29786 Federal Register / Vol. 63. No. 104 / Monday, June 1, 1998 / Notices

OFFICE OF MANAGEMENT AND

BUDGET

Cost Principles for Educational

Institutions

AGENCY: Office of Management and

Budget.

ACTION: Final Revision and interim final

revision of OMB Circular A–21, ‘‘Cost

Principles for Educational Institutions.’’

SUMMARY: The Office of Management

and Budget revises Circular A–21, ‘‘Cost

Principles for Educational Institutions,’’

by: (1) establishing review and

documentation requirements to assure

the reasonableness of large research

facility costs, (2) implementing a new

alternative approach to replace using

special cost studies for the recovery of

utility costs and deferring the

elimination of special cost studies for

the recovery of library costs, (3)

providing additional guidance on the

calculation of depreciation and use

allowances on buildings and equipment,

and (4) changing the distribution basis

for the facilities and administrative cost

application (from salaries and wages to

modified total direct costs) at

universities that use the simplified

(short-form) method to calculate their

facilities and administrative rate.

In addition, OMB is issuing an

interim final revision to allow trustees’

travel expenses.

DATES: The revision and the interim

final revision are effective on June 1,

1998. Comments on the interim final

revision must be received by July 1,

1998.

ADDRESSES: Comments should be

mailed to Gilbert Tran, Financial

Standards and Reporting Branch, Office

of Federal Financial Management,

Office of Management and Budget, 725

17th Street, NW, Room 6025,

Washington, DC 20503. Comments up to

three pages in length may be submitted

via facsimile to 202–395–4915.

Electronic mail comments may be

submitted via Internet to TRAN—

H@A1.EOP.GOV. Please include the full

body of electronic mail comments in the

text and not as an attachment. Please

include the name, title, organization,

postal address, and E-mail address in

the text of the message.

FOR FURTHER INFORMATION CONTACT:

Non-Federal organizations should

contact the organization’s cognizant

Federal agency. Federal agencies should

contact Gilbert Tran, Financial

Standards and Reporting Branch, Office

of Federal Financial Management,

Office of Management and Budget, (202)

395–3993.

SUPPLEMENTARY INFORMATION:

A. Purpose of Circular A–21

Office of Management and Budget

(OMB) Circular A–21, ‘‘Cost Principles

for Educational Institutions,’’

establishes principles for determining

costs applicable to Federal grants,

contracts, and other sponsored

agreements with educational

institutions.

B. Recent Prior Revisions

On February 6, 1995, OMB published

two sets of proposed revisions (60 FR

7104 and 60 FR 7105): one for

immediate consideration and the other

for future consideration. The first set of

proposed revisions was finalized on

May 8, 1996 (61 FR 20880) with the

following revisions.

• Incorporated four Cost Accounting

Standards applicable to educational

institutions, issued by the Cost

Accounting Standards Board (CASB) on

November 8, 1994 (59 FR 55746), and

extended these standards to all

sponsored agreements.

• Required certain large institutions

to disclose their cost accounting

practices by the submission of a

Disclosure Statement prescribed by the

CASB.

• Amended the definition of

equipment.

• Eliminated in 1998 the use of

special cost studies to allocate utility,

library and student services costs.

• Required the use of fixed facilities

and administrative (F&A) cost rates for

the life of sponsored agreements.

• Established cost negotiation

cognizant agency responsibilities.

• Replaced the term ‘‘indirect costs’’

with ‘‘facilities and administrative

costs’’.

• Clarified the policy for a change

from use allowance to depreciation.

• Added criteria to interest

allowability.

• Disallowed tuition benefits for

employee family members.

C. Current Revisions

On September 10, 1997, OMB

proposed the second set of revisions (62

FR 47722) to complete OMB’s intention

expressed in February 1995. The

proposal included the following:

1. Establish guidance for Federal cost

negotiators to assure the reasonableness

of facility costs.

2. Implement a new alternative

approach to replace using special cost

studies for the recovery of utility costs

and defer the elimination of special cost

studies for the recovery of library costs.

3. Provide additional guidance on the

calculation of depreciation and use

allowances on buildings and equipment.

4. Change the distribution basis for

the facilities and administrative cost

application (from salaries and wages to

modified total direct costs) at

universities that use the simplified

(short-form) method to calculate their

facilities and administrative rate.

5. Develop a standard format for F&A

proposal submissions.

Circular A–21 is revised to:

1. Establish a review process to ensure

the reasonableness of facility costs. To

increase accountability in the research

component of F&A costs and ensure that

the cost of new research facilities passes

a ‘‘prudent person’’ test of

reasonableness, OMB establishes a

review and documentation process for

large research facilities. Large facilities

are defined as buildings costing more

than $10 million. The new provisions

apply to large research facilities that are

included in F&A rate proposals

negotiated after January 1, 2000, with

design and construction beginning after

July 1, 1998. The revision, which is

detailed in a new Section F.2.c, ‘‘Large

research facilities,’’ is based on a

university proposal and implements the

following requirements:

• A requirement for institutions to

maintain an adequate internal review

and approval process for facility costs to

ensure that the construction costs for

large research facilities are reasonable.

The requirement is applicable when an

institution has a new large research

facility (costing more than $10 million),

of which more than 40 percent is

expected to be allocated to Federal

research. An annual review of the

institution’s internal review process

would be performed under the audit for

Federal programs, as required by OMB

Circular A–133, ‘‘Audits of State, Local

Governments, and Non-Profit

Organizations.’’ Future revisions to the

OMB Single Audit Compliance

Supplement, which provides steps and

procedures for auditors in conducting

A–133 audits, will address the auditor’s

responsibility for assessing institutional

compliance with the research facility

cost review process.

• An additional documentation

requirement for a building costing more

than $25 million, of which more than 50

percent is expected to be allocated to

Federal research. For any such building,

the institution must perform and

document an analysis of construction

costs, which includes a comparison of

those costs with the National Science

Foundation data on research

construction costs (based on its biennial

survey, ‘‘Science and Engineering

Facilities at Colleges and Universities’’),

and any other relevant construction cost

data.
Federal Register / Vol. 63. No. 104 / Monday, June 1, 1998 / Notices 29787

2. Implement an alternative approach

for the payment of utility costs and

defer the elimination of special cost

studies for the recovery of library costs.

For the fiscal year beginning on or after

July 1, 1998, institutions that have

included special cost studies in their

most recently submitted F&A proposal

(listed in Exhibit B) may, instead, add

a utility cost adjustment (UCA) of 1.3

percentage points to the university’s

overall F&A organized research rate

calculated using the standard Circular

A–21 allocation methods.

As explained below, the 1.3

percentage points represent the

weighted average incremental rate that

the Federal Government paid above the

rate calculated using the standard

allocation methodology to the 50

institutions that previously submitted

special utility studies for utility costs

related to research activities. OMB will

periodically reassess the UCA.

OMB will also develop criteria and

publish them in a Federal Register

notice by which the institutions may be

periodically recertified and by which

other institutions could qualify for the

UCA by July 1, 2002 and may change

the UCA percentage point.

Further, OMB revises the Circular to

allow special studies for library costs.

Due to the uncertain effects of recent

and ongoing changes to university

libraries and their services brought

about by the increased use of the

Internet and on-line research, OMB

defers the elimination of special cost

studies to support the allocation of

library costs until OMB has an

opportunity to evaluate the impact of

these changes on the costs of library

services benefitting organized research.

3. Provide additional guidelines on

depreciation and use allowances.

To provide more consistency in the

treatment of use allowances and

depreciation among educational

institutions and Federal cognizant

agencies, the Circular is revised as

follows:

(a) Limit use allowance recovery to

the acquisition costs of assets, or fair

market value of donated assets at the

time of donation (see subsection J.12.c).

(b) Require institutions that report

depreciation on their financial

statements to use the same depreciation

method and useful lives for the F&A

proposals (see subsection J.12.b).

(c) Establish guidelines for the

calculation of depreciation on buildings

when depreciation is calculated on

individual building components (see

subsection J.12.b). This revision

establishes general categories of

building components.

(d) Require institutions that record

depreciation in their financial

statements to record gains and losses on

the disposition of depreciable assets (see

section J.33).

4. Change the distribution basis for

F&A application (from salaries and

wages to modified total direct costs) for

institutions that use the simplified

allocation method. This change,

detailed in Section H.3, provides more

comparability of F&A rates between

small and large universities.

5. Allow trustees’ travel expenses.

This change is issued as an interim final

revision and is made to provide

consistency with recent revisions to

Circular A–122, ‘‘Cost Principles for

Non-Profit Organizations.’’ OMB

requests comments on this change.

Circular A–21, as amended by this

revision, consists of the Circular

published in 1979 (44 FR 12368;

February 26, 1979), as amended in 1982

(47 FR 33658; July 23, 1982), in 1986 (51

FR 20908; June 9, 1986), in 1986 (51 FR

43487; December 2, 1986), in 1991 (56

FR 50224; October 1, 1991), in 1993 (58

FR 39996), in 1996 (61 FR 20880; May

8, 1996), and in this notice. The 1996

amendment included a recompilation of

the Circular up to that date (61 FR

20893). A recompilation of the entire

Circular with all its amendments,

including this amendment, is available

in electronic form on the OMB Home

Page at http://www.whitehouse.gov/

WH/EOP/omb.

D. Comments and Responses

OMB received about 130 comments

from universities, Federal agencies,

professional organizations, and

accounting and law firms. The

comments received and OMB’s

responses are summarized below.

Several comments resulted in

modifications to OMB’s original

proposal.

Facility Costs

Comment: The commenters strongly

opposed the proposal to establish

benchmark rates for facility costs, citing

the following reasons: (1) benchmarks

are unnecessary given that there is no

evidence of abuse and universities

already have rigid internal review and

approval processes to assure reasonable

construction costs; (2) benchmarks

would compromise scientific excellence

by discouraging universities’ investment

in modern facilities; (3) negotiators are

not qualified to review justifications of

facilities costs; and (4) the proposed

NSF data are not suitable for

establishing benchmark rates.

Some universities proposed a less

rigid approach that relies on university

cost management procedures to control

the research facility costs.

Response: The objective of the

proposed review process based on

benchmark rates was to improve

accountability by requiring and

reviewing construction cost

justifications of buildings costing more

than 125 percent above the calculated

average regional median. However,

OMB recognizes that there may exist

review and approval systems at

universities to assure that construction

costs are reasonable. Therefore, in

accordance with the universities’

suggestion, the Circular is revised to

implement an approach that relies more

on a university’s internal review process

for facility costs rather than established

benchmarks. The approach requires a

review of universities’ internal cost

management procedures, combined

with additional documentation for large

research facilities that are substantially

allocated to Federal programs.

Comment: The review of any internal

control system for costs charged against

Federal programs should be included as

part of the annual audit of Federal

programs required by Circular A–133.

Response: OMB agrees. The review of

the university’s internal control and

approval process for construction costs,

which are indirectly charged to Federal

programs through depreciation/use

allowance costs, is included as part of

the annual university A–133 audit. The

review procedures will be included in

the A–133 Compliance Supplement.

Comment: The National Science

Foundation (NSF) survey data for

research construction costs are

inadequate for establishing benchmark

rates. The data does not identify costs

by project and produces an average rate

based on the total of all construction

projects, regardless of size. Some

commenters added that benchmark rates

should be based only on construction

cost data for large projects at researchintensive schools, since these buildings

tend to cost more.

Response: OMB has requested NSF to

conduct a follow-up survey that would

identify costs by project, and

accumulate data for projects costing

more than $10 million. For the revised

review process in section F.2.c,

universities shall include these NSF

construction cost data for comparison

purposes in their analysis of large

research facilities costs.

Comment: One of the criteria that

triggers a review for construction costs

is that a building is substantially

allocated to Federal programs. Does this

criteria apply only when the building is

initially put in service or during the life

of the building?
29788 Federal Register / Vol. 63. No. 104 / Monday, June 1, 1998 / Notices

Response: The criteria for Federal

participation (use) percentage are based

on university’s estimation of the

building use for its entire life. Therefore,

when a university estimates during the

planning phase that the space of a

particular research building will be

substantially allocated to Federal

programs during its life (thus, the

Federal government will fund a

substantial part of the building costs),

then the university must comply with

requirements of section F.2.c. The

Federal cognizant agencies will monitor

the actual Federal participation

percentage in the building usage versus

the universities’ estimation, so that

OMB may evaluate whether further

revisions to the review requirements

would be appropriate.

Comment: The review process for

facility costs should exclude

reconstruction and renovation projects

because of the diverse nature of these

projects, and therefore their costs. In

addition, the total costs of these projects

are usually not material.

Response: OMB agrees.

Reconstruction and renovation projects

are not subject to the requirements of

section F.2.c.

Comment: The criteria for

construction projects subject to

benchmark review should be increased

to $25 million in construction costs and

50 percent of space allocated to Federal

programs (instead of the proposed $10

million and 40 percent Federal

participation).

Response: The revised requirements

consist of two sets of criteria. The first

one (buildings costing more than $10

million and 40 percent Federal

participation) triggers the requirement

for an internal review and approval

system for facility construction costs at

the institution. As suggested by some,

the second set of criteria (buildings

costing more than $25 million and 50

percent Federal participation) triggers

the documentation requirement for that

particular building.

Comment: The NSF construction data,

which are required to be used as

comparison data in section F.2.c, should

be made available publicly and

published as a separate schedule, as an

attachment to A–21, or as part of the

NSF biennial report.

Response: OMB agrees. NSF data will

be available publicly because this data

must be used by institutions in the

comparative analysis for buildings

costing more than $25 million. NSF will

publish this data as part of their

biennial report on research facilities.

Comment: Do the provisions in

section F.2.c apply to buildings on

which the design and construction

begins prior to July 1, 1998 (and the

buildings are not completed until fiscal

year 2000)?

Response: OMB generally does not

apply new provisions retroactively.

Therefore, the new provisions in section

F.2.c apply only to construction

projects, on which the design and

planning begins after July 1, 1998, and

whose costs are included in the F&A

rate proposals negotiated after January

1, 2000. The design and planning of a

particular building start when the

architectural design of the building is

first presented to the institution’s board

of trustees for consideration.

Utility cost adjustment

Comment: Some commenters

suggested an increase in the utility cost

adjustment (UCA) from 1.3 percent to

1.7 percent based on the weighted

average of negotiated UCA at 11 major

research universities.

Response: The UCA remains at 1.3

percent at this time. The 1.3 percent

UCA is the weighted average for 50

universities that have performed special

utility cost studies, as OMB identified at

proposal time. Since the proposal was

published, an additional 16 universities

have been identified to be eligible for

the UCA because of their previous

submission of the special cost studies.

The revised weighted average UCA for

the 66 schools dropped subsequently to

1.2 percent. Instead of reducing the

UCA to 1.2 percent, OMB will finalize

the UCA at 1.3 percent.

Comment: The UCA should be

allowable to all schools regardless of

whether they have previously

performed a special utility cost study,

since it is evident that research space

require more utility costs than other

types of space.

Response: OMB allows the

universities to conduct special cost

studies to support the utility

consumption for research activities

under section E.2.d of the Circular. As

a result, 66 universities performed the

special studies that support the

allocation of utility costs to their

research activities. OMB does not

believe it is appropriate to grant the

UCA at this time to universities that

have not demonstrated the heavier

utility consumption for their research

activities. In addition, utility

consumption varies greatly depending

on the types of research space. For

certain types of research space (e.g.,

computer laboratory, agricultural

research barn, dry laboratory, and math

laboratory), the standard allocation

method (based on square foot) generally

provides the best allocation of utility

costs to benefiting activities. However,

OMB will develop criteria by fiscal year

2002 for these universities to become

certified for the UCA.

Comment: The UCA number needs to

be connected with future actual utility

costs because utility costs can increase

astronomically in the future.

Response: OMB will periodically

reassess the UCA number. OMB plans to

reevaluate the UCA in fiscal year 2002

with the assistance from Federal

agencies and the universities.

Comment: How is the UCA applied?

On a building by building basis or on

the total F&A rate?

Response: The UCA is added to the

university’s overall F&A rate that is

computed using the standard allocation

method. For example, a university

computes its total F&A rate of 50

percent (using the square feet basis to

allocate its utility costs); the F&A

adjusted rate with the UCA would be

51.3 percent.

Depreciation and use allowance

Comment: Can a state university, that

is not required to record depreciation

for financial statements under generally

accepted accounting principles (GAAP),

use depreciation for its F&A proposal?

Response: A state university, which is

not currently required under GAAP to

record depreciation on its assets, can

either use depreciation or use allowance

for its F&A proposal. When the

depreciation method is selected, the

university must comply with the

existing provisions in section J.12.b of

the Circular to calculate depreciation

costs.

Comment: The revision requires that

the same depreciation method be used

for financial statements and for a F&A

proposal. Can a Federal negotiator

question the useful life of an asset when

that useful life is used for financial

statements?

Response: The Federal negotiator can

always question the reasonableness of a

particular asset’s useful life as part of

the F&A proposal review. However,

with this revision, the Federal

negotiator should address his/her

concerns to the institution’s external

auditors, who are responsible for

certifying the adequacy of the

institution’s financial statements

(including the asset depreciation

methods). For public universities that

do not currently record depreciation on

their financial statements, but use

depreciation methods on their F&A

proposals, the Federal negotiator can

address his/her concerns to the

institution’s management and make any

necessary adjustments on the F&A

proposal.
Federal Register / Vol. 63. No. 104 / Monday, June 1, 1998 / Notices 29789

Comment: The revision suggests the

grouping of building components for

depreciation purposes into three general

groups: building shell, building services

systems, and fixed equipment. Can a

university have more than three general

groups with the authorization from the

Federal cognizant agency?

Response: OMB believes that the three

general groups are sufficient for

grouping building components for

depreciation. If, in an exceptional case,

a university believes it should have

more than the three general groups for

building components, the university

may so proceed if it receives

authorization from the Federal

cognizant agency to do so. Such an

exception should rarely be authorized, if

ever. The use of the three general groups

standardizes the ‘‘componentization’’

process, eases the review of

depreciation, and allows better data

collection on depreciation costs.

Comment: Can each component

within a major building group have a

separate useful life?

Response: Each component within a

general building group can have a

separate useful life that takes into

consideration such factors as: type of

construction, nature of equipment,

technological developments in the

particular area, and the renewal and

replacement policies for the assets.

When a general component group has

more than one useful life for its

components, a composite useful life for

the entire group must be calculated.

Comment: The commenters,

particularly the public universities,

opposed a requirement to limit (i.e.,

cap) the use allowance recovery on

assets to the acquisition costs. They

argued that (1) the requirement is

contrary to current policy regarding use

allowance; (2) the over-recovery of use

allowance on those assets that have

surpassed their useful life is balanced

by the under-recovery of assets that are

disposed of earlier than their useful life;

and (3) the new limitation will lead

universities to convert to depreciation,

which is costly, will add accounting

burden, and will increase the F&A rate.

Response: OMB disagrees. To allow

use allowance for assets in excess of the

assets’ acquisition costs can result in

over-recovery of costs by the

universities, particularly when the

universities can select either the

depreciation or use allowance methods

for a particular class of assets. In many

instances, universities use both the

depreciation and use allowance

methods for different classes of assets:

often using use allowance for longlasting assets such as buildings and

laboratory benches, while using

depreciation for shorter-life assets such

as computers. In these instances, the

under-recovery and over-recovery of

asset costs do not balance each other

out, but rather the result is an overrecovery of costs against Federal

programs.

Under special circumstances, when a

university uses the use allowance

method for all its assets, current section

J.12.c.(3) allows the university to claim

use allowance recovery in excess of

acquisition costs for certain assets, with

approval from Federal cognizant

agencies.

This issue may soon become moot

when the public universities are

required, by the Governmental

Accounting Standards Board (GASB), to

record depreciation for financial

statements (at this time, this

requirement is projected to be effective

for fiscal year 2001).

Comment: The conversion to

depreciation for old buildings is

extremely difficult, if not impossible,

because of the lack of records for older

capital improvement projects. The

commenters suggest that capital

improvement projects be excluded from

the limitations of use allowance

recovery.

Response: For older capital

improvement projects, for which

records are unavailable, the university

and the Federal cognizant agency may

negotiate a reasonable use allowance

amount as long as the buildings are still

in use for the benefit of Federal

programs.

Comment: The provision on gains and

losses on the sale, retirement, or other

disposition of depreciable property

should not apply to public universities,

which are not required to depreciate

under GAAP, and therefore, do not

maintain depreciation records.

Response: OMB agrees. Section J.33.a

(d) provides an exemption for

institutions that claim use allowance in

lieu of depreciation for the recovery of

their asset costs.

Distribution Basis for ‘‘Short-Form’’

Universities

Comment: The use of the modified

total direct costs (MTDC) basis should

be an option rather than a requirement

for the simplified allocation method

since the determination of a MTDC basis

can be much more complicated than the

salaries and wages basis. In some cases,

universities have to make major

accounting system changes to

accommodate this requirement.

Response: OMB agrees. OMB

encourages universities to use the

MTDC as the distribution basis for the

simplified allocation method, as it

would improve the consistency of F&A

rate reporting among small and large

universities. However, because of the

possible difficulties for some

universities to calculate the MTDC

amount, the revision allows the

universities to use either the MTDC or

salaries and wages as distribution basis.

Definition of ‘‘Major Projects’

Comment: In July 1994, OMB issued

a memorandum to the Federal agencies

to clarify its policy on administrative

costs for ‘‘major project’’, referred in

subsection F.6.b, ‘‘Departmental

administration expenses.’’ OMB should

add this clarification to the Circular to

provide consistent definition and

treatment of the administrative costs

related to ‘‘major project.’’

Response: OMB agrees. The OMB

memorandum to the Federal agencies

(dated July 13, 1994) provided guidance

on defining the circumstances under

which administrative and clerical

salaries may be charged directly to

Federal sponsored agreements. The

definition of ‘‘major project’’, as

provided in OMB’s memorandum, is

added to section F.6.b. A sample of

examples is listed as new exhibit C.

E. Other Items

Develop a standard format for the

submission of F&A proposals

OMB proposed in September 1997 to

develop a standard format for the

submission of F&A proposals, that

would assist universities in completing

their F&A rate proposals more

efficiently and help the Federal

cognizant agency review each proposal

on a more consistent basis. OMB, with

assistance from Federal agencies and

universities, is in the process of

developing this standard format. When

completed, OMB will request comments

under the Paperwork Reduction Act

through a separate Federal Register

notice. The standard format will be

included as an Appendix to the Circular

and be available electronically.

Interim Final Revision—Trustees’ Travel

Expenses

OMB is making an interim final

revision to allow trustees’ travel

expenses at educational institutions

under the administrative cost

component of the F&A rate. The

revision is made to provide consistency

with recent revisions to Circular A–122,

‘‘Cost Principles for Non-Profit

Organizations,’’ which retained the

allowability of trustees’ travel expenses.

OMB recently issued final revisions to

Circular A–122 to provide consistency

across all cost circulars. Based on the

comments received from non-profit
29790 Federal Register / Vol. 63. No. 104 / Monday, June 1, 1998 / Notices

grantees regarding the proposed

disallowance of trustees’ travel

expenses, OMB determined that

trustees’ travel expenses are reasonable

and necessary business expenses for the

operations of non-profit organizations

and should remain allowable. In

considering this issue for A–122, OMB

also decided that trustees’ travel

expenses are reasonable and necessary

for universities. In October 1991, trustee

travel was made unallowable in Circular

A–21, along with a number of other cost

categories (e.g., alcohol and advertising

costs). This interim final rule reflects

the view that trustee travel, unlike the

other unallowable costs, is a reasonable

cost of business, and should be allowed.

Accordingly, OMB is revising Circular

A-21 to allow trustees’ travel expenses

(see revised section 50). OMB requests

comments on this change.

Franklin D. Raines,

Director.

Circular A–21 is revised as follows:

1. Replace subsection E.2.d.(5) with

the following:

(5) Notwithstanding subsection (3),

effective July 1, 1998, a cost analysis or

base other than that in Section F shall

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.

2. Add new subsection F.2.c:

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 a 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 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. Add new subsections F.4.c and

F.4.d:

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 benefitting 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.

4. Replace subsection F.6.b with the

following:

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.

5. Replace subsection H.1.a with the

following:

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.

6. Change the title for subsection H.2.

to ‘‘Simplified Procedure—Salaries and

Wages Base.’’

7. Add a new subsection H.3.

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) which customarily are

classified under the following titles or

their equivalents:

(1) General administration and

general expenses (exclusive of costs of

student administration and services,

student activities, student aid, and

scholarships).

(2) Operation and maintenance of

physical plant; and depreciation and

use allowances; after appropriate

adjustment for costs applicable to other

institutional activities.
Federal Register / Vol. 63. No. 104 / Monday, June 1, 1998 / Notices 29791

(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

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.

8. Replace subsection J.12.b.(2) with

the following:

(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 institutions (e.g., public

institutions) which are not required to

record depreciation by applicable

generally accepted accounting

principles (GAAP).

9. Replace subsection J.12.b.(4) with

the following:

(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, fumehoods, cold rooms and

glassware/washers). In exceptional

cases, a Federal cognizant agency may

authorize an institution to use more

than these three groupings. When an

institution elects to depreciate its

buildings by its components, the same

depreciation methods must be used for

F&A purposes and financial statements

purposes, as described in subsection (2).

10. Replace subsection J.12.c.(1) with

the following:

(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 is limited to the fair market

value of the assets at the time of

donation.

11. Replace section J.33 with the

following:

33. Profits and losses on disposition

of plant equipment or other capital

assets.

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.12.

(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.21.d.

(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 Federal award 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 NonProfit Organizations.’’

12. Replace Section 50 with the

following:

50. 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 48.

13. Add Exhibit B—Listing of

institutions receiving the utility cost

adjustment and Exhibit C—Examples of

‘‘major project’’ where direct charging of

administrative or clerical staff salaries

may be appropriate, as follows:

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

42. University of CA, San Francisco

43. University of Chicago

44. University of Cincinnati
29792 Federal Register / Vol. 63. No. 104 / Monday, June 1, 1998 / Notices

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

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 field sites that are remote from

campus.

• Individual projects requiring projectspecific database management;

individualized graphics or manuscript

preparation; human or animal protocols; and

multiple project-related 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 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.

[FR Doc. 98–14078 Filed 5–29–98; 8:45 am]

BILLING CODE 3110–01–P