[Federal Register Volume 61, Number 90 (Wednesday, May 8, 1996)]
[Notices]
[Pages 20880-20941]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-11111]
[[Page 20879]]
_______________________________________________________________________
Part II
Office of Management and Budget
_______________________________________________________________________
Cost Principles for Educational Institutions; Notice
Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 /
Notices
[[Page 20880]]
OFFICE OF MANAGEMENT AND BUDGET
Cost Principles for Educational Institutions
AGENCY: Office of Management and Budget.
ACTION: Final Revision and Recompilation of OMB Circular A-21.
-----------------------------------------------------------------------
SUMMARY: The Office of Management and Budget (OMB) revises OMB Circular
A-21, ``Cost Principles for Educational Institutions,'' by
incorporating four Cost Accounting Standards applicable to educational
institutions, issued by the Cost Accounting Standards Board (CASB) on
November 8, 1994 (59 FR 55746), and extending these standards to all
sponsored agreements. The revision also: requires certain large
institutions to disclose their cost accounting practices by the
submission of a Disclosure Statement prescribed by the CASB; amends the
definition of equipment; eliminates in 1998 the use of special cost
studies to allocate utility, library and student services costs; and,
requires the use of fixed facilities and administrative cost rates for
the life of sponsored agreements. Further, the revision establishes
cost negotiation cognizant agency responsibilities, replaces the term
``indirect costs'' with ``facilities and administrative costs'' (to
describe more accurately the various cost components of sponsored
agreements), clarifies the policy for a change from use allowance to
depreciation, adds criteria to interest allowability, and disallows
tuition benefits for employee family members. Finally, the revision
rescinds OMB Circular A-88, ``Indirect Cost Rates, Audits, and Audit
Follow-up at Educational Institutions,'' in its entirety. The
recompilation of Circular A-21 in its entirety appears after the
revision.
EFFECTIVE DATES: The effective date of this revision of Circular A-21
is May 8, l996, unless otherwise noted within this revision. Circular
A-88 is rescinded effective July 1, l996.
FOR FURTHER INFORMATION: Educational institutions should contact the
educational institution's cognizant Federal agency. Federal agencies
should contact Gilbert Tran, Office of Financial Federal Financial
Management, Office of Management and Budget, (202) 395-3993.
SUPPLEMENTARY INFORMATION:
A. Purpose of Circular A-21
Office of Management and Budget (OMB) Circular A-21, ``Cost
Principles for Educational Institutions,'' establishes principles for
determining costs applicable to Federal grants, contracts, and other
sponsored agreements with educational institutions.
B. Recent Prior Revisions
Circular A-21 was last amended in 1991 and 1993 (56 FR 50224 of 10/
1/91 and 58 FR 39996 of 7/15/93, respectively). The 1991 revisions made
certain specified costs unallowable for Federal reimbursement and
placed a limit on the amount of reimbursable administrative costs. That
revision also required a certification to accompany each rate proposal.
The 1991 revisions also added Exhibit A containing a list of colleges
and universities subject to Section J.12.F, Depreciation and Use
Allowance. The 1993 revisions further clarified and standardized the
Circular's principles for determining allowable costs.
C. Current Revisions
On February 6, 1995, OMB proposed revisions in 60 FR 7104 and 60 FR
7106. In 60 FR 7104, OMB proposed the extension of the four cost
accounting standards (CAS) applicable to educational institutions to
all sponsored agreements and an amendment to the definition of
equipment. In 60 FR 7106, OMB proposed eight additional revisions,
including the rescission of OMB Circular A-88, ``Indirect Cost Rate,
Audits, and Audit Follow-up at Educational Institutions,'' and
mentioned six other revisions for future consideration.
Circular A-21 is revised to:
1. Incorporate the four CAS (48 CFR 9905) and the Disclosure
Statement (the Cost Accounting Standards Board's (CASB) form DS-2) and
associated administrative requirements promulgated by the CASB for
educational institutions. This action will extend the four CAS to all
sponsored agreements (see Sections C.10, 11, 12 and 13 and Appendix A)
and extend the applicability of the DS-2 (48 CFR 9903.202) to major
educational institutions (see Sections C.14, K.2.b and Appendix B).
Guidance for the implementation and administration of the CAS
requirements and the submission of required DS-2s is also provided.
2. Replace the term ``indirect'' costs with ``facilities and
administrative'' (F&A) costs. F&A costs are synonymous with
``indirect'' costs, as previously used in this Circular and as
currently used in Appendices A and B.
3. Eliminate the use of special cost studies to allocate utility,
library and student services costs effective July 1, 1998, at which
time an alternative methodology making payments on utility costs will
be in place (see Section E.2.d(5)).
4. Require Federal funding agencies to use F&A rates in effect at
the time of an initial award throughout the life of the sponsored
agreement (see Section G.7).
5. Rescind Circular A-88 and establish cost negotiation cognizance
for educational institutions and cognizant agency responsibilities in
Circular A-21 (see Section G.11).
6. Eliminate the allowability of dependent tuition benefits (see
Section J.8.f(2)).
7. Clarify the policy governing the transition from use allowance
to depreciation (see Section J.12.b.(3)).
8. Amend the definition of equipment by increasing the
capitalization threshold to the lesser of the amount used for financial
statement purposes or $5000 (see Section J.16).
9. Establish criteria for reimbursement of interest costs (see
Section J.22.f).
Circular A-21, as amended by this revision, consists of the
Circular published at 44 FR 12368 (2/26/79), as amended by Transmittal
Memoranda Numbers 1 through 5, at 47 FR 33658 (7/23/82), 51 FR 20908
(6/9/86), 51 FR 43487 (12/2/86), 56 FR 50224 (10/01/91), 58 FR 39996
(7/15/93), respectively, and the amendments herein. A recompilation of
the entire Circular A-21 with all its amendments to date appears at the
end of this notice and is available in electronic form on the OMB Home
Page at http://www.whitehouse.gov/WH/EOP/OMB, or in hard copy by
calling OMB's Publication Office at (202) 395-7332.
D. Paperwork Reduction Act
This revision includes an information collection requirement for
educational institutions receiving more than $25 million in federally-
sponsored agreements to file the CASB's DS-2. This revision's
information collection requirement covers more educational institutions
than those subject to CASB's regulatory requirement for filing the DS-
2, pursuant to Public Law 100-679, which was previously approved and
assigned OMB control number 0348-0055 (which expires August 31, 1997).
On February 6, 1995 (60 FR 7104), OMB requested comments on this
proposed information collection requirement in accordance with the
Paperwork Reduction Act (44 U.S.C. Chapter 35 et seq.). The proposed
information requirement will not be effective until another notice is
published in the Federal Register. The subsequent notice will provide
the effective date and the OMB control number.
[[Page 20881]]
E. Comments and Responses
OMB received about 200 comments from colleges and universities,
Federal agencies, professional organizations, and accounting firms. The
comments and OMB's responses are included in this notice. Several of
the comments resulted in modifications to OMB's original proposal.
The comments received and OMB's responses are summarized below.
Cost Accounting Standards (CAS) (Sections C.10-13 and Appendix A)
Comment: Many commenters stated that OMB Circular A-21 currently
provides adequate rules and guidelines regarding cost reimbursements
for Federal grants and contracts. Therefore, they argued that the
proposed incorporation of the CAS would duplicate Circular A-21's
requirements.
Response: OMB concurs that many of the requirements covered under
the CAS currently exist in OMB Circular A-21. However, the four CAS are
being incorporated since they provide more explicit provisions and
guidance regarding the consistent application of cost accounting
practices at educational institutions. To minimize potential conflict
between OMB policies and the Cost Accounting Standards Board (CASB)
regulations at 48 CFR 9903, the CASB has committed to perform an
analysis to identify administrative requirements--especially those
relating to contract clauses, definitions of a cost accounting
practice, and the cost impact process--that may not be readily
adaptable to colleges and universities. The CASB will separately
evaluate the need to establish any unique or alternative provisions
that should be applied to colleges and universities based on the
changes in Circular A-21. Recognizing that the two sets of documents
should be compatible, the CASB will, within the limitations imposed by
the statutory requirements of the CASB's organic statute, examine the
administrative requirements issue in order to determine what
improvements can be made to the administrative requirements of the
CASB's rules as they effect colleges, universities and Federal
cognizant agencies.
Comment: The CAS language refers to contracts. Language in the
Circular needs to be amended to cover sponsored agreements.
Response: The CAS language in Sections C.10, 11, 12 and 13 and
Appendix A of the Circular has been changed to cover all forms of
sponsored agreements.
Comment: The proposal stated that the CAS provisions will not go
into effect on January 9, 1995; however, no other effective date was
provided. When will the CAS language become effective?
Response: For CAS-covered contracts, the CASB's effective date for
the application of CAS was January 9, 1995. For other sponsored
agreements, the application of CAS is effective for the educational
institution's fiscal year starting on or after the publication date of
this revision.
Comment: The CAS were intended for commercial enterprises and are
not appropriate for colleges and universities. Also, commercial
enterprises are not limited by a 26 percent administrative cap;
therefore, they can recover additional administrative costs to comply
with CAS.
Response: Commercial contractors are subject to 19 CAS. Only four
of those CAS are being applied to universities. The four CAS are for:
(1) consistency in estimating, accumulating and reporting costs; (2)
consistency in allocating costs incurred for the same purpose; (3)
accounting for unallowable costs; and, (4) cost accounting period.
Since these CAS merely strengthen the cost principles currently in
Circular A-21, the implementation of CAS should not significantly
increase burden or result in any additional costs to universities.
Comment: The revision limits an educational institution's
flexibility to take necessary or advantageous action in a changing
environment.
Response: The application of the four CAS should not limit an
educational institution's flexibility in a changing business
environment. The standards only require that costs be treated
consistently and, if an educational institution makes an accounting
change that materially impacts sponsored agreement reimbursement, then
the change and its impact need to be reported. These requirements
currently exist in Circular A-21. A change that converts a cost from
direct to F&A (during a period where an educational institution has a
predetermined F&A rate) normally is not considered a significant
change, because it does not have a material impact on sponsored
agreement reimbursement.
Comment: Limit CAS coverage to sponsored agreements in excess of
$500,000, which is consistent with CAS coverage of contracts. Some
universities have several thousand agreements. Most of them are smaller
than the $500,000 threshold. The smaller agreements should not be
covered by these requirements. To cover smaller agreements would hold
educational institutions to a higher standard than the industry's
standard. At issue is whether or not a cost impact proposal or some
other form of submission for an equitable adjustment should be made on
all agreements.
Response: The four CAS promote consistency in cost accounting
practices used by an educational institution to estimate, accumulate
and report costs charged against federally-sponsored agreements. These
underlining principles currently exist in Circular A-21 which covers
all sponsored agreements. The four CAS set forth more explicit
fundamental requirements, techniques and illustrations on how to comply
with these principles. Therefore, it is appropriate to extend these CAS
to all sponsored agreements.
Furthermore, a cost impact proposal is not required to be prepared
for each agreement when an educational institution changes accounting
practices. Instead, CAS regulations (48 CFR 9903.306 (e) and (f)) allow
the use of ``any other suitable technique'' for cost impact adjustment.
Thus, a cost impact adjustment could be done through the F&A cost
negotiation process and rate agreement if deemed appropriate by the
cognizant agency.
Comment: Educational institutions do not have sufficient funds to
build accounting systems effective enough to comply with CAS.
Commenters suggested an increase of the administrative cap of 26
percent of modified total direct costs (MTDC) to cover the increased
paperwork burden. Failing this, the commenters requested an increase of
the alternative administrative threshold rate from 24 percent, as
allowed in Section G.8, to 26 percent.
Response: Compliance with CAS should not require educational
institutions to acquire additional accounting systems. Since the CAS
only clarify existing provisions for sponsored agreements, existing
accounting systems that comply with Sec. ______.21, Standards for
financial management systems, in OMB Circular A-110, ``Uniform
Administrative Requirements for Grants and Agreements with Institutions
of Higher Education, Hospitals and Non-Profit Organizations,'' should
require no change.
Comment: The Circular should stipulate that Federal agencies retain
the latitude to permit certain administrative expenditures to be
charged directly to a project when they believe that these costs are
essential for the conduct of the project.
Response: Section C.11 states that ``all costs incurred for the
same purpose, in like circumstances, are either direct costs only or
F&A costs only with respect to final costs objectives.''
[[Page 20882]]
However, there are circumstances where it is appropriate to direct
charge costs, such as administrative and clerical salaries, when these
costs are normally charged indirectly. For example, direct charging of
these costs may be appropriate where a major project or activity
requires a significant level of administrative or clerical services and
individuals involved can be specifically identified with the project or
activity. In this example, the administrative or clerical service costs
are not incurred for the same purpose and under like circumstances as
are administrative and clerical service costs associated with general
university functions, such accounting operations or general
administrative activities, which do not result from specifically
identifiable requirements.
Comment: CAS definitions (for direct cost, ``indirect'' cost,
consistency and accounting change) are more limiting than in Circular
A-21. How will such inconsistencies between the two documents be
handled?
Response: Inconsistency in definitions and cost policy
interpretations do not exist between the two documents. To further
assure consistency between the two documents, all inquiries related to
the CAS applicable to educational institutions will be addressed by
OMB's Office of Federal Financial Management, in coordination with the
CASB.
Comment: The precision required by CAS would not be consistent with
future proposed systems of benchmarking, thresholds, caps, and other
limiting factors. OMB is sending out mixed messages.
Response: The purposes of the four CAS and future proposed
revisions to Circular A-21 are different. The four CAS incorporated in
the Circular serve to promote consistent treatment of estimated costs
proposed to the Federal Government and actual costs charged as
reimbursable cost against federally- sponsored agreements. The purposes
of the future proposed revisions are to assure the consistent treatment
of costs proposed and charged to federally-sponsored agreements.
Comment: Some small colleges have training grants with 8 percent
overhead limits. Could CAS requirements and disclosures be waived for
those educational institutions with low overhead rates (perhaps 10
percent)?
Response: Small colleges with less than $25 million in Federal
funding covered under this Circular will be subject to the CAS but are
exempt from the Disclosure Statement filing requirements.
Disclosure Statement (DS-2) (Section C.14 and Appendix B)
Comment: Many commenters express concerns that the preparation of
the Disclosure Statement (DS-2) can take as much as 2500 hours. A
suggestion was made to require a submission only for the year when the
educational institution is required to submit a F&A cost rate proposal.
Response: OMB disagrees that the DS-2 can take as much as 2500
hours to complete unless a university does not currently have adequate
written cost accounting policies. The DS-2 is a 20-page document that
provides a summary of an educational institution's cost accounting
system for Federal grants and contracts. The cost accounting practices
used for Federal grants and contracts should already be properly
documented as required by Subpart C, Sec. ______.21, Standards for
financial management systems, in OMB Circular A-110. Therefore, the
effort to summarize the existing practices in the DS-2 should not be
overly burdensome to complete.
In addition, educational institutions do not have to file the DS-2
on an annual basis. Educational institutions are only required to file
an initial DS-2 in accordance with the time frame described in Section
C.14 and thereafter, educational institutions only need to submit
amendments of sections affected by changes in cost accounting practices
deemed significant by the cognizant agency. Section C.14.d discourages
the resubmission of a complete, updated DS-2 except for extensive
changes.
Furthermore, the DS-2 submission is required only for educational
institutions receiving more than $25 million in federally-sponsored
agreements during their most recently completed fiscal year.
Comment: The paperwork burden imposed has not proven necessary and
the costs of providing the information outweigh the benefits to be
derived.
Response: OMB believes that the DS-2 requires no more information
than would normally be provided to the cognizant agency for review of
an educational institution's F&A cost rate proposal and for negotiation
of the associated rate agreement. OMB does not intend for the paperwork
to be an arduous process, rather a reasonable representation of the
accounting practices and policies that are used by the educational
institution in recovering costs under Federal sponsored programs.
Comment: The DS-2 will result in additional work and expense, but,
because of the 26 percent cap, educational institutions will not be
allowed to recover those amounts.
Response: OMB believes that the information required by the DS-2 is
of the type that historically should have been submitted during F&A
cost rate negotiations and made available for audits of grants and
contracts in accordance OMB Circular A-133, ``Audits of Institutions of
Higher Education and Other Non-Profit Institutions.'' Therefore, the
only additional time requirements should be to put the same information
in the format required by the DS-2 and to submit information on
accounting changes, as needed. Subsequently, the information will not
have to be resubmitted every time a rate proposal is submitted. Only
changes in cost accounting practices need to be addressed as the
changes are made. This should result in administrative cost savings in
the long term.
Comment: The revision should clarify what constitutes an accounting
change, and provide a materiality threshold so that insignificant
changes do not have to be reported.
Response: OMB does not intend for educational institutions to
report insignificant accounting changes. Sections C.14.d and g
emphasize that a change is to be reported and approved by the cognizant
agency only when ``the change is expected to have a material impact on
the educational institution's negotiated F&A rates * * *'' (emphasis
added). The determination of whether an accounting change is
significant and, therefore, requires an amendment to the DS-2 and
possibly a cost impact proposal is to be made by the cognizant agency.
However, educational institutions are prohibited under the allocability
clauses of the Circular from double-counting any costs to the Federal
Government which could result from a change in accounting.
Comment: There were many comments about confusion over the
submission dates for the initial DS-2 between the proposed dates stated
in the proposed revision to Circular A-21 and the dates published by
the CASB on November 8, 1994.
Response: In order to clarify the submission dates for the initial
DS-2, and to prevent confusion, the DS-2 submission dates in this
Circular for CAS-covered educational institutions are the same as those
published by the CASB on November 8, 1994. The DS-2 submission date for
educational institution not covered by the CASB requirements is six
months after the end of the fiscal year which starts after the
publication date of this revision. In addition, the cognizant agency
has the
[[Page 20883]]
authority to provide a filing date extension on a case-by-case basis,
unless the DS-2 submission date is defined by receipt of a CAS-covered
contract by the educational institution.
Comment: Small colleges and universities are disproportionately
affected by the DS-2 submission requirements since a small university
which received a CAS-covered contract and $25 million in sponsored
awards could have the same submission due date as the top 20
universities which receive substantially more Federal awards
(approximately $150 million or more).
Response: To provide consistency and avoid confusion among all
colleges and universities regarding the submission due dates for the
DS-2, OMB has revised the due dates to correspond with the due dates
published by the CASB. A cognizant agency has the authority to grant a
filing date extension.
Comment: A definition is needed for ``a component unit'' or the
previously-defined terms ``segment'' and ``a business unit'' should be
used.
Response: ``A component unit'' in Section C.14 is replaced with ``a
business unit.'' A business unit at colleges and universities means any
unit of an educational institution which is not divided into segments.
Segment means one of two or more divisions, campus locations, or other
subdivisions of an educational institution that operate as independent
organizational entities under the auspices of the parent educational
institution and report directly to an intermediary group office or the
governing central system office of the parent educational institution.
Comment: For those educational institutions that are required to
file a DS-2, there should be a transition time period (e.g., within one
year after submittal) in which the cognizant agency is required to
identify any procedures or descriptions that it believes would lead to
disallowance of costs in the future and the educational institution
should be given an opportunity to correct these procedures or
descriptions without a penalty. When the document is found acceptable
to the cognizant agency, then it should receive a written
acknowledgment that, in the agency's opinion, the document describes
acceptable practices. An educational institution would then only be
subject to disallowances if it is found to be violating its described
practices in such a way that unallowable costs were being incurred.
Response: OMB disagrees. The DS-2 should disclose the cost
accounting practices used to estimate, accumulate and report the costs
of sponsored agreements over the award periods of performance. If the
cognizant agency identifies established or disclosed cost accounting
practices that would lead to disallowance of costs, it would require
the educational institution to correct the practice and may also
compute a cost adjustment, if material, in accordance with Section
C.14.e.
Comment: Any subsequent cost adjustments for procedures that are
inconsistent with those disclosed in the DS-2 and result in unallowable
costs should be limited to the time period beginning after acceptance
of the DS-2 by the cognizant agency.
Response: While the purpose of the DS-2 is to disclose an
educational institution's current cost accounting practices and is
intended more for future purposes than for a review of past practices,
it may be necessary to make adjustments for some unallowable costs that
may have been reimbursed in the past. These adjustments will be made at
the discretion of the cognizant agency. Adjustments for the effects of
deviations from the practices disclosed in the DS-2 can occur only
after the filing. However, the effect of deviations by an educational
institution from established practices, whether or not a DS-2
submission is required, will continue to be subject to adjustments in
accordance with Section C.8.
Comment: In resolving questions about costs incurred, any claimed
disallowances should be based on requirements of Circular A-21 with
regards to allowability of costs and not some procedural issue related
to following a procedure described in the DS-2.
Response: OMB agrees that Circular A-21 should provide the basis of
allowability of costs. However, in some instances, the DS-2 will help
to clarify how such costs are allocated and may effect the
reimbursement of costs claimed as allocable and, therefore,
reimbursable costs.
Comment: The DS-2 will be difficult to manage when the reporting
entity manages grants from various locations. OMB should clarify
disclosure requirements for multi-campus and multi-location educational
institutions.
Response: OMB expects that educational institutions' accounting
policies would be the same, particularly if the locations are all
covered by the same cost pools. If this is not the case, OMB believes
that preparation of the DS-2 will help educational institutions to
develop consistent accounting policies. However, if for some justified
reasons various locations maintain different cost accounting practices,
a separate DS-2 should be submitted for each business unit as stated in
Section C.14.a.
Terminology (``Indirect'' Costs)
Comment: Most commenters agreed with the proposed change of
terminology from ``indirect'' costs to ``facilities and
administrative'' costs. However, some commenters noted that this change
will create confusion and conflicts with other OMB cost principles
circulars and OMB grants management circulars that still use the term
``indirect'' costs.
Response: OMB agrees that inconsistent terminology may cause short
term problems. However, this change is needed to more accurately
describe the several cost pools for sponsored agreements at educational
institutions. The replacement of the term ``indirect'' costs will be
limited to Circular A-21 and not extended to other OMB grants
management circulars because of the several cost pools that exist only
in Circular A-21. The term ``indirect'' costs still appears in Appendix
A--CASB's Cost Accounting Standards and Appendix B--Disclosure
Statement (DS-2) since these appendices are directly from the CASB's
regulations.
Special Cost Studies (Section E.2.d.)
Comment: The provision to limit special cost studies to allocate
utility, library and student costs should be delayed until reasonable
benchmarks can be established for the payment of these costs.
Response: Benchmark studies to develop alternative payment methods
for facility construction, utilities and library costs are currently
underway. In the meantime, due to the ambiguous nature of special cost
studies that were the source of disagreement between cognizant agencies
and institutions, OMB plans to make utility, library and student
services cost recoveries based on special cost studies unallowable
costs. This restriction's effective date is delayed until July 1, 1998
at which time OMB will have in place an alternative method to pay
utility costs. Utility, library and student services cost allocations
based on special cost studies will be disallowed for administrative and
facilities payment rates negotiated on or after July 1, 1998. The
special cost studies cannot be used to establish rates beyond fiscal
year ending in 1998, unless a rate agreement in effect at the time of
this publication extends beyond 1998, in which case the use of special
cost studies will terminate at the end of the rate agreement period.
OMB is currently reviewing proposals for
[[Page 20884]]
alternative methodologies for making payments on costs related to
utilities. OMB will publish the proposals for public comments prior to
July 1, 1997.
Comment: Instead of eliminating the special cost studies, OMB
should develop standards, methodology and criteria for conducting
special cost studies that would be acceptable for the Federal
Government.
Response: Special cost studies were cited as an example of an area
of potential abuse and source of disagreement and distrust between
cognizant agencies and institutions. Rather than try to devise a set of
complex parameters that would preclude any opportunity for abuse, OMB
decided to disallow any cost allocations based upon those studies and,
instead, to provide an alternative payment mechanism.
Fixed Rates (Section G.7)
Comment: Clarification of ``life of agreement'' is needed since a
project can extend over a long period of time exceeding ten or fifteen
years at times. Does it mean each continuing period of an award or each
competing renewal of an award? Fixed rates should only apply
prospectively to new awards. ``Life'' should mean each competitive
renewal period. A commenter suggested that a fixed rate apply for a
period of three years.
Response: OMB has clarified ``life of agreement'' to mean each new
competitive segment. A competitive segment is a period of years
approved for a project at the time of the award, usually three to five
years. Fixed rates will apply only to awards made after the publication
date of this revision.
Comment: A clarification is needed for the impact of a fixed rate
throughout the life of the award on the various types of rates, i.e.,
provisional, predetermined and fixed rates.
Response: The revision requires that the Federal funding agencies
use rates in effect at time of award throughout the life of the award,
using the negotiated rates (predetermined, fixed or provisional) at the
time of the award. For example, if an educational institution has a
provisional rate of 40 percent at the time of the award, the 40 percent
rate will be used for funding and reimbursement throughout the life of
that award. If an educational institution has predetermined rates of 40
percent (first year), 42 percent (second year) and 45 percent (third
year), then a five-year project would have rates of 40 percent (first
year), 42 percent (second year) and 45 percent (third, fourth and fifth
years).
When an educational institution does not have a negotiated rate
with the Federal Government at the time of the award (because the
educational institution is a new grantee or the parties cannot reach
agreement on a rate), the provisional rate used at the time of the
award will be adjusted after a rate is negotiated and approved by the
cognizant agency.
Comment: To implement a fixed rate throughout the life of an award
penalizes a university with growth in facility costs. This would
discourage colleges and universities from investing in facility costs.
Response: When entering into an agreement with educational
institutions to perform a specific project, it is only fair for the
Federal Government to commit funding and reimbursement based on the
conditions as they are understood to exist at that time. Most research
project activities remain in the same laboratory during the entire life
of the project and, therefore, the facility costs should remain at the
same level. A fixed rate throughout the life of an award would only
adversely affect an educational institution when, after the award date,
the educational institution moved the project into a more modern and
expensive facility. Therefore, for future awards, an educational
institution with growth in facility costs should seek to establish
future cost rates (fixed or predetermined) that reflect the growing
cost pattern.
Comment: It is not clear what rate is to be used when the
educational institution's rate is decreasing during the life of the
award.
Response: In the case of anticipated declining cost rates, the
educational institution should provide the basis for the anticipated
decline. Total funding for the award would reflect the anticipated
decline. If a declining cost rate is not anticipated at the time of
award, the educational institution may recover the costs at the rates
in effect at the time of the award.
Comment: Fixed rates should not be applied to primate centers that
are funded by the National Institutes of Health P-51 awards, since
these centers are involved in a very long-term agreement with the
Federal Government for specific research activities.
Response: The fixed rates concept does not apply to the seven
primate animal care facilities that are involved in special animal
research funded under the National Institutes of Health P-51--Primate
Research Center Grant. These centers are primarily federally-funded and
are involved in a very long-term agreement with the Federal Government.
The federally-funded F&A costs that make up the rates are used to
charge the educational institution's users of the facility and are
treated as program income and returned to the Federal awards.
Comment: Fixed rates should only be used for funding a total
project, regardless of Federal reimbursement of a university's F&A
costs. This policy is consistent with the funding and reimbursement
policies for grants by the National Science Foundation (NSF).
Response: Current NSF policies award a fixed amount (direct and F&A
costs) for the conduct of an entire project. This policy allows the
educational institution to recover more F&A costs than originally
budgeted as long as the total reimbursement for the project does not
exceed the funding for the total award. The revision in Section G.7
provides that a fixed rate shall be used for both funding and
reimbursement of F&A costs during an award's life (or a competitive
segment's life). This policy assures that the Federal Government is
receiving the level of services (i.e., research) agreed to by the
educational institution and the Federal agency when the award was made.
If the fixed rate concept is used only for funding of the award and not
reimbursement of F&A costs, during periods of increasing rates, while
the total funding for the award remains the same, then a shift of
funding available for direct costs to F&A costs would occur. Therefore,
the funding available for direct cost activities would decrease and so
would the level of services (or research).
Cost Negotiation Cognizance (Section G.11)
Comment: The Circular should address the effects that a change in
cost negotiation cognizance would have on an educational institution's
administrative functions.
Response: A change in cost negotiation cognizance should have no
impact on an educational institution's administrative functions. The
consolidation of cognizant agencies for cost negotiation will enhance
the consistency in the application and interpretations of the
Circular's cost principles and in the review of cost rate proposals.
Comment: Several commenters suggest that the period for cognizant
agency assignment should be ten years rather than five since
universities frequently negotiate multiple year rates for two or three
years.
Response: The assignment period for a cognizant agency will remain
at five years, as proposed. A five-year period assignment should
normally extend over more than two normal negotiation
[[Page 20885]]
cycles. Furthermore, since the funding pattern from particular Federal
agencies at a particular university usually does not change over a
short time period, the cognizance should remain reasonably stable.
Comment: One commenter suggests that financial statements rather
National Science Foundation (NSF) data should be used in the
determination of a cognizant agency.
Response: The preferable source for cognizant agency determination
would be the Schedule of Federal Awards, as required by OMB Circular A-
133, that accompanies an educational institution's financial
statements. However, information on the Schedules of Federal Awards has
not yet been automated in a Federal data base. Therefore, the best
source data are the most recent three years of data published by NSF in
its annual report (``Selected Data on Federal Support to Universities
and Colleges''), in the table at page 5, entitled ``Federal obligations
for science and engineering research and development to universities
and colleges, ranked by total amount received, by agency; fiscal
year.'' OMB is revising Circular A-133 which will establish a data base
that can be used for this purpose.
Comment: Which would be the cognizant agency for educational
institutions that do not receive either HHS or the Department of
Defense, Office of Naval Research (DOD) funding? One commenter
suggested that an agency which has a predominant interest and an on-
site presence should be the cognizant agency. The concern is that the
major funding agency may not have the authority to address cost issues
that impact its funded projects.
Response: The Circular has been revised to provide that an
educational institution will have an assigned cognizant agency even
when HHS or DOD provides little or no funding at that educational
institution. Cognizance is assigned to either HHS or DOD depending on
which of the two agencies (HHS or DOD) provides more funds to the
educational institution. In cases where neither HHS nor DOD provides
any funding, the cognizant agency assignment shall default to HHS.
Other arrangements for cognizance of a particular educational
institution may also be made based on mutual agreement by both HHS and
DOD.
Section G.11 also states that the cognizant agency is responsible
for coordinating the formal negotiation and arranging a pre-negotiation
conference if there is interest from another agency. This process
assures that an interested major funding agency is not precluded from
participating in the negotiation process.
Comment: The agency with Federal audit cognizance (established by
Circular A-133) and cost negotiation cognizance (established by
Circular A-21) should be the same for each educational institution.
Response: With the rescission of OMB A-88, which assigned a single
Federal cognizant agency for rate negotiation, audit and audit follow-
up, an educational institution may have two different agencies
responsible for audit and cost cognizance. OMB believes that the audit
function and cost negotiation functions are different functions. This
division of responsibility works effectively for State and local
governments under Circulars A-87, ``Cost Principles for State, Local
and Indian Tribal Governments'' (60 FR 26484; May 17, 1995), and A-128,
``Audits of State and Local Governments'' (50 FR 19114; May 10, 1985).
Comment: Which agency would be the cognizant cost negotiation
agency for the Federally-Funded Research and Development Centers
(FFRDCs) associated with educational institutions? Is the FFRDC
included in the total dollar amount received by the educational
institution for the determination of a cognizant agency?
Response: Federal responsibilities associated with FFRDCs are not
affected by the revision to Circular A-21. FFRDCs associated with
educational institutions are independent organizations that function
outside the operational activities of the educational institutions.
They are required to comply with the CAS and rules and regulations
issued by the CASB set forth in 48 CFR Chapter 99. The determination of
their cognizant agency will continue to be based on the primary funding
source. Federal funding to FFRDCs shall be excluded from the
determination of cost cognizance for an educational institution.
Comment: Several commenters suggested that Federal agencies do not
have the authority to use a F&A rate for a class of sponsored
agreements or a single agreement other than the negotiated rates. To
allow this would defeat the purpose of standardized rate agreements.
Response: Under normal circumstances, the negotiated rates
established between the educational institution and the cognizant
agency should be used by all agencies. The Circular has been revised to
state that only under special circumstances prescribed by law or
regulation can an agency use a rate other than the negotiated rate.
Comment: The proposed revision stated that cognizant assignments as
of December 31, 1995, will continue in effect through an educational
institution's fiscal years ending during 1997. Is this based on the
receipt of the educational institution's cost proposal or is it based
on the year for which the proposal is prepared?
Response: The transfer of cognizance assignment is based on the
receipt date of the cost proposal. The cognizant agency for an
educational institution as of December 31, 1995, is responsible for the
review and negotiation of rates for all cost proposals submitted to
that agency through fiscal years ending during 1997. The cognizant
agency is also responsible for any disputes or appeals that result from
proposals submitted through fiscal years ending during 1997.
Dependent Tuition Benefits (Section J.8)
Comment: Most commenters stated that dependent tuition benefits are
legitimate fringe benefit costs, as are health benefits, and are
commonly used by a university to attract the best faculty and staff.
This benefit should not be eliminated. A comparison of this benefit to
the private sector should not be made since the salary for faculty and
staff are typically much lower and university employees do not receive
some benefits offered by the private sector, such as stock options.
Eliminating the dependent tuition benefit will cause universities to
raise wages for their employees, thus ultimately resulting in higher
costs for Federal research.
Response: OMB disagrees for the following reasons:
(1) Some universities charge federally-sponsored agreements for
dependent tuition assistance even when there is no actual cost incurred
by the university. For example, in the four universities covered by a
recent General Accounting Office (GAO) study (``University Research--
U.S. Reimbursement of Tuition Costs for University Employee Family
Members,'' GAO/NSIAD-95-19), when a dependent attended the university
where an employee worked, the four universities charged tuition in full
or in part to federally-sponsored agreements. GAO's report provided an
example in which an institution ``would have charged $18,000 to the
fringe benefit pool for a child of a tenured faculty member attending
the university during 1993.'' Generally, provision of substantial
fringe benefits that do not in fact impose a measurable cost on an
entity are not a ``cost'' that is properly chargeable to the
government.
[[Page 20886]]
(2) Since 1977, the Federal Acquisition Regulation (FAR)(48 CFR
Subpart 31.205-44, ``Training and education costs''), which applies to
Federal contracts with commercial firms, has treated dependent tuition
benefit as an unallowable cost. This change was made because the
procurement regulation review committee, which studied changes to the
FAR in the mid 1970's, believed that there was no benefit to the
government from subsidizing tuition costs of employee family members.
(3) Dependent tuition benefits are unique to educational
institutions, i.e., they are not available as a normal business
practice for the private sector (subject to the FAR), State and local
governments (subject to OMB Circular A-87), and non-profit
organizations (subject to OMB Circular A-122, ``Cost Principles for
Non-Profit Organizations''). Allowing dependent tuition benefits to
educational institutions would provide allowable costs for only one
group of grantees and contractors.
(4) No evidence has been offered to support the comment that
compensation for educational institution faculty and staff currently is
much lower than compensation in the private sector for the same
discipline. If higher salary levels are required to attract faculty and
staff, then such salaries will be chargeable to Federal awards to the
extent allowable under this Circular and the terms of the awards.
Based on the above reasons, the Circular is revised to disallow
dependent tuition benefits for educational institutions' fiscal years
starting on or after September 30, 1998.
Comment: A phase-in period with an effective date of 1998 should be
allowed for the total elimination of this benefit.
Response: Given existing contractual commitments to faculty and
staff, the effective date for making the dependent tuition an
unallowable cost is the educational institution's fiscal years
beginning on or after September 30, 1998.
Use Allowance/Depreciation (Section J.12)
Comment: The educational institution should be allowed to
depreciate the remaining (full) value of the assets at the time of
conversion, using the depreciation rate until the assets are disposed.
Response: For claiming its costs on a single class of assets, an
educational institution always has the choice of selecting either the
use allowance or depreciation methodology. These two methodologies are
based on different cost reimbursement principles (i.e., use allowance
allows cost recovery beyond useful lives as long as the asset is in
use, while depreciation allows a quicker cost recovery based on a
depreciable life only). The selection of recovery method is up to the
educational institution.
Circular A-21 does not require the educational institution to
convert from the use allowance method to the depreciation method. The
revision in Section J.12.b.(3) simply clarifies that, in the case where
an educational institution, by its own choice, elects to convert from
use allowance to the depreciation method, the conversion should be made
as if the depreciation method had been used over the entire life of the
asset.
Additionally, the ``allocability principle'' in Section C.4 of
Circular A-21 states that ``a cost is allocable to a particular cost
objective if the goods or services involved are chargeable or
assignable to such cost objective in accordance with relative benefits
received or other equitable relationship'' (emphasis added). 44 FR
12368 (February 26, 1979). The allocability principle would be violated
if unclaimed costs could be charged to the future periods that do not
benefit from the use of the asset.
Comment: Circular A-21 should allow the use allowance method for
old buildings and the depreciation method for new buildings rather than
restrict the use of one method of reimbursement for one type of assets.
The provision should apply to new assets only and not all assets. The
commenter recommends changing the language to ``a combination of the
depreciation and use allowances may not be used for new assets.''
Response: Section J.12.d has provided that a combination of the
depreciation and use allowance may not be used, in like circumstances,
for a single class of assets. To allow the use of both methods for a
single class of assets would violate the consistent treatment principle
of the Circular, complicate the depreciation/use allowance calculation
process, and create inequities in the recovery of asset costs against
Federal programs. This provision prevents an educational institution
from both using depreciation to recover the cost of assets with useful
lives that are shorter than the average lives reflected in the use
allowance rates (50 years for buildings and 15 years for equipment) AND
using allowance for the recovery of assets with longer useful lives.
The mix of the two methods for a single class of assets is clearly
inequitable to the Federal Government since the use allowance method is
a simplified recovery method that is based on an averaging concept
which implicitly recognizes that certain assets within each broad
category have lives that differ from the average. OMB does not see the
need to change this policy since it is the educational institution's
choice to select the appropriate method of recovery for facility costs.
Comment: The provision should allow full recovery of assets that
are converted from use allowance to depreciation. This could be done by
allowing use allowance beyond the asset's depreciable ``life''--as long
as the assets are in use--until the full cost is recovered.
Authorization from the cognizant agency shall be obtained.
Response: OMB disagrees. If the depreciation method is used,
Section J.12.b.(5) provides that depreciation is not allowed on any
assets that have outlived their depreciable lives. However, Section
J.12.c.(3) allows a ``reasonable use allowance'' for any assets that
are considered to be fully depreciated after considering the amount of
depreciation previously charged to the Federal Government, the
estimated useful life remaining at the time of negotiation, the effect
of any increased maintenance charges, decreased efficiency due to age,
and any other factors pertinent to the utilization of the asset for the
purposed contemplated. The allowable amounts are determined by the
cognizant agency. This provision allows a use allowance for fully
depreciated assets only under the most extraordinary circumstances and
is not applicable when converting from use allowance to depreciation.
This provision is intended to permit reimbursement under unusual
circumstances where an asset is treated as having outlived its useful
life but nevertheless has future cost consequences that are not
recoverable through capitalized repair and replacement costs or as
current period expenses.
An example of a ``reasonable use allowance'' is for the use of an
electronic microscope by the educational institution after its useful
life. At the start of its service life, a reasonable estimate of the
useful life of an electronic microscope is five years. However, after
five years, when the asset is fully depreciated and its costs fully
recovered, if it is still functional and is used to support Federal
projects, then consideration may be given by the cognizant agency for a
reasonable use allowance. This approach results in cost savings both
for the educational institution and the Federal Government since the
educational institution could have replaced the old electronic
microscope with a new, more expensive
[[Page 20887]]
one and then appropriately charge a use allowance to the Federal
projects.
Equipment Definition (Section J.16)
Comment: The effective date of the equipment definition change
should be prior to the expiration of an educational institution's F&A
cost rate agreements.
Response: In order to simplify the transition, the effective date
of the equipment definition change will be at the beginning of the next
F&A cost rate agreement. An educational institution with predetermined
or fixed rates that wishes to raise its equipment threshold earlier
should contact its cognizant agency for approval. While educational
institutions are free to change their capitalization policy at any
time, there should be limitations as to when sponsoring agencies may
recognize the change. To do otherwise could result in direct costs and
F&A costs being reimbursed under conditions different from those upon
which the F&A cost rate was predicated. Federal sponsoring agencies are
to award, and grantees are to claim, costs in accordance with the
policies in effect at the time the cost rate agreement was issued. At
the cognizant agency's discretion, revised cost rates may be
established based on an analysis of the impact on cost rates of the
conversion.
Comment: Clarification is needed on the treatment of depreciation
of those assets which had costs between the old $500 threshold and the
new $5000.
Response: In order to clarify the accounting for the unamortized
portion of any equipment costs as a result of a change in
capitalization levels, language has been added to Section J.16.a.(1) to
explain that the unamortized portion may be recovered by continuing to
claim the otherwise allowable use allowance or depreciation on the
equipment, or by amortizing the amount to be written off over a period
of years negotiated with the cognizant agency.
Interest Criteria (Section J.22)
General
Comment: Clarifications are needed for the calculations used in the
lease-purchase analysis and the cash-flow analysis.
Response: The commenter is correct. The Circular has been revised
to provide the following clarifications for the interest requirements.
A threshold of $500,000 has been set for the requirement of a lease-
purchase analysis for a facility acquisition, a cash-flow analysis is
required for debt arrangements over $1 million (when the initial equity
contribution by the educational institution is less than 25 percent),
and notification is required in case of a substantial relocation from a
building funded in part or whole through Federal reimbursements. The
same clarifications adopted in the final revision of the interest
provision of Circular A-122 (60 FR 52516), have been included in this
revision to Circular A-21 in Section J.22.f. This will maintain
conformity across the cost principles circulars.
Comment: The requirements under the interest criteria create an
additional administrative burden for colleges and universities in a
period when the administrative costs are already capped.
Response: OMB recognizes that there might be a nominal increase in
an administrative burden in a few cases. However, OMB believes that
these requirements are needed to protect the Federal Government against
abusive financing arrangements (such as ``balloon financing method''
where the entire principal amount is made at the end of the finance
term).
Comment: The requirements should only apply prospectively to future
asset acquisitions.
Response: OMB revises the provision in Section J.22.f to state that
the criteria for interest allowability in this revision apply only to
facilities and equipment acquired after the effective date of this
revision.
Comment: What are the reimbursement limitations when the least
expensive alternative is not chosen?
Response: As the revision in Section J.22.f states, when a lease-
purchase analysis is required to be performed, reimbursement will be
limited to the least expensive alternative available, whether or not it
is the chosen alternative.
Comment: Where a facility is acquired and the components are
depreciated over varying lives, can interest on debt associated with
fully depreciated assets be claimed?
Response: No. Under the allocability provisions of Section C.4.a,
interest costs on fully depreciated, retired, scrapped, or nonexistent
assets are unallowable.
Comment: Where a new facility is acquired or constructed with
excess capacity intended to meet future needs, can interest costs be
claimed for that portion of the facility that is currently excess and
not in use?
Response: No. Under the allocability provisions of Section C.4.a,
interest costs on excess or idle capacity are not allocable to Federal
programs and are, therefore, unallowable. This provision also applies
to any related costs, such as depreciation.
Lease-Purchase Analysis
Comment: A higher threshold should be established for the
requirement of the lease-purchase analysis. Thresholds of $50 million
and $25 million were recommended.
Response: Many commenters indicated that lease-purchase analyses
are generally performed by the educational institutions as a common
business practice. Such analyses normally are performed for assets
under the suggested $25 million threshold, whether or not Federal funds
are involved. The expense of the analysis is justified when one
considers the considerably greater amounts that are at stake in a real
estate lease or purchase. Also, by identifying the most economical
acquisition alternative, such analyses can pay for themselves. Section
C.3 of Circular A-21 requires that, to be allowable, costs must be
reasonable. A lease-purchase analysis provides such supporting
documentation. A threshold of $25 million or $50 million is simply too
high to protect the interests of the Federal Government
However, OMB recognizes that a lease-purchase analysis may not be
cost effective for smaller facility acquisitions. Therefore, a
threshold of $500,000 has been established in the final revision for
the lease-purchase analysis requirement for facilities. Additionally,
the analysis is not required to be submitted but is only to be
maintained on file for cognizant agency review upon request. There is
no requirement for a lease-purchase analysis for equipment.
Cash-Flow Analysis
Comment: The educational institution should have the option of
rolling forward the ``excess'' cash recovery to future years rather
than being disallowed in the year incurred since interest costs are
often based on a declining principal balance and are not spread evenly
over the life of the mortgage.
Response: The provision on ``excess'' cash flow addresses the
interest costs to the Federal Government in instances where cash flow
from depreciation exceeds debt principal payments (e.g., a ``balloon''
payment arrangement). In such case, where the entire principal amount
is paid at the end of the finance period, the cash flow received by the
educational institution for reimbursement of depreciation and interest
expenses on a facility would exceed the payments made by the
educational institution for interest and principal, thus resulting in
an excessive cash flow. The interest on the excess
[[Page 20888]]
cash flow should be deducted from interest costs in the year earned and
not spread out over the life of the mortgage since the Federal
Government pays its proportionate share of future period interest.
The provision requiring an adjustment to allowable interest for
positive cash flow does not result in a ``disallowance'' of
depreciation exceeding principal payments. When inflows exceed
outflows, earnings are to be imputed on the excess cash flow and offset
against interest costs for the 12-month period. The educational
institution, however, retains the excess cash flow which will be needed
during periods of negative cash flow.
A sample cash-flow analysis is presented hereafter.
Comment: The provision requires that earnings on positive cash
flows be offset against interest costs. If principal payments include
the cost of land, the positive cash flow and imputed earnings will be
understated.
Response: OMB agrees. While interest on debt to acquire land is
allowable, the cost of land is not. Accordingly, when computing cash
flows, each debt principal payment shall be reduced by an amount equal
to the portion of the principal payment attributed to the acquisition
of land. This requirement is included in Section J.22.f.
BILLING CODE 3110-01-P
[[Page 20889]]
[GRAPHIC] [TIFF OMITTED] TN08MY96.024
BILLING CODE 3110-01-C
[[Page 20890]]
Interagency Policy Group
Comment: The establishment of a Federal interagency group for the
development of grant and contract policy should be addressed in
Circular A-110 rather than Circular A-21. This group should include
representatives from colleges and universities.
Response: The commenter is correct that the interagency policy
group should be formed under broader auspices than just Circular A-21.
In response, the proposal has been deleted from the final revision of
this Circular. This proposal is not being pursued at this time.
Alice M. Rivlin,
Director.
EXECUTIVE OFFICE OF THE PRESIDENT
Office of Management and Budget
Circular No. A-21, Revised, Transmittal Memorandum No. 6.
To the Heads of Executive Departments and Establishments
Subject: Cost Principles for Educational Institutions.
April 26, 1996.
This transmittal memorandum revises OMB Circular No. A-21,
``Cost Principles for Educational Institutions.'' The attached
revision further clarifies and standardizes the Circular's
principles for determining costs applicable to grants, contracts,
and other agreements with educational institutions, and rescinds OMB
Circular A-88, ``Indirect Cost Rates, Audits, and Audit Follow-up at
Educational Institutions.'' This revision is effective on the date
of its publication in the Federal Register, unless otherwise noted
within this revision.
Also attached is a recompilation of Circular A-21 that consists
of the original Circular published at 44 FR 12368 (February 26,
1979), as amended by Transmittal Memoranda Numbers 1 through 5, at
47 FR 33658 (July 23, 1982), 51 FR 20908 (June 9, 1986), 51 FR 43487
(December 2, 1986), 56 FR 50224 (October 1, 1991), 58 FR 39996 (July
15, 1993), respectively, and the amendments herein.
Alice M. Rivlin,
Director.
Attachments.
I. Circular A-88 is rescinded, effective July 1, 1996.
II. Circular A-21 is revised as follows:
Revise Sections A, C, G, J and K as follows.
1. In Section A, add subsection 4 to read as follows: 4.
Inquiries. All inquiries from Federal agencies concerning the cost
principles contained in this Circular, including the administration
and implementation of the Cost Accounting Standards (CAS) (described
in Sections C.10 through C.13) and disclosure statement (DS-2)
requirements, shall be addressed by the Office of Management and
Budget (OMB), Office of Federal Financial Management, in
coordination with the Cost Accounting Standard Board (CASB) with
respect to inquiries concerning CAS. Educational institutions'
inquiries should be addressed to the cognizant agency.
2. In Section C, change subsection 8 as follows. 8. Collection
of unallowable costs, excess costs due to noncompliance with cost
policies, increased costs due to failure to follow a disclosed
accounting practice and increased costs resulting from a change in
cost accounting practice. The following costs shall be refunded
(including interest) in accordance with applicable Federal agency
regulations:
a. Costs specifically identified as unallowable in Section J,
either directly or indirectly, and charged to the Federal
Government.
b. Excess costs due to failure by the educational institution to
comply with the cost policies in this Circular.
c. Increased costs due to a noncompliant cost accounting
practice used to estimate, accumulate, or report costs.
d. Increased costs resulting from a change in accounting
practice.
3. In Section C, add subsection 10 to read as follows: 10.
Consistency in estimating, accumulating and reporting costs.
a. An educational institution's practices used in estimating
costs in pricing a proposal shall be consistent with the educational
institution's cost accounting practices used in accumulating and
reporting costs.
b. An educational institution's cost accounting practices used
in accumulating and reporting actual costs for a sponsored agreement
shall be consistent with the educational institution's practices
used in estimating costs in pricing the related proposal or
application.
c. The grouping of homogeneous costs in estimates prepared for
proposal purposes shall not per se be deemed an inconsistent
application of cost accounting practices under subsection a when
such costs are accumulated and reported in greater detail on an
actual cost basis during performance of the sponsored agreement.
d. Appendix A also reflects this requirement, along with the
purpose, definitions, and techniques for application, all of which
are authoritative.
4. In Section C, add subsection 11 to read as follows: 11.
Consistency in allocating costs incurred for the same purpose.
a. All costs incurred for the same purpose, in like
circumstances, are either direct costs only or F&A costs only with
respect to final cost objectives. No final cost objective shall have
allocated to it as a cost any cost, if other costs incurred for the
same purpose, in like circumstances, have been included as a direct
cost of that or any other final cost objective. Further, no final
cost objective shall have allocated to it as a direct cost any cost,
if other costs incurred for the same purpose, in like circumstances,
have been included in any F&A cost pool to be allocated to that or
any other final cost objective.
b. Appendix A reflects this requirement along with its purpose,
definitions, techniques for application, illustrations and
interpretations, all of which are authoritative.
5. In Section C, add subsection 12 to read as follows: 12.
Accounting for unallowable costs.
a. Costs expressly unallowable or mutually agreed to be
unallowable, including costs mutually agreed to be unallowable
directly associated costs, shall be identified and excluded from any
billing, claim, application, or proposal applicable to a sponsored
agreement.
b. Costs which specifically become designated as unallowable as
a result of a written decision furnished by a Federal official
pursuant to sponsored agreement disputes procedures shall be
identified if included in or used in the computation of any billing,
claim, or proposal applicable to a sponsored agreement. This
identification requirement applies also to any costs incurred for
the same purpose under like circumstances as the costs specifically
identified as unallowable under either this subsection or subsection
a.
c. Costs which, in a Federal official's written decision
furnished pursuant to sponsored agreement disputes procedures, are
designated as unallowable directly associated costs of unallowable
costs covered by either subsection a or b shall be accorded the
identification required by subsection b.
d. The costs of any work project not contractually authorized by
a sponsored agreement, whether or not related to performance of a
proposed or existing sponsored agreement, shall be accounted for, to
the extent appropriate, in a manner which permits ready separation
from the costs of authorized work projects.
e. All unallowable costs covered by subsections a through d
shall be subject to the same cost accounting principles governing
cost allocability as allowable costs. In circumstances where these
unallowable costs normally would be part of a regular F&A cost
allocation base or bases, they shall remain in such base or bases.
Where a directly associated cost is part of a category of costs
normally included in a F&A cost pool that shall be allocated over a
base containing the unallowable cost with which it is associated,
such a directly associated cost shall be retained in the F&A cost
pool and be allocated through the regular allocation process.
f. Where the total of the allocable and otherwise allowable
costs exceeds a limitation-of-cost or ceiling-price provision in a
sponsored agreement, full direct and F&A cost allocation shall be
made to the sponsored agreement cost objective, in accordance with
established cost accounting practices and standards which regularly
govern a given entity's allocations to sponsored agreement cost
objectives. In any determination of a cost overrun, the amount
thereof shall be identified in terms of the excess of allowable
costs over the ceiling amount, rather than through specific
identification of particular cost items or cost elements.
g. Appendix A reflects this requirement, along with its purpose,
definitions, techniques for application, and illustrations of this
standard, all of which are authoritative.
6. In Section C, add subsection 13 to read as follows: 13. Cost
accounting period.
a. Educational institutions shall use their fiscal year as their
cost accounting period, except that:
(1) Costs of a F&A function which exists for only a part of a
cost accounting period may
[[Page 20891]]
be allocated to cost objectives of that same part of the period on
the basis of data for that part of the cost accounting period if the
cost is: (i) material in amount, (ii) accumulated in a separate F&A
cost pool or expense pool, and (iii) allocated on the basis of an
appropriate direct measure of the activity or output of the function
during that part of the period.
(2) An annual period other than the fiscal year may, upon mutual
agreement with the Federal Government, be used as the cost
accounting period if the use of such period is an established
practice of the educational institution and is consistently used for
managing and controlling revenues and disbursements, and appropriate
accruals, deferrals or other adjustments are made with respect to
such annual periods.
(3) A transitional cost accounting period other than a year
shall be used whenever a change of fiscal year occurs.
b. An educational institution shall follow consistent practices
in the selection of the cost accounting period or periods in which
any types of expense and any types of adjustment to expense
(including prior-period adjustments) are accumulated and allocated.
c. The same cost accounting period shall be used for
accumulating costs in a F&A cost pool as for establishing its
allocation base, except that the Federal Government and educational
institution may agree to use a different period for establishing an
allocation base, provided:
(1) The practice is necessary to obtain significant
administrative convenience,
(2) The practice is consistently followed by the educational
institution,
(3) The annual period used is representative of the activity of
the cost accounting period for which the F&A costs to be allocated
are accumulated, and
(4) The practice can reasonably be estimated to provide a
distribution to cost objectives of the cost accounting period not
materially different from that which otherwise would be obtained.
d. Appendix A reflects this requirement, along with its purpose,
definitions, techniques for application and illustrations, all of
which are authoritative.
7. In Section C, add subsection 14 to read as follows: 14.
Disclosure Statement.
a. Educational institutions that received aggregate sponsored
agreements totaling $25 million or more subject to this Circular
during their most recently completed fiscal year shall disclose
their cost accounting practices by filing a Disclosure Statement
(DS-2), which is reproduced in Appendix B. With the approval of the
cognizant agency, an educational institution may meet the DS-2
submission by submitting the DS-2 for each business unit that
received $25 million or more in sponsored agreements.
b. The DS-2 shall be submitted to the cognizant agency with a
copy to the educational institution's audit cognizant office.
c. Educational institutions receiving $25 million or more in
sponsored agreements that are not required to file a DS-2 pursuant
to 48 CFR 9903.202-1 shall file a DS-2 covering the first fiscal
year beginning after the publication date of this revision, within
six months after the end of that fiscal year. Extensions beyond the
above due date may be granted by the cognizant agency on a case-by-
case basis.
d. Educational institutions are responsible for maintaining an
accurate DS-2 and complying with disclosed cost accounting
practices. Educational institutions must file amendments to the DS-2
when disclosed practices are changed to comply with a new or
modified standard, or when practices are changed for other reasons.
Amendments of a DS-2 may be submitted at any time. If the change is
expected to have a material impact on the educational institution's
negotiated F&A cost rates, the revision shall be approved by the
cognizant agency before it is implemented. Resubmission of a
complete, updated DS-2 is discouraged except when there are
extensive changes to disclosed practices.
e. Cost and funding adjustments. Cost adjustments shall be made
by the cognizant agency if an educational institution fails to
comply with the cost policies in this Circular or fails to
consistently follow its established or disclosed cost accounting
practices when estimating, accumulating or reporting the costs of
sponsored agreements, if aggregate cost impact on sponsored
agreements is material. The cost adjustment shall normally be made
on an aggregate basis for all affected sponsored agreements through
an adjustment of the educational institution's future F&A costs
rates or other means considered appropriate by the cognizant agency.
Under the terms of CAS-covered contracts, adjustments in the amount
of funding provided may also be required when the estimated proposal
costs were not determined in accordance with established cost
accounting practices.
f. Overpayments. Excess amounts paid in the aggregate by the
Federal Government under sponsored agreements due to a noncompliant
cost accounting practice used to estimate, accumulate, or report
costs shall be credited or refunded, as deemed appropriate by the
cognizant agency. Interest applicable to the excess amounts paid in
the aggregate during the period of noncompliance shall also be
determined and collected in accordance with applicable Federal
agency regulations.
g. Compliant cost accounting practice changes. Changes from one
compliant cost accounting practice to another compliant practice
that are approved by the cognizant agency may require cost
adjustments if the change has a material effect on sponsored
agreements and the changes are deemed appropriate by the cognizant
agency.
h. Responsibilities. The cognizant agency shall:
(1) Determine cost adjustments for all sponsored agreements in
the aggregate on behalf of the Federal Government. Actions of the
cognizant agency official in making cost adjustment determinations
shall be coordinated with all affected Federal agencies to the
extent necessary.
(2) Prescribe guidelines and establish internal procedures to
promptly determine on behalf of the Federal Government that a DS-2
adequately discloses the educational institution's cost accounting
practices and that the disclosed practices are compliant with
applicable CAS and the requirements of this Circular.
(3) Distribute to all affected agencies any DS-2 determination
of adequacy and/or noncompliance.
8. In Section E, add subsection 2.d(5) to read as follows:
2.d(5) Notwithstanding subsection (3), effective July 1, 1998, a
cost analysis study or base other than that in Section F shall not
be used to distribute utility, library or student services costs. By
that date, OMB shall have in place an alternative methodology for
making payments on costs related to utilities.
9. In Section G, add a new subsection 7 to read as follows, and
renumber all subsequent subsections from 7, 8 and 9 to 8, 9 and 10,
respectively: 7. Fixed rates for the life of the sponsored
agreement.
a. Federal agencies shall use the negotiated rates for F&A costs
in effect at the time of the initial award throughout the life of
the sponsored agreement. ``Life'' for the purpose of this subsection
means each competitive segment of a project. A competitive segment
is a period of years approved by the Federal funding agency at the
time of the award. If negotiated rate agreements do not extend
through the life of the sponsored agreement at the time of the
initial award, then the negotiated rate for the last year of the
sponsored agreement shall be extended through the end of the life of
the sponsored agreement. Award levels for sponsored agreements may
not be adjusted in future years as a result of changes in negotiated
rates.
b. When an educational institution does not have a negotiated
rate with the Federal Government at the time of the award (because
the educational institution is a new grantee or the parties cannot
reach agreement on a rate), the provisional rate used at the time of
the award shall be adjusted once a rate is negotiated and approved
by the cognizant agency.
10. In Section G, add subsection 11 to read as follows: 11.
Negotiation and approval of F&A rate.
a. Cognizant agency assignments. ``A cognizant agency'' means
the Federal agency responsible for negotiating and approving F&A
rates for an educational institution on behalf of all Federal
agencies.
(1) Cost negotiation cognizance is assigned to the Department of
Health and Human Services (HHS) or the Department of Defense's
Office of Naval Research (DOD), normally depending on which of the
two agencies (HHS or DOD) provides more funds to the educational
institution for the most recent three years. Information on funding
shall be derived from relevant data gathered by the National Science
Foundation. In cases where neither HHS nor DOD provides Federal
funding to an educational institution, the cognizant agency
assignment shall default to HHS. Notwithstanding the method for
cognizance determination described above, other arrangements for
cognizance of a particular educational institution may also be based
in part on the types of research performed at the educational
institution and
[[Page 20892]]
shall be decided based on mutual agreement between HHS and DOD.
(2) Cognizant assignments as of December 31, 1995, shall
continue in effect through educational institutions' fiscal years
ending during 1997, or the period covered by negotiated agreements
in effect on December 31, 1995, whichever is later, except for those
educational institutions with cognizant agencies other than HHS or
DOD. Cognizance for these educational institutions shall transfer to
HHS or DOD at the end of the period covered by the current
negotiated rate agreement. After cognizance is established, it shall
continue for a five-year period.
b. Acceptance of rates. The negotiated rates shall be accepted
by all Federal agencies. Only under special circumstances, when
required by law or regulation, may an agency use a rate different
from the negotiated rate for a class of sponsored agreements or a
single sponsored agreement.
c. Correcting deficiencies. The cognizant agency shall negotiate
changes needed to correct systems deficiencies relating to
accountability for sponsored agreements. Cognizant agencies shall
address the concerns of other affected agencies, as appropriate.
d. Resolving questioned costs. The cognizant agency shall
conduct any necessary negotiations with an educational institution
regarding amounts questioned by audit that are due the Federal
Government related to costs covered by a negotiated agreement.
e. Reimbursement. Reimbursement to cognizant agencies for work
performed under Circular A-21 may be made by reimbursement billing
under the Economy Act, 31 U.S.C. 1535.
f. Procedure for establishing facilities and administrative
rates. The cognizant agency shall arrange with the educational
institution to provide copies of rate proposals to all interested
agencies. Agencies wanting such copies should notify the cognizant
agency. Rates shall be established by one of the following methods:
(1) Formal negotiation. The cognizant agency is responsible for
negotiating and approving rates for an educational institution on
behalf of all Federal agencies. Non- cognizant Federal agencies,
which award sponsored agreements to an educational institution,
shall notify the cognizant agency of specific concerns (i.e., a need
to establish special cost rates) which could affect the negotiation
process. The cognizant agency shall address the concerns of all
interested agencies, as appropriate. A pre-negotiation conference
may be scheduled among all interested agencies, if necessary. The
cognizant agency shall then arrange a negotiation conference with
the educational institution.
(2) Other than formal negotiation. The cognizant agency and
educational institution may reach an agreement on rates without a
formal negotiation conference; for example, through correspondence
or use of the simplified method described in this Circular.
g. Formalizing determinations and agreements. The cognizant
agency shall formalize all determinations or agreements reached with
an educational institution and provide copies to other agencies
having an interest.
h. Disputes and disagreements. Where the cognizant agency is
unable to reach agreement with an educational institution with
regard to rates or audit resolution, the appeal system of the
cognizant agency shall be followed for resolution of the
disagreement.
11. In Section J, replace subsection 8.f.(2) to read as follows:
8.f.(2) Fringe benefits in the form of employer contributions or
expenses for social security, employee insurance, workmen's
compensation insurance, tuition or remission of tuition for
individual employees are allowable, provided such benefits are
granted in accordance with established educational institutional
policies, and are distributed to all institutional activities on an
equitable basis. Tuition benefits for family members other than the
employee are unallowable for fiscal years beginning after September
30, 1998. See Section J.41.b, Scholarships and student aid costs,
for treatment of tuition remission provided to students.
12. In Section J, add subsection 12.b.(3) to read as follows:
12.b.(3) Where the depreciation method is introduced to replace
the use allowance method, depreciation shall be computed as if the
asset had been depreciated over its entire life (i.e., from the date
the asset was acquired and ready for use to the date of disposal or
withdrawal from service). The aggregate amount of use allowances and
depreciation attributable to an asset (including imputed
depreciation applicable to periods prior to the conversion to the
use allowance method as well as depreciation after the conversion)
may be less than, and in no case, greater than the total acquisition
cost of the asset.
13. In Section J, add subsection 12 c.(4) to read as follows:
12.c.(4) Notwithstanding subsection(3), once an educational
institution converts from one cost recovery methodology to another,
acquisition costs not recovered may not be used in the calculation
of the use allowance in subsection(3).
14. In Section J, amend subsections 16.a.(1) and 16.b.(2) to
read as follows:
16.a.(1) ``Equipment'' means an article of nonexpendable,
tangible personal property having a useful life of more than one
year and an acquisition cost which equals or exceeds the lesser of
the capitalization level established by the organization for
financial statement purposes, or $5000. The unamortized portion of
any equipment written off as a result of a change in capitalization
levels may be recovered by continuing to claim the otherwise
allowable use allowances or depreciation on the equipment, or by
amortizing the amount to be written off over a period of years
negotiated with the cognizant agency.
16.b.(2) Expenditures for special purpose equipment are
allowable as direct charges with the approval of the sponsoring
agency.
15. In Section J, add subsection 22.f to read as follows:
22.f. Interest on debt incurred after the effective date of this
revision to acquire, replace or renovate capital assets (including
renovations, alterations, equipment, land, and capital assets
acquired through capital leases), acquired after the effective date
of this revision and used in support of sponsored agreements is
subject to the following conditions:
(1) For facilities costing over $500,000, the educational
institution shall prepare, prior to the acquisition or replacement
of the facility, a lease-purchase analysis in accordance with
Sec. ______.44 of OMB Circular A-110, which shows that a financed
purchase, including a capital lease is less costly to the
educational institution than other operating lease alternatives, on
a net present value basis. Discount rates used shall be equal to the
educational institution's anticipated interest rates and shall be no
higher than the fair market rate available to the educational
institution from an unrelated (``arm's length'') third-party. The
lease-purchase analysis shall include a comparison of the net
present value of the projected total cost comparisons of both
alternatives over the period the asset is expected to be used by the
educational institution. The cost comparisons associated with
purchasing the facility shall include the estimated purchase price,
anticipated operating and maintenance costs (including property
taxes, if applicable) not included in the debt financing, less any
estimated asset salvage value at the end of the defined period. The
cost comparison for a capital lease shall include the estimated
total lease payments, any estimated bargain purchase option,
operating and maintenance costs, and taxes not included in the
capital leasing arrangement, less any estimated credits due under
the lease at the end of the defined period. Projected operating
lease costs shall be based on the anticipated cost of leasing
comparable facilities at fair market rates under rental agreements
that would be renewed or reestablished over the period defined
above, and any expected maintenance costs and allowable property
taxes to be borne by the educational institution directly or as part
of the lease arrangement.
(2) The actual interest cost claimed is predicated upon interest
rates that are no higher than the fair market rate available to the
educational institution from an unrelated (arm's length) third
party.
(3) Investment earnings, including interest income on bond or
loan principal, pending payment of the construction or acquisition
costs, are used to offset allowable interest cost. Arbitrage
earnings reportable to the Internal Revenue Service are not required
to be offset against allowable interest costs.
(4) Reimbursements are limited to the least costly alternative
based on the total cost analysis required under subsection (1). For
example, if an operating lease is determined to be less costly than
purchasing through debt financing, then reimbursement is limited to
the amount determined if leasing had been used. In all cases where a
lease-purchase analysis is required to be performed, Federal
reimbursement shall be based upon the least expensive alternative.
(5) Educational institutions are also subject to the following
conditions:
(a) For debt arrangements over $1 million, unless the
educational institution makes an initial equity contribution to the
asset purchase of 25 percent or more, educational
[[Page 20893]]
institutions shall reduce claims for interest cost by an amount
equal to imputed interest earnings on excess cash flow, which is to
be calculated as follows. Annually, educational institutions shall
prepare a cumulative (from the inception of the project) report of
monthly cash flows that includes inflows and outflows, regardless of
the funding source. Inflows consist of depreciation expense,
amortization of capitalized construction interest, and annual
interest cost. For cash flow calculations, the annual inflow figures
shall be divided by the number of months in the year (i.e., usually
12) that the building is in service for monthly amounts. Outflows
consist of initial equity contributions, debt principal payments
(less the pro rata share attributable to the unallowable costs of
land) and interest payments. Where cumulative inflows exceed
cumulative outflows, interest shall be calculated on the excess
inflows for that period and be treated as a reduction to allowable
interest cost. The rate of interest to be used to compute earnings
on excess cash flows shall be the three-month Treasury bill closing
rate as of the last business day of that month.
(b) Substantial relocation of federally-sponsored activities
from a facility financed by indebtedness, the cost of which was
funded in whole or part through Federal reimbursements, to another
facility prior to the expiration of a period of 20 years requires
notice to the cognizant agency. The extent of the relocation, the
amount of the Federal participation in the financing, and the
depreciation and interest charged to date may require negotiation
and/or downward adjustments of replacement space charged to Federal
programs in the future.
(c) The allowable costs to acquire facilities and equipment are
limited to a fair market value available to the educational
institution from an unrelated (arm's length) third party.
(6) The following definitions are to be used for purposes of
this section:
(a) ``Initial equity contribution'' means the amount or value of
contributions made by non-Federal entities for the acquisition of
the asset prior to occupancy of facilities.
(b) ``Asset costs'' means the capitalizable costs of an asset,
including construction costs, acquisition costs, and other such
costs capitalized in accordance with Generally Accepted Accounting
Principles (GAAP).
16. In Section K, add an instruction and subsection 2.b(5) under
the ``Certificate of F&A Costs'' to read as follows:
For educational institutions that are required to file a DS-2 in
accordance with Section C.14, the following statement shall be added
to the ``Certificate of F&A Costs'':
(5) The rate proposal is prepared using the same cost accounting
practices that are disclosed in the DS-2, including its amendments
and revisions, filed with and approved by the cognizant agency.
17. Throughout the entire Circular, except for in Appendices A
and B, replace the term ``indirect costs'' with ``facilities and
administrative costs'' and make the following additional amendments:
a. In Section B, add the definition of facilities and
administrative (F&A) costs to read as follows:
4. Facilities and administrative (F&A) costs, for the purpose of
this Circular, means costs that are incurred for common or joint
objectives and, therefore, cannot be identified readily and
specifically with a particular sponsored project, an instructional
activity, or any other institutional activity. F&A costs are
synonymous with ``indirect'' costs, as previously used in this
Circular and as currently used in Appendices A and B. The F&A cost
categories are described in Section F.1.
b. In Section E, replace subsection 1 to read as follows:
1. General. F&A costs are those that are incurred for common or
joint objectives and therefore cannot be identified readily and
specifically with a particular sponsored project, an institutional
activity, or any other institutional activity. See Section F.1 for a
discussion of the components of F&A costs.
c. In Section E, replace subsection 2.e.(1) to read as follows:
2.e.(1) F&A costs are the broad categories of costs discussed in
Section F.1.
d. In Section F, replace the first sentence of subsection 1 to
read as follows:
1. Definition of Facilities and Administration. F&A costs are
broad categories of costs.
18. Add Appendices A and B for the CASB's Cost Accounting
Standards (CAS) and the CASB's Disclosure Statement (DS-2).
19. In OMB's recompilation of Circular A-21 and its six
Transmittal Memoranda, throughout the Circular, consistent
conventions were introduced, including some numbering changes,
punctuation changes, correction of typographical errors, etc. In
addition, in Section J, former subsections 29, ``Public information
services costs,'' and 39, ``Special services costs,'' were removed
since their contents were merged into subsections 1 and 3 in
Transmittal Memorandum No. 4.
EXECUTIVE OFFICE OF THE PRESIDENT
Office of Management and Budget
Circular No. A-21, Revised
To the Heads of Executive Departments and Establishments
Subject: Cost principles for educational institutions.
1. Purpose. This Circular establishes principles for determining
costs applicable to grants, contracts, and other agreements with
educational institutions . The principles deal with the subject of
cost determination, and make no attempt to identify the
circumstances or dictate the extent of agency and institutional
participation in the financing of a particular project. The
principles are designed to provide that the Federal Government bear
its fair share of total costs, determined in accordance with
generally accepted accounting principles, except where restricted or
prohibited by law. Agencies are not expected to place additional
restrictions on individual items of cost. Provision for profit or
other increment above cost is outside the scope of this Circular.
2. Supersession. The Circular supersedes Federal Management
Circular 73-8, dated December 19, 1973. FMC 73-8 is revised and
reissued under its original designation of OMB Circular No. A-21.
3. Applicability.
a. All Federal agencies that sponsor research and development,
training, and other work at educational institutions shall apply the
provisions of this Circular in determining the costs incurred for
such work. The principles shall also be used as a guide in the
pricing of fixed price or lump sum agreements.
b. In addition, Federally Funded Research and Development
Centers associated with educational institutions shall be required
to comply with the Cost Accounting Standards, rules and regulations
issued by the Cost Accounting Standards Board, and set forth in 48
CFR part 99; provided that they are subject thereto under defense
related contracts.
4. Responsibilities. The successful application of cost
accounting principles requires development of mutual understanding
between representatives of educational institutions and of the
Federal Government as to their scope, implementation, and
interpretation.
5. Attachment. The principles and related policy guides are set
forth in the Attachment, ``Principles for determining costs
applicable to grants, contracts, and other agreements with
educational institutions.''
6. Effective date. The provisions of this Circular shall be
effective October 1, 1979, except for subsequent amendments
incorporated herein for which the effective dates were specified in
six Transmittal Memoranda (47 FR 33658, 51 FR 20908, 51 FR 43487, 56
FR 50224, and 58 FR 39996 and [insert today's FR cite for this
Part]). The provisions shall be implemented by institutions as of
the start of their first fiscal year beginning after that date.
Earlier implementation, or a delay in implementation of individual
provisions, is permitted by mutual agreement between an institution
and the cognizant Federal agency.
7. Inquiries. Further information concerning this Circular may
be obtained by contacting the Office of Federal Financial
Management, Office of Management and Budget, Washington, DC 20503,
telephone (202) 395-3993.
Attachment.
Principles for Determining Costs Applicable to Grants, Contracts, and
Other Agreements With Educational Institutions
Table of Contents
A. Purpose and scope
1. Objectives
2. Policy guides
3. Application
4. Inquiries
B. Definition of terms
1. Major functions of an institution
2. Sponsored agreement
3. Allocation
4. Facilities and administrative (F&A) costs
C. Basic considerations
1. Composition of total costs
2. Factors affecting allowability of costs
3. Reasonable costs
4. Allocable costs
5. Applicable credits
6. Costs incurred by State and local governments
7. Limitations on allowance of costs
8. Collection of unallowable costs
[[Page 20894]]
9. Adjustment of previously negotiated F&A cost rates containing
unallowable costs
10. Consistency in estimating, accumulating and reporting costs
11. Consistency in allocating costs incurred for the same
purpose
12. Accounting for unallowable costs
13. Cost accounting period
14. Disclosure statement
D. Direct costs
1. General
2. Application to sponsored agreements
E. F&A costs
1. General
2. Criteria for distribution
F. Identification and assignment of F&A costs
1. Definition of Facilities and Administration
2. Depreciation and use allowances
3. Interest
4. Operation and maintenance expenses
5. General administration and general expenses
6. Departmental administration expenses
7. Sponsored projects administration
8. Library expenses
9. Student administration and services
10. Offset for F&A expenses otherwise provided for by the
Federal Government
G. Determination and application of F&A cost rate or rates
1. F&A cost pools
2. The distribution basis
3. Negotiated lump sum for F&A costs
4. Predetermined rates for F&A costs
5. Negotiated fixed rates and carry-forward provisions
6. Provisional and final rates for F&A costs
7. Fixed rates for the life of the sponsored agreement
8. Limitation on reimbursement of administrative costs
9. Alternative method for administrative costs
10. Individual rate components
11. Negotiation and approval of F&A rate
H. Simplified method for small institutions
1. General
2. Simplified procedure
I. Reserved
J. General provisions for selected items of cost
1. Advertising and public relations costs
2. Alcoholic beverages
3. Alumni/ae activities
4. Bad debts
5. Civil defense costs
6. Commencement and convocation costs
7. Communication costs
8. Compensation for personal services
9. Contingency provisions
10. Deans of faculty and graduate schools
11. Defense and prosecution of criminal and civil proceedings,
claims, appeals and patent infringement
12. Depreciation and use allowances
13. Donations and contributions
14. Employee morale, health, and welfare costs and credits
15. Entertainment costs
16. Equipment and other capital expenditures
17. Executive lobbying costs
18. Fines and penalties
19. Goods or services for personal use
20. Housing and personal living expenses
21. Insurance and indemnification
22. Interest, fund raising, and investment management costs
23. Labor relations costs
24. Lobbying
25. Losses on other sponsored agreements or contracts
26. Maintenance and repair costs
27. Material costs
28. Memberships, subscriptions and professional activity costs
29. Patent costs
30. Plant security costs
31. Preagreement costs
32. Professional services costs
33. Profits and losses on disposition of plant equipment or
other capital assets
34. Proposal costs
35. Rearrangement and alteration costs
36. Reconversion costs
37. Recruiting costs
38. Rental cost of buildings and equipment
39. Royalties and other costs for use of patents
40. Sabbatical leave costs
41. Scholarships and student aid costs
42. Selling and marketing
43. Severance pay
44. Specialized service facilities
45. Student activity costs
46. Taxes
47. Transportation costs
48. Travel costs
49. Termination costs applicable to sponsored agreements
50. Trustees
K. Certification of charges
Exhibit A--List of Colleges and Universities Subject to Section
J.12.f of Circular A-21
Appendix A--CASB's Cost Accounting Standards (CAS)
Appendix B--CASB's Disclosure Statement (DS-2)
Principles for Determining Costs Applicable to Grants, Contracts, and
Other Agreements With Educational Institutions
A. Purpose and Scope
1. Objectives. This Attachment provides principles for
determining the costs applicable to research and development,
training, and other sponsored work performed by colleges and
universities under grants, contracts, and other agreements with the
Federal Government. These agreements are referred to as sponsored
agreements.
2. Policy guides. The successful application of these cost
accounting principles requires development of mutual understanding
between representatives of universities and of the Federal
Government as to their scope, implementation, and interpretation. It
is recognized that--
a. The arrangements for Federal agency and institutional
participation in the financing of a research, training, or other
project are properly subject to negotiation between the agency and
the institution concerned, in accordance with such governmentwide
criteria or legal requirements as may be applicable.
b. Each institution, possessing its own unique combination of
staff, facilities, and experience, should be encouraged to conduct
research and educational activities in a manner consonant with its
own academic philosophies and institutional objectives.
c. The dual role of students engaged in research and the
resulting benefits to sponsored agreements are fundamental to the
research effort and shall be recognized in the application of these
principles.
d. Each institution, in the fulfillment of its obligations,
should employ sound management practices.
e. The application of these cost accounting principles should
require no significant changes in the generally accepted accounting
practices of colleges and universities. However, the accounting
practices of individual colleges and universities must support the
accumulation of costs as required by the principles, and must
provide for adequate documentation to support costs charged to
sponsored agreements.
f. Cognizant Federal agencies involved in negotiating facilities
and administrative (F&A) cost rates and auditing should assure that
institutions are generally applying these cost accounting principles
on a consistent basis. Where wide variations exist in the treatment
of a given cost item among institutions, the reasonableness and
equitableness of such treatments should be fully considered during
the rate negotiations and audit.
3. Application. These principles shall be used in determining
the allowable costs of work performed by colleges and universities
under sponsored agreements. The principles shall also be used in
determining the costs of work performed by such institutions under
subgrants, cost-reimbursement subcontracts, and other awards made to
them under sponsored agreements. They also shall be used as a guide
in the pricing of fixed-price contracts and subcontracts where costs
are used in determining the appropriate price. The principles do not
apply to:
a. Arrangements under which Federal financing is in the form of
loans, scholarships, fellowships, traineeships, or other fixed
amounts based on such items as education allowance or published
tuition rates and fees of an institution.
b. Capitation awards.
c. Other awards under which the institution is not required to
account to the Federal Government for actual costs incurred.
4. Inquiries. All inquiries from Federal agencies concerning the
cost principles contained in this Circular, including the
administration and implementation of the Cost Accounting Standards
(CAS) (described in Sections C.10 through C.13) and disclosure
statement (DS-2) requirements, shall be addressed by the Office of
Management and Budget (OMB), Office of Federal Financial Management,
in coordination with the Cost Accounting Standard Board (CASB) with
respect to inquiries concerning CAS. Educational institutions'
inquiries should be addressed to the cognizant agency.
B. Definition of Terms
1. Major functions of an institution refers to instruction,
organized research, other sponsored activities and other
institutional activities as defined below:
a. Instruction means the teaching and training activities of an
institution. Except for
[[Page 20895]]
research training as provided in subsection b, this term includes
all teaching and training activities, whether they are offered for
credits toward a degree or certificate or on a non-credit basis, and
whether they are offered through regular academic departments or
separate divisions, such as a summer school division or an extension
division. Also considered part of this major function are
departmental research, and, where agreed to, university research.
(1) Sponsored instruction and training means specific
instructional or training activity established by grant, contract,
or cooperative agreement. For purposes of the cost principles, this
activity may be considered a major function even though an
institution's accounting treatment may include it in the instruction
function.
(2) Departmental research means research, development and
scholarly activities that are not organized research and,
consequently, are not separately budgeted and accounted for.
Departmental research, for purposes of this document, is not
considered as a major function, but as a part of the instruction
function of the institution.
b. Organized research means all research and development
activities of an institution that are separately budgeted and
accounted for. It includes:
(1) Sponsored research means all research and development
activities that are sponsored by Federal and non-Federal agencies
and organizations . This term includes activities involving the
training of individuals in research techniques (commonly called
research training) where such activities utilize the same facilities
as other research and development activities and where such
activities are not included in the instruction function.
(2) University research means all research and development
activities that are separately budgeted and accounted for by the
institution under an internal application of institutional funds.
University research, for purposes of this document, shall be
combined with sponsored research under the function of organized
research.
c. Other sponsored activities means programs and projects
financed by Federal and non-Federal agencies and organizations which
involve the performance of work other than instruction and organized
research. Examples of such programs and projects are health service
projects, and community service programs. However, when any of these
activities are undertaken by the institution without outside
support, they may be classified as other institutional activities.
d. Other institutional activities means all activities of an
institution except:
(1) instruction, departmental research, organized research, and
other sponsored activities, as defined above;
(2) F&A cost activities identified in Section F; and
(3) specialized service facilities described in Section J.44.
Other institutional activities include operation of residence halls,
dining halls, hospitals and clinics, student unions, intercollegiate
athletics, bookstores, faculty housing, student apartments, guest
houses, chapels, theaters, public museums, and other similar
auxiliary enterprises. This definition also includes any other
categories of activities, costs of which are ``unallowable'' to
sponsored agreements, unless otherwise indicated in the agreements.
2. Sponsored agreement, for purposes of this Circular, means any
grant, contract, or other agreement between the institution and the
Federal Government.
3. Allocation means the process of assigning a cost, or a group
of costs, to one or more cost objective, in reasonable and realistic
proportion to the benefit provided or other equitable relationship.
A cost objective may be a major function of the institution, a
particular service or project, a sponsored agreement, or a F&A cost
activity, as described in Section F. The process may entail
assigning a cost(s) directly to a final cost objective or through
one or more intermediate cost objectives.
4.Facilities and administrative (F&A) costs, for the purpose of
this Circular, means costs that are incurred for common or joint
objectives and, therefore, cannot be identified readily and
specifically with a particular sponsored project, an instructional
activity, or any other institutional activity. F&A costs are
synonymous with ``indirect'' costs, as previously used in this
Circular and as currently used in Appendices A and B. The F&A cost
categories are described in Section F.1.
C. Basic Considerations
1. Composition of total costs. The cost of a sponsored agreement
is comprised of the allowable direct costs incident to its
performance, plus the allocable portion of the allowable F&A costs
of the institution, less applicable credits as described in
subsection 5.
2. Factors affecting allowability of costs. The tests of
allowability of costs under these principles are: (a) They must be
reasonable; (b) they must be allocable to sponsored agreements under
the principles and methods provided herein; (c) they must be given
consistent treatment through application of those generally accepted
accounting principles appropriate to the circumstances; and (d) they
must conform to any limitations or exclusions set forth in these
principles or in the sponsored agreement as to types or amounts of
cost items.
3. Reasonable costs. A cost may be considered reasonable if the
nature of the goods or services acquired or applied, and the amount
involved therefor, reflect the action that a prudent person would
have taken under the circumstances prevailing at the time the
decision to incur the cost was made. Major considerations involved
in the determination of the reasonableness of a cost are: (a)
whether or not the cost is of a type generally recognized as
necessary for the operation of the institution or the performance of
the sponsored agreement; (b) the restraints or requirements imposed
by such factors as arm's-length bargaining, Federal and State laws
and regulations, and sponsored agreement terms and conditions; (c)
whether or not the individuals concerned acted with due prudence in
the circumstances, considering their responsibilities to the
institution, its employees, its students, the Federal Government,
and the public at large; and, (d) the extent to which the actions
taken with respect to the incurrence of the cost are consistent with
established institutional policies and practices applicable to the
work of the institution generally, including sponsored agreements.
4. Allocable costs. a. A cost is allocable to a particular cost
objective (i.e., a specific function, project, sponsored agreement,
department, or the like) if the goods or services involved are
chargeable or assignable to such cost objective in accordance with
relative benefits received or other equitable relationship. Subject
to the foregoing, a cost is allocable to a sponsored agreement if
(1) it is incurred solely to advance the work under the sponsored
agreement; (2) it benefits both the sponsored agreement and other
work of the institution, in proportions that can be approximated
through use of reasonable methods, or (3) it is necessary to the
overall operation of the institution and, in light of the principles
provided in this Circular, is deemed to be assignable in part to
sponsored projects. Where the purchase of equipment or other capital
items is specifically authorized under a sponsored agreement, the
amounts thus authorized for such purchases are assignable to the
sponsored agreement regardless of the use that may subsequently be
made of the equipment or other capital items involved.
b. Any costs allocable to a particular sponsored agreement under
the standards provided in this Circular may not be shifted to other
sponsored agreements in order to meet deficiencies caused by
overruns or other fund considerations, to avoid restrictions imposed
by law or by terms of the sponsored agreement, or for other reasons
of convenience.
c. Any costs allocable to activities sponsored by industry,
foreign governments or other sponsors may not be shifted to
federally-sponsored agreements.
d. Allocation and documentation standard.
(1) Cost principles. The recipient institution is responsible
for ensuring that costs charged to a sponsored agreement are
allowable, allocable, and reasonable under these cost principles.
(2) Internal controls. The institution's financial management
system shall ensure that no one person has complete control over all
aspects of a financial transaction.
(3) Direct cost allocation principles. If a cost benefits two or
more projects or activities in proportions that can be determined
without undue effort or cost, the cost should be allocated to the
projects based on the proportional benefit. If a cost benefits two
or more projects or activities in proportions that cannot be
determined because of the interrelationship of the work involved,
then, notwithstanding subsection b, the costs may be allocated or
transferred to benefited projects on any reasonable basis,
consistent with subsections d. (1) and (2).
(4) Documentation. Federal requirements for documentation are
specified in this Circular, Circular A-110, ``Uniform Administrative
Requirements for Grants and Agreements with Institutions of Higher
Education, Hospitals, and Other Non-Profit
[[Page 20896]]
Organizations,'' and specific agency policies on cost transfers. If
the institution authorizes the principal investigator or other
individual to have primary responsibility, given the requirements of
subsection d.(2), for the management of sponsored agreement funds,
then the institution's documentation requirements for the actions of
those individuals (e.g., signature or initials of the principal
investigator or designee or use of a password) will normally be
considered sufficient.
5. Applicable credits. a. The term ``applicable credits'' refers
to those receipts or negative expenditures that operate to offset or
reduce direct or F&A cost items. Typical examples of such
transactions are: purchase discounts, rebates, or allowances;
recoveries or indemnities on losses; and adjustments of overpayments
or erroneous charges. This term also includes ``educational
discounts'' on products or services provided specifically to
educational institutions, such as discounts on computer equipment,
except where the arrangement is clearly and explicitly identified as
a gift by the vendor.
b. In some instances, the amounts received from the Federal
Government to finance institutional activities or service operations
should be treated as applicable credits. Specifically, the concept
of netting such credit items against related expenditures should be
applied by the institution in determining the rates or amounts to be
charged to sponsored agreements for services rendered whenever the
facilities or other resources used in providing such services have
been financed directly, in whole or in part, by Federal funds. (See
Sections F.10, J.12.a, and J.44 for areas of potential application
in the matter of direct Federal financing.)
6. Costs incurred by State and local governments. Costs incurred
or paid by State or local governments on behalf of their colleges
and universities for fringe benefit programs, such as pension costs
and FICA and any other costs specifically incurred on behalf of, and
in direct benefit to, the institutions, are allowable costs of such
institutions whether or not these costs are recorded in the
accounting records of the institutions, subject to the following:
a. The costs meet the requirements of subsections 1 through 5.
b. The costs are properly supported by cost allocation plans in
accordance with applicable Federal cost accounting principles.
c. The costs are not otherwise borne directly or indirectly by
the Federal Government.
7. Limitations on allowance of costs. Sponsored agreements may
be subject to statutory requirements that limit the allowance of
costs. When the maximum amount allowable under a limitation is less
than the total amount determined in accordance with the principles
in this Circular, the amount not recoverable under a sponsored
agreement may not be charged to other sponsored agreements.
8. Collection of unallowable costs, excess costs due to
noncompliance with cost policies, increased costs due to failure to
follow a disclosed accounting practice and increased costs resulting
from a change in cost accounting practice. The following costs shall
be refunded (including interest) in accordance with applicable
Federal agency regulations:
a. Costs specifically identified as unallowable in Section J,
either directly or indirectly, and charged to the Federal
Government.
b. Excess costs due to failure by the educational institution to
comply with the cost policies in this Circular.
c. Increased costs due to a noncompliant cost accounting
practice used to estimate, accumulate, or report costs.
d. Increased costs resulting from a change in accounting
practice.
9. Adjustment of previously negotiated F&A cost rates containing
unallowable costs. Negotiated F&A cost rates based on a proposal
later found to have included costs that (a) are unallowable as
specified by (i) law or regulation, (ii) Section J of this Circular,
(iii) terms and conditions of sponsored agreements, or (b) are
unallowable because they are clearly not allocable to sponsored
agreements, shall be adjusted, or a refund shall be made, in
accordance with the requirements of this section. These adjustments
or refunds are designed to correct the proposals used to establish
the rates and do not constitute a reopening of the rate negotiation.
The adjustments or refunds will be made regardless of the type of
rate negotiated (predetermined, final, fixed, or provisional).
a. For rates covering a future fiscal year of the institution,
the unallowable costs will be removed from the F&A cost pools and
the rates appropriately adjusted.
b. For rates covering a past period, the Federal share of the
unallowable costs will be computed for each year involved and a cash
refund (including interest chargeable in accordance with applicable
regulations) will be made to the Federal Government. If cash refunds
are made for past periods covered by provisional or fixed rates,
appropriate adjustments will be made when the rates are finalized to
avoid duplicate recovery of the unallowable costs by the Federal
Government.
c. For rates covering the current period, either a rate
adjustment or a refund, as described in subsections a and b, shall
be required by the cognizant agency. The choice of method shall be
at the discretion of the cognizant agency, based on its judgment as
to which method would be most practical.
d. The amount or proportion of unallowable costs included in
each year's rate will be assumed to be the same as the amount or
proportion of unallowable costs included in the base year proposal
used to establish the rate.
10. Consistency in estimating, accumulating and reporting costs.
a. An educational institution's practices used in estimating
costs in pricing a proposal shall be consistent with the educational
institution's cost accounting practices used in accumulating and
reporting costs.
b. An educational institution's cost accounting practices used
in accumulating and reporting actual costs for a sponsored agreement
shall be consistent with the educational institution's practices
used in estimating costs in pricing the related proposal or
application.
c. The grouping of homogeneous costs in estimates prepared for
proposal purposes shall not per se be deemed an inconsistent
application of cost accounting practices under subsection a when
such costs are accumulated and reported in greater detail on an
actual cost basis during performance of the sponsored agreement.
d. Appendix A also reflects this requirement, along with the
purpose, definitions, and techniques for application, all of which
are authoritative.
11. Consistency in allocating costs incurred for the same
purpose.
a. All costs incurred for the same purpose, in like
circumstances, are either direct costs only or F&A costs only with
respect to final cost objectives. No final cost objective shall have
allocated to it as a cost any cost, if other costs incurred for the
same purpose, in like circumstances, have been included as a direct
cost of that or any other final cost objective. Further, no final
cost objective shall have allocated to it as a direct cost any cost,
if other costs incurred for the same purpose, in like circumstances,
have been included in any F&A cost pool to be allocated to that or
any other final cost objective.
b. Appendix A reflects this requirement along with its purpose,
definitions, techniques for application, illustrations and
interpretations, all of which are authoritative.
12. Accounting for unallowable costs.
a. Costs expressly unallowable or mutually agreed to be
unallowable, including costs mutually agreed to be unallowable
directly associated costs, shall be identified and excluded from any
billing, claim, application, or proposal applicable to a sponsored
agreement.
b. Costs which specifically become designated as unallowable as
a result of a written decision furnished by a Federal official
pursuant to sponsored agreement disputes procedures shall be
identified if included in or used in the computation of any billing,
claim, or proposal applicable to a sponsored agreement. This
identification requirement applies also to any costs incurred for
the same purpose under like circumstances as the costs specifically
identified as unallowable under either this subsection or subsection
a.
c. Costs which, in a Federal official's written decision
furnished pursuant to sponsored agreement disputes procedures, are
designated as unallowable directly associated costs of unallowable
costs covered by either subsection a or b shall be accorded the
identification required by subsection b.
d. The costs of any work project not contractually authorized by
a sponsored agreement, whether or not related to performance of a
proposed or existing sponsored agreement, shall be accounted for, to
the extent appropriate, in a manner which permits ready separation
from the costs of authorized work projects.
e. All unallowable costs covered by subsections a through d
shall be subject to the same cost accounting principles governing
cost allocability as allowable costs. In circumstances where these
unallowable
[[Page 20897]]
costs normally would be part of a regular F&A cost allocation base
or bases, they shall remain in such base or bases. Where a directly
associated cost is part of a category of costs normally included in
a F&A cost pool that shall be allocated over a base containing the
unallowable cost with which it is associated, such a directly
associated cost shall be retained in the F&A cost pool and be
allocated through the regular allocation process.
f. Where the total of the allocable and otherwise allowable
costs exceeds a limitation-of-cost or ceiling-price provision in a
sponsored agreement, full direct and F&A cost allocation shall be
made to the sponsored agreement cost objective, in accordance with
established cost accounting practices and standards which regularly
govern a given entity's allocations to sponsored agreement cost
objectives. In any determination of a cost overrun, the amount
thereof shall be identified in terms of the excess of allowable
costs over the ceiling amount, rather than through specific
identification of particular cost items or cost elements.
g. Appendix A reflects this requirement, along with its purpose,
definitions, techniques for application, and illustrations of this
standard, all of which are authoritative.
13. Cost accounting period.
a. Educational institutions shall use their fiscal year as their
cost accounting period, except that:
(1) Costs of a F&A function which exists for only a part of a
cost accounting period may be allocated to cost objectives of that
same part of the period on the basis of data for that part of the
cost accounting period if the cost is: (i) material in amount, (ii)
accumulated in a separate F&A cost pool or expense pool, and (iii)
allocated on the basis of an appropriate direct measure of the
activity or output of the function during that part of the period.
(2) An annual period other than the fiscal year may, upon mutual
agreement with the Federal Government, be used as the cost
accounting period if the use of such period is an established
practice of the educational institution and is consistently used for
managing and controlling revenues and disbursements, and appropriate
accruals, deferrals or other adjustments are made with respect to
such annual periods.
(3) A transitional cost accounting period other than a year
shall be used whenever a change of fiscal year occurs.
b. An educational institution shall follow consistent practices
in the selection of the cost accounting period or periods in which
any types of expense and any types of adjustment to expense
(including prior-period adjustments) are accumulated and allocated.
c. The same cost accounting period shall be used for
accumulating costs in a F&A cost pool as for establishing its
allocation base, except that the Federal Government and educational
institution may agree to use a different period for establishing an
allocation base, provided:
(1) The practice is necessary to obtain significant
administrative convenience,
(2) The practice is consistently followed by the educational
institution,
(3) The annual period used is representative of the activity of
the cost accounting period for which the F&A costs to be allocated
are accumulated, and
(4) The practice can reasonably be estimated to provide a
distribution to cost objectives of the cost accounting period not
materially different from that which otherwise would be obtained.
d. Appendix A reflects this requirement, along with its purpose,
definitions, techniques for application and illustrations, all of
which are authoritative.
14. Disclosure Statement. a. Educational institutions that
received aggregate sponsored agreements totaling $25 million or more
subject to this Circular during their most recently completed fiscal
year shall disclose their cost accounting practices by filing a
Disclosure Statement (DS-2), which is reproduced in Appendix B. With
the approval of the cognizant agency, an educational institution may
meet the DS-2 submission by submitting the DS-2 for each business
unit that received $25 million or more in sponsored agreements.
b. The DS-2 shall be submitted to the cognizant agency with a
copy to the educational institution's audit cognizant office.
c. Educational institutions receiving $25 million or more in
sponsored agreements that are not required to file a DS-2 pursuant
to 48 CFR 9903.202-1 shall file a DS-2 covering the first fiscal
year beginning after the publication date of this revision, within
six months after the end of that fiscal year. Extensions beyond the
above due date may be granted by the cognizant agency on a case-by-
case basis.
d. Educational institutions are responsible for maintaining an
accurate DS-2 and complying with disclosed cost accounting
practices. Educational institutions must file amendments to the DS-2
when disclosed practices are changed to comply with a new or
modified standard, or when practices are changed for other reasons.
Amendments of a DS-2 may be submitted at any time. If the change is
expected to have a material impact on the educational institution's
negotiated F&A cost rates, the revision shall be approved by the
cognizant agency before it is implemented. Resubmission of a
complete, updated DS-2 is discouraged except when there are
extensive changes to disclosed practices.
e. Cost and funding adjustments. Cost adjustments shall be made
by the cognizant agency if an educational institution fails to
comply with the cost policies in this Circular or fails to
consistently follow its established or disclosed cost accounting
practices when estimating, accumulating or reporting the costs of
sponsored agreements, if aggregate cost impact on sponsored
agreements is material. The cost adjustment shall normally be made
on an aggregate basis for all affected sponsored agreements through
an adjustment of the educational institution's future F&A costs
rates or other means considered appropriate by the cognizant agency.
Under the terms of CAS-covered contracts, adjustments in the amount
of funding provided may also be required when the estimated proposal
costs were not determined in accordance with established cost
accounting practices.
f. Overpayments. Excess amounts paid in the aggregate by the
Federal Government under sponsored agreements due to a noncompliant
cost accounting practice used to estimate, accumulate, or report
costs shall be credited or refunded, as deemed appropriate by the
cognizant agency. Interest applicable to the excess amounts paid in
the aggregate during the period of noncompliance shall also be
determined and collected in accordance with applicable Federal
agency regulations.
g. Compliant cost accounting practice changes. Changes from one
compliant cost accounting practice to another compliant practice
that are approved by the cognizant agency may require cost
adjustments if the change has a material effect on sponsored
agreements and the changes are deemed appropriate by the cognizant
agency.
h. Responsibilities. The cognizant agency shall:
(1) Determine cost adjustments for all sponsored agreements in
the aggregate on behalf of the Federal Government. Actions of the
cognizant agency official in making cost adjustment determinations
shall be coordinated with all affected Federal agencies to the
extent necessary.
(2) Prescribe guidelines and establish internal procedures to
promptly determine on behalf of the Federal Government that a DS-2
adequately discloses the educational institution's cost accounting
practices and that the disclosed practices are compliant with
applicable CAS and the requirements of this Circular.
(3) Distribute to all affected agencies any DS-2 determination
of adequacy and/or noncompliance.
D. Direct Costs
1. General. Direct costs are those costs that can be identified
specifically with a particular sponsored project, an instructional
activity, or any other institutional activity, or that can be
directly assigned to such activities relatively easily with a high
degree of accuracy. Costs incurred for the same purpose in like
circumstances must be treated consistently as either direct or F&A
costs. Where an institution treats a particular type of cost as a
direct cost of sponsored agreements, all costs incurred for the same
purpose in like circumstances shall be treated as direct costs of
all activities of the institution.
2. Application to sponsored agreements. Identification with the
sponsored work rather than the nature of the goods and services
involved is the determining factor in distinguishing direct from F&A
costs of sponsored agreements. Typical costs charged directly to a
sponsored agreement are the compensation of employees for
performance of work under the sponsored agreement, including related
fringe benefit costs to the extent they are consistently treated, in
like circumstances, by the institution as direct rather than F&A
costs; the costs of materials consumed or expended in the
performance of the work; and other items of expense
[[Page 20898]]
incurred for the sponsored agreement, including extraordinary
utility consumption. The cost of materials supplied from stock or
services rendered by specialized facilities or other institutional
service operations may be included as direct costs of sponsored
agreements, provided such items are consistently treated, in like
circumstances, by the institution as direct rather than F&A costs,
and are charged under a recognized method of computing actual costs,
and conform to generally accepted cost accounting practices
consistently followed by the institution.
E. F&A Costs
1. General. F&A costs are those that are incurred for common or
joint objectives and therefore cannot be identified readily and
specifically with a particular sponsored project, an instructional
activity, or any other institutional activity. See Section F.1 for a
discussion of the components of F&A costs.
2. Criteria for distribution. a. Base period. A base period for
distribution of F&A costs is the period during which the costs are
incurred. The base period normally should coincide with the fiscal
year established by the institution, but in any event the base
period should be so selected as to avoid inequities in the
distribution of costs.
b. Need for cost groupings. The overall objective of the F&A
cost allocation process is to distribute the F&A costs described in
Section F to the major functions of the institution in proportions
reasonably consistent with the nature and extent of their use of the
institution's resources. In order to achieve this objective, it may
be necessary to provide for selective distribution by establishing
separate groupings of cost within one or more of the F&A cost
categories referred to in subsection 1. In general, the cost
groupings established within a category should constitute, in each
case, a pool of those items of expense that are considered to be of
like nature in terms of their relative contribution to (or degree of
remoteness from) the particular cost objectives to which
distribution is appropriate. Cost groupings should be established
considering the general guides provided in subsection c. Each such
pool or cost grouping should then be distributed individually to the
related cost objectives, using the distribution base or method most
appropriate in the light of the guides set forth in subsection d.
c. General considerations on cost groupings. The extent to which
separate cost groupings and selective distribution would be
appropriate at an institution is a matter of judgment to be
determined on a case-by-case basis. Typical situations which may
warrant the establishment of two or more separate cost groupings
(based on account classification or analysis) within a F&A cost
category include but are not limited to the following:
(1) Where certain items or categories of expense relate solely
to one of the major functions of the institution or to less than all
functions, such expenses should be set aside as a separate cost
grouping for direct assignment or selective allocation in accordance
with the guides provided in subsections b and d.
(2) Where any types of expense ordinarily treated as general
administration or departmental administration are charged to
sponsored agreements as direct costs, expenses applicable to other
activities of the institution when incurred for the same purposes in
like circumstances must, through separate cost groupings, be
excluded from the F&A costs allocable to those sponsored agreements
and included in the direct cost of other activities for cost
allocation purposes.
(3) Where it is determined that certain expenses are for the
support of a service unit or facility whose output is susceptible of
measurement on a workload or other quantitative basis, such expenses
should be set aside as a separate cost grouping for distribution on
such basis to organized research, instructional, and other
activities at the institution or within the department.
(4) Where activities provide their own purchasing, personnel
administration, building maintenance or similar service, the
distribution of general administration and general expenses, or
operation and maintenance expenses to such activities should be
accomplished through cost groupings which include only that portion
of central F&A costs (such as for overall management) which are
properly allocable to such activities.
(5) Where the institution elects to treat fringe benefits as F&A
charges, such costs should be set aside as a separate cost grouping
for selective distribution to related cost objectives.
(6) The number of separate cost groupings within a category
should be held within practical limits, after taking into
consideration the materiality of the amounts involved and the degree
of precision attainable through less selective methods of
distribution.
d. Selection of distribution method.
(1) Actual conditions must be taken into account in selecting
the method or base to be used in distributing individual cost
groupings. The essential consideration in selecting a base is that
it be the one best suited for assigning the pool of costs to cost
objectives in accordance with benefits derived; a traceable cause
and effect relationship; or logic and reason, where neither benefit
nor cause and effect relationship is determinable.
(2) Where a cost grouping can be identified directly with the
cost objective benefited, it should be assigned to that cost
objective.
(3) Where the expenses in a cost grouping are more general in
nature, the distribution may be based on a cost analysis study which
results in an equitable distribution of the costs. Such cost
analysis studies may take into consideration weighting factors,
population, or space occupied if appropriate. Cost analysis studies,
however, must (a) be appropriately documented in sufficient detail
for subsequent review by the cognizant Federal agency, (b)
distribute the costs to the related cost objectives in accordance
with the relative benefits derived, (c) be statistically sound, (d)
be performed specifically at the institution at which the results
are to be used, and (e) be reviewed periodically, but not less
frequently than every two years, updated if necessary, and used
consistently. Any assumptions made in the study must be stated and
explained. The use of cost analysis studies and periodic changes in
the method of cost distribution must be fully justified.
(4) If a cost analysis study is not performed, or if the study
does not result in an equitable distribution of the costs, the
distribution shall be made in accordance with the appropriate base
cited in Section F, unless one of the following conditions is met:
(a) it can be demonstrated that the use of a different base would
result in a more equitable allocation of the costs, or that a more
readily available base would not increase the costs charged to
sponsored agreements, or (b) the institution qualifies for, and
elects to use, the simplified method for computing F&A cost rates
described in Section H.
(5) Notwithstanding subsection (3), effective July 1, 1998, a
cost analysis study or base other than that in Section F shall not
be used to distribute utility, library or student services costs. By
that date, OMB shall have in place an alternative methodology for
making payments on costs related to utilities.
e. Order of distribution. (1) F&A costs are the broad categories
of costs discussed in Section F.1.
(2) Depreciation and use allowances, operation and maintenance
expenses, and general administrative and general expenses should be
allocated in that order to the remaining F&A cost categories as well
as to the major functions and specialized service facilities of the
institution. Other cost categories may be allocated in the order
determined to be most appropriate by the institutions. When cross
allocation of costs is made as provided in subsection (3), this
order of allocation does not apply.
(3) Normally a F&A cost category will be considered closed once
it has been allocated to other cost objectives, and costs may not be
subsequently allocated to it. However, a cross allocation of costs
between two or more F&A cost categories may be used if such
allocation will result in a more equitable allocation of costs. If a
cross allocation is used, an appropriate modification to the
composition of the F&A cost categories described in Section F is
required.
F. Identification and Assignment of F&A Costs
1. Definition of Facilities and Administration. F&A costs are
broad categories of costs. ``Facilities'' is defined as depreciation
and use allowances, interest on debt associated with certain
buildings, equipment and capital improvements, operation and
maintenance expenses, and library expenses. ``Administration'' is
defined as general administration and general expenses, departmental
administration, sponsored projects administration, student
administration and services, and all other types of expenditures not
listed specifically under one of the subcategories of Facilities
(including cross allocations from other pools).
2. Depreciation and use allowances. a. The expenses under this
heading are the portion of the costs of the institution's buildings,
capital improvements to land and buildings,
[[Page 20899]]
and equipment which are computed in accordance with Section J.12.
b. In the absence of the alternatives provided for in Section
E.2.d, the expenses included in this category shall be allocated in
the following manner:
(1) Depreciation or use allowances on buildings used exclusively
in the conduct of a single function, and on capital improvements and
equipment used in such buildings, shall be assigned to that
function.
(2) Depreciation or use allowances on buildings used for more
than one function, and on capital improvements and equipment used in
such buildings, shall be allocated to the individual functions
performed in each building on the basis of usable square feet of
space, excluding common areas such as hallways, stairwells, and rest
rooms.
(3) Depreciation or use allowances on buildings, capital
improvements and equipment related to space (e.g., individual rooms,
laboratories) used jointly by more than one function (as determined
by the users of the space) shall be treated as follows. The cost of
each jointly used unit of space shall be allocated to benefiting
functions on the basis of:
(a) the employee full-time equivalents (FTEs) or salaries and
wages of those individual functions benefiting from the use of that
space; or
(b) institution-wide employee FTEs or salaries and wages
applicable to the benefiting major functions (see Section B.1) of
the institution.
(4) Depreciation or use allowances on certain capital
improvements to land, such as paved parking areas, fences,
sidewalks, and the like, not included in the cost of buildings,
shall be allocated to user categories of students and employees on a
full-time equivalent basis. The amount allocated to the student
category shall be assigned to the instruction function of the
institution. The amount allocated to the employee category shall be
further allocated to the major functions of the institution in
proportion to the salaries and wages of all employees applicable to
those functions.
3. Interest. Interest on debt associated with certain buildings,
equipment and capital improvements, as defined in Sections J.22.e
and f, shall be classified as an expenditure under the category
Facilities. These costs shall be allocated in the same manner as the
depreciation or use allowances on the buildings, equipment and
capital improvements to which the interest relates.
4. Operation and maintenance expenses. a. The expenses under
this heading are those that have been incurred for the
administration, supervision, operation, maintenance, preservation,
and protection of the institution's physical plant. They include
expenses normally incurred for such items as janitorial and utility
services; repairs and ordinary or normal alterations of buildings,
furniture and equipment; care of grounds; maintenance and operation
of buildings and other plant facilities; security; earthquake and
disaster preparedness; environmental safety; hazardous waste
disposal; property, liability and all other insurance relating to
property; space and capital leasing; facility planning and
management; and, central receiving. The operation and maintenance
expense category should also include its allocable share of fringe
benefit costs, depreciation and use allowances, and interest costs.
b. In the absence of the alternatives provided for in Section
E.2.d, the expenses included in this category shall be allocated in
the same manner as described in subsection 2.b for depreciation and
use allowances.
5. General administration and general expenses. a. The expenses
under this heading are those that have been incurred for the general
executive and administrative offices of educational institutions and
other expense of a general character which do not relate solely to
any major function of the institution; i.e., solely to (1)
instruction, (2) organized research, (3) other sponsored activities,
or (4) other institutional activities. The general administration
and general expense category should also include its allocable share
of fringe benefit costs, operation and maintenance expense,
depreciation and use allowances, and interest costs. Examples of
general administration and general expenses include: those expenses
incurred by administrative offices that serve the entire university
system of which the institution is a part; central offices of the
institution such as the President's or Chancellor's office, the
offices for institution-wide financial management, business
services, budget and planning, personnel management, and safety and
risk management; the office of the General Counsel; and, the
operations of the central administrative management information
systems. General administration and general expenses shall not
include expenses incurred within non- university-wide deans'
offices, academic departments, organized research units, or similar
organizational units. (See subsection 6, Departmental administration
expenses.)
b. In the absence of the alternatives provided for in Section
E.2.d, the expenses included in this category shall be grouped first
according to common major functions of the institution to which they
render services or provide benefits. The aggregate expenses of each
group shall then be allocated to serviced or benefited functions on
the modified total cost basis. Modified total costs consist of the
same elements as those in Section G.2. When an activity included in
this F&A cost category provides a service or product to another
institution or organization, an appropriate adjustment must be made
to either the expenses or the basis of allocation or both, to assure
a proper allocation of costs.
6. Departmental administration expenses. a. The expenses under
this heading are those that have been incurred for administrative
and supporting services that benefit common or joint departmental
activities or objectives in academic deans' offices, academic
departments and divisions, and organized research units. Organized
research units include such units as institutes, study centers, and
research centers. Departmental administration expenses are subject
to the following limitations.
(1) Academic deans' offices. Salaries and operating expenses are
limited to those attributable to administrative functions.
(2) Academic departments:
(a) Salaries and fringe benefits attributable to the
administrative work (including bid and proposal preparation) of
faculty (including department heads), and other professional
personnel conducting research and/or instruction, shall be allowed
at a rate of 3.6 percent of modified total direct costs. This
category does not include professional business or professional
administrative officers. This allowance shall be added to the
computation of the F&A cost rate for major functions in Section G;
the expenses covered by the allowance shall be excluded from the
departmental administration cost pool. No documentation is required
to support this allowance.
(b) Other administrative and supporting expenses incurred within
academic departments are allowable provided they are treated
consistently in like circumstances. This would include expenses such
as the salaries of secretarial and clerical staffs, the salaries of
administrative officers and assistants, travel, office supplies,
stockrooms, and the like.
(3) Other fringe benefit costs applicable to the salaries and
wages included in subsections (1) and (2) are allowable, as well as
an appropriate share of general administration and general expenses,
operation and maintenance expenses, and depreciation and/or use
allowances.
(4) Federal agencies may authorize reimbursement of additional
costs for department heads and faculty only in exceptional cases
where an institution can demonstrate undue hardship or detriment to
project performance.
b. In developing the departmental administration cost pool,
special care should be exercised to ensure that costs incurred for
the same purpose in like circumstances are treated consistently as
either direct or F&A costs. For example, salaries of technical
staff, laboratory supplies (e.g., chemicals), telephone toll
charges, animals, animal care costs, computer costs, travel costs,
and specialized shop costs shall be treated as direct cost wherever
identifiable to a particular cost objective. Direct charging of
these costs may be accomplished through specific identification of
individual costs to benefiting cost objectives, or through recharge
centers or specialized service facilities, as appropriate under the
circumstances. The salaries of administrative and clerical staff
should normally be treated as F&A costs. Direct charging of these
costs may be appropriate where a major project or activity
explicitly budgets for administrative or clerical services and
individuals involved can be specifically identified with the project
or activity. Items such as office supplies, postage, local telephone
costs, and memberships shall normally be treated as F&A costs.
c. In the absence of the alternatives provided for in Section
E.2.d, the expenses included in this category shall be allocated as
follows:
(1) The administrative expenses of the dean's office of each
college and school shall
[[Page 20900]]
be allocated to the academic departments within that college or
school on the modified total cost basis.
(2) The administrative expenses of each academic department, and
the department's share of the expenses allocated in subsection (1)
shall be allocated to the appropriate functions of the department on
the modified total cost basis.
7. Sponsored projects administration. a. The expenses under this
heading are limited to those incurred by a separate organization(s)
established primarily to administer sponsored projects, including
such functions as grant and contract administration (Federal and
non-Federal), special security, purchasing, personnel,
administration, and editing and publishing of research and other
reports. They include the salaries and expenses of the head of such
organization, assistants, and immediate staff, together with the
salaries and expenses of personnel engaged in supporting activities
maintained by the organization, such as stock rooms, stenographic
pools and the like. This category also includes an allocable share
of fringe benefit costs, general administration and general
expenses, operation and maintenance expenses, depreciation/use
allowances. Appropriate adjustments will be made for services
provided to other functions or organizations.
b. In the absence of the alternatives provided for in Section
E.2.d, the expenses included in this category shall be allocated to
the major functions of the institution under which the sponsored
projects are conducted on the basis of the modified total cost of
sponsored projects.
c. An appropriate adjustment shall be made to eliminate any
duplicate charges to sponsored agreements when this category
includes similar or identical activities as those included in the
general administration and general expense category or other F&A
cost items, such as accounting, procurement, or personnel
administration.
8. Library expenses. a. The expenses under this heading are
those that have been incurred for the operation of the library,
including the cost of books and library materials purchased for the
library, less any items of library income that qualify as applicable
credits under Section C.5. The library expense category should also
include the fringe benefits applicable to the salaries and wages
included therein, an appropriate share of general administration and
general expense, operation and maintenance expense, and depreciation
and use allowances. Costs incurred in the purchases of rare books
(museum-type books) with no value to sponsored agreements should not
be allocated to them.
b. In the absence of the alternatives provided for in Section
E.2.d, the expenses included in this category shall be allocated
first on the basis of primary categories of users, including
students, professional employees, and other users.
(1) The student category shall consist of full-time equivalent
students enrolled at the institution, regardless of whether they
earn credits toward a degree or certificate.
(2) The professional employee category shall consist of all
faculty members and other professional employees of the institution,
on a full-time equivalent basis.
(3) The other users category shall consist of all other users of
library facilities.
c. Amount allocated in subsection b shall be assigned further as
follows:
(1) The amount in the student category shall be assigned to the
instruction function of the institution.
(2) The amount in the professional employee category shall be
assigned to the major functions of the institution in proportion to
the salaries and wages of all faculty members and other professional
employees applicable to those functions.
(3) The amount in the other users category shall be assigned to
the other institutional activities function of the institution.
9. Student administration and services. a. The expenses under
this heading are those that have been incurred for the
administration of student affairs and for services to students,
including expenses of such activities as deans of students,
admissions, registrar, counseling and placement services, student
advisers, student health and infirmary services, catalogs, and
commencements and convocations. The salaries of members of the
academic staff whose responsibilities to the institution require
administrative work that benefits sponsored projects may also be
included to the extent that the portion charged to student
administration is determined in accordance with Section J.8. This
expense category also includes the fringe benefit costs applicable
to the salaries and wages included therein, an appropriate share of
general administration and general expenses, operation and
maintenance, and use allowances and/or depreciation.
b. In the absence of the alternatives provided for in Section
E.2.d, the expenses in this category shall be allocated to the
instruction function, and subsequently to sponsored agreements in
that function.
10. Offset for F&A expenses otherwise provided for by the
Federal Government. a. The items to be accumulated under this
heading are the reimbursements and other payments from the Federal
Government which are made to the institution to support solely,
specifically, and directly, in whole or in part, any of the
administrative or service activities described in subsections 2
through 9.
b. The items in this group shall be treated as a credit to the
affected individual F&A cost category before that category is
allocated to benefiting functions.
G. Determination and Application of F&A Cost Rate or Rates
1. F&A cost pools. a. (1) Subject to subsection b, the separate
categories of F&A costs allocated to each major function of the
institution as prescribed in Section F shall be aggregated and
treated as a common pool for that function. The amount in each pool
shall be divided by the distribution base described in subsection 2
to arrive at a single F&A cost rate for each function.
(2) The rate for each function is used to distribute F&A costs
to individual sponsored agreements of that function. Since a common
pool is established for each major function of the institution, a
separate F&A cost rate would be established for each of the major
functions described in Section B.1 under which sponsored agreements
are carried out.
(3) Each institution's F&A cost rate process must be
appropriately designed to ensure that Federal sponsors do not in any
way subsidize the F&A costs of other sponsors, specifically
activities sponsored by industry and foreign governments.
Accordingly, each allocation method used to identify and allocate
the F&A cost pools, as described in Sections E.2 and F.2 through
F.9, must contain the full amount of the institution's modified
total costs or other appropriate units of measurement used to make
the computations. In addition, the final rate distribution base (as
defined in subsection 2) for each major function (organized
research, instruction, etc., as described in Section B.1) shall
contain all the programs or activities which utilize the F&A costs
allocated to that major function. At the time a F&A cost proposal is
submitted to a cognizant Federal agency, each institution must
describe the process it uses to ensure that Federal funds are not
used to subsidize industry and foreign government funded programs.
b. In some instances a single rate basis for use across the
board on all work within a major function at an institution may not
be appropriate. A single rate for research, for example, might not
take into account those different environmental factors and other
conditions which may affect substantially the F&A costs applicable
to a particular segment of research at the institution. A particular
segment of research may be that performed under a single sponsored
agreement or it may consist of research under a group of sponsored
agreements performed in a common environment. The environmental
factors are not limited to the physical location of the work. Other
important factors are the level of the administrative support
required, the nature of the facilities or other resources employed,
the scientific disciplines or technical skills involved, the
organizational arrangements used, or any combination thereof. Where
a particular segment of a sponsored agreement is performed within an
environment which appears to generate a significantly different
level of F&A costs, provisions should be made for a separate F&A
cost pool applicable to such work. The separate F&A cost pool should
be developed during the regular course of the rate determination
process and the separate F&A cost rate resulting therefrom should be
utilized; provided it is determined that (1) such F&A cost rate
differs significantly from that which would have been obtained under
subsection a, and (2) the volume of work to which such rate would
apply is material in relation to other sponsored agreements at the
institution.
2. The distribution basis. F&A costs shall be distributed to
applicable sponsored agreements and other benefiting activities
within each major function (see Section B.1) on the basis of
modified total direct costs, consisting of all salaries and wages,
fringe benefits, materials and supplies, services, travel, and
subgrants and subcontracts up to the first $25,000 of each subgrant
or subcontract (regardless of the period covered
[[Page 20901]]
by the subgrant or subcontract). Equipment, capital expenditures,
charges for patient care and tuition remission, rental costs,
scholarships, and fellowships as well as the portion of each
subgrant and subcontract in excess of $25,000 shall be excluded from
modified total direct costs. Other items may only be excluded where
necessary to avoid a serious inequity in the distribution of F&A
costs. For this purpose, a F&A cost rate should be determined for
each of the separate F&A cost pools developed pursuant to subsection
1. The rate in each case should be stated as the percentage which
the amount of the particular F&A cost pool is of the modified total
direct costs identified with such pool.
3. Negotiated lump sum for F&A costs. A negotiated fixed amount
in lieu of F&A costs may be appropriate for self-contained, off-
campus, or primarily subcontracted activities where the benefits
derived from an institution's F&A services cannot be readily
determined. Such negotiated F&A costs will be treated as an offset
before allocation to instruction, organized research, other
sponsored activities, and other institutional activities. The base
on which such remaining expenses are allocated should be
appropriately adjusted.
4. Predetermined rates for F&A costs. Public Law 87-638 (76
Stat. 437) authorizes the use of predetermined rates in determining
the ``indirect costs'' (F&A costs in this Circular) applicable under
research agreements with educational institutions. The stated
objectives of the law are to simplify the administration of cost-
type research and development contracts (including grants) with
educational institutions, to facilitate the preparation of their
budgets, and to permit more expeditious closeout of such contracts
when the work is completed. In view of the potential advantages
offered by this procedure, negotiation of predetermined rates for
F&A costs for a period of two to four years should be the norm in
those situations where the cost experience and other pertinent facts
available are deemed sufficient to enable the parties involved to
reach an informed judgment as to the probable level of F&A costs
during the ensuing accounting periods.
5. Negotiated fixed rates and carry-forward provisions. When a
fixed rate is negotiated in advance for a fiscal year (or other time
period), the over- or under-recovery for that year may be included
as an adjustment to the F&A cost for the next rate negotiation. When
the rate is negotiated before the carry-forward adjustment is
determined, the carry-forward amount may be applied to the next
subsequent rate negotiation. When such adjustments are to be made,
each fixed rate negotiated in advance for a given period will be
computed by applying the expected F&A costs allocable to sponsored
agreements for the forecast period plus or minus the carry-forward
adjustment (over- or under-recovery) from the prior period, to the
forecast distribution base. Unrecovered amounts under lump-sum
agreements or cost-sharing provisions of prior years shall not be
carried forward for consideration in the new rate negotiation. There
must, however, be an advance understanding in each case between the
institution and the cognizant Federal agency as to whether these
differences will be considered in the rate negotiation rather than
making the determination after the differences are known. Further,
institutions electing to use this carry-forward provision may not
subsequently change without prior approval of the cognizant Federal
agency. In the event that an institution returns to a postdetermined
rate, any over- or under-recovery during the period in which
negotiated fixed rates and carry-forward provisions were followed
will be included in the subsequent postdetermined rates. Where
multiple rates are used, the same procedure will be applicable for
determining each rate.
6. Provisional and final rates for F&A costs. Where the
cognizant agency determines that cost experience and other pertinent
facts do not justify the use of predetermined rates, or a fixed rate
with a carry-forward, or if the parties cannot agree on an equitable
rate, a provisional rate shall be established. To prevent
substantial overpayment or underpayment, the provisional rate may be
adjusted by the cognizant agency during the institution's fiscal
year. Predetermined or fixed rates may replace provisional rates at
any time prior to the close of the institution's fiscal year. If a
provisional rate is not replaced by a predetermined or fixed rate
prior to the end of the institution's fiscal year, a final rate will
be established and upward or downward adjustments will be made based
on the actual allowable costs incurred for the period involved.
7. Fixed rates for the life of the sponsored agreement. a.
Federal agencies shall use the negotiated rates for F&A costs in
effect at the time of the initial award throughout the life of the
sponsored agreement. ``Life'' for the purpose of this subsection
means each competitive segment of a project. A competitive segment
is a period of years approved by the Federal funding agency at the
time of the award. If negotiated rate agreements do not extend
through the life of the sponsored agreement at the time of the
initial award, then the negotiated rate for the last year of the
sponsored agreement shall be extended through the end of the life of
the sponsored agreement. Award levels for sponsored agreements may
not be adjusted in future years as a result of changes in negotiated
rates.
b. When an educational institution does not have a negotiated
rate with the Federal Government at the time of the award (because
the educational institution is a new grantee or the parties cannot
reach agreement on a rate), the provisional rate used at the time of
the award shall be adjusted once a rate is negotiated and approved
by the cognizant agency.
8. Limitation on reimbursement of administrative costs. a.
Notwithstanding the provisions of subsection 1.a, the administrative
costs charged to sponsored agreements awarded or amended (including
continuation and renewal awards) with effective dates beginning on
or after the start of the institution's first fiscal year which
begins on or after October 1, 1991, shall be limited to 26% of
modified total direct costs (as defined in subsection 2) for the
total of General Administration and General Expenses, Departmental
Administration, Sponsored Projects Administration, and Student
Administration and Services (including their allocable share of
depreciation and/or use allowances, interest costs, operation and
maintenance expenses, and fringe benefits costs, as provided by
Sections F.5, F.6, F.7 and F.9) and all other types of expenditures
not listed specifically under one of the subcategories of facilities
in Section F.
b. Existing F&A cost rates that affect institutions' fiscal
years which begin on or after October 1, 1991, shall be unilaterally
amended by the cognizant Federal agency to reflect the cost
limitation in subsection a.
c. Permanent rates established prior to this revision which have
been amended in accordance with subsection b may be renegotiated.
However, no such renegotiated rate may exceed the rate which would
have been in effect if the agreement had remained in effect; nor may
the administrative portion of any renegotiated rate exceed the
limitation in subsection a.
d. Institutions should not change their accounting or cost
allocation methods which were in effect on May 1, 1991, if the
effect is to: (i) change the charging of a particular type of cost
from F&A to direct, or (ii) reclassify costs, or increase
allocations, from the administrative pools identified in subsection
a to the other F&A cost pools or fringe benefits. Cognizant Federal
agencies are authorized to permit changes where an institution's
charging practices are at variance with acceptable practices
followed by a substantial majority of other institutions.
9. Alternative method for administrative costs. a.
Notwithstanding the provisions of subsection 1.a, an institution may
elect to claim fixed allowance for the ``Administration'' portion of
F&A costs. The allowance could be either 24% of modified total
direct costs or a percentage equal to 95% of the most recently
negotiated fixed or predetermined rate for the cost pools included
under ``Administration'' as defined in Section F.1, whichever is
less, provided that no accounting or cost allocation changes with
the effects described in subsection 8.d have occurred. Under this
alternative, no cost proposal need be prepared for the
``Administration'' portion of the F&A cost rate nor is further
identification or documentation of these costs required (see
subsection c). Where a negotiated F&A cost agreement includes this
alternative, an institution shall make no further charges for the
expenditure categories described in Sections F.5, F.6, F.7 and F.9.
b. In negotiations of rates for subsequent periods, an
institution that has elected the option of subsection a may continue
to exercise it at the same rate without further identification or
documentation of costs, provided that no accounting or cost
allocation changes with the effects described in subsection 8.d have
occurred.
c. If an institution elects to accept a threshold rate, it is
not required to perform a detailed analysis of its administrative
costs. However, in order to compute the facilities components of its
F&A cost rate, the institution must reconcile its F&A cost
[[Page 20902]]
proposal to its financial statements and make appropriate
adjustments and reclassifications to identify the costs of each
major function as defined in Section B.1, as well as to identify and
allocate the facilities components. Administrative costs that are
not identified as such by the institution's accounting system (such
as those incurred in academic departments) will be classified as
instructional costs for purposes of reconciling F&A cost proposals
to financial statements and allocating facilities costs.
10. Individual rate components. In order to satisfy the
requirements of Section J.12.f and to provide mutually agreed upon
information for management purposes, each F&A cost rate negotiation
or determination shall include development of a rate for each F&A
cost pool as well as the overall F&A cost rate.
11. Negotiation and approval of F&A rate. a. Cognizant agency
assignments. ``A cognizant agency'' means the Federal agency
responsible for negotiating and approving F&A rates for an
educational institution on behalf of all Federal agencies.
(1) Cost negotiation cognizance is assigned to the Department of
Health and Human Services (HHS) or the Department of Defense's
Office of Naval Research (DOD), normally depending on which of the
two agencies (HHS or DOD) provides more funds to the educational
institution for the most recent three years. Information on funding
shall be derived from relevant data gathered by the National Science
Foundation. In cases where neither HHS nor DOD provides Federal
funding to an educational institution, the cognizant agency
assignment shall default to HHS. Notwithstanding the method for
cognizance determination described above, other arrangements for
cognizance of a particular educational institution may also be based
in part on the types of research performed at the educational
institution and shall be decided based on mutual agreement between
HHS and DOD.
(2) Cognizant assignments as of December 31, 1995, shall
continue in effect through educational institutions' fiscal years
ending during 1997, or the period covered by negotiated agreements
in effect on December 31, 1995, whichever is later, except for those
educational institutions with cognizant agencies other than HHS or
DOD. Cognizance for these educational institutions shall transfer to
HHS or DOD at the end of the period covered by the current
negotiated rate agreement. After cognizance is established, it shall
continue for a five-year period.
b. Acceptance of rates. The negotiated rates shall be accepted
by all Federal agencies. Only under special circumstances, when
required by law or regulation, may an agency use a rate different
from the negotiated rate for a class of sponsored agreements or a
single sponsored agreement.
c. Correcting deficiencies. The cognizant agency shall negotiate
changes needed to correct systems deficiencies relating to
accountability for sponsored agreements. Cognizant agencies shall
address the concerns of other affected agencies, as appropriate.
d. Resolving questioned costs. The cognizant agency shall
conduct any necessary negotiations with an educational institution
regarding amounts questioned by audit that are due the Federal
Government related to costs covered by a negotiated agreement.
e. Reimbursement. Reimbursement to cognizant agencies for work
performed under Circular A-21 may be made by reimbursement billing
under the Economy Act, 31 U.S.C. 1535.
f. Procedure for establishing facilities and administrative
rates. The cognizant agency shall arrange with the educational
institution to provide copies of rate proposals to all interested
agencies. Agencies wanting such copies should notify the cognizant
agency. Rates shall be established by one of the following methods:
(1) Formal negotiation. The cognizant agency is responsible for
negotiating and approving rates for an educational institution on
behalf of all Federal agencies. Non-cognizant Federal agencies,
which award sponsored agreements to an educational institution,
shall notify the cognizant agency of specific concerns (i.e., a need
to establish special cost rates) which could affect the negotiation
process. The cognizant agency shall address the concerns of all
interested agencies, as appropriate. A pre-negotiation conference
may be scheduled among all interested agencies, if necessary. The
cognizant agency shall then arrange a negotiation conference with
the educational institution.
(2) Other than formal negotiation. The cognizant agency and
educational institution may reach an agreement on rates without a
formal negotiation conference; for example, through correspondence
or use of the simplified method described in this Circular.
g. Formalizing determinations and agreements. The cognizant
agency shall formalize all determinations or agreements reached with
an educational institution and provide copies to other agencies
having an interest.
h. Disputes and disagreements. Where the cognizant agency is
unable to reach agreement with an educational institution with
regard to rates or audit resolution, the appeal system of the
cognizant agency shall be followed for resolution of the
disagreement.
H. Simplified Method for Small Institutions.
1. General. a. Where the total direct cost of work covered by
this Circular at an institution does not exceed $10 million in a
fiscal year, the use of the simplified procedure described in
subsection 2, may be used in determining allowable F&A costs. Under
this simplified procedure, the institution's most recent annual
financial report and immediately available supporting information
with salaries and wages segregated from other costs, will be
utilized as a basis for determining the F&A cost rate applicable to
all sponsored agreements.
b. The simplified procedure should not be used where it produces
results which appear inequitable to the Federal Government or the
institution. In any such case, F&A costs should be determined
through use of the regular procedure.
2. Simplified procedure. a. Establish the total amount of
salaries and wages paid to all employees of the institution.
b. Establish a F&A cost pool consisting of the expenditures
(exclusive of capital items and other costs specifically identified
as unallowable) which customarily are classified under the following
titles or their equivalents:
(1) General administration and general expenses (exclusive of
costs of student administration and services, student activities,
student aid, and scholarships).
(2) Operation and maintenance of physical plant; and
depreciation and use allowances; after appropriate adjustment for
costs applicable to other institutional activities.
(3) Library.
(4) Department administration expenses, which will be computed
as 20 percent of the salaries and expenses of deans and heads of
departments.
In those cases where expenditures classified under subsection
(1) have previously been allocated to other institutional
activities, they may be included in the F&A cost pool. The total
amount of salaries and wages included in the F&A cost pool must be
separately identified.
c. Establish a salary and wage distribution base, determined by
deducting from the total of salaries and wages as established in
subsection a the amount of salaries and wages included under
subsection b.
d. Establish the F&A cost rate, determined by dividing the
amount in the F&A cost pool, subsection b, by the amount of the
distribution base, subsection c.
e. Apply the F&A cost rate to direct salaries and wages for
individual agreements to determine the amount of F&A costs allocable
to such agreements.
J. General Provisions for Selected Items of Cost
Sections 1 through 50 provide principles to be applied in
establishing the allowability of certain items involved in
determining cost. These principles should apply irrespective of
whether a particular item of cost is properly treated as direct cost
or F&A cost. Failure to mention a particular item of cost is not
intended to imply that it is either allowable or unallowable;
rather, determination as to allowability in each case should be
based on the treatment provided for similar or related items of
cost. In case of a discrepancy between the provisions of a specific
sponsored agreement and the provisions below, the agreement should
govern.
1. Advertising and public relations costs. a. The term
advertising costs means the costs of advertising media and corollary
administrative costs. Advertising media include magazines,
newspapers, radio and television programs, direct mail, exhibits,
and the like.
b. The term public relations includes community relations and
means those activities dedicated to maintaining the image of the
institution or maintaining or promoting understanding and favorable
relations with the community or public at large or any segment of
the public.
c. The only allowable advertising costs are those which are
solely for:
(1) The recruitment of personnel required for the performance by
the institution of obligations arising under the sponsored
[[Page 20903]]
agreement, when considered in conjunction with all other recruitment
costs, as set forth in Section J.37;
(2) The procurement of goods and services for the performance of
the sponsored agreement;
(3) The disposal of scrap or surplus materials acquired in the
performance of the sponsored agreement except when institutions are
reimbursed for disposal costs at a predetermined amount in
accordance with Circular A-110; or
(4) Other specific purposes necessary to meet the requirements
of the sponsored agreement.
d. The only allowable public relations costs are:
(1) Costs specifically required by sponsored agreements;
(2) Costs of communicating with the public and press pertaining
to specific activities or accomplishments which result from
performance of sponsored agreements; or
(3) Costs of conducting general liaison with news media and
government public relations officers, to the extent that such
activities are limited to communication and liaison necessary to
keep the public informed on matters of public concern, such as
notices of contract/grant awards, financial matters, etc.
e. Costs identified in subsections c and d if incurred for more
than one sponsored agreement or for both sponsored work and other
work of the institution, are allowable to the extent that the
principles in Sections D and E are observed.
f. Unallowable advertising and public relations costs include
the following:
(1) All advertising and public relations costs other than as
specified in subsections c, d, and e;
(2) Costs of convocations or other events related to instruction
or other institutional activities including:
(i) Costs of displays, demonstrations, and exhibits;
(ii) Costs of meeting rooms, hospitality suites, and other
special facilities used in conjunction with shows and other special
events; and
(iii) Salaries and wages of employees engaged in setting up and
displaying exhibits, making demonstrations, and providing briefings;
(3) Costs of promotional items and memorabilia, including
models, gifts, and souvenirs;
(4) Costs of advertising and public relations designed solely to
promote the institution.
2. Alcoholic beverages. Costs of alcoholic beverages are
unallowable.
3. Alumni/ae activities. Costs incurred for, or in support of,
alumni/ae activities and similar services are unallowable.
4. Bad debts. Any losses, whether actual or estimated, arising
from uncollectible accounts and other claims, related collections
costs, and related legal costs, are unallowable.
5. Civil defense costs. Civil defense costs are those incurred
in planning for, and the protection of life and property against,
the possible effects of enemy attack. Reasonable costs of civil
defense measures (including costs in excess of normal plant
protection costs, first-aid training and supplies, firefighting
training, posting of additional exit notices and directions, and
other approved civil defense measures) undertaken on the
institution's premises pursuant to suggestions or requirements of
civil defense authorities are allowable when distributed to all
activities of the institution. Capital expenditures for civil
defense purposes will not be allowed, but a use allowance or
depreciation may be permitted in accordance with provisions set
forth in Section J.12. Costs of local civil defense projects not on
the institution's premises are unallowable.
6. Commencement and convocation costs. Costs incurred for
commencements and convocations are unallowable, except as provided
for in Section F.9.
7. Communication costs. Costs incurred for telephone services,
local and long distance telephone calls, telegrams, radiograms,
postage and the like, are allowable.
8. Compensation for personal services. a. General. Compensation
for personal services covers all amounts paid currently or accrued
by the institution for services of employees rendered during the
period of performance under sponsored agreements. Such amounts
include salaries, wages, and fringe benefits (see subsection f).
These costs are allowable to the extent that the total compensation
to individual employees conforms to the established policies of the
institution, consistently applied, and provided that the charges for
work performed directly on sponsored agreements and for other work
allocable as F&A costs are determined and supported as provided
below. Charges to sponsored agreements may include reasonable
amounts for activities contributing and intimately related to work
under the agreements, such as delivering special lectures about
specific aspects of the ongoing activity, writing reports and
articles, participating in appropriate seminars, consulting with
colleagues and graduate students, and attending meetings and
conferences. Incidental work (that in excess of normal for the
individual), for which supplemental compensation is paid by an
institution under institutional policy, need not be included in the
payroll distribution systems described below, provided such work and
compensation are separately identified and documented in the
financial management system of the institution.
b. Payroll distribution. (1) General Principles. (a) The
distribution of salaries and wages, whether treated as direct or F&A
costs, will be based on payrolls documented in accordance with the
generally accepted practices of colleges and universities.
Institutions may include in a residual category all activities that
are not directly charged to sponsored agreements, and that need not
be distributed to more than one activity for purposes of identifying
F&A costs and the functions to which they are allocable. The
components of the residual category are not required to be
separately documented.
(b) The apportionment of employees' salaries and wages which are
chargeable to more than one sponsored agreement or other cost
objective will be accomplished by methods which will (1) be in
accordance with Sections A.2 and C, (2) produce an equitable
distribution of charges for employee's activities, and (3)
distinguish the employees' direct activities from their F&A
activities.
(c) In the use of any methods for apportioning salaries, it is
recognized that, in an academic setting, teaching, research,
service, and administration are often inextricably intermingled. A
precise assessment of factors that contribute to costs is not always
feasible, nor is it expected. Reliance, therefore, is placed on
estimates in which a degree of tolerance is appropriate.
(d) There is no single best method for documenting the
distribution of charges for personal services. Methods for
apportioning salaries and wages, however, must meet the criteria
specified in subsection b.(2). Examples of acceptable methods are
contained in subsection c. Other methods which meet the criteria
specified in subsection b.(2) also shall be deemed acceptable, if a
mutually satisfactory alternative agreement is reached.
(2) Criteria for Acceptable Methods. (a) The payroll
distribution system will (i) be incorporated into the official
records of the institution, (ii) reasonably reflect the activity for
which the employee is compensated by the institution, and (iii)
encompass both sponsored and all other activities on an integrated
basis, but may include the use of subsidiary records. (Compensation
for incidental work described in Section J.8.a need not be
included.)
(b) The method must recognize the principle of after-the-fact
confirmation or determination so that costs distributed represent
actual costs, unless a mutually satisfactory alternative agreement
is reached. Direct cost activities and F&A cost activities may be
confirmed by responsible persons with suitable means of verification
that the work was performed. Confirmation by the employee is not a
requirement for either direct or F&A cost activities if other
responsible persons make appropriate confirmations.
(c) The payroll distribution system will allow confirmation of
activity allocable to each sponsored agreement and each of the
categories of activity needed to identify F&A costs and the
functions to which they are allocable. The activities chargeable to
F&A cost categories or the major functions of the institution for
employees whose salaries must be apportioned (see subsection
b.(1)(b)), if not initially identified as separate categories, may
be subsequently distributed by any reasonable method mutually agreed
to, including, but not limited to, suitably conducted surveys,
statistical sampling procedures, or the application of negotiated
fixed rates.
(d) Practices vary among institutions and within institutions as
to the activity constituting a full workload. Therefore, the payroll
distribution system may reflect categories of activities expressed
as a percentage distribution of total activities.
(e) Direct and F&A charges may be made initially to sponsored
agreements on the basis of estimates made before services are
performed. When such estimates are used, significant changes in the
corresponding work activity must be identified and entered into the
payroll distribution system. Short-
[[Page 20904]]
term (such as one or two months) fluctuation between workload
categories need not be considered as long as the distribution of
salaries and wages is reasonable over the longer term, such as an
academic period.
(f) The system will provide for independent internal evaluations
to ensure the system's effectiveness and compliance with the above
standards.
(g) For systems which meet these standards, the institution will
not be required to provide additional support or documentation for
the effort actually performed.
c. Examples of Acceptable Methods for Payroll Distribution: (1)
Plan-Confirmation: Under this method, the distribution of salaries
and wages of professorial and professional staff applicable to
sponsored agreements is based on budgeted, planned, or assigned work
activity, updated to reflect any significant changes in work
distribution. A plan-confirmation system used for salaries and wages
charged directly or indirectly to sponsored agreements will meet the
following standards:
(a) A system of budgeted, planned, or assigned work activity
will be incorporated into the official records of the institution
and encompass both sponsored and all other activities on an
integrated basis. The system may include the use of subsidiary
records.
(b) The system will reasonably reflect only the activity for
which the employee is compensated by the institution (compensation
for incidental work described in subsection a need not be included).
Practices vary among institutions and within institutions as to the
activity constituting a full workload. Hence, the system will
reflect categories of activities expressed as a percentage
distribution of total activities. (See Section H for treatment of
F&A costs under the simplified method for small institutions.)
(c) The system will reflect activity applicable to each
sponsored agreement and to each category needed to identify F&A
costs and the functions to which they are allocable. The system may
treat F&A cost activities initially within a residual category and
subsequently determine them by alternate methods as discussed in
subsection b.(2)(c).
(d) The system will provide for modification of an individual's
salary or salary distribution commensurate with a significant change
in the employee's work activity. Short-term (such as one or two
months) fluctuation between workload categories need not be
considered as long as the distribution of salaries and wages is
reasonable over the longer term, such as an academic period.
Whenever it is apparent that a significant change in work activity
which is directly or indirectly charged to sponsored agreements will
occur or has occurred, the change will be documented over the
signature of a responsible official and entered into the system.
(e) At least annually a statement will be signed by the
employee, principal investigator, or responsible official(s) using
suitable means of verification that the work was performed, stating
that salaries and wages charged to sponsored agreements as direct
charges, and to residual, F&A cost or other categories are
reasonable in relation to work performed.
(f) The system will provide for independent internal evaluation
to ensure the system's integrity and compliance with the above
standards.
(g) In the use of this method, an institution shall not be
required to provide additional support or documentation for the
effort actually performed.
(2) After-the-fact Activity Records: Under this system the
distribution of salaries and wages by the institution will be
supported by activity reports as prescribed below.
(a) Activity reports will reflect the distribution of activity
expended by employees covered by the system (compensation for
incidental work as described in subsection a need not be included).
(b) These reports will reflect an after-the-fact reporting of
the percentage distribution of activity of employees. Charges may be
made initially on the basis of estimates made before the services
are performed, provided that such charges are promptly adjusted if
significant differences are indicated by activity records.
(c) Reports will reasonably reflect the activities for which
employees are compensated by the institution. To confirm that the
distribution of activity represents a reasonable estimate of the
work performed by the employee during the period, the reports will
be signed by the employee, principal investigator, or responsible
official(s) using suitable means of verification that the work was
performed.
(d) The system will reflect activity applicable to each
sponsored agreement and to each category needed to identify F&A
costs and the functions to which they are allocable. The system may
treat F&A cost activities initially within a residual category and
subsequently determine them by alternate methods as discussed in
subsection b.(2)(c).
(e) For professorial and professional staff, the reports will be
prepared each academic term, but no less frequently than every six
months. For other employees, unless alternate arrangements are
agreed to, the reports will be prepared no less frequently than
monthly and will coincide with one or more pay periods.
(f) Where the institution uses time cards or other forms of
after-the-fact payroll documents as original documentation for
payroll and payroll charges, such documents shall qualify as records
for this purpose, provided that they meet the requirements in
subsections (a) through (e).
(3) Multiple Confirmation Records: Under this system, the
distribution of salaries and wages of professorial and professional
staff will be supported by records which certify separately for
direct and F&A cost activities as prescribed below.
(a) For employees covered by the system, there will be direct
cost records to reflect the distribution of that activity expended
which is to be allocable as direct cost to each sponsored agreement.
There will also be F&A cost records to reflect the distribution of
that activity to F&A costs. These records may be kept jointly or
separately (but are to be certified separately, see below).
(b) Salary and wage charges may be made initially on the basis
of estimates made before the services are performed, provided that
such charges are promptly adjusted if significant differences occur.
(c) Institutional records will reasonably reflect only the
activity for which employees are compensated by the institution
(compensation for incidental work as described in subsection a need
not be included).
(d) The system will reflect activity applicable to each
sponsored agreement and to each category needed to identify F&A
costs and the functions to which they are allocable.
(e) To confirm that distribution of activity represents a
reasonable estimate of the work performed by the employee during the
period, the record for each employee will include: (i) the signature
of the employee or of a person having direct knowledge of the work,
confirming that the record of activities allocable as direct costs
of each sponsored agreement is appropriate; and, (ii) the record of
F&A costs will include the signature of responsible person(s) who
use suitable means of verification that the work was performed and
is consistent with the overall distribution of the employee's
compensated activities. These signatures may all be on the same
document.
(f) The reports will be prepared each academic term, but no less
frequently than every six months.
(g) Where the institution uses time cards or other forms of
after-the-fact payroll documents as original documentation for
payroll and payroll charges, such documents shall qualify as records
for this purposes, provided they meet the requirements in
subsections (a) through (f).
d. Salary rates for faculty members. (1) Salary rates for
academic year. Charges for work performed on sponsored agreements by
faculty members during the academic year will be based on the
individual faculty member's regular compensation for the continuous
period which, under the policy of the institution concerned,
constitutes the basis of his salary. Charges for work performed on
sponsored agreements during all or any portion of such period are
allowable at the base salary rate. In no event will charges to
sponsored agreements, irrespective of the basis of computation,
exceed the proportionate share of the base salary for that period.
This principle applies to all members of the faculty at an
institution. Since intra-university consulting is assumed to be
undertaken as a university obligation requiring no compensation in
addition to full-time base salary, the principle also applies to
faculty members who function as consultants or otherwise contribute
to a sponsored agreement conducted by another faculty member of the
same institution. However, in unusual cases where consultation is
across departmental lines or involves a separate or remote
operation, and the work performed by the consultant is in addition
to his regular departmental load, any charges for such work
representing extra compensation above the base salary are allowable
provided that such consulting arrangements are specifically provided
for in the agreement or approved in writing by the sponsoring
agency.
[[Page 20905]]
(2) Periods outside the academic year. (a) Except as otherwise
specified for teaching activity in subsection (b), charges for work
performed by faculty members on sponsored agreements during the
summer months or other period not included in the base salary period
will be determined for each faculty member at a rate not in excess
of the base salary divided by the period to which the base salary
relates, and will be limited to charges made in accordance with
other parts of this section. The base salary period used in
computing charges for work performed during the summer months will
be the number of months covered by the faculty member's official
academic year appointment.
(b) Charges for teaching activities performed by faculty members
on sponsored agreements during the summer months or other periods
not included in the base salary period will be based on the normal
policy of the institution governing compensation to faculty members
for teaching assignments during such periods.
(3) Part-time faculty. Charges for work performed on sponsored
agreements by faculty members having only part-time appointments
will be determined at a rate not in excess of that regularly paid
for the part-time assignments. For example, an institution pays
$5000 to a faculty member for half-time teaching during the academic
year. He devoted one-half of his remaining time to a sponsored
agreement. Thus, his additional compensation, chargeable by the
institution to the agreement, would be one-half of $5000, or $2500.
e. Noninstitutional professional activities. Unless an
arrangement is specifically authorized by a Federal sponsoring
agency, an institution must follow its institution-wide policies and
practices concerning the permissible extent of professional services
that can be provided outside the institution for noninstitutional
compensation. Where such institution-wide policies do not exist or
do not adequately define the permissible extent of consulting or
other noninstitutional activities undertaken for extra outside pay,
the Federal Government may require that the effort of professional
staff working on sponsored agreements be allocated between (1)
institutional activities, and (2) noninstitutional professional
activities. If the sponsoring agency considers the extent of
noninstitutional professional effort excessive, appropriate
arrangements governing compensation will be negotiated on a case-by-
case basis.
f. Fringe benefits. (1) Fringe benefits in the form of regular
compensation paid to employees during periods of authorized absences
from the job, such as for annual leave, sick leave, military leave,
and the like, are allowable, provided such costs are distributed to
all institutional activities in proportion to the relative amount of
time or effort actually devoted by the employees. See Section J.40
for treatment of sabbatical leave.
(2) Fringe benefits in the form of employer contributions or
expenses for social security, employee insurance, workmen's
compensation insurance, tuition or remission of tuition for
individual employees are allowable, provided such benefits are
granted in accordance with established educational institutional
policies, and are distributed to all institutional activities on an
equitable basis. Tuition benefits for family members other than the
employee are unallowable for fiscal years beginning after September
30, 1998. See Section J.41.b, Scholarships and student aid costs,
for treatment of tuition remission provided to students.
(3) Rules for pension plan costs are as follows:
(a) Costs of the institution's pension plan which are incurred
in accordance with the established policies of the institution are
allowable, provided: (i) such policies meet the test of
reasonableness, (ii) the methods of cost allocation are equitable
for all activities, (iii) the amount of pension cost assigned to
each fiscal year is determined in accordance with subsection (b),
and (iv) the cost assigned to a given fiscal year is paid or funded
for all plan participants within six months after the end of that
year. However, increases to normal and past service pension costs
caused by a delay in funding the actuarial liability beyond 30 days
after each quarter of the year to which such costs are assignable
are unallowable.
(b) The amount of pension cost assigned to each fiscal year
shall be determined in accordance with generally accepted accounting
principles. Institutions may elect to follow the ``Cost Accounting
Standard for Composition and Measurement of Pension Cost'' (48 Part
9904-412).
(c) Premiums paid for pension plan termination insurance
pursuant to the Employee Retirement Income Security Act (ERISA) of
1974 (Pub. L. 93-406) are allowable. Late payment charges on such
premiums are unallowable. Excise taxes on accumulated funding
deficiencies and prohibited transactions of pension plan fiduciaries
imposed under ERISA are also unallowable.
(4) Fringe benefits may be assigned to cost objectives by
identifying specific benefits to specific individual employees or by
allocating on the basis of institution-wide salaries and wages of
the employees receiving the benefits. When the allocation method is
used, separate allocations must be made to selective groupings of
employees, unless the institution demonstrates that costs in
relationship to salaries and wages do not differ significantly for
different groups of employees. Fringe benefits shall be treated in
the same manner as the salaries and wages of the employees receiving
the benefits. The benefits related to salaries and wages treated as
direct costs shall also be treated as direct costs; the benefits
related to salaries and wages treated as F&A costs shall be treated
as F&A costs.
g. Institution-furnished automobiles. That portion of the cost
of institution-furnished automobiles that relates to personal use by
employees (including transportation to and from work) is unallowable
regardless of whether the cost is reported as taxable income to the
employees.
9. Contingency provisions. Contributions to a contingency
reserve or any similar provision made for events, the occurrence of
which cannot be foretold with certainty as to time, intensity, or
with an assurance of their happening, are unallowable. (See also
Section J.21.c.)
10. Deans of faculty and graduate schools. The salaries and
expenses of deans of faculty and graduate schools, or their
equivalents, and their staffs, are allowable.
11. Defense and prosecution of criminal and civil proceedings,
claims, appeals and patent infringement.
a. Definitions. ``Conviction,'' as used herein, means a judgment
or conviction of a criminal offense by any court of competent
jurisdiction, whether entered upon verdict or a plea, including a
conviction due to a plea of nolo contendere.
``Costs,'' include, but are not limited to, administrative and
clerical expenses; the cost of legal services, whether performed by
in-house or private counsel; the costs of the services of
accountants, consultants, or others retained by the institution to
assist it; costs of employees, officers and trustees, and any
similar costs incurred before, during, and after commencement of a
judicial or administrative proceeding that bears a direct
relationship to the proceedings.
``Fraud,'' as used herein, means (i) acts of fraud or corruption
or attempts to defraud the Federal Government or to corrupt its
agents, (ii) acts that constitute a cause for debarment or
suspension (as specified in agency regulations), and (iii) acts
which violate the False Claims Act, 31 U.S.C., sections 3729-3731,
or the Anti-kickback Act, 41 U.S.C., sections 51 and 54.
``Penalty,'' does not include restitution, reimbursement, or
compensatory damages.
``Proceeding,'' includes an investigation.
b. (1) Except as otherwise described herein, costs incurred in
connection with any criminal, civil or administrative proceeding
(including filing of a false certification) commenced by the Federal
Government, or a State, local or foreign government, are not
allowable if the proceeding (a) relates to a violation of, or
failure to comply with, a Federal, State, local or foreign statute
or regulation, by the institution (including its agents and
employees); and (b) results in any of the following dispositions:
(i) In a criminal proceeding, a conviction.
(ii) In a civil or administrative proceeding involving an
allegation of fraud or similar misconduct, a determination of
institutional liability.
(iii) In the case of any civil or administrative proceeding, the
imposition of a monetary penalty.
(iv) A final decision by an appropriate Federal official to
debar or suspend the institution, to rescind or void an award, or to
terminate an award for default by reason of a violation or failure
to comply with a law or regulation.
(v) A disposition by consent or compromise, if the action could
have resulted in any of the dispositions described in subsections
(i) through (iv).
(2) If more than one proceeding involves the same alleged
misconduct, the costs of all such proceedings shall be unallowable
if any one of them results in one of the dispositions shown in
subsection b.
c. If a proceeding referred to in subsection b is commenced by
the Federal Government and is resolved by consent or compromise
[[Page 20906]]
pursuant to an agreement entered into by the institution and the
Federal Government, then the costs incurred by the institution in
connection with such proceedings that are otherwise not allowable
under subsection b may be allowed to the extent specifically
provided in such agreement.
d. If a proceeding referred to in subsection b is commenced by a
State, local or foreign government, the authorized Federal official
may allow the costs incurred by the institution for such
proceedings, if such authorized official determines that the costs
were incurred as a result of (1) a specific term or condition of a
federally-sponsored agreement, or (2) specific written direction of
an authorized official of the sponsoring agency.
e. Costs incurred in connection with proceedings described in
subsection b, but which are not made unallowable by that subsection,
may be allowed by the Federal Government, but only to the extent
that:
(1) The costs are reasonable in relation to the activities
required to deal with the proceeding and the underlying cause of
action;
(2) Payment of the costs incurred, as allowable and allocable
costs, is not prohibited by any other provision(s) of the sponsored
agreement;
(3) The costs are not otherwise recovered from the Federal
Government or a third party, either directly as a result of the
proceeding or otherwise; and,
(4) The percentage of costs allowed does not exceed the
percentage determined by an authorized Federal official to be
appropriate considering the complexity of procurement litigation,
generally accepted principles governing the award of legal fees in
civil actions involving the United States as a party, and such other
factors as may be appropriate. Such percentage shall not exceed 80
percent. However, if an agreement reached under subsection c has
explicitly considered this 80 percent limitation and permitted a
higher percentage, then the full amount of costs resulting from that
agreement shall be allowable.
f. Costs incurred by the institution in connection with the
defense of suits brought by its employees or ex-employees under
section 2 of the Major Fraud Act of 1988 (Pub. L. 100-700),
including the cost of all relief necessary to make such employee
whole, where the institution was found liable or settled, are
unallowable.
g. Costs of legal, accounting, and consultant services, and
related costs, incurred in connection with defense against Federal
Government claims or appeals, or the prosecution of claims or
appeals against the Federal Government, are unallowable.
h. Costs of legal, accounting, and consultant services, and
related costs, incurred in connection with patent infringement
litigation, are unallowable unless otherwise provided for in the
sponsored agreements.
i. Costs which may be unallowable under this section, including
directly associated costs, shall be segregated and accounted for by
the institution separately. During the pendency of any proceeding
covered by subsections b and f, the Federal Government shall
generally withhold payment of such costs. However, if in the best
interests of the Federal Government, the Federal Government may
provide for conditional payment upon provision of adequate security,
or other adequate assurance, and agreement by the institution to
repay all unallowable costs, plus interest, if the costs are
subsequently determined to be unallowable.
12. Depreciation and use allowances. Institutions may be
compensated for the use of their buildings, capital improvements,
and equipment, provided that they are used, needed in the
institutions' activities, and properly allocable to sponsored
agreements. Such compensation shall be made by computing either
depreciation or use allowance. Use allowances are the means of
providing such compensation when depreciation or other equivalent
costs are not computed. The allocation for depreciation or use
allowance shall be made in accordance with Section F.2. Depreciation
and use allowances are computed applying the following rules:
a. The computation of depreciation or use allowances shall be
based on the acquisition cost of the assets involved. For this
purpose, the acquisition cost will exclude (1) the cost of land; (2)
any portion of the cost of buildings and equipment borne by or
donated by the Federal Government, irrespective of where title was
originally vested or where it is presently located; and (3) any
portion of the cost of buildings and equipment contributed by or for
the institution where law or agreement prohibit recovery. For an
asset donated to the institution by a third party, its fair market
value at the time of the donation shall be considered as the
acquisition cost.
b. In the use of the depreciation method, the following shall be
observed:
(1) The period of useful service or useful life established in
each case for usable capital assets must take into consideration
such factors as type of construction, nature of the equipment,
technological developments in the particular area, and the renewal
and replacement policies followed for the individual items or
classes of assets involved.
(2) The depreciation method used to charge the cost of an asset
(or group of assets) to accounting periods shall reflect the pattern
of consumption of the asset during its useful life. In the absence
of clear evidence indicating that the expected consumption of the
asset will be significantly greater in the early portions than in
the later portions of its useful life, the straight-line method
shall be presumed to be the appropriate method. Depreciation methods
once used shall not be changed unless approved in advance by the
cognizant Federal agency.
(3) Where the depreciation method is introduced to replace the
use allowance method, depreciation shall be computed as if the asset
had been depreciated over its entire life (i.e., from the date the
asset was acquired and ready for use to the date of disposal or
withdrawal from service). The aggregate amount of use allowances and
depreciation attributable to an asset (including imputed
depreciation applicable to periods prior to the conversion to the
use allowance method as well as depreciation after the conversion)
may be less than, and in no case, greater than the total acquisition
cost of the asset.
(4) When the depreciation method is used for buildings, a
building ``shell'' may be treated separately from other building
components, such as plumbing system and heating and air conditioning
system. Each component item may then be depreciated over its
estimated useful life. On the other hand, the entire building,
including the shell and all components, may be treated as a single
asset and depreciated over a single useful life.
(5) Where the depreciation method is used for a particular class
of assets, no depreciation may be allowed on any such assets that
have outlived their depreciable lives. (See also subsection c.(3).)
c. Under the use allowance method, the following shall be
observed:
(1) The use allowance for buildings and improvements (including
improvements such as paved parking areas, fences, and sidewalks)
will be computed at an annual rate not exceeding two percent of
acquisition cost. The use allowance for equipment will be computed
at an annual rate not exceeding six and two-thirds percent of
acquisition cost.
(2) In contrast to the depreciation method, the entire building
must be treated as a single asset without separating its ``shell''
from other building components under the use allowance method. The
entire building must be treated as a single asset, and the two-
percent use allowance limitation must be applied to all parts of the
building. The two-percent limitation, however, need not be applied
to equipment or other assets that are merely attached or fastened to
the building but not permanently fixed and are used as furnishings,
decorations or for specialized purposes (e.g., dentist chairs and
dental treatment units, counters, laboratory benches bolted to the
floor, dishwashers, and carpeting). Such equipment and assets will
be considered as not being permanently fixed to the building if they
can be removed without the need for costly or extensive alterations
or repairs to the building to make the space usable for other
purposes. Equipment and assets which meet these criteria will be
subject to the six and two-thirds percent equipment use allowance.
(3) A reasonable use allowance may be negotiated for any assets
that are considered to be fully depreciated, after taking into
consideration the amount of depreciation previously charged to the
Federal Government, the estimated useful life remaining at the time
of negotiation, the effect of any increased maintenance charges,
decreased efficiency due to age, and any other factors pertinent to
the utilization of the asset for the purpose contemplated.
(4) Notwithstanding subsection (3), once an educational
institution converts from one cost recovery methodology to another,
acquisition costs not recovered may not be used in the calculation
of the use allowance in subsection (3).
d. Except as otherwise provided in subsections b and c, a
combination of the depreciation and use allowance methods may not be
used, in like circumstances, for a
[[Page 20907]]
single class of assets (e.g., buildings, office equipment, and
computer equipment).
e. Charges for use allowances or depreciation must be supported
by adequate property records, and physical inventories must be taken
at least once every two years to ensure that the assets exist and
are usable, used, and needed. Statistical sampling techniques may be
used in taking these inventories. In addition, when the depreciation
method is used, adequate depreciation records showing the amount of
depreciation taken each period must also be maintained.
f. This section applies to the largest college and university
recipients of Federal research and development funds as displayed in
Exhibit A.
(1) Institutions shall expend currently, or reserve for
expenditure within the next five years, the portion of F&A cost
payments made for depreciation or use allowances under sponsored
research agreements, consistent with Section F.2, to acquire or
improve research facilities. This provision applies only to Federal
agreements which reimburse F&A costs at a full negotiated rate.
These funds may only be used for (a) liquidation of the principal of
debts incurred to acquire assets that are used directly for
organized research activities, or (b) payments to acquire, repair,
renovate, or improve buildings or equipment directly used for
organized research. For buildings or equipment not exclusively used
for organized research activity, only appropriately proportionate
amounts will be considered to have been expended for research
facilities.
(2) An assurance that an amount equal to the Federal
reimbursements has been appropriately expended or reserved to
acquire or improve research facilities shall be submitted as part of
each F&A cost proposal submitted to the cognizant Federal agency
which is based on costs incurred on or after October 1, 1991. This
assurance will cover the cumulative amounts of funds received and
expended during the period beginning after the period covered by the
previous assurance and ending with the fiscal year on which the
proposal is based. The assurance shall also cover any amounts
reserved from a prior period in which the funds received exceeded
the amounts expended.
13. Donations and contributions. a. The value of donated
services and property are not allowable either as a direct or F&A
cost, except that depreciation or use allowances on donated assets
are permitted in accordance with Section J.12.a. The value of
donated services and property may be used to meet cost sharing or
matching requirements, in accordance with Circular A-110.
b. Donations or contributions made by the institution,
regardless of the recipient, are unallowable.
14. Employee morale, health, and welfare costs and credits. The
costs of house publications, health or first-aid clinics and/or
infirmaries, recreational activities, food services, employees'
counseling services, and other expenses incurred in accordance with
the institution's established practice or custom for the improvement
of working conditions, employer-employee relations, employee morale,
and employee performance, are allowable. Such costs will be
equitably apportioned to all activities of the institution. Income
generated from any of these activities will be credited to the cost
thereof unless such income has been irrevocably set over to employee
welfare organizations. Losses resulting from operating food services
are allowable only if the institution's objective is to operate such
services on a break-even basis. Losses sustained because of
operating objectives other than the above are allowable only (a)
where the institution can demonstrate unusual circumstances, and (b)
with the approval of the cognizant Federal agency.
15. Entertainment costs. Costs of entertainment, including
amusement, diversion, and social activities and any costs directly
associated with such costs (such as tickets to shows or sports
events, meals, lodging, rentals, transportation, and gratuities) are
unallowable.
16. Equipment and other capital expenditures. a. For purposes of
this subsection, the following definitions apply:
(1) ``Equipment'' means an article of nonexpendable, tangible
personal property having a useful life of more than one year and an
acquisition cost which equals or exceeds the lesser of the
capitalization level established by the organization for financial
statement purposes, or $5000. The unamortized portion of any
equipment written off as a result of a change in capitalization
levels may be recovered by continuing to claim the otherwise
allowable use allowances or depreciation on the equipment, or by
amortizing the amount to be written off over a period of years
negotiated with the cognizant agency.
(2) ``Capital expenditures'' means the cost of the asset
including the cost to put it in place. Capital expenditure for
equipment, for example, means the net invoice price of the
equipment, including the cost of any modifications, attachments,
accessories, or auxiliary apparatus necessary to make it usable for
the purpose for which it is acquired. Ancillary charges, such as
taxes, duty, protective in transit insurance, freight, and
installation may be included in, or excluded from, capital
expenditure cost in accordance with the institution's regular
accounting practices.
(3) ``Special purpose equipment'' means equipment which is used
only for research, medical, scientific, or other technical
activities.
(4) ``General purpose equipment'' means equipment, the use of
which is not limited only to research, medical, scientific or other
technical activities. Examples of general purpose equipment include
office equipment and furnishings, air conditioning equipment,
reproduction and printing equipment, motor vehicles, and automatic
data processing equipment.
b. The following rules of allowability shall apply to equipment
and other capital expenditures:
(1) Capital expenditures for general purpose equipment,
buildings, and land are unallowable as direct charges, except where
approved in advance by the sponsoring agency.
(2) Expenditures for special purpose equipment are allowable as
direct charges with the approval of the sponsoring agency.
(3) Capital expenditures for improvements to land, buildings, or
equipment which materially increase their value or useful life are
unallowable as direct charges, except where approved in advance by
the sponsoring agency.
(4) Capital expenditures are unallowable as F&A costs. See
Section J.12 for allowability of depreciation or use allowances on
buildings, capital improvements, and equipment. Also see Section
J.38 for allowability of rental costs on land, buildings, and
equipment.
17. Executive lobbying costs. Costs incurred in attempting to
improperly influence either directly or indirectly, an employee or
officer of the Executive Branch of the Federal Government to give
consideration or to act regarding a sponsored agreement or a
regulatory matter are unallowable. Improper influence means any
influence that induces or tends to induce a Federal employee or
officer to give consideration or to act regarding a federally-
sponsored agreement or regulatory matter on any basis other than the
merits of the matter.
18. Fines and penalties. Costs resulting from violations of, or
failure of the institution to comply with, Federal, State, and local
or foreign laws and regulations are unallowable, except when
incurred as a result of compliance with specific provisions of the
sponsored agreement, or instructions in writing from the authorized
official of the sponsoring agency authorizing in advance such
payments.
19. Goods or services for personal use. Costs of goods or
services for personal use of the institution's employees are
unallowable regardless of whether the cost is reported as taxable
income to the employees.
20. Housing and personal living expenses. a. Costs of housing
(e.g., depreciation, maintenance, utilities, furnishings, rent,
etc.), housing allowances and personal living expenses for/of the
institution's officers are unallowable regardless of whether the
cost is reported as taxable income to the employees.
b. The term ``officers'' includes current and past officers.
21. Insurance and indemnification. a. Costs of insurance
required or approved, and maintained, pursuant to the sponsored
agreement, are allowable.
b. Costs of other insurance maintained by the institution in
connection with the general conduct of its activities, are allowable
subject to the following limitations: (1) types and extent and cost
of coverage must be in accordance with sound institutional practice;
(2) costs of insurance or of any contributions to any reserve
covering the risk of loss of or damage to federally-owned property
are unallowable, except to the extent that the Federal Government
has specifically required or approved such costs; and (3) costs of
insurance on the lives of officers or trustees are unallowable
except where such insurance is part of an employee plan which is not
unduly restricted.
c. Contributions to a reserve for a self-insurance program are
allowable, to the extent that the types of coverage, extent of
[[Page 20908]]
coverage, and the rates and premiums would have been allowed had
insurance been purchased to cover the risks.
d. Actual losses which could have been covered by permissible
insurance (whether through purchased insurance or self-insurance)
are unallowable, unless expressly provided for in the sponsored
agreement, except that costs incurred because of losses not covered
under existing deductible clauses for insurance coverage provided in
keeping with sound management practice as well as minor losses not
covered by insurance, such as spoilage, breakage and disappearance
of small hand tools, which occur in the ordinary course of
operations, are allowable.
e. Indemnification includes securing the institution against
liabilities to third persons and other losses not compensated by
insurance or otherwise. The Federal Government is obligated to
indemnify the institution only to the extent expressly provided for
in the sponsored agreement, except as provided in subsection d.
f. Insurance against defects. Costs of insurance with respect to
any costs incurred to correct defects in the institution's materials
or workmanship are unallowable.
g. Medical liability (malpractice) insurance is an allowable
cost of research programs only to the extent that the research
involves human subjects. Medical liability insurance costs shall be
treated as a direct cost and shall be assigned to individual
projects based on the manner in which the insurer allocates the risk
to the population covered by the insurance.
22. Interest, fund raising, and investment management costs. a.
Costs incurred for interest on borrowed capital or temporary use of
endowment funds, however represented, are unallowable, except as
indicated in subsection e.
b. Costs of organized fund raising, including financial
campaigns, endowment drives, solicitation of gifts and bequests, and
similar expenses incurred solely to raise capital or obtain
contributions, are unallowable.
c. Costs of investment counsel and staff and similar expenses
incurred solely to enhance income from investments are unallowable.
d. Costs related to the physical custody and control of monies
and securities are allowable.
e. The cost of interest paid to an external party is allowable
where associated with the following assets, provided the assets are
used in support of sponsored agreements, and the total cost
(including depreciation or use allowance, operation and maintenance
costs, interest, etc.) does not exceed the rental cost of comparable
assets in the same locality.
(1) Buildings acquired or completed on or after July 1, 1982.
(2) Major reconstruction and remodeling of existing buildings
completed on or after July 1, 1982.
(3) Acquisition or fabrication of capital equipment (as defined
in Section J.16, Equipment and other capital expenditures) completed
on or after July 1, 1982, costing $10,000 or more, if agreed to by
the Federal Government.
f. Interest on debt incurred after the effective date of this
revision to acquire, replace or renovate capital assets (including
renovations, alterations, equipment, land, and capital assets
acquired through capital leases), acquired after the effective date
of this revision and used in support of sponsored agreements is
subject to the following conditions:
(1) For facilities costing over $500,000, the educational
institution shall prepare, prior to the acquisition or replacement
of the facility, a lease-purchase analysis in accordance with
Sec. ____.44 of OMB Circular A-110, which shows that a financed
purchase, including a capital lease, is less costly to the
educational institution than other operating lease alternatives, on
a net present value basis. Discount rates used shall be equal to the
educational institution's anticipated interest rates and shall be no
higher than the fair market rate available to the educational
institution from an unrelated (``arm's length'') third party. The
lease-purchase analysis shall include a comparison of the net
present value of the projected total cost comparisons of both
alternatives over the period the asset is expected to be used by the
educational institution. The cost comparisons associated with
purchasing the facility shall include the estimated purchase price,
anticipated operating and maintenance costs (including property
taxes, if applicable) not included in the debt financing, less any
estimated asset salvage value at the end of the defined period. The
cost comparison for a capital lease shall include the estimated
total lease payments, any estimated bargain purchase option,
operating and maintenance costs, and taxes not included in the
capital leasing arrangement, less any estimated credits due under
the lease at the end of the defined period. Projected operating
lease costs shall be based on the anticipated cost of leasing
comparable facilities at fair market rates under rental agreements
that would be renewed or reestablished over the period defined
above, and any expected maintenance costs and allowable property
taxes to be borne by the educational institution directly or as part
of the lease arrangement.
(2) The actual interest cost claimed is predicated upon interest
rates that are no higher than the fair market rate available to the
educational institution from an unrelated (arm's length) third
party.
(3) Investment earnings, including interest income on bond or
loan principal, pending payment of the construction or acquisition
costs, are used to offset allowable interest cost. Arbitrage
earnings reportable to the Internal Revenue Service are not required
to be offset against allowable interest costs.
(4) Reimbursements are limited to the least costly alternative
based on the total cost analysis required under subsection (1). For
example, if an operating lease is determined to be less costly than
purchasing through debt financing, then reimbursement is limited to
the amount determined if leasing had been used. In all cases where a
lease-purchase analysis is required to be performed, Federal
reimbursement shall be based upon the least expensive alternative.
(5) Educational institutions are also subject to the following
conditions:
(a) For debt arrangements over $1 million, unless the
educational institution makes an initial equity contribution to the
asset purchase of 25 percent or more, educational institutions shall
reduce claims for interest cost by an amount equal to imputed
interest earnings on excess cash flow, which is to be calculated as
follows. Annually, educational institutions shall prepare a
cumulative (from the inception of the project) report of monthly
cash flows that includes inflows and outflows, regardless of the
funding source. Inflows consist of depreciation expense,
amortization of capitalized construction interest, and annual
interest cost. For cash flow calculations, the annual inflow figures
shall be divided by the number of months in the year (i.e., usually
12) that the building is in service for monthly amounts. Outflows
consist of initial equity contributions, debt principal payments
(less the pro rata share attributable to the unallowable costs of
land) and interest payments. Where cumulative inflows exceed
cumulative outflows, interest shall be calculated on the excess
inflows for that period and be treated as a reduction to allowable
interest cost. The rate of interest to be used to compute earnings
on excess cash flows shall be the three-month Treasury bill closing
rate as of the last business day of that month.
(b) Substantial relocation of federally-sponsored activities
from a facility financed by indebtedness, the cost of which was
funded in whole or part through Federal reimbursements, to another
facility prior to the expiration of a period of 20 years requires
notice to the cognizant agency. The extent of the relocation, the
amount of the Federal participation in the financing, and the
depreciation and interest charged to date may require negotiation
and/or downward adjustments of replacement space charged to Federal
programs in the future.
(c) The allowable costs to acquire facilities and equipment are
limited to a fair market value available to the educational
institution from an unrelated (arm's length) third party.
(6) The following definitions are to be used for purposes of
this section:
(a) ``Initial equity contribution'' means the amount or value of
contributions made by non-Federal entities for the acquisition of
the asset prior to occupancy of facilities.
(b) ``Asset costs'' means the capitalizable costs of an asset,
including construction costs, acquisition costs, and other such
costs capitalized in accordance with Generally Accepted Accounting
Principles (GAAP).
23. Labor relations costs. Costs incurred in maintaining
satisfactory relations between the institution and its employees,
including costs of labor management committees, employees'
publications, and other related activities, are allowable.
24. Lobbying. Reference is made to the common rule published at
55 FR 6736 (2/26/90), and OMB's governmentwide guidance, amendments
to OMB's governmentwide guidance, and OMB's clarification notices
published at 54 FR 52306 (12/20/89), 61 FR 1412 (1/19/96), 55 FR
24540 (6/15/90) and 57 FR 1772 (1/15/92), respectively. In addition,
the following restrictions shall apply:
a. Notwithstanding other provisions of this Circular, costs
associated with the following activities are unallowable:
[[Page 20909]]
(1) Attempts to influence the outcomes of any Federal, State, or
local election, referendum, initiative, or similar procedure,
through in kind or cash contributions, endorsements, publicity, or
similar activity;
(2) Establishing, administering, contributing to, or paying the
expenses of a political party, campaign, political action committee,
or other organization established for the purpose of influencing the
outcomes of elections;
(3) Any attempt to influence (i) the introduction of Federal or
State legislation, (ii) the enactment or modification of any pending
Federal or State legislation through communication with any member
or employee of the Congress or State legislature (including efforts
to influence State or local officials to engage in similar lobbying
activity, or (iii) any government official or employee in connection
with a decision to sign or veto enrolled legislation;
(4) Any attempt to influence (i) the introduction of Federal or
State legislation; or (ii) the enactment or modification of any
pending Federal or State legislation by preparing, distributing, or
using publicity or propaganda, or by urging members of the general
public, or any segment thereof, to contribute to or participate in
any mass demonstration, march, rally, fund raising drive, lobbying
campaign or letter writing or telephone campaign; or
(5) Legislative liaison activities, including attendance at
legislative sessions or committee hearings, gathering information
regarding legislation, and analyzing the effect of legislation, when
such activities are carried on in support of or in knowing
preparation for an effort to engage in unallowable lobbying.
b. The following activities are excepted from the coverage of
subsection a:
(1) Technical and factual presentations on topics directly
related to the performance of a grant, contract, or other agreement
(through hearing testimony, statements, or letters to the Congress
or a State legislature, or subdivision, member, or cognizant staff
member thereof), in response to a documented request (including a
Congressional Record notice requesting testimony or statements for
the record at a regularly scheduled hearing) made by the recipient
member, legislative body or subdivision, or a cognizant staff member
thereof, provided such information is readily obtainable and can be
readily put in deliverable form, and further provided that costs
under this section for travel, lodging or meals are unallowable
unless incurred to offer testimony at a regularly scheduled
Congressional hearing pursuant to a written request for such
presentation made by the Chairman or Ranking Minority Member of the
Committee or Subcommittee conducting such hearings;
(2) Any lobbying made unallowable by subsection a.(3) to
influence State legislation in order to directly reduce the cost, or
to avoid material impairment of the institution's authority to
perform the grant, contract, or other agreement; or
(3) Any activity specifically authorized by statute to be
undertaken with funds from the grant, contract, or other agreement.
c. When an institution seeks reimbursement for F&A costs, total
lobbying costs shall be separately identified in the F&A cost rate
proposal, and thereafter treated as other unallowable activity costs
in accordance with the procedures of Section B.1.d.
d. Institutions shall submit as part of their annual F&A cost
rate proposal a certification that the requirements and standards of
this section have been complied with.
e. Institutions shall maintain adequate records to demonstrate
that the determination of costs as being allowable or unallowable
pursuant to this section complies with the requirements of this
Circular.
f. Time logs, calendars, or similar records shall not be
required to be created for purposes of complying with this section
during any particular calendar month when: (1) the employee engages
in lobbying (as defined in subsections a and b) 25 percent or less
of the employee's compensated hours of employment during that
calendar month, and (2) within the preceding five-year period, the
institution has not materially misstated allowable or unallowable
costs of any nature, including legislative lobbying costs. When
conditions (1) and (2) are met, institutions are not required to
establish records to support the allowability of claimed costs in
addition to records already required or maintained. Also, when
conditions (1) and (2) are met, the absence of time logs, calendars,
or similar records will not serve as a basis for disallowing costs
by contesting estimates of lobbying time spent by employees during a
calendar month.
g. Agencies shall establish procedures for resolving in advance,
in consultation with OMB, any significant questions or disagreements
concerning the interpretation or application of this section. Any
such advance resolutions shall be binding in any subsequent
settlements, audits, or investigations with respect to that grant or
contract for purposes of interpretation of this Circular, provided,
however, that this shall not be construed to prevent a contractor or
grantee from contesting the lawfulness of such a determination.
25. Losses on other sponsored agreements or contracts. Any
excess of costs over income under any other sponsored agreement or
contract of any nature is unallowable. This includes, but is not
limited to, the institution's contributed portion by reason of cost-
sharing agreements or any under-recoveries through negotiation of
flat amounts for F&A costs.
26. Maintenance and repair costs. Costs incurred for necessary
maintenance, repair or upkeep of property (including Federal
property unless otherwise provided for) which neither add to the
permanent value of the property nor appreciably prolong its intended
life but keep it in an efficient operating condition, are allowable.
27. Material costs. Costs incurred for purchased materials,
supplies, and fabricated parts directly or indirectly related to the
sponsored agreement, are allowable. Purchases made specifically for
the sponsored agreement should be charged thereto at their actual
prices after deducting all cash discounts, trade discounts, rebates,
and allowances received by the institution. Withdrawals from general
stores or stockrooms should be charged at their cost under any
recognized method of pricing stores withdrawals conforming to sound
accounting practices consistently followed by the institution.
Incoming transportation charges are a proper part of material cost.
Direct material cost should include only the materials and supplies
actually used for the performance of the sponsored agreement, and
due credit should be given for any excess materials retained, or
returned to vendors. Due credit should be given for all proceeds or
value received for any scrap resulting from work under the sponsored
agreement. Where federally-donated or furnished materials is used in
performing the sponsored agreement, such material will be used
without charge.
28. Memberships, subscriptions and professional activity costs.
a. Costs of the institution's membership in business, technical,
and professional organizations are allowable.
b. Costs of the institution's subscriptions to business,
professional, and technical periodicals are allowable.
c. Costs of meetings and conferences, when the primary purpose
is the dissemination of technical information, are allowable. This
includes costs of meals, transportation, rental of facilities, and
other items incidental to such meetings or conferences.
d. Costs of membership in any civic or community organization
are unallowable.
e. Costs of membership in any country club or social or dining
club or organization are unallowable.
29. Patent costs. Costs of preparing disclosures, reports, and
other documents required by the sponsored agreement, and of
searching the art to the extent necessary to make such invention
disclosures, are allowable. In accordance with the clauses of the
sponsored agreement relating to patents, costs of preparing
documents and any other patent costs, in connection with the filing
of a patent application where title is conveyed to the Federal
Government, are allowable. (See also Section J.39.)
30. Plant security costs. Necessary expenses incurred to comply
with security requirements, including wages, uniforms and equipment
of personnel engaged in plant protection, are allowable.
31. Preagreement costs. Costs incurred prior to the effective
date of the sponsored agreement, whether or not they would have been
allowable thereunder if incurred after such date, are unallowable
thereunder if incurred after such date, are unallowable unless
approved by the sponsoring agency.
32. Professional services costs. a. Costs of professional and
consulting services, including legal services rendered by the
members of a particular profession who are not employees of the
institution, are allowable, subject to subsection b and Section J.11
when reasonable in relation to the services rendered and when not
contingent upon recovery of the costs from the Federal Government.
Retainer fees, to be allowable, must be reasonably supported by
evidence of services rendered.
b. Factors to be considered in determining the allowability of
costs in a particular case
[[Page 20910]]
include (1) the past pattern of such costs, particularly in the
years prior to the award of sponsored agreements; (2) the impact of
sponsored agreements on the institution's total activity; (3) the
nature and scope of managerial services expected of the
institution's own organizations; and (4) whether the proportion of
Federal Government work to the institution's total activity is such
as to influence the institution in favor of incurring the cost,
particularly where the services rendered are not of a continuing
nature and have little relationship to work under sponsored
agreements.
33. Profits and losses on disposition of plant equipment or
other capital assets. Profits or losses arising from the sale or
exchange of plant, facilities, equipment or other capital assets,
including sale or exchange of either short-term or long-term
investments, shall not be considered in computing the costs of
sponsored agreements except for pension plans as provided in Section
J.8.f. When assets acquired with Federal funds, in part or wholly,
are disposed of, the distribution of the proceeds shall be made in
accordance with Circular A-110.
34. Proposal costs. Proposal costs are the costs of preparing
bids or proposals on potential federally and non-federally-sponsored
agreements or projects, including the development of data necessary
to support the institution's bids or proposals. Proposal costs of
the current accounting period of both successful and unsuccessful
bids and proposals normally should be treated as F&A costs and
allocated currently to all activities of the institution, and no
proposal costs of past accounting periods will be allocable to the
current period. However, the institution's established practices may
be to treat proposal costs by some other recognized method.
Regardless of the method used, the results obtained may be accepted
only if found to be reasonable and equitable.
35. Rearrangement and alteration costs. Costs incurred for
ordinary or normal rearrangement and alteration of facilities are
allowable. Special arrangement and alteration costs incurred
specifically for the project are allowable when such work has been
approved in advance by the sponsoring agency.
36. Reconversion costs. Costs incurred in the restoration or
rehabilitation of the institution's facilities to approximately the
same condition existing immediately prior to commencement of a
sponsored agreement, fair wear and tear excepted, are allowable.
37. Recruiting costs. a. Subject to subsections b, c, and d, and
provided that the size of the staff recruited and maintained is in
keeping with workload requirements, costs of ``help wanted''
advertising, operating costs of an employment office necessary to
secure and maintain an adequate staff, costs of operating an
aptitude and educational testing program, travel costs of employees
while engaged in recruiting personnel, travel costs of applicants
for interviews for prospective employment, and relocation costs
incurred incident to recruitment of new employees, are allowable to
the extent that such costs are incurred pursuant to a well-managed
recruitment program. Where the institution uses employment agencies,
costs not in excess of standard commercial rates for such services
are allowable.
b. In publications, costs of help wanted advertising that
includes color, includes advertising material for other than
recruitment purposes, or is excessive in size (taking into
consideration recruitment purposes for which intended and normal
institutional practices in this respect), are unallowable.
c. Costs of help wanted advertising, special emoluments, fringe
benefits, and salary allowances incurred to attract professional
personnel from other institutions that do not meet the test of
reasonableness or do not conform with the established practices of
the institution, are unallowable.
d. Where relocation costs incurred incident to recruitment of a
new employee have been allowed either as an allocable direct or F&A
cost, and the newly hired employee resigns for reasons within his
control within 12 months after hire, the institution will be
required to refund or credit such relocation costs to the Federal
Government.
38. Rental cost of buildings and equipment. a. Rental costs of
buildings or equipment are allowable to the extent that the decision
to rent or lease is in accordance with Section C.3. Rental
arrangements should be reviewed periodically to determine if
circumstances have changed and other options are available.
b. Rental costs under ``sale and lease back'' arrangements are
allowable only up to the amount that would be allowed if the
institution continued to own the property.
c. Rental costs under ``less-than-arms-length'' leases are
allowable only up to the amount that would be allowed if the
institution owned the property. For this purpose, a less-than-arms-
length lease is one under which one party to the lease agreement is
able to control or substantially influence the actions of the other.
d. Where significant rental costs are incurred under leases
which create a material equity in the leased property, they are
allowable only up to the amount that would be allowed if the
institution purchased the property on the date the lease agreement
was executed. For this purpose, a material equity in the property
exists when the lease:
(1) Is noncancelable or is cancelable only upon the occurrence
of some remote contingency, and
(2) Has one or more of the following characteristics:
(a) Title to the property passes to the institution at some time
during or after the lease period.
(b) The term of the lease corresponds substantially to the
estimated useful life of the property (i.e., the period of economic
usefulness to the legal owner of the property).
(c) The initial term is less than the useful life of the
property and the institution has the option to renew the lease for
the remaining useful life at substantially less than fair rental
value.
(d) The property was acquired by the leaser to meet the special
needs of the institution and will probably be usable only for that
purpose and only by the institution.
(e) The institution has the right, during or at the expiration
of the lease, to purchase the property at a price which at the
inception of the lease appears to be substantially less than the
probable fair market value at the time it is permitted to purchase
the property (commonly called a lease with a bargain purchase
option), except for any discount normally given to educational
institutions.
39. Royalties and other costs for use of patents. Royalties on a
patent or amortization of the cost of acquiring a patent or
invention or rights thereto, necessary for the proper performance of
the sponsored agreement and applicable to tasks or processes
thereunder, are allowable unless the Federal Government has a
license or the right to free use of the patent, the patent has been
adjudicated to be invalid or has been administratively determined to
be invalid, the patent is considered to be unenforceable, or the
patent has expired.
40. Sabbatical leave costs. Costs of leave of absence by
employees for performance of graduate work or sabbatical study,
travel, or research are allowable provided the institution has a
uniform policy on sabbatical leave for persons engaged in
instruction and persons engaged in research. Such costs will be
allocated on an equitable basis among all related activities of the
institution. Where sabbatical leave is included in fringe benefits
for which a cost is determined for assessment as a direct charge,
the aggregate amount of such assessments applicable to all work of
the institution during the base period must be reasonable in
relation to the institution's actual experience under its sabbatical
leave policy.
41. Scholarships and student aid costs. a. Costs of
scholarships, fellowships, and other programs of student aid are
allowable only when the purpose of the sponsored agreement is to
provide training to selected participants and the charge is approved
by the sponsoring agency. However, tuition remission and other forms
of compensation paid as, or in lieu of, wages to students performing
necessary work are allowable provided that (1) there is a bona fide
employer-employee relationship between the student and the
institution for the work performed, (2) the tuition or other
payments are reasonable compensation for the work performed and are
conditioned explicitly upon the performance of necessary work, and
(3) it is the institution's practice to similarly compensate
students in nonsponsored as well as sponsored activities.
b. Charges for tuition remission and other forms of compensation
paid to students as, or in lieu of, salaries and wages shall be
subject to the reporting requirements stipulated in Section J.8, and
shall be treated as direct or F&A cost in accordance with the actual
work being performed. Tuition remission may be charged on an average
rate basis.
42. Selling and marketing. Costs of selling and marketing any
products or services of the institution (unless allowed under
Section J.1.c. or J.34) are unallowable.
43. Severance pay. a. Severance pay is compensation in addition
to regular salary and wages which is paid by an institution to
employees whose services are being terminated. Costs of severance
pay are allowable only to the extent that such payments are required
by law, by employer-
[[Page 20911]]
employee agreement, by established policy that constitutes in effect
an implied agreement on the institution's part, or by circumstances
of the particular employment.
b. Severance payments that are due to normal recurring turnover
and which otherwise meet the conditions of subsection a may be
allowed provided the actual costs of such severance payments are
regarded as expenses applicable to the current fiscal year and are
equitably distributed among the institution's activities during that
period.
c. Severance payments that are due to abnormal or mass
terminations are of such conjectural nature that allowability must
be determined on a case-by-case basis. However, the Federal
Government recognizes its obligation to participate, to the extent
of its fair share, in any specific payment.
d. Costs incurred in excess of the institution's normal
severance pay policy applicable to all persons employed by the
institution upon termination of employment are unallowable.
44. Specialized service facilities. a. The costs of
institutional services involving the use of highly complex or
specialized facilities such as electronic computers, wind tunnels,
and reactors are allowable, provided the charge for the service
meets the conditions of subsections b through d.
b. The cost of each service normally shall consist of both its
direct costs and its allocable share of F&A costs with deductions
for appropriate income of Federal financing as described in Section
C.5.
c. The cost of such institutional services when material in
amount will be charged directly to users, including sponsored
agreements based on actual use of the services and a schedule of
rates that does not discriminate between federally and non-federally
supported activities of the institution, including use by the
institution for internal purposes. Charges for the use of
specialized facilities should be designed to recover not more than
the aggregate cost of the services over a long-term period agreed to
by the institution and the cognizant Federal agency. Accordingly, it
is not necessary that the rates charged for services be equal to the
cost of providing those services during any one fiscal year as long
as rates are reviewed periodically for consistency with the long-
term plan and adjusted if necessary.
d. Where the costs incurred for such institutional services are
not material, they may be allocated as F&A costs. Such arrangements
must be agreed to by the institution and the cognizant Federal
agency.
e. Where it is in the best interest of the Federal Government
and the institution to establish alternative costing arrangements,
such arrangements may be worked out with the cognizant Federal
agency.
45. Student activity costs. Costs incurred for intramural
activities, student publications, student clubs, and other student
activities, are unallowable, unless specifically provided for in the
sponsored agreements.
46. Taxes. a. In general, taxes which the institution is
required to pay and which are paid or accrued in accordance with
generally accepted accounting principles are allowable. Payments
made to local governments in lieu of taxes which are commensurate
with the local government services received are allowable, except
for (1) taxes from which exemptions are available to the institution
directly or which are available to the institution based on an
exemption afforded the Federal Government, and in the latter case
when the sponsoring agency makes available the necessary exemption
certificates; and (2) special assessments on land which represent
capital improvements.
b. Any refund of taxes, interest, or penalties, and any payment
to the institution of interest thereon, attributable to taxes,
interest, or penalties which were allowed as sponsored agreement
costs, will be credited or paid to the Federal Government in the
manner directed by the Federal Government. However, any interest
actually paid or credited to an institution incident to a refund of
tax, interest, and penalty will be paid or credited to the Federal
Government only to the extent that such interest accrued over the
period during which the institution has been reimbursed by the
Federal Government for the taxes, interest, and penalties.
47. Transportation costs. Costs incurred for freight, express,
cartage, postage, and other transportation services relating either
to goods purchased, in process, or delivered, are allowable. When
such costs can readily be identified with the items involved, they
may be charged directly as transportation costs or added to the cost
of such items. Where identification with the materials received
cannot readily be made, inbound transportation cost may be charged
to the appropriate F&A cost accounts if the institution follows a
consistent, equitable procedure in this respect. Outbound freight,
if reimbursable under the terms of the sponsored agreement, should
be treated as a direct cost.
48. Travel costs. a. General. Travel costs are the expenses for
transportation, lodging, subsistence, and related items incurred by
employees who are in travel status on official business of the
institution. Such costs may be charged on an actual basis, on a per
diem or mileage basis in lieu of actual costs incurred, or on a
combination of the two, provided the method used is applied to an
entire trip and not to selected days of the trip, results in
reasonable charges, and is in accordance with the institution's
travel policy and practices consistently applied to all
institutional travel activities.
b. Lodging and subsistence. Costs incurred by employees and
officers for travel, including costs of lodging, other subsistence,
and incidental expenses, shall be considered reasonable and
allowable only to the extent such costs do not exceed charges
normally allowed by the institution in its regular operations as a
result of an institutional policy and the amounts claimed under
sponsored agreements represent reasonable and allocable costs. In
the absence of an acceptable institutional policy regarding travel
costs, the rates and amounts established under subchapter I of
Chapter 57 of Title 5, United States Code, or by the Administrator
of General Services, or the President (or his or her designee)
pursuant to any provisions of such subchapter shall apply to
sponsored agreements (41 U.S.C. 420).
c. Commercial air travel. Airfare costs in excess of the lowest
available commercial discount airfare, Federal Government contract
airfare (where authorized and available), or customary standard
(coach or equivalent) airfare, are unallowable except when such
accommodations would: require circuitous routing; require travel
during unreasonable hours; excessively prolong travel; greatly
increase the duration of the flight; result in increased costs that
would offset transportation savings; or offer accommodations not
reasonably adequate for the medical needs of the traveler. Where an
institution can reasonably demonstrate to the sponsoring agency
either the nonavailability of discount airfare or Federal contract
airfare for individual trips or, on an overall basis, that it is the
institution's practice to make routine use of such airfare, specific
determinations of nonavailability will generally not be questioned
by the Federal Government, unless a pattern of avoidance is
detected. However, in order for airfare costs in excess of the
customary standard commercial airfare to be allowable, e.g., use of
first-class airfare, the institution must justify and document on a
case-by-case basis the applicable condition(s) set forth above.
d. Air travel by other than commercial carrier. ``Cost of travel
by institution-owned, -leased, or -chartered aircraft,'' as used in
this subsection, includes the cost of lease, charter, operation
(including personnel costs), maintenance, depreciation, insurance,
and other related costs. Costs of travel via institution-owned, -
leased, or -chartered aircraft shall not exceed the cost of
allowable commercial air travel, as provided for in subsection c.
49. Termination costs applicable to sponsored agreement. a.
Termination of sponsored agreements generally gives rise to the
incurrence of costs or to the need for special treatment of costs,
which would not have arisen had the agreement not been terminated.
Items peculiar to termination are set forth below. They are to be
used in conjunction with all other provisions of this Circular in
the case of termination.
b. The cost of common items of material reasonably usable on the
institution's other work will not be allowable unless the
institution submits evidence that it could not retain such items at
cost without sustaining a loss. In deciding whether such items are
reasonably usable on other work of the institution, consideration
should be given to the institution's plans and orders for current
and scheduled work. Contemporaneous purchases of common items by the
institution will be regarded as evidence that such items are
reasonably usable on the institution's other work. Any acceptance of
common items as allowable to the terminated portion of the agreement
should be limited to the extent that the quantities of such items on
hand, in transit, and on order are in excess of the reasonable
quantitative requirements of other work.
c. If in a particular case, despite all reasonable efforts by
the institution, certain costs cannot be discontinued immediately
after the effective date of the termination,
[[Page 20912]]
such costs are generally allowable within the limitations set forth
in this Circular, except that any such costs continuing after
termination due to the negligent or willful failure of the
institution to discontinue such costs will be considered
unacceptable.
d. Loss of useful value of special tooling, and special
machinery and equipment is generally allowable, provided (1) such
special tooling, machinery, or equipment is not reasonably capable
of use in the other work of the institution; (2) the interest of the
Federal Government is protected by transfer of title or by other
means deemed appropriate by the contracting officer or equivalent;
and (3) the loss of useful value as to any one terminated agreement
is limited to that portion of the acquisition cost which bears the
same ratio to the total acquisition cost as the terminated portion
of the agreement bears to the entire terminated agreement and other
Federal agreements for which the special tooling, special machinery,
or equipment was acquired.
e. Rental costs under unexpired leases are generally allowable
where clearly shown to have been reasonably necessary for the
performance of the terminated agreement, less the residual value of
such leases, if (1) the amount of such rental claimed does not
exceed the reasonable use value of the property leased for the
period of the agreement and such further period as may be
reasonable; and (2) the institution makes all reasonable efforts to
terminate, assign, settle, or otherwise reduce the cost of such
lease. There also may be included the cost of alterations of such
leased property, provided such alternations were necessary for the
performance of the agreement, and of reasonable restoration required
by the provisions of the lease.
f. Settlement expenses including the following are generally
allowable: (1) accounting, legal, clerical, and similar costs
reasonably necessary for the preparation and presentation to
contracting officers or equivalent of settlement claims and
supporting data with respect to the terminated portion of the
agreement, and the termination and settlement of subagreements; and
(2) reasonable costs for the storage, transportation, protection,
and disposition of property provided by the Federal Government or
acquired or produced by the institution for the agreement, except
when the institution is reimbursed for disposals at a predetermined
amount in accordance with the provisions of Circular A-110.
g. Claims under subagreements, including the allocable portion
of claims which are common to the agreement and to other work of the
institution, are generally allowable.
50. Trustees. Travel and subsistence costs of trustees,
regardless of the purpose of the trip, are unallowable.
K. Certification of Charges
1. To assure that expenditures for sponsored agreements are
proper and in accordance with the agreement documents and approved
project budgets, the annual and/or final fiscal reports or vouchers
requesting payment under the agreements will include a
certification, signed by an authorized official of the university,
which reads essentially as follows: ``I certify that all
expenditures reported (or payment requested) are for appropriate
purposes and in accordance with the provisions of the application
and award documents.''
2. Certification of F&A costs. a. Policy. (1) No proposal to
establish F&A cost rates shall be acceptable unless such costs have
been certified by the educational institution using the Certificate
of F&A Costs set forth in subsection b. The certificate must be
signed on behalf of the institution by an individual at a level no
lower than vice president or chief financial officer of the
institution that submits the proposal.
(2) No F&A cost rate shall be binding upon the Federal
Government if the most recent required proposal from the institution
has not been certified. Where it is necessary to establish F&A cost
rates, and the institution has not submitted a certified proposal
for establishing such rates in accordance with the requirements of
this section, the Federal Government shall unilaterally establish
such rates. Such rates may be based upon audited historical data or
such other data that have been furnished to the cognizant Federal
agency and for which it can be demonstrated that all unallowable
costs have been excluded. When F&A cost rates are unilaterally
established by the Federal Government because of failure of the
institution to submit a certified proposal for establishing such
rates in accordance with this section, the rates established will be
set at a level low enough to ensure that potentially unallowable
costs will not be reimbursed.
b. Certificate. The certificate required by this section shall
be in the following form:
Certificate of F&A Costs
This is to certify that to the best of my knowledge and belief:
(1) I have reviewed the F&A cost proposal submitted herewith;
(2) All costs included in this proposal [identify date] to
establish billing or final F&A costs rate for [identify period
covered by rate] are allowable in accordance with the requirements
of the Federal agreement(s) to which they apply and with the cost
principles applicable to those agreements.
(3) This proposal does not include any costs which are
unallowable under applicable cost principles such as (without
limitation): advertising and public relations costs, contributions
and donations, entertainment costs, fines and penalties, lobbying
costs, and defense of fraud proceedings; and
(4) All costs included in this proposal are properly allocable
to Federal agreements on the basis of a beneficial or causal
relationship between the expenses incurred and the agreements to
which they are allocated in accordance with applicable requirements.
For educational institutions that are required to file a DS-2 in
accordance with Section C.14, the following statement shall be added
to the ``Certificate of F&A Costs'':
(5) The rate proposal is prepared using the same cost accounting
practices that are disclosed in the DS-2, including its amendments
and revisions, filed with and approved by the cognizant agency.
I declare under penalty of perjury that the foregoing is true
and correct.
Institution:-----------------------------------------------------------
Signature:-------------------------------------------------------------
Name of Official:------------------------------------------------------
Title:-----------------------------------------------------------------
Date of Execution:-----------------------------------------------------
Exhibit A--List of Colleges and Universities; Subject to Section J.12.f
of Circular A-21
1. Johns Hopkins University
2. Stanford University
3. Massachusetts Institute of Technology
4. University of Washington
5. University of California-Los Angeles
6. University of Michigan
7. University of California-San Diego
8. University of California-San Francisco
9. University of Wisconsin-Madison
10. Columbia University
11. Yale University
12. Harvard University
13. Cornell University
14. University of Pennsylvania
15. University of California-Berkeley
16. University of Minnesota
17. Pennsylvania State University
18. University of Southern California
19. Duke University
20. Washington University
21. University of Colorado
22. University of Illinois-Urbana
23. University of Rochester
24. University of North Carolina-Chapel Hill
25. University of Pittsburgh
26. University of Chicago
27. University of Texas-Austin
28. University of Arizona
29. New York University
30. University of Iowa
31. Ohio State University
32. University of Alabama-Birmingham
33. Case Western Reserve
34. Baylor College of Medicine
35. California Institute of Technology
36. Yeshiva University
37. University of Massachusetts
38. Vanderbilt University
39. Purdue University
40. University of Utah
41. Georgia Institute of Technology
42. University of Maryland-College Park
43. University of Miami
44. University of California-Davis
45. Boston University
46. University of Florida
47. Carnegie-Mellon University
48. Northwestern University
49. Indiana University
50. Michigan State University
51. University of Virginia
52. University of Texas-SW Medical Center
53. University of California-Irvine
54. Princeton University
55. Tulane University of Louisiana
56. Emory University
57. University of Georgia
58. Texas A&M University-all campuses
59. New Mexico State University
60. North Carolina State University-Raleigh
61. University of Illinois-Chicago
62. Utah State University
63. Virginia Commonwealth University
64. Oregon State University
65. SUNY-Stony Brook
66. University of Cincinnati
[[Page 20913]]
67. CUNY-Mount Sinai School of Medicine
68. University of Connecticut
69. Louisiana State University
70. Tufts University
71. University of California-Santa Barbara
72. University of Hawaii-Manoa
73. Rutgers State University of New Jersey
74. Colorado State University
75. Rockefeller University
76. University of Maryland-Baltimore
77. Virginia Polytechnic Institute & State University
78. SUNY-Buffalo
79. Brown University
80. University of Medicine & Dentistry of New Jersey
81. University of Texas-Health Science Center San Antonio
82. University of Vermont
83. University of Texas-Health Science Center Houston
84. Florida State University
85. University of Texas-MD Anderson Cancer Center
86. University of Kentucky
87. Wake Forest University
88. Wayne State University
89. Iowa State University of Science & Technology
90. University of New Mexico
91. Georgetown University
92. Dartmouth College
93. University of Kansas
94. Oregon Health Sciences University
95. University of Texas-Medical Branch-Galveston
96. University of Missouri-Columbia
97. Temple University
98. George Washington University
99. University of Dayton
Appendix A--Part 99005--Cost Accounting Standards for Educational
Institutions
CAS 9905.501--Consistency in Estimating, Accumulating and Reporting
Costs by Educational Institutions
Purpose
The purpose of this standard is to ensure that each educational
institution's practices used in estimating costs for a proposal are
consistent with cost accounting practices used by the educational
institution in accumulating and reporting costs. Consistency in the
application of cost accounting practices is necessary to enhance the
likelihood that comparable transactions are treated alike. With
respect to individual sponsored agreements, the consistent
application of cost accounting practices will facilitate the
preparation of reliable cost estimates used in pricing a proposal
and their comparison with the costs of performance of the resulting
sponsored agreement. Such comparisons provide one important basis
for financial control over costs during sponsored agreement
performance and aid in establishing accountability for costs in the
manner agreed to by both parties at the time of agreement. The
comparisons also provide an improved basis for evaluating estimating
capabilities.
Definitions
(a) The following are definitions of terms which are prominent
in this standard.
(1) Accumulating costs means the collecting of cost data in an
organized manner, such as through a system of accounts.
(2) Actual cost means an amount determined on the basis of cost
incurred (as distinguished from forecasted cost), including standard
cost properly adjusted for applicable variance.
(3) Estimating costs means the process of forecasting a future
result in terms of cost, based upon information available at the
time.
(4) Indirect cost pool means a grouping of incurred costs
identified with two or more objectives but not identified
specifically with any final cost objective.
(5) Pricing means the process of establishing the amount or
amounts to be paid in return for goods or services.
(6) Proposal means any offer or other submission used as a basis
for pricing a sponsored agreement, sponsored agreement modification
or termination settlement or for securing payments thereunder.
(7) Reporting costs means the providing of cost information to
others.
Fundamental Requirement
An educational institution's practices used in estimating costs
in pricing a proposal shall be consistent with the educational
institution's cost accounting practices used in accumulating and
reporting costs.
An educational institution's cost accounting practices used in
accumulating and reporting actual costs for a sponsored agreement
shall be consistent with the educational institution's practices
used in estimating costs in the related proposal or application.
The grouping of homogeneous costs in estimates prepared for
proposal purposes shall not per se be deemed an inconsistent
application of cost accounting practices of this paragraph when such
costs are accumulated in reported in greater detail on an actual
costs basis during performance of the sponsored agreement.
Techniques for Application
(a) The standard allows grouping of homogeneous costs in order
to cover those cases where it is not practicable to estimate
sponsored agreement costs by individual cost element. However, costs
estimated for proposal purposes shall be presented in such a manner
and in such detail that any significant cost can be compared with
the actual cost accumulated and reported therefor. In any event, the
cost accounting practices used in estimating costs in pricing a
proposal and in accumulating and reporting costs on the resulting
sponsored agreement shall be consistent with respect to:
(1) The classification of elements of cost as direct or
indirect; (2) the indirect cost pools to which each element of cost
is charged or proposed to be charged; and (3) the methods of
allocating indirect costs to the sponsored agreement.
(b) Adherence to the requirement of this standard shall be
determined as of the date of award of the sponsored agreement,
unless the sponsored agreement has submitted cost or pricing data
pursuant to 10 U.S.C. 2306(a) or 41 U.S.C. 254(d) (Pub. L. 87-653),
in which case adherence to the requirement of this standard shall be
determined as of the date of final agreement on price, as shown on
the signed certificate of current cost or pricing data.
Notwithstanding 9905.501-40(b), changes in established cost
accounting practices during sponsored agreement performance may be
made in accordance with Part 9903 (48 CFR 9903).
(b) The standard does not prescribe the amount of detail
required in accumulating and reporting costs. The basic requirement
which must be met, however, is that for any significant amount of
estimated cost, the sponsored agreement must be able to accumulate
and report actual cost at a level which permits sufficient and
meaningful comparison with its estimates. The amount of detail
required may vary considerably depending on how the proposed costs
were estimated, the data presented in justification or lack thereof,
and the significance of each situation. Accordingly, it is neither
appropriate nor practical to prescribe a single set of accounting
practices which would be consistent in all situations with the
practices of estimating costs. Therefore, the amount of accounting
and statistical detail to be required and maintained in accounting
for estimated costs has been and continues to be a matter to be
decided by Government procurement authorities on the basis of the
individual facts and circumstances.
CAS 9905.502--Consistency in Allocating Costs Incurred for the Same
Purpose by Educational Institutions
Purpose
The purpose of this standard is to require that each type of
cost is allocated only once and on only one basis to any sponsored
agreement or other cost objective. The criteria for determining the
allocation of costs to a sponsored agreement or other cost objective
should be the same for all similar objectives. Adherence to these
cost accounting concepts is necessary to guard against the
overcharging of some cost objectives and to prevent double counting.
Double counting occurs most commonly when cost items are allocated
directly to a cost objective without eliminating like cost items
from indirect cost pools which are allocated to that cost objective.
Definitions
(a) The following are definitions of terms which are prominent
in this standard.
(1) Allocate means to assign an item of cost, or a group of
items of cost, to one or more cost objectives. This term includes
both direct assignment of cost and the reassignment of a share from
an indirect cost pool.
(2) Cost objective means a function, organizational subdivision,
sponsored agreement, or other work unit for which cost data are
desired and for which provision is made to accumulate and measure
the cost of processes, products, jobs, capitalized projects, etc.
(3) Direct cost means any cost which is identified specifically
with a particular final cost objective. Direct costs are not limited
to items which are incorporated in the end product as material or
labor. Costs identified specifically with a sponsored agreement are
[[Page 20914]]
direct costs of that sponsored agreement. All costs identified
specifically with other final cost objectives of the educational
institution are direct costs of those cost objectives.
(4) Final cost objective means a cost objective which has
allocated to it both direct and indirect costs, and in the
educational institution's accumulation system, is one of the final
accumulation points.
(5) Indirect cost means any cost not directly identified with a
single final cost objective, but identified with two or more final
cost objectives or with at least one intermediate cost objective.
(6) Indirect cost pool means a grouping of incurred costs
identified with two or more cost objectives but not identified with
any final cost objective.
(7) Intermediate cost objective means a cost objective that is
used to accumulate indirect costs or service center costs that are
subsequently allocated to one or more indirect cost pools and/or
final cost objectives.
Fundamental Requirement
All costs incurred for the same purpose, in like circumstances,
are either direct costs only or indirect costs only with respect to
final cost objectives. No final cost objective shall have allocated
to it as an indirect cost any cost, if other costs incurred for the
same purpose, in like circumstances, have been included as a direct
cost of that or any other final cost objective. Further, no final
cost objective shall have allocated to it as a direct cost any cost,
if other costs incurred for the same purpose, in like circumstances,
have been included in any indirect cost pool to be allocated to that
or any other final cost objective.
Techniques for Application
(a) The Fundamental Requirement is stated in terms of cost
incurred and is equally applicable to estimates of costs to be
incurred as used in sponsored agreement proposals.
(b) The Disclosure Statement to be submitted by the educational
institution will require that the educational institution set forth
its cost accounting practices with regard to the distinction between
direct and indirect costs. In addition, for those types of cost
which are sometimes accounted for as direct and sometimes accounted
for as indirect, the educational institution will set forth in its
Disclosure Statement the specific criteria and circumstances for
making such distinctions. In essence, the Disclosure Statement
submitted by the educational institution, by distinguishing between
direct and indirect costs, and by describing the criteria and
circumstances for allocating those items which are sometimes direct
and sometimes indirect, will be determinative as to whether or not
costs are incurred for the same purpose. Disclosure Statement as
used herein refers to the statement required to be submitted by
educational institutions in Section C.14.
(c) In the event that an educational institution has not
submitted a Disclosure Statement, the determination of whether
specific costs are directly allocable to sponsored agreements shall
be based upon the educational institution's cost accounting
practices used at the time of sponsored agreement proposal.
(d) Whenever costs which serve the same purpose cannot equitably
be indirectly allocated to one or more final cost objectives in
accordance with the educational institution's disclosed accounting
practices, the educational institution may either (1) use a method
for reassigning all such costs which would provide an equitable
distribution to all final cost objectives, or (2) directly assign
all such costs to final cost objectives with which they are
specifically identified. In the event the educational institution
decides to make a change for either purpose, the Disclosure
Statement shall be amended to reflect the revised accounting
practices involved.
(e) Any direct cost of minor dollar amount may be treated as an
indirect cost for reasons of practicality where the accounting
treatment for such cost is consistently applied to all final cost
objectives, provided that such treatment produces results which are
substantially the same as the results which would have been obtained
if such cost had been treated as a direct cost.
Illustrations
(a) Illustrations of costs which are incurred for the same
purpose:
(1) An educational institution normally allocates all travel as
an indirect cost and previously disclosed this accounting practice
to the Government. For purposes of a new proposal, the educational
institution intends to allocate the travel costs of personnel whose
time is accounted for as direct labor directly to the sponsored
agreement. Since travel costs of personnel whose time is accounted
for as direct labor working on other sponsored agreements are costs
which are incurred for the same purpose, these costs may no longer
be included within indirect cost pools for purposes of allocation to
any covered Government sponsored agreement. The educational
institution's Disclosure Statement must be amended for the proposed
changes in accounting practices.
(2) An educational institution normally allocates purchasing
activity costs indirectly and allocates this cost to instruction and
research on the basis of modified total costs. A proposal for a new
sponsored agreement requires a disproportionate amount of
subcontract administration to be performed by the purchasing
activity. The educational institution prefers to continue to
allocate purchasing activity costs indirectly. In order to equitably
allocate the total purchasing activity costs, the educational
institution may use a method for allocating all such costs which
would provide an equitable distribution to all applicable indirect
cost pools. For example, the educational institution may use the
number of transactions processed rather than its former allocation
base of modified total costs. The educational institution's
Disclosure Statement must be amended for the proposed changes in
accounting practices.
(b) Illustrations of costs which are not incurred for the same
purpose:
(1) An educational institution normally allocates special test
equipment costs directly to sponsored agreements. The costs of
general purpose test equipment are normally included in the indirect
cost pool which is allocated to sponsored agreements. Both of these
accounting practices were previously disclosed to the Government.
Since both types of costs involved were not incurred for the same
purpose in accordance with the criteria set forth in the educational
institution's Disclosure Statement, the allocation of general
purpose test equipment costs from the indirect cost pool to the
sponsored agreement, in addition to the directly allocated special
test equipment costs, is not considered a violation of the standard.
(2) An educational institution proposes to perform a sponsored
agreement which will require three firemen on 24-hour duty at a
fixed-post to provide protection against damage to highly
inflammable materials used on the sponsored agreement. The
educational institution presently has a firefighting force of 10
employees for general protection of its facilities. The educational
institution's costs for these latter firemen are treated as indirect
costs and allocated to all sponsored agreements; however, it wants
to allocate the three fixed-post firemen directly to the particular
sponsored agreement requiring them and also allocate a portion of
the cost of the general firefighting force to the same sponsored
agreement. The educational institution may do so but only on
condition that its disclosed practices indicate that the costs of
the separate classes of firemen serve different purposes and that it
is the educational institution's practice to allocate the general
firefighting force indirectly and to allocate fixed-post firemen
directly.
Interpretation
(a) Consistency in Allocating Costs Incurred for the Same
Purpose by Educational Institutions, provides, in this standard,
that ``* * * no final cost objective shall have allocated to it as a
direct cost any cost, if other costs incurred for the same purpose,
in like circumstances, have been included in any indirect cost pool
to be allocated to that or any other final cost objective.''
(b) This interpretation deals with the way this standard applies
to the treatment of costs incurred in preparing, submitting, and
supporting proposals. In essence, it is addressed to whether or not,
under the standard, all such costs are incurred for the same
purpose, in like circumstances.
(c) Under this standard, costs incurred in preparing,
submitting, and supporting proposals pursuant to a specific
requirement of an existing sponsored agreement are considered to
have been incurred in different circumstances from the circumstances
under which costs are incurred in preparing proposals which do not
result from such specific requirement. The circumstances are
different because the costs of preparing proposals specifically
required by the provisions of an existing sponsored agreement relate
only to that sponsored agreement while other proposal costs relate
to all work of the educational institution.
(d) This interpretation does not preclude the allocation, as
indirect costs, of costs incurred in preparing all proposals. The
cost accounting practices used by the educational institution,
however, must be followed consistently and the method used to
reallocate such costs, of course, must provide
[[Page 20915]]
an equitable distribution to all final cost objectives.
CAS 9905.505--Accounting for Unallowable Costs--Educational
Institutions
Purpose
(a) The purpose of this standard is to facilitate the
negotiation, audit, administration and settlement of sponsored
agreements by establishing guidelines covering (1) identification of
costs specifically described as unallowable, at the time such costs
first become defined or authoritatively designated as unallowable,
and (2) the cost accounting treatment to be accorded such identified
unallowable costs in order to promote the consistent application of
sound cost accounting principles covering all incurred costs. The
standard is predicated on the proposition that costs incurred in
carrying on the activities of an educational institution--regardless
of the allowability of such costs under Government sponsored
agreements--are allocable to the cost objectives with which they are
identified on the basis of their beneficial or causal relationships.
(b) This standard does not govern the allowability of costs.
This is a function of the appropriate procurement or reviewing
authority.
Definitions
(a) The following are definitions of terms which are prominent
in this standard.
(1) Directly associated cost means any cost which is generated
solely as a result of the incurrence of another cost, and which
would not have been incurred had the other cost not been incurred.
(2) Expressly unallowable cost means a particular item or type
of cost which, under the express provisions of an applicable law,
regulation, or sponsored agreement, is specifically named and stated
to be unallowable.
(3) Indirect cost means any cost not directly identified with a
single final cost objective, but identified with two or more final
cost objectives or with at least one intermediate cost objective.
(4) Unallowable cost means any cost which, under the provisions
of any pertinent law, regulation, or sponsored agreement, cannot be
included in prices, cost reimbursements, or settlements under a
Government sponsored agreement to which it is allocable.
Fundamental Requirement
(a) Costs expressly unallowable or mutually agreed to be
unallowable, including costs mutually agreed to be unallowable
directly associated costs, shall be identified and excluded from any
billing, claim, application, or proposal applicable to a Government
Sponsored Agreement.
(b) Costs which specifically become designated as unallowable as
a result of a written decision furnished by a Federal official
pursuant to sponsored agreement disputes procedures shall be
identified if included in or used in the computation of any billing,
claim, or proposal applicable to a sponsored agreement. This
identification requirement applies also to any costs incurred for
the same purpose under like circumstances as the costs specifically
identified as unallowable under either this paragraph or paragraph
(a) of this subsection.
(c) Costs which, in a Federal official's written decision
furnished pursuant to disputes procedures, are designated as
unallowable directly associated costs of unallowable costs covered
by either paragraph (a) or (b) of this subsection shall be accorded
the identification required by paragraph b. of this subsection.
(d) The costs of any work project not contractually authorized,
whether or not related to performance of a proposed or existing
contract, shall be accounted for, to the extent appropriate, in a
manner which permits ready separation from the costs of authorized
work projects.
(e) All unallowable costs covered by paragraphs (a) through (d)
of this subsection shall be subject to the same cost accounting
principles governing cost allocability as allowable costs. In
circumstances where these unallowable costs normally would be part
of a regular indirect-cost allocation base or bases, they shall
remain in such base or bases. Where a directly associated cost is
part of a category of costs normally included in an indirect-cost
pool that will be allocated over a base containing the unallowable
cost with which it is associated, such a directly associated cost
shall be retained in the indirect-cost pool and be allocated through
the regular allocation process.
(f) Where the total of the allocable and otherwise allowable
costs exceeds a limitation-of-cost or ceiling-price provision in a
sponsored agreement, full direct and indirect cost allocation shall
be made to the cost objective, in accordance with established cost
accounting practices and Standards which regularly govern a given
entity's allocations to Government sponsored agreement cost
objectives. In any determination of unallowable cost overrun, the
amount thereof shall be identified in terms of the excess of
allowable costs over the ceiling amount, rather than through
specific identification of particular cost items or cost elements.
Techniques for Application
(a) The detail and depth of records required as backup support
for proposals, billings, or claims shall be that which is adequate
to establish and maintain visibility of identified unallowable costs
(including directly associated costs), their accounting status in
terms of their allocability to sponsored agreement cost objectives,
and the cost accounting treatment which has been accorded such
costs. Adherence to this cost accounting principle does not require
that allocation of unallowable costs to final cost objectives be
made in the detailed cost accounting records. It does require that
unallowable costs be given appropriate consideration in any cost
accounting determinations governing the content of allocation bases
used for distributing indirect costs to cost objectives. Unallowable
costs involved in the determination of rates used for standard
costs, or for indirect-cost bidding or billing, need be identified
only at the time rates are proposed, established, revised or
adjusted.
(b) The visibility requirement of paragraph (a) of this
subsection, may be satisfied by any form of cost identification
which is adequate for purposes of sponsored agreement cost
determination and verification. The standard does not require such
cost identification for purposes which are not relevant to the
determination of Government sponsored agreement cost. Thus, to
provide visibility for incurred costs, acceptable alternative
practices would include (1) the segregation of unallowable costs in
separate accounts maintained for this purpose in the regular books
of account, (2) the development and maintenance of separate
accounting records or workpapers, or (3) the use of any less formal
cost accounting techniques which establishes and maintains adequate
cost identification to permit audit verification of the accounting
recognition given unallowable costs. Educational institutions may
satisfy the visibility requirements for estimated costs either (1)
by designation and description (in backup data, workpapers, etc.) of
the amounts and types of any unallowable costs which have
specifically been identified and recognized in making the estimates,
or (2) by description of any other estimating technique employed to
provide appropriate recognition of any unallowable costs pertinent
to the estimates.
(c) Specific identification of unallowable costs is not required
in circumstances where, based upon considerations of materiality,
the Government and the educational institution reach agreement on an
alternate method that satisfies the purpose of the standard.
Illustrations
(a) An auditor recommends disallowance of certain direct labor
and direct material costs, for which a billing has been submitted
under a sponsored agreement, on the basis that these particular
costs were not required for performance and were not authorized by
the sponsored agreement. The Federal officer issues a written
decision which supports the auditor's position that the questioned
costs are unallowable. Following receipt of the Federal officer's
decision, the educational institution must clearly identify the
disallowed direct labor and direct material costs in the educational
institution's accounting records and reports covering any subsequent
submission which includes such costs. Also, if the educational
institution's base for allocation of any indirect cost pool relevant
to the subject sponsored agreement consists of direct labor, direct
material, total prime cost, total cost input, etc., the educational
institution must include the disallowed direct labor and material
costs in its allocation base for such pool. Had the Federal
officer's decision been against the auditor, the educational
institution would not, of course, have been required to account
separately for the costs questioned by the auditor.
(b) An educational institution incurs, and separately
identifies, as a part of a service center or expense pool, certain
costs which are expressly unallowable under the existing and
currently effective regulations. If the costs of the service center
or indirect expense pool are regularly a part of the educational
institution's base for allocation of general administration and
general expenses
[[Page 20916]]
(GA&GE) or other indirect expenses, the educational institution must
allocate the GA&GE or other indirect expenses to sponsored
agreements and other final cost objectives by means of a base which
includes the identified unallowable indirect costs.
(c) An auditor recommends disallowance of certain indirect
costs. The educational institution claims that the costs in question
are allowable under the provisions of Office Of Management and
Budget Circular A-21, Cost Principles For Educational Institutions;
the auditor disagrees. The issue is referred to the Federal officer
for resolution pursuant to the sponsored agreement disputes clause.
The Federal officer issues a written decision supporting the
auditor's position that the total costs questioned are unallowable
under the Circular. Following receipt of the Federal officer's
decision, the educational institution must identify the disallowed
costs and specific other costs incurred for the same purpose in like
circumstances in any subsequent estimating, cost accumulation or
reporting for Government sponsored agreements, in which such costs
are included. If the Federal officer's decision had supported the
educational institution's contention, the costs questioned by the
auditor would have been allowable and the educational institution
would not have been required to provide special identification.
(d) An educational institution incurred certain unallowable
costs that were charged indirectly as general administration and
general expenses (GA&GE). In the educational institution's proposals
for final indirect cost rates to be applied in determining allowable
sponsored agreement costs, the educational institution identified
and excluded the expressly unallowable costs. In addition, during
the course of negotiation of indirect cost rates to be used for
bidding and billing purposes, the educational institution agreed to
classify as unallowable cost, various directly associated costs of
the identifiable unallowable costs. On the basis of negotiations and
agreements between the educational institution and the Federal
officer's authorized representatives, indirect cost rates were
established, based on the net balance of allowable GA&GE.
Application of the rates negotiated to proposals, and to billings,
for covered sponsored agreements constitutes compliance with the
standard.
(e) An employee, whose salary, travel, and subsistence expenses
are charged regularly to the general administration and general
expenses (GA&GE) pool, takes several business associates on what is
clearly a business entertainment trip. The entertainment costs of
such trips is expressly unallowable because it constitutes
entertainment expense prohibited by OMB Circular A-21, and is
separately identified by the educational institution. The
educational institution does not regularly include its GA&GE in any
indirect-expense allocation base. In these circumstances, the
employee's travel and subsistence expenses would be directly
associated costs for identification with the unallowable
entertainment expense. However, unless this type of activity
constituted a significant part of the employee's regular duties and
responsibilities on which his salary was based, no part of the
employee's salary would be required to be identified as a directly
associated cost of the unallowable entertainment expense.
CAS 9905.506--Cost Accounting Period --Educational Institutions
Purpose
The purpose of this standard is to provide criteria for the
selection of the time periods to be used as cost accounting periods
for sponsored agreement cost estimating, accumulating, and
reporting. This standard will reduce the effects of variations in
the flow of costs within each cost accounting period. It will also
enhance objectivity, consistency, and verifiability, and promote
uniformity and comparability in sponsored agreement cost
measurements.
Definitions
(a) The following are definitions of terms which are prominent
in this standard.
(1) Allocate means to assign an item of cost, or a group of
items of cost, to one or more cost objectives. This term includes
both direct assignment of cost and the reassignment of a share from
an indirect cost pool.
(2) Cost Objective means a function, organizational subdivision,
sponsored agreement, or other work unit for which cost data are
desired and for which provision is made to accumulate and measure
the cost of processes, products, jobs, capitalized projects, etc.
(3) Fiscal year means the accounting period for which annual
financial statements are regularly prepared, generally a period of
12 months, 52 weeks, or 53 weeks.
(4) Indirect cost pool means a grouping of incurred costs
identified with two or more cost objectives but not identified
specifically with any final cost objective.
Fundamental Requirement
Educational institutions shall use their fiscal year as their
cost accounting period, except that:
Costs of an indirect function which exists for only a part of a
cost accounting period may be allocated to cost objectives of that
same part of the period.
An annual period other than the fiscal year may be used as the
cost accounting period if its use is an established practice of the
educational institution.
A transitional cost accounting period other than a year shall be
used whenever a change of fiscal year occurs.
An educational institution shall follow consistent practices in
the selection of the cost accounting period or periods in which any
types of expense and any types of adjustment to expense (including
prior-period adjustments) are accumulated and allocated.
The same cost accounting period shall be used for accumulating
costs in an indirect cost pool as for establishing its allocation
base, except that the contracting parties may agree to use a
different period for establishing an allocation base.
Techniques for Application
(a) The cost of an indirect function which exists for only a
part of a cost accounting period may be allocated on the basis of
data for that part of the cost accounting period if the cost is (1)
material in amount, (2) accumulated in a separate indirect cost pool
or expense pool, and (3) allocated on the basis of an appropriate
direct measure of the activity or output of the function during that
part of the period.
(b) The practices required by this standard shall include
appropriate practices for deferrals, accruals, and other adjustments
to be used in identifying the cost accounting periods among which
any types of expense and any types of adjustment to expense are
distributed. If an expense, such as insurance or employee leave, is
identified with a fixed, recurring, annual period which is different
from the educational institution's cost accounting period, the
standard permits continued use of that different period. Such
expenses shall be distributed to cost accounting periods in
accordance with the educational institution's established practices
for accruals, deferrals, and other adjustments.
(c) Indirect cost allocation rates, based on estimates, which
are used for the purpose of expediting the closing of sponsored
agreements which are terminated or completed prior to the end of a
cost accounting period need not be those finally determined or
negotiated for that cost accounting period. They shall, however, be
developed to represent a full cost accounting period, except as
provided in paragraph (a) of this subsection.
(d) An educational institution may, upon mutual agreement with
the Government, use as its cost accounting period a fixed annual
period other than its fiscal year, if the use of such a period is an
established practice of the educational institution and is
consistently used for managing and controlling revenues and
disbursements, and appropriate accruals, deferrals or other
adjustments are made with respect to such annual periods.
(e) The parties may agree to use an annual period which does not
coincide precisely with the cost accounting period for developing
the data used in establishing an allocation base: Provided,
(1) The practice is necessary to obtain significant
administrative convenience, (2) the practice is consistently
followed by the educational institution, (3) the annual period used
is representative of the activity of the cost accounting period for
which the indirect costs to be allocated are accumulated, and (4)
the practice can reasonably be estimated to provide a distribution
to cost objectives of the cost accounting period not materially
different from that which otherwise would be obtained.
(f) When a transitional cost accounting period is required,
educational institution may select any one of the following: (1) the
period, less than a year in length, extending from the end of its
previous cost accounting period to the beginning of its next regular
cost accounting period, (2) a period in excess of a year, but not
longer than 15 months, obtained by combining the period described in
subparagraph (f)(1) of this subsection with the previous cost
accounting period, or (3) a period in excess of a year, but not
longer than 15 months, obtained by combining the period
[[Page 20917]]
described in subparagraph (f)(1) of this subsection with the next
regular cost accounting period. A change in the educational
institution's cost accounting period is a change in accounting
practices for which an adjustment in the sponsored agreement price
may be required.
Illustrations
(a) An educational institution allocates indirect expenses for
Organized Research on the basis of a modified total direct cost
base. In a proposal for a sponsored agreement, it estimates the
allocable expenses based solely on the estimated amount of indirect
costs allocated to Organized Research and the amount of the modified
total direct cost base estimated to be incurred during the 8 months
in which performance is scheduled to be commenced and completed.
Such a proposal would be in violation of the requirements of this
standard that the calculation of the amounts of both the indirect
cost pools and the allocation bases be based on the educational
institution's cost accounting period.
(b) An educational institution whose cost accounting period is
the calendar year, installs a computer service center to begin
operations on May 1. The operating expense related to the new
service center is expected to be material in amount, will be
accumulated in an intermediate cost objective, and will be allocated
to the benefiting cost objectives on the basis of measured usage.
The total operating expenses of the computer service center for the
8-month part of the cost accounting period may be allocated to the
benefiting cost objectives of that same 8-month period.
(c) An educational institution changes its fiscal year from a
calendar year to the 12-month period ending May 31. For financial
reporting purposes, it has a 5-month transitional ``fiscal year.''
The same 5-month period must be used as the transitional cost
accounting period; it may not be combined, because the transitional
period would be longer than 15 months. The new fiscal year must be
adopted thereafter as its regular cost accounting period. The change
in its cost accounting period is a change in accounting practices;
adjustments of the sponsored agreement prices may thereafter be
required.
(d) Financial reports are prepared on a calendar year basis on a
university-wide basis. However, the contracting segment does all
internal financial planning, budgeting, and internal reporting on
the basis of a twelve month period ended June 30. The contracting
parties agree to use the period ended June 30 and they agree to
overhead rates on the June 30 basis. They also agree on a technique
for prorating fiscal year assignment of the university's central
system office expenses between such June 30 periods. This practice
is permitted by the standard.
(e) Most financial accounts and sponsored agreement cost records
are maintained on the basis of a fiscal year which ends November 30
each year. However, employee vacation allowances are regularly
managed on the basis of a ``vacation year'' which ends September 30
each year. Vacation expenses are estimated uniformly during each
``vacation year.'' Adjustments are made each October to adjust the
accrued liability to actual, and the estimating rates are modified
to the extent deemed appropriate. This use of a separate annual
period for determining the amounts of vacation expense is permitted.
BILLING CODE 3110-01-P
[[Page 20918]]
Appendix B--Disclosure Statement (DS-2) for Educational Institutions
[GRAPHIC] [TIFF OMITTED] TN08MY96.000
[[Page 20919]]
[GRAPHIC] [TIFF OMITTED] TN08MY96.001
[[Page 20920]]
[GRAPHIC] [TIFF OMITTED] TN08MY96.002
[[Page 20921]]
[GRAPHIC] [TIFF OMITTED] TN08MY96.003
[[Page 20922]]
[GRAPHIC] [TIFF OMITTED] TN08MY96.004
[[Page 20923]]
[GRAPHIC] [TIFF OMITTED] TN08MY96.005
[[Page 20924]]
[GRAPHIC] [TIFF OMITTED] TN08MY96.006
[[Page 20925]]
[GRAPHIC] [TIFF OMITTED] TN08MY96.007
[[Page 20926]]
[GRAPHIC] [TIFF OMITTED] TN08MY96.008
[[Page 20927]]
[GRAPHIC] [TIFF OMITTED] TN08MY96.009
[[Page 20928]]
[GRAPHIC] [TIFF OMITTED] TN08MY96.010
[[Page 20929]]
[GRAPHIC] [TIFF OMITTED] TN08MY96.011
[[Page 20930]]
[GRAPHIC] [TIFF OMITTED] TN08MY96.012
[[Page 20931]]
[GRAPHIC] [TIFF OMITTED] TN08MY96.013
[[Page 20932]]
[GRAPHIC] [TIFF OMITTED] TN08MY96.014
[[Page 20933]]
[GRAPHIC] [TIFF OMITTED] TN08MY96.015
[[Page 20934]]
[GRAPHIC] [TIFF OMITTED] TN08MY96.016
[[Page 20935]]
[GRAPHIC] [TIFF OMITTED] TN08MY96.017
[[Page 20936]]
[GRAPHIC] [TIFF OMITTED] TN08MY96.018
[[Page 20937]]
[GRAPHIC] [TIFF OMITTED] TN08MY96.019
[[Page 20938]]
[GRAPHIC] [TIFF OMITTED] TN08MY96.020
[[Page 20939]]
[GRAPHIC] [TIFF OMITTED] TN08MY96.021
[[Page 20940]]
[GRAPHIC] [TIFF OMITTED] TN08MY96.022
[[Page 20941]]
[GRAPHIC] [TIFF OMITTED] TN08MY96.023
[FR Doc. 96-11111 Filed 5-7-96; 8:45 am]
BILLING CODE 3110-01-C
