45 CFR Parts 160 & 164 (CFR Annual Edition) c depart- ments are allowable provided they are treat- ed 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 sub- sections (1) and (2) are allowable, as well as an appropriate share of general administra- tion and general expenses, operation and maintenance expenses, and depreciation. (4) Federal agencies may authorize reim- bursement of additional costs for department heads and faculty only in exceptional cases where an institution can demonstrate undue hardship or detriment to project perform- ance. b. The following guidelines apply to the de- termination of departmental administrative costs as direct or indirect (F&A) costs. (1) In developing the departmental admin- istration cost pool, special care should be ex- ercised to ensure that costs incurred for the same purpose in like circumstances are treated consistently as either direct or indi- rect (F&A) costs. For example, salaries of technical staff, laboratory supplies (e.g. that costs incurred for the same purpose in like circumstances are treated consistently as either direct or indi- rect (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 must be treated as direct costs wherever identifiable to a particular cost objective. Direct charg- ing of these costs may be accomplished through specific identification of individual costs to benefitting cost objectives, or through recharge centers or specialized serv- ice facilities, as appropriate under the cir- cumstances. See §§ 75.413(c) and 75.468. (2) Items such as office supplies, postage, local telephone costs, and memberships must normally be treated as indirect (F&A) costs. c. In the absence of the alternatives pro- vided for in Section A.2.d, the expenses in- cluded in this category must be allocated as follows: (1) The administrative expenses of the dean’s office of each college and school must be allocated to the academic departments within that college or school on the modified total cost basis. (2) The administrative expenses of each academic depa ’s office of each college and school must 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) must be allocated to the appropriate func- tions of the department on the modified total cost basis. 7. Sponsored Projects Administration a. The expenses under this heading are lim- ited to those incurred by a separate organi- zation(s) established primarily to administer sponsored projects, including such functions as grant and contract administration (Fed- eral and non-Federal), special security, pur- chasing, personnel, administration, and edit- ing and publishing of research and other re- ports. They include the salaries and expenses of the head of such organization, assistants, and immediate staff, together with the sala- ries and expenses of personnel engaged in supporting activities maintained by the or- ganization, such as stock rooms, print shops, and the like. This category also includes an allocable share of fringe benefit costs, gen- eral administration and general expenses, 363 Pt. 75, App. III ganization, such as stock rooms, print shops, and the like. This category also includes an allocable share of fringe benefit costs, gen- eral administration and general expenses, 363 Pt. 75, App. III 45 CFR Subtitle A (10–1–24 Edition) operation and maintenance expenses, and de- preciation. Appropriate adjustments will be made for services provided to other functions or organizations. b. In the absence of the alternatives pro- vided for in Section A.2.d, the expenses in- cluded in this category must 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 must be made to eliminate any duplicate charges to Federal awards when this category includes similar or identical activities as those in- cluded in the general administration and general expense category or other indirect (F&A) cost items, such as accounting, pro- curement, or personnel administration. 8. Library Expenses a. The expenses under this heading are those that have been incurred for the oper- ation of the library, including the cost of books and library materials purchased for the l tion. 8. Library Expenses a. The expenses under this heading are those that have been incurred for the oper- ation 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 § 75.406. 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 mainte- nance expense, and depreciation. Costs in- curred in the purchases of rare books (mu- seum-type books) with no value to Federal awards should not be allocated to them. b. In the absence of the alternatives pro- vided for in Section A.2.d, the expenses in- cluded in this category must be allocated first on the basis of primary categories of users, including students, professional em- ployees, and other users. (1) The student category must 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 must consist of all faculty members and other professional employees of the institution, regardless of whether they earn credits toward a degree or certificate. (2) The professional employee category must consist of all faculty members and other professional employees of the institu- tion, on a full-time equivalent basis. This category may also include post-doctorate fellows and graduate students. (3) The other users category must consist of a reasonable factor as determined by insti- tutional records to account for all other users of library facilities. c. Amount allocated in paragraph b of this section must be assigned further as follows: (1) The amount in the student category must be assigned to the instruction function of the institution. (2) The amount in the professional em- ployee category must be assigned to the major functions of the institution in propor- tion 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 must 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 admin- istration of student affa stitutional activities function of the institution. 9. Student Administration and Services a. The expenses under this heading are those that have been incurred for the admin- istration of student affairs and for services to students, including expenses of such ac- tivities as deans of students, admissions, reg- istrar, counseling and placement services, student advisers, student health and infir- mary services, catalogs, and commence- ments and convocations. The salaries of members of the academic staff whose respon- sibilities to the institution require adminis- trative work that benefits sponsored projects may also be included to the extent that the portion charged to student administration is determined in accordance with Subpart E of this part. This expense category also in- cludes the fringe benefit costs applicable to the salaries and wages included therein, an appropriate share of general administration and general expenses, operation and mainte- nance, interest expense, and depreciation. b. In the absence of the alternatives pro- vided for in Section A.2.d, the expenses in this category must be allocated to the in- struction function, and subsequently to Fed- eral awards in reciation. b. In the absence of the alternatives pro- vided for in Section A.2.d, the expenses in this category must be allocated to the in- struction function, and subsequently to Fed- eral awards in that function. 10. Offset for Indirect (F&A) Expenses Other- wise Provided for by the Federal Govern- ment 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 must be treated as a credit to the affected individual indirect (F&A) cost category before that category is allocated to benefitting functions. C. Determination and Application of Indirect (F&A) Cost Rate or Rates 1. Indirect (F&A) Cost Pools a. (1) Subject to subsection b, the separate categories of indirect (F&A) costs allocated to each major function of the institution as prescribed in Section B of this paragraph C.1- , must be aggregated and treated as a com- mon pool for that function. The amount in each pool must be divided by the distribution b f the institution as prescribed in Section B of this paragraph C.1- , must be aggregated and treated as a com- mon pool for that function. The amount in each pool must be divided by the distribution base described in subsection 2 to arrive at a single indirect (F&A) cost rate for each func- tion. (2) The rate for each function is used to distribute indirect (F&A) costs to individual Federal awards of that function. Since a common pool is established for each major 364 Dept. of Health and Human Services Pt. 75, App. III function of the institution, a separate indi- rect (F&A) cost rate would be established for each of the major functions described in Sec- tion A.1 under which Federal awards are car- ried out. (3) Each institution’s indirect (F&A) cost rate process must be appropriately designed to ensure that Federal sponsors do not in any way subsidize the indirect (F&A) costs of other sponsors, specifically activities spon- sored by industry and foreign governments. Accordingly, each allocation method used to identify and allocate the indirect (F&A) cost pools, as described in Sections A.2, and B.2 through B.9, must contain the full amount of the institution’s modified total costs allocation method used to identify and allocate the indirect (F&A) cost pools, as described in Sections A.2, and B.2 through B.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 (orga- nized research, instruction, etc., as described in Section A.1) must contain all the pro- grams or activities which utilize the indirect (F&A) costs allocated to that major func- tion. At the time an indirect (F&A) cost pro- posal is submitted to a cognizant agency for indirect costs, each institution must de- scribe the process it uses to ensure that Fed- eral 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 indirect (F&A) costs applicable to a par- ticular segment of researc example, might not take into account those different environmental factors and other conditions which may affect substantially the indirect (F&A) costs applicable to a par- ticular segment of research at the institu- tion. A particular segment of research may be that performed under a single sponsored agreement or it may consist of research under a group of Federal awards performed in a common environment. The environ- mental factors are not limited to the phys- ical 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. If a particular segment of a sponsored agreement is performed with- in an environment which appears to generate a significantly different level of indirect (F&A) costs, provisions should be made for a separate indirect (F&A) cost pool applicable to such work. The separate indirect (F&A) cost pool should be developed during the reg- ular course of the rate determination process and the separate indirect (F&A) cost rate re- sulting therefrom sh to such work. The separate indirect (F&A) cost pool should be developed during the reg- ular course of the rate determination process and the separate indirect (F&A) cost rate re- sulting therefrom should be utilized; pro- vided it is determined that (1) such indirect (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 Federal awards at the insti- tution. 2. The Distribution Basis Indirect (F&A) costs must be distributed to applicable Federal awards and other benefit- ting activities within each major function (see section A.1, Major functions of an insti- tution) on the basis of modified total direct costs (MTDC), consisting of all salaries and wages, fringe benefits, materials and sup- plies, services, travel, and up to the first $25,000 of each subaward (regardless of the period covered by the subaward). MTDC is defined in § 75.2. For this purpose, an indirect (F&A) cost rate should be determined for each of the separate indirect (F&A) cost pools developed pursuant to subsection 1. The rate in each case should be stated as the percentage which , an indirect (F&A) cost rate should be determined for each of the separate indirect (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 par- ticular indirect (F&A) cost pool is of the modified total direct costs identified with such pool. 3. Negotiated Lump Sum for Indirect (F&A) Costs A negotiated fixed amount in lieu of indi- rect (F&A) costs may be appropriate for self- contained, off-campus, or primarily subcon- tracted activities where the benefits derived from an institution’s indirect (F&A) services cannot be readily determined. Such nego- tiated indirect (F&A) costs will be treated as an offset before allocation to instruction, or- ganized research, other sponsored activities, and other institutional activities. The base on which such remaining expenses are allo- cated should be appropriately adjusted. 4. Predetermined Rates for Indirect (F&A) Costs Public Law 87–638 (76 Stat. 437) as amended (41 U.S.C. 4708) authorizes the use of pre- determined rates in determining the ‘‘indi- rect costs’’ (indirect (F&A) costs) applicable under research agreements with educational institutions. The stated U.S.C. 4708) authorizes the use of pre- determined rates in determining the ‘‘indi- rect costs’’ (indirect (F&A) costs) 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 (in- cluding grants) with educational institu- tions, 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 advan- tages offered by this procedure, negotiation of predetermined rates for indirect (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 judg- ment as to the probable level of indirect (F&A) costs during the ensuing accounting periods. 365 Pt. 75, App. III 45 CFR Subtitle A (10–1–24 Edition) 5. Negotiated Fixed Rates and Carry- Forward Provisions 7. Fixed Rates for the Life of the Sponsored Agreement When a fixed rate is negotiated in advance for a fiscal year (or other time period), the over- or under-r xed Rates and Carry- Forward Provisions 7. Fixed Rates for the Life of the Sponsored Agreement 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 indirect (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 ad- justments are to be made, each fixed rate ne- gotiated in advance for a given period will be computed by applying the expected indirect (F&A) costs allocable to Federal awards for the forecast period plus or minus the carry- forward adjustment (over- or under-recovery) from the prior period, to the forecast dis- tribution base. Unrecovered amounts under lump-sum agreements or cost-sharing provi- sions of prior years must not be carried for- ward for consideration in the new rate nego- tiation. There must, however, be an advance understanding in each case between the in- stitution and the cognizant agency for indi- rect costs as to whether these differences will be considered in the rate negotiation rat however, be an advance understanding in each case between the in- stitution and the cognizant agency for indi- rect costs as to whether these differences will be considered in the rate negotiation rather than making the determination after the differences are known. Further, institu- tions electing to use this carry-forward pro- vision may not subsequently change without prior approval of the cognizant agency for indirect costs. In the event that an institu- tion returns to a post-determined rate, any over- or under-recovery during the period in which negotiated fixed rates and carry-for- ward provisions were followed will be in- cluded in the subsequent post-determined rates. Where multiple rates are used, the same procedure will be applicable for deter- mining each rate. 6. Provisional and Final Rates for Indirect (F&A) Costs Where the cognizant agency for indirect costs 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 must be established. To prevent substantial overpayment or underpayment, the provi- sional rate may d rate with a carry-forward, or if the parties cannot agree on an equitable rate, a provisional rate must be established. To prevent substantial overpayment or underpayment, the provi- sional rate may be adjusted by the cognizant agency for indirect costs during the institu- tion’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 re- placed 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. a. Except as provided in paragraph (c)(1) of § 75.414 Federal agencies must use the nego- tiated rates for indirect (F&A) costs in effect at the time of the initial award throughout the life of the Federal award. Award levels for Federal awards may not be adjusted in future years as a result of changes in nego- tiated rates. ‘‘Negotiated rates’’ per the rate agreement include final, fixed, and predeter- mined rates and exclude provisional rates. ‘‘Life’’ for the purpose of this subsection means each n nego- tiated rates. ‘‘Negotiated rates’’ per the rate agreement include final, fixed, and predeter- mined rates and exclude provisional rates. ‘‘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 awarding agency at the time of the Federal award. If negotiated rate agreements do not extend through the life of the Federal award at the time of the initial award, then the nego- tiated rate for the last year of the Federal award must be extended through the end of the life of the Federal award. b. Except as provided in § 75.414, when an educational institution does not have a nego- tiated rate with the Federal Government at the time of an award (because the edu- cational institution is a new recipient or the parties cannot reach agreement on a rate), the provisional rate used at the time of the award must be adjusted once a rate is nego- tiated and approved by the cognizant agency for indirect costs. 8. Limitation on Reimbursement of Administrative Costs a. Notwithstanding the provisions of sub- section C.1.a, the administrative costs charged to Federal awards awarded or amended (inc direct costs. 8. Limitation on Reimbursement of Administrative Costs a. Notwithstanding the provisions of sub- section C.1.a, the administrative costs charged to Federal awards awarded or amended (including continuation and re- newal 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, must be limited to 26% of modified total direct costs (as defined in subsection 2) for the total of General Administration and General Expenses, Departmental Adminis- tration, Sponsored Projects Administration, and Student Administration and Services (including their allocable share of deprecia- tion, interest costs, operation and mainte- nance expenses, and fringe benefits costs, as provided by Section B, Identification and as- signment of indirect (F&A) costs, and all other types of expenditures not listed spe- cifically under one of the subcategories of fa- cilities in Section B. b. Institutions should not change their ac- counting or cost allocation methods if the ef- fect is to change the charging of a particular type of cost from F&A to direct, or to reclas- sify costs, or increase allocations from the admi their ac- counting or cost allocation methods if the ef- fect is to change the charging of a particular type of cost from F&A to direct, or to reclas- sify costs, or increase allocations from the administrative pools identified in paragraph B.1 of this Appendix to the other F&A cost pools or fringe benefits. Cognizant agencies for indirect cost are authorized to allow 366 Dept. of Health and Human Services Pt. 75, App. III 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 sub- section C.1.a, an institution may elect to claim a fixed allowance for the ‘‘Adminis- tration’’ portion of indirect (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 in- cluded under ‘‘Administration’’ as defined in Section B.1, whichever is less. Under this al- ternative, no cost proposal need be prepared for the ‘‘Administration’’ portion of the indi- rect (F&A) cost rate nor is further identi n’’ as defined in Section B.1, whichever is less. Under this al- ternative, no cost proposal need be prepared for the ‘‘Administration’’ portion of the indi- rect (F&A) cost rate nor is further identifica- tion or documentation of these costs re- quired (see subsection c). Where a negotiated indirect (F&A) cost agreement includes this alternative, an institution must make no further charges for the expenditure cat- egories described in Section B.5, Section B.6, Section B.7, and Section B.9. b. In negotiations of rates for subsequent periods, an institution that has elected the option of subsection a may continue to exer- cise it at the same rate without further iden- tification or documentation of costs. c. If an institution elects to accept a threshold rate as defined in subsection a of this section, it is not required to perform a detailed analysis of its administrative costs. However, in order to compute the facilities components of its indirect (F&A) cost rate, the institution must reconcile its indirect (F&A) cost proposal to its financial state- ments and make appropriate adjustments and reclassifications to identify the costs of each major function as defined in Section A.1, reconcile its indirect (F&A) cost proposal to its financial state- ments and make appropriate adjustments and reclassifications to identify the costs of each major function as defined in Section A.1, as well as to identify and allocate the fa- cilities components. Administrative costs that are not identified as such by the insti- tution’s accounting system (such as those in- curred in academic departments) will be classified as instructional costs for purposes of reconciling indirect (F&A) cost proposals to financial statements and allocating facili- ties costs. 10. Individual Rate Components In order to provide mutually agreed-upon information for management purposes, each indirect (F&A) cost rate negotiation or de- termination must include development of a rate for each indirect (F&A) cost pool as well as the overall indirect (F&A) cost rate. 11. Negotiation and Approval of Indirect (F&A) Rate a. Cognizant agency for indirect costs is defined in § 75.2. (1) Cost negotiation cognizance is assigned to the Department of Health and Human Services (HHS) or the Department of De- fense’s Office of Naval Research (DOD), nor- mally depending on which of the two agen- cies (HHS or DOD) pr ce is assigned to the Department of Health and Human Services (HHS) or the Department of De- fense’s Office of Naval Research (DOD), nor- mally depending on which of the two agen- cies (HHS or DOD) provides more funds to the educational institution for the most re- cent three years. Information on funding must be derived from relevant data gathered by the National Science Foundation. In cases where neither HHS nor DOD provides Fed- eral funding to an educational institution, the cognizant agency for indirect costs as- signment must default to HHS. Notwith- standing the method for cognizance deter- mination described in this section, other ar- rangements for cognizance of a particular educational institution may also be based in part on the types of research performed at the educational institution and must be de- cided based on mutual agreement between HHS and DOD. Where a non-Federal entity only receives funds as a subrecipient, see the requirements of § 75.352. (2) After cognizance is established, it must continue for a five-year period. b. Acceptance of rates. See § 75.414. c. Correcting deficiencies. The cognizant agency for indirect costs must negotiate changes needed to corre s established, it must continue for a five-year period. b. Acceptance of rates. See § 75.414. c. Correcting deficiencies. The cognizant agency for indirect costs must negotiate changes needed to correct systems defi- ciencies relating to accountability for Fed- eral awards. Cognizant agencies for indirect costs must address the concerns of other af- fected agencies, as appropriate, and must ne- gotiate special rates for Federal agencies that are required to limit recovery of indi- rect costs by statute. d. Resolving questioned costs. The cog- nizant agency for indirect costs must con- duct any necessary negotiations with an edu- cational institution regarding amounts ques- tioned by audit that are due the Federal Government related to costs covered by a ne- gotiated agreement. e. Reimbursement. Reimbursement to cog- nizant agencies for indirect costs for work performed under this Part may be made by reimbursement billing under the Economy Act, 31 U.S.C. 1535. f. Procedure for establishing facilities and administrative rates must be established by one of the following methods: (1) Formal negotiation. The cognizant agency for indirect costs is responsible for negotiating and approvin ing facilities and administrative rates must be established by one of the following methods: (1) Formal negotiation. The cognizant agency for indirect costs is responsible for negotiating and approving rates for an edu- cational institution on behalf of all Federal agencies. Federal awarding agencies that do not have cognizance for indirect costs must notify the cognizant agency for indirect costs of specific concerns (i.e., a need to es- tablish special cost rates) which could affect the negotiation process. The cognizant agen- cy for indirect costs must address the con- cerns of all interested agencies, as appro- priate. A pre-negotiation conference may be scheduled among all interested agencies, if necessary. The cognizant agency for indirect 367 Pt. 75, App. III 45 CFR Subtitle A (10–1–24 Edition) costs must then arrange a negotiation con- ference with the educational institution. (2) Other than formal negotiation. The cog- nizant agency for indirect costs and edu- cational institution may reach an agreement on rates without a formal negotiation con- ference; for example, through correspond- ence or use of the simplified method de- scribed in this section D of this Appendix. g. tion may reach an agreement on rates without a formal negotiation con- ference; for example, through correspond- ence or use of the simplified method de- scribed in this section D of this Appendix. g. Formalizing determinations and agree- ments. The cognizant agency for indirect costs must formalize all determinations or agreements reached with an educational in- stitution and provide copies to other agen- cies having an interest. Determinations should include a description of any adjust- ments, the actual amount, both dollar and percentage adjusted, and the reason for mak- ing adjustments. h. Disputes and disagreements. Where the cognizant agency for indirect costs is unable to reach agreement with an educational in- stitution with regard to rates or audit reso- lution, the appeal system of the cognizant agency for indirect costs must be followed for resolution of the disagreement. 12. Standard Format for Submission For facilities and administrative (indirect (F&A)) rate proposals, educational institu- tions must use the standard format, shown in section E of this appendix, to submit their indirect (F&A) rate proposal to the cog- nizant agency for indirect costs. The cog- nizant a ucational institu- tions must use the standard format, shown in section E of this appendix, to submit their indirect (F&A) rate proposal to the cog- nizant agency for indirect costs. The cog- nizant agency for indirect costs may, on an institution-by-institution basis, grant excep- tions from all or portions of Part II of the standard format requirement. This require- ment does not apply to educational institu- tions that use the simplified method for cal- culating indirect (F&A) rates, as described in Section D of this Appendix. As provided in section C.10, each F&A cost rate negotiation or determination must in- clude development of a rate for each F&A cost pool as well as the overall F&A rate. D. Simplified Method for Small Institutions 1. General a. Where the total direct cost of work cov- ered by this part 75 at an institution does not exceed $10 million in a fiscal year, the simplified procedure described in subsections 2 or 3 may be used in determining allowable indirect (F&A) costs. Under this simplified procedure, the institution’s most recent an- nual financial report and immediately avail- able supporting information must be utilized as a basis for determining the indire osts. Under this simplified procedure, the institution’s most recent an- nual financial report and immediately avail- able supporting information must be utilized as a basis for determining the indirect (F&A) cost rate applicable to all Federal awards. The institution may use either the salaries and wages (see subsection 2) or modified total direct costs (see subsection 3) as the distribution basis. 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, indirect (F&A) costs should be determined through use of the regular procedure. 2. Simplified Procedure—Salaries and Wages Base a. Establish the total amount of salaries and wages paid to all employees of the insti- tution. b. Establish an indirect (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 ex- penses (exclusive of costs of student adminis- tration and services, student activities, stu- dent aid, and scholarships). (2) Ope tles or their equivalents: (1) General administration and general ex- penses (exclusive of costs of student adminis- tration and services, student activities, stu- dent aid, and scholarships). (2) Operation and maintenance of physical plant and depreciation (after appropriate ad- justment for costs applicable to other insti- tutional 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 classi- fied under subsection (1) have previously been allocated to other institutional activi- ties, they may be included in the indirect (F&A) cost pool. The total amount of sala- ries and wages included in the indirect (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 sub- section a. from the amount of salaries and wages included under subsection b. d. Establish the indirect (F&A) cost rate, determined by dividing the amount in the in- direct (F&A) cost pool, subsection b, by the amount of the distribution base, subsection c. e. der subsection b. d. Establish the indirect (F&A) cost rate, determined by dividing the amount in the in- direct (F&A) cost pool, subsection b, by the amount of the distribution base, subsection c. e. Apply the indirect (F&A) cost rate to di- rect salaries and wages for individual agree- ments to determine the amount of indirect (F&A) costs allocable to such agreements. 3. Simplified Procedure—Modified Total Direct Cost Base a. Establish the total costs incurred by the institution for the base period. b. Establish an indirect (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 ex- penses (exclusive of costs of student adminis- tration and services, student activities, stu- dent aid, and scholarships). 368 Dept. of Health and Human Services Pt. 75, App. III (2) Operation and maintenance of physical plant and depreciation (after appropriate ad- justment for costs applicable to other insti- tutional activities). (3) Library. (4) Department administration expenses, which will be computed a physical plant and depreciation (after appropriate ad- justment for costs applicable to other insti- tutional 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 expendi- tures classified under subsection (1) have previously been allocated to other institu- tional activities, they may be included in the indirect (F&A) cost pool. The modified total direct costs amount included in the indirect (F&A) cost pool must be separately identi- fied. c. Establish a modified total direct cost distribution base, as defined in Section C.2, that consists of all institution’s direct func- tions. d. Establish the indirect (F&A) cost rate, determined by dividing the amount in the in- direct (F&A) cost pool, subsection b, by the amount of the distribution base, subsection c. e. Apply the indirect (F&A) cost rate to the modified total direct costs for individual agreements to determine the amount of indi- rect (F&A) costs allocable to such agree- ments. E. Documentation Requirements The standard format for documentation re- quirements for indirect (indirect (F&A)) rat s to determine the amount of indi- rect (F&A) costs allocable to such agree- ments. E. Documentation Requirements The standard format for documentation re- quirements for indirect (indirect (F&A)) rate proposals for claiming costs under the reg- ular method is available on the OMB Web site http://www.whitehouse.gov/omb/ here: grants_forms. F. Certification 1. Certification of Charges To assure that expenditures for Federal awards are proper and in accordance with the agreement documents and approved project budgets, the annual and/or final fis- cal reports or vouchers requesting payment under the agreements will include a certifi- cation, signed by an authorized official of the university, which reads ‘‘By signing this report, I certify to the best of my knowledge and belief that the report is true, complete, and accurate, and the expenditures, disburse- ments and cash receipts are for the purposes and intent set forth in the award documents. I am aware that any false, fictitious, or fraudulent information, or the omission of any material fact, may subject me to crimi- nal, civil or administrative penalties for fraud, false statements, false claims or oth- erwise. (U.S. Code, Title raudulent information, or the omission of any material fact, may subject me to crimi- nal, civil or administrative penalties for fraud, false statements, false claims or oth- erwise. (U.S. Code, Title 18, Section 1001 and Title 31, Sections 3729–3733 and 3801–3812)’’. 2. Certification of Indirect (F&A) Costs a. Policy. Cognizant agencies must not ac- cept a proposed indirect cost rate unless such costs have been certified by the edu- cational institution using the Certificate of indirect (F&A) Costs set forth in subsection F.2.c b. The certificate must be signed on behalf of the institution by the chief financial offi- cer or an individual designated by an indi- vidual at a level no lower than vice president or chief financial officer. An indirect (F&A) cost rate is not binding upon the Federal Government if the most re- cent required proposal from the institution has not been certified. Where it is necessary to establish indirect (F&A) cost rates, and the institution has not submitted a certified proposal for establishing such rates in ac- cordance with the requirements of this sec- tion, the Federal Government must unilater- ally establish such rates. Such rates may be based upon a certified proposal for establishing such rates in ac- cordance with the requirements of this sec- tion, the Federal Government must unilater- ally establish such rates. Such rates may be based upon audited historical data or such other data that have been furnished to the cognizant agency for indirect costs and for which it can be demonstrated that all unal- lowable costs have been excluded. When indi- rect (F&A) cost rates are unilaterally estab- lished by the Federal Government because of failure of the institution to submit a cer- tified proposal for establishing such rates in accordance with this section, the rates es- tablished will be set at a level low enough to ensure that potentially unallowable costs will not be reimbursed. c. Certificate. The certificate required by this section must be in the following form: Certificate of Indirect (F&A) Costs This is to certify that to the best of my knowledge and belief: (1) I have reviewed the indirect (F&A) cost proposal submitted herewith; (2) All costs included in this proposal [iden- tify date] to establish billing or final indi- rect (F&A) costs rate for [identify period covered by rate] are allowable in accordance with the r rewith; (2) All costs included in this proposal [iden- tify date] to establish billing or final indi- rect (F&A) costs rate for [identify period covered by rate] are allowable in accordance with the requirements of the Federal agree- ment(s) to which they apply and with the cost principles applicable to those agree- ments. (3) This proposal does not include any costs which are unallowable under applicable cost principles such as (without limitation): pub- lic relations costs, contributions and dona- tions, entertainment costs, fines and pen- alties, 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 relation- ship between the expenses incurred and the agreements to which they are allocated in accordance with applicable requirements. I declare that the foregoing is true and cor- rect. Institution of Higher Education: Signature: Name of Official: Title: 369 Pt. 75, App. IV Date of Execution: [79 FR 75889, Dec. 19, 2014, as amended at 81 FR 3018, Jan. 20, 2016] APPENDIX IV TO PART 75—INDIRECT (F&A) COSTS IDENTIFICATION AND ASSIGNMENT, AND RATE DETERMINA- TION 5, App. IV Date of Execution: [79 FR 75889, Dec. 19, 2014, as amended at 81 FR 3018, Jan. 20, 2016] APPENDIX IV TO PART 75—INDIRECT (F&A) COSTS IDENTIFICATION AND ASSIGNMENT, AND RATE DETERMINA- TION FOR NONPROFIT ORGANIZA- TIONS A. General 1. Indirect costs are those that have been incurred for common or joint objectives and cannot be readily identified with a par- ticular final cost objective. Direct cost of minor amounts may be treated as indirect costs under the conditions described in § 75.413(d). After direct costs have been deter- mined and assigned directly to awards or other work as appropriate, indirect costs are those remaining to be allocated to benefit- ting cost objectives. A cost may not be allo- cated to a Federal award as an indirect cost if any other cost incurred for the same pur- pose, in like circumstances, has been as- signed to a Federal award as a direct cost. 2. ‘‘Major nonprofit organizations’’ are de- fined in § 75.414(a). See indirect cost rate re- porting requirements in sections B.2.e and B.3.g. of this appendix. B. Allocation of Indirect Costs and Determination of Indirect Cost Rates 1. General a. If a nonprofit organization has only one major functio equirements in sections B.2.e and B.3.g. of this appendix. B. Allocation of Indirect Costs and Determination of Indirect Cost Rates 1. General a. If a nonprofit organization has only one major function, or where all its major func- tions benefit from its indirect costs to ap- proximately the same degree, the allocation of indirect costs and the computation of an indirect cost rate may be accomplished through simplified allocation procedures, as described in section B.2 of this Appendix. b. If an organization has several major functions which benefit from its indirect costs in varying degrees, allocation of indi- rect costs may require the accumulation of such costs into separate cost groupings which then are allocated individually to ben- efitting functions by means of a base which best measures the relative degree of benefit. The indirect costs allocated to each function are then distributed to individual Federal awards and other activities included in that function by means of an indirect cost rate(s). c. The determination of what constitutes an organization’s major functions will de- pend on its purpose in being; the types of services it renders to the public, its clients, and i irect cost rate(s). c. The determination of what constitutes an organization’s major functions will de- pend on its purpose in being; the types of services it renders to the public, its clients, and its members; and the amount of effort it devotes to such activities as fundraising, public information and membership activi- ties. d. Specific methods for allocating indirect costs and computing indirect cost rates along with the conditions under which each 45 CFR Subtitle A (10–1–24 Edition) method should be used are described in sec- tion B.2 through B.5 of this Appendix. e. The base period for the allocation of in- direct costs is the period in which such costs are incurred and accumulated for allocation to work performed in that period. The base period normally should coincide with the or- ganization’s fiscal year but, in any event, must be so selected as to avoid inequities in the allocation of the costs. 2. Simplified Allocation Method a. Where an organization’s major functions benefit from its indirect costs to approxi- mately the same degree, the allocation of in- direct costs may be accomplished by (i) sepa- rating the organization’s total costs for the base period as either d it from its indirect costs to approxi- mately the same degree, the allocation of in- direct costs may be accomplished by (i) sepa- rating the organization’s total costs for the base period as either direct or indirect, and (ii) dividing the total allowable indirect costs (net of applicable credits) by an equi- table distribution base. The result of this process is an indirect cost rate which is used to distribute indirect costs to individual Federal awards. The rate should be expressed as the percentage which the total amount of allowable indirect costs bears to the base se- lected. This method should also be used where an organization has only one major function encompassing a number of indi- vidual projects or activities, and may be used where the level of Federal awards to an organization is relatively small. b. Both the direct costs and the indirect costs must exclude capital expenditures and unallowable costs. However, unallowable costs which represent activities must be in- cluded in the direct costs under the condi- tions described in § 75.413(e). c. The distribution base may be total di- rect costs (excluding capital expenditures and other distorting items, such as sub- awa d in the direct costs under the condi- tions described in § 75.413(e). c. The distribution base may be total di- rect costs (excluding capital expenditures and other distorting items, such as sub- awards for $25,000 or more), direct salaries and wages, or other base which results in an equitable distribution. The distribution base must exclude participant support costs as de- fined in § 75.2. d. Except where a special rate(s) is re- quired in accordance with section B.5 of this Appendix, the indirect cost rate developed under the above principles is applicable to all Federal awards of the organization. If a special rate(s) is required, appropriate modi- fications must be made in order to develop the special rate(s). e. For an organization that receives more than $10 million in direct Federal funding in a fiscal year, a breakout of the indirect cost component into two broad categories, Facili- ties and Administration as defined in § 75.414(a), is required. The rate in each case must be stated as the percentage which the amount of the particular indirect cost cat- egory (i.e., Facilities or Administration) is of the distribution base identified with that category. 370 Dept. of Health stated as the percentage which the amount of the particular indirect cost cat- egory (i.e., Facilities or Administration) is of the distribution base identified with that category. 370 Dept. of Health and Human Services Pt. 75, App. IV 3. Multiple Allocation Base Method a. General. Where an organization’s indi- rect costs benefit its major functions in varying degrees, indirect costs must be accu- mulated into separate cost groupings, as de- scribed in subparagraph b. Each grouping must then be allocated individually to bene- fitting functions by means of a base which best measures the relative benefits. The de- fault allocation bases by cost pool are de- scribed in section B.3.c of this Appendix. b. Identification of indirect costs. Cost groupings must be established so as to per- mit the allocation of each grouping on the basis of benefits provided to the major func- tions. Each grouping must constitute a pool of expenses that are of like character in terms of functions they benefit and in terms of the allocation base which best measures the relative benefits provided to each func- tion. The groupings are classified within the two broad categories: ‘‘Facilities’’ and ‘‘Ad- minist and in terms of the allocation base which best measures the relative benefits provided to each func- tion. The groupings are classified within the two broad categories: ‘‘Facilities’’ and ‘‘Ad- ministration,’’ as described in section A.3 of this Appendix. The indirect cost pools are de- fined as follows: (1) Depreciation. The expenses under this heading are the portion of the costs of the organization’s buildings, capital improve- ments to land and buildings, and equipment which are computed in accordance with § 75.436 . (2) Interest. Interest on debt associated with certain buildings, equipment and cap- ital improvements are computed in accord- ance with § 75.449. (3) Operation and maintenance expenses. The expenses under this heading are those that have been incurred for the administra- tion, operation, maintenance, preservation, and protection of the organization’s physical plant. They include expenses normally in- curred for such items as: janitorial and util- ity services; repairs and ordinary or normal alterations of buildings, furniture and equip- ment; care of grounds; maintenance and op- eration of buildings and other plant facili- ties; security; earthquake and disaster p and ordinary or normal alterations of buildings, furniture and equip- ment; care of grounds; maintenance and op- eration of buildings and other plant facili- ties; security; earthquake and disaster pre- paredness; environmental safety; hazardous waste disposal; property, liability and other insurance relating to property; space and capital leasing; facility planning and man- agement; and central receiving. The oper- ation and maintenance expenses category must also include its allocable share of fringe benefit costs, depreciation, and inter- est costs. (4) General administration and general ex- penses. The expenses under this heading are those that have been incurred for the overall general executive and administrative offices of the organization and other expenses of a general nature which do not relate solely to any major function of the organization. This category must also include its allocable share of fringe benefit costs, operation and maintenance expense, depreciation, and in- terest costs. Examples of this category in- clude central offices, such as the director’s office, the office of finance, business serv- ices, budget and planning, personnel, safety and risk managemen terest costs. Examples of this category in- clude central offices, such as the director’s office, the office of finance, business serv- ices, budget and planning, personnel, safety and risk management, general counsel, man- agement information systems, and library costs. In developing this cost pool, special care should be exercised to ensure that costs in- curred for the same purpose in like cir- cumstances are treated consistently as ei- ther direct or indirect costs. For example, salaries of technical staff, project supplies, project publication, telephone toll charges, computer costs, travel costs, and specialized services costs must be treated as direct costs wherever identifiable to a particular pro- gram. The salaries and wages of administra- tive and pooled clerical staff should nor- mally be treated as indirect costs. Direct charging of these costs may be appropriate as described in § 75.413. Items such as office supplies, postage, local telephone costs, peri- odicals and memberships should normally be treated as indirect costs. c. Allocation bases. Actual conditions must be taken into account in selecting the base to be used in allocating the expenses in each grouping to berships should normally be treated as indirect costs. c. Allocation bases. Actual conditions must be taken into account in selecting the base to be used in allocating the expenses in each grouping to benefitting functions. The essential consideration in selecting a method or a base is that it is the one best suited for assigning the pool of costs to cost objectives in accordance with benefits derived; a trace- able cause and effect relationship; or logic and reason, where neither the cause nor the effect of the relationship is determinable. When an allocation can be made by assign- ment of a cost grouping directly to the func- tion benefitted, the allocation must be made in that manner. When the expenses in a cost grouping are more general in nature, the al- location must be made through the use of a selected base which produces results that are equitable to both the Federal Government and the organization. The distribution must be made in accordance with the bases de- scribed herein unless 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 F unless 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 Federal awards. The results of special cost studies (such as an engineering utility study) must not be used to determine and allocate the in- direct costs to Federal awards. (1) Depreciation. Depreciation expenses must be allocated in the following manner: (a) Depreciation on buildings used exclu- sively in the conduct of a single function, and on capital improvements and equipment used in such buildings, must be assigned to that function. (b) Depreciation on buildings used for more than one function, and on capital improve- ments and equipment used in such buildings, must be allocated to the individual functions performed in each building on the basis of 371 Pt. 75, App. IV 45 CFR Subtitle A (10–1–24 Edition) usable square feet of space, excluding com- mon areas, such as hallways, stairwells, and restrooms. (c) Depreciation on buildings, capital im- provements and equipment related space (e.g., individual rooms, and laboratories) used jointly by more than one function (as determined by ls, and restrooms. (c) Depreciation on buildings, capital im- provements and equipment related space (e.g., individual rooms, and laboratories) used jointly by more than one function (as determined by the users of the space) must be treated as follows. The cost of each joint- ly used unit of space must be allocated to the benefitting functions on the basis of: (i) the employees and other users on a full- time equivalent (FTE) basis or salaries and wages of those individual functions benefit- ting from the use of that space; or (ii) organization-wide employee FTEs or salaries and wages applicable to the benefit- ting functions of the organization. (d) Depreciation on certain capital im- provements to land, such as paved parking areas, fences, sidewalks, and the like, not in- cluded in the cost of buildings, must be allo- cated to user categories on a FTE basis and distributed to major functions in proportion to the salaries and wages of all employees applicable to the functions. (2) Interest. Interest costs must be allo- cated in the same manner as the deprecia- tion on the buildings, equipment and capital equipment to which the interest relates. (3) Operation and maintenance expens erest. Interest costs must be allo- cated in the same manner as the deprecia- tion on the buildings, equipment and capital equipment to which the interest relates. (3) Operation and maintenance expenses. Operation and maintenance expenses must be allocated in the same manner as the de- preciation. (4) General administration and general ex- penses. General administration and general expenses must be allocated to benefitting functions based on modified total costs (MTC). The MTC is the modified total direct costs (MTDC), as described in § 75.2, plus the allocated indirect cost proportion. The ex- penses included in this category could be grouped first according to major functions of the organization to which they render serv- ices or provide benefits. The aggregate ex- penses of each group must then be allocated to benefitting functions based on MTC. d. Order of distribution. (1) Indirect cost categories consisting of depreciation, interest, operation and mainte- nance, and general administration and gen- eral expenses must be allocated in that order to the remaining indirect cost categories as well as to the major functions of the organi- zation. Other cost categories should be allo istration and gen- eral expenses must be allocated in that order to the remaining indirect cost categories as well as to the major functions of the organi- zation. Other cost categories should be allo- cated in the order determined to be most ap- propriate by the organization. This order of allocation does not apply if cross allocation of costs is made as provided in section B.3.d.2 of this Appendix. (2) Normally, an indirect cost category will be considered closed once it has been allo- cated to other cost objectives, and costs must not be subsequently allocated to it. However, a cross allocation of costs between two or more indirect costs categories could be used if such allocation will result in a more equitable allocation of costs. If a cross allocation is used, an appropriate modifica- tion to the composition of the indirect cost categories is required. e. Application of indirect cost rate or rates. Except where a special indirect cost rate(s) is required in accordance with section B.5 of this Appendix, the separate groupings of indirect costs allocated to each major function must be aggregated and treated as a common pool for that function. The costs in the common pool must t n B.5 of this Appendix, the separate groupings of indirect costs allocated to each major function must be aggregated and treated as a common pool for that function. The costs in the common pool must then be distributed to individual Federal awards included in that function by use of a single indirect cost rate. f. Distribution basis. Indirect costs must be distributed to applicable Federal awards and other benefitting activities within each major function on the basis of MTDC (see definition in § 75.2). g. Individual Rate Components. An indi- rect cost rate must be determined for each separate indirect cost pool developed. The rate in each case must be stated as the per- centage which the amount of the particular indirect cost pool is of the distribution base identified with that pool. Each indirect cost rate negotiation or determination agreement must include development of the rate for each indirect cost pool as well as the overall indirect cost rate. The indirect cost pools must be classified within two broad cat- egories: ‘‘Facilities’’ and ‘‘Administration,’’ as described in § 75.414(a). 4. Direct Allocation Method a. Some nonprofit organizations treat all costs as direct cost classified within two broad cat- egories: ‘‘Facilities’’ and ‘‘Administration,’’ as described in § 75.414(a). 4. Direct Allocation Method a. Some nonprofit organizations treat all costs as direct costs except general adminis- tration and general expenses. These organi- zations generally separate their costs into three basic categories: (i) General adminis- tration and general expenses, (ii) fund- raising, and (iii) other direct functions (in- cluding projects performed under Federal awards). Joint costs, such as depreciation, rental costs, operation and maintenance of facilities, telephone expenses, and the like are prorated individually as direct costs to each category and to each Federal award or other activity using a base most appropriate to the particular cost being prorated. b. This method is acceptable, provided each joint cost is prorated using a base which ac- curately measures the benefits provided to each Federal award or other activity. The bases must be established in accordance with reasonable criteria, and be supported by cur- rent data. This method is compatible with the Standards of Accounting and Financial Reporting for Voluntary Health and Welfare Organizations i rdance with reasonable criteria, and be supported by cur- rent data. This method is compatible with the Standards of Accounting and Financial Reporting for Voluntary Health and Welfare Organizations issued jointly by the National Health Council, Inc., the National Assembly of Voluntary Health and Social Welfare Or- ganizations, and the United Way of America. c. Under this method, indirect costs con- sist exclusively of general administration and general expenses. In all other respects, the organization’s indirect cost rates must 372 Dept. of Health and Human Services Pt. 75, App. IV be computed in the same manner as that de- scribed in section B.2 of this Appendix. 5. Special Indirect Cost Rates In some instances, a single indirect cost rate for all activities of an organization or for each major function of the organization may not be appropriate, since it would not take into account those different factors which may substantially affect the indirect costs applicable to a particular segment of work. For this purpose, a particular segment of work may be that performed under a sin- gle Federal award or it may consist of work under a group of Federal awards performed in a common envi egment of work. For this purpose, a particular segment of work may be that performed under a sin- gle Federal award or it may consist of work under a group of Federal awards performed in a common environment. These factors may include the physical location of the work, the level of administrative support re- quired, the nature of the facilities or other resources employed, the scientific disciplines or technical skills involved, the organiza- tional arrangements used, or any combina- tion thereof. When a particular segment of work is performed in an environment which appears to generate a significantly different level of indirect costs, provisions should be made for a separate indirect cost pool appli- cable to such work. The separate indirect cost pool should be developed during the course of the regular allocation process, and the separate indirect cost rate resulting therefrom should be used, provided it is de- termined that (i) the rate differs signifi- cantly from that which would have been ob- tained under sections B.2, B.3, and B.4 of this Appendix, and (ii) the volume of work to which the rate would apply is material. C. Negotiation and Approval of Indirect Cost Rates 1. De have been ob- tained under sections B.2, B.3, and B.4 of this Appendix, and (ii) the volume of work to which the rate would apply is material. C. Negotiation and Approval of Indirect Cost Rates 1. Definitions As used in this section, the following terms have the meanings set forth in this section: a. Cognizant agency for indirect costs means the Federal agency responsible for negoti- ating and approving indirect cost rates for a nonprofit organization on behalf of all Fed- eral agencies. b. Predetermined rate means an indirect cost rate, applicable to a specified current or fu- ture period, usually the organization’s fiscal year. The rate is based on an estimate of the costs to be incurred during the period. A pre- determined rate is not subject to adjust- ment. c. Fixed rate means an indirect cost rate which has the same characteristics as a pre- determined rate, except that the difference between the estimated costs and the actual costs of the period covered by the rate is car- ried forward as an adjustment to the rate computation of a subsequent period. d. Final rate means an indirect cost rate applicable to a specified past period which is based on the actual costs of the peri forward as an adjustment to the rate computation of a subsequent period. d. Final rate means an indirect cost rate applicable to a specified past period which is based on the actual costs of the period. A final rate is not subject to adjustment. e. Provisional rate or billing rate means a temporary indirect cost rate applicable to a specified period which is used for funding, in- terim reimbursement, and reporting indirect costs on Federal awards pending the estab- lishment of a final rate for the period. f. Indirect cost proposal means the docu- mentation prepared by an organization to substantiate its claim for the reimbursement of indirect costs. This proposal provides the basis for the review and negotiation leading to the establishment of an organization’s in- direct cost rate. g. Cost objective means a function, organiza- tional subdivision, contract, Federal award, or other work unit for which cost data are desired and for which provision is made to accumulate and measure the cost of proc- esses, projects, jobs and capitalized projects. 2. Negotiation and Approval of Rates a. Unless different arrangements are agreed to by the Federal agencies concerned, the Federal agency w ost of proc- esses, projects, jobs and capitalized projects. 2. Negotiation and Approval of Rates a. Unless different arrangements are agreed to by the Federal agencies concerned, the Federal agency with the largest dollar value of Federal awards with an organization will be designated as the cognizant agency for indirect costs for the negotiation and ap- proval of the indirect cost rates and, where necessary, other rates such as fringe benefit and computer charge-out rates. Once an agency is assigned cognizance for a par- ticular nonprofit organization, the assign- ment will not be changed unless there is a shift in the dollar volume of the Federal awards to the organization for at least three years. All concerned Federal agencies must be given the opportunity to participate in the negotiation process but, after a rate has been agreed upon, it will be accepted by all Federal agencies. When a Federal agency has reason to believe that special operating fac- tors affecting its Federal awards necessitate special indirect cost rates in accordance with section B.5 of this Appendix, it will, prior to the time the rates are negotiated, notify the cognizant agency for indirect costs. (See ards necessitate special indirect cost rates in accordance with section B.5 of this Appendix, it will, prior to the time the rates are negotiated, notify the cognizant agency for indirect costs. (See also § 75.414.) Where a non-Federal entity only receives funds as a subrecipient, see the requirements of § 75.352. b. Except as otherwise provided in § 75.414(f), a nonprofit organization which has not previously established an indirect cost rate with a Federal agency must submit its initial indirect cost proposal immediately after the organization is advised that a Fed- eral award will be made and, in no event, later than three months after the effective date of the Federal award. indirect costs c. Unless approved by the cognizant agency for in accordance with § 75.414(g), organizations that have previously established indirect cost rates must submit a new indirect cost proposal to the cognizant agency for indirect costs within six months after the close of each fiscal year. 373 Pt. 75, App. V 45 CFR Subtitle A (10–1–24 Edition) d. A predetermined rate may be negotiated for use on Federal awards where there is rea- sonable assurance, based on past experience and reliable projection o App. V 45 CFR Subtitle A (10–1–24 Edition) d. A predetermined rate may be negotiated for use on Federal awards where there is rea- sonable assurance, based on past experience and reliable projection of the organization’s costs, that the rate is not likely to exceed a rate based on the organization’s actual costs. e. Fixed rates may be negotiated where predetermined rates are not considered ap- propriate. A fixed rate, however, must not be negotiated if (i) all or a substantial portion of the organization’s Federal awards are ex- pected to expire before the carry-forward ad- justment can be made; (ii) the mix of Federal and non-Federal work at the organization is too erratic to permit an equitable carry-for- ward adjustment; or (iii) the organization’s operations fluctuate significantly from year to year. f. Provisional and final rates must be nego- tiated where neither predetermined nor fixed rates are appropriate. Predetermined or fixed rates may replace provisional rates at any time prior to the close of the organiza- tion’s fiscal year. If that event does not occur, a final rate will be established and up- ward or downward adjustments will be made based on the actual allowable c prior to the close of the organiza- tion’s fiscal year. If that event does not occur, a final rate will be established and up- ward or downward adjustments will be made based on the actual allowable costs incurred for the period involved. g. The results of each negotiation must be formalized in a written agreement between the cognizant agency for indirect costs and the nonprofit organization. The cognizant agency for indirect costs must make avail- able copies of the agreement to all concerned Federal agencies. h. If a dispute arises in a negotiation of an indirect cost rate between the cognizant agency for indirect costs and the nonprofit organization, the dispute must be resolved in accordance with the appeals procedures of the cognizant agency for indirect costs. i. To the extent that problems are encoun- tered among the Federal agencies in connec- tion with the negotiation and approval proc- ess, OMB will lend assistance as required to resolve such problems in a timely manner. D. Certification of Indirect (F&A) Costs 1. Required Certification. No proposal to establish indirect (F&A) cost rates must be acceptable unless such costs have been cer- tified by the non-profit organiza ertification of Indirect (F&A) Costs 1. Required Certification. No proposal to establish indirect (F&A) cost rates must be acceptable unless such costs have been cer- tified by the non-profit organization using the Certificate of Indirect (F&A) Costs set forth in subsection 2., below. The certificate must be signed on behalf of the organization by an individual at a level no lower than vice president or chief financial officer for the or- ganization. 2. Each indirect cost rate proposal must be accompanied by a certification in the fol- lowing form: Certificate of Indirect (F&A) Costs This is to certify that to the best of my knowledge and belief: (1) I have reviewed the indirect (F&A) cost proposal submitted herewith; (2) All costs included in this proposal [iden- tify date] to establish billing or final indi- rect (F&A) costs rate for [identify period covered by rate] are allowable in accordance with the requirements of the Federal awards to which they apply and with Subpart E of part 75. (3) This proposal does not include any costs which are unallowable under Subpart E of part 75 such as (without limitation): public relations costs, contributions and donations, entertainment cost 75. (3) This proposal does not include any costs which are unallowable under Subpart E of part 75 such as (without limitation): public relations costs, contributions and donations, entertainment costs, fines and penalties, lob- bying costs, and defense of fraud pro- ceedings; and (4) All costs included in this proposal are properly allocable to Federal awards on the basis of a beneficial or causal relationship between the expenses incurred and the Fed- eral awards to which they are allocated in accordance with applicable requirements. I declare that the foregoing is true and cor- rect. Nonprofit Organization: Signature: Name of Official: Title: Date of Execution: [79 FR 75889, Dec. 19, 2014, as amended at 81 FR 3018, Jan. 20, 2016] APPENDIX V TO PART 75—STATE/LOCAL GOVERNMENTWIDE CENTRAL SERVICE COST ALLOCATION PLANS A. General 1. Most governmental units provide certain services, such as motor pools, computer cen- ters, purchasing, accounting, etc., to oper- ating agencies on a centralized basis. Since federally-supported awards are performed within the individual operating agencies, there needs to be a process whereby these central service costs can be identified and assigned to lized basis. Since federally-supported awards are performed within the individual operating agencies, there needs to be a process whereby these central service costs can be identified and assigned to benefitted activities on a reason- able and consistent basis. The central service cost allocation plan provides that process. All costs and other data used to distribute the costs included in the plan should be sup- ported by formal accounting and other records that will support the propriety of the costs assigned to Federal awards. 2. Guidelines and illustrations of central service cost allocation plans are provided in a brochure published by the Department of Health and Human Services entitled ‘‘A Guide for State, Local and Indian Tribal Gov- ernments: Cost Principles and Procedures for Developing Cost Allocation Plans and Indirect Cost Rates for Agreements with the Federal Government.’’ A copy of this brochure may be obtained from the HHS’ Cost Allocation Services or at their Web site at https:// rates.psc.gov. 374 Dept. of Health and Human Services Pt. 75, App. V B. Definitions 1. Agency or operating agency means an or- ganizational unit or sub-division within a governmental unit t t https:// rates.psc.gov. 374 Dept. of Health and Human Services Pt. 75, App. V B. Definitions 1. Agency or operating agency means an or- ganizational unit or sub-division within a governmental unit that is responsible for the performance or administration of Federal awards or activities of the governmental unit. 2. Allocated central services means central services that benefit operating agencies but are not billed to the agencies on a fee-for- service or similar basis. These costs are allo- cated to benefitted agencies on some reason- able basis. Examples of such services might include general accounting, personnel ad- ministration, purchasing, etc. 3. Billed central services means central serv- ices that are billed to benefitted agencies or programs on an individual fee-for-service or similar basis. Typical examples of billed cen- tral services include computer services, transportation insurance, and services, fringe benefits. 4. Cognizant agency for indirect costs is de- fined in § 75.2. The determination of cog- nizant agency for indirect costs for states and local governments is described in section F.1. 5. Major local government means local gov- ernment that receives more tha 75.2. The determination of cog- nizant agency for indirect costs for states and local governments is described in section F.1. 5. Major local government means local gov- ernment that receives more than $100 million in direct Federal awards subject to this part. C. Scope of the Central Service Cost Allocation Plans The central service cost allocation plan will include all central service costs that will be claimed (either as a billed or an allo- cated cost) under Federal awards and will be documented as described in section E. Costs of central services omitted from the plan will not be reimbursed. D. Submission Requirements 1. Each state will submit a plan to the De- partment of Health and Human Services for each year in which it claims central service costs under Federal awards. The plan should include (a) a projection of the next year’s al- located central service cost (based either on actual costs for the most recently completed year or the budget projection for the coming year), and (b) a reconciliation of actual allo- cated central service costs to the estimated costs used for either the most recently com- pleted year or the year immediately pre- ceding the most recently comple (b) a reconciliation of actual allo- cated central service costs to the estimated costs used for either the most recently com- pleted year or the year immediately pre- ceding the most recently completed year. 2. Each major local government is also re- quired to submit a plan to its cognizant agency for indirect costs annually. 3. All other local governments claiming central service costs must develop a plan in accordance with the requirements described in this Part and maintain the plan and re- lated supporting documentation for audit. These local governments are not required to submit their plans for Federal approval un- less they are specifically requested to do so by the cognizant agency for indirect costs. Where a local government only receives funds as a subrecipient, the pass-through en- tity will be responsible for monitoring the subrecipient’s plan. 4. All central service cost allocation plans will be prepared and, when required, sub- mitted within six months prior to the begin- ning of each of the governmental unit’s fis- cal years in which it proposes to claim cen- tral service costs. Extensions may be grant- ed by the cognizant agency for indirect costs on a case-by-cas n- ning of each of the governmental unit’s fis- cal years in which it proposes to claim cen- tral service costs. Extensions may be grant- ed by the cognizant agency for indirect costs on a case-by-case basis. E. Documentation Requirements for Submitted Plans The documentation requirements described in this section may be modified, expanded, or reduced by the cognizant agency for indirect costs on a case-by-case basis. For example, the requirements may be reduced for those central services which have little or no im- pact on Federal awards. Conversely, if a re- view of a plan indicates that certain addi- tional information is needed, and will likely be needed in future years, it may be rou- tinely requested in future plan submissions. Items marked with an asterisk (*) should be submitted only once; subsequent plans should merely indicate any changes since the last plan. 1. General All proposed plans must be accompanied by the following: An organization chart suffi- ciently detailed to show operations including the central service activities of the state/ local government whether or not they are shown as benefitting from central service functions; a copy of the Comprehensive An- nual how operations including the central service activities of the state/ local government whether or not they are shown as benefitting from central service functions; a copy of the Comprehensive An- nual Financial Report (or a copy of the Exec- utive Budget if budgeted costs are being pro- posed) to support the allowable costs of each central service activity included in the plan; and, a certification (see subsection 4.) that the plan was prepared in accordance with this Part, contains only allowable costs, and was prepared in a manner that treated simi- lar costs consistently among the various Federal awards and between Federal and non-Federal awards/activities. 2. Allocated Central Services For each allocated central service*, the plan must also include the following: a brief description of the service, an identification of the unit rendering the service and the op- erating agencies receiving the service, the items of expense included in the cost of the service, the method used to distribute the cost of the service to benefitted agencies, and a summary schedule showing the alloca- tion of each service to the specific benefitted agencies. If any self-insurance funds or fringe benefit ibute the cost of the service to benefitted agencies, and a summary schedule showing the alloca- tion of each service to the specific benefitted agencies. If any self-insurance funds or fringe benefits costs are treated as allocated 375 Pt. 75, App. V 45 CFR Subtitle A (10–1–24 Edition) (rather than billed) central services, docu- mentation discussed in subsections 3.b. and c. must also be included. 3. Billed Services a. General. The information described in this section must be provided for all billed central services, including internal service funds, self-insurance funds, and fringe ben- efit funds. b. Internal service funds. (1) For each internal service fund or simi- lar activity with an operating budget of $5 million or more, the plan must include: A brief description of each service; a balance sheet for each fund based on individual ac- counts contained in the governmental unit’s accounting system; a revenue/expenses state- ment, with revenues broken out by source, e.g., regular billings, interest earned, etc.; a listing of all non-operating transfers (as de- fined by Generally Accepted Accounting Principles (GAAP)) into and out of the fund; a description of the procedures ( billings, interest earned, etc.; a listing of all non-operating transfers (as de- fined by Generally Accepted Accounting Principles (GAAP)) into and out of the fund; a description of the procedures (method- ology) used to charge the costs of each serv- ice to users, including how billing rates are determined; a schedule of current rates; and, a schedule comparing total revenues (includ- ing imputed revenues) generated by the serv- ice to the allowable costs of the service, as determined under this Part, with an expla- nation of how variances will be handled. (2) Revenues must consist of all revenues generated by the service, including unbilled and uncollected revenues. If some users were not billed for the services (or were not billed at the full rate for that class of users), a schedule showing the full imputed revenues associated with these users must be pro- vided. Expenses must be broken out by ob- ject cost categories (e.g., salaries, supplies, etc.). c. Self-insurance funds. For each self-insur- ance fund, the plan must include: The fund balance sheet; a statement of revenue and expenses including a summary of billings and claims paid by agency; a listing of all non-operatin each self-insur- ance fund, the plan must include: The fund balance sheet; a statement of revenue and expenses including a summary of billings and claims paid by agency; a listing of all non-operating transfers into and out of the fund; the type(s) of risk(s) covered by the fund (e.g., automobile liability, workers’ compensation, etc.); an explanation of how the level of fund contributions are deter- mined, including a copy of the current actu- arial report (with the actuarial assumptions used) if the contributions are determined on an actuarial basis; and, a description of the procedures used to charge or allocate fund contributions to benefitted activities. Re- serve levels in excess of claims (1) submitted and adjudicated but not paid, (2) submitted but not adjudicated, and (3) incurred but not submitted must be identified and explained. d. Fringe benefits. For fringe benefit costs, the plan must include: A listing of fringe benefits provided to covered employees, and the overall annual cost of each type of ben- efit; current fringe benefit policies; and pro- cedures used to charge or allocate the costs of the benefits to benefitted activities. In ad- dition, for pension and po nnual cost of each type of ben- efit; current fringe benefit policies; and pro- cedures used to charge or allocate the costs of the benefits to benefitted activities. In ad- dition, for pension and post-retirement health insurance plans, the following infor- mation must be provided: the governmental unit’s funding policies, e.g., legislative bills, trust agreements, or state-mandated con- tribution rules, if different from actuarially determined rates; the pension plan’s costs accrued for the year; the amount funded, and date(s) of funding; a copy of the current ac- tuarial report (including the actuarial as- sumptions); the plan trustee’s report; and, a schedule from the activity showing the value of the interest cost associated with late funding. 4. Required Certification Each central service cost allocation plan will be accompanied by a certification in the following form: Certificate of Cost Allocation Plan This is to certify that I have reviewed the cost allocation plan submitted herewith and to the best of my knowledge and belief: (1) All costs included in this proposal [iden- tify date] to establish cost allocations or bil- lings for [identify period covered by plan] are all herewith and to the best of my knowledge and belief: (1) All costs included in this proposal [iden- tify date] to establish cost allocations or bil- lings for [identify period covered by plan] are allowable in accordance with the require- ments of this Part and the Federal award(s) to which they apply. Unallowable costs have been adjusted for in allocating costs as indi- cated in the cost allocation plan. (2) All costs included in this proposal are properly allocable to Federal awards on the basis of a beneficial or causal relationship between the expenses incurred and the Fed- eral awards to which they are allocated in accordance with applicable requirements. Further, the same costs that have been treated as indirect costs have not been claimed as direct costs. Similar types of costs have been accounted for consistently. I declare that the foregoing is true and cor- rect. Governmental Unit: Signature: Name of Official: Title: Date of Execution: F. Negotiation and Approval of Central Service Plans 1. Federal Cognizant Agency for Indirect Costs Assignments for Cost Negotiation In general, unless different arrangements are agreed to by the concerned Federal agen- cies, for central se ervice Plans 1. Federal Cognizant Agency for Indirect Costs Assignments for Cost Negotiation In general, unless different arrangements are agreed to by the concerned Federal agen- cies, for central service cost allocation plans, the cognizant agency responsible for review and approval is the Federal agency with the largest dollar value of total Federal awards with a governmental unit. For indi- rect cost rates and departmental indirect cost allocation plans, the cognizant agency 376 Dept. of Health and Human Services Pt. 75, App. V is the Federal agency with the largest dollar value of direct Federal awards with a govern- mental unit or component, as appropriate. Once designated as the cognizant agency for indirect costs, the Federal agency must re- main so for a period of five years. In addi- tion, the following Federal agencies continue to be responsible for the indicated govern- mental entities: Department of Health and Human Services— Public assistance and state-wide cost alloca- tion plans for all states (including the Dis- trict of Columbia and Puerto Rico), state and local hospitals, libraries and health dis- tricts. Department of the Interior—Indian tribal governments, terr ion plans for all states (including the Dis- trict of Columbia and Puerto Rico), state and local hospitals, libraries and health dis- tricts. Department of the Interior—Indian tribal governments, territorial governments, and state and local park and recreational dis- tricts. Department of Labor—State and local labor departments. Department of Education—School districts and state and local education agencies. Department of Agriculture—State and local agriculture departments. Department of Transportation—State and local airport and port authorities and transit districts. Department of Commerce—State and local economic development districts. Department of Housing and Urban Develop- ment—State and local housing and develop- ment districts. Environmental Protection Agency—State and local water and sewer districts. subsequently found to violate a statute or the information upon which the plan was ne- gotiated is later found to be materially in- complete or inaccurate. The results of the negotiation must be made available to all Federal agencies for their use. 4. Adjustments Negotiated cost allocation plans based on a proposal later found to have included costs that: (a) Are unallowable ( tiation must be made available to all Federal agencies for their use. 4. Adjustments Negotiated cost allocation plans based on a proposal later found to have included costs that: (a) Are unallowable (i) as specified by law or regulation, (ii) as identified in subpart F, General Provisions for selected Items of Cost of this Part, or (iii) by the terms and conditions of Federal awards, or (b) are unal- lowable because they are clearly not allo- cable to Federal awards, must be adjusted, or a refund must be made at the option of the cognizant agency for indirect costs, includ- ing earned or imputed interest from the date of transfer and debt interest, if applicable, chargeable in accordance with applicable Federal cognizant agency for indirect costs regulations. Adjustments or cash refunds may include, at the option of the cognizant agency for indirect costs, earned or imputed interest from the date of expenditure and de- linquent debt interest, if applicable, charge- able in accordance with applicable cognizant agency claims collection regulations. These adjustments or refunds are designed to cor- rect the plans and do not constitute a re- opening of the negotiation. G. Other Policie ith applicable cognizant agency claims collection regulations. These adjustments or refunds are designed to cor- rect the plans and do not constitute a re- opening of the negotiation. G. Other Policies 2. Review 1. Billed Central Service Activities All proposed central service cost allocation plans that are required to be submitted will be reviewed, negotiated, and approved by the cognizant agency for indirect costs on a timely basis. The cognizant agency for indi- rect costs will review the proposal within six months of receipt of the proposal and either negotiate/approve the proposal or advise the governmental unit of the additional docu- mentation needed to support/evaluate the proposed plan or the changes required to make the proposal acceptable. Once an agreement with the governmental unit has been reached, the agreement will be accepted and used by all Federal agencies, unless pro- hibited or limited by statute. Where a Fed- eral awarding agency has reason to believe that special operating factors affecting its Federal awards necessitate special consider- ation, the funding agency will, prior to the time the plans are negotiated, notify the cognizant agency for indirect costs operating factors affecting its Federal awards necessitate special consider- ation, the funding agency will, prior to the time the plans are negotiated, notify the cognizant agency for indirect costs. 3. Agreement The results of each negotiation must be formalized in a written agreement between the cognizant agency for indirect costs and the governmental unit. This agreement will be subject to re-opening if the agreement is Each billed central service activity must separately account for all revenues (includ- ing imputed revenues) generated by the serv- ice, expenses incurred to furnish the service, and profit/loss. 2. Working Capital Reserves Internal service funds are dependent upon a reasonable level of working capital reserve to operate from one billing cycle to the next. Charges by an internal service activity to provide for the establishment and mainte- nance of a reasonable level of working cap- ital reserve, in addition to the full recovery of costs, are allowable. A working capital re- serve as part of retained earnings of up to 60 calendar days cash expenses for normal oper- ating purposes is considered reasonable. A working capital reserve exceeding 60 cal- endar days m apital re- serve as part of retained earnings of up to 60 calendar days cash expenses for normal oper- ating purposes is considered reasonable. A working capital reserve exceeding 60 cal- endar days may be approved by the cog- nizant agency for indirect costs in excep- tional cases. 3. Carry-Forward Adjustments of Allocated Central Service Costs Allocated central service costs are usually negotiated and approved for a future fiscal year on a ‘‘fixed with carry-forward’’ basis. Under this procedure, the fixed amounts for 377 Pt. 75, App. VI 45 CFR Subtitle A (10–1–24 Edition) the future year covered by agreement are not subject to adjustment for that year. However, when the actual costs of the year involved become known, the differences be- tween the fixed amounts previously approved and the actual costs will be carried forward and used as an adjustment to the fixed amounts established for a later year. This ‘‘carry-forward’’ procedure applies to all cen- tral services whose costs were fixed in the approved plan. However, a carry-forward ad- justment is not permitted, for a central serv- ice activity that was not included in the ap- proved plan, or for unallowable costs that must be fixed in the approved plan. However, a carry-forward ad- justment is not permitted, for a central serv- ice activity that was not included in the ap- proved plan, or for unallowable costs that must be reimbursed immediately. 4. Adjustments of Billed Central Services Billing rates used to charge Federal awards must be based on the estimated costs of pro- viding the services, including an estimate of the allocable central service costs. A com- parison of the revenue generated by each billed service (including total revenues whether or not billed or collected) to the ac- tual allowable costs of the service will be made at least annually, and an adjustment will be made for the difference between the revenue and the allowable costs. These ad- justments will be made through one of the following adjustment methods: (a) A cash re- fund including earned or imputed interest from the date of transfer and debt interest, if applicable, chargeable in accordance with applicable Federal cognizant agency for indi- rect costs regulations to the Federal Govern- ment for the Federal share of the adjust- ment, (b) credits to the amounts charged to the individual programs, (c) adjustments to future bill cy for indi- rect costs regulations to the Federal Govern- ment for the Federal share of the adjust- ment, (b) credits to the amounts charged to the individual programs, (c) adjustments to future billing rates, or (d) adjustments to al- located central service costs. Adjustments to allocated central services will not be per- mitted where the total amount of the adjust- ment for a particular service (Federal share and non-Federal) share exceeds $500,000. Ad- justment methods may include, at the option of the cognizant agency, earned or imputed interest from the date of expenditure and de- linquent debt interest, if applicable, charge- able in accordance with applicable cognizant agency claims collection regulations. 5. Records Retention All central service cost allocation plans and related documentation used as a basis for claiming costs under Federal awards must be retained for audit in accordance with the records retention requirements con- tained in Subpart D of part 75. 6. Appeals If a dispute arises in the negotiation of a plan between the cognizant agency for indi- rect costs and the governmental unit, the dispute must be resolved in accordance with the appeals procedures of t f a dispute arises in the negotiation of a plan between the cognizant agency for indi- rect costs and the governmental unit, the dispute must be resolved in accordance with the appeals procedures of the cognizant agency for indirect costs. 7. OMB Assistance To the extent that problems are encoun- tered among the Federal agencies or govern- mental units in connection with the negotia- tion and approval process, OMB will lend as- sistance, as required, to resolve such prob- lems in a timely manner. [79 FR 75889, Dec. 19, 2014, as amended at 81 FR 3019, Jan. 20, 2016] APPENDIX VI TO PART 75—PUBLIC ASSISTANCE COST ALLOCATION PLANS A. General Federally-financed programs administered by state public assistance agencies are fund- ed predominately by the Department of Health and Human Services (HHS). In sup- port of its stewardship requirements, HHS has published requirements for the develop- ment, documentation, submission, negotia- tion, and approval of public assistance cost allocation plans in Subpart E of 45 CFR part 95. All administrative costs (direct and indi- rect) are normally charged to Federal awards by implementing the public assistance cost allocation plan. This Appendix exte s in Subpart E of 45 CFR part 95. All administrative costs (direct and indi- rect) are normally charged to Federal awards by implementing the public assistance cost allocation plan. This Appendix extends these requirements to all Federal awarding agen- cies whose programs are administered by a state public assistance agency. Major feder- ally-financed programs typically adminis- tered by state public assistance agencies in- clude: Temporary Aid for Needy Families (TANF), Medicaid, Food Stamps, Child Sup- port Enforcement, Adoption Assistance and Foster Care, and Social Services Block Grant. B. Definitions 1. State public assistance agency means a state agency administering or supervising the administration of one or more public as- sistance programs operated by the state as identified in Subpart E of 45 CFR part 95. For the purpose of this Appendix, these programs include all programs administered by the state public assistance agency. 2. State public assistance agency costs means all costs incurred by, or allocable to, the state public assistance agency, except ex- penditures for financial assistance, medical contractor payments, food stamps, and pay- ments for services and goods costs incurred by, or allocable to, the state public assistance agency, except ex- penditures for financial assistance, medical contractor payments, food stamps, and pay- ments for services and goods provided di- rectly to program recipients. C. Policy State public assistance agencies will de- velop, document and implement, and the Federal Government will review, negotiate, and approve, public assistance cost alloca- tion plans in accordance with Subpart E of 45 CFR part 95. The plan will include all pro- grams administered by the state public as- sistance agency. Where a letter of approval 378 Dept. of Health and Human Services Pt. 75, App. VII or disapproval is transmitted to a state pub- lic assistance agency in accordance with Subpart E, the letter will apply to all Fed- eral agencies and programs. The remaining sections of this Appendix (except for the re- quirement for certification) summarize the provisions of Subpart E of 45 CFR part 95. D. Submission, Documentation, and Ap- proval of Public Assistance Cost Allocation Plans 1. State public assistance agencies are re- quired to promptly submit amendments to the cost allocation plan to HHS for review and approval. 2. Under th oval of Public Assistance Cost Allocation Plans 1. State public assistance agencies are re- quired to promptly submit amendments to the cost allocation plan to HHS for review and approval. 2. Under the coordination process outlined in section E, Review of Implementation of Approved Plans, affected Federal agencies will review all new plans and plan amend- ments and provide comments, as appro- priate, to HHS. The effective date of the plan or plan amendment will be the first day of the calendar quarter following the event that required the amendment, unless an- other date is specifically approved by HHS. HHS, as the cognizant agency for indirect costs acting on behalf of all affected Federal agencies, will, as necessary, conduct negotia- tions with the state public assistance agency and will inform the state agency of the ac- tion taken on the plan or plan amendment. E. Review of Implementation of Approved Plans 1. Since public assistance cost allocation plans are of a narrative nature, the review during the plan approval process consists of evaluating the appropriateness of the pro- posed groupings of costs (cost centers) and the related allocation bases. As such, the Federal Gover the review during the plan approval process consists of evaluating the appropriateness of the pro- posed groupings of costs (cost centers) and the related allocation bases. As such, the Federal Government needs some assurance that the cost allocation plan has been imple- mented as approved. This is accomplished by reviews by the Federal awarding agencies, single audits, or audits conducted by the cognizant agency for indirect costs. 2. Where inappropriate charges affecting more than one Federal awarding agency are identified, the cognizant HHS cost negotia- tion office will be advised and will take the lead in resolving the issue(s) as provided for in Subpart E of 45 CFR part 95. 3. If a dispute arises in the negotiation of a plan or from a disallowance involving two or more Federal awarding agencies, the dis- pute must be resolved in accordance with the appeals procedures set out in 45 CFR part 16. Disputes involving only one Federal award- ing agency will be resolved in accordance with the Federal awarding agency’s appeal process. 4. To the extent that problems are encoun- tered among the Federal awarding agencies or governmental units in connection with the negotiation and appr ith the Federal awarding agency’s appeal process. 4. To the extent that problems are encoun- tered among the Federal awarding agencies or governmental units in connection with the negotiation and approval process, the Of- fice of Management and Budget will lend as- sistance, as required, to resolve such prob- lems in a timely manner. F. Unallowable Costs Claims developed under approved cost allo- cation plans will be based on allowable costs as identified in this Part. Where unallowable costs have been claimed and reimbursed, they will be refunded to the program that re- imbursed the unallowable cost using one of the following methods: (a) A cash refund, (b) offset to a subsequent claim, or (c) credits to the amounts charged to individual Federal awards. Cash refunds, offsets, and credits may include at the option of the cognizant agency for indirect cost, earned or imputed interest from the date of expenditure and de- linquent debt interest, if applicable, charge- able in accordance with applicable cognizant agency for indirect cost claims collection regulations. APPENDIX VII TO PART 75—STATES AND LOCAL GOVERNMENT AND INDIAN TRIBE INDIRECT COST PROPOSALS A. General 1. Indirect cos ith applicable cognizant agency for indirect cost claims collection regulations. APPENDIX VII TO PART 75—STATES AND LOCAL GOVERNMENT AND INDIAN TRIBE INDIRECT COST PROPOSALS A. General 1. Indirect costs are those that have been incurred for common or joint purposes. These costs benefit more than one cost ob- jective and cannot be readily identified with a particular final cost objective without ef- fort disproportionate to the results achieved. After direct costs have been determined and assigned directly to Federal awards and other activities as appropriate, indirect costs are those remaining to be allocated to bene- fitted cost objectives. A cost may not be al- located to a Federal award as an indirect cost if any other cost incurred for the same purpose, in like circumstances, has been as- signed to a Federal award as a direct cost. 2. Indirect costs include (a) the indirect costs originating in each department or agency of the governmental unit carrying out Federal awards and (b) the costs of cen- tral governmental services distributed through the central service cost allocation plan (as described in Appendix V to part) and not otherwise treated as direct costs. 3. Indirect cos he costs of cen- tral governmental services distributed through the central service cost allocation plan (as described in Appendix V to part) and not otherwise treated as direct costs. 3. Indirect costs are normally charged to Federal awards by the use of an indirect cost rate. A separate indirect cost rate(s) is usu- ally necessary for each department or agen- cy of the governmental unit claiming indi- rect costs under Federal awards. Guidelines and illustrations of indirect cost proposals are provided in a brochure published by the Department of Health and Human Services entitled ‘‘A Guide for States and Local Govern- ment Agencies: Cost Principles and Procedures for Establishing Cost Allocation Plans and Indi- rect Cost Rates for Grants and Contracts with the Federal Government.’’ A copy of this bro- chure may be obtained from the HHS’ Cost 379 Pt. 75, App. VII 45 CFR Subtitle A (10–1–24 Edition) Allocation Services or at their Web site at https://rates.psc.gov. 4. Because of the diverse characteristics and accounting practices of governmental units, the types of costs which may be classi- fied as indirect costs cannot be specified in all situations. However, typical examples of verse characteristics and accounting practices of governmental units, the types of costs which may be classi- fied as indirect costs cannot be specified in all situations. However, typical examples of indirect costs may include certain state/ local-wide central service costs, general ad- ministration of the non-Federal entity ac- counting and personnel services performed within the non-Federal entity, depreciation on buildings and equipment, the costs of op- erating and maintaining facilities. 5. This Appendix does not apply to state public assistance agencies. These agencies should refer instead to Appendix VI to part 75. B. Definitions 1. Base means the accumulated direct costs (normally either total direct salaries and wages or total direct costs exclusive of any extraordinary or distorting expenditures) used to distribute indirect costs to indi- vidual Federal awards. The direct cost base selected should result in each Federal award bearing a fair share of the indirect costs in reasonable relation to the benefits received from the costs. 2. Base period for the allocation of indirect costs is the period in which such costs are in- curred and accumulated for allocation to ac- tiv sonable relation to the benefits received from the costs. 2. Base period for the allocation of indirect costs is the period in which such costs are in- curred and accumulated for allocation to ac- tivities performed in that period. The base period normally should coincide with the governmental unit’s fiscal year, but in any event, must be so selected as to avoid inequi- ties in the allocation of costs. 3. Cognizant agency for indirect costs means the Federal agency responsible for reviewing and approving the governmental unit’s indi- rect cost rate(s) on the behalf of the Federal Government. The cognizant agency for indi- rect costs assignment is described in Appen- dix V, section F. 4. Final rate means an indirect cost rate ap- plicable to a specified past period which is based on the actual allowable costs of the pe- riod. A final audited rate is not subject to adjustment. 5. Fixed rate means an indirect cost rate which has the same characteristics as a pre- determined rate, except that the difference between the estimated costs and the actual, allowable costs of the period covered by the rate is carried forward as an adjustment to the rate computation of a subsequent period. 6. hat the difference between the estimated costs and the actual, allowable costs of the period covered by the rate is carried forward as an adjustment to the rate computation of a subsequent period. 6. Indirect cost pool is the accumulated costs that jointly benefit two or more pro- grams or other cost objectives. 7. Indirect cost rate is a device for deter- mining in a reasonable manner the propor- tion of indirect costs each program should bear. It is the ratio (expressed as a percent- age) of the indirect costs to a direct cost base. 8. Indirect cost rate proposal means the doc- umentation prepared by a governmental unit or subdivision thereof to substantiate its re- quest for the establishment of an indirect cost rate. 9. Predetermined rate means an indirect cost rate, applicable to a specified current or fu- ture period, usually the governmental unit’s fiscal year. This rate is based on an estimate of the costs to be incurred during the period. Except under very unusual circumstances, a predetermined rate is not subject to adjust- ment. (Because of legal constraints, pre- determined rates are not permitted for Fed- eral contracts; they may, however, be used for grants or coopera s, a predetermined rate is not subject to adjust- ment. (Because of legal constraints, pre- determined rates are not permitted for Fed- eral contracts; they may, however, be used for grants or cooperative agreements.) Pre- determined rates may not be used by govern- mental units that have not submitted and negotiated the rate with the cognizant agen- cy for indirect costs. In view of the potential advantages offered by this procedure, nego- tiation of predetermined rates for indirect 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 judg- ment as to the probable level of indirect costs during the ensuing accounting periods. 10. Provisional rate means a temporary indi- rect cost rate applicable to a specified period which is used for funding, interim reimburse- ment, and reporting indirect costs on Fed- eral awards pending the establishment of a ‘‘final’’ rate for that period. C. Allocation of Indirect Costs and Determination of Indirect Cost Rates 1. General a. Where a governmental unit’s depart- ment or agency has only he establishment of a ‘‘final’’ rate for that period. C. Allocation of Indirect Costs and Determination of Indirect Cost Rates 1. General a. Where a governmental unit’s depart- ment or agency has only one major function, or where all its major functions benefit from the indirect costs to approximately the same degree, the allocation of indirect costs and the computation of an indirect cost rate may be accomplished through simplified alloca- tion procedures as described in subsection 2. b. Where a governmental unit’s depart- ment or agency has several major functions which benefit from its indirect costs in vary- ing degrees, the allocation of indirect costs may require the accumulation of such costs into separate cost groupings which then are allocated individually to benefitted func- tions by means of a base which best meas- ures the relative degree of benefit. The indi- rect costs allocated to each function are then distributed to individual Federal awards and other activities included in that function by means of an indirect cost rate(s). c. Specific methods for allocating indirect costs and computing indirect cost rates along with the conditions under which each method should b ed in that function by means of an indirect cost rate(s). c. Specific methods for allocating indirect costs and computing indirect cost rates along with the conditions under which each method should be used are described in sub- sections 2, 3 and 4. 380 Dept. of Health and Human Services Pt. 75, App. VII 2. Simplified Method a. Where a non-Federal entity’s major functions benefit from its indirect costs to approximately the same degree, the alloca- tion of indirect costs may be accomplished by (1) classifying the non-Federal entity’s total costs for the base period as either di- rect or indirect, and (2) dividing the total al- lowable indirect costs (net of applicable credits) by an equitable distribution base. The result of this process is an indirect cost rate which is used to distribute indirect costs to individual Federal awards. The rate should be expressed as the percentage which the total amount of allowable indirect costs bears to the base selected. This method should also be used where a governmental unit’s department or agency has only one major function encompassing a number of in- dividual projects or activities, and may be used where the level of Federal awards to that sed where a governmental unit’s department or agency has only one major function encompassing a number of in- dividual projects or activities, and may be used where the level of Federal awards to that department or agency is relatively small. b. Both the direct costs and the indirect costs must exclude capital expenditures and unallowable costs. However, unallowable costs must be included in the direct costs if they represent activities to which indirect costs are properly allocable. c. The distribution base may be (1) total di- rect costs (excluding capital expenditures and other distorting items, such as pass- through funds, subawards in excess of $25,000, participant support costs, etc.), (2) direct sal- aries and wages, or (3) another base which re- sults in an equitable distribution. 3. Multiple Allocation Base Method a. Where a non-Federal entity’s indirect costs benefit its major functions in varying degrees, such costs must be accumulated into separate cost groupings. Each grouping must then be allocated individually to bene- fitted functions by means of a base which best measures the relative benefits. b. The cost groupings should be established so as to permit the allocat ping must then be allocated individually to bene- fitted functions by means of a base which best measures the relative benefits. b. The cost groupings should be established so as to permit the allocation of each group- ing on the basis of benefits provided to the major functions. Each grouping should con- stitute a pool of expenses that are of like character in terms of the functions they ben- efit and in terms of the allocation base which best measures the relative benefits provided to each function. The number of separate groupings should be held within practical limits, taking into consideration the materiality of the amounts involved and the degree of precision needed. c. Actual conditions must be taken into ac- count in selecting the base to be used in allo- cating the expenses in each grouping to ben- efitted functions. When an allocation can be made by assignment of a cost grouping di- rectly to the function benefitted, the alloca- tion must be made in that manner. When the expenses in a grouping are more general in nature, the allocation should be made through the use of a selected base which pro- duces results that are equitable to both the Federal Government and the gover nses in a grouping are more general in nature, the allocation should be made through the use of a selected base which pro- duces results that are equitable to both the Federal Government and the governmental unit. In general, any cost element or related factor associated with the governmental unit’s activities is potentially adaptable for use as an allocation base provided that: (1) It can readily be expressed in terms of dollars or other quantitative measures (total direct costs, direct salaries and wages, staff hours applied, square feet used, hours of usage, number of documents processed, population served, and the like), and (2) it is common to the benefitted functions during the base pe- riod. d. Except where a special indirect cost rate(s) is required in accordance with para- graph (C)(4) of this Appendix, the separate groupings of indirect costs allocated to each major function must be aggregated and treated as a common pool for that function. The costs in the common pool must then be distributed to individual Federal awards in- cluded in that function by use of a single in- direct cost rate. e. The distribution base used in computing the indirect cost rate for each function hen be distributed to individual Federal awards in- cluded in that function by use of a single in- direct cost rate. e. The distribution base used in computing the indirect cost rate for each function may be (1) total direct costs (excluding capital ex- penditures and other distorting items such as pass-through funds, subawards in excess of $25,000, participant support costs, etc.), (2) direct salaries and wages, or (3) another base which results in an equitable distribution. An indirect cost rate should be developed for each separate indirect cost pool developed. The rate in each case should be stated as the percentage relationship between the par- ticular indirect cost pool and the distribu- tion base identified with that pool. 4. Special Indirect Cost Rates a. In some instances, a single indirect cost rate for all activities of a non-Federal entity or for each major function of the agency may not be appropriate. It may not take into ac- count those different factors which may sub- stantially affect the indirect costs applicable to a particular program or group of pro- grams. The factors may include the physical location of the work, the level of administra- tive support required tantially affect the indirect costs applicable to a particular program or group of pro- grams. The factors may include the physical location of the work, the level of administra- tive support required, the nature of the fa- cilities or other resources employed, the or- ganizational arrangements used, or any com- bination thereof. When a particular Federal award is carried out in an environment which appears to generate a significantly different level of indirect costs, provisions should be made for a separate indirect cost pool applicable to that Federal award. The separate indirect cost pool should be devel- oped during the course of the regular alloca- tion process, and the separate indirect cost rate resulting therefrom should be used, pro- vided that: (1) The rate differs significantly 381 Pt. 75, App. VII 45 CFR Subtitle A (10–1–24 Edition) from the rate which would have been devel- oped under paragraphs (C)(2) and (C)(3) of this Appendix, and (2) the Federal award to which the rate would apply is material in amount. b. Where Federal statutes restrict the re- imbursement of certain indirect costs, it may be necessary to develop a special rate for the affected Federal award. Wh te would apply is material in amount. b. Where Federal statutes restrict the re- imbursement of certain indirect costs, it may be necessary to develop a special rate for the affected Federal award. Where a ‘‘re- stricted rate’’ is required, the same proce- dure for developing a non-restricted rate will be used except for the additional step of the elimination from the indirect cost pool those costs for which the law prohibits reimburse- ment. D. Submission and Documentation of Proposals 1. Submission of Indirect Cost Rate Proposals a. All departments or agencies of the gov- ernmental unit desiring to claim indirect costs under Federal awards must prepare an indirect cost rate proposal and related docu- mentation to support those costs. The pro- posal and related documentation must be re- tained for audit in accordance with the records retention requirements contained in § 75.361. b. A governmental department or agency unit that receives more than $35 million in direct Federal funding must submit its indi- rect cost rate proposal to its cognizant agen- cy for indirect costs. Other governmental de- partment or agency must develop an indirect cost proposal in accordance with the requi ust submit its indi- rect cost rate proposal to its cognizant agen- cy for indirect costs. Other governmental de- partment or agency must develop an indirect cost proposal in accordance with the require- ments of this Part and maintain the proposal and related supporting documentation for audit. These governmental departments or agencies are not required to submit their proposals unless they are specifically re- quested to do so by the cognizant agency for indirect costs. Where a non-Federal entity only receives funds as a subrecipient, the pass-through entity will be responsible for negotiating and/or monitoring the subrecipi- ent’s indirect costs. c. Each Indian tribal government desiring reimbursement of indirect costs must submit its indirect cost proposal to the Department of the Interior (its cognizant agency for indi- rect costs). d. Indirect cost proposals must be devel- oped (and, when required, submitted) within six months after the close of the govern- mental unit’s fiscal year, unless an exception is approved by the cognizant agency for indi- rect costs. If the proposed central service cost allocation plan for the same period has not been approved by that time, the indi ear, unless an exception is approved by the cognizant agency for indi- rect costs. If the proposed central service cost allocation plan for the same period has not been approved by that time, the indirect cost proposal may be prepared including an amount for central services that is based on the latest federally-approved central service cost allocation plan. The difference between these central service amounts and the amounts ultimately approved will be com- pensated for by an adjustment in a subse- quent period. 2. Documentation of Proposals The following must be included with each indirect cost proposal: a. The rates proposed, including subsidiary work sheets and other relevant data, cross referenced and reconciled to the financial data noted in subsection b. Allocated central service costs will be supported by the sum- mary table included in the approved central service cost allocation plan. This summary table is not required to be submitted with the indirect cost proposal if the central serv- ice cost allocation plan for the same fiscal year has been approved by the cognizant agency for indirect costs and is available to the funding agency. b. A copy of the financial data (fina ntral serv- ice cost allocation plan for the same fiscal year has been approved by the cognizant agency for indirect costs and is available to the funding agency. b. A copy of the financial data (financial statements, comprehensive annual financial report, executive budgets, accounting re- ports, etc.) upon which the rate is based. Ad- justments the use of unaudited data will be recognized, where ap- propriate, by the Federal cognizant agency for indirect costs in a subsequent proposal. resulting from c. The approximate amount of direct base costs incurred under Federal awards. These costs should be broken out between salaries and wages and other direct costs. d. A chart showing the organizational structure of the agency during the period for which the proposal applies, along with a functional statement(s) noting the duties and/or responsibilities of all units that com- prise the agency. (Once this is submitted, only revisions need be submitted with subse- quent proposals.) 3. Required Certification. Each indirect cost rate proposal must be accompanied by a certification in the fol- lowing form: Certificate of Indirect Costs This is to certify that I have reviewed the indirect cost Certification. Each indirect cost rate proposal must be accompanied by a certification in the fol- lowing form: Certificate of Indirect Costs This is to certify that I have reviewed the indirect cost rate proposal submitted here- with and to the best of my knowledge and belief: (1) All costs included in this proposal [iden- tify date] to establish billing or final indi- rect costs rates for [identify period covered by rate] are allowable in accordance with the requirements of the Federal award(s) to which they apply and the provisions of this 45 CFR part 75. Unallowable costs have been adjusted for in allocating costs as indicated in the indirect cost proposal. (2) All costs included in this proposal are properly allocable to Federal awards on the basis of a beneficial or causal relationship between the expenses incurred and the agree- ments to which they are allocated in accord- ance with applicable requirements. Further, 382 Dept. of Health and Human Services Pt. 75, App. VII the same costs that have been treated as in- direct costs have not been claimed as direct costs. Similar types of costs have been ac- counted for consistently and the Federal Government will be notified of me costs that have been treated as in- direct costs have not been claimed as direct costs. Similar types of costs have been ac- counted for consistently and the Federal Government will be notified of any account- ing changes that would affect the predeter- mined rate. I declare that the foregoing is true and cor- rect. Governmental Unit: Signature: Name of Official: Title: Date of Execution: E. Negotiation and Approval of Rates 1. Indirect cost rates will be reviewed, ne- gotiated, and approved by the cognizant agency on a timely basis. Once a rate has been agreed upon, it will be accepted and used by all Federal agencies unless prohib- ited or limited by statute. Where a Federal awarding agency has reason to believe that special operating factors affecting its Fed- eral awards necessitate special indirect cost rates, the funding agency will, prior to the time the rates are negotiated, notify the cog- nizant agency for indirect costs. 2. The use of predetermined rates, if al- lowed, is encouraged where the cognizant agency for indirect costs has reasonable as- surance based on past experience and reli- able projection of the non-Federal entity’s costs, that the rate is not likely t encouraged where the cognizant agency for indirect costs has reasonable as- surance based on past experience and reli- able projection of the non-Federal entity’s costs, that the rate is not likely to exceed a rate based on actual costs. Long-term agree- ments utilizing predetermined rates extend- ing over two or more years are encouraged, where appropriate. 3. The results of each negotiation must be formalized in a written agreement between the cognizant agency for indirect costs and the governmental unit. This agreement will be subject to re-opening if the agreement is subsequently found to violate a statute, or the information upon which the plan was ne- gotiated is later found to be materially in- complete or inaccurate. The agreed upon rates must be made available to all Federal agencies for their use. 4. Refunds must be made if proposals are later found to have included costs that (a) are unallowable (i) as specified by law or reg- ulation, (ii) as identified in § 75.420 of this part, or (iii) by the terms and conditions of Federal awards, or (b) are unallowable be- cause they are clearly not allocable to Fed- eral awards. These adjustments or refunds will be made regardless part, or (iii) by the terms and conditions of Federal awards, or (b) are unallowable be- cause they are clearly not allocable to Fed- eral awards. These adjustments or refunds will be made regardless of the type of rate negotiated (predetermined, final, fixed, or provisional). F. Other Policies 1. Fringe Benefit Rates If overall fringe benefit rates are not ap- proved for the governmental unit as part of the central service cost allocation plan, these rates will be reviewed, negotiated and approved for individual recipient agencies during the indirect cost negotiation process. In these cases, a proposed fringe benefit rate computation should accompany the indirect cost proposal. If fringe benefit rates are not used at the recipient agency level (i.e., the agency specifically identifies fringe benefit costs to individual employees), the govern- mental unit should so advise the cognizant agency for indirect costs. 2. Billed Services Provided by the Recipient Agency In some cases, governmental departments or agencies (components of the govern- mental unit) provide and bill for services similar to those covered by central service cost allocation plans (e.g., computer cen- ters). Where mental departments or agencies (components of the govern- mental unit) provide and bill for services similar to those covered by central service cost allocation plans (e.g., computer cen- ters). Where this occurs, the governmental departments or agencies (components of the governmental unit) should be guided by the requirements in Appendix V relating to the development of billing rates and documenta- tion requirements, and should advise the cognizant agency for indirect costs of any billed services. Reviews of these types of services (including reviews of costing/billing methodology, profits or losses, etc.) will be made on a case-by-case basis as warranted by the circumstances involved. 3. Indirect Cost Allocations Not Using Rates In certain situations, governmental de- partments or agencies (components of the governmental unit), because of the nature of their Federal awards, may be required to de- velop a cost allocation plan that distributes indirect (and, in some cases, direct) costs to the specific funding sources. In these cases, a narrative cost allocation methodology should be developed, documented, main- tained for audit, or submitted, as appro- priate, to the cognizant ag ts to the specific funding sources. In these cases, a narrative cost allocation methodology should be developed, documented, main- tained for audit, or submitted, as appro- priate, to the cognizant agency for indirect costs for review, negotiation, and approval. 4. Appeals If a dispute arises in a negotiation of an in- direct cost rate (or other rate) between the cognizant agency for indirect costs and the governmental unit, the dispute must be re- solved in accordance with the appeals proce- dures of the cognizant agency for indirect costs. 5. Collection of Unallowable Costs and Erroneous Payments Costs specifically identified as unallowable and charged to Federal awards either di- rectly or indirectly will be refunded (includ- ing interest chargeable in accordance with applicable Federal cognizant agency for indi- rect costs regulations). 383 Pt. 75, App. VIII 45 CFR Subtitle A (10–1–24 Edition) 6. OMB Assistance 27. Southwest Research Institute, San Anto- To the extent that problems are encoun- tered among the Federal agencies or govern- mental units in connection with the negotia- tion and approval process, OMB will lend as- sistance, as required, to resolve such prob- lems in are encoun- tered among the Federal agencies or govern- mental units in connection with the negotia- tion and approval process, OMB will lend as- sistance, as required, to resolve such prob- lems in a timely manner. [79 FR 75889, Dec. 19, 2014, as amended at 81 FR 3019, Jan. 20, 2016] APPENDIX VIII TO PART 75—NONPROFIT FROM ORGANIZATIONS EXEMPTED SUBPART E OF PART 75 1. Advance Technology Institute (ATI), Charleston, South Carolina 2. Aerospace Corporation, El Segundo, Cali- fornia 3. American Institutes of Research (AIR), Washington, DC 4. Argonne National Laboratory, Chicago, Il- linois 5. Atomic Casualty Commission, Wash- ington, DC 6. Battelle Memorial Institute, Headquartered in Columbus, Ohio 7. Brookhaven National Laboratory, Upton, New York 8. Charles Stark Draper Laboratory, Incor- porated, Cambridge, Massachusetts 9. CNA Corporation (CNAC), Alexandria, Vir- ginia 10. Environmental Institute of Michigan, Ann Arbor, Michigan 11. Georgia Institute of Technology/Georgia Tech Applied Research Corporation/Geor- gia Tech Research Institute, Atlanta, Georgia 12. Hanford Environmental Health Founda- tion, Richland, Washington 13. IIT Research Institute, Chicago, Illinois 14. Inst lied Research Corporation/Geor- gia Tech Research Institute, Atlanta, Georgia 12. Hanford Environmental Health Founda- tion, Richland, Washington 13. IIT Research Institute, Chicago, Illinois 14. Institute of Gas Technology, Chicago, Il- linois 15. Institute for Defense Analysis, Alexan- dria, Virginia 16. LMI, McLean, Virginia 17. Mitre Corporation, Bedford, Massachu- setts 18. Noblis, Inc., Falls Church, Virginia 19. National Radiological Astronomy Observ- atory, Green Bank, West Virginia 20. National Renewable Energy Laboratory, Golden, Colorado 21. Oak Ridge Associated Universities, Oak Ridge, Tennessee 22. Rand Corporation, Santa Monica, Cali- fornia 23. Research Triangle Institute, Research Triangle Park, North Carolina 24. Riverside Research Institute, New York, New York 25. South Carolina Research Authority (SCRA), Charleston, South Carolina 26. Southern Research Institute, Bir- mingham, Alabama nio, Texas 28. SRI International, Menlo Park, California 29. Syracuse Research Corporation, Syra- cuse, New York 30. Universities Research Association, Incor- porated (National Acceleration Lab), Ar- gonne, Illinois 31. Urban Institute, Washington DC 32. Non-profit insurance compani oration, Syra- cuse, New York 30. Universities Research Association, Incor- porated (National Acceleration Lab), Ar- gonne, Illinois 31. Urban Institute, Washington DC 32. Non-profit insurance companies, such as Blue Cross and Blue Shield Organizations 33. Other non-profit organizations as nego- tiated with Federal awarding agencies [79 FR 75889, Dec. 19, 2014, as amended at 81 FR 3019, Jan. 20, 2016] APPENDIX IX TO PART 75—PRINCIPLES FOR DETERMINING COSTS APPLICA- BLE TO RESEARCH AND DEVELOP- MENT UNDER GRANTS AND CON- TRACTS WITH HOSPITALS A. Purpose and Scope 1. Objectives This appendix provides principles for deter- mining the costs applicable to research and development work performed by hospitals under grants and contracts with the Depart- ment of Health and Human Services. These principles are confined to the subject of cost determination and make no attempt to iden- tify the circumstances or dictate the extent of hospital participation in the financing of a particular research or development project. The principles are designed to pro- vide recognition of the full allocated costs of such research work under generally accepted accounting principles. These principles will be or development project. The principles are designed to pro- vide recognition of the full allocated costs of such research work under generally accepted accounting principles. These principles will be applicable to both proprietary and non- profit hospitals. No provision for profit or other increment above cost is provided for in these principles. However, this is not to be interpreted as precluding a negotiated fee between contracting parties when a fee is ap- propriate. 2. Policy Guides The successful application of these prin- ciples requires development of mutual under- standing between representatives of hos- pitals and of the Department of Health and Human Services as to their scope, applica- bility and interpretation. It is recognized that: a. The arrangements for hospital participa- tion in the financing of a research and devel- opment project are properly subject to nego- tiation between the agency and the hospital concerned in accordance with such Govern- ment-wide criteria as may be applicable. b. Each hospital, possessing its own unique combination of staff, facilities and experi- ence, should be encouraged to conduct re- search in a manner consonant with its own institu may be applicable. b. Each hospital, possessing its own unique combination of staff, facilities and experi- ence, should be encouraged to conduct re- search in a manner consonant with its own institutional philosophies and objectives. 384 Dept. of Health and Human Services Pt. 75, App. IX c. Each hospital in the fulfillment of its contractual obligations should be expected to employ sound management practices. d. The application of the principles estab- lished herein shall be in conformance with the generally accepted accounting practices of hospitals. e. Hospitals receive reimbursements from the Federal Government for differing types of services under various programs such as support of Research and Development (in- cluding discrete clinical centers) Health Services Projects, Medicare, etc. It is essen- tial that consistent procedures for deter- mining reimbursable costs for similar serv- ices be employed without regard to program differences. Therefore, both the direct and indirect costs of research programs must be identified as a cost center(s) for the cost finding and step-down requirements of the Medicare program, or in its absence the Med- icaid program. 3. Application All costs of research programs must be identified as a cost center(s) for the cost finding and step-down requirements of the Medicare program, or in its absence the Med- icaid program. 3. Application All operating agencies within the Depart- ment of Health and Human Services that sponsor research and development work in hospitals will apply these principles and re- lated policy guides in determining the costs incurred for such work under grants and cost-reimbursement type contracts and sub- contracts. These principles will also be used as a guide in the pricing of fixed-price con- tracts and subcontracts. B. Definition of Terms 1. Organized research means all research ac- tivities of a hospital that may be identified whether the support for such research is from a federal, non-federal or internal source. 2. Departmental research means research ac- tivities that are not separately budgeted and accounted for. Such work, which includes all research activities not encompassed under the term organized research, is regarded for purposes of this document as a part of the patient care activities of the hospital. 3. Research agreement means any valid ar- rangement to perform federally-sponsored ganized research, is regarded for purposes of this document as a part of the patient care activities of the hospital. 3. Research agreement means any valid ar- rangement to perform federally-sponsored research or development including grants, cost-reimbursement type contracts, cost-re- imbursement type subcontracts, and fixed- price contracts and subcontracts. 4. Instruction and training means the formal or informal programs of educating and train- ing technical and professional health serv- ices personnel, primarily medical and nurs- ing training. This activity, if separately budgeted or identifiable with specific costs, should be considered as a cost objective for purposes of indirect cost allocations and the development of patient care costs. 5. Other hospital activities means all orga- nized activities of a hospital not imme- diately related to the patient care, research, and instructional and training functions which produce identifiable revenue from the performance of these activities. If a non-re- lated activity does not produce identifiable revenue, it may be necessary to allocate this expense using an appropriate basis. In such a case, the activity may be included as an al ities. If a non-re- lated activity does not produce identifiable revenue, it may be necessary to allocate this expense using an appropriate basis. In such a case, the activity may be included as an allo- cable cost (See paragraph C.4 below.) Also in- cluded under this definition is any category of cost treated as ‘‘Unallowable,’’ provided such category of cost identifies a function or activity to which a portion of the institu- tion’s indirect cost (as defined in paragraph E.1.) are properly allocable. 6. Patient care means those departments or cost centers which render routine or ancil- lary services to in-patients and/or out-pa- tients. As used in paragraph I.2.w, it means the cost of these services applicable to pa- tients involved in research programs. 7. Allocation means the process by which the indirect costs are assigned as between: a. Organized research, b. Patient care including departmental re- search. c. Instruction and training, and d. Other hospital activities. 8. Cost center means an identifiable depart- ment or area (including research) within the hospital which has been assigned an account number in the hospital accounting system for the purpose of accumulating expe ter means an identifiable depart- ment or area (including research) within the hospital which has been assigned an account number in the hospital accounting system for the purpose of accumulating expense by department or area. 9. Cost finding is the process of recasting the data derived from the accounts ordi- narily kept by a hospital to ascertain costs of the various types of services rendered. It is the determination of direct costs by spe- cific identification and the proration of indi- rect costs by allocation. 10. Step down is a cost finding method that recognizes that services rendered by certain nonrevenue-producing departments or cen- ters are utilized by certain other nonrevenue producing centers as well as by the revenue- producing centers. All costs of nonrevenue- producing centers are allocated to all cen- ters which they serve, regardless of whether or not these centers produce revenue. Fol- lowing the apportionment of the cost of the nonrevenue-producing center, that center will be considered closed and no further costs are apportioned to that center. 11. Scatter bed is a bed assigned to a re- search patient based on availability. Re- search patients occupying these ter will be considered closed and no further costs are apportioned to that center. 11. Scatter bed is a bed assigned to a re- search patient based on availability. Re- search patients occupying these beds are not physically segregated from nonresearch pa- tients occupying beds. Scatter beds are geo- graphically dispersed among all the beds available for use in the hospital. There are no special features attendant to a scatter bed that distinguishes it from others that could just as well have been occupied. 12. Discrete bed is a bed or beds that have been set aside for occupancy by research pa- tients and are physically segregated from other hospital beds in an environment that 385 Pt. 75, App. IX 45 CFR Subtitle A (10–1–24 Edition) permits an easily ascertainable allocation of costs associated with the space they occupy and the services they generate. C. Basic Considerations 1. Composition of Total Costs The cost of a research agreement is com- prised of the allowable direct costs incident to its performance plus the allocable portion of the allowable indirect costs of the hospital less applicable credits. (See paragraph C.5.) 2. Factors Affecting Allowability of Costs The tests of dent to its performance plus the allocable portion of the allowable indirect costs of the hospital less applicable credits. (See paragraph C.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 assigned to research agreements under the standards and methods provided herein. c. They must be accorded consistent treat- ment through application of those generally accepted accounting principles appropriate to the circumstances (See paragraph A.2.e.) and d. They must conform to any limitations or exclusions set forth in these principles or in the research 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 in- volved in the determination of the reason- ableness of a cost are: a. Whether or not the cost is of a type gen- erally recognized as necessary for the oper- ation of the hospi Major considerations in- volved in the determination of the reason- ableness of a cost are: a. Whether or not the cost is of a type gen- erally recognized as necessary for the oper- ation of the hospital or the performance of the research agreement, b. The restraints or requirements imposed by such factors as arm’s length bargaining, federal and state laws and regulations, and research agreement terms and conditions, c. Whether or not the individuals con- cerned acted with due prudence in the cir- cumstances, considering their responsibil- ities to the hospital, its patients, its employ- ees, its students, the 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 hospital policies and practices applicable to the work of the hospital generally, including Government re- search. 4. Allocable Costs a. A cost is allocable to a particular cost center (i.e., a specific function, project, re- search agreement, department, or the like) if the goods or services involved are chargeable or assignable to such cost center in accord- ance with relative benefits received or other equitable relati search agreement, department, or the like) if the goods or services involved are chargeable or assignable to such cost center in accord- ance with relative benefits received or other equitable relationship. Subject to the fore- going, a cost is allocable to a research agree- ment if it is incurred solely to advance the work under the research agreement; or it benefits both the research agreement and other work of the hospital in proportions that can be approximated through use of rea- sonable methods; or it is necessary to the overall operation of the hospital and, in light of the standards provided in this chapter, is deemed to be assignable in part to organized research. Where the purchase of equipment or other capital items are specifically au- thorized under a research agreement, the amounts thus authorized for such purchases are allocable to the research agreement re- gardless of the use that may subsequently be made of the equipment or other capital items involved. b. Any costs allocable to a particular re- search agreement under the standards pro- vided in these principles may not be shifted to other research agreements in order to meet deficiencies caused by overruns or ot allocable to a particular re- search agreement under the standards pro- vided in these principles may not be shifted to other research agreements in order to meet deficiencies caused by overruns or other fund considerations, to avoid restric- tions imposed by law or by terms of the re- search agreement, or for other reasons of convenience. 5. Applicable Credits a. The term applicable credits refers to those receipts or negative expenditure types of transactions which operate to offset or re- duce expense items that are allocable to re- search agreements as direct or indirect costs as outlined in paragraph E.1. Typical exam- ples of such transactions are: Purchase dis- counts, rebates, or allowances; recoveries or indemnities on losses; sales of scrap or inci- dental services; tuition; adjustments of over- payments or erroneous charges; and services rendered to patients admitted to federally funded clinical research centers, primarily for care though also participating in re- search protocols. b. In some instances, the amounts received from the Federal Government to finance hos- pital activities or service operations should be treated as applicable credits. Specifically, the concept tocols. b. In some instances, the amounts received from the Federal Government to finance hos- pital activities or service operations should be treated as applicable credits. Specifically, the concept of netting such credit items against related expenditures should be ap- plied by the hospital in determining the rates or amounts to be charged to govern- ment research for services rendered when- ever the facilities or other resources used in providing such services have been financed directly, in whole or in part, by federal funds. Thus, where such items are provided for or benefit a particular hospital activity, i.e., patient care, research, instruction and training, or other, they should be treated as an offset to the indirect costs apportioned to that activity. Where the benefits are com- mon to all hospital activities they should be 386 Dept. of Health and Human Services Pt. 75, App. IX treated as a credit to the total indirect cost pool before allocation to the various cost ob- jectives. D. Direct Costs 1. General Direct costs are those that can be identi- fied specifically with a particular cost cen- ter. For this purpose, the term cost center refers not only to the ultimate c tives. D. Direct Costs 1. General Direct costs are those that can be identi- fied specifically with a particular cost cen- ter. For this purpose, the term cost center refers not only to the ultimate centers against which costs are finally lodged such as research agreements, but also to other es- tablished cost centers such as the individual accounts for recording particular objects or items of expense, and the separate account groupings designed to record the expenses in- curred by individual organizational units, functions, projects and the like. In general, the administrative functions and service ac- tivities described in paragraph VI are identi- fiable as separate cost centers, and the ex- penses associated with such centers become eligible in due course for distribution as in- direct costs of research agreements and other ultimate cost centers. 2. Application to Research Agreements Identifiable benefit to the research work rather than the nature of the goods and serv- ices involved is the determining factor in distinguishing direct from indirect costs of research agreements. Typical of transactions chargeable to a research agreement as direct costs are the compensation of empl d is the determining factor in distinguishing direct from indirect costs of research agreements. Typical of transactions chargeable to a research agreement as direct costs are the compensation of employees for the time or effort devoted to the perform- ance of work under the research agreement, including related staff benefit and pension plan costs to the extent that such items are consistently accorded to all employees and treated by the hospital as direct rather than indirect costs (see paragraph E.2.d(2)); the costs of materials consumed or expended in the performance of such work; and other items of expense incurred for the research agreement, such as extraordinary utility consumption. The cost of materials supplied from stock or services rendered by special- ized facilities or other institutional service operations may be included as direct costs of research agreements provided such items are consistently treated by the institution as di- rect rather than indirect costs and are charged under a recognized method of cost- ing or pricing designed to recover only the actual direct and indirect costs of such ma- terial or service and conforming to generally accepted cost accounting arged under a recognized method of cost- ing or pricing designed to recover only the actual direct and indirect costs of such ma- terial or service and conforming to generally accepted cost accounting practices consist- ently followed by the institution. E. Indirect Costs 1. General Indirect costs are those that have been in- curred for common or joint objectives, and thus are not readily subject to treatment as direct costs of research agreements or other ultimate or revenue producing cost centers. In hospitals such costs normally are classi- fied but not necessarily restricted to the fol- lowing functional categories: Depreciation; Administrative and General (including fringe benefits if not charged directly); Operation of Plant; Maintenance of Plant; Laundry and Linen Service; Housekeeping; Dietary; Main- tenance of Personnel; and Medical Records and Library. 2. Criteria for Distribution a. Base period. A base period for distribution of indirect costs is the period during which such costs are incurred and accumulated for distribu- tion to work performed within that period. The base period normally should coincide with the fiscal year established by the hos- pital, but in any eve costs are incurred and accumulated for distribu- tion to work performed within that period. The base period normally should coincide with the fiscal year established by the hos- pital, 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 allocation process is to distribute the indirect costs de- scribed in paragraph F. to organized re- search, patient care, instruction and train- ing, and other hospital activities in reason- able proportions consistent with the nature and extent of the use of the hospital’s re- sources by research personnel, medical staff, patients, students, and other personnel or or- ganizations. In order to achieve this objec- tive with reasonable precision, it may be necessary to provide for selective distribu- tion by establishing separate groupings of cost within one or more of the functional categories of indirect costs referred to in paragraph E.1. In general, the cost groupings established within a functional category should constitute, in each case, a pool of those items of expense that are considered to be of like character in terms of their r n general, the cost groupings established within a functional category should constitute, in each case, a pool of those items of expense that are considered to be of like character in terms of their relative contribution to (or degree of remoteness from) the particular cost centers to which distribution is appropriate. Each such pool or cost grouping should then be distributed individually to the related cost centers, using the distribution base or method most appropriate in the light of the guides set out in 2.c. below. While this paragraph places primary emphasis on a step-down method of indirect cost computation, paragraph H. pro- vides an alternate method which may be used under certain conditions. c. Selection of distribution method. Actual conditions must be taken into ac- count in selecting the method or base to be used in distributing to related cost centers the expenses assembled under each of the in- dividual cost groups established as indicated under 2.b. above. Where a distribution can be made by assignment of a cost grouping di- rectly to the area benefited, the distribution should be made in that manner. Care should be given, however, to eliminate similar or 387 Pt. 7 ribution can be made by assignment of a cost grouping di- rectly to the area benefited, the distribution should be made in that manner. Care should be given, however, to eliminate similar or 387 Pt. 75, App. IX 45 CFR Subtitle A (10–1–24 Edition) duplicative costs from any other distribution made to this area. Where the expenses under a cost grouping are more general in nature, the distribution to related cost centers should be made through use of a selected base which will produce results which are eq- uitable to both the Government and the hos- pital. In general, any cost element or cost- related factor associated with the hospital’s work is potentially adaptable for use as a distribution base provided: (1) It can readily be expressed in terms of dollars or other quantitative measure (total direct expenditures, direct salaries, man- hours applied, square feet utilized, hours of usage, number of documents processed, popu- lation served, and the like); and (2) It is common to the related cost centers during the base period. The essential consid- eration in selection of the distribution base in each instance is that it be the one best suited for assigning the pool of costs to re- la ed cost centers during the base period. The essential consid- eration in selection of the distribution base in each instance is that it be the one best suited for assigning the pool of costs to re- lated cost centers in accord with the relative benefits derived; the traceable cause and ef- fect relationship; or logic and reason, where neither benefit nor cause and effect relation- ship is determinable. d. General consideration on cost groupings. separate cost to which The extent groupings and selective distribution would be appropriate at a hospital 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 groups (based on account classification or analysis) within a functional category in- clude but are not limited to the following: (1) Where certain items or categories of ex- pense relate solely to one of the major divi- sions of the hospital (patient care, sponsored research, instruction and training, or other hospital activities) or to any two but not all, such expenses should be set aside as a sepa- rate cost grouping for direct assignment or selective distribution in accordance with th training, or other hospital activities) or to any two but not all, such expenses should be set aside as a sepa- rate cost grouping for direct assignment or selective distribution in accordance with the guides provided in 2.b. and 2.c.above. (2) Where any types of expense ordinary treated as indirect cost as outlined in para- graph are charged to research agreements as direct costs, the similar type expenses appli- cable to other activities of the institution must through separate cost grouping be ex- cluded from the indirect costs allocable to research agreements. (3) Where it is determined that certain ex- penses are for the support of a service unit or facility whose output is susceptible of meas- urement 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 and other hospital activities. (4) Where organized activities (including identifiable segments of organized research as well as the activities cited inB.5.) provide their own purchasing, personnel administra- tion, building maintenance, or housekeeping or similar service, the distribution of such elements of indirect cost t as the activities cited inB.5.) provide their own purchasing, personnel administra- tion, building maintenance, or housekeeping or similar service, the distribution of such elements of indirect cost to such activities should be accomplished through cost group- ing which includes only that portion of cen- tral indirect costs (such as for overall man- agement) which are properly allocable to such activities. (5) Where the hospital elects to treat as in- direct charges the costs of pension plans and other staff benefits, such costs should be set aside as a separate cost grouping for selec- tive distribution to related cost centers, in- cluding organized research. (6) Where the hospital is affiliated with a medical school or some other institution which performs organized research on the hospital’s premises, every effort should be made to establish separate cost groupings in the Administrative and General or other ap- plicable category which will reasonably re- flect the use of services and facilities by such research. (See also paragraph.) e. Materiality. Where it is determined that the use of sep- arate cost groupings and selective distribu- tion are necessary to produce equitable re d facilities by such research. (See also paragraph.) e. Materiality. Where it is determined that the use of sep- arate cost groupings and selective distribu- tion are necessary to produce equitable re- sults, the number of such separate cost groupings within a functional category should be held within practical limits, after taking into consideration the materiality of the amounts involved and the degree of pre- less selective cision attainable through methods of distribution. 3. Administration of Limitations on Allowances for Indirect Costs a. Research grants may be subject to laws and/or administrative regulations that limit the allowance for indirect costs under each such grant to a stated percentage of the di- rect costs allowed. Agencies that sponsor such grants will establish procedures which will assure that: (1) The terms and amount authorized in each case conform with the provisions of paragraphs C, E, and I of these principles as they apply to matters involving the con- sistent treatment and allowability of indi- vidual items of cost; and (2) The amount actually allowed for indi- rect costs under each such research grant does not exceed the maximum allowable under the lim nt treatment and allowability of indi- vidual items of cost; and (2) The amount actually allowed for indi- rect costs under each such research grant does not exceed the maximum allowable under the limitation or the amount other- wise allowable under these principles, which- ever is the smaller. b. Where the actual allowance for indirect costs on any research grant must be re- stricted to the smaller of the two alternative amounts referred to in 3.a. above, such alter- native amounts should be determined in ac- cordance with the following guides: (1) The maximum allowable under the limi- tation should be established by applying the stated percentage to a direct cost base which 388 Dept. of Health and Human Services Pt. 75, App. IX shall include all items of expenditure au- thorized by the sponsoring agency for inclu- sion as part of the total cost for the direct benefit of the work under the grant; and (2) The amount otherwise allowable under these principles should be established by ap- plying the current institutional indirect cost rate to those elements of direct cost which were included in the base on which the rate was computed. c. When the maximum amount allowable under a stat - plying the current institutional indirect cost rate to those elements of direct cost which were included in the base on which the rate was computed. c. When the maximum amount allowable under a statutory limitation or the terms of a research agreement is less than the amount otherwise allocable as indirect costs under these principles, the amount not re- coverable as indirect costs under the re- search agreement involved may not be shift- ed to other research agreements. F. Identification and Assignment of Indirect Costs 1. Depreciation or Use Charge a. The expenses under this heading should include depreciation (as defined in paragraph I.2.i(1)) on buildings, fixed equipment, and movable equipment, except to the extent purchased through federal funds. Where ade- quate records for the recording of deprecia- tion are not available, a use charge may be substituted for depreciation (See paragraph I.2.) b. The expenses included in this category should be allocated to applicable cost cen- ters in a manner consistent with the guides set forth in paragraph E.2., on a basis that gives primary emphasis to (a) space utiliza- tion with respect to depreciation on build- ings and fixed equipm ters in a manner consistent with the guides set forth in paragraph E.2., on a basis that gives primary emphasis to (a) space utiliza- tion with respect to depreciation on build- ings and fixed equipment; and (b) specific identification of assets and their use with re- spect to movable equipment as it relates to patient care, organized research, instruction and training, and other hospital activities. Where such records are not sufficient for the purpose of the foregoing, reasonable esti- mates will suffice as a means for effecting distribution of the amounts involved. 2. Administration and General Expenses a. The expenses under this heading are those that have been incurred for the admin- istrative offices of the hospital including ac- counting, personnel, purchasing, information centers, telephone expense, and the like which do not relate solely to any major divi- sion of the institution, i.e., solely to patient care, organized research, instruction and training, or other hospital activities. b. The expenses included in this category may be allocated on the basis of total ex- penditures exclusive of capital expenditures, or salaries and wages in situations where the results of th tivities. b. The expenses included in this category may be allocated on the basis of total ex- penditures exclusive of capital expenditures, or salaries and wages in situations where the results of the distribution made on this basis are deemed to be equitable both to the Gov- ernment and the hospital; otherwise the dis- tribution of Administration and General ex- penses should be made through use of se- lected bases, applied to separate cost groupings established within this category of expenses in accordance with the guides set out in paragraph E.2. 3. Operation of Plant a. The expenses under this heading are those that have been incurred by a central service organization or at the departmental level for the administration, supervision, and provision of utilities (exclusive of telephone expense) and protective services to the phys- ical plant. They include expenses incurred for such items as power plant operations, general utility costs, elevator operations, protection services, and general parking lots. b. The expenses included in this category should be allocated to applicable cost cen- ters in a manner consistent with the guides provided in paragraph E.2., on a basis that give general parking lots. b. The expenses included in this category should be allocated to applicable cost cen- ters in a manner consistent with the guides provided in paragraph E.2., on a basis that gives primary emphasis to space utilization. The allocations should be developed as fol- lows: (1) Where actual space and related cost records are available or can readily be devel- oped and maintained without significant change in the accounting practices, the amount distributed should be based on such records; (2) Where the space and related cost records maintained are not sufficient for purposes of the foregoing, a reasonable esti- mate of the proportion of total space as- signed to the various costs centers normally will suffice as a means for effecting distribu- tion of the amounts involved; or (3) Where it can be demonstrated that an area or volume or space basis of allocation is impractical or inequitable, other bases may be used provided consideration is given to the use of facilities by research personnel and others, including patients. 4. Maintenance of Plant a. The expenses under this heading should include: (1) All salaries and wages pertaining to or- dinary repair and maintena by research personnel and others, including patients. 4. Maintenance of Plant a. The expenses under this heading should include: (1) All salaries and wages pertaining to or- dinary repair and maintenance work per- formed by employees on the payroll of the hospital; (2) All supplies and parts used in the ordi- nary repairing and maintaining of buildings and general equipment; and (3) Amounts paid to outside concerns for the ordinary repairing and maintaining of buildings and general equipment. b. The expenses included in this category should be allocated to applicable cost cen- ters in a manner consistent with the guides provided in paragraph E.2. on a basis that gives primary emphasis to space utilization. The allocations and apportionments should be developed as follows: (1) Where actual space and related cost records are available and can readily be de- veloped and maintained without significant 389 Pt. 75, App. IX 45 CFR Subtitle A (10–1–24 Edition) change in the accounting practices, the amount distributed should be based on such records; (2) Where the space and related cost records maintained are not sufficient for purposes of the foregoing, a reasonable esti- mate of the prop s, the amount distributed should be based on such records; (2) Where the space and related cost records maintained are not sufficient for purposes of the foregoing, a reasonable esti- mate of the proportion of total space as- signed to the various cost centers normally will suffice as a means for effecting distribu- tion of the amounts involved; or (3) Where it can be demonstrated that an area or volume of space basis of allocation is impractical or inequitable, other basis may be used provided consideration is given to the use of facilities by research personnel and others, including patients. 5. Laundry and Linen a. The expenses under this heading should include: (1) Salaries and wages of laundry depart- ment employees, seamstresses, clean linen handlers, linen delivery men, etc.; (2) Supplies used in connection with the laundry operation and all linens purchased; and (3) Amounts paid to outside concerns for purchased laundry and/or linen service. b. The expense included in this category should be allocated to related cost centers in a manner consistent with the guides pro- vided in paragraph E.2. on a basis that gives primary emphasis to actual pounds of linen used. The allocati gory should be allocated to related cost centers in a manner consistent with the guides pro- vided in paragraph E.2. on a basis that gives primary emphasis to actual pounds of linen used. The allocations should be developed as follows: (1) Where actual poundage and related cost records are available or can readily be devel- oped and maintained without significant change in the accounting practices, the amount distributed should be based on such records; (2) Where it can be demonstrated that a poundage basis of allocation is impractical or inequitable other bases may be used pro- vided consideration is given to the use of linen by research personnel and others, in- cluding patients. 6. Housekeeping a. The expenses under this heading should include: (1) All salaries and wages of the depart- ment head, foreman, maids, porters, janitors, wall washers, and other housekeeping em- ployees; (2) All supplies used in carrying out the housekeeping functions; and (3) Amounts paid to outside concerns for purchased services such as window washing, insect extermination, etc. b. The expenses included in this category should be allocated to related cost centers in a manner consistent with the guide ns for purchased services such as window washing, insect extermination, etc. b. The expenses included in this category should be allocated to related cost centers in a manner consistent with the guides pro- vided in paragraph E.2. on a basis that gives primary emphasis to space actually serviced by the housekeeping department. The alloca- tions and apportionments should be devel- oped as follows: (1) Where actual space serviced and related cost records are available or can readily be developed and maintained without signifi- cant change in the accounting practices, the amount distributed should be based on such records; (2) Where the space serviced and related cost records maintained are not sufficient for purposes of the foregoing, a reasonable estimate of the proportion of total space as- signed to the various cost centers normally will suffice as a means for effecting distribu- tion of the amounts of housekeeping ex- penses involved; or (3) Where it can be demonstrated that the space serviced basis of allocation is imprac- tical or inequitable, other bases may be used provided consideration is given to the use of housekeeping services by research personnel and others, including e serviced basis of allocation is imprac- tical or inequitable, other bases may be used provided consideration is given to the use of housekeeping services by research personnel and others, including patients. 7. Dietary a. These expenses, as used herein, shall mean only the subsidy provided by the hos- pital to its employees including research personnel through its cafeteria operation. The hospital must be able to demonstrate through the use of proper cost accounting techniques that the cafeteria operates at a loss to the benefit of employees. b. The reasonable operating loss of a sub- sidized cafeteria operation should be allo- cated to related cost centers in a manner consistent with the guides provided in para- graph E.2. on a basis that gives primary em- phasis to number of employees. 8. Maintenance (Housing) of Personnel a. The expenses under this heading should include: (1) The salaries and wages of matrons, clerks, and other employees engaged in work in nurses’ residences and other employees’ quarters; (2) All supplies used in connection with the operation of such dormitories; and (3) Payments to outside agencies for the rental of houses, apartments, or rooms used by hospit ther employees’ quarters; (2) All supplies used in connection with the operation of such dormitories; and (3) Payments to outside agencies for the rental of houses, apartments, or rooms used by hospital personnel. b. The expenses included in this category should be allocated to related cost centers in a manner consistent with the guides pro- vided in paragraph E.2. on a basis that gives primary emphasis to employee utilization of housing facilities. The allocation should be developed as follows: (1) Appropriate credit should be given for all payments received from employees or otherwise to reduce the expense to be allo- cated; (2) A net cost per housed employee may then be computed; and 390 Dept. of Health and Human Services Pt. 75, App. IX (3) Allocation should be made on a depart- mental basis based on the number of housed employees in each respective department. 9. Medical Records and Library a. The expenses under this heading should include: (1) The salaries and wages of the records li- brarian, medical librarian, clerks, stenog- raphers, etc.; and (2) All supplies such as medical record forms, chart covers, filing supplies, sta- tionery, medical library books, periodicals, etc s li- brarian, medical librarian, clerks, stenog- raphers, etc.; and (2) All supplies such as medical record forms, chart covers, filing supplies, sta- tionery, medical library books, periodicals, etc. b. The expenses included in this category should be allocated to related cost centers in a manner consistent with the guides pro- vided in paragraph E.2. on a basis that gives primary emphasis to a special time survey of medical records personnel. If this appears to be impractical or inequitable, other bases may be used provided consideration is given to the use of these facilities by research per- sonnel and others, including patients. G. Determination and Application of Indirect Cost Rate or Rates 1. Indirect Cost Pools a. Subject to b. below, indirect costs allo- cated to organized research should be treated as a common pool, and the costs in such common pool should be distributed to indi- vidual research agreements benefiting there- from on a single rate basis. b. In some instances a single rate basis for use on all government research at a hospital may not be appropriate since it would not take into account those different environ- mental factors which may affect substan- tially single rate basis for use on all government research at a hospital may not be appropriate since it would not take into account those different environ- mental factors which may affect substan- tially the indirect costs applicable to a par- ticular segment of government research at the institution. For this purpose, a par- ticular segment of government research may be that performed under a single research agreement or it may consist of research under a group of research agreements per- formed in a common environment. The envi- ronmental factors are not limited to the physical location of the work. Other impor- tant factors are the level of the administra- tive support required, the nature of the fa- cilities or other resources employed, the sci- entific disciplines or technical skills in- volved, the organizational arrangements used, or any combination thereof. Where a particular segment of government research is performed within an environment which appears to generate a significantly different level of indirect costs, provision should be made for a separate indirect cost pool appli- cable to such work. An example of this dif- ferential may be in the development of a sep- arate i y different level of indirect costs, provision should be made for a separate indirect cost pool appli- cable to such work. An example of this dif- ferential may be in the development of a sep- arate indirect cost pool for a clinical re- search center grant. The separate indirect cost pool should be developed during the course of the regular distribution process, and the separate indirect cost rate resulting therefrom should be utilized provided it is determined that: (1) Such indirect cost rate differs signifi- cantly from that which would have obtained under a. above; and (2) The volume of research work to which such rate would apply is material in relation to other government research at the institu- tion. c. It is a common practice for grants or contracts awarded to other institutions, typically University Schools of Medicine, to be performed on hospital premises. In these cases the hospital should develop a separate indirect cost pool applicable to the work under such grants or contracts. This pool should be developed by a selective distribu- tion of only those indirect cost categories which benefit the work performed by the other institution, within the practical limits dictat tracts. This pool should be developed by a selective distribu- tion of only those indirect cost categories which benefit the work performed by the other institution, within the practical limits dictated by available data and the materi- ality of the amounts involved. Hospital costs determined to be allocable to grants or con- tracts awarded to another institution may not be recovered as a cost of grants or con- tracts awarded directly to the hospital. 2. The Distribution Base Preferably, indirect costs allocated to or- ganized research should be distributed to ap- plicable research agreements on the basis of direct salaries and wages. However, where the use of salaries and wages results in an in- equitable allocation of costs to the research agreements, total direct costs or a variation thereof, may be used in lieu of salaries and wages. Regardless of the base used, an indi- rect cost rate should be determined for each of the separate indirect cost pools developed pursuant to paragraph G.1. The rate in each case should be stated as the percentage which the amount of the particular indirect cost pool is of the total direct salaries and wages (or other base selected) for all re- sear G.1. The rate in each case should be stated as the percentage which the amount of the particular indirect cost pool is of the total direct salaries and wages (or other base selected) for all re- search agreements identified with such a pool. 3. Negotiated Lump Sum for Overhead A negotiated fixed amount in lieu of indi- rect costs may be appropriate for self-con- tained or off-campus research activities where the benefits derived from a hospital’s indirect services cannot be readily deter- mined. Such amount negotiated in lieu of in- direct costs will be treated as an offset to the appropriate indirect cost pool after allo- cation to patient care, organized research, instruction and training, and other hospital activities. The base on which such remaining expenses are allocated should be appro- priately adjusted. 391 Pt. 75, App. IX 45 CFR Subtitle A (10–1–24 Edition) 4. Predetermined Overhead Rates The utilization of predetermined fixed overhead rates may offer potential advan- tages in the administration of research agreements by facilitating the preparation of research budgets and permitting more ex- peditious close out of the agreements when the work is completed. Therefore, to in the administration of research agreements by facilitating the preparation of research budgets and permitting more ex- peditious close out of the agreements when the work is completed. Therefore, to the ex- tent allowed by law, consideration may be given to the negotiation of predetermined fixed rates in those situations where the cost experience and other pertinent factors avail- able are deemed sufficient to enable the Gov- ernment and the hospital to reach a reason- able conclusion as to the probable level of the indirect cost rate for the ensuing ac- counting period. H. Simplified Method for Small Institutions 1. General a. Where the total direct cost of all govern- ment-sponsored research and development work at a hospital in a year is minimal, the use of the abbreviated procedure described in paragraph H.2. below may be acceptable in the determination of allowable indirect costs. This method may also be used to ini- tially determine a provisional indirect cost rate for hospitals that have not previously established a rate. Under this abbreviated procedure, data taken directly from the in- stitution’s most recent annual financial re- port and immediately available supporting s that have not previously established a rate. Under this abbreviated procedure, data taken directly from the in- stitution’s most recent annual financial re- port and immediately available supporting information will be utilized as a basis for de- termining the indirect cost rate applicable to research agreements at the institution. b. The rigid formula approach provided under the abbreviated procedure has limita- tions which may preclude its use at some hospitals either because the minimum data required for this purpose are not readily available or because the application of the abbreviated procedure to the available data produces results which appear inequitable to the Government or the hospital. In any such case, indirect costs should be determined through use of the regular procedure rather than the abbreviated procedure. c. In certain instances where the total di- rect cost of all government-sponsored re- search and development work at the hospital is more than minimal, the abbreviated pro- cedure may be used if prior permission is ob- tained. This alternative will be granted only in those cases where it can be demonstrated that the step-down technique cannot be fol- lowed. 2 viated pro- cedure may be used if prior permission is ob- tained. This alternative will be granted only in those cases where it can be demonstrated that the step-down technique cannot be fol- lowed. 2. Abbreviated Procedure a. Total expenditures as taken from the most recent annual financial report will be adjusted by eliminating from further consid- eration expenditures for capital items as de- fined in paragraph I.2.d. and unallowable costs as defined under various headings in paragraph I. and paragraph C.5. b. Total expenditures as adjusted under the foregoing will then be distributed among (1) expenditures applicable to administrative and general overhead functions, (2) expendi- tures applicable to all other overhead func- tions, and (3) expenditures for all other pur- poses. The first group shall include amounts associated with the functional categories, Administration and General, and Dietary, as defined in paragraphs F.2. and 7. The second group shall include Depreciation, Operation of Plant, Maintenance of Plant, and House- keeping. The third group—expenditures for all other purposes—shall the amounts applicable to all other activities, namely, patient care, organized resea tion of Plant, Maintenance of Plant, and House- keeping. The third group—expenditures for all other purposes—shall the amounts applicable to all other activities, namely, patient care, organized research, in- struction and training, and other hospital activities as defined under paragraph B.5. For the purposes of this section, the func- tional categories of Laundry and Linen, Maintenance of Personnel, and Medical Records and Library as defined in paragraph E. shall be considered as expenditures for all other purposes. include c. The expenditures distributed to the first two groups in paragraph H.2.b. should then be adjusted by those receipts or negative ex- penditure types of transactions which tend to reduce expense items allocable to research agreements as indirect costs. Examples of such receipts or negative expenditures are itemized in paragraph C.5.a. d. In applying the procedures in paragraphs H.2.a and 2.b, the cost of unallowable activi- ties such as Gift Shop, Investment Property Management, Fund Raising, and Public Rela- tions, when they benefit from the hospital’s indirect cost services, should be treated as expenditures for all other purposes. Such ac- tivities are pres rty Management, Fund Raising, and Public Rela- tions, when they benefit from the hospital’s indirect cost services, should be treated as expenditures for all other purposes. Such ac- tivities are presumed to benefit from the hospital’s indirect cost services when they include salaries of personnel working in the hospital. When they do not include such sal- aries, they should be eliminated from the in- direct cost rate computation. e. The indirect cost rate will then be com- puted in two stages. The first stage requires the computation of an Administrative and General rate component. This is done by ap- plying a ratio of research direct costs over total direct costs to the Administrative and General pool developed under paragraphs H.2.b and 2.c. above. The resultant amount— that which is allocable to research—is di- vided by the direct research cost base. The second stage requires the computation of an All Other Indirect Cost rate component. This is done by applying a ratio of research direct space over total direct space to All Other In- direct Cost pool developed under paragraphs H.2.b. and 2.c. above. The resultant amount— that which is allocable to research—is di- vided by the d direct space over total direct space to All Other In- direct Cost pool developed under paragraphs H.2.b. and 2.c. above. The resultant amount— that which is allocable to research—is di- vided by the direct research cost base. The total of the two rate components will be the institution’s indirect cost rate. For 392 Dept. of Health and Human Services Pt. 75, App. IX the purposes of this section, the research di- rect cost or space and total direct cost or space will be that cost or space identified with the functional categories classified under Expenditures for all other purposes under paragraph H.2.b. I. General Standards for Selected Items of Cost 1. General This section provides standards to be ap- plied in establishing the allowability of cer- tain items involved in determining cost. These standards should apply irrespective of whether a particular item of cost is properly treated as direct cost or indirect cost. Fail- ure to mention a particular item of cost in the standards 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 or stand- ards provided for similar or related it t intended to imply that it is either allowable or unallowable; rather, determination as to allowability in each case should be based on the treatment or stand- ards provided for similar or related items of cost. In case of discrepancy between the pro- visions of a specific research agreement and the applicable standards provided, the provi- sions of the research agreement should gov- ern. However, in some cases advance under- standings should be reached on particular cost items in order that the full costs of re- search be supported. The extent of allow- ability of the selected items of cost covered in this section has been stated to apply broadly to many accounting systems in varying environmental situations. Thus, as to any given research agreement, the reason- ableness and allocability of certain items of costs may be difficult to determine, particu- larly in connection with hospitals which have medical school or other affiliations. In order to avoid possible subsequent disallow- ance or dispute based on unreasonableness or nonallocability, it is important that prospec- tive recipients of federal funds, particularly those whose work is predominantly or sub- stantially with the nce or dispute based on unreasonableness or nonallocability, it is important that prospec- tive recipients of federal funds, particularly those whose work is predominantly or sub- stantially with the Government, seek agree- ment with the Government in advance of the incurrence of special or unusual costs in cat- egories where reasonableness or allocability are difficult to determine. Such agreement may also be initiated by the Government. Any such agreement should be incorporated in the research agreement itself. However, the absence of such an advance agreement on any element of cost will not in itself serve to make that element either allowable or unal- lowable. Examples of costs on which advance agreements may be particularly important are: a. Facilities costs, such as; (1) Depreciation (2) Rental (3) Use charges for fully depreciated assets (4) Idle facilities and idle capacity (5) Plant reconversion (6) Extraordinary or deferred maintenance and repair (7) Acquisition of automatic data proc- essing equipment. b. Pre-award costs c. Non-hospital professional activities d. Self-insurance e. Support services charged directly (com- puter services, printing and duplicating serv- ices data proc- essing equipment. b. Pre-award costs c. Non-hospital professional activities d. Self-insurance e. Support services charged directly (com- puter services, printing and duplicating serv- ices, etc.) f. Employee compensation, travel, and other personnel costs, including: (1) Compensation for personal service, in- cluding wages and salaries, bonuses and in- centives, premium payments, pay for time not worked, and supplementary compensa- tion and benefits, such as pension and retire- ment, group insurance, severance pay plans, and other forms of compensation; (2) Morale, health, welfare, and food serv- ice and dormitory costs. (3) Training and education costs. (4) Relocation costs, including special or mass personnel movement. 2. Selected Items a. Advertising costs. The term advertising costs means the costs of advertising media and corollary administrative costs. Adver- tising media include magazines, newspapers, radio and television programs, direct mail, exhibits, and the like. The only advertising costs allowable are those which are solely for: (1) The recruitment of persons required for the performance by the institution of obliga- tions arising under the research agreem . The only advertising costs allowable are those which are solely for: (1) The recruitment of persons required for the performance by the institution of obliga- tions arising under the research agreement, when considered in conjunction with all other recruitment costs as set forth in para- graph I.2.hh; (2) The procurement of scarce items for the performance of the research agreement; or (3) The disposal of scrap or surplus mate- rials acquired in the performance of the re- search agreement. Costs of this nature, if incurred for more than one research agreement or for both re- search agreement work and other work of the institution, are allowable to the extent that the principles in paragraphs D. and E. are observed. b. Bad debts. Losses arising from uncollectible accounts and other claims and related collection and legal costs are unal- lowable except that a bad debt may be in- cluded as a direct cost of the research agree- ment to the extent that it is caused by a re- search patient and approved by the awarding agency. This inclusion is only intended to cover the situation of the patient admitted for research purposes who subsequently or in conjunction with the research receives and approved by the awarding agency. This inclusion is only intended to cover the situation of the patient admitted for research purposes who subsequently or in conjunction with the research receives clin- ical care for which a charge is made to the patient. If, after exhausting all means of col- lecting these charges, a bad debt results, it may be considered an appropriate charge to the research agreement. c. Bonding costs. 393 Pt. 75, App. IX 45 CFR Subtitle A (10–1–24 Edition) (1) Bonding costs arise when the Govern- ment requires assurance against financial loss to itself or others by reason of the act or default of the hospital. They arise also in in- stances where the hospital requires similar assurance. Included are such types as bid, perform- ance, payment, advance payment, infringe- ment, and fidelity bonds. (2) Costs of bonding required pursuant to the terms of the research agreement are al- lowable. (3) Costs of bonding required by the hos- pital in the general conduct of its business are allowable to the extent that such bond- ing is in accordance with sound business practice and the rates and premiums are rea- sonable under the circumstances. d. Capital expenditures. T s business are allowable to the extent that such bond- ing is in accordance with sound business practice and the rates and premiums are rea- sonable under the circumstances. d. Capital expenditures. The costs of equip- ment, buildings, and repairs which materi- ally increase the value or useful life of build- ings or equipment should be capitalized and are unallowable except as provided for in the research agreement. e. Civil defense costs. Civil defense costs are those incurred in planning for, and the pro- tection of life and property against the pos- sible effects of enemy attack. Reasonable costs of civil defense measures (including costs in excess of normal plant protection costs, first-aid training and supplies, fire- fighting training, posting of additional exit notices and directions, and other approved civil defense measures) undertaken on the institution’s premises pursuant to sugges- tions or requirements of civil defense au- thorities are allowable when distributed to all activities of the institution. Capital ex- penditures for civil defense purposes will not be allowed, but a use allowance or deprecia- tion may be permitted in accordance with provisions set forth else ctivities of the institution. Capital ex- penditures for civil defense purposes will not be allowed, but a use allowance or deprecia- tion may be permitted in accordance with provisions set forth elsewhere. Costs of local civil defense projects not on the institution’s premises are unallowable. f. Communication costs. Costs incurred for telephone services, local and long distance telephone calls, telegrams, radiograms, post- age, and the like are allowable. g. Compensation for personal services. (1) General Compensation for personal services covers all remuneration paid currently or accrued to employees of the hospital for services ren- dered during the period of performance under government research agreements. Such re- muneration includes salaries, wages, staff benefits (see paragraph I.2.j.), and pension plan costs (see paragraph I.2.y.). The costs of such remuneration are allowable to the ex- tent that the total compensation to indi- vidual employees is reasonable for the serv- ices rendered and conforms to the estab- lished policy of the institution consistently applied, and provided that the charges for work performed directly on government re- search agreements and for other s rendered and conforms to the estab- lished policy of the institution consistently applied, and provided that the charges for work performed directly on government re- search agreements and for other work allo- cable as indirect costs to sponsored research are determined and supported as hereinafter provided. For non-profit, non-proprietary in- stitutions, where federally supported pro- grams constitute less than a preponderance of the activity at the institution the primary test of reasonableness will be to require that the institution’s compensation policies be applied consistently both to federally-spon- sored and non-sponsored activities alike. However, where special circumstances so dic- tate a contractual clause may be utilized which calls for application of the test of comparability in determining the reason- ableness of compensation. (2) Payroll Distribution Amounts charged to organized research for personal services, regardless of whether treated as direct costs or allocated as indi- rect costs, will be based on hospital payrolls which have been approved and documented in accordance with generally accepted hos- pital practices. In order to develop necessary direct and ind as indi- rect costs, will be based on hospital payrolls which have been approved and documented in accordance with generally accepted hos- pital practices. In order to develop necessary direct and indirect allocations of cost, sup- plementary data on time or effort as pro- vided in paragraph (3) below, normally need be required only for individuals whose com- pensation is properly chargeable to two or more research agreements or to two or more of the following broad functional categories: (i) Patient care; (ii) organized research; (iii) instruction and training; (iv) indirect activi- ties as defined in paragraph E.1.; or (v) other hospital activities as defined in paragraph B.5. (3) Reporting Time or Effort Charges for salaries and wages of individ- uals other than members of the professional staff will be supported by daily time and at- tendance and payroll distribution records. For members of the professional staff, cur- rent and reasonable estimates of the percent- age distribution of their total effort may be used as support in the absence of actual time records. The term professional staff for pur- poses of this section includes physicians, re- search associates, and other per of their total effort may be used as support in the absence of actual time records. The term professional staff for pur- poses of this section includes physicians, re- search associates, and other personnel per- forming work at responsible levels of activi- ties. These personnel normally fulfill duties, the competent performance of which usually requires persons possessing degrees from ac- credited institutions of higher learning and/ or state licensure. In order to qualify as cur- rent and reasonable, estimates must be made no later than one month (though not nec- essarily a calendar month) after the month in which the services were performed. (4) Preparation of Estimates of Effort Where required under paragraph (3) above, estimates of effort spent by a member of the professional staff on each research agree- ment should be prepared by the individual 394 Dept. of Health and Human Services Pt. 75, App. IX who performed the services or by a respon- sible individual such as a department head or supervisor having first-hand knowledge of the services performed on each research agreement. Estimates must show the alloca- tion of effort between organized research and all other hospital ac