[Federal Register Volume 63, Number 104 (Monday, June 1, 1998)]
[Notices]
[Pages 29786-29792]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-14078]


  

[[Page 29785]]

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Part II





Office of Management and Budget





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Cost Principles for Educational Institutions; Notice

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

[[Page 29786]]



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.''

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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 <a href="/cdn-cgi/l/email-protection" class="__cf_email__" data-cfemail="bbefe9faf59696f3fbfa8a95fef4eb95fcf4ed95">[email protected]</a> 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.
    <bullet> 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.
    <bullet> Required certain large institutions to disclose their cost 
accounting practices by the submission of a Disclosure Statement 
prescribed by the CASB.
    <bullet> Amended the definition of equipment.
    <bullet> Eliminated in 1998 the use of special cost studies to 
allocate utility, library and student services costs.
    <bullet> Required the use of fixed facilities and administrative 
(F&A) cost rates for the life of sponsored agreements.
    <bullet> Established cost negotiation cognizant agency 
responsibilities.
    <bullet> Replaced the term ``indirect costs'' with ``facilities and 
administrative costs''.
    <bullet> Clarified the policy for a change from use allowance to 
depreciation.
    <bullet> Added criteria to interest allowability.
    <bullet> 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:
    <bullet> 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.
    <bullet> 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.

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    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 <a href="http://
www.whitehouse.gov/WH/EOP/omb">http://
www.whitehouse.gov/WH/EOP/omb</a>.

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 research-
intensive 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?

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    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.

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    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 long-lasting 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 over-recovery 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

[[Page 29790]]

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.

[[Page 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 Non-Profit 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

[[Page 29792]]

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.
    <bullet> 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.
    <bullet> 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).
    <bullet> Projects that require making travel and meeting 
arrangements for large numbers of participants, such as conferences 
and seminars.
    <bullet> Projects whose principal focus is the preparation and 
production of manuals and large reports, books and monographs 
(excluding routine progress and technical reports).
    <bullet> 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.
    <bullet> Individual projects requiring project-specific 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


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