s partners as subrecipients.

4. NDF’s partners were responsible for adhering to applicable federal program requirements specified in the federal award.

The fourth characteristic supporting classification of a non-federal entity as a subrecipient is when the entity is responsible for adhering to applicable federal program requirements specified in the award.  45 C.F.R. § 75.351(a)(4).  NDF was awarded the EHS-CCP grant to provide EHS program services, through its partners, to 344 children in the designated service area.  NDF Ex. D at 3; NDF Ex. B at 5, 23-24, 29, 36.  The award was subject to all statutory and regulatory requirements applicable to EHS programs.  NDF Ex. D at 3.  Again, there is no dispute that NDF’s partners were required to provide all educational

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and childcare services in accordance with Head Start Performance Standards applicable to EHS programs.  NDF Ex. B at 89 (“Partner assures that all services . . . will meet [] all Head Start Performance Standards”); id. at 139 (same).¹²  This requirement is expressed repeatedly throughout the MOA and renewed MOAs.  See NDF Ex. B at 92 (“Partner agrees to be in full compliance with the EHS Program Requirements . . . .”); NDF Ex. B at 146 (Partner “agrees to maintain full compliance with the EHS Program Requirements.”).  Partners further agreed to work with NDF “to develop policies and guidelines that meet the criteria for the HSPS.”  Id. at 91 (MOA), 142 (renewed MOA).  Partners were required to take certain corrective actions if they did not maintain full compliance with EHS Program Requirements.  Id.

Partners were also required to “employ sufficient, qualified staff to fully implement the education, disabilities and transition piece of the HSPS.”  NDF Ex. B at 91; see also id. at 143 (“[Partner] will employ sufficient, qualified staff to fully implement the education, disabilities, transition, nutrition and health & safety requirements of the Head Start Performance Standards.”).  Relatedly, partners were required to maintain the required teacher to child ratios, as specified by the HSPS.  NDF Ex. B at 91 (“Partners will provide staff supervision and scheduling to ensure that there are no more than four children per teacher and no more than eight children in an EHS classroom.”); id. at 142 (“Provider agrees to maintain required staff to child ratios at all times, as specified by Head Start Program Performance Standards.”).

Partners were also obligated to “offer care and education services forty-eight (48) weeks of the year, operating at least ten (10) hours per day Monday through Friday.”  NDF Ex. B at 89 (MOA); id. at 140 (renewed MOA).  NDF points to this lack of control over the “length of the service day” as evidence that its partners should be considered contractors.  NDF Br. at 12-13; NDF Ex. E at 3-4 (¶ 12).  However, the need for “full-day, full-year” services derives from federal program requirements as specified in the FOA.  See NDF Ex. C at 5 (“[T]he Office of Head Start (OHS) expects that applicants will propose serving children in a full-day, full-year model with a minimum of 48 weeks.”), 6 (“Early Head Start programs provide family-centered, full-day, full-year services designed to promote the development of the youngest children . . . .”), 9 (“EHS-CC Partnership applicants are required to propose that their partner sites will provide full-day, full-year services.”).

NDF does not dispute that its partners were required to adhere to applicable federal program requirements in accordance with the EHS-CCP award but attempts to minimize this fact by pointing out that the childcare industry is “heavily regulated by numerous, state and local laws and licensing requirements.”  NDF Br. at 17.  While that may be true, it does not negate the fact that NDF’s partners were required to comply with EHS

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program requirements and applicable Head Start Performance Standards to remain partners and receive federal funding from NDF under the award.  Accordingly, we find that NDF’s partners were responsible for adhering to applicable federal program requirements specified in the award and that this characteristic weighs in favor of classifying NDF’s partners as subrecipients.

5. In accordance with their agreements, NDF’s partners used federal funds to carry out the EHS-CCP program for a public purpose specified in the authorizing statute, as opposed to providing goods or services for NDF’s benefit.

The fifth characteristic supporting classification of a non-federal entity as a subrecipient is when, in accordance with its agreement, the entity uses federal funds to carry out a program for a public purpose specified in the authorizing statute, as opposed to providing goods or services for the benefit of the pass-through entity.  45 C.F.R. § 75.351(a)(5).  As described above, NDF’s partners used federal funds, in accordance with the MOA, to provide EHS program services for a public purpose as specified in the authorizing statutes.  The Early Head Start program is authorized by 42 U.S.C. § 9840a.  Under the Consolidated Appropriations Act, 2014, Congress authorized funding for new grant programs, including EHS-CCP grants that are intended for grantees to partner with local childcare providers to expand access to EHS program services to eligible children.  NDF Ex. C at 4-5.

In its grant application, NDF explained that “100 percent of services” under the award would be provided through the EHS-CC Partnership with eight childcare programs.  NDF Ex. B at 69.  NDF made clear that most of the $4.6 million in federal funding requested would be “passed through directly to the Partners to augment and increase program quality through enhanced teacher salaries and benefits, basic supplies and scholarships.”  NDF Ex. B at 70, 77 (emphasis added); see also id. at 78 (itemizing direct funding of partners).  In other words, the federal funding passed through to NDF’s partners was not in exchange for goods or services that the partners would provide to NDF; rather, NDF’s partners were to directly carry out EHS-compliant childcare and educational services for the benefit of eligible children.  This was the very purpose of the EHS-CCP program—for partners to provide, in accordance with EHS program standards, high-quality childcare, developmental, and educational services to children eligible for the EHS program.  NDF Ex. B at 28, 30 (explaining how the EHS-CC Partnership would expand access to EHS services to eligible children and improve childcare services in the targeted area).

Prior to this administrative appeal, and in response to the OIG’s initial audit findings, NDF conceded that its “[p]artners were not contracted for [NDF’s] own use, rather the intent of the grant was to broaden and strengthen the partner’s services to the community.”  NDF Ex. A at 4 (emphasis added).  OIG found that NDF’s partners

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provided the “very services that are established and required by the EHS program.”  NDF Ex. B at 106-07.  NDF has not shown that OIG’s finding is legally or factually unjustified.  Here, NDF readily acknowledges that its partners implemented “most of the day-to-day operation of the EHS-CCP program . . . .”  NDF Ex. E at 5 (¶ 18 ); see also NDF Ex. C at 11 (“Partner sites are responsible for providing all of the direct education and health and safety requirements.”); NDF Br. at 6 (“NDF’s partners were to implement the majority of child care services, while NDF provided the remaining services as well as conducted programmatic oversight.”); NDF Br. at 13 (acknowledging that “NDF’s Partners are responsible for the day-to-day provision” of “high-quality, comprehensive services to EHS enrollees and their families”).

That NDF provided oversight of its partners, managed the grant, and retained some responsibility for some direct services, NDF Ex. E at 4 (¶ 14), does not mean that NDF’s partners are not subrecipients.  A “subaward” is by definition “an award provided by a pass-through entity to a subrecipient for the subrecipient to carry out part of a Federal award received by the pass-through entity.”  45 C.F.R. § 75.2 (emphasis added).  Thus, the very purpose of a “subaward” is for the subrecipient to carry out a portion of the federal award.  Id. § 75.351(a).  Accordingly, we find that NDF’s partners received federal funding under the EHS-CCP award to carry out the public purpose of the program and were not retained to merely provide goods or services to NDF.  We further find that this characteristic weighs in favor of classifying NDF’s partners as subrecipients.

B. The regulatory characteristics under section 75.351(b) weigh against classifying NDF’s partners as contractors.

A contract serves a different purpose than a subaward.  “A contract is for the purpose of obtaining goods and services for the non-Federal entity’s own use and creates a procurement relationship with the contractor.”  45 C.F.R. § 75.351(b) (emphasis added) (citing definition of “contract” under § 75.2).  Section 75.351(b) enumerates five characteristics indicative of a procurement relationship between a non-federal entity and contractor.  For the reasons explained below, we find that the regulatory characteristics do not support finding a procurement relationship between NDF and its partners or classifying NDF’s partners as mere contractors.

The first characteristic indicative of a procurement relationship is when the alleged contractor provides the goods and services “within normal business operations.”  45 C.F.R. § 75.351(b)(1).  This characteristic must be read in the context of section 75.351(b), which specifies that a “contract is for the purpose of obtaining goods and services for the non-Federal entity’s own use.”Although NDF’s partners certainly provided childcare and educational services within normal business operations, those services were not provided for NDF’s own use.  As described in detail above, and as NDF acknowledged in response to the OIG’s audit findings, NDF’s partners provided

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services “to the community” – not to NDF.  See supra at 19-20; NDF Ex. A at 4.  Thus, this characteristic does not support classifying NDF’s partners as contractors.

The second characteristic of a procurement relationship is when the alleged contractor provides “similar goods or services to many different purchasers.”  45 C.F.R. § 75.351(b)(2).  Again, this characteristic must be read in the context of section 75.351(b).  NDF did not “purchase” childcare or educational services from its partners for its own use.  NDF Ex. A at 4.  Moreover, for this characteristic to apply, NDF would need to show that it was one of many different “purchasers” of the EHS program services that NDF’s partners provided under their partner agreements.  NDF, however, provided no evidence that its partners worked with any other Head Start or Early Head Start grantees (like NDF) or that anyone other than NDF “purchased” EHS-compliant services from NDF’s partners.  We reject NDF’s argument that “purchasers,” for purposes of this characteristic, are the children and families that NDF’s partners served.  NDF itself selected the partners because they agreed to implement comprehensive EHS services in their community with funding from NDF under the EHS-CCP award.  NDF Ex. B at 29-32 (award application).  NDF provided no evidence that any children or families “purchased” for themselves EHS-compliant services from NDF’s partners outside of the EHS-CCP program.  Accordingly, this characteristic does not support finding that NDF’s partners were contractors.

The third characteristic of a procurement relationship is when the alleged contractor “[n]ormally operates in a competitive environment.”  45 C.F.R. § 75.351(b)(3).  The parties do not dispute that NDF’s partners operated in a “competitive environment” and could be replaced if they did not meet EHS program requirements.  NDF Br. at 14; see supra at 16.  While this characteristic weighs in favor of finding a procurement relationship between NDF and its partners, we do not find it to be dispositive and, when it is weighed against all other regulatory characteristics under section 75.351, we do not find there is a sufficient basis to classify NDF’s partners as contractors.

The fourth characteristic indicative of a procurement relationship is when the alleged contractor provides goods or services that are “ancillary” to the operation of the federal program.  45 C.F.R. § 75.351(b)(4).  As explained above, and as OIG found, NDF’s partners did not provide goods or services that are “ancillary” to the operation of the EHS program – they provided the “very services that are established and required by the EHS program.”  NDF Ex. B at 106-07; see also supra at 7-9, 17-20.  Indeed, the central purpose of the EHS-CCP program is to enhance the quality and availability of EHS program services to low income, working families.  See, e.g., NDF Ex. C at 4.  We find the EHS program services provided by NDF’s partners to eligible children are unlike the routine services that contractors may provide for the use and benefit of a grantee, such as janitorial, building maintenance, or information-technology services.  NDF’s partners did not provide goods or services that were “ancillary” to the operation of the EHS-CCP

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program and, therefore, this characteristic does not support finding that NDF’s partners were contractors.

The final characteristic indicative of a procurement relationship is when the alleged contractor is not, as a result of its agreement, subject to the compliance requirements of the federal program (though similar requirements may apply for other reasons).  45 C.F.R. § 75.351(b)(5).  NDF’s partners were, in fact, required to maintain “full compliance with the EHS Program Requirements” under their agreements.  NDF Ex. B at 92, 146.  As discussed at length above, NDF’s partners were specifically subject to the compliance requirements of the EHS-CCP program and related Head Start Performance Standards.  See supra at 17-19.  Accordingly, this characteristic does not support finding that NDF’s partners were mere contractors.

Having evaluated the evidence submitted by both parties in connection with each of the regulatory characteristics under section 75.351(a) and (b), we find, based on our de novo review, that the evidence weighs heavily in favor of classifying NDF’s partners as subrecipients, rather than contractors, and that NDF has not carried its burden of showing that OIG’s audit findings are legally or factually unjustified.¹³

II. NDF’s remaining arguments provide no basis to overturn the disallowance.

NDF argues that its partners should “most likely” be classified as contractors based on its completion of a one-page form entitled “Subrecipient or Contractor Determination: An Analysis Tool” (Analysis Tool).  NDF Br. at 11.  The Analysis Tool, which NDF describes as “guidance,” provides ten prompts that purport to assist EHS-CCP grantees “in determining whether a partner should appropriately be classified as a contractor or a subrecipient.”  NDF Ex. B at 125.  After answering each prompt, the grantee is instructed to “[a]dd up the number of checks in each column” to assess whether the partner is “likely” a subrecipient or a contractor.  Id.  NDF initially submitted the Analysis Tool to ACF on November 6, 2019, approximately six weeks after OIG issued its final audit report.  NDF Ex. B at 97, 124-25.  NDF claimed it received the Analysis Tool from OHS and contends that NDF’s responses to each of the prompts support classifying its partners as contractors.  Id. at 124-25; see also NDF Br. at 11-15; NDF Ex. E at 3 (¶ 9).

There are several problems with NDF’s reliance on the Analysis Tool.  First, NDF’s self-serving answers to the prompts are not wholly accurate.  For example, in response to the

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prompt about which entity determines who is eligible for EHS partnership services, NDF checked only the box for “grantee.”  NDF Ex. B at 125.  The record evidence, however, shows that both NDF and its partners determined program eligibility.  See supra at 14-15.  NDF also indicated that it alone can “unilaterally make important decisions impacting the delivery of services . . . .”  NDF Ex. B at 125.  But again, the record shows that many important decisions impacting the delivery of services were made by NDF’s partners, at times, in collaboration with NDF.  See supra at 16-17.  In response to other prompts,NDF indicated that its partners have no responsibility for assuring compliance with standards associated with the award and no responsibility for “assuring that the program delivers high-quality, comprehensive services” to low-income children and families.  NDF Ex. B at 125.  Again, the record evidence plainly contradicts NDF’s responses to these prompts.  See supra at 15-16, 17-19.

The second problem with NDF’s reliance on the Analysis Tool is that section 75.351 provides that the HHS awarding agency “may supply and require recipients to comply with additional guidance” to support subrecipient or contractor determinations, “provided such guidance does not conflict with this section.”  45 C.F.R. § 75.351 (initial paragraph).  The Analysis Tool, however, conflicts with and omits relevant regulatory provisions under section 75.351.  For instance, none of the prompts asks whether the “goods or services” provided by the partner are “ancillary” to the operation of the EHS program.  45 C.F.R. § 75.351(b)(4).  Another prompt suggests that if a partner’s services “cover only some aspects of comprehensive services to EHS-enrolled children and their families,” that would support classifying the partner as a contractor.  NDF Ex. B at 125.  That prompt, however, fails to make a qualitative assessment of the services provided by the partner and conflicts with the regulations in that a subaward is, by definition, made for the purpose of carrying out part of a federal award by the subrecipient.  See 45 C.F.R. §§ 75.351(a), 75.2 (defining subaward).

Third, apart from the ten prompts, the Analysis Tool defines “subrecipient” to mean “an entity that has entered into a partnership agreement and receives funds from an awardee to independently carry out the delivery of comprehensive services required by the EHS-CCP award.”  NDF Ex. B at 125.  That is precisely what NDF’s partners agreed to do under the MOA and renewed MOAs.  The term “comprehensive services,” as used in the FOA, includes, but is not limited to, “all of the direct education and health and safety requirements” provided by partners in accordance with Head Start Program Performance Standards.  NDF Ex. C at 11; see also id. at 8 (“Partner sites are the local child care center(s) . . . that partner with new or existing Early Head Start grantees to provide high-quality comprehensive services to low-income children and their families.”).  NDF concedes that its “partners are largely responsible for implementing comprehensive services to EHS-enrolled children and their families,” while NDF maintained responsibility for other “comprehensive” services required by regulation.  NDF Br. at 14.

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Fourth, the Analysis Tool cannot supplant the regulatory characteristics under section 75.351.  The Analysis Tool is, at most, sub-regulatory guidance and does not have the force or effect of law.  See Int’l Educ. Servs., Inc., DAB No. 3055, at 22-23 (2021) (rejecting grantee’s reliance on question and answer form relating to salary rate limitations in a disallowance case because the form is not a law or regulation); see also Yolanda Hamilton, M.D., DAB No. 3061, at 28 (2022) (explaining that an agency’s manuals, instructions, or policy guidance do not have the force and effect of law); Conn. Dep’t of Soc. Servs., DAB No. 1982, at 20 (2005) (explaining that a manual “does not have the legal authority of the statute and regulations, [and] must give way to the statute and regulations to the extent of any conflict”).  The Analysis Tool does not directly correlate to the characteristics in section 75.351.  The Analysis Tool does not provide a definitive determination and relies on the factual accuracy of the grantee’s responses.  We apply the regulatory characteristics under section 75.351 because we are bound, not by an agency’s sub-regulatory guidance, but by “all applicable laws and regulations.”  45 C.F.R. § 16.14.  In evaluating and weighing each of the regulatory characteristics in section 75.351, we find that NDF’s partners were subrecipients and not mere contractors.¹⁴

We also reject NDF’s argument that the notation, “Number of Delegates: 0” in the notice of award shows that NDF had no subrecipients.  NDF Br. at 7 (citing NDF Ex. D at 3).  NDF equates “delegates” with “subrecipients,” emphasizing perceived similarities between the regulatory definition of a “subaward” in 45 C.F.R. § 75.2 and the statutory definition of a “delegate agency” in 42 U.S.C. § 9832.  NDF Br. at 9-10 (“[A] ‘subrecipient’ under a Head Start grant would also be a ‘delegate agency.’”).  We reject NDF’s contention.  As an initial matter, the notice of award did not state, “Number of Subrecipients: 0.”  NDF offered no evidence and pointed to no legal authority or guidance suggesting that ACF (which issued the notice of award) uses the term “delegates” to mean “subrecipients” or intended that the notation referring to “delegates” means that NDF’s partners were not, and could not be, subrecipients.  Under the “Policy and Program Guidance for the Early Head Start-Child Care Partnerships (EHS-CCP),” the relevant question for this form of award, according to ACF, is not whether a partner is a “delegate,” but whether they are a subrecipient or contractor.  NDF Ex. B at 279 (“Grantees must determine whether their partnership agreement creates the relationship of a sub-recipient or contractor.  Grantees should consult the regulations found at 45 CFR Part 75 (the Uniform Guidance) to understand the terms ‘sub-recipient’ and ‘contractor,’ . . . .”).  Moreover, even if we were to accept the premise of NDF’s argument, a single reference to zero “delegates” in the initial notice of award does not outweigh the

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abundant record evidence, detailed above, supporting ACF’s conclusion that, under the specified regulatory factors, NDF’s partners were subrecipients.

We further note that a “delegate agency” is an agency to which a grantee “has delegated all or part of the responsibility of the grantee for operating a Head Start program.”  42 U.S.C. § 9832(3) (emphasis added).  Under this form of EHS-CCP award, however, it was always contemplated that NDF’s partners would have their own “clearly defined roles and responsibilities articulated through” a partnership agreement.  NDF Ex. C at 11.  When the notice was issued, ACF clearly understood that NDF would have at least eight partners and that NDF intended to “pass-through” millions of dollars in federal funding to its partners to provide EHS program services to 344 eligible children.  NDF Ex. B at 70, 77-78; NDF Ex. D at 3.  A “subaward” contemplates that the grantee will pass-through federal award funding to a subrecipient to “carry out part of a federal award.”  45 C.F.R. § 75.2 (defining subaward).  A “subaward,” as defined in the regulations, does not require “delegating” the grantee’s responsibility for operating a federal program to the subrecipient.  Still further, the notice of award is subject to the HHS GPS, which defines “subrecipient” to mean:  “An entity that receives a subaward from a recipient . . . and is accountable to the recipient . . . for the use of the Federal funds provided by the subaward.”  ACF Ex. 2, at 194; NDF Ex. D at 3.  As shown above, NDF’s partners clearly satisfied this definition, which does not require delegation of the grantee’s responsibilities.  Thus, we reject the argument that, simply because the notice of award stated there were no “delegates,” NDF’s partners cannot be subrecipients.

Finally, we reject NDF’s assertion that the Board should give deference to NDF’s subrecipient/contractor determination.  Reply at 1-2.  While section 75.351(c) provides that a “pass-through entity must use judgment in classifying each agreement as a subaward or a procurement contract,” nothing in the Grants Policy Administration Manual (NDF Ex. H) or in the applicable law or regulations requires the federal awarding agency or the Board to defer to the pass-through entity’s judgment.  NDF’s argument is unsupported by any legal authority and contradicts the standard of review applicable to this case.  See supra at 12-13.

The OIG audit found that NDF’s partners were subrecipients—not contractors—and NDF failed to show that the audit findings were legally or factually unjustified.  Having evaluated the evidence in light of each regulatory characteristic under section 75.351, and having considered NDF’s arguments, we conclude that NDF failed to demonstrate that it had allowable indirect costs of more than $25,000 under the EHS-CCP award.

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Conclusion

For the reasons explained above, we sustain the disallowance in the amount of $142,104.

Endnotes

¹ The parties agree that the requirements at 45 C.F.R. Part 75 apply here.  See NDF Br. at 4, 9; ACF Br. at 4 n.3.  We cite to and apply the regulations at Part 75 that were in effect when the awards implicated by the disallowance were issued.  See 45 C.F.R. § 75.110(a) (noting that Part 75 standards, with some exceptions, became effective December 26, 2014).

² The term “non-Federal entity,” which is used throughout the Part 75 regulations, includes a nonprofit organization that “carries out a federal award as a recipient or subrecipient.”  45 C.F.R. § 75.2.  “Recipient” means an entity “that receives a Federal award directly from a Federal awarding agency to carry out an activity under a Federal program.”  Id.  “The term recipient does not include subrecipients.”  Id.  There is no dispute NDF is the recipient of an EHS-CCP award.  The question here is whether NDF’s partners are “subrecipients” or “contractors.”

³ Indirect costs must be classified within two categories: “Facilities” or “Administration.”  Id. § 75.414(a).  “‘Facilities’ is defined as depreciation on buildings, equipment and capital improvement, interest on debt associated with certain buildings, equipment and capital improvements, and operations and maintenance expenses.”  Id.  “‘Administration’ is defined as general administration and general expenses such as the director’s office, accounting, personnel and all other types of expenditures not listed specifically under one of the subcategories of ‘Facilities’ . . . .”  Id.  While not specified by the parties, the category of indirect costs at issue here appears to relate to NDF’s administration of the EHS-CCP grant.

⁴ NDF did not comply with the Board’s instructions to ensure that all exhibit pages are numbered.  Acknowledgment Ltr. at 3.  NDF’s exhibits contain unnumbered pages or non-sequentially numbered pages.  For uniformity and to avoid confusion, we cite to the PDF page numbers of NDF’s exhibits.

⁵  “Partner sites” is a defined term in the FOA and means “the local child care center(s) and/or family child care provider(s) that partner with new or existing Early Head Start grantees to provide high-quality comprehensive services to low-income children and their families.”  NDF Ex. C at 8.

⁶ The eight partners were:  St. Joseph Academy, Neighborhood House of Milwaukee, COA Youth & Family Centers, Kindercare Learning Center, Stepping Stones Children’s Center, Malaika Early Learning Center, Capitol Infant-Toddler Center, and St. Ann Center for Intergenerational Care.  NDF Ex. B at 94.  The MOA term began “January 1, 2015 or after receipt of grant whichever is later,” and provided that “this contract will automatically renew for subsequent annual one-year terms (‘renewal terms’) (January 1-December 31), unless the agreement is terminated by either party.”  Id. at 93.

⁷ Although the grant application identified eight proposed partners, the OIG audit found NDF had 10 partners during the two-year audit period.  The 10 partners included seven of the eight partners identified in the application (all except Capitol Infant-Toddler Center), plus Jo’s Early Learning Academy, La Causa, Inc., and YMCA of Milwaukee, Inc.  NDF Ex. B at 123, 138.  The record includes copies of “renewed” MOAs that became effective in the latter half of 2016 for each of the 10 partners.  NDF Br. at 6 n.3 (citing NDF Ex. B at 139-268).  NDF contends that, for purposes of this dispute, the terms of the MOA submitted with its application and the “renewed” MOAs are “substantively the same.”  NDF Br. at 6 n.3.  We do not find any material differences in the renewed MOAs; however, this decision addresses both the MOA that was in effect at the start of the audit period and the renewed MOAs in effect during the latter part of the audit period.

⁸ The renewed MOAs for 2016-2017 contained similar language.  See, e.g., NDF Ex. B at 140-41.

⁹ The renewed MOAs are substantively the same.  See NDF Ex. B at 139-268.  We cite to the first renewed MOA included in NDF Ex. B (COA Youth and Family Centers) because it is representative of the others.

¹⁰ Our analysis of this characteristic overlaps with our analysis, infra, of the fourth characteristic related to responsibility for adherence to applicable federal program requirements.

¹¹ The renewed MOAs contained a similar provision.  NDF Ex. B at 142.

¹²  The renewed MOAs used the term “Provider” rather than “Partners,” but the quoted language is substantively the same.

¹³ The conclusion we reach here is supported by other authorities that have addressed the distinction between subrecipients and contractors in connection with federal awards.  See Jonathan D. Shaffer & Daniel H. Ramish, Federal Grant Practice § 30:6 (2023 ed.).  “The key distinction between a subaward and a contract, is that payments for goods or services are to a contractor, and payments to execute a portion of the grant are to a subrecipient.”  Id.  “In a procurement relationship, the buyer gets something from the seller under what is a private contract—albeit subject to some federal requirements.”  Id. § 30:11.  “In an assistance relationship, the recipient often partners with the subrecipient in carrying out a portion of the federal award, and the subrecipient does so in compliance with the federal requirements of the recipient’s award.”  Id.

¹⁴ To the extent that NDF’s arguments related to the Analysis Tool are intended to appeal to equity, we do not have the authority to grant equitable relief.  See Loving Arms Learning Ctr., DAB No. 2921, at 4 (2019) (“[T]he Board has consistently held, in accordance with 45 C.F.R. § 16.14, that it is bound by all applicable laws and regulations and has no authority to waive a disallowance based on equitable principles.”); see also Kids Cent., Inc., DAB No. 2897, at 14 (2018) (collecting cases).