1 

CIRCULAR A-21 (Revised 05/10/04) 

CIRCULAR NO. A-21 

Revised 

TO THE HEADS OF EXECUTIVE DEPARTMENTS AND ESTABLISHMENTS 

SUBJECT: Cost Principles for Educational Institutions 

 1. Purpose. This Circular establishes principles for 

determining costs applicable to grants, contracts, and other 

agreements with educational institutions. The principles deal 

with the subject of cost determination, and make no attempt to 

identify the circumstances or dictate the extent of agency and 

institutional participation in the financing of a particular 

project. The principles are designed to provide that the 

Federal Government bear its fair share of total costs, 

determined in accordance with generally accepted accounting 

principles, except where restricted or prohibited by law. 

Agencies are not expected to place additional restrictions on 

individual items of cost. Provision for profit or other 

increment above cost is outside the scope of this Circular. 

 2. Supersession. The Circular supersedes Federal Management 

Circular 73-8, dated December 19, 1973. FMC 73-8 is revised and 

reissued under its original designation of OMB Circular No. 

A-21. 

 3. Applicability. 

 a. All Federal agencies that sponsor research and 

development, training, and other work at educational 

institutions shall apply the provisions of this Circular in 

determining the costs incurred for such work. The principles 

shall also be used as a guide in the pricing of fixed price or 

lump sum agreements. 

 b. In addition, Federally Funded Research and Development 

Centers associated with educational institutions shall be 

required to comply with the Cost Accounting Standards, rules and 

regulations issued by the Cost Accounting Standards Board, and 

set forth in 48 CFR part 99; provided that they are subject 

thereto under defense related contracts. 

 4. Responsibilities. The successful application of cost 

accounting principles requires development of mutual 

understanding between representatives of educational 
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institutions and of the Federal Government as to their scope, 

implementation, and interpretation. 

 5. Attachment. The principles and related policy guides are 

set forth in the Attachment, "Principles for determining costs 

applicable to grants, contracts, and other agreements with 

educational institutions." 

 6. Effective date. The provisions of this Circular shall be 

effective October 1, 1979, except for subsequent amendments 

incorporated herein for which the effective dates were specified 

in these revisions (47 FR 33658, 51 FR 20908, 51 FR 43487, 56 FR 

50224, 58 FR 39996, 61 FR 20880, 63 FR 29786, 63 FR 57332, 65 FR 

48566 and 69 FR 25970). Institutions as of the start of their 

first fiscal year beginning after that date shall implement the 

provisions. Earlier implementation, or a delay in 

implementation of individual provisions, is permitted by mutual 

agreement between an institution and the cognizant Federal 

agency. 

 7. Inquiries. Further information concerning this Circular 

may be obtained by contacting the Office of Federal Financial 

Management, Office of Management and Budget, Washington, DC 

20503, telephone (202) 395-3993. 

 Attachment 

PRINCIPLES FOR DETERMINING COSTS APPLICABLE TO GRANTS, 

CONTRACTS, AND OTHER AGREEMENTS WITH 

EDUCATIONAL INSTITUTIONS 

TABLE OF CONTENTS 

A. Purpose and scope 

 1. Objectives 

 2. Policy guides 

 3. Application 

 4. Inquiries 

B. Definition of terms 

 1. Major functions of an institution 

 2. Sponsored agreement 

 3. Allocation 

 4. Facilities and administrative (F&A) costs 

C. Basic considerations 
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 1. Composition of total costs 

 2. Factors affecting allowability of costs 

 3. Reasonable costs 

 4. Allocable costs 

 5. Applicable credits 

 6. Costs incurred by State and local governments 

 7. Limitations on allowance of costs 

 8. Collection of unallowable costs 

 9. Adjustment of previously negotiated F&A cost rates 

containing unallowable costs 

 10. Consistency in estimating, accumulating and reporting 

costs 

 11. Consistency in allocating costs incurred for the same 

purpose 

 12. Accounting for unallowable costs 

 13. Cost accounting period 

 14. Disclosure statement 

D. Direct costs 

 1. General 

 2. Application to sponsored agreements 

E. F&A costs 

 1. General 

 2. Criteria for distribution 

F. Identification and assignment of F&A costs 

 1. Definition of Facilities and Administration. 

 2. Depreciation and use allowances 

 3. Interest 

 4. Operation and maintenance expenses 

 5. General administration and general expenses 

 6. Departmental administration expenses 

 7. Sponsored projects administration 

 8. Library expenses 

 9. Student administration and services 

 10. Offset for F&A expenses otherwise provided for by the 

Federal Government 

G. Determination and application of F&A cost rate or rates 

 1. F&A cost pools 

 2. The distribution basis 

 3. Negotiated lump sum for F&A costs 

 4. Predetermined rates for F&A costs 

 5. Negotiated fixed rates and carry-forward provisions 
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 6. Provisional and final rates for F&A costs 

 7. Fixed rates for the life of the sponsored agreement 

 8. Limitation on reimbursement of administrative costs 

 9. Alternative method for administrative costs 

 10. Individual rate components 

 11. Negotiation and approval of F&A rate 

 12. Standard format for submission 

H. Simplified method for small institutions 

 1. General 

 2. Simplified procedure 

I. Reserved 

J. General provisions for selected items of cost 

1. Advertising and public relations costs 

2. Advisory councils 

3. Alcoholic beverages 

4. Alumni/ae activities 

5. Audit and related services 

6. Bad debts 

7. Bonding costs 

8. Commencement and convocation costs 

9. Communication costs 

10. Compensation for personal services 

11. Contingency provisions 

12. Deans of faculty and graduate schools 

13. Defense and prosecution of criminal and civil 

proceedings, claims, appeals and patent infringement 

14. Depreciation and use allowances 

15. Donations and contributions 

16. Employee morale, health, and welfare costs 

17. Entertainment costs 

18. Equipment and other capital expenditures 

19. Fines and penalties 

20. Fund raising and investment costs 

21. Gains and losses on depreciable assets 

22. Goods or services for personal use 

23. Housing and personal living expenses 

24. Idle facilities and idle capacity 

25. Insurance and indemnification 

26. Interest 

27. Labor relations costs 

28. Lobbying 

29. Losses on other sponsored agreements or contracts 
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30. Maintenance and repair costs 

31. Material and supplies costs 

32. Meetings and conferences 

33. Memberships, subscriptions and professional activity 

costs 

34. Patent costs 

35. Plant and homeland security costs 

36. Pre-agreement costs 

37. Professional service costs 

38. Proposal costs 

39. Publication and printing costs 

40. Rearrangement and alteration costs 

41. Reconversion costs 

42. Recruiting costs 

43. Rental costs of buildings and equipment 

44. Royalties and other costs for use of patents 

45. Scholarships and student aid costs 

46. Selling and marketing 

47. Specialized service facilities 

48. Student activity costs 

49. Taxes 

50. Termination costs applicable to sponsored agreements 

51. Training costs 

52. Transportation costs 

53. Travel costs 

54. Trustees 

K. Certification of charges 

 Exhibit A - List of Colleges and Universities Subject to 

Section J.12.h of Circular A-21 

 Exhibit B - Listing of Institutions that are eligible for 

the utility cost adjustment 

 Exhibit C - Examples of "major project" where direct 

charging of administrative or clerical staff salaries may be 

appropriate 

 Appendix A - CASB's Cost Accounting Standards (CAS) 

 Appendix B - CASB's Disclosure Statement (DS-2) 

 Appendix C - Documentation Requirements for Facilities and 

Administrative (F&A) Rate Proposals 
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PRINCIPLES FOR DETERMINING COSTS APPLICABLE TO GRANTS, 

CONTRACTS, AND OTHER AGREEMENTS WITH 

EDUCATIONAL INSTITUTIONS 

A. Purpose and scope. 

 1. Objectives. This Attachment provides principles for 

determining the costs applicable to research and development, 

training, and other sponsored work performed by colleges and 

universities under grants, contracts, and other agreements with 

the Federal Government. These agreements are referred to as 

sponsored agreements. 

 2. Policy guides. The successful application of these cost 

accounting principles requires development of mutual 

understanding between representatives of universities and of the 

Federal Government as to their scope, implementation, and 

interpretation. It is recognized that -- 

 a. The arrangements for Federal agency and institutional 

participation in the financing of a research, training, or other 

project are properly subject to negotiation between the agency 

and the institution concerned, in accordance with such 

governmentwide criteria or legal requirements as may be 

applicable. 

 b. Each institution, possessing its own unique combination 

of staff, facilities, and experience, should be encouraged to 

conduct research and educational activities in a manner 

consonant with its own academic philosophies and institutional 

objectives. 

 c. The dual role of students engaged in research and the 

resulting benefits to sponsored agreements are fundamental to 

the research effort and shall be recognized in the application 

of these principles. 

 d. Each institution, in the fulfillment of its obligations, 

should employ sound management practices. 

 e. The application of these cost accounting principles 

should require no significant changes in the generally accepted 

accounting practices of colleges and universities. However, the 

accounting practices of individual colleges and universities 

must support the accumulation of costs as required by the 

principles, and must provide for adequate documentation to 

support costs charged to sponsored agreements. 
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 f. Cognizant Federal agencies involved in negotiating 

facilities and administrative (F&A) cost rates and auditing 

should assure that institutions are generally applying these 

cost accounting principles on a consistent basis. Where wide 

variations exist in the treatment of a given cost item among 

institutions, the reasonableness and equitableness of such 

treatments should be fully considered during the rate 

negotiations and audit. 

 3. Application. These principles shall be used in 

determining the allowable costs of work performed by colleges 

and universities under sponsored agreements. The principles 

shall also be used in determining the costs of work performed by 

such institutions under subgrants, cost-reimbursement 

subcontracts, and other awards made to them under sponsored 

agreements. They also shall be used as a guide in the pricing 

of fixed-price contracts and subcontracts where costs are used 

in determining the appropriate price. The principles do not 

apply to: 

 a. Arrangements under which Federal financing is in the form 

of loans, scholarships, fellowships, traineeships, or other 

fixed amounts based on such items as education allowance or 

published tuition rates and fees of an institution. 

 b. Capitation awards. 

 c. Other awards under which the institution is not required 

to account to the Federal Government for actual costs incurred. 

 d. Conditional exemptions. 

 (1) OMB authorizes conditional exemption from OMB 

administrative requirements and cost principles circulars for 

certain Federal programs with statutorily-authorized 

consolidated planning and consolidated administrative funding, 

that are identified by a Federal agency and approved by the head 

of the Executive department or establishment. A Federal agency 

shall consult with OMB during its consideration of whether to 

grant such an exemption. 

 (2) To promote efficiency in State and local program 

administration, when Federal non-entitlement programs with 

common purposes have specific statutorily-authorized 

consolidated planning and consolidated administrative funding 

and where most of the State agency's resources come from 

non-Federal sources, Federal agencies may exempt these covered 

State-administered, non-entitlement grant programs from certain 

OMB grants management requirements. The exemptions would be 

from all but the allocability of costs provisions of OMB 

Circulars A-87 (Attachment A, subsection C.3), "Cost Principles 
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for State, Local, and Indian Tribal Governments," A-21 (Section 

C, subpart 4), "Cost Principles for Educational Institutions," 

and A-122 (Attachment A, subsection A.4), "Cost Principles for 

Non-Profit Organizations," and from all of the administrative 

requirements provisions of OMB Circular A-110, "Uniform 

Administrative Requirements for Grants and Agreements with 

Institutions of Higher Education, Hospitals, and Other 

Non-Profit Organizations," and the agencies' grants management 

common rule. 

 (3) When a Federal agency provides this flexibility, as a 

prerequisite to a State's exercising this option, a State must 

adopt its own written fiscal and administrative requirements for 

expending and accounting for all funds, which are consistent 

with the provisions of OMB Circular A-87, and extend such 

policies to all subrecipients. These fiscal and administrative 

requirements must be sufficiently specific to ensure that: funds 

are used in compliance with all applicable Federal statutory and 

regulatory provisions, costs are reasonable and necessary for 

operating these programs, and funds are not be used for general 

expenses required to carry out other responsibilities of a State 

or its subrecipients. 

 4. Inquiries. 

 All inquiries from Federal agencies concerning the cost 

principles contained in this Circular, including the 

administration and implementation of the Cost Accounting 

Standards (CAS) (described in Sections C.10 through C.13) and 

disclosure statement (DS-2) requirements, shall be addressed by 

the Office of Management and Budget (OMB), Office of Federal 

Financial Management, in coordination with the Cost Accounting 

Standard Board (CASB) with respect to inquiries concerning CAS. 

Educational institutions' inquiries should be addressed to the 

cognizant agency. 

B. Definition of terms. 

 1. Major functions of an institution refers to instruction, 

organized research, other sponsored activities and other 

institutional activities as defined below: 

 a. Instruction means the teaching and training activities of 

an institution. Except for research training as provided in 

subsection b, this term includes all teaching and training 

activities, whether they are offered for credits toward a degree 

or certificate or on a non-credit basis, and whether they are 

offered through regular academic departments or separate 

divisions, such as a summer school division or an extension 
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division. Also considered part of this major function are 

departmental research, and, where agreed to, university 

research. 

 (1) Sponsored instruction and training means specific 

instructional or training activity established by grant, 

contract, or cooperative agreement. For purposes of the cost 

principles, this activity may be considered a major function 

even though an institution's accounting treatment may include it 

in the instruction function. 

 (2) Departmental research means research, development and 

scholarly activities that are not organized research and, 

consequently, are not separately budgeted and accounted for. 

Departmental research, for purposes of this document, is not 

considered as a major function, but as a part of the instruction 

function of the institution. 

 b. Organized research means all research and development 

activities of an institution that are separately budgeted and 

accounted for. It includes: 

 (1) Sponsored research means all research and development 

activities that are sponsored by Federal and non-Federal 

agencies and organizations. This term includes activities 

involving the training of individuals in research techniques 

(commonly called research training) where such activities 

utilize the same facilities as other research and development 

activities and where such activities are not included in the 

instruction function. 

 (2) University research means all research and development 

activities that are separately budgeted and accounted for by the 

institution under an internal application of institutional 

funds. University research, for purposes of this document, 

shall be combined with sponsored research under the function of 

organized research. 

 c. Other sponsored activities means programs and projects 

financed by Federal and non-Federal agencies and organizations 

which involve the performance of work other than instruction and 

organized research. Examples of such programs and projects are 

health service projects, and community service programs. 

However, when any of these activities are undertaken by the 

institution without outside support, they may be classified as 

other institutional activities. 

 d. Other institutional activities means all activities of an 

institution except: 

 (1) instruction, departmental research, organized 

research, and other sponsored activities, as defined above; 

 (2) F&A cost activities identified in Section F; and 
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 (3) specialized service facilities described in Section 

J.47. Other institutional activities include operation of 

residence halls, dining halls, hospitals and clinics, student 

unions, intercollegiate athletics, bookstores, faculty housing, 

student apartments, guest houses, chapels, theaters, public 

museums, and other similar auxiliary enterprises. This 

definition also includes any other categories of activities, 

costs of which are "unallowable" to sponsored agreements, unless 

otherwise indicated in the agreements. 

 2. Sponsored agreement, for purposes of this Circular, means 

any grant, contract, or other agreement between the institution 

and the Federal Government. 

 3. Allocation means the process of assigning a cost, or a 

group of costs, to one or more cost objective, in reasonable and 

realistic proportion to the benefit provided or other equitable 

relationship. A cost objective may be a major function of the 

institution, a particular service or project, a sponsored 

agreement, or a F&A cost activity, as described in Section F. 

The process may entail assigning a cost(s) directly to a final 

cost objective or through one or more intermediate cost 

objectives. 

 4. Facilities and administrative (F&A) costs, for the 

purpose of this Circular, means costs that are incurred for 

common or joint objectives and, therefore, cannot be identified 

readily and specifically with a particular sponsored project, an 

instructional activity, or any other institutional activity. 

F&A costs are synonymous with "indirect" costs, as previously 

used in this Circular and as currently used in Appendices A and 

B. The F&A cost categories are described in Section F.1. 

C. Basic considerations. 

 1. Composition of total costs. The cost of a sponsored 

agreement is comprised of the allowable direct costs incident to 

its performance, plus the allocable portion of the allowable F&A 

costs of the institution, less applicable credits as described 

in subsection 5. 

 2. Factors affecting allowability of costs. The tests of 

allowability of costs under these principles are: (a) they must 

be reasonable; (b) they must be allocable to sponsored 

agreements under the principles and methods provided herein; (c) 

they must be given consistent treatment through application of 

those generally accepted accounting principles appropriate to 

the circumstances; and (d) they must conform to any limitations 

or exclusions set forth in these principles or in the sponsored 

agreement as to types or amounts of cost items. 
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 3. Reasonable costs. A cost may be considered reasonable if 

the nature of the goods or services acquired or applied, and the 

amount involved therefore, reflect the action that a prudent 

person would have taken under the circumstances prevailing at 

the time the decision to incur the cost was made. Major 

considerations involved in the determination of the 

reasonableness of a cost are: (a) whether or not the cost is of 

a type generally recognized as necessary for the operation of 

the institution or the performance of the sponsored agreement; 

(b) the restraints or requirements imposed by such factors as 

arm's-length bargaining, Federal and State laws and regulations, 

and sponsored agreement terms and conditions; (c) whether or not 

the individuals concerned acted with due prudence in the 

circumstances, considering their responsibilities to the 

institution, its employees, its students, the Federal 

Government, and the public at large; and, (d) the extent to 

which the actions taken with respect to the incurrence of the 

cost are consistent with established institutional policies and 

practices applicable to the work of the institution generally, 

including sponsored agreements. 

 4. Allocable costs. 

 a. A cost is allocable to a particular cost objective (i.e., 

a specific function, project, sponsored agreement, department, 

or the like) if the goods or services involved are chargeable or 

assignable to such cost objective in accordance with relative 

benefits received or other equitable relationship. Subject to 

the foregoing, a cost is allocable to a sponsored agreement if 

(1) it is incurred solely to advance the work under the 

sponsored agreement; (2) it benefits both the sponsored 

agreement and other work of the institution, in proportions that 

can be approximated through use of reasonable methods, or (3) it 

is necessary to the overall operation of the institution and, in 

light of the principles provided in this Circular, is deemed to 

be assignable in part to sponsored projects. Where the purchase 

of equipment or other capital items is specifically authorized 

under a sponsored agreement, the amounts thus authorized for 

such purchases are assignable to the sponsored agreement 

regardless of the use that may subsequently be made of the 

equipment or other capital items involved. 

 b. Any costs allocable to a particular sponsored agreement 

under the standards provided in this Circular may not be shifted 

to other sponsored agreements in order to meet deficiencies 

caused by overruns or other fund considerations, to avoid 
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restrictions imposed by law or by terms of the sponsored 

agreement, or for other reasons of convenience. 

 c. Any costs allocable to activities sponsored by industry, 

foreign governments or other sponsors may not be shifted to 

federally-sponsored agreements. 

 d. Allocation and documentation standard. 

 (1) Cost principles. The recipient institution is 

responsible for ensuring that costs charged to a sponsored 

agreement are allowable, allocable, and reasonable under these 

cost principles. 

 (2) Internal controls. The institution's financial 

management system shall ensure that no one person has complete 

control over all aspects of a financial transaction. 

 (3) Direct cost allocation principles. If a cost benefits 

two or more projects or activities in proportions that can be 

determined without undue effort or cost, the cost should be 

allocated to the projects based on the proportional benefit. If 

a cost benefits two or more projects or activities in 

proportions that cannot be determined because of the 

interrelationship of the work involved, then, notwithstanding 

subsection b, the costs may be allocated or transferred to 

benefited projects on any reasonable basis, consistent with 

subsections d. (1) and (2). 

 (4) Documentation. Federal requirements for documentation 

are specified in this Circular, Circular A-110, "Uniform 

Administrative Requirements for Grants and Agreements with 

Institutions of Higher Education, Hospitals, and Other 

Non-Profit Organizations," and specific agency policies on cost 

transfers. If the institution authorizes the principal 

investigator or other individual to have primary responsibility, 

given the requirements of subsection d. (2), for the management 

of sponsored agreement funds, then the institution's 

documentation requirements for the actions of those individuals 

(e.g., signature or initials of the principal investigator or 

designee or use of a password) will normally be considered 

sufficient. 

 5. Applicable credits. 

 a. The term "applicable credits" refers to those receipts or 

negative expenditures that operate to offset or reduce direct or 

F&A cost items. Typical examples of such transactions are: 

purchase discounts, rebates, or allowances; recoveries or 

indemnities on losses; and adjustments of overpayments or 

erroneous charges. This term also includes "educational 

discounts" on products or services provided specifically to 
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educational institutions, such as discounts on computer 

equipment, except where the arrangement is clearly and 

explicitly identified as a gift by the vendor. 

 b. In some instances, the amounts received from the Federal 

Government to finance institutional activities or service 

operations should be treated as applicable credits. 

Specifically, the concept of netting such credit items against 

related expenditures should be applied by the institution in 

determining the rates or amounts to be charged to sponsored 

agreements for services rendered whenever the facilities or 

other resources used in providing such services have been 

financed directly, in whole or in part, by Federal funds. (See 

Sections F.10, J.14, and J.47 for areas of potential application 

in the matter of direct Federal financing.) 

 6. Costs incurred by State and local governments. Costs 

incurred or paid by State or local governments on behalf of 

their colleges and universities for fringe benefit programs, 

such as pension costs and FICA and any other costs specifically 

incurred on behalf of, and in direct benefit to, the 

institutions, are allowable costs of such institutions whether 

or not these costs are recorded in the accounting records of the 

institutions, subject to the following: 

 a. The costs meet the requirements of subsections 1 through 

5. 

 b. The costs are properly supported by cost allocation plans 

in accordance with applicable Federal cost accounting 

principles. 

 c. The costs are not otherwise borne directly or indirectly 

by the Federal Government. 

 7. Limitations on allowance of costs. Sponsored agreements 

may be subject to statutory requirements that limit the 

allowance of costs. When the maximum amount allowable under a 

limitation is less than the total amount determined in 

accordance with the principles in this Circular, the amount not 

recoverable under a sponsored agreement may not be charged to 

other sponsored agreements. 

 8. Collection of unallowable costs, excess costs due to 

noncompliance with cost policies, increased costs due to failure 

to follow a disclosed accounting practice and increased costs 

resulting from a change in cost accounting practice. The 

following costs shall be refunded (including interest) in 

accordance with applicable Federal agency regulations: 
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 a. Costs specifically identified as unallowable in Section 

J, either directly or indirectly, and charged to the Federal 

Government. 

 b. Excess costs due to failure by the educational 

institution to comply with the cost policies in this Circular. 

 c. Increased costs due to a noncompliant cost accounting 

practice used to estimate, accumulate, or report costs. 

 d. Increased costs resulting from a change in accounting 

practice. 

 9. Adjustment of previously negotiated F&A cost rates 

containing unallowable costs. Negotiated F&A cost rates based 

on a proposal later found to have included costs that (a) are 

unallowable as specified by (i) law or regulation, (ii) Section 

J of this Circular, (iii) terms and conditions of sponsored 

agreements, or (b) are unallowable because they are clearly not 

allocable to sponsored agreements, shall be adjusted, or a 

refund shall be made, in accordance with the requirements of 

this section. These adjustments or refunds are designed to 

correct the proposals used to establish the rates and do not 

constitute a reopening of the rate negotiation. The adjustments 

or refunds will be made regardless of the type of rate 

negotiated (predetermined, final, fixed, or provisional). 

 a. For rates covering a future fiscal year of the 

institution, the unallowable costs will be removed from the F&A 

cost pools and the rates appropriately adjusted. 

 b. For rates covering a past period, the Federal share of 

the unallowable costs will be computed for each year involved 

and a cash refund (including interest chargeable in accordance 

with applicable regulations) will be made to the Federal 

Government. If cash refunds are made for past periods covered 

by provisional or fixed rates, appropriate adjustments will be 

made when the rates are finalized to avoid duplicate recovery of 

the unallowable costs by the Federal Government. 

 c. For rates covering the current period, either a rate 

adjustment or a refund, as described in subsections a and b, 

shall be required by the cognizant agency. The choice of method 

shall be at the discretion of the cognizant agency, based on its 

judgment as to which method would be most practical. 

 d. The amount or proportion of unallowable costs included in 

each year's rate will be assumed to be the same as the amount or 

proportion of unallowable costs included in the base year 

proposal used to establish the rate. 
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 10. Consistency in estimating, accumulating and reporting 

costs. 

 a. An educational institution's practices used in estimating 

costs in pricing a proposal shall be consistent with the 

educational institution's cost accounting practices used in 

accumulating and reporting costs. 

 b. An educational institution's cost accounting practices 

used in accumulating and reporting actual costs for a sponsored 

agreement shall be consistent with the educational institution's 

practices used in estimating costs in pricing the related 

proposal or application. 

 c. The grouping of homogeneous costs in estimates prepared 

for proposal purposes shall not per se be deemed an inconsistent 

application of cost accounting practices under subsection a when 

such costs are accumulated and reported in greater detail on an 

actual cost basis during performance of the sponsored agreement. 

 d. Appendix A also reflects this requirement, along with the 

purpose, definitions, and techniques for application, all of 

which are authoritative. 

 11. Consistency in allocating costs incurred for the same 

purpose. 

 a. All costs incurred for the same purpose, in like 

circumstances, are either direct costs only or F&A costs only 

with respect to final cost objectives. No final cost objective 

shall have allocated to it as a cost any cost, if other costs 

incurred for the same purpose, in like circumstances, have been 

included as a direct cost of that or any other final cost 

objective. Further, no final cost objective shall have 

allocated to it as a direct cost any cost, if other costs 

incurred for the same purpose, in like circumstances, have been 

included in any F&A cost pool to be allocated to that or any 

other final cost objective. 

 b. Appendix A reflects this requirement along with its 

purpose, definitions, and techniques for application, 

illustrations and interpretations, all of which are 

authoritative. 

 12. Accounting for unallowable costs. 

 a. Costs expressly unallowable or mutually agreed to be 

unallowable, including costs mutually agreed to be unallowable 

directly associated costs, shall be identified and excluded from 

any billing, claim, application, or proposal applicable to a 

sponsored agreement. 
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 b. Costs which specifically become designated as unallowable 

as a result of a written decision furnished by a Federal 

official pursuant to sponsored agreement disputes procedures 

shall be identified if included in or used in the computation of 

any billing, claim, or proposal applicable to a sponsored 

agreement. This identification requirement applies also to any 

costs incurred for the same purpose under like circumstances as 

the costs specifically identified as unallowable under either 

this subsection or subsection a. 

 c. Costs which, in a Federal official's written decision 

furnished pursuant to sponsored agreement disputes procedures, 

are designated as unallowable directly associated costs of 

unallowable costs covered by either subsection a or b shall be 

accorded the identification required by subsection b. 

 d. The costs of any work project not contractually 

authorized by a sponsored agreement, whether or not related to 

performance of a proposed or existing sponsored agreement, shall 

be accounted for, to the extent appropriate, in a manner which 

permits ready separation from the costs of authorized work 

projects. 

 e. All unallowable costs covered by subsections a through d 

shall be subject to the same cost accounting principles 

governing cost allocability as allowable costs. In 

circumstances where these unallowable costs normally would be 

part of a regular F&A cost allocation base or bases, they shall 

remain in such base or bases. Where a directly associated cost 

is part of a category of costs normally included in a F&A cost 

pool that shall be allocated over a base containing the 

unallowable cost with which it is associated, such a directly 

associated cost shall be retained in the F&A cost pool and be 

allocated through the regular allocation process. 

 f. Where the total of the allocable and otherwise allowable 

costs exceeds a limitation-of-cost or ceiling-price provision in 

a sponsored agreement, full direct and F&A cost allocation shall 

be made to the sponsored agreement cost objective, in accordance 

with established cost accounting practices and standards which 

regularly govern a given entity's allocations to sponsored 

agreement cost objectives. In any determination of a cost 

overrun, the amount thereof shall be identified in terms of the 

excess of allowable costs over the ceiling amount, rather than 

through specific identification of particular cost items or cost 

elements. 

 g. Appendix A reflects this requirement, along with its 

purpose, definitions, techniques for application, and 

illustrations of this standard, all of which are authoritative. 
17 

 13. Cost accounting period. 

 a. Educational institutions shall use their fiscal year as 

their cost accounting period, except that: 

 (1) Costs of a F&A function which exists for only a part 

of a cost accounting period may be allocated to cost objectives 

of that same part of the period on the basis of data for that 

part of the cost accounting period if the cost is: (i) material 

in amount, (ii) accumulated in a separate F&A cost pool or 

expense pool, and (iii) allocated on the basis of an appropriate 

direct measure of the activity or output of the function during 

that part of the period. 

 (2) An annual period other than the fiscal year may, upon 

mutual agreement with the Federal Government, be used as the 

cost accounting period if the use of such period is an 

established practice of the educational institution and is 

consistently used for managing and controlling revenues and 

disbursements, and appropriate accruals, deferrals or other 

adjustments are made with respect to such annual periods. 

 (3) A transitional cost accounting period other than a 

year shall be used whenever a change of fiscal year occurs. 

 b. An educational institution shall follow consistent 

practices in the selection of the cost accounting period or 

periods in which any types of expense and any types of 

adjustment to expense (including prior-period adjustments) are 

accumulated and allocated. 

 c. The same cost accounting period shall be used for 

accumulating costs in a F&A cost pool as for establishing its 

allocation base, except that the Federal Government and 

educational institution may agree to use a different period for 

establishing an allocation base, provided: 

 (1) The practice is necessary to obtain significant 

administrative convenience, 

 (2) The practice is consistently followed by the 

educational institution, 

 (3) The annual period used is representative of the 

activity of the cost accounting period for which the F&A costs 

to be allocated are accumulated, and 

 (4) The practice can reasonably be estimated to provide a 

distribution to cost objectives of the cost accounting period 

not materially different from that which otherwise would be 

obtained. 

 d. Appendix A reflects this requirement, along with its 

purpose, definitions, techniques for application and 

illustrations, all of which are authoritative. 
18 

 14. Disclosure Statement. 

 a. Educational institutions that received aggregate 

sponsored agreements totaling $25 million or more subject to 

this Circular during their most recently completed fiscal year 

shall disclose their cost accounting practices by filing a 

Disclosure Statement (DS-2), which is reproduced in Appendix B. 

With the approval of the cognizant agency, an educational 

institution may meet the DS-2 submission by submitting the DS-2 

for each business unit that received $25 million or more in 

sponsored agreements. 

 b. The DS-2 shall be submitted to the cognizant agency with 

a copy to the educational institution's audit cognizant office. 

 c. Educational institutions receiving $25 million or more in 

sponsored agreements that are not required to file a DS-2 

pursuant to 48 CFR 9903.202-1 shall file a DS-2 covering the 

first fiscal year beginning after the publication date of this 

revision, within six months after the end of that fiscal year. 

Extensions beyond the above due date may be granted by the 

cognizant agency on a case-by-case basis. 

 d. Educational institutions are responsible for maintaining 

an accurate DS-2 and complying with disclosed cost accounting 

practices. Educational institutions must file amendments to the 

DS-2 when disclosed practices are changed to comply with a new 

or modified standard, or when practices are changed for other 

reasons. Amendments of a DS-2 may be submitted at any time. If 

the change is expected to have a material impact on the 

educational institution's negotiated F&A cost rates, the 

revision shall be approved by the cognizant agency before it is 

implemented. Resubmission of a complete, updated DS-2 is 

discouraged except when there are extensive changes to disclosed 

practices. 

 e. Cost and funding adjustments. Cost adjustments shall be 

made by the cognizant agency if an educational institution fails 

to comply with the cost policies in this Circular or fails to 

consistently follow its established or disclosed cost accounting 

practices when estimating, accumulating or reporting the costs 

of sponsored agreements, if aggregate cost impact on sponsored 

agreements is material. The cost adjustment shall normally be 

made on an aggregate basis for all affected sponsored agreements 

through an adjustment of the educational institution's future 

F&A costs rates or other means considered appropriate by the 

cognizant agency. Under the terms of CAS-covered contracts, 

adjustments in the amount of funding provided may also be 

required when the estimated proposal costs were not determined 

in accordance with established cost accounting practices. 
19 

 f. Overpayments. Excess amounts paid in the aggregate by 

the Federal Government under sponsored agreements due to a 

noncompliant cost accounting practice used to estimate, 

accumulate, or report costs shall be credited or refunded, as 

deemed appropriate by the cognizant agency. Interest applicable 

to the excess amounts paid in the aggregate during the period of 

noncompliance shall also be determined and collected in 

accordance with applicable Federal agency regulations. 

 g. Compliant cost accounting practice changes. Changes from 

one compliant cost accounting practice to another compliant 

practice that are approved by the cognizant agency may require 

cost adjustments if the change has a material effect on 

sponsored agreements and the changes are deemed appropriate by 

the cognizant agency. 

 h. Responsibilities. The cognizant agency shall: 

 (1) Determine cost adjustments for all sponsored 

agreements in the aggregate on behalf of the Federal Government. 

Actions of the cognizant agency official in making cost 

adjustment determinations shall be coordinated with all affected 

Federal agencies to the extent necessary. 

 (2) Prescribe guidelines and establish internal procedures 

to promptly determine on behalf of the Federal Government that a 

DS-2 adequately discloses the educational institution's cost 

accounting practices and that the disclosed practices are 

compliant with applicable CAS and the requirements of this 

Circular. 

 (3) Distribute to all affected agencies any DS-2 

determination of adequacy and/or noncompliance. 

D. Direct costs. 

 1. General. Direct costs are those costs that can be 

identified specifically with a particular sponsored project, an 

instructional activity, or any other institutional activity, or 

that can be directly assigned to such activities relatively 

easily with a high degree of accuracy. Costs incurred for the 

same purpose in like circumstances must be treated consistently 

as either direct or F&A costs. Where an institution treats a 

particular type of cost as a direct cost of sponsored 

agreements, all costs incurred for the same purpose in like 

circumstances shall be treated as direct costs of all activities 

of the institution. 

 2. Application to sponsored agreements. Identification with 

the sponsored work rather than the nature of the goods and 

services involved is the determining factor in distinguishing 

direct from F&A costs of sponsored agreements. Typical costs 
20 

charged directly to a sponsored agreement are the compensation 

of employees for performance of work under the sponsored 

agreement, including related fringe benefit costs to the extent 

they are consistently treated, in like circumstances, by the 

institution as direct rather than F&A costs; the costs of 

materials consumed or expended in the performance of the work; 

and other items of expense incurred for the sponsored agreement, 

including extraordinary utility consumption. The cost of 

materials supplied from stock or services rendered by 

specialized facilities or other institutional service operations 

may be included as direct costs of sponsored agreements, 

provided such items are consistently treated, in like 

circumstances, by the institution as direct rather than F&A 

costs, and are charged under a recognized method of computing 

actual costs, and conform to generally accepted cost accounting 

practices consistently followed by the institution. 

E. F&A costs. 

 1. General. F&A costs are those that are incurred for 

common or joint objectives and therefore cannot be identified 

readily and specifically with a particular sponsored project, an 

instructional activity, or any other institutional activity. 

See Section F.1 for a discussion of the components of F&A costs. 

 2. Criteria for distribution. 

 a. Base period. A base period for distribution of F&A costs 

is the period during which the costs are incurred. The base 

period normally should coincide with the fiscal year established 

by the institution, but in any event the base period should be 

so selected as to avoid inequities in the distribution of costs. 

 b. Need for cost groupings. The overall objective of the 

F&A cost allocation process is to distribute the F&A costs 

described in Section F to the major functions of the institution 

in proportions reasonably consistent with the nature and extent 

of their use of the institution's resources. In order to 

achieve this objective, it may be necessary to provide for 

selective distribution by establishing separate groupings of 

cost within one or more of the F&A cost categories referred to 

in subsection 1. In general, the cost groupings established 

within a category should constitute, in each case, a pool of 

those items of expense that are considered to be of like nature 

in terms of their relative contribution to (or degree of 

remoteness from) the particular cost objectives to which 

distribution is appropriate. Cost groupings should be 

established considering the general guides provided in 

subsection c. Each such pool or cost grouping should then be 
21 

distributed individually to the related cost objectives, using 

the distribution base or method most appropriate in the light of 

the guides set forth in subsection d. 

 c. General considerations on cost groupings. The extent to 

which separate cost groupings and selective distribution would 

be appropriate at an institution is a matter of judgment to be 

determined on a case-by-case basis. Typical situations which 

may warrant the establishment of two or more separate cost 

groupings (based on account classification or analysis) within 

an F&A cost category include but are not limited to the 

following: 

 (1) Where certain items or categories of expense relate 

solely to one of the major functions of the institution or to 

less than all functions, such expenses should be set aside as a 

separate cost grouping for direct assignment or selective 

allocation in accordance with the guides provided in subsections 

b and d. 

 (2) Where any types of expense ordinarily treated as 

general administration or departmental administration are 

charged to sponsored agreements as direct costs, expenses 

applicable to other activities of the institution when incurred 

for the same purposes in like circumstances must, through 

separate cost groupings, be excluded from the F&A costs 

allocable to those sponsored agreements and included in the 

direct cost of other activities for cost allocation purposes. 

 (3) Where it is determined that certain expenses are for 

the support of a service unit or facility whose output is 

susceptible of measurement on a workload or other quantitative 

basis, such expenses should be set aside as a separate cost 

grouping for distribution on such basis to organized research, 

instructional, and other activities at the institution or within 

the department. 

 (4) Where activities provide their own purchasing, 

personnel administration, building maintenance or similar 

service, the distribution of general administration and general 

expenses, or operation and maintenance expenses to such 

activities should be accomplished through cost groupings which 

include only that portion of central F&A costs (such as for 

overall management) which are properly allocable to such 

activities. 

 (5) Where the institution elects to treat fringe benefits 

as F&A charges, such costs should be set aside as a separate 

cost grouping for selective distribution to related cost 

objectives. 
22 

 (6) The number of separate cost groupings within a 

category should be held within practical limits, after taking 

into consideration the materiality of the amounts involved and 

the degree of precision attainable through less selective 

methods of distribution. 

 d. Selection of distribution method. 

 (1) Actual conditions must be taken into account in 

selecting the method or base to be used in distributing 

individual cost groupings. The essential consideration in 

selecting a base is that it be the one best suited for assigning 

the pool of costs to cost objectives in accordance with benefits 

derived; a traceable cause and effect relationship; or logic and 

reason, where neither benefit nor cause and effect relationship 

is determinable. 

 (2) Where a cost grouping can be identified directly with 

the cost objective benefited, it should be assigned to that cost 

objective. 

 (3) Where the expenses in a cost grouping are more general 

in nature, the distribution may be based on a cost analysis 

study which results in an equitable distribution of the costs. 

Such cost analysis studies may take into consideration weighting 

factors, population, or space occupied if appropriate. Cost 

analysis studies, however, must (a) be appropriately documented 

in sufficient detail for subsequent review by the cognizant 

Federal agency, (b) distribute the costs to the related cost 

objectives in accordance with the relative benefits derived, (c) 

be statistically sound, (d) be performed specifically at the 

institution at which the results are to be used, and (e) be 

reviewed periodically, but not less frequently than every two 

years, updated if necessary, and used consistently. Any 

assumptions made in the study must be stated and explained. The 

use of cost analysis studies and periodic changes in the method 

of cost distribution must be fully justified. 

 (4) If a cost analysis study is not performed, or if the 

study does not result in an equitable distribution of the costs, 

the distribution shall be made in accordance with the 

appropriate base cited in Section F, unless one of the following 

conditions is met: (a) it can be demonstrated that the use of a 

different base would result in a more equitable allocation of 

the costs, or that a more readily available base would not 

increase the costs charged to sponsored agreements, or (b) the 

institution qualifies for, and elects to use, the simplified 

method for computing F&A cost rates described in Section H. 

 (5) Notwithstanding subsection (3), effective July 1, 

1998, a cost analysis or base other than that in Section F shall 
23 

not be used to distribute utility or student services costs. 

Instead, subsections F.4.c and F.4.d may be used in the recovery 

of utility costs. 

 e. Order of distribution. 

 (1) F&A costs are the broad categories of costs discussed 

in Section F.1. 

 (2) Depreciation and use allowances, operation and 

maintenance expenses, and general administrative and general 

expenses should be allocated in that order to the remaining F&A 

cost categories as well as to the major functions and 

specialized service facilities of the institution. Other cost 

categories may be allocated in the order determined to be most 

appropriate by the institutions. When cross allocation of costs 

is made as provided in subsection (3), this order of allocation 

does not apply. 

 (3) Normally an F&A cost category will be considered 

closed once it has been allocated to other cost objectives, and 

costs may not be subsequently allocated to it. However, a cross 

allocation of costs between two or more F&A cost categories may 

be used if such allocation will result in a more equitable 

allocation of costs. If a cross allocation is used, an 

appropriate modification to the composition of the F&A cost 

categories described in Section F is required. 

F. Identification and assignment of F&A costs. 

 1. Definition of Facilities and Administration. F&A costs 

are broad categories of costs. "Facilities" is defined as 

depreciation and use allowances, interest on debt associated 

with certain buildings, equipment and capital improvements, 

operation and maintenance expenses, and library expenses. 

"Administration" is defined as general administration and 

general expenses, departmental administration, sponsored 

projects administration, student administration and services, 

and all other types of expenditures not listed specifically 

under one of the subcategories of Facilities (including cross 

allocations from other pools). 

 2. Depreciation and use allowances. 

 a. The expenses under this heading are the portion of the 

costs of the institution's buildings, capital improvements to 

land and buildings, and equipment which are computed in 

accordance with Section J.14. 

 b. In the absence of the alternatives provided for in 

Section E.2.d, the expenses included in this category shall be 

allocated in the following manner: 
24 

 (1) Depreciation or use allowances on buildings used 

exclusively in the conduct of a single function, and on capital 

improvements and equipment used in such buildings, shall be 

assigned to that function. 

 (2) Depreciation or use allowances on buildings used for 

more than one function, and on capital improvements and 

equipment used in such buildings, shall be allocated to the 

individual functions performed in each building on the basis of 

usable square feet of space, excluding common areas such as 

hallways, stairwells, and rest rooms. 

 (3) Depreciation or use allowances on buildings, capital 

improvements and equipment related to space (e.g., individual 

rooms, laboratories) used jointly by more than one function (as 

determined by the users of the space) shall be treated as 

follows. The cost of each jointly used unit of space shall be 

allocated to benefiting functions on the basis of: 

 (a) the employee full-time equivalents (FTEs) or salaries 

and wages of those individual functions benefiting from the use 

of that space; or 

 (b) institution-wide employee FTEs or salaries and wages 

applicable to the benefiting major functions (see Section B.1) 

of the institution. 

 (4) Depreciation or use allowances on certain capital 

improvements to land, such as paved parking areas, fences, 

sidewalks, and the like, not included in the cost of buildings, 

shall be allocated to user categories of students and employees 

on a full-time equivalent basis. The amount allocated to the 

student category shall be assigned to the instruction function 

of the institution. The amount allocated to the employee 

category shall be further allocated to the major functions of 

the institution in proportion to the salaries and wages of all 

employees applicable to those functions. 

 c. Large research facilities. The following provisions 

apply to large research facilities that are included in F&A rate 

proposals negotiated after January 1, 2000, and on which the 

design and construction begin after July 1, 1998. Large 

facilities, for this provision, are defined as buildings with 

construction costs of more than $10 million. The determination 

of the Federal participation (use) percentage in a building is 

based on institution's estimates of building use over its life, 

and is made during the planning phase for the building. 

 (1) When an institution has large research facilities, of 

which 40 percent or more of total assignable space is expected 

for Federal use, the institution must maintain an adequate 

review and approval process to ensure that construction costs 
25 

are reasonable. The review process shall address and document 

relevant factors affecting construction costs, such as: 

 - Life cycle costs 

 - Unique research needs 

 - Special building needs 

 - Building site preparation 

 - Environmental consideration 

 - Federal construction code requirements 

 - Competitive procurement practices 

 The approval process shall include review and approval of 

the projects by the institution's Board of Trustees (which can 

also be called Board of Directors, Governors or Regents) or 

other independent entities. 

 (2) For research facilities costing more than $25 million, 

of which 50 percent or more of total assignable space is 

expected for Federal use, the institution must document the 

review steps performed to assure that construction costs are 

reasonable. The review should include an analysis of 

construction costs and a comparison of these costs with relevant 

construction data, including the National Science Foundation 

data for research facilities based on its biennial survey, 

"Science and Engineering Facilities at Colleges and 

Universities.” The documentation must be made available for 

review by Federal negotiators, when requested. 

 3. Interest. Interest on debt associated with certain 

buildings, equipment and capital improvements, as defined in 

Sections J.25, shall be classified as an expenditure under the 

category Facilities. These costs shall be allocated in the same 

manner as the depreciation or use allowances on the buildings, 

equipment and capital improvements to which the interest 

relates. 

 4. Operation and maintenance expenses. 

 a. The expenses under this heading are those that have been 

incurred for the administration, supervision, operation, 

maintenance, preservation, and protection of the institution's 

physical plant. They include expenses normally incurred for 

such items as janitorial and utility services; repairs and 

ordinary or normal alterations of buildings, furniture and 

equipment; care of grounds; maintenance and operation of 

buildings and other plant facilities; security; earthquake and 

disaster preparedness; environmental safety; hazardous waste 

disposal; property, liability and all other insurance relating 

to property; space and capital leasing; facility planning and 

management; and, central receiving. The operation and 

maintenance expense category should also include its allocable 
26 

share of fringe benefit costs, depreciation and use allowances, 

and interest costs. 

 b. In the absence of the alternatives provided for in 

Section E.2.d, the expenses included in this category shall be 

allocated in the same manner as described in subsection 2.b for 

depreciation and use allowances. 

 c. For F&A rates negotiated on or after July 1, 1998, an 

institution that previously employed a utility special cost 

study in its most recently negotiated F&A rate proposal in 

accordance with Section E.2.d, may add a utility cost adjustment 

(UCA) of 1.3 percentage points to its negotiated overall F&A 

rate for organized research. Exhibit B displays the list of 

eligible institutions. The allocation of utility costs to the 

benefiting functions shall otherwise be made in the same manner 

as described in subsection F.4.b. Beginning on July 1, 2002, 

Federal agencies shall reassess periodically the eligibility of 

institutions to receive the UCA. 

 d. Beginning on July 1, 2002, Federal agencies may receive 

applications for utilization of the UCA from institutions not 

subject to the provisions of subsection F.4.c. 

 5. General administration and general expenses. 

 a. The expenses under this heading are those that have been 

incurred for the general executive and administrative offices of 

educational institutions and other expense of a general 

character which do not relate solely to any major function of 

the institution; i.e., solely to (1) instruction, (2) organized 

research, (3) other sponsored activities, or (4) other 

institutional activities. The general administration and 

general expense category should also include its allocable share 

of fringe benefit costs, operation and maintenance expense, 

depreciation and use allowances, and interest costs. Examples 

of general administration and general expenses include: those 

expenses incurred by administrative offices that serve the 

entire university system of which the institution is a part; 

central offices of the institution such as the President's or 

Chancellor's office, the offices for institution-wide financial 

management, business services, budget and planning, personnel 

management, and safety and risk management; the office of the 

General Counsel; and, the operations of the central 

administrative management information systems. General 

administration and general expenses shall not include expenses 

incurred within non-university-wide deans' offices, academic 

departments, organized research units, or similar organizational 

units. (See subsection 6, Departmental administration 

expenses.) 
27 

 b. In the absence of the alternatives provided for in 

Section E.2.d, the expenses included in this category shall be 

grouped first according to common major functions of the 

institution to which they render services or provide benefits. 

The aggregate expenses of each group shall then be allocated to 

serviced or benefited functions on the modified total cost 

basis. Modified total costs consist of the same elements as 

those in Section G.2. When an activity included in this F&A 

cost category provides a service or product to another 

institution or organization, an appropriate adjustment must be 

made to either the expenses or the basis of allocation or both, 

to assure a proper allocation of costs. 

 6. Departmental administration expenses. 

 a. The expenses under this heading are those that have been 

incurred for administrative and supporting services that benefit 

common or joint departmental activities or objectives in 

academic deans' offices, academic departments and divisions, and 

organized research units. Organized research units include such 

units as institutes, study centers, and research centers. 

Departmental administration expenses are subject to the 

following limitations. 

 (1) Academic deans' offices. Salaries and operating 

expenses are limited to those attributable to administrative 

functions. 

 (2) Academic departments: 

 (a) Salaries and fringe benefits attributable to the 

administrative work (including bid and proposal preparation) of 

faculty (including department heads), and other professional 

personnel conducting research and/or instruction, shall be 

allowed at a rate of 3.6 percent of modified total direct costs. 

This category does not include professional business or 

professional administrative officers. This allowance shall be 

added to the computation of the F&A cost rate for major 

functions in Section G; the expenses covered by the allowance 

shall be excluded from the departmental administration cost 

pool. No documentation is required to support this allowance. 

 (b) Other administrative and supporting expenses incurred 

within academic departments are allowable provided they are 

treated consistently in like circumstances. This would include 

expenses such as the salaries of secretarial and clerical 

staffs, the salaries of administrative officers and assistants, 

travel, office supplies, stockrooms, and the like. 

 (3) Other fringe benefit costs applicable to the salaries 

and wages included in subsections (1) and (2) are allowable, as 

well as an appropriate share of general administration and 
28 

general expenses, operation and maintenance expenses, and 

depreciation and/or use allowances. 

 (4) Federal agencies may authorize reimbursement of 

additional costs for department heads and faculty only in 

exceptional cases where an institution can demonstrate undue 

hardship or detriment to project performance. 

 b. The following guidelines apply to the determination of 

departmental administrative costs as direct or F&A costs. 

 (1) In developing the departmental administration cost 

pool, special care should be exercised to ensure that costs 

incurred for the same purpose in like circumstances are treated 

consistently as either direct or F&A costs. For example, 

salaries of technical staff, laboratory supplies (e.g., 

chemicals), telephone toll charges, animals, animal care costs, 

computer costs, travel costs, and specialized shop costs shall 

be treated as direct cost wherever identifiable to a particular 

cost objective. Direct charging of these costs may be 

accomplished through specific identification of individual costs 

to benefiting cost objectives, or through recharge centers or 

specialized service facilities, as appropriate under the 

circumstances. 

 (2) The salaries of administrative and clerical staff 

should normally be treated as F&A costs. Direct charging of 

these costs may be appropriate where a major project or activity 

explicitly budgets for administrative or clerical services and 

individuals involved can be specifically identified with the 

project or activity. "Major project" is defined as a project 

that requires an extensive amount of administrative or clerical 

support, which is significantly greater than the routine level 

of such services provided by academic departments. Some 

examples of major projects are described in Exhibit C. 

 (3) Items such as office supplies, postage, local 

telephone costs, and memberships shall normally be treated as 

F&A costs. 

 c. In the absence of the alternatives provided for in 

Section E.2.d, the expenses included in this category shall be 

allocated as follows: 

 (1) The administrative expenses of the dean's office of 

each college and school shall be allocated to the academic 

departments within that college or school on the modified total 

cost basis. 

 (2) The administrative expenses of each academic 

department, and the department's share of the expenses allocated 

in subsection (1) shall be allocated to the appropriate 

functions of the department on the modified total cost basis. 
29 

 7. Sponsored projects administration. 

 a. The expenses under this heading are limited to those 

incurred by a separate organization(s) established primarily to 

administer sponsored projects, including such functions as grant 

and contract administration (Federal and non-Federal), special 

security, purchasing, personnel, administration, and editing and 

publishing of research and other reports. They include the 

salaries and expenses of the head of such organization, 

assistants, and immediate staff, together with the salaries and 

expenses of personnel engaged in supporting activities 

maintained by the organization, such as stock rooms, 

stenographic pools and the like. This category also includes an 

allocable share of fringe benefit costs, general administration 

and general expenses, operation and maintenance expenses, 

depreciation/use allowances. Appropriate adjustments will be 

made for services provided to other functions or organizations. 

 b. In the absence of the alternatives provided for in 

Section E.2.d, the expenses included in this category shall be 

allocated to the major functions of the institution under which 

the sponsored projects are conducted on the basis of the 

modified total cost of sponsored projects. 

 c. An appropriate adjustment shall be made to eliminate any 

duplicate charges to sponsored agreements when this category 

includes similar or identical activities as those included in 

the general administration and general expense category or other 

F&A cost items, such as accounting, procurement, or personnel 

administration. 

 8. Library expenses. 

 a. The expenses under this heading are those that have been 

incurred for the operation of the library, including the cost of 

books and library materials purchased for the library, less any 

items of library income that qualify as applicable credits under 

Section C.5. The library expense category should also include 

the fringe benefits applicable to the salaries and wages 

included therein, an appropriate share of general administration 

and general expense, operation and maintenance expense, and 

depreciation and use allowances. Costs incurred in the 

purchases of rare books (museum-type books) with no value to 

sponsored agreements should not be allocated to them. 

 b. In the absence of the alternatives provided for in 

Section E.2.d, the expenses included in this category shall be 

allocated first on the basis of primary categories of users, 

including students, professional employees, and other users. 
30 

 (1) The student category shall consist of full-time 

equivalent students enrolled at the institution, regardless of 

whether they earn credits toward a degree or certificate. 

 (2) The professional employee category shall consist of 

all faculty members and other professional employees of the 

institution, on a full-time equivalent basis. 

 (3) The other users category shall consist of all other 

users of library facilities. 

 c. Amount allocated in subsection b shall be assigned 

further as follows: 

 (1) The amount in the student category shall be assigned 

to the instruction function of the institution. 

 (2) The amount in the professional employee category shall 

be assigned to the major functions of the institution in 

proportion to the salaries and wages of all faculty members and 

other professional employees applicable to those functions. 

 (3) The amount in the other users category shall be 

assigned to the other institutional activities function of the 

institution. 

 9. Student administration and services. 

 a. The expenses under this heading are those that have been 

incurred for the administration of student affairs and for 

services to students, including expenses of such activities as 

deans of students, admissions, registrar, counseling and 

placement services, student advisers, student health and 

infirmary services, catalogs, and commencements and 

convocations. The salaries of members of the academic staff 

whose responsibilities to the institution require administrative 

work that benefits sponsored projects may also be included to 

the extent that the portion charged to student administration is 

determined in accordance with Section J.10. This expense 

category also includes the fringe benefit costs applicable to 

the salaries and wages included therein, an appropriate share of 

general administration and general expenses, operation and 

maintenance, and use allowances and/or depreciation. 

 b. In the absence of the alternatives provided for in 

Section E.2.d, the expenses in this category shall be allocated 

to the instruction function, and subsequently to sponsored 

agreements in that function. 

 10. Offset for F&A expenses otherwise provided for by the 

Federal Government. 

 a. The items to be accumulated under this heading are the 

reimbursements and other payments from the Federal Government 

that are made to the institution to support solely, 

specifically, and directly, in whole or in part, any of the 
31 

administrative or service activities described in subsections 2 

through 9. 

 b. The items in this group shall be treated as a credit to 

the affected individual F&A cost category before that category 

is allocated to benefiting functions. 

G. Determination and application of F&A cost rate or rates. 

 1. F&A cost pools. 

 a. (1) Subject to subsection b, the separate categories of 

F&A costs allocated to each major function of the institution as 

prescribed in Section F shall be aggregated and treated as a 

common pool for that function. The amount in each pool shall be 

divided by the distribution base described in subsection 2 to 

arrive at a single F&A cost rate for each function. 

 (2) The rate for each function is used to distribute F&A 

costs to individual sponsored agreements of that function. 

Since a common pool is established for each major function of 

the institution, a separate F&A cost rate would be established 

for each of the major functions described in Section B.1 under 

which sponsored agreements are carried out. 

 (3) Each institution's F&A cost rate process must be 

appropriately designed to ensure that Federal sponsors do not in 

any way subsidize the F&A costs of other sponsors, specifically 

activities sponsored by industry and foreign governments. 

Accordingly, each allocation method used to identify and 

allocate the F&A cost pools, as described in Sections E.2 and 

F.2 through F.9, must contain the full amount of the 

institution's modified total costs or other appropriate units of 

measurement used to make the computations. In addition, the 

final rate distribution base (as defined in subsection 2) for 

each major function (organized research, instruction, etc., as 

described in Section B.1) shall contain all the programs or 

activities that utilize the F&A costs allocated to that major 

function. At the time a F&A cost proposal is submitted to a 

cognizant Federal agency, each institution must describe the 

process it uses to ensure that Federal funds are not used to 

subsidize industry and foreign government funded programs. 

 b. In some instances a single rate basis for use across the 

board on all work within a major function at an institution may 

not be appropriate. A single rate for research, for example, 

might not take into account those different environmental 

factors and other conditions which may affect substantially the 

F&A costs applicable to a particular segment of research at the 

institution. A particular segment of research may be that 

performed under a single sponsored agreement or it may consist 
32 

of research under a group of sponsored agreements performed in a 

common environment. The environmental factors are not limited 

to the physical location of the work. Other important factors 

are the level of the administrative support required, the nature 

of the facilities or other resources employed, the scientific 

disciplines or technical skills involved, the organizational 

arrangements used, or any combination thereof. Where a 

particular segment of a sponsored agreement is performed within 

an environment which appears to generate a significantly 

different level of F&A costs, provisions should be made for a 

separate F&A cost pool applicable to such work. The separate 

F&A cost pool should be developed during the regular course of 

the rate determination process and the separate F&A cost rate 

resulting therefrom should be utilized; provided it is 

determined that (1) such F&A cost rate differs significantly 

from that which would have been obtained under subsection a, and 

(2) the volume of work to which such rate would apply is 

material in relation to other sponsored agreements at the 

institution. 

 2. The distribution basis. F&A costs shall be distributed 

to applicable sponsored agreements and other benefiting 

activities within each major function (see Section B.1) on the 

basis of modified total direct costs, consisting of all salaries 

and wages, fringe benefits, materials and supplies, services, 

travel, and subgrants and subcontracts up to the first $25,000 

of each subgrant or subcontract (regardless of the period 

covered by the subgrant or subcontract). Equipment, capital 

expenditures, charges for patient care and tuition remission, 

rental costs, scholarships, and fellowships as well as the 

portion of each subgrant and subcontract in excess of $25,000 

shall be excluded from modified total direct costs. Other items 

may only be excluded where necessary to avoid a serious inequity 

in the distribution of F&A costs. For this purpose, a F&A cost 

rate should be determined for each of the separate F&A cost 

pools developed pursuant to subsection 1. The rate in each case 

should be stated as the percentage that the amount of the 

particular F&A cost pool is of the modified total direct costs 

identified with such pool. 

 3. Negotiated lump sum for F&A costs. A negotiated fixed 

amount in lieu of F&A costs may be appropriate for 

self-contained, off-campus, or primarily subcontracted 

activities where the benefits derived from an institution's F&A 

services cannot be readily determined. Such negotiated F&A 

costs will be treated as an offset before allocation to 

instruction, organized research, other sponsored activities, and 
33 

other institutional activities. The base on which such 

remaining expenses are allocated should be appropriately 

adjusted. 

 4. Predetermined rates for F&A costs. Public Law 87-638 (76 

Stat. 437) authorizes the use of predetermined rates in 

determining the "indirect costs" (F&A costs in this Circular) 

applicable under research agreements with educational 

institutions. The stated objectives of the law are to simplify 

the administration of cost-type research and development 

contracts (including grants) with educational institutions, to 

facilitate the preparation of their budgets, and to permit more 

expeditious closeout of such contracts when the work is 

completed. In view of the potential advantages offered by this 

procedure, negotiation of predetermined rates for F&A costs for 

a period of two to four years should be the norm in those 

situations where the cost experience and other pertinent facts 

available are deemed sufficient to enable the parties involved 

to reach an informed judgment as to the probable level of F&A 

costs during the ensuing accounting periods. 

 5. Negotiated fixed rates and carry-forward provisions. 

When a fixed rate is negotiated in advance for a fiscal year (or 

other time period), the over- or under-recovery for that year 

may be included as an adjustment to the F&A cost for the next 

rate negotiation. When the rate is negotiated before the 

carry-forward adjustment is determined, the carry-forward amount 

may be applied to the next subsequent rate negotiation. When 

such adjustments are to be made, each fixed rate negotiated in 

advance for a given period will be computed by applying the 

expected F&A costs allocable to sponsored agreements for the 

forecast period plus or minus the carry-forward adjustment 

(over- or under-recovery) from the prior period, to the forecast 

distribution base. Unrecovered amounts under lump-sum 

agreements or cost-sharing provisions of prior years shall not 

be carried forward for consideration in the new rate 

negotiation. There must, however, be an advance understanding 

in each case between the institution and the cognizant Federal 

agency as to whether these differences will be considered in the 

rate negotiation rather than making the determination after the 

differences are known. Further, institutions electing to use 

this carry-forward provision may not subsequently change without 

prior approval of the cognizant Federal agency. In the event 

that an institution returns to a postdetermined rate, any overor under-recovery during the period in which negotiated fixed 

rates and carry-forward provisions were followed will be 

included in the subsequent postdetermined rates. Where multiple 
34 

rates are used, the same procedure will be applicable for 

determining each rate. 

 6. Provisional and final rates for F&A costs. Where the 

cognizant agency determines that cost experience and other 

pertinent facts do not justify the use of predetermined rates, 

or a fixed rate with a carry-forward, or if the parties cannot 

agree on an equitable rate, a provisional rate shall be 

established. To prevent substantial overpayment or 

underpayment, the provisional rate may be adjusted by the 

cognizant agency during the institution's fiscal year. 

Predetermined or fixed rates may replace provisional rates at 

any time prior to the close of the institution's fiscal year. 

If a provisional rate is not replaced by a predetermined or 

fixed rate prior to the end of the institution's fiscal year, a 

final rate will be established and upward or downward 

adjustments will be made based on the actual allowable costs 

incurred for the period involved. 

 7. Fixed rates for the life of the sponsored agreement. 

 a. Federal agencies shall use the negotiated rates for F&A 

costs in effect at the time of the initial award throughout the 

life of the sponsored agreement. "Life" for the purpose of this 

subsection means each competitive segment of a project. A 

competitive segment is a period of years approved by the Federal 

funding agency at the time of the award. If negotiated rate 

agreements do not extend through the life of the sponsored 

agreement at the time of the initial award, then the negotiated 

rate for the last year of the sponsored agreement shall be 

extended through the end of the life of the sponsored agreement. 

Award levels for sponsored agreements may not be adjusted in 

future years as a result of changes in negotiated rates. 

 b. When an educational institution does not have a 

negotiated rate with the Federal Government at the time of the 

award (because the educational institution is a new grantee or 

the parties cannot reach agreement on a rate), the provisional 

rate used at the time of the award shall be adjusted once a rate 

is negotiated and approved by the cognizant agency. 

 8. Limitation on reimbursement of administrative costs. 

 a. Notwithstanding the provisions of subsection 1.a, the 

administrative costs charged to sponsored agreements awarded or 

amended (including continuation and renewal awards) with 

effective dates beginning on or after the start of the 

institution's first fiscal year which begins on or after October 

1, 1991, shall be limited to 26% of modified total direct costs 

(as defined in subsection 2) for the total of General 

Administration and General Expenses, Departmental 
35 

Administration, Sponsored Projects Administration, and Student 

Administration and Services (including their allocable share of 

depreciation and/or use allowances, interest costs, operation 

and maintenance expenses, and fringe benefits costs, as provided 

by Sections F.5, F.6, F.7 and F.9) and all other types of 

expenditures not listed specifically under one of the 

subcategories of facilities in Section F. 

 b. Existing F&A cost rates that affect institutions' fiscal 

years which begin on or after October 1, 1991, shall be 

unilaterally amended by the cognizant Federal agency to reflect 

the cost limitation in subsection a. 

 c. Permanent rates established prior to this revision that 

have been amended in accordance with subsection b may be 

renegotiated. However, no such renegotiated rate may exceed the 

rate which would have been in effect if the agreement had 

remained in effect; nor may the administrative portion of any 

renegotiated rate exceed the limitation in subsection a. 

 d. Institutions should not change their accounting or cost 

allocation methods which were in effect on May 1, 1991, if the 

effect is to: (i) change the charging of a particular type of 

cost from F&A to direct, or (ii) reclassify costs, or increase 

allocations, from the administrative pools identified in 

subsection to the other F&A cost pools or fringe benefits. 

Cognizant Federal agencies are authorized to permit changes 

where an institution's charging practices are at variance with 

acceptable practices followed by a substantial majority of other 

institutions. 

 9. Alternative method for administrative costs. 

 a. Notwithstanding the provisions of subsection 1.a, an 

institution may elect to claim fixed allowance for the 

"Administration" portion of F&A costs. The allowance could be 

either 24% of modified total direct costs or a percentage equal 

to 95% of the most recently negotiated fixed or predetermined 

rate for the cost pools included under "Administration" as 

defined in Section F.1, whichever is less, provided that no 

accounting or cost allocation changes with the effects described 

in subsection 8.d have occurred. Under this alternative, no 

cost proposal need be prepared for the "Administration" portion 

of the F&A cost rate nor is further identification or 

documentation of these costs required (see subsection c). Where 

a negotiated F&A cost agreement includes this alternative, an 

institution shall make no further charges for the expenditure 

categories described in Sections F.5, F.6, F.7 and F.9. 

 b. In negotiations of rates for subsequent periods, an 

institution that has elected the option of subsection a may 
36 

continue to exercise it at the same rate without further 

identification or documentation of costs, provided that no 

accounting or cost allocation changes with the effects described 

in subsection 8.d have occurred. 

 c. If an institution elects to accept a threshold rate, it 

is not required to perform a detailed analysis of its 

administrative costs. However, in order to compute the 

facilities components of its F&A cost rate, the institution must 

reconcile its F&A cost proposal to its financial statements and 

make appropriate adjustments and reclassifications to identify 

the costs of each major function as defined in Section B.1, as 

well as to identify and allocate the facilities components. 

Administrative costs that are not identified as such by the 

institution's accounting system (such as those incurred in 

academic departments) will be classified as instructional costs 

for purposes of reconciling F&A cost proposals to financial 

statements and allocating facilities costs. 

 10. Individual rate components. 

 In order to satisfy the requirements of Section J.14 and to 

provide mutually agreed upon information for management 

purposes, each F&A cost rate negotiation or determination shall 

include development of a rate for each F&A cost pool as well as 

the overall F&A cost rate. 

 11. Negotiation and approval of F&A rate. 

 a. Cognizant agency assignments. "A cognizant agency" means 

the Federal agency responsible for negotiating and approving F&A 

rates for an educational institution on behalf of all Federal 

agencies. 

 (1) Cost negotiation cognizance is assigned to the 

Department of Health and Human Services (HHS) or the Department 

of Defense's Office of Naval Research (DOD), normally depending 

on which of the two agencies (HHS or DOD) provides more funds to 

the educational institution for the most recent three years. 

Information on funding shall be derived from relevant data 

gathered by the National Science Foundation. In cases where 

neither HHS nor DOD provides Federal funding to an educational 

institution, the cognizant agency assignment shall default to 

HHS. Notwithstanding the method for cognizance determination 

described above, other arrangements for cognizance of a 

particular educational institution may also be based in part on 

the types of research performed at the educational institution 

and shall be decided based on mutual agreement between HHS and 

DOD. 

 (2) Cognizant assignments as of December 31, 1995, shall 

continue in effect through educational institutions' fiscal 
37 

years ending during 1997, or the period covered by negotiated 

agreements in effect on December 31, 1995, whichever is later, 

except for those educational institutions with cognizant 

agencies other than HHS or DOD. Cognizance for these 

educational institutions shall transfer to HHS or DOD at the end 

of the period covered by the current negotiated rate agreement. 

After cognizance is established, it shall continue for a 

five-year period. 

 b. Acceptance of rates. The negotiated rates shall be 

accepted by all Federal agencies. Only under special 

circumstances, when required by law or regulation, may an agency 

use a rate different from the negotiated rate for a class of 

sponsored agreements or a single sponsored agreement. 

 c. Correcting deficiencies. The cognizant agency shall 

negotiate changes needed to correct systems deficiencies 

relating to accountability for sponsored agreements. Cognizant 

agencies shall address the concerns of other affected agencies, 

as appropriate. 

 d. Resolving questioned costs. The cognizant agency shall 

conduct any necessary negotiations with an educational 

institution regarding amounts questioned by audit that are due 

the Federal Government related to costs covered by a negotiated 

agreement. 

 e. Reimbursement. Reimbursement to cognizant agencies for 

work performed under Circular A-21 may be made by reimbursement 

billing under the Economy Act, 31 U.S.C. 1535. 

 f. Procedure for establishing facilities and administrative 

rates. The cognizant agency shall arrange with the educational 

institution to provide copies of rate proposals to all 

interested agencies. Agencies wanting such copies should notify 

the cognizant agency. Rates shall be established by one of the 

following methods: 

 (1) Formal negotiation. The cognizant agency is 

responsible for negotiating and approving rates for an 

educational institution on behalf of all Federal agencies. 

Non-cognizant Federal agencies, which award sponsored agreements 

to an educational institution, shall notify the cognizant agency 

of specific concerns (i.e., a need to establish special cost 

rates) that could affect the negotiation process. The cognizant 

agency shall address the concerns of all interested agencies, as 

appropriate. A pre-negotiation conference may be scheduled 

among all interested agencies, if necessary. The cognizant 

agency shall then arrange a negotiation conference with the 

educational institution. 
38 

 (2) Other than formal negotiation. The cognizant agency 

and educational institution may reach an agreement on rates 

without a formal negotiation conference; for example, through 

correspondence or use of the simplified method described in this 

Circular. 

 g. Formalizing determinations and agreements. The cognizant 

agency shall formalize all determinations or agreements reached 

with an educational institution and provide copies to other 

agencies having an interest. 

 h. Disputes and disagreements. Where the cognizant agency 

is unable to reach agreement with an educational institution 

with regard to rates or audit resolution, the appeal system of 

the cognizant agency shall be followed for resolution of the 

disagreement. 

 12. Standard Format for Submission. For facilities and 

administrative (F&A) rate proposals submitted on or after July 

1, 2001, educational institutions shall use the standard format, 

shown in Appendix C, to submit their F&A rate proposal to the 

cognizant agency. The cognizant agency may, on an 

institution-by-institution basis, grant exceptions from all or 

portions of Part II of the standard format requirement. This 

requirement does not apply to educational institutions that use 

the simplified method for calculating F&A rates, as described in 

Section H. 

H. Simplified method for small institutions. 

 1. General. 

 a. Where the total direct cost of work covered by Circular 

A-21 at an institution does not exceed $10 million in a fiscal 

year, the use of the simplified procedure described in 

subsections 2 or 3, may be used in determining allowable F&A 

costs. Under this simplified procedure, the institution's most 

recent annual financial report and immediately available 

supporting information shall be utilized as basis for 

determining the F&A cost rate applicable to all sponsored 

agreements. The institution may use either the salaries and 

wages (see subsection 2) or modified total direct costs (see 

subsection 3) as distribution basis. 

 b. The simplified procedure should not be used where it 

produces results that appear inequitable to the Federal 

Government or the institution. In any such case, F&A costs 

should be determined through use of the regular procedure. 

 2. Simplified procedure - Salaries and wages base. 

 a. Establish the total amount of salaries and wages paid to 

all employees of the institution. 
39 

 b. Establish an F&A cost pool consisting of the expenditures 

(exclusive of capital items and other costs specifically 

identified as unallowable) that customarily are classified under 

the following titles or their equivalents: 

 (1) General administration and general expenses (exclusive 

of costs of student administration and services, student 

activities, student aid, and scholarships). 

 (2) Operation and maintenance of physical plant; and 

depreciation and use allowances; after appropriate adjustment 

for costs applicable to other institutional activities. 

 (3) Library. 

 (4) Department administration expenses, which will be 

computed as 20 percent of the salaries and expenses of deans and 

heads of departments. 

 In those cases where expenditures classified under 

subsection (1) have previously been allocated to other 

institutional activities, they may be included in the F&A cost 

pool. The total amount of salaries and wages included in the 

F&A cost pool must be separately identified. 

 c. Establish a salary and wage distribution base, determined 

by deducting from the total of salaries and wages as established 

in subsection a the amount of salaries and wages included under 

subsection b. 

 d. Establish the F&A cost rate, determined by dividing the 

amount in the F&A cost pool, subsection b, by the amount of the 

distribution base, subsection c. 

 e. Apply the F&A cost rate to direct salaries and wages for 

individual agreements to determine the amount of F&A costs 

allocable to such agreements. 

 3. Simplified procedure - Modified total direct cost base. 

 a. Establish the total costs incurred by the institution for 

the base period. 

 b. Establish a F&A cost pool consisting of the expenditures 

(exclusive of capital items and other costs specifically 

identified as unallowable) that customarily are classified under 

the following titles or their equivalents: 

 (1) General administration and general expenses (exclusive 

of costs of student administration and services, student 

activities, student aid, and scholarships). 

 (2) Operation and maintenance of physical plant; and 

depreciation and use allowances; after appropriate adjustment 

for costs applicable to other institutional activities. 

 (3) Library. 
40 

 (4) Department administration expenses, which will be 

computed as 20 percent of the salaries and expenses of deans and 

heads of departments. 

 In those cases where expenditures classified under 

subsection (1) have previously been allocated to other 

institutional activities, they may be included in the F&A cost 

pool. The modified total direct costs amount included in the 

F&A cost pool must be separately identified. 

 c. Establish a modified total direct cost distribution base, 

as defined in Section G.2, that consists of all institution's 

direct functions. 

 d. Establish the F&A cost rate, determined by dividing the 

amount in the F&A cost pool, subsection b, by the amount of the 

distribution base, subsection c. 

 e. Apply the F&A cost rate to the modified total direct 

costs for individual agreements to determine the amount of F&A 

costs allocable to such agreements. 

J. General provisions for selected items of cost. 

 Sections 1 through 54 provide principles to be applied in 

establishing the allowability of certain items involved in 

determining cost. These principles should apply irrespective of 

whether a particular item of cost is properly treated as direct 

cost or F&A cost. Failure to mention a particular item of cost 

is not intended to imply that it is either allowable or 

unallowable; rather, determination as to allowability in each 

case should be based on the treatment provided for similar or 

related items of cost. In case of a discrepancy between the 

provisions of a specific sponsored agreement and the provisions 

below, the agreement should govern. 

 1. Advertising and public relations costs.

 a. The term advertising costs means the costs of advertising 

media and corollary administrative costs. Advertising media 

include magazines, newspapers, radio and television, direct mail, 

exhibits, electronic or computer transmittals, and the like. 

 b. The term public relations includes community relations and 

means those activities dedicated to maintaining the image of the 

institution or maintaining or promoting understanding and favorable 

relations with the community or public at large or any segment of 

the public. 

 c. The only allowable advertising costs are those that are 

solely for: 
41 

 (1) The recruitment of personnel required for the performance 

by the institution of obligations arising under a sponsored 

agreement (See also subsection b. of section J.42, Recruiting); 

 (2) The procurement of goods and services for the performance 

of a sponsored agreement; 

 (3) The disposal of scrap or surplus materials acquired in 

the performance of a sponsored agreement except when non-Federal 

entities are reimbursed for disposal costs at a predetermined 

amount; or 

 (4) Other specific purposes necessary to meet the 

requirements of the sponsored agreement. 

 d. The only allowable public relations costs are: 

 (1) Costs specifically required by the sponsored agrrement; 

 (2) Costs of communicating with the public and press 

pertaining to specific activities or accomplishments which result 

from performance of sponsored agreements (these costs are 

considered necessary as part of the outreach effort for the 

sponsored agreement); or 

 (3) Costs of conducting general liaison with news media and 

government public relations officers, to the extent that such 

activities are limited to communication and liaison necessary keep 

the public informed on matters of public concern, such as notices 

of Federal contract/grant awards, financial matters, etc. 

 e. Costs identified in subsections c and d if incurred for more 

than one sponsored agreement or for both sponsored work and other 

work of the institution, are allowable to the extent that the 

principles in sections D. (“Direct Costs”) and E. (“F & A Costs”) 

are observed. 

 f. Unallowable advertising and public relations costs include 

the following: 

 (1) All advertising and public relations costs other than as 

specified in subsections 1.c, 1.d and 1.e. 

 (2) Costs of meetings, conventions, convocations, or other 

events related to other activities of the institution, including: 

 (a) Costs of displays, demonstrations, and exhibits; 

 (b) Costs of meeting rooms, hospitality suites, and other 

special facilities used in conjunction with shows and other special 

events; and 

 (c) Salaries and wages of employees engaged in setting up and 

displaying exhibits, making demonstrations, and providing 

briefings; 

 (3) Costs of promotional items and memorabilia, including 

models, gifts, and souvenirs; 

 (4) Costs of advertising and public relations designed solely 

to promote the institution. 

 2. Advisory councils.
42 

 Costs incurred by advisory councils or committees are 

allowable as a direct cost where authorized by the Federal 

awarding agency or as an indirect cost where allocable to 

sponsored agreements. 

 3. Alcoholic beverages. 

 Costs of alcoholic beverages are unallowable. 

 4. Alumni/ae activities. 

 Costs incurred for, or in support of, alumni/ae activities 

and similar services are unallowable. 

 5. Audit costs and related services.

 a. The costs of audits required by, and performed in 

accordance with, the Single Audit Act, as implemented by 

Circular A-133, "Audits of States, Local Governments, and NonProfit Organizations” are allowable. Also see 31 USC 7505(b) 

and section ___.230 (“Audit Costs”) of Circular A-133. 

 b. Other audit costs are allowable if included in an 

indirect cost rate proposal , or if specifically approved by the 

awarding agency as a direct cost to an award. 

 c. The cost of agreed-upon procedures engagements to 

monitor subrecipients who are exempted from A-133 under section 

___.200(d) are allowable, subject to the conditions listed in A133, section ___.230 (b)(2). 

 6. Bad Debt. 

 Bad debts, including losses (whether actual or estimated) 

arising from uncollectable accounts and other claims, related 

collection costs, and related legal costs, are unallowable. 

 7. Bonding costs.

 a. Bonding costs arise when the Federal Government requires 

assurance against financial loss to itself or others by reason 

of the act or default of the institution. They arise also in 

instances where the institution requires similar assurance. 

Included are such bonds as bid, performance, payment, advance 

payment, infringement, and fidelity bonds. 

 b. Costs of bonding required pursuant to the terms of the 

award are allowable. 

 c. Costs of bonding required by the institution in the 

general conduct of its operations are allowable to the extent 

that such bonding is in accordance with sound business practice 

and the rates and premiums are reasonable under the 

circumstances. 
43 

 8. Commencement and convocation costs.

 Costs incurred for commencements and convocations are 

unallowable, except as provided for in Section F.9. 

 9. Communication costs. 

 Costs incurred for telephone services, local and long 

distance telephone calls, telegrams, postage, messenger, 

electronic or computer transmittal services and the like are 

allowable. 

 10. Compensation for personal services.

 a. General. Compensation for personal services covers all 

amounts paid currently or accrued by the institution for 

services of employees rendered during the period of performance 

under sponsored agreements. Such amounts include salaries, 

wages, and fringe benefits (see subsection f). These costs are 

allowable to the extent that the total compensation to 

individual employees conforms to the established policies of the 

institution, consistently applied, and provided that the charges 

for work performed directly on sponsored agreements and for 

other work allocable as F&A costs are determined and supported 

as provided below. Charges to sponsored agreements may include 

reasonable amounts for activities contributing and intimately 

related to work under the agreements, such as delivering special 

lectures about specific aspects of the ongoing activity, writing 

reports and articles, participating in appropriate seminars, 

consulting with colleagues and graduate students, and attending 

meetings and conferences. Incidental work (that in excess of 

normal for the individual), for which supplemental compensation 

is paid by an institution under institutional policy, need not 

be included in the payroll distribution systems described below, 

provided such work and compensation are separately identified 

and documented in the financial management system of the 

institution. 

 b. Payroll distribution. 

 (1) General Principles. 

 (a) The distribution of salaries and wages, whether 

treated as direct or F&A costs, will be based on payrolls 

documented in accordance with the generally accepted practices 

of colleges and universities. Institutions may include in a 

residual category all activities that are not directly charged 

to sponsored agreements, and that need not be distributed to 

more than one activity for purposes of identifying F&A costs and 

the functions to which they are allocable. The components of 
44 

the residual category are not required to be separately 

documented. 

 (b) The apportionment of employees' salaries and wages 

which are chargeable to more than one sponsored agreement or 

other cost objective will be accomplished by methods which will- 

 (1) be in accordance with Sections A.2 and C; 

 (2) produce an equitable distribution of charges for 

employee's activities; and 

 (3) distinguish the employees' direct activities from 

their F&A activities. 

 (c) In the use of any methods for apportioning salaries, 

it is recognized that, in an academic setting, teaching, 

research, service, and administration are often inextricably 

intermingled. A precise assessment of factors that contribute 

to costs is not always feasible, nor is it expected. Reliance, 

therefore, is placed on estimates in which a degree of tolerance 

is appropriate. 

 (d) There is no single best method for documenting the 

distribution of charges for personal services. Methods for 

apportioning salaries and wages, however, must meet the criteria 

specified in subsection b.(2). Examples of acceptable methods 

are contained in subsection c. Other methods that meet the 

criteria specified in subsection b.(2) also shall be deemed 

acceptable, if a mutually satisfactory alternative agreement is 

reached. 

 (2) Criteria for Acceptable Methods. 

 (a) The payroll distribution system will 

 (i) be incorporated into the official records of the 

institution; 

 (ii) reasonably reflect the activity for which the 

employee is compensated by the institution; and 

 (iii) encompass both sponsored and all other activities on 

an integrated basis, but may include the use of subsidiary 

records. (Compensation for incidental work described in 

subsection a need not be included.) 

 (b) The method must recognize the principle of 

after-the-fact confirmation or determination so that costs 

distributed represent actual costs, unless a mutually 

satisfactory alternative agreement is reached. Direct cost 

activities and F&A cost activities may be confirmed by 

responsible persons with suitable means of verification that the 

work was performed. Confirmation by the employee is not a 

requirement for either direct or F&A cost activities if other 

responsible persons make appropriate confirmations. 
45 

 (c) The payroll distribution system will allow 

confirmation of activity allocable to each sponsored agreement 

and each of the categories of activity needed to identify F&A 

costs and the functions to which they are allocable. The 

activities chargeable to F&A cost categories or the major 

functions of the institution for employees whose salaries must 

be apportioned (see subsection b.(1)b)), if not initially 

identified as separate categories, may be subsequently 

distributed by any reasonable method mutually agreed to, 

including, but not limited to, suitably conducted surveys, 

statistical sampling procedures, or the application of 

negotiated fixed rates. 

 (d) Practices vary among institutions and within 

institutions as to the activity constituting a full workload. 

Therefore, the payroll distribution system may reflect 

categories of activities expressed as a percentage distribution 

of total activities. 

 (e) Direct and F&A charges may be made initially to 

sponsored agreements on the basis of estimates made before 

services are performed. When such estimates are used, 

significant changes in the corresponding work activity must be 

identified and entered into the payroll distribution system. 

Short-term (such as one or two months) fluctuation between 

workload categories need not be considered as long as the 

distribution of salaries and wages is reasonable over the longer 

term, such as an academic period. 

 (f) The system will provide for independent internal 

evaluations to ensure the system's effectiveness and compliance 

with the above standards. 

 (g) For systems which meet these standards, the 

institution will not be required to provide additional support 

or documentation for the effort actually performed. 

 c. Examples of Acceptable Methods for Payroll Distribution: 

 (1) Plan-Confirmation: Under this method, the distribution 

of salaries and wages of professorial and professional staff 

applicable to sponsored agreements is based on budgeted, 

planned, or assigned work activity, updated to reflect any 

significant changes in work distribution. A plan-confirmation 

system used for salaries and wages charged directly or 

indirectly to sponsored agreements will meet the following 

standards: 

 (a) A system of budgeted, planned, or assigned work 

activity will be incorporated into the official records of the 

institution and encompass both sponsored and all other 
46 

activities on an integrated basis. The system may include the 

use of subsidiary records. 

 (b) The system will reasonably reflect only the activity 

for which the employee is compensated by the institution 

(compensation for incidental work described in subsection a need 

not be included). Practices vary among institutions and within 

institutions as to the activity constituting a full workload. 

Hence, the system will reflect categories of activities 

expressed as a percentage distribution of total activities. 

(See Section H for treatment of F&A costs under the simplified 

method for small institutions.) 

 (c) The system will reflect activity applicable to each 

sponsored agreement and to each category needed to identify F&A 

costs and the functions to which they are allocable. The system 

may treat F&A cost activities initially within a residual 

category and subsequently determine them by alternate methods as 

discussed in subsection b.(2)(c). 

 (d) The system will provide for modification of an 

individual's salary or salary distribution commensurate with a 

significant change in the employee's work activity. Short-term 

(such as one or two months) fluctuation between workload 

categories need not be considered as long as the distribution of 

salaries and wages is reasonable over the longer term, such as 

an academic period. Whenever it is apparent that a significant 

change in work activity that is directly or indirectly charged 

to sponsored agreements will occur or has occurred, the change 

will be documented over the signature of a responsible official 

and entered into the system. 

 (e) At least annually a statement will be signed by the 

employee, principal investigator, or responsible official(s) 

using suitable means of verification that the work was 

performed, stating that salaries and wages charged to sponsored 

agreements as direct charges, and to residual, F&A cost or other 

categories are reasonable in relation to work performed. 

 (f) The system will provide for independent internal 

evaluation to ensure the system's integrity and compliance with 

the above standards. 

 (g) In the use of this method, an institution shall not be 

required to provide additional support or documentation for the 

effort actually performed. 

 (2) After-the-fact Activity Records: Under this system 

the distribution of salaries and wages by the institution will 

be supported by activity reports as prescribed below. 

 (a) Activity reports will reflect the distribution of 

activity expended by employees covered by the system 
47 

(compensation for incidental work as described in subsection a 

need not be included). 

 (b) These reports will reflect an after-the-fact reporting 

of the percentage distribution of activity of employees. 

Charges may be made initially on the basis of estimates made 

before the services are performed, provided that such charges 

are promptly adjusted if significant differences are indicated 

by activity records. 

 (c) Reports will reasonably reflect the activities for 

which employees are compensated by the institution. To confirm 

that the distribution of activity represents a reasonable 

estimate of the work performed by the employee during the 

period, the reports will be signed by the employee, principal 

investigator, or responsible official(s) using suitable means of 

verification that the work was performed. 

 (d) The system will reflect activity applicable to each 

sponsored agreement and to each category needed to identify F&A 

costs and the functions to which they are allocable. The system 

may treat F&A cost activities initially within a residual 

category and subsequently determine them by alternate methods as 

discussed in subsection b.(2)(c). 

 (e) For professorial and professional staff, the reports 

will be prepared each academic term, but no less frequently than 

every six months. For other employees, unless alternate 

arrangements are agreed to, the reports will be prepared no less 

frequently than monthly and will coincide with one or more pay 

periods. 

 (f) Where the institution uses time cards or other forms 

of after-the-fact payroll documents as original documentation 

for payroll and payroll charges, such documents shall qualify as 

records for this purpose, provided that they meet the 

requirements in subsections (a) through (e). 

 (3) Multiple Confirmation Records: Under this system, the 

distribution of salaries and wages of professorial and 

professional staff will be supported by records which certify 

separately for direct and F&A cost activities as prescribed 

below. 

 (a) For employees covered by the system, there will be 

direct cost records to reflect the distribution of that activity 

expended which is to be allocable as direct cost to each 

sponsored agreement. There will also be F&A cost records to 

reflect the distribution of that activity to F&A costs. These 

records may be kept jointly or separately (but are to be 

certified separately, see below). 
48 

 (b) Salary and wage charges may be made initially on the 

basis of estimates made before the services are performed, 

provided that such charges are promptly adjusted if significant 

differences occur. 

 (c) Institutional records will reasonably reflect only the 

activity for which employees are compensated by the institution 

(compensation for incidental work as described in subsection a 

need not be included). 

 (d) The system will reflect activity applicable to each 

sponsored agreement and to each category needed to identify F&A 

costs and the functions to which they are allocable. 

 (e) To confirm that distribution of activity represents a 

reasonable estimate of the work performed by the employee during 

the period, the record for each employee will include: 

 (1) the signature of the employee or of a person having 

direct knowledge of the work, confirming that the record of 

activities allocable as direct costs of each sponsored agreement 

is appropriate; and, 

 (2) the record of F&A costs will include the signature of 

responsible person(s) who use suitable means of verification 

that the work was performed and is consistent with the overall 

distribution of the employee's compensated activities. These 

signatures may all be on the same document. 

 (f) The reports will be prepared each academic term, but 

no less frequently than every six months. 

 (g) Where the institution uses time cards or other forms 

of after-the-fact payroll documents as original documentation 

for payroll and payroll charges, such documents shall qualify as 

records for this purposes, provided they meet the requirements 

in subsections (a) through (f). 

 d. Salary rates for faculty members. 

 (1) Salary rates for academic year. Charges for work 

performed on sponsored agreements by faculty members during the 

academic year will be based on the individual faculty member's 

regular compensation for the continuous period which, under the 

policy of the institution concerned, constitutes the basis of 

his salary. Charges for work performed on sponsored agreements 

during all or any portion of such period are allowable at the 

base salary rate. In no event will charges to sponsored 

agreements, irrespective of the basis of computation, exceed the 

proportionate share of the base salary for that period. This 

principle applies to all members of the faculty at an 

institution. Since intra-university consulting is assumed to be 

undertaken as a university obligation requiring no compensation 

in addition to full-time base salary, the principle also applies 
49 

to faculty members who function as consultants or otherwise 

contribute to a sponsored agreement conducted by another faculty 

member of the same institution. However, in unusual cases where 

consultation is across departmental lines or involves a separate 

or remote operation, and the work performed by the consultant is 

in addition to his regular departmental load, any charges for 

such work representing extra compensation above the base salary 

are allowable provided that such consulting arrangements are 

specifically provided for in the agreement or approved in 

writing by the sponsoring agency. 

 (2) Periods outside the academic year. 

 (a) Except as otherwise specified for teaching activity in 

subsection (b), charges for work performed by faculty members on 

sponsored agreements during the summer months or other period 

not included in the base salary period will be determined for 

each faculty member at a rate not in excess of the base salary 

divided by the period to which the base salary relates, and will 

be limited to charges made in accordance with other parts of 

this section. The base salary period used in computing charges 

for work performed during the summer months will be the number 

of months covered by the faculty member's official academic year 

appointment. 

 (b) Charges for teaching activities performed by faculty 

members on sponsored agreements during the summer months or 

other periods not included in the base salary period will be 

based on the normal policy of the institution governing 

compensation to faculty members for teaching assignments during 

such periods. 

 (3) Part-time faculty. Charges for work performed on 

sponsored agreements by faculty members having only part-time 

appointments will be determined at a rate not in excess of that 

regularly paid for the part-time assignments. For example, an 

institution pays $5000 to a faculty member for half-time 

teaching during the academic year. He devoted one-half of his 

remaining time to a sponsored agreement. Thus, his additional 

compensation, chargeable by the institution to the agreement, 

would be one-half of $5000, or $2500. 

 e. Noninstitutional professional activities. Unless an 

arrangement is specifically authorized by a Federal sponsoring 

agency, an institution must follow its institution-wide policies 

and practices concerning the permissible extent of professional 

services that can be provided outside the institution for 

noninstitutional compensation. Where such institution-wide 

policies do not exist or do not adequately define the 

permissible extent of consulting or other noninstitutional 
50 

activities undertaken for extra outside pay, the Federal 

Government may require that the effort of professional staff 

working on sponsored agreements be allocated between (1) 

institutional activities, and (2) noninstitutional professional 

activities. If the sponsoring agency considers the extent of 

noninstitutional professional effort excessive, appropriate 

arrangements governing compensation will be negotiated on a 

case-by-case basis. 

 f. Fringe benefits. 

 (1) Fringe benefits in the form of regular compensation 

paid to employees during periods of authorized absences from the 

job, such as for annual leave, sick leave, military leave, and 

the like, are allowable, provided such costs are distributed to 

all institutional activities in proportion to the relative 

amount of time or effort actually devoted by the employees. See 

subsection 11.f.(4) for treatment of sabbatical leave. 

 (2) Fringe benefits in the form of employer contributions 

or expenses for social security, employee insurance, workmen's 

compensation insurance, tuition or remission of tuition for 

individual employees are allowable, provided such benefits are 

granted in accordance with established educational institutional 

policies, and are distributed to all institutional activities on 

an equitable basis. Tuition benefits for family members other 

than the employee are unallowable for fiscal years beginning 

after September 30, 1998. See Section J.45.b, Scholarships and 

student aid costs, for treatment of tuition remission provided 

to students. 

 (3) Rules for pension plan costs are as follows: 

 (a) Costs of the institution's pension plan which are 

incurred in accordance with the established policies of the 

institution are allowable, provided: (i) such policies meet the 

test of reasonableness, (ii) the methods of cost allocation are 

equitable for all activities, (iii) the amount of pension cost 

assigned to each fiscal year is determined in accordance with 

subsection (b), and (iv) the cost assigned to a given fiscal 

year is paid or funded for all plan participants within six 

months after the end of that year. However, increases to normal 

and past service pension costs caused by a delay in funding the 

actuarial liability beyond 30 days after each quarter of the 

year to which such costs are assignable are unallowable. 

 (b) The amount of pension cost assigned to each fiscal 

year shall be determined in accordance with generally accepted 

accounting principles. Institutions may elect to follow the 

"Cost Accounting Standard for Composition and Measurement of 

Pension Cost" (48 Part 9904-412). 
51 

 (c) Premiums paid for pension plan termination insurance 

pursuant to the Employee Retirement Income Security Act (ERISA) 

of 1974 (Pub. L. 93-406) are allowable. Late payment charges 

on such premiums are unallowable. Excise taxes on accumulated 

funding deficiencies and prohibited transactions of pension plan 

fiduciaries imposed under ERISA are also unallowable. 

 (4) Rules for sabbatical leave are as follows: 

 (a) Costs of leave of absence by employees for performance 

of graduate work or sabbatical study, travel, or research are 

allowable provided the institution has a uniform policy on 

sabbatical leave for persons engaged in instruction and persons 

engaged in research. Such costs will be allocated on an 

equitable basis among all related activities of the institution. 

 (b) Where sabbatical leave is included in fringe benefits 

for which a cost is determined for assessment as a direct 

charge, the aggregate amount of such assessments applicable to 

all work of the institution during the base period must be 

reasonable in relation to the institution's actual experience 

under its sabbatical leave policy. 

 (5) Fringe benefits may be assigned to cost objectives by 

identifying specific benefits to specific individual employees 

or by allocating on the basis of institution-wide salaries and 

wages of the employees receiving the benefits. When the 

allocation method is used, separate allocations must be made to 

selective groupings of employees, unless the institution 

demonstrates that costs in relationship to salaries and wages do 

not differ significantly for different groups of employees. 

Fringe benefits shall be treated in the same manner as the 

salaries and wages of the employees receiving the benefits. The 

benefits related to salaries and wages treated as direct costs 

shall also be treated as direct costs; the benefits related to 

salaries and wages treated as F&A costs shall be treated as F&A 

costs. 

 g. Institution-furnished automobiles. 

 That portion of the cost of institution-furnished 

automobiles that relates to personal use by employees (including 

transportation to and from work) is unallowable regardless of 

whether the cost is reported as taxable income to the employees. 

 h. Severance pay. 

 (1) Severance pay is compensation in addition to regular 

salary and wages which is paid by an institution to employees 

whose services are being terminated. Costs of severance pay are 

allowable only to the extent that such payments are required by 

law, by employer-employee agreement, by established policy that 

constitutes in effect an implied agreement on the institution's 
52 

part, or by circumstances of the particular employment. 

 (2) Severance payments that are due to normal recurring 

turnover and which otherwise meet the conditions of subsection 

(1) may be allowed provided the actual costs of such severance 

payments are regarded as expenses applicable to the current 

fiscal year and are equitably distributed among the 

institution's activities during that period. 

 (3) Severance payments that are due to abnormal or mass 

terminations are of such conjectural nature that allowability 

must be determined on a case-by-case basis. However, the 

Federal Government recognizes its obligation to participate, to 

the extent of its fair share, in any specific payment. 

 (4) Costs incurred in excess of the institution's normal 

severance pay policy applicable to all persons employed by the 

institution upon termination of employment are unallowable. 

 11. Contingency provisions. 

 Contributions to a contingency reserve or any similar 

provision made for events the occurrence of which cannot be 

foretold with certainty as to time, intensity, or with an 

assurance of their happening, are unallowable, except as noted 

in the cost principles in this circular regarding selfinsurance, pensions, severance and post-retirement health costs. 

 12. Deans of faculty and graduate schools. 

 The salaries and expenses of deans of faculty and graduate 

schools, or their equivalents, and their staffs, are allowable. 

 13. Defense and prosecution of criminal and civil 

proceedings, claims, appeals and patent infringement.

 a. Definitions. 

 "Conviction," as used herein, means a judgment or conviction 

of a criminal offense by any court of competent jurisdiction, 

whether entered upon verdict or a plea, including a conviction 

due to a plea of nolo contendere. 

 "Costs," include, but are not limited to, administrative and 

clerical expenses; the cost of legal services, whether performed 

by in-house or private counsel; the costs of the services of 

accountants, consultants, or others retained by the institution 

to assist it; costs of employees, officers and trustees, and any 

similar costs incurred before, during, and after commencement of 

a judicial or administrative proceeding that bears a direct 

relationship to the proceedings. 

 "Fraud," as used herein, means – 
53 

 (1) acts of fraud or corruption or attempts to defraud the 

Federal Government or to corrupt its agents; 

 (2) acts that constitute a cause for debarment or 

suspension (as specified in agency regulations), and (3) acts 

which violate the False Claims Act, 31 U.S.C., sections 

3729-3731, or the Anti-kickback Act, 41 U.S.C., sections 51 and 

54. 

 "Penalty," does not include restitution, reimbursement, or 

compensatory damages. 

 "Proceeding," includes an investigation. 

 b. (1) Except as otherwise described herein, costs incurred 

in connection with any criminal, civil or administrative 

proceeding (including filing of a false certification) commenced 

by the Federal Government, or a State, local or foreign 

government, are not allowable if the proceeding 

 (a) relates to a violation of, or failure to comply with, 

a Federal, State, local or foreign statute or regulation, by the 

institution (including its agents and employees); and 

 (b) results in any of the following dispositions: 

 (i) In a criminal proceeding, a conviction. 

 (ii) In a civil or administrative proceeding involving an 

allegation of fraud or similar misconduct, a determination of 

institutional liability. 

 (iii) In the case of any civil or administrative 

proceeding, the imposition of a monetary penalty. 

 (iv) A final decision by an appropriate Federal official 

to debar or suspend the institution, to rescind or void an 

award, or to terminate an award for default by reason of a 

violation or failure to comply with a law or regulation. 

 (v) A disposition by consent or compromise, if the action 

could have resulted in any of the dispositions described in 

subsections (i) through (iv). 

 (2) If more than one proceeding involves the same alleged 

misconduct, the costs of all such proceedings shall be 

unallowable if any one of them results in one of the 

dispositions shown in subsection b. 

 c. If a proceeding referred to in subsection b. is commenced 

by the Federal Government and is resolved by consent or 

compromise pursuant to an agreement entered into by the 

institution and the Federal Government, then the costs incurred 

by the institution in connection with such proceedings that are 

otherwise not allowable under subsection b. may be allowed to 

the extent specifically provided in such agreement. 

 d. If a proceeding referred to in subsection b. is commenced 

by a State, local or foreign government, the authorized Federal 
54 

official may allow the costs incurred by the institution for 

such proceedings, if such authorized official determines that 

the costs were incurred as a result of – 

 (1) a specific term or condition of a federally-sponsored 

agreement; or 

 (2) specific written direction of an authorized official 

of the sponsoring agency. 

 e. Costs incurred in connection with proceedings described 

in subsection b, but which are not made unallowable by that 

subsection, may be allowed by the Federal Government, but only 

to the extent that: 

 (1) The costs are reasonable in relation to the activities 

required to deal with the proceeding and the underlying cause of 

action; 

 (2) Payment of the costs incurred, as allowable and 

allocable costs, is not prohibited by any other provision(s) of 

the sponsored agreement; 

 (3) The costs are not otherwise recovered from the Federal 

Government or a third party, either directly as a result of the 

proceeding or otherwise; and, 

 (4) The percentage of costs allowed does not exceed the 

percentage determined by an authorized Federal official to be 

appropriate considering the complexity of procurement 

litigation, generally accepted principles governing the award of 

legal fees in civil actions involving the United States as a 

party, and such other factors as may be appropriate. Such 

percentage shall not exceed 80 percent. However, if an 

agreement reached under subsection c has explicitly considered 

this 80 percent limitation and permitted a higher percentage, 

then the full amount of costs resulting from that agreement 

shall be allowable. 

 f. Costs incurred by the institution in connection with the 

defense of suits brought by its employees or ex-employees under 

section 2 of the Major Fraud Act of 1988 (Pub. L. 100-700), 

including the cost of all relief necessary to make such employee 

whole, where the institution was found liable or settled, are 

unallowable. 

 g. Costs of legal, accounting, and consultant services, and 

related costs, incurred in connection with defense against 

Federal Government claims or appeals, or the prosecution of 

claims or appeals against the Federal Government, are 

unallowable. 

 h. Costs of legal, accounting, and consultant services, and 

related costs, incurred in connection with patent infringement 
55 

litigation, are unallowable unless otherwise provided for in the 

sponsored agreements. 

 i. Costs, which may be unallowable under this section, 

including directly associated costs, shall be segregated and 

accounted for by the institution separately. During the 

pendency of any proceeding covered by subsections b and f, the 

Federal Government shall generally withhold payment of such 

costs. However, if in the best interests of the Federal 

Government, the Federal Government may provide for conditional 

payment upon provision of adequate security, or other adequate 

assurance, and agreement by the institution to repay all 

unallowable costs, plus interest, if the costs are subsequently 

determined to be unallowable. 

 14. Depreciation and use allowances. 

 a. Institutions may be compensated for the use of their 

buildings, capital improvements, and equipment, provided that 

they are used, needed in the institutions' activities, and 

properly allocable to sponsored agreements. Such compensation 

shall be made by computing either depreciation or use allowance. 

Use allowances are the means of providing such compensation when 

depreciation or other equivalent costs are not computed. The 

allocation for depreciation or use allowance shall be made in 

accordance with Section F.2. Depreciation and use allowances 

are computed applying the following rules: 

 b. The computation of depreciation or use allowances shall 

be based on the acquisition cost of the assets involved. The 

acquisition cost of an asset donated to the institution by a 

third party shall be its fair market value at the time of the 

donation. 

 c. For this purpose, the acquisition cost will exclude: 

 (1) the cost of land; 

 (2) any portion of the cost of buildings and equipment 

borne by or donated by the Federal Government, irrespective of 

where title was originally vested or where it is presently 

located; and 

 (3) any portion of the cost of buildings and equipment 

contributed by or for the institution where law or agreement 

prohibits recovery. 

 d. In the use of the depreciation method, the following 

shall be observed: 

 (1) The period of useful service (useful life) established 

in each case for usable capital assets must take into 

consideration such factors as type of construction, nature of 

the equipment, technological developments in the particular 
56 

area, and the renewal and replacement policies followed for the 

individual items or classes of assets involved. 

 (2) The depreciation method used to charge the cost of an 

asset (or group of assets) to accounting periods shall reflect 

the pattern of consumption of the asset during its useful life. 

In the absence of clear evidence indicating that the expected 

consumption of the asset will be significantly greater in the 

early portions than in the later portions of its useful life, 

the straight-line method shall be presumed to be the appropriate 

method. 

 Depreciation methods once used shall not be changed unless 

approved in advance by the cognizant Federal agency. The 

depreciation methods used to calculate the depreciation amounts 

for F&A rate purposes shall be the same methods used by the 

institution for its financial statements. This requirement does 

not apply to those institutions (e.g., public institutions of 

higher education) which are not required to record depreciation 

by applicable generally accepted accounting principles (GAAP). 

 (3) Where the depreciation method is introduced to replace 

the use allowance method, depreciation shall be computed as if 

the asset had been depreciated over its entire life (i.e., from 

the date the asset was acquired and ready for use to the date of 

disposal or withdrawal from service). The aggregate amount of 

use allowances and depreciation attributable to an asset 

(including imputed depreciation applicable to periods prior to 

the conversion to the use allowance method as well as 

depreciation after the conversion) may be less than, and in no 

case, greater than the total acquisition cost of the asset. 

 (4) The entire building, including the shell and all 

components, may be treated as a single asset and depreciated 

over a single useful life. A building may also be divided into 

multiple components. Each component item may then be 

depreciated over its estimated useful life. The building 

components shall be grouped into three general components of a 

building: building shell (including construction and design 

costs), building services systems (e.g., elevators, HVAC, 

plumbing system and heating and air-conditioning system) and 

fixed equipment (e.g., sterilizers, casework, fume hoods, cold 

rooms and glassware/washers). In exceptional cases, a Federal 

cognizant agency may authorize a institution to use more than 

these three groupings. When a institution elects to depreciate 

its buildings by its components, the same depreciation methods 

must be used for F&A purposes and financial statement purposes, 

as described in subsection d.2. 
57 

 (5) Where the depreciation method is used for a particular 

class of assets, no depreciation may be allowed on any such 

assets that have outlived their depreciable lives. (See also 

subsection e.(3)) 

 e. Under the use allowance method, the following shall be 

observed: 

 (1) The use allowance for buildings and improvements 

(including improvements such as paved parking areas, fences, and 

sidewalks) shall be computed at an annual rate not exceeding two 

percent of acquisition cost. 

 The use allowance for equipment shall be computed at an 

annual rate not exceeding six and two-thirds percent of 

acquisition cost. Use allowance recovery is limited to the 

acquisition cost of the assets. For donated assets, use 

allowance recovery is limited to the fair market value of the 

assets at the time of donation. 

 (2) In contrast to the depreciation method, the entire 

building must be treated as a single asset without separating 

its "shell" from other building components under the use 

allowance method. The entire building must be treated as a 

single asset, and the two-percent use allowance limitation must 

be applied to all parts of the building. 

 The two-percent limitation, however, need not be applied to 

equipment or other assets that are merely attached or fastened 

to the building but not permanently fixed and are used as 

furnishings, decorations or for specialized purposes (e.g., 

dentist chairs and dental treatment units, counters, laboratory 

benches bolted to the floor, dishwashers, modular furniture, and 

carpeting). Such equipment and assets will be considered as not 

being permanently fixed to the building if they can be removed 

without the need for costly or extensive alterations or repairs 

to the building to make the space usable for other purposes. 

Equipment and assets that meet these criteria will be subject to 

the 6 2/3 percent equipment use allowance. 

 (3) A reasonable use allowance may be negotiated for any 

assets that are considered to be fully depreciated, after taking 

into consideration the amount of depreciation previously charged 

to the Federal Government, the estimated useful life remaining 

at the time of negotiation, the effect of any increased 

maintenance charges, decreased efficiency due to age, and any 

other factors pertinent to the utilization of the asset for the 

purpose contemplated. 

 (4) Notwithstanding subsection e.(3), once a institution 

converts from one cost recovery methodology to another, 
58 

acquisition costs not recovered may not be used in the 

calculation of the use allowance in subsection e.(3). 

 f. Except as otherwise provided in subsections b. through 

e., a combination of the depreciation and use allowance methods 

may not be used, in like circumstances, for a single class of 

assets (e.g., buildings, office equipment, and computer 

equipment). 

 g. Charges for use allowances or depreciation must be 

supported by adequate property records, and physical inventories 

must be taken at least once every two years to ensure that the 

assets exist and are usable, used, and needed. Statistical 

sampling techniques may be used in taking these inventories. In 

addition, when the depreciation method is used, adequate 

depreciation records showing the amount of depreciation taken 

each period must also be maintained. 

 h. This section applies to the largest college and 

university recipients of Federal research and development funds 

as displayed in Exhibit A, List of Colleges and Universities 

Subject to Section J.14.h of Circular A-21. 

 (1) Institutions shall expend currently, or reserve for 

expenditure within the next five years, the portion of F&A cost 

payments made for depreciation or use allowances under sponsored 

research agreements, consistent with Section F.2, to acquire or 

improve research facilities. This provision applies only to 

Federal agreements, which reimburse F&A costs at a full 

negotiated rate. These funds may only be used for (a) 

liquidation of the principal of debts incurred to acquire assets 

that are used directly for organized research activities, or (b) 

payments to acquire, repair, renovate, or improve buildings or 

equipment directly used for organized research. For buildings 

or equipment not exclusively used for organized research 

activity, only appropriately proportionate amounts will be 

considered to have been expended for research facilities. 

 (2) An assurance that an amount equal to the Federal 

reimbursements has been appropriately expended or reserved to 

acquire or improve research facilities shall be submitted as 

part of each F&A cost proposal submitted to the cognizant 

Federal agency which is based on costs incurred on or after 

October 1, 1991. This assurance will cover the cumulative 

amounts of funds received and expended during the period 

beginning after the period covered by the previous assurance and 

ending with the fiscal year on which the proposal is based. The 

assurance shall also cover any amounts reserved from a prior 

period in which the funds received exceeded the amounts 

expended. 
59 

 15. Donations and contributions.

 a. Contributions or Donations rendered. 

 Contributions or donations, including cash, property, and 

services, made by the institution, regardless of the recipient, 

are unallowable. 

 b. Donated services received. 

 Donated or volunteer services may be furnished to a 

institution by professional and technical personnel, 

consultants, and other skilled and unskilled labor. The value 

of these services is not reimbursable either as a direct or F&A 

cost. However, the value of donated services may be used to 

meet cost sharing or matching requirements in accordance with 

Circular A-110. 

 c. Donated property. 

 The value of donated property is not reimbursable either as 

a direct or F&A cost, except that depreciation or use allowances 

on donated assets are permitted in accordance with Section J.14. 

The value of donated property may be used to meet cost sharing 

or matching requirements, in accordance with Circular A-110. 

 16. Employee morale, health, and welfare costs and costs. 

 a. The costs of employee information publications, health or 

first-aid clinics and/or infirmaries, recreational activities, 

employee counseling services, and any other expenses incurred in 

accordance with the institution's established practice or 

custom for the improvement of working conditions, employeremployee relations, employee morale, and employee performance 

are allowable. 

 b. Such costs will be equitably apportioned to all 

activities of the institution. Income generated from any of 

these activities will be credited to the cost thereof unless 

such income has been irrevocably set over to employee welfare 

organizations. 

 c. Losses resulting from operating food services are 

allowable only if the institution’s objective is to operate such 

services on a break-even basis. Losses sustained because of 

operating objectives other than the above are allowable only (a) 

where the institution can demonstrate unusual circumstances, and 

(b) with the approval of the cognizant Federal agency. 

 17. Entertainment costs. 

 Costs of entertainment, including amusement, diversion, and 

social activities and any costs directly associated with such 

costs (such as tickets to shows or sports events, meals, 
60 

lodging, rentals, transportation, and gratuities) are 

unallowable. 

 18. Equipment and other capital expenditures.

 a. For purposes of this subsection, the following 

definitions apply: 

 (1) "Capital Expenditures” means expenditures for the 

acquisition cost of capital assets (equipment, buildings, and 

land), or expenditures to make improvements to capital assets 

that materially increase their value or useful life. 

Acquisition cost means the cost of the asset including the cost 

to put it in place. Acquisition cost for equipment, for 

example, means the net invoice price of the equipment, including 

the cost of any modifications, attachments, accessories, or 

auxiliary apparatus necessary to make it usable for the purpose 

for which it is acquired. Ancillary charges, such as taxes, 

duty, protective in transit insurance, freight, and installation 

may be included in, or excluded from the acquisition cost in 

accordance with the institution's regular accounting practices. 

 (2) "Equipment" means an article of nonexpendable, 

tangible personal property having a useful life of more than one 

year and an acquisition cost which equals or exceeds the lesser 

of the capitalization level established by the institution for 

financial statement purposes, or $5000. 

 (3) "Special purpose equipment" means equipment which is 

used only for research, medical, scientific, or other technical 

activities. Examples of special purpose equipment include 

microscopes, x-ray machines, surgical instruments, and 

spectrometers. 

 (4) "General purpose equipment" means equipment, which is 

not limited to research, medical, scientific or other technical 

activities. Examples include office equipment and furnishings, 

modular offices, telephone networks, information technology 

equipment and systems, air conditioning equipment, reproduction 

and printing equipment, and motor vehicles. 

 b. The following rules of allowability shall apply to 

equipment and other capital expenditures: 

 (1) Capital expenditures for general purpose equipment, 

buildings, and land are unallowable as direct charges, except 

where approved in advance by the awarding agency. 

 (2) Capital expenditures for special purpose equipment are 

allowable as direct costs, provided that items with a unit cost 

of $5000 or more have the prior approval of the awarding agency. 

 (3) Capital expenditures for improvements to land, 

buildings, or equipment which materially increase their value or 
61 

useful life are unallowable as a direct cost except with the 

prior approval of the awarding agency. 

 (4) When approved as a direct charge pursuant to 

subsections J.18.b(1) through (3)above, capital expenditures 

will be charged in the period in which the expenditure is 

incurred, or as otherwise determined appropriate by and 

negotiated with the awarding agency. 

 (5) Equipment and other capital expenditures are 

unallowable as indirect costs. However, see section J.14, 

Depreciation and use allowances, for rules on the allowability 

of use allowances or depreciation on buildings, capital 

improvements, and equipment. Also, see section J.43, Rental 

costs of buildings and equipment, for rules on the allowability 

of rental costs for land, buildings, and equipment. 

 (6) The unamortized portion of any equipment written off 

as a result of a change in capitalization levels may be 

recovered by continuing to claim the otherwise allowable use 

allowances or depreciation on the equipment, or by amortizing 

the amount to be written off over a period of years negotiated 

with the cognizant agency. 

 19. Fines and penalties. 

 Costs resulting from violations of, or failure of the 

institution to comply with, Federal, State, and local or foreign 

laws and regulations are unallowable, except when incurred as a 

result of compliance with specific provisions of the sponsored 

agreement, or instructions in writing from the authorized 

official of the sponsoring agency authorizing in advance such 

payments. 

 20. Fund raising and investment costs.

 a. Costs of organized fund raising, including financial 

campaigns, endowment drives, solicitation of gifts and bequests, 

and similar expenses incurred solely to raise capital or obtain 

contributions, are unallowable. 

 b. Costs of investment counsel and staff and similar 

expenses incurred solely to enhance income form investments are 

unallowable. 

 c. Costs related to the physical custody and control of 

monies and securities are allowable. 

 21. Gain and losses on depreciable assets.
62 

 a. (1) Gains and losses on the sale, retirement, or other 

disposition of depreciable property shall be included in the 

year in which they occur as credits or charges to the asset cost 

grouping(s) in which the property was included. The amount of 

the gain or loss to be included as a credit or charge to the 

appropriate asset cost grouping(s) shall be the difference 

between the amount realized on the property and the 

undepreciated basis of the property. 

 (2) Gains and losses on the disposition of depreciable 

property shall not be recognized as a separate credit or charge 

under the following conditions: 

 (a) The gain or loss is processed through a depreciation 

account and is reflected in the depreciation allowable under 

Section J.14. 

 (b) The property is given in exchange as part of the 

purchase price of a similar item and the gain or loss is taken 

into account in determining the depreciation cost basis of the 

new item. 

 (c) A loss results from the failure to maintain permissible 

insurance, except as otherwise provided in Section J.25. 

 (d) Compensation for the use of the property was provided 

through use allowances in lieu of depreciation. 

 b. Gains or losses of any nature arising from the sale or 

exchange of property other than the property covered in 

subsection a shall be excluded in computing sponsored agreement 

costs. 

 c. When assets acquired with Federal funds, in part or 

wholly, are disposed of, the distribution of the proceeds shall 

be made in accordance with Circular A-110, "Uniform 

Administrative Requirements for Grants and Agreements with 

Institutions of Higher Education, Hospitals, and Other 

Non-Profit Organizations." 

 22. Goods or services for personal use. 

 Costs of goods or services for personal use of the 

institution's employees are unallowable regardless of whether 

the cost is reported as taxable income to the employees. 

 23. Housing and personal living expenses.

 a. Costs of housing (e.g., depreciation, maintenance, 

utilities, furnishings, rent, etc.), housing allowances and 

personal living expenses for/of the institution's officers are 

unallowable regardless of whether the cost is reported as 

taxable income to the employees. 

 b. The term "officers" includes current and past officers. 
63 

24. Idle facilities and idle capacity.

a. As used in this section the following terms have the 

meanings set forth below: 

(1) "Facilities" means land and buildings or any portion 

thereof, equipment individually or collectively, or any other 

tangible capital asset, wherever located, and whether owned or 

leased by the institution. 

(2) "Idle facilities" means completely unused facilities 

that are excess to the institution's current needs. 

(3) "Idle capacity" means the unused capacity of partially 

used facilities. It is the difference between: 

(a) that which a facility could achieve under 100 percent 

operating time on a one-shift basis less operating interruptions 

resulting from time lost for repairs, setups, unsatisfactory 

materials, and other normal delays; and 

(b) the extent to which the facility was actually used to 

meet demands during the accounting period. A multi-shift basis 

should be used if it can be shown that this amount of usage 

would normally be expected for the type of facility involved. 

(4) "Cost of idle facilities or idle capacity" means costs 

such as maintenance, repair, housing, rent, and other related 

costs, e.g., insurance, interest, property taxes and 

depreciation or use allowances. 

b. The costs of idle facilities are unallowable except to 

the extent that: 

(1) They are necessary to meet fluctuations in workload; or 

(2) Although not necessary to meet fluctuations in 

workload, they were necessary when acquired and are now idle 

because of changes in program requirements, efforts to achieve 

more economical operations, reorganization, termination, or 

other causes which could not have been reasonably foreseen. 

Under the exception stated in this subsection, costs of idle 

facilities are allowable for a reasonable period of time, 

ordinarily not to exceed one year, depending on the initiative 

taken to use, lease, or dispose of such facilities. 

c. The costs of idle capacity are normal costs of doing 

business and are a factor in the normal fluctuations of usage or 

indirect cost rates from period to period. Such costs are 

allowable, provided that the capacity is reasonably anticipated 

to be necessary or was originally reasonable and is not subject 

to reduction or elimination by use on other sponsored 

agreements, subletting, renting, or sale, in accordance with 
64 

sound business, economic, or security practices. Widespread 

idle capacity throughout an entire facility or among a group of 

assets having substantially the same function may be considered 

idle facilities. 

 25. Insurance and indemnification.

 a. Costs of insurance required or approved, and maintained, 

pursuant to the sponsored agreement, are allowable. 

 b. Costs of other insurance maintained by the institution in 

connection with the general conduct of its activities, are 

allowable subject to the following limitations: 

 (1) types and extent and cost of coverage must be in 

accordance with sound institutional practice; 

 (2) costs of insurance or of any contributions to any 

reserve covering the risk of loss of or damage to 

federally-owned property are unallowable, except to the extent 

that the Federal Government has specifically required or 

approved such costs; and 

 (3) costs of insurance on the lives of officers or 

trustees are unallowable except where such insurance is part of 

an employee plan which is not unduly restricted. 

 c. Contributions to a reserve for a self-insurance program 

are allowable, to the extent that the types of coverage, extent 

of coverage, and the rates and premiums would have been allowed 

had insurance been purchased to cover the risks. 

 d. Actual losses which could have been covered by 

permissible insurance (whether through purchased insurance or 

self-insurance) are unallowable, unless expressly provided for 

in the sponsored agreement, except that costs incurred because 

of losses not covered under existing deductible clauses for 

insurance coverage provided in keeping with sound management 

practice as well as minor losses not covered by insurance, such 

as spoilage, breakage and disappearance of small hand tools, 

which occur in the ordinary course of operations, are allowable. 

 e. Indemnification includes securing the institution against 

liabilities to third persons and other losses not compensated by 

insurance or otherwise. The Federal Government is obligated to 

indemnify the institution only to the extent expressly provided 

for in the sponsored agreement, except as provided in subsection 

d. 

 f. Insurance against defects. Costs of insurance with 

respect to any costs incurred to correct defects in the 

institution's materials or workmanship are unallowable. 

 g. Medical liability (malpractice) insurance is an allowable 

cost of research programs only to the extent that the research 
65 

involves human subjects. Medical liability insurance costs 

shall be treated as a direct cost and shall be assigned to 

individual projects based on the manner in which the insurer 

allocates the risk to the population covered by the insurance. 

 26. Interest.

 a. Costs incurred for interest on borrowed capital, 

temporary use of endowment funds, or the use of the 

institution’s own funds, however represented, are unallowable. 

However, interest on debt incurred after July 1, 1982 to acquire 

buildings, major reconstruction and remodeling, or the 

acquisition or fabrication of capital equipment costing $10,000 

or more, is allowable. 

 b. Interest on debt incurred after May 8, 1996 to acquire or 

replace capital assets (including construction, renovations, 

alterations, equipment, land, and capital assets acquired 

through capital leases) acquired after that date and used in 

support of sponsored agreements is allowable, subject to the 

following conditions: 

 (1) For facilities costing over $500,000, the institution 

shall prepare, prior to acquisition or replacement of the 

facility, a lease-purchase analysis in accordance with the 

provisions of Sec___.30 through____.37 of OMB Circular A-110, 

which shows that a financed purchase, including a capital lease 

is less costly to the institution than other operating lease 

alternatives, on a net present value basis. Discount rates used 

shall be equal to the institution's anticipated interest rates 

and shall be no higher than the fair market rate available to 

the institution from an unrelated ("arm's length") third-party. 

The lease-purchase analysis shall include a comparison of the 

net present value of the projected total cost comparisons of 

both alternatives over the period the asset is expected to be 

used by the institution. The cost comparisons associated with 

purchasing the facility shall include the estimated purchase 

price, anticipated operating and maintenance costs (including 

property taxes, if applicable) not included in the debt 

financing, less any estimated asset salvage value at the end of 

the defined period. The cost comparison for a capital lease 

shall include the estimated total lease payments, any estimated 

bargain purchase option, operating and maintenance costs, and 

taxes not included in the capital leasing arrangement, less any 

estimated credits due under the lease at the end of the defined 

period. Projected operating lease costs shall be based on the 

anticipated cost of leasing comparable facilities at fair market 

rates under rental agreements that would be renewed or 
66 

reestablished over the period defined above, and any expected 

maintenance costs and allowable property taxes to be borne by 

the institution directly or as part of the lease arrangement. 

 (2) The actual interest cost claimed is predicated upon 

interest rates that are no higher than the fair market rate 

available to the institution from an unrelated (arm's length) 

third party. 

 (3) Investment earnings, including interest income on bond 

or loan principal, pending payment of the construction or 

acquisition costs, are used to offset allowable interest cost. 

Arbitrage earnings reportable to the Internal Revenue Service 

are not required to be offset against allowable interest costs. 

 (4) Reimbursements are limited to the least costly 

alternative based on the total cost analysis required under 

subsection (1). For example, if an operating lease is 

determined to be less costly than purchasing through debt 

financing, then reimbursement is limited to the amount 

determined if leasing had been used. In all cases where a 

lease-purchase analysis is required to be performed, Federal 

reimbursement shall be based upon the least expensive 

alternative. 

 (5) For debt arrangements over $1 million, unless the 

institution makes an initial equity contribution to the asset 

purchase of 25 percent or more, the institution shall reduce 

claims for interest expense by an amount equal to imputed 

interest earnings on excess cash flow, which is to be calculated 

as follows. Annually, non-Federal entities shall prepare a 

cumulative (from the inception of the project) report of monthly 

cash flows that includes inflows and outflows, regardless of the 

funding source. Inflows consist of depreciation expense, 

amortization of capitalized construction interest, and annual 

interest cost. For cash flow calculations, the annual inflow 

figures shall be divided by the number of months in the year 

(i.e., usually 12) that the building is in service for monthly 

amounts. Outflows consist of initial equity contributions, debt 

principal payments (less the pro rata share attributable to the 

unallowable costs of land) and interest payments. Where 

cumulative inflows exceed cumulative outflows, interest shall be 

calculated on the excess inflows for that period and be treated 

as a reduction to allowable interest cost. The rate of interest 

to be used to compute earnings on excess cash flows shall be the 

three-month Treasury bill closing rate as of the last business 

day of that month. 

 (6) Substantial relocation of federally-sponsored 

activities from a facility financed by indebtedness, the cost of 
67 

which was funded in whole or part through Federal 

reimbursements, to another facility prior to the expiration of a 

period of 20 years requires notice to the cognizant agency. The 

extent of the relocation, the amount of the Federal 

participation in the financing, and the depreciation and 

interest charged to date may require negotiation and/or downward 

adjustments of replacement space charged to Federal programs in 

the future. 

 (7) The allowable costs to acquire facilities and 

equipment are limited to a fair market value available to the 

institution from an unrelated (arm's length) third party. 

 c. Institutions are also subject to the following 

conditions: 

 (1) Interest on debt incurred to finance or refinance 

assets re-acquired after the applicable effective dates 

stipulated above is unallowable. 

 (2) Interest attributable to fully depreciated assets is 

unallowable. 

 d. The following definitions are to be used for purposes of 

this section: 

 (1) “Re-acquired” assets means assets held by the 

institution prior to the applicable effective dates stipulated 

above that have again come to be held by the institution, 

whether through repurchase or refinancing. It does not include 

assets acquired to replace older assets. 

 (2) "Initial equity contribution" means the amount or 

value of contributions made by non-Federal entities for the 

acquisition of the asset prior to occupancy of facilities. 

 (3) "Asset costs" means the capitalizable costs of an 

asset, including construction costs, acquisition costs, and 

other such costs capitalized in accordance with Generally 

Accepted Accounting Principles (GAAP). 

 27. Labor relations costs. 

 Costs incurred in maintaining satisfactory relations between 

the institution and its employees, including costs of labor 

management committees, employees' publications, and other 

related activities, are allowable. 

 28. Lobbying. 

 Reference is made to the common rule published at 55 FR 6736 

(2/26/90), and OMB's governmentwide guidance, amendments to 

OMB's governmentwide guidance, and OMB's clarification notices 

published at 54 FR 52306 (12/20/89), 61 FR 1412 (1/19/96), 55 FR 
68 

24540 (6/15/90) and 57 FR 1772 (1/15/92), respectively. In 

addition, the following restrictions shall apply: 

 a. Notwithstanding other provisions of this Circular, costs 

associated with the following activities are unallowable: 

 (1) Attempts to influence the outcomes of any Federal, 

State, or local election, referendum, initiative, or similar 

procedure, through in kind or cash contributions, endorsements, 

publicity, or similar activity; 

 (2) Establishing, administering, contributing to, or 

paying the expenses of a political party, campaign, political 

action committee, or other organization established for the 

purpose of influencing the outcomes of elections; 

 (3) Any attempt to influence – 

 (i) the introduction of Federal or State legislation; 

 (ii) the enactment or modification of any pending Federal 

or State legislation through communication with any member or 

employee of the Congress or State legislature, including efforts 

to influence State or local officials to engage in similar 

lobbying activity; or 

 (iii) any government official or employee in connection 

with a decision to sign or veto enrolled legislation; 

 (4) Any attempt to influence – 

 (i) the introduction of Federal or State legislation; or 

 (ii) the enactment or modification of any pending Federal 

or State legislation by preparing, distributing, or using 

publicity or propaganda, or by urging members of the general 

public, or any segment thereof, to contribute to or participate 

in any mass demonstration, march, rally, fund raising drive, 

lobbying campaign or letter writing or telephone campaign; or 

 (5) Legislative liaison activities, including attendance 

at legislative sessions or committee hearings, gathering 

information regarding legislation, and analyzing the effect of 

legislation, when such activities are carried on in support of 

or in knowing preparation for an effort to engage in unallowable 

lobbying. 

 b. The following activities are excepted from the coverage 

of subsection a: 

 (1) Technical and factual presentations on topics directly 

related to the performance of a grant, contract, or other 

agreement (through hearing testimony, statements, or letters to 

the Congress or a State legislature, or subdivision, member, or 

cognizant staff member thereof), in response to a documented 

request (including a Congressional Record notice requesting 

testimony or statements for the record at a regularly scheduled 

hearing) made by the recipient member, legislative body or 
69 

subdivision, or a cognizant staff member thereof, provided such 

information is readily obtainable and can be readily put in 

deliverable form, and further provided that costs under this 

section for travel, lodging or meals are unallowable unless 

incurred to offer testimony at a regularly scheduled 

Congressional hearing pursuant to a written request for such 

presentation made by the Chairman or Ranking Minority Member of 

the Committee or Subcommittee conducting such hearings; 

 (2) Any lobbying made unallowable by subsection a.(3) to 

influence State legislation in order to directly reduce the 

cost, or to avoid material impairment of the institution's 

authority to perform the grant, contract, or other agreement; or 

 (3) Any activity specifically authorized by statute to be 

undertaken with funds from the grant, contract, or other 

agreement. 

 c. When an institution seeks reimbursement for F&A costs, 

total lobbying costs shall be separately identified in the F&A 

cost rate proposal, and thereafter treated as other unallowable 

activity costs in accordance with the procedures of Section 

B.1.d. 

 d. Institutions shall submit as part of their annual F&A 

cost rate proposal a certification that the requirements and 

standards of this section have been complied with. 

 e. Institutions shall maintain adequate records to 

demonstrate that the determination of costs as being allowable 

or unallowable pursuant to this section complies with the 

requirements of this Circular. 

 f. Time logs, calendars, or similar records shall not be 

required to be created for purposes of complying with this 

section during any particular calendar month when: 

 (1) the employee engages in lobbying (as defined in 

subsections a and b) 25 percent or less of the employee's 

compensated hours of employment during that calendar month; and 

 (2) within the preceding five-year period, the institution 

has not materially misstated allowable or unallowable costs of 

any nature, including legislative lobbying costs. When 

conditions (1) and (2) are met, institutions are not required to 

establish records to support the allowability of claimed costs 

in addition to records already required or maintained. Also, 

when conditions (1) and (2) are met, the absence of time logs, 

calendars, or similar records will not serve as a basis for 

disallowing costs by contesting estimates of lobbying time spent 

by employees during a calendar month. 

 g. Agencies shall establish procedures for resolving in 

advance, in consultation with OMB, any significant questions or 
70 

disagreements concerning the interpretation or application of 

this section. Any such advance resolutions shall be binding in 

any subsequent settlements, audits, or investigations with 

respect to that grant or contract for purposes of interpretation 

of this Circular, provided, however, that this shall not be 

construed to prevent a contractor or grantee from contesting the 

lawfulness of such a determination. 

 h. Executive lobbying costs. 

 Costs incurred in attempting to improperly influence either 

directly or indirectly, an employee or officer of the Executive 

Branch of the Federal Government to give consideration or to act 

regarding a sponsored agreement or a regulatory matter are 

unallowable. Improper influence means any influence that 

induces or tends to induce a Federal employee or officer to give 

consideration or to act regarding a federally-sponsored 

agreement or regulatory matter on any basis other than the 

merits of the matter. 

 29. Losses on other sponsored agreements or contracts. 

 Any excess of costs over income under any other sponsored 

agreement or contract of any nature is unallowable. This 

includes, but is not limited to, the institution's contributed 

portion by reason of cost-sharing agreements or any 

under-recoveries through negotiation of flat amounts for F&A 

costs. 

 30. Maintenance and repair costs. 

 Costs incurred for necessary maintenance, repair, or upkeep 

of buildings and equipment (including Federal property unless 

otherwise provided for) which neither add to the permanent value 

of the property nor appreciably prolong its intended life, but 

keep it in an efficient operating condition, are allowable. 

Costs incurred for improvements which add to the permanent value 

of the buildings and equipment or appreciably prolong their 

intended life shall be treated as capital expenditures (see 

section 18.a(1)). 

 31. Material and supplies costs. 

 a. Costs incurred for materials, supplies, and fabricated 

parts necessary to carry out a sponsored agreement are 

allowable. 

 b. Purchased materials and supplies shall be charged at 

their actual prices, net of applicable credits. Withdrawals 

from general stores or stockrooms should be charged at their 

actual net cost under any recognized method of pricing inventory 
71 

withdrawals, consistently applied. Incoming transportation 

charges are a proper part of materials and supplies costs. 

 c. Only materials and supplies actually used for the 

performance of a sponsored agreement may be charged as direct 

costs. 

 d. Where federally-donated or furnished materials are used 

in performing the sponsored agreement, such materials will be 

used without charge. 

 32. Meetings and Conferences.

 Costs of meetings and conferences, the primary purpose of 

which is the dissemination of technical information, are 

allowable. This includes costs of meals, transportation, rental 

of facilities, speakers' fees, and other items incidental to 

such meetings or conferences. But see section J.17, 

Entertainment costs. 

 33. Memberships, subscriptions and professional activity 

costs.

 a. Costs of the institution’s membership in business, 

technical, and professional organizations are allowable. 

 b. Costs of the institution’s subscriptions to business, 

professional, and technical periodicals are allowable. 

 c. Costs of membership in any civic or community 

organization are unallowable. 

 d. Costs of membership in any country club or social or 

dining club or organization are unallowable. 

 34. Patent costs. 

 a. The following costs relating to patent and copyright 

matters are allowable: 

 (1) cost of preparing disclosures, reports, and other 

documents required by the sponsored agreement and of searching 

the art to the extent necessary to make such disclosures; 

 (2) cost of preparing documents and any other patent costs 

in connection with the filing and prosecution of a United States 

patent application where title or royalty-free license is 

required by the Federal Government to be conveyed to the Federal 

Government; and 

 (3) general counseling services relating to patent and 

copyright matters, such as advice on patent and copyright laws, 

regulations, clauses, and employee agreements (but see sections 

J.37, Professional service costs, and J.44, Royalties and other 

costs for use of patents). 
72 

 b. The following costs related to patent and copyright 

matter are unallowable: 

 (i) Cost of preparing disclosures, reports, and other 

documents and of searching the art to the extent necessary to 

make disclosures not required by the award 

 (ii) Costs in connection with filing and prosecuting any 

foreign patent application, or any United States patent 

application, where the sponsored agreement award does not 

require conveying title or a royalty-free license to the Federal 

Government, (but see section J.44, Royalties and other costs for 

use of patents). 

 35. Plant and homeland security costs.

 Necessary and reasonable expenses incurred for routine and 

homeland security to protect facilities, personnel, and work 

products are allowable. Such costs include, but are not limited 

to, wages and uniforms of personnel engaged in security 

activities; equipment; barriers; contractual security services; 

consultants; etc. Capital expenditures for homeland and plant 

security purposes are subject to section J.18, Equipment and 

other capital expenditures, of this Circular. 

 36. Preagreement costs. Costs incurred prior to the 

effective date of the sponsored agreement, whether or not they 

would have been allowable thereunder if incurred after such 

date, are unallowable unless approved by the sponsoring agency. 

 37. Professional service costs.

 a. Costs of professional and consultant services rendered by 

persons who are members of a particular profession or possess a 

special skill, and who are not officers or employees of the 

institution, are allowable, subject to subparagraphs b and c

when reasonable in relation to the services rendered and when 

not contingent upon recovery of the costs from the Federal 

Government. In addition, legal and related services are limited 

under section J.13. 

 b. In determining the allowability of costs in a particular 

case, no single factor or any special combination of factors is 

necessarily determinative. However, the following factors are 

relevant: 

 (1) The nature and scope of the service rendered in 

relation to the service required. 

 (2) The necessity of contracting for the service, 

considering the institution's capability in the particular 

area. 
73 

 (3) The past pattern of such costs, particularly in the 

years prior to sponsored agreements. 

 (4) The impact on the institution's business (i.e., what 

new problems have arisen). 

 (5) Whether the proportion of Federal work to the 

institution's total business is such as to influence the 

institution in favor of incurring the cost, particularly where 

the services rendered are not of a continuing nature and have 

little relationship to work under Federal grants and contracts. 

 (6) Whether the service can be performed more 

economically by direct employment rather than contracting. 

 (7) The qualifications of the individual or concern 

rendering the service and the customary fees charged, especially 

on non-sponsored agreements. 

 (8) Adequacy of the contractual agreement for the 

service (e.g., description of the service, estimate of time 

required, rate of compensation, and termination provisions). 

 c. In addition to the factors in subparagraph b, retainer 

fees to be allowable must be supported by evidence of bona fide 

services available or rendered. 

 38. Proposal costs. 

 Proposal costs are the costs of preparing bids or proposals 

on potential federally and non-federally-funded sponsored 

agreements or projects, including the development of data 

necessary to support the institution's bids or proposals. 

Proposal costs of the current accounting period of both 

successful and unsuccessful bids and proposals normally should 

be treated as F&A costs and allocated currently to all 

activities of the institution, and no proposal costs of past 

accounting periods will be allocable to the current period. 

However, the institution's established practices may be to treat 

proposal costs by some other recognized method. Regardless of 

the method used, the results obtained may be accepted only if 

found to be reasonable and equitable. 

 39. Publication and printing costs.

 a. Publication costs include the costs of printing 

(including the processes of composition, plate-making, press 

work, binding, and the end products produced by such processes), 

distribution, promotion, mailing, and general handling. 

Publication costs also include page charges in professional 

publications. 
74 

 b. If these costs are not identifiable with a particular 

cost objective, they should be allocated as indirect costs to 

all benefiting activities of the institution. 

 c. Page charges for professional journal publications are 

allowable as a necessary part of research costs where: 

 (1) The research papers report work supported by the 

Federal Government: and 

 (2) The charges are levied impartially on all research 

papers published by the journal, whether or not by federallysponsored authors. 

 40. Rearrangement and alteration costs. 

 Costs incurred for ordinary or normal rearrangement and 

alteration of facilities are allowable. Special arrangement and 

alteration costs incurred specifically for the project are 

allowable with the prior approval of the sponsoring agency. 

 41. Reconversion costs. 

 Costs incurred in the restoration or rehabilitation of the 

institution's facilities to approximately the same condition 

existing immediately prior to commencement of a sponsored 

agreement, fair wear and tear excepted, are allowable. 

 42. Recruiting costs.

 a. Subject to subsections b, c, and d, and provided that the 

size of the staff recruited and maintained is in keeping with 

workload requirements, costs of "help wanted" advertising, 

operating costs of an employment office necessary to secure and 

maintain an adequate staff, costs of operating an aptitude and 

educational testing program, travel costs of employees while 

engaged in recruiting personnel, travel costs of applicants for 

interviews for prospective employment, and relocation costs 

incurred incident to recruitment of new employees, are allowable 

to the extent that such costs are incurred pursuant to a 

well-managed recruitment program. Where the institution uses 

employment agencies, costs not in excess of standard commercial 

rates for such services are allowable. 

 b. In publications, costs of help wanted advertising that 

includes color, includes advertising material for other than 

recruitment purposes, or is excessive in size (taking into 

consideration recruitment purposes for which intended and normal 

institutional practices in this respect), are unallowable. 

 c. Costs of help wanted advertising, special emoluments, 

fringe benefits, and salary allowances incurred to attract 

professional personnel from other institutions that do not meet 
75 

the test of reasonableness or do not conform with the 

established practices of the institution, are unallowable. 

 d. Where relocation costs incurred incident to recruitment 

of a new employee have been allowed either as an allocable 

direct or F&A cost, and the newly hired employee resigns for 

reasons within his control within 12 months after hire, the 

institution will be required to refund or credit such relocation 

costs to the Federal Government. 

 43. Rental costs of buildings and equipment.

 a. Subject to the limitations described in subsections b. 

through d. of this section, rental costs are allowable to the 

extent that the rates are reasonable in light of such factors 

as: rental costs of comparable property, if any; market 

conditions in the area; alternatives available; and, the type, 

life expectancy, condition, and value of the property leased. 

Rental arrangements should be reviewed periodically to determine 

if circumstances have changed and other options are available. 

 b. Rental costs under “sale and lease back” arrangements are 

allowable only up to the amount that would be allowed had the 

institution continued to own the property. This amount would 

include expenses such as depreciation or use allowance, 

maintenance, taxes, and insurance. 

 c. Rental costs under "less-than-arms-length" leases are 

allowable only up to the amount (as explained in subsection b) 

that would be allowed had title to the property vested in the 

institution. For this purpose, a less-than-arms-length lease is 

one under which one party to the lease agreement is able to 

control or substantially influence the actions of the other. 

Such leases include, but are not limited to those between -– 

 (1) divisions of a institution; 

 (2) non-Federal entities under common control through 

common officers, directors, or members; and 

 (3) a institution and a director, trustee, officer, or key 

employee of the institution or his immediate family, either 

directly or through corporations, trusts, or similar 

arrangements in which they hold a controlling interest. For 

example, a institution may establish a separate corporation for 

the sole purpose of owning property and leasing it back to the 

institution. 

 d. Rental costs under leases which are required to be 

treated as capital leases under GAAP are allowable only up to 

the amount (as explained in subsection b) that would be allowed 

had the institution purchased the property on the date the lease 

agreement was executed. The provisions of Financial Accounting 
76 

Standards Board Statement 13, Accounting for Leases, shall be 

used to determine whether a lease is a capital lease. Interest 

costs related to capital leases are allowable to the extent they 

meet the criteria in section J.26. Unallowable costs include 

amounts paid for profit, management fees, and taxes that would 

not have been incurred had the institution purchased the 

facility. 

 44. Royalties and other costs for use of patents. 

 a. Royalties on a patent or copyright or amortization of the 

cost of acquiring by purchase a copyright, patent, or rights 

thereto, necessary for the proper performance of the award are 

allowable unless: 

 (1) The Federal Government has a license or the right to 

free use of the patent or copyright. 

 (2) The patent or copyright has been adjudicated to be 

invalid, or has been administratively determined to be invalid. 

 (3) The patent or copyright is considered to be 

unenforceable. 

 (4) The patent or copyright is expired. 

 b. Special care should be exercised in determining 

reasonableness where the royalties may have been arrived at as a 

result of less-than-arm's-length bargaining, e.g.: 

 (1) Royalties paid to persons, including corporations, 

affiliated with the institution. 

 (2) Royalties paid to unaffiliated parties, including 

corporations, under an agreement entered into in contemplation 

that a sponsored agreement award would be made. 

 (3) Royalties paid under an agreement entered into after 

an award is made to a institution. 

 c. In any case involving a patent or copyright formerly 

owned by the institution, the amount of royalty allowed should 

not exceed the cost which would have been allowed had the 

institution retained title thereto. 

 45. Scholarships and student aid costs.

 a. Costs of scholarships, fellowships, and other programs of 

student aid are allowable only when the purpose of the sponsored 

agreement is to provide training to selected participants and 

the charge is approved by the sponsoring agency. However, 

tuition remission and other forms of compensation paid as, or in 

lieu of, wages to students performing necessary work are 

allowable provided that -- 

 (1) The individual is conducting activities necessary to 

the sponsored agreement; 
77 

 (2) Tuition remission and other support are provided in 

accordance with established educational institutional policy and 

consistently provided in a like manner to students in return for 

similar activities conducted in nonsponsored as well as 

sponsored activities; and 

 (3) During the academic period, the student is enrolled in 

an advanced degree program at the institution or affiliated 

institution and the activities of the student in relation to the 

Federally-sponsored research project are related to the degree 

program; 

 (4) the tuition or other payments are reasonable 

compensation for the work performed and are conditioned 

explicitly upon the performance of necessary work; and 

 (5) it is the institution's practice to similarly 

compensate students in nonsponsored as well as sponsored 

activities. 

 b. Charges for tuition remission and other forms of 

compensation paid to students as, or in lieu of, salaries and 

wages shall be subject to the reporting requirements stipulated 

in Section J.10, and shall be treated as direct or F&A cost in 

accordance with the actual work being performed. Tuition 

remission may be charged on an average rate basis. 

 46. Selling and marketing. 

 Costs of selling and marketing any products or services of 

the institution are unallowable (unless allowed under subsection 

J.1 as allowable public relations costs or under subsection J.38 

as allowable proposal costs). 

 47. Specialized service facilities.

 a. The costs of services provided by highly complex or 

specialized facilities operated by the institution, 

such as computers, wind tunnels, and reactors are allowable, 

provided the charges for the services meet the conditions of 

either subsection 47.b. or 47.c. and, in addition, take into 

account any items of income or Federal financing that qualify as 

applicable credits under subsection C.5. of this Circular. 

 b. The costs of such services, when material, must be 

charged directly to applicable awards based on actual usage of 

the services on the basis of a schedule of rates or established 

methodology that 

 (1) does not discriminate against federally-supported 

activities of the institution, including usage by the 

institution for internal purposes, and 
78 

 (2) is designed to recover only the aggregate costs of the 

services. The costs of each service shall consist normally of 

both its direct costs and its allocable share of all F&A costs. 

Rates shall be adjusted at least biennially, and shall take into 

consideration over/under applied costs of the previous 

period(s). 

 c. Where the costs incurred for a service are not material, 

they may be allocated as F&A costs. 

 d. Under some extraordinary circumstances, where it is in 

the best interest of the Federal Government and the institution 

to establish alternative costing arrangements, such arrangements 

may be worked out with the cognizant Federal agency. 

 48. Student activity costs. 

 Costs incurred for intramural activities, student 

publications, student clubs, and other student activities, are 

unallowable, unless specifically provided for in the sponsored 

agreements. 

 49. Taxes.

 a. In general, taxes which the institution is required to 

pay and which are paid or accrued in accordance with generally 

accepted accounting principles are allowable. Payments made to 

local governments in lieu of taxes which are commensurate with 

the local government services received are allowable, except 

for-- 

 (1) taxes from which exemptions are available to the 

institution directly or which are available to the institution 

based on an exemption afforded the Federal Government, and in 

the latter case when the sponsoring agency makes available the 

necessary exemption certificates; and 

 (2) special assessments on land which represent capital 

improvements. 

 b. Any refund of taxes, interest, or penalties, and any 

payment to the institution of interest thereon, attributable to 

taxes, interest, or penalties which were allowed as sponsored 

agreement costs, will be credited or paid to the Federal 

Government in the manner directed by the Federal Government. 

However, any interest actually paid or credited to an 

institution incident to a refund of tax, interest, and penalty 

will be paid or credited to the Federal Government only to the 

extent that such interest accrued over the period during which 

the institution has been reimbursed by the Federal Government 

for the taxes, interest, and penalties. 
79 

 50. Termination costs applicable to sponsored agreements.

 Termination of awards generally gives rise to the incurrence 

of costs, or the need for special treatment of costs, which 

would not have arisen had the sponsored agreement not been 

terminated. Cost principles covering these items are set forth 

below. They are to be used in conjunction with the other 

provisions of this Circular in termination situations. 

 a. The cost of items reasonably usable on the institution's 

other work shall not be allowable unless the institution submits 

evidence that it would not retain such items at cost without 

sustaining a loss. In deciding whether such items are 

reasonably usable on other work of the institution, the awarding 

agency should consider the institution's plans and orders for 

current and scheduled activity. 

 Contemporaneous purchases of common items by the institution 

shall be regarded as evidence that such items are reasonably 

usable on the institution's other work. Any acceptance of 

common items as allocable to the terminated portion of the 

sponsored agreement shall be limited to the extent that the 

quantities of such items on hand, in transit, and on order are 

in excess of the reasonable quantitative requirements of other 

work. 

 b. If in a particular case, despite all reasonable efforts 

by the institution, certain costs cannot be discontinued 

immediately after the effective date of termination, such costs 

are generally allowable within the limitations set forth in this 

Circular, except that any such costs continuing after 

termination due to the negligent or willful failure of the 

institution to discontinue such costs shall be unallowable. 

 c. Loss of useful value of special tooling, machinery, and 

equipment is generally allowable if: 

 (1) Such special tooling, special machinery, or equipment 

is not reasonably capable of use in the other work of the 

institution, 

 (2) The interest of the Federal Government is protected by 

transfer of title or by other means deemed appropriate by the 

awarding agency, and 

 (3) The loss of useful value for any one terminated 

sponsored agreement is limited to that portion of the 

acquisition cost which bears the same ratio to the total 

acquisition cost as the terminated portion of the sponsored 

agreement bears to the entire terminated sponsored agreement 

award and other sponsored agreements for which the special 

tooling, machinery, or equipment was acquired. 
80 

 d. Rental costs under unexpired leases are generally 

allowable where clearly shown to have been reasonably necessary 

for the performance of the terminated sponsored agreement less 

the residual value of such leases, if: 

 (1) the amount of such rental claimed does not exceed the 

reasonable use value of the property leased for the period of 

the sponsored agreement and such further period as may be 

reasonable, and 

 (2) the institution makes all reasonable efforts to 

terminate, assign, settle, or otherwise reduce the cost of such 

lease. There also may be included the cost of alterations of 

such leased property, provided such alterations were necessary 

for the performance of the sponsored agreement, and of 

reasonable restoration required by the provisions of the lease. 

 e. Settlement expenses including the following are generally 

allowable: 

 (1) Accounting, legal, clerical, and similar costs 

reasonably necessary for: 

 (a) The preparation and presentation to the awarding 

agency of settlement claims and supporting data with respect to 

the terminated portion of the sponsored agreement, unless the 

termination is for default (see Subpart. __.61 of Circular A110); and 

 (b) The termination and settlement of subawards. 

 (2) Reasonable costs for the storage, transportation, 

protection, and disposition of property provided by the Federal 

Government or acquired or produced for the sponsord agreement, 

except when institutions are reimbursed for disposals at a 

predetermined amount in accordance with Subparts ___.32 through 

___.37 of Circular A-110. 

 (3) F&A costs related to salaries and wages incurred as 

settlement expenses in subsections b.(1) and (2). Normally, 

such F&A costs shall be limited to fringe benefits, occupancy 

cost, and immediate supervision. 

 f. Claims under subawards, including the allocable portion 

of claims which are common to the sponsored agreement and to 

other work of the institution, are generally allowable. 

 An appropriate share of the institution's F&A costs may be 

allocated to the amount of settlements with subcontractors 

and/or subgrantees, provided that the amount allocated is 

otherwise consistent with the basic guidelines contained in 

section E, F&A costs. The F&A costs so allocated shall exclude 

the same and similar costs claimed directly or indirectly as 

settlement expenses. 
81 

 51. Training costs.

 The cost of training provided for employee development is 

allowable. 

 52. Transportation costs. 

 Costs incurred for freight, express, cartage, postage, and 

other transportation services relating either to goods 

purchased, in process, or delivered, are allowable. When such 

costs can readily be identified with the items involved, they 

may be charged directly as transportation costs or added to the 

cost of such items. Where identification with the materials 

received cannot readily be made, inbound transportation cost may 

be charged to the appropriate F&A cost accounts if the 

institution follows a consistent, equitable procedure in this 

respect. Outbound freight, if reimbursable under the terms of 

the sponsored agreement, should be treated as a direct cost. 

 53. Travel costs.

 a. General. 

 Travel costs are the expenses for transportation, lodging, 

subsistence, and related items incurred by employees who are in 

travel status on official business of the institution. Such 

costs may be charged on an actual cost basis, on a per diem or 

mileage basis in lieu of actual costs incurred, or on a 

combination of the two, provided the method used is applied to 

an entire trip and not to selected days of the trip, and results 

in charges consistent with those normally allowed in like 

circumstances in the institution’s non-federally-sponsored 

activities. 

 b. Lodging and subsistence. 

 Costs incurred by employees and officers for travel, 

including costs of lodging, other subsistence, and incidental 

expenses, shall be considered reasonable and allowable only to 

the extent such costs do not exceed charges normally allowed by 

the institution in its regular operations as the result of the 

institution’s written travel policy. In the absence of an 

acceptable, written institution policy regarding travel costs, 

the rates and amounts established under subchapter I of Chapter 

57, Title 5, United States Code (“Travel and Subsistence 

Expenses; Mileage Allowances”), or by the Administrator of 

General Services, or by the President (or his or her designee) 

pursuant to any provisions of such subchapter shall apply to 

travel under sponsored agreements (48 CFR 31.205-46(a)). 

 c. Commercial air travel. 
82 

 (1) Airfare costs in excess of the customary standard 

commercial airfare (coach or equivalent), Federal Government 

contract airfare (where authorized and available), or the lowest 

commercial discount airfare are unallowable except when such 

accommodations would: 

 (a) require circuitous routing; 

 (b) require travel during unreasonable hours; (c) 

excessively prolong travel; 

 (d) result in additional costs that would offset the 

transportation savings; or 

 (e) offer accommodations not reasonably adequate for the 

traveler’s medical needs. The institution must justify and 

document these conditions on a case-by-case basis in order for 

the use of first-class airfare to be allowable in such cases. 

 (2) Unless a pattern of avoidance is detected, the Federal 

Government will generally not question a institution's 

determinations that customary standard airfare or other discount 

airfare is unavailable for specific trips if the institution can 

demonstrate either of the following: 

 (a) that such airfare was not available in the specific 

case; or 

 (b) that it is the institution’s overall practice to make 

routine use of such airfare. 

 d. Air travel by other than commercial carrier. 

 Costs of travel by institution-owned, -leased, or -chartered 

aircraft include the cost of lease, charter, operation 

(including personnel costs), maintenance, depreciation, 

insurance, and other related costs. The portion of such costs 

that exceeds the cost of allowable commercial air travel, as 

provided for in subsection 53.c., is unallowable. 

 54. Trustees.

 Travel and subsistence costs of trustees (or directors) are 

allowable. The costs are subject to restrictions regarding 

lodging, subsistence and air travel costs provided in Section 

53. 

K. Certification of charges. 

 1. To assure that expenditures for sponsored agreements are 

proper and in accordance with the agreement documents and 

approved project budgets, the annual and/or final fiscal reports 

or vouchers requesting payment under the agreements will include 

a certification, signed by an authorized official of the 

university, which reads essentially as follows: "I certify that 
83 

all expenditures reported (or payment requested) are for 

appropriate purposes and in accordance with the provisions of 

the application and award documents." 

 2. Certification of F&A costs. 

 a. Policy. 

 (1) No proposal to establish F&A cost rates shall be 

acceptable unless such costs have been certified by the 

educational institution using the Certificate of F&A Costs set 

forth in subsection b. The certificate must be signed on behalf 

of the institution by an individual at a level no lower than 

vice president or chief financial officer of the institution 

that submits the proposal. 

 (2) No F&A cost rate shall be binding upon the Federal 

Government if the most recent required proposal from the 

institution has not been certified. Where it is necessary to 

establish F&A cost rates, and the institution has not submitted 

a certified proposal for establishing such rates in accordance 

with the requirements of this section, the Federal Government 

shall unilaterally establish such rates. Such rates may be based 

upon audited historical data or such other data that have been 

furnished to the cognizant Federal agency and for which it can 

be demonstrated that all unallowable costs have been excluded. 

When F&A cost rates are unilaterally established by the Federal 

Government because of failure of the institution to submit a 

certified proposal for establishing such rates in accordance 

with this section, the rates established will be set at a level 

low enough to ensure that potentially unallowable costs will not 

be reimbursed. 

 b. Certificate. The certificate required by this section 

shall be in the following form: 

 Certificate of F&A Costs 

 This is to certify that to the best of my knowledge and 

belief: 

 (1) I have reviewed the F&A cost proposal submitted 

herewith; 

 (2) All costs included in this proposal [identify date] to 

establish billing or final F&A costs rate for [identify period 
84 

covered by rate] are allowable in accordance with the 

requirements of the Federal agreement(s) to which they apply and 

with the cost principles applicable to those agreements. 

 (3) This proposal does not include any costs which are 

unallowable under applicable cost principles such as (without 

limitation): advertising and public relations costs, 

contributions and donations, entertainment costs, fines and 

penalties, lobbying costs, and defense of fraud proceedings; and 

 (4) All costs included in this proposal are properly 

allocable to Federal agreements on the basis of a beneficial or 

causal relationship between the expenses incurred and the 

agreements to which they are allocated in accordance with 

applicable requirements. 

 For educational institutions that are required to file a DS2 in accordance with Section C.14, the following statement shall 

be added to the "Certificate of F&A Costs": 

 (5) The rate proposal is prepared using the same cost 

accounting practices that are disclosed in the DS-2, including 

its amendments and revisions, filed with and approved by the 

cognizant agency. 

 I declare under penalty of perjury that the foregoing is 

true and correct. 

 Institution: ____________________________________________ 

 Signature: ____________________________________________ 

 Name of Official: _______________________________________ 

 Title: ________________________________________________ 

 Date of Execution: ______________________________________ 
85 

 Exhibit A -- List of Colleges and Universities Subject to 

Section J.12.h of Circular A-21. 

 1. Johns Hopkins University 

 2. Stanford University 

 3. Massachusetts Institute of Technology 

 4. University of Washington 

 5. University of California-Los Angeles 

 6. University of Michigan 

 7. University of California-San Diego 

 8. University of California-San Francisco 

 9. University of Wisconsin-Madison 

 10. Columbia University 

 11. Yale University 

 12. Harvard University 

 13. Cornell University 

 14. University of Pennsylvania 

 15. University of California-Berkeley 

 16. University of Minnesota 

 17. Pennsylvania State University 

 18. University of Southern California 

 19. Duke University 

 20. Washington University 

 21. University of Colorado 

 22. University of Illinois-Urbana 

 23. University of Rochester 

 24. University of North Carolina-Chapel Hill 

 25. University of Pittsburgh 

 26. University of Chicago 

 27. University of Texas-Austin 

 28. University of Arizona 

 29. New York University 

 30. University of Iowa 

 31. Ohio State University 

 32. University of Alabama-Birmingham 

 33. Case Western Reserve 

 34. Baylor College of Medicine 

 35. California Institute of Technology 

 36. Yeshiva University 

 37. University of Massachusetts 

 38. Vanderbilt University 

 39. Purdue University 

 40. University of Utah 

 41. Georgia Institute of Technology 

 42. University of Maryland-College Park 
86 

 43. University of Miami 

 44. University of California-Davis 

 45. Boston University 

 46. University of Florida 

 47. Carnegie-Mellon University 

 48. Northwestern University 

 49. Indiana University 

 50. Michigan State University 

 51. University of Virginia 

 52. University of Texas-SW Medical Center 

 53. University of California-Irvine 

 54. Princeton University 

 55. Tulane University of Louisiana 

 56. Emory University 

 57. University of Georgia 

 58. Texas A&M University-all campuses 

 59. New Mexico State University 

 60. North Carolina State University-Raleigh 

 61. University of Illinois-Chicago 

 62. Utah State University 

 63. Virginia Commonwealth University 

 64. Oregon State University 

 65. SUNY-Stony Brook 

 66. University of Cincinnati 

 67. CUNY-Mount Sinai School of Medicine 

 68. University of Connecticut 

 69. Louisiana State University 

 70. Tufts University 

 71. University of California-Santa Barbara 

 72. University of Hawaii-Manoa 

 73. Rutgers State University of New Jersey 

 74. Colorado State University 

 75. Rockefeller University 

 76. University of Maryland-Baltimore 

 77. Virginia Polytechnic Institute & State University 

 78. SUNY-Buffalo 

 79. Brown University 

 80. University of Medicine & Dentistry of New Jersey 

 81. University of Texas-Health Science Center San Antonio 

 82. University of Vermont 

 83. University of Texas-Health Science Center Houston 

 84. Florida State University 

 85. University of Texas-MD Anderson Cancer Center 

 86. University of Kentucky 

 87. Wake Forest University 
87 

 88. Wayne State University 

 89. Iowa State University of Science & Technology 

 90. University of New Mexico 

 91. Georgetown University 

 92. Dartmouth College 

 93. University of Kansas 

 94. Oregon Health Sciences University 

 95. University of Texas-Medical Branch-Galveston 

 96. University of Missouri-Columbia 

 97. Temple University 

 98. George Washington University 

 99. University of Dayton 
88 

 Exhibit B -- Listing of institutions that are eligible for 

the utility cost adjustment. 

 1. Baylor University 

 2. Boston College 

 3. Boston University 

 4. California Institute of Technology 

 5. Carnegie-Mellon University 

 6. Case Western University 

 7. Columbia University 

 8. Cornell University (Endowed) 

 9. Cornell University (Statutory) 

 10. Cornell University (Medical) 

 11. Dayton University 

 12. Emory University 

 13. George Washington University (Medical) 

 14. Georgetown University 

 15. Harvard Medical School 

 16. Harvard University (Main Campus) 

 17. Harvard University (School of Public Health) 

 18. Johns Hopkins University 

 19. Massachusetts Institute of Technology 

 20. Medical University of South Carolina 

 21. Mount Sinai School of Medicine 

 22. New York University (except New York University Medical 

Center) 

 23. New York University Medical Center 

 24. North Carolina State University 

 25. Northeastern University 

 26. Northwestern University 

 27. Oregon Health Sciences University 

 28. Oregon State University 

 29. Rice University 

 30. Rockefeller University 

 31. Stanford University 

 32. Tufts University 

 33. Tulane University 

 34. Vanderbilt University 

 35. Virginia Commonwealth University 

 36. Virginia Polytechnic Institute and State University 

 37. University of Arizona 

 38. University of CA, Berkeley 

 39. University of CA, Irvine 

 40. University of CA, Los Angeles 

 41. University of CA, San Diego 
89 

 42. University of CA, San Francisco 

 43. University of Chicago 

 44. University of Cincinnati 

 45. University of Colorado, Health Sciences Center 

 46. University of Connecticut, Health Sciences Center 

 47. University of Health Science and The Chicago Medical 

School 

 48. University of Illinois, Urbana 

 49. University of Massachusetts, Medical Center 

 50. University of Medicine & Dentistry of New Jersey 

 51. University of Michigan 

 52. University of Pennsylvania 

 53. University of Pittsburgh 

 54. University of Rochester 

 55. University of Southern California 

 56. University of Tennessee, Knoxville 

 57. University of Texas, Galveston 

 58. University of Texas, Austin 

 60. University of Texas Southwestern Medical Center 

 61. University of Virginia 

 62. University of Vermont & State Agriculture College 

 63. University of Washington 

 64. Washington University 

 65. Yale University 

 66. Yeshiva University 
90 

 Exhibit C -- Examples of "major project" where direct 

charging of administrative or clerical staff salaries may be 

appropriate. 

 * Large, complex programs such as General Clinical 

Research Centers, Primate Centers, Program Projects, 

environmental research centers, engineering research centers, 

and other grants and contracts that entail assembling and 

managing teams of investigators from a number of institutions. 

 * Projects which involve extensive data accumulation, 

analysis and entry, surveying, tabulation, cataloging, searching 

literature, and reporting (such as epidemiological studies, 

clinical trials, and retrospective clinical records studies). 

 * Projects that require making travel and meeting 

arrangements for large numbers of participants, such as 

conferences and seminars. 

 * Projects whose principal focus is the preparation and 

production of manuals and large reports, books and monographs 

(excluding routine progress and technical reports). 

 * Projects that are geographically inaccessible to 

normal departmental administrative services, such as research 

vessels, radio astronomy projects, and other research fields 

sites that are remote from campus. 

 * Individual projects requiring project-specific 

database management; individualized graphics or manuscript 

preparation; human or animal protocols; and multiple projectrelated investigator coordination and communications. 

 These examples are not exhaustive nor are they intended to 

imply that direct charging of administrative or clerical 

salaries would always be appropriate for the situations 

illustrated in the examples. For instance, the examples would be 

appropriate when the costs of such activities are incurred in 

unlike circumstances, i.e., the actual activities charged direct 

are not the same as the actual activities normally included in 

the institution's facilities and administrative (F&A) cost pools 

or, if the same, the indirect activity costs are immaterial in 

amount. It would be inappropriate to charge the cost of such 

activities directly to specific sponsored agreements if, in 

similar circumstances, the costs of performing the same type of 
91 

activity for other sponsored agreements were included as 

allocable costs in the institution's F&A cost pools. Application 

of negotiated predetermined F&A cost rates may also be 

inappropriate if such activity costs charged directly were not 

provided for in the allocation base that was used to determine 

the predetermined F&A cost rates. 
92 

 Appendix A Part 99005 -- Cost Accounting Standards for 

Educational Institutions. 

 CAS 9905.501 -- Consistency in estimating, accumulating and 

reporting costs by educational institutions. 

 Purpose 

 The purpose of this standard is to ensure that each 

educational institution's practices used in estimating costs for 

a proposal are consistent with cost accounting practices used by 

the educational institution in accumulating and reporting costs. 

Consistency in the application of cost accounting practices is 

necessary to enhance the likelihood that comparable transactions 

are treated alike. With respect to individual sponsored 

agreements, the consistent application of cost accounting 

practices will facilitate the preparation of reliable cost 

estimates used in pricing a proposal and their comparison with 

the costs of performance of the resulting sponsored agreement. 

Such comparisons provide one important basis for financial 

control over costs during sponsored agreement performance and 

aid in establishing accountability for costs in the manner 

agreed to by both parties at the time of agreement. The 

comparisons also provide an improved basis for evaluating 

estimating capabilities. 

 Definitions 

 (a) The following are definitions of terms which are 

prominent in this standard. 

 (1) Accumulating costs means the collecting of cost data in 

an organized manner, such as through a system of accounts. 

 (2) Actual cost means an amount determined on the basis of 

cost incurred (as distinguished from forecasted cost), including 

standard cost properly adjusted for applicable variance. 

 (3) Estimating costs means the process of forecasting a 

future result in terms of cost, based upon information available 

at the time. 

 (4) Indirect cost pool means a grouping of incurred costs 

identified with two or more objectives but not identified 

specifically with any final cost objective. 
93 

 (5) Pricing means the process of establishing the amount or 

amounts to be paid in return for goods or services. 

 (6) Proposal means any offer or other submission used as a 

basis for pricing a sponsored agreement, sponsored agreement 

modification or termination settlement or for securing payments 

thereunder. 

 (7) Reporting costs means the providing of cost information 

to others. 

 Fundamental Requirement 

 An educational institution's practices used in estimating 

costs in pricing a proposal shall be consistent with the 

educational institution's cost accounting practices used in 

accumulating and reporting costs. 

 An educational institution's cost accounting practices used 

in accumulating and reporting actual costs for a sponsored 

agreement shall be consistent with the educational institution's 

practices used in estimating costs in the related proposal or 

application. 

 The grouping of homogeneous costs in estimates prepared for 

proposal purposes shall not per se be deemed an inconsistent 

application of cost accounting practices of this paragraph when 

such costs are accumulated in reported in greater detail on an 

actual costs basis during performance of the sponsored 

agreement. 

 Techniques for application 

 (a) The standard allows grouping of homogeneous costs in 

order to cover those cases where it is not practicable to 

estimate sponsored agreement costs by individual cost element. 

However, costs estimated for proposal purposes shall be 

presented in such a manner and in such detail that any 

significant cost can be compared with the actual cost 

accumulated and reported therefor. In any event, the cost 

accounting practices used in estimating costs in pricing a 

proposal and in accumulating and reporting costs on the 

resulting sponsored agreement shall be consistent with respect 

to: 
94 

 (1) The classification of elements of cost as direct or 

indirect; (2) the indirect cost pools to which each element of 

cost is charged or proposed to be charged; and (3) the methods 

of allocating indirect costs to the sponsored agreement. 

 (b) Adherence to the requirement of this standard shall be 

determined as of the date of award of the sponsored agreement, 

unless the sponsored agreement has submitted cost or pricing 

data pursuant to 10 U.S.C. 2306(a) or 41 U.S.C. 254(d) (Pub. L. 

87-653), in which case adherence to the requirement of this 

standard shall be determined as of the date of final agreement 

on price, as shown on the signed certificate of current cost or 

pricing data. Notwithstanding 9905.501-40(b), changes in 

established cost accounting practices during sponsored agreement 

performance may be made in accordance with Part 9903 (48 CFR 

9903). 

 (c) The standard does not prescribe the amount of detail 

required in accumulating and reporting costs. The basic 

requirement which must be met, however, is that for any 

significant amount of estimated cost, the sponsored agreement 

must be able to accumulate and report actual cost at a level 

which permits sufficient and meaningful comparison with its 

estimates. The amount of detail required may vary considerably 

depending on how the proposed costs were estimated, the data 

presented in justification or lack thereof, and the significance 

of each situation. Accordingly, it is neither appropriate nor 

practical to prescribe a single set of accounting practices 

which would be consistent in all situations with the practices 

of estimating costs. Therefore, the amount of accounting and 

statistical detail to be required and maintained in accounting 

for estimated costs has been and continues to be a matter to be 

decided by Government procurement authorities on the basis of 

the individual facts and circumstances. 

 CAS 9905.502 -- Consistency in allocating costs incurred for 

the same purpose by educational institutions. 

 Purpose 

 The purpose of this standard is to require that each type of 

cost is allocated only once and on only one basis to any 

sponsored agreement or other cost objective. The criteria for 

determining the allocation of costs to a sponsored agreement or 
95 

other cost objective should be the same for all similar 

objectives. Adherence to these cost accounting concepts is 

necessary to guard against the overcharging of some cost 

objectives and to prevent double counting. Double counting 

occurs most commonly when cost items are allocated directly to a 

cost objective without eliminating like cost items from indirect 

cost pools which are allocated to that cost objective. 

 Definitions 

 (a) The following are definitions of terms which are 

prominent in this standard. 

 (1) Allocate means to assign an item of cost, or a group of 

items of cost, to one or more cost objectives. This term 

includes both direct assignment of cost and the reassignment of 

a share from an indirect cost pool. 

 (2) Cost objective means a function, organizational 

subdivision, sponsored agreement, or other work unit for which 

cost data are desired and for which provision is made to 

accumulate and measure the cost of processes, products, jobs, 

capitalized projects, etc. 

 (3) Direct cost means any cost which is identified 

specifically with a particular final cost objective. Direct 

costs are not limited to items which are incorporated in the end 

product as material or labor. Costs identified specifically with 

a sponsored agreement are direct costs of that sponsored 

agreement. All costs identified specifically with other final 

cost objectives of the educational institution are direct costs 

of those cost objectives. 

 (4) Final cost objective means a cost objective which has 

allocated to it both direct and indirect costs, and in the 

educational institution's accumulation system, is one of the 

final accumulation points. 

 (5) Indirect cost means any cost not directly identified 

with a single final cost objective, but identified with two or 

more final cost objectives or with at least one intermediate 

cost objective. 
96 

 (6) Indirect cost pool means a grouping of incurred costs 

identified with two or more cost objectives but not identified 

with any final cost objective. 

 (7) Intermediate cost objective means a cost objective that 

is used to accumulate indirect costs or service center costs 

that are subsequently allocated to one or more indirect cost 

pools and/or final cost objectives. 

 Fundamental Requirement 

 All costs incurred for the same purpose, in like 

circumstances, are either direct costs only or indirect costs 

only with respect to final cost objectives. No final cost 

objective shall have allocated to it as an indirect cost any 

cost, if other costs incurred for the same purpose, in like 

circumstances, have been included as a direct cost of that or 

any other final cost objective. Further, no final cost 

objective shall have allocated to it as a direct cost any cost, 

if other costs incurred for the same purpose, in like 

circumstances, have been included in any indirect cost pool to 

be allocated to that or any other final cost objective. 

 Techniques for application 

 (a) The Fundamental Requirement is stated in terms of cost 

incurred and is equally applicable to estimates of costs to be 

incurred as used in sponsored agreement proposals. 

 (b) The Disclosure Statement to be submitted by the 

educational institution will require that the educational 

institution set forth its cost accounting practices with regard 

to the distinction between direct and indirect costs. In 

addition, for those types of cost which are sometimes accounted 

for as direct and sometimes accounted for as indirect, the 

educational institution will set forth in its Disclosure 

Statement the specific criteria and circumstances for making 

such distinctions. In essence, the Disclosure Statement 

submitted by the educational institution, by distinguishing 

between direct and indirect costs, and by describing the 

criteria and circumstances for allocating those items which are 

sometimes direct and sometimes indirect, will be determinative 

as to whether or not costs are incurred for the same purpose. 

Disclosure Statement as used herein refers to the statement 
97 

required to be submitted by educational institutions in Section 

C.14. 

 (c) In the event that an educational institution has not 

submitted a Disclosure Statement, the determination of whether 

specific costs are directly allocable to sponsored agreements 

shall be based upon the educational institution's cost 

accounting practices used at the time of sponsored agreement 

proposal. 

 (d) Whenever costs which serve the same purpose cannot 

equitably be indirectly allocated to one or more final cost 

objectives in accordance with the educational institution's 

disclosed accounting practices, the educational institution may 

either (1) use a method for reassigning all such costs which 

would provide an equitable distribution to all final cost 

objectives, or (2) directly assign all such costs to final cost 

objectives with which they are specifically identified. In the 

event the educational institution decides to make a change for 

either purpose, the Disclosure Statement shall be amended to 

reflect the revised accounting practices involved. 

 (e) Any direct cost of minor dollar amount may be treated 

as an indirect cost for reasons of practicality where the 

accounting treatment for such cost is consistently applied to 

all final cost objectives, provided that such treatment produces 

results which are substantially the same as the results which 

would have been obtained if such cost had been treated as a 

direct cost. 

 Illustrations 

 (a) Illustrations of costs which are incurred for the same 

purpose: 

 (1) An educational institution normally allocates all 

travel as an indirect cost and previously disclosed this 

accounting practice to the Government. For purposes of a new 

proposal, the educational institution intends to allocate the 

travel costs of personnel whose time is accounted for as direct 

labor directly to the sponsored agreement. Since travel costs 

of personnel whose time is accounted for as direct labor working 

on other sponsored agreements are costs which are incurred for 

the same purpose, these costs may no longer be included within 

indirect cost pools for purposes of allocation to any covered 

Government sponsored agreement. The educational institution's 
98 

Disclosure Statement must be amended for the proposed changes in 

accounting practices. 

 (2) An educational institution normally allocates 

purchasing activity costs indirectly and allocates this cost to 

instruction and research on the basis of modified total costs. A 

proposal for a new sponsored agreement requires a 

disproportionate amount of subcontract administration to be 

performed by the purchasing activity. The educational 

institution prefers to continue to allocate purchasing activity 

costs indirectly. In order to equitably allocate the total 

purchasing activity costs, the educational institution may use a 

method for allocating all such costs which would provide an 

equitable distribution to all applicable indirect cost pools. 

For example, the educational institution may use the number of 

transactions processed rather than its former allocation base of 

modified total costs. The educational institution's Disclosure 

Statement must be amended for the proposed changes in accounting 

practices. 

 (b) Illustrations of costs which are not incurred for the 

same purpose: 

 (1) An educational institution normally allocates special 

test equipment costs directly to sponsored agreements. The costs 

of general purpose test equipment are normally included in the 

indirect cost pool which is allocated to sponsored agreements. 

Both of these accounting practices were previously disclosed to 

the Government. Since both types of costs involved were not 

incurred for the same purpose in accordance with the criteria 

set forth in the educational institution's Disclosure Statement, 

the allocation of general purpose test equipment costs from the 

indirect cost pool to the sponsored agreement, in addition to 

the directly allocated special test equipment costs, is not 

considered a violation of the standard. 

 (2) An educational institution proposes to perform a 

sponsored agreement which will require three firemen on 24-hour 

duty at a fixed-post to provide protection against damage to 

highly inflammable materials used on the sponsored agreement. 

The educational institution presently has a firefighting force 

of 10 employees for general protection of its facilities. The 

educational institution's costs for these latter firemen are 

treated as indirect costs and allocated to all sponsored 

agreements; however, it wants to allocate the three fixed-post 
99 

firemen directly to the particular sponsored agreement requiring 

them and also allocate a portion of the cost of the general 

firefighting force to the same sponsored agreement. The 

educational institution may do so but only on condition that its 

disclosed practices indicate that the costs of the separate 

classes of firemen serve different purposes and that it is the 

educational institution's practice to allocate the general 

firefighting force indirectly and to allocate fixed-post firemen 

directly. 

 Interpretation 

 (a) Consistency in Allocating Costs Incurred for the Same 

Purpose by Educational Institutions, provides, in this standard, 

that " * * * no final cost objective shall have allocated to it 

as a direct cost any cost, if other costs incurred for the same 

purpose, in like circumstances, have been included in any 

indirect cost pool to be allocated to that or any other final 

cost objective." 

 (b) This interpretation deals with the way this standard 

applies to the treatment of costs incurred in preparing, 

submitting, and supporting proposals. In essence, it is 

addressed to whether or not, under the standard, all such costs 

are incurred for the same purpose, in like circumstances. 

 (c) Under this standard, costs incurred in preparing, 

submitting, and supporting proposals pursuant to a specific 

requirement of an existing sponsored agreement are considered to 

have been incurred in different circumstances from the 

circumstances under which costs are incurred in preparing 

proposals which do not result from such specific requirement. 

The circumstances are different because the costs of preparing 

proposals specifically required by the provisions of an existing 

sponsored agreement relate only to that sponsored agreement 

while other proposal costs relate to all work of the educational 

institution. 

 (d) This interpretation does not preclude the allocation, 

as indirect costs, of costs incurred in preparing all proposals. 

The cost accounting practices used by the educational 

institution, however, must be followed consistently and the 

method used to reallocate such costs, of course, must provide an 

equitable distribution to all final cost objectives. 
100 

 CAS 9905.505 -- Accounting for unallowable costs -- 

Educational institutions. 

 Purpose 

 (a) The purpose of this standard is to facilitate the 

negotiation, audit, administration and settlement of sponsored 

agreements by establishing guidelines covering (1) 

identification of costs specifically described as unallowable, 

at the time such costs first become defined or authoritatively 

designated as unallowable, and (2) the cost accounting treatment 

to be accorded such identified unallowable costs in order to 

promote the consistent application of sound cost accounting 

principles covering all incurred costs. The standard is 

predicated on the proposition that costs incurred in carrying on 

the activities of an educational institution -- regardless of 

the allowability of such costs under Government sponsored 

agreements -- are allocable to the cost objectives with which 

they are identified on the basis of their beneficial or causal 

relationships. 

 (b) This standard does not govern the allowability of 

costs. This is a function of the appropriate procurement or 

reviewing authority. 

 Definitions 

 (a) The following are definitions of terms which are 

prominent in this standard. 

 (1) Directly associated cost means any cost which is 

generated solely as a result of the incurrence of another cost, 

and which would not have been incurred had the other cost not 

been incurred. 

 (2) Expressly unallowable cost means a particular item or 

type of cost which, under the express provisions of an 

applicable law, regulation, or sponsored agreement, is 

specifically named and stated to be unallowable. 

 (3) Indirect cost means any cost not directly identified 

with a single final cost objective, but identified with two or 

more final cost objectives or with at least one intermediate 

cost objective. 
101 

 (4) Unallowable cost means any cost which, under the 

provisions of any pertinent law, regulation, or sponsored 

agreement, cannot be included in prices, cost reimbursements, or 

settlements under a Government sponsored agreement to which it 

is allocable. 

 Fundamental requirement 

 (a) Costs expressly unallowable or mutually agreed to be 

unallowable, including costs mutually agreed to be unallowable 

directly associated costs, shall be identified and excluded from 

any billing, claim, application, or proposal applicable to a 

Government sponsored agreement. 

 (b) Costs which specifically become designated as 

unallowable as a result of a written decision furnished by a 

Federal official pursuant to sponsored agreement disputes 

procedures shall be identified if included in or used in the 

computation of any billing, claim, or proposal applicable to a 

sponsored agreement. This identification requirement applies 

also to any costs incurred for the same purpose under like 

circumstances as the costs specifically identified as 

unallowable under either this paragraph or paragraph (a) of this 

subsection. 

 (c) Costs which, in a Federal official's written decision 

furnished pursuant to disputes procedures, are designated as 

unallowable directly associated costs of unallowable costs 

covered by either paragraph (a) or (b) of this subsection shall 

be accorded the identification required by paragraph b. of this 

subsection. 

 (d) The costs of any work project not contractually 

authorized, whether or not related to performance of a proposed 

or existing contract, shall be accounted for, to the extent 

appropriate, in a manner which permits ready separation from the 

costs of authorized work projects. 

 (e) All unallowable costs covered by paragraphs (a) through 

(d) of this subsection shall be subject to the same cost 

accounting principles governing cost allocability as allowable 

costs. In circumstances where these unallowable costs normally 

would be part of a regular indirect-cost allocation base or 

bases, they shall remain in such base or bases. Where a directly 

associated cost is part of a category of costs normally included 
102 

in an indirect-cost pool that will be allocated over a base 

containing the unallowable cost with which it is associated, 

such a directly associated cost shall be retained in the 

indirect-cost pool and be allocated through the regular 

allocation process. 

 (f) Where the total of the allocable and otherwise allowable 

costs exceeds a limitation-of-cost or ceiling-price provision in 

a sponsored agreement, full direct and indirect cost allocation 

shall be made to the cost objective, in accordance with 

established cost accounting practices and Standards which 

regularly govern a given entity's allocations to Government 

sponsored agreement cost objectives. In any determination of 

unallowable cost overrun, the amount thereof shall be identified 

in terms of the excess of allowable costs over the ceiling 

amount, rather than through specific identification of 

particular cost items or cost elements. 

 Techniques for application 

 (a) The detail and depth of records required as backup 

support for proposals, billings, or claims shall be that which 

is adequate to establish and maintain visibility of identified 

unallowable costs (including directly associated costs), their 

accounting status in terms of their allocability to sponsored 

agreement cost objectives, and the cost accounting treatment 

which has been accorded such costs. Adherence to this cost 

accounting principle does not require that allocation of 

unallowable costs to final cost objectives be made in the 

detailed cost accounting records. It does require that 

unallowable costs be given appropriate consideration in any cost 

accounting determinations governing the content of allocation 

bases used for distributing indirect costs to cost objectives. 

Unallowable costs involved in the determination of rates used 

for standard costs, or for indirect-cost bidding or billing, 

need be identified only at the time rates are proposed, 

established, revised or adjusted. 

 (b) The visibility requirement of paragraph (a) of this 

subsection, may be satisfied by any form of cost identification 

which is adequate for purposes of sponsored agreement cost 

determination and verification. The standard does not require 

such cost identification for purposes which are not relevant to 

the determination of Government sponsored agreement cost. Thus, 

to provide visibility for incurred costs, acceptable alternative 
103 

practices would include (1) the segregation of unallowable costs 

in separate accounts maintained for this purpose in the regular 

books of account, (2) the development and maintenance of 

separate accounting records or workpapers, or (3) the use of any 

less formal cost accounting techniques which establishes and 

maintains adequate cost identification to permit audit 

verification of the accounting recognition given unallowable 

costs. Educational institutions may satisfy the visibility 

requirements for estimated costs either (1) by designation and 

description (in backup data, workpapers, etc.) of the amounts 

and types of any unallowable costs which have specifically been 

identified and recognized in making the estimates, or (2) by 

description of any other estimating technique employed to 

provide appropriate recognition of any unallowable costs 

pertinent to the estimates. 

 (c) Specific identification of unallowable costs is not 

required in circumstances where, based upon considerations of 

materiality, the Government and the educational institution 

reach agreement on an alternate method that satisfies the 

purpose of the standard. 

 Illustrations 

 (a) An auditor recommends disallowance of certain direct 

labor and direct material costs, for which a billing has been 

submitted under a sponsored agreement, on the basis that these 

particular costs were not required for performance and were not 

authorized by the sponsored agreement. The Federal officer 

issues a written decision which supports the auditor's position 

that the questioned costs are unallowable. Following receipt of 

the Federal officer's decision, the educational institution must 

clearly identify the disallowed direct labor and direct material 

costs in the educational institution's accounting records and 

reports covering any subsequent submission which includes such 

costs. Also, if the educational institution's base for 

allocation of any indirect cost pool relevant to the subject 

sponsored agreement consists of direct labor, direct material, 

total prime cost, total cost input, etc., the educational 

institution must include the disallowed direct labor and 

material costs in its allocation base for such pool. Had the 

Federal officer's decision been against the auditor, the 

educational institution would not, of course, have been required 

to account separately for the costs questioned by the auditor. 
104 

 (b) An educational institution incurs, and separately 

identifies, as a part of a service center or expense pool, 

certain costs which are expressly unallowable under the existing 

and currently effective regulations. If the costs of the service 

center or indirect expense pool are regularly a part of the 

educational institution's base for allocation of general 

administration and general expenses (GA&GE) or other indirect 

expenses, the educational institution must allocate the GA&GE or 

other indirect expenses to sponsored agreements and other final 

cost objectives by means of a base which includes the identified 

unallowable indirect costs. 

 (c) An auditor recommends disallowance of certain indirect 

costs. The educational institution claims that the costs in 

question are allowable under the provisions of Office Of 

Management and Budget Circular A-21, Cost Principles For 

Educational Institutions; the auditor disagrees. The issue is 

referred to the Federal officer for resolution pursuant to the 

sponsored agreement disputes clause. The Federal officer issues 

a written decision supporting the auditor's position that the 

total costs questioned are unallowable under the Circular. 

Following receipt of the Federal officer's decision, the 

educational institution must identify the disallowed costs and 

specific other costs incurred for the same purpose in like 

circumstances in any subsequent estimating, cost accumulation or 

reporting for Government sponsored agreements, in which such 

costs are included. If the Federal officer's decision had 

supported the educational institution's contention, the costs 

questioned by the auditor would have been allowable and the 

educational institution would not have been required to provide 

special identification. 

 (d) An educational institution incurred certain unallowable 

costs that were charged indirectly as general administration and 

general expenses (GA&GE). In the educational institution's 

proposals for final indirect cost rates to be applied in 

determining allowable sponsored agreement costs, the educational 

institution identified and excluded the expressly unallowable 

costs. In addition, during the course of negotiation of indirect 

cost rates to be used for bidding and billing purposes, the 

educational institution agreed to classify as unallowable cost, 

various directly associated costs of the identifiable 

unallowable costs. On the basis of negotiations and agreements 

between the educational institution and the Federal officer's 

authorized representatives, indirect cost rates were 
105 

established, based on the net balance of allowable GA&GE. 

Application of the rates negotiated to proposals, and to 

billings, for covered sponsored agreements constitutes 

compliance with the standard. 

 (e) An employee, whose salary, travel, and subsistence 

expenses are charged regularly to the general administration and 

general expenses (GA&GE) pool, takes several business associates 

on what is clearly a business entertainment trip. The 

entertainment costs of such trips is expressly unallowable 

because it constitutes entertainment expense prohibited by OMB 

Circular A-21, and is separately identified by the educational 

institution. The educational institution does not regularly 

include its GA&GE in any indirect-expense allocation base. In 

these circumstances, the employee's travel and subsistence 

expenses would be directly associated costs for identification 

with the unallowable entertainment expense. However, unless this 

type of activity constituted a significant part of the 

employee's regular duties and responsibilities on which his 

salary was based, no part of the employee's salary would be 

required to be identified as a directly associated cost of the 

unallowable entertainment expense. 

 CAS 9905.506 -- Cost accounting period -- Educational 

institutions. 

 Purpose 

 The purpose of this standard is to provide criteria for the 

selection of the time periods to be used as cost accounting 

periods for sponsored agreement cost estimating, accumulating, 

and reporting. This standard will reduce the effects of 

variations in the flow of costs within each cost accounting 

period. It will also enhance objectivity, consistency, and 

verifiability, and promote uniformity and comparability in 

sponsored agreement cost measurements. 

 Definitions 

 (a) The following are definitions of terms which are 

prominent in this standard. 

 (1) Allocate means to assign an item of cost, or a group of 

items of cost, to one or more cost objectives. This term 
106 

includes both direct assignment of cost and the reassignment of 

a share from an indirect cost pool. 

 (2) Cost Objective means a function, organizational 

subdivision, sponsored agreement, or other work unit for which 

cost data are desired and for which provision is made to 

accumulate and measure the cost of processes, products, jobs, 

capitalized projects, etc. 

 (3) Fiscal year means the accounting period for which 

annual financial statements are regularly prepared, generally a 

period of 12 months, 52 weeks, or 53 weeks. 

 (4) Indirect cost pool means a grouping of incurred costs 

identified with two or more cost objectives but not identified 

specifically with any final cost objective. 

 Fundamental requirement 

 Educational institutions shall use their fiscal year as 

their cost accounting period, except that: 

 Costs of an indirect function which exists for only a part 

of a cost accounting period may be allocated to cost objectives 

of that same part of the period. 

 An annual period other than the fiscal year may be used as 

the cost accounting period if its use is an established practice 

of the educational institution. 

 A transitional cost accounting period other than a year 

shall be used whenever a change of fiscal year occurs. 

 An educational institution shall follow consistent practices 

in the selection of the cost accounting period or periods in 

which any types of expense and any types of adjustment to 

expense (including prior-period adjustments) are accumulated and 

allocated. 

 The same cost accounting period shall be used for 

accumulating costs in an indirect cost pool as for establishing 

its allocation base, except that the contracting parties may 

agree to use a different period for establishing an allocation 

base. 

 Techniques for application 
107 

 (a) The cost of an indirect function which exists for only 

a part of a cost accounting period may be allocated on the basis 

of data for that part of the cost accounting period if the cost 

is (1) material in amount, (2) accumulated in a separate 

indirect cost pool or expense pool, and (3) allocated on the 

basis of an appropriate direct measure of the activity or output 

of the function during that part of the period. 

 (b) The practices required by this standard shall include 

appropriate practices for deferrals, accruals, and other 

adjustments to be used in identifying the cost accounting 

periods among which any types of expense and any types of 

adjustment to expense are distributed. If an expense, such as 

insurance or employee leave, is identified with a fixed, 

recurring, annual period which is different from the educational 

institution's cost accounting period, the standard permits 

continued use of that different period. Such expenses shall be 

distributed to cost accounting periods in accordance with the 

educational institution's established practices for accruals, 

deferrals, and other adjustments. 

 (c) Indirect cost allocation rates, based on estimates, 

which are used for the purpose of expediting the closing of 

sponsored agreements which are terminated or completed prior to 

the end of a cost accounting period need not be those finally 

determined or negotiated for that cost accounting period. They 

shall, however, be developed to represent a full cost accounting 

period, except as provided in paragraph (a) of this subsection. 

 (d) An educational institution may, upon mutual agreement 

with the Government, use as its cost accounting period a fixed 

annual period other than its fiscal year, if the use of such a 

period is an established practice of the educational institution 

and is consistently used for managing and controlling revenues 

and disbursements, and appropriate accruals, deferrals or other 

adjustments are made with respect to such annual periods. 

 (e) The parties may agree to use an annual period which 

does not coincide precisely with the cost accounting period for 

developing the data used in establishing an allocation base: 

Provided, 

 (1) The practice is necessary to obtain significant 

administrative convenience, (2) the practice is consistently 

followed by the educational institution, (3) the annual period 
108 

used is representative of the activity of the cost accounting 

period for which the indirect costs to be allocated are 

accumulated, and (4) the practice can reasonably be estimated to 

provide a distribution to cost objectives of the cost accounting 

period not materially different from that which otherwise would 

be obtained. 

 (f) When a transitional cost accounting period is required, 

educational institution may select any one of the following: (1) 

the period, less than a year in length, extending from the end 

of its previous cost accounting period to the beginning of its 

next regular cost accounting period, (2) a period in excess of a 

year, but not longer than 15 months, obtained by combining the 

period described in subparagraph (f)(1) of this subsection with 

the previous cost accounting period, or (3) a period in excess 

of a year, but not longer than 15 months, obtained by combining 

the period described in subparagraph (f)(1) of this subsection 

with the next regular cost accounting period. A change in the 

educational institution's cost accounting period is a change in 

accounting practices for which an adjustment in the sponsored 

agreement price may be required. 

 Illustrations 

 (a) An educational institution allocates indirect expenses 

for Organized Research on the basis of a modified total direct 

cost base. In a proposal for a sponsored agreement, it estimates 

the allocable expenses based solely on the estimated amount of 

indirect costs allocated to Organized Research and the amount of 

the modified total direct cost base estimated to be incurred 

during the 8 months in which performance is scheduled to be 

commenced and completed. Such a proposal would be in violation 

of the requirements of this standard that the calculation of the 

amounts of both the indirect cost pools and the allocation bases 

be based on the educational institution's cost accounting 

period. 

 (b) An educational institution whose cost accounting period 

is the calendar year, installs a computer service center to 

begin operations on May 1. The operating expense related to the 

new service center is expected to be material in amount, will be 

accumulated in an intermediate cost objective, and will be 

allocated to the benefitting cost objectives on the basis of 

measured usage. The total operating expenses of the computer 

service center for the 8-month part of the cost accounting 
109 

period may be allocated to the benefitting cost objectives of 

that same 8-month period. 

 (c) An educational institution changes its fiscal year from 

a calendar year to the 12-month period ending May 31. For 

financial reporting purposes, it has a 5-month transitional 

"fiscal year." The same 5-month period must be used as the 

transitional cost accounting period; it may not be combined, 

because the transitional period would be longer than 15 months. 

The new fiscal year must be adopted thereafter as its regular 

cost accounting period. The change in its cost accounting 

period is a change in accounting practices; adjustments of the 

sponsored agreement prices may thereafter be required. 

 (d) Financial reports are prepared on a calendar year basis 

on a university-wide basis. However, the contracting segment 

does all internal financial planning, budgeting, and internal 

reporting on the basis of a twelve month period ended June 30. 

The contracting parties agree to use the period ended 

June 30 and they agree to overhead rates on the June 30 

basis. They also agree on a technique for prorating fiscal year 

assignment of the university's central system office expenses 

between such June 30 periods. This practice is permitted by the 

standard. 

 (e) Most financial accounts and sponsored agreement cost 

records are maintained on the basis of a fiscal year which ends 

November 30 each year. However, employee vacation allowances are 

regularly managed on the basis of a "vacation year" which ends 

September 30 each year. Vacation expenses are estimated 

uniformly during each "vacation year." Adjustments are made each 

October to adjust the accrued liability to actual, and the 

estimating rates are modified to the extent deemed appropriate. 

This use of a separate annual period for determining the amounts 

of vacation expense is permitted.