29794 Federal Register / Vol. 63, No. 104 / Monday, June 1, 1998 / Notices

OFFICE OF MANAGEMENT AND

BUDGET

Cost Principles for Non-Profit

Organizations

AGENCY: Office of Management and

Budget.

ACTION: Final revision of OMB Circular

A–122, ‘‘Cost Principles for Non-Profit

Organizations.’’

SUMMARY: The Office of Management

and Budget (OMB) revises OMB Circular

A–122 by amending the definition for

equipment; requiring the breakout of

indirect costs into two categories

(facilities and administration) for certain

non-profit organizations; modifying the

multiple allocation basis; and, clarifying

the treatment of certain cost items.

DATES: The revision is effective on June

1, 1998.

FOR FURTHER INFORMATION CONTACT:

Federal agencies should contact Gilbert

Tran, Office of Federal Financial

Management, Office of Management and

Budget, (202) 395–3993. Non-Federal

organizations should contact the

organization’s Federal cognizant agency.

SUPPLEMENTARY INFORMATION:

A. Background

On October 6, 1995, the Office of

Management and Budget (OMB) issued

a final revision to OMB Circular A–122,

‘‘Cost Principles for Non-Profit

Organizations,’’ in the Federal Register

(60 FR 52516) regarding interest

allowability. The revision was made in

a continuing effort to increase

consistency across OMB’s cost

principles circulars A–122, A–21, ‘‘Cost

Principles for Educational Institutions,’’

and A–87, ‘‘Cost Principles for State,

Local and Indian Tribal Governments.’’

To further the goals of consistency,

OMB proposed on the same date (60 FR

52522) to revise the definition of

equipment, to clarify the treatment of

certain types of costs, to modify the

multiple allocation base method for

computing indirect cost rate(s), and to

place an upper-limit on payments of

administrative expenses for certain nonprofit organizations.

With this final revision, Circular A–

122 consists of the Circular as issued in

1980 (45 FR 46022; July 8, 1980), as

amended in 1984 (49 FR 18260; April

27, 1984), in 1987 (52 FR 19788; May

27, 1987), in 1995 (60 FR 52516;

October 6, 1995), in 1997 (62 FR 45934;

August 29, 1997), and in this notice. A

recompilation of the entire Circular A–

122, with all its amendments,

accompanies the notice and is available

in electronic form on the OMB Home

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

WH/EOP/omb.

B. Current Revisions

Circular A–122 is revised in this

notice to:

1. Amend the definition of equipment

by increasing the capitalization

threshold to the lesser amount used for

financial statement purposes or $5,000

(see paragraph 15).

2. Require major non-profit

organizations (those receiving more than

$10 million in direct Federal funding) to

report indirect cost rates by two major

component categories: facilities and

administration (see paragraph D,

Attachment A).

3. Modify the multiple allocation base

method (MAB) to be consistent with

OMB Circular A–21 (see paragraph D.3).

However, major non-profit organizations

are not required to use the multiple

allocation base method. MAB remains

one of the three available methodologies

for computing indirect costs.

4. Clarify the treatment of the

following cost items to provide

consistency across OMB’s cost

principles circulars (A–21 and A–87)

and the Federal Acquisition

Regulations, where applicable:

• Alcoholic beverages.

• Advertising and public relations

costs.

• Organization-furnished

automobiles.

• Defense and prosecution of criminal

and civil proceedings, claims, appeals

and patent infringements.

• Housing and living expenses.

• Insurance.

• Memberships.

• Selling or marketing of goods and

services.

• Severance pay for foreign nationals.

OMB is not implementing the

proposed restrictions on trustees’ travel

expenses at non-profit organizations. In

line with this decision, and to further

consistency between cost circulars,

OMB will be amending Circular A–21 to

allow trustees’ travel expenses.

OMB defers considering an upperlimit on payment of administrative

expenses until better data on indirect

costs at non-profit organizations are

collected.

C. Comments and Responses

OMB received about 185 comments

from non-profit organizations, Federal

agencies, professional organizations and

accounting firms. A summary of

comments and OMB’s responses are

included in this notice. Several

comments resulted in modifications to

OMB’s original proposal.

The comments and OMB’s responses

are summarized by section as follow.

Equipment Definition

Comment: Clarification is needed on

the treatment of depreciation of those

assets which had costs between the old

$500 threshold and the new $5,000.

Response: In order to clarify the

accounting for the undepreciated

portion of any equipment costs as a

result of a change in capitalization

levels, paragraph 15 has been added to

explain that the undepreciated amount

may be recovered by continuing to

claim otherwise allowable use

allowances or depreciation on the

equipment, or by amortizing the amount

to be written off over a period of years

as negotiated with the Federal cognizant

agency.

Comment: Clarification is needed on

whether equipment under the $5,000

threshold, as established by the nonprofit organizations’ policy, requires

Federal approval prior to acquisition.

Response: Equipment under the

$5,000 threshold, as established by the

non-profit organization’s policy, can be

directly charged to sponsored

agreements (subparagraph 15.b) without

prior Federal approval.

Comment: Current subparagraph 13.b

requires prior approval for special

purpose equipment, as direct costs, with

a unit cost of $1,000 or more. This

requirement is not consistent with the

higher threshold of $5,000 allowed in

the proposed revision. This requirement

should be revised to be consistent with

the proposed revision.

Response: OMB agrees. The Circular

is revised to require prior Federal

approval only for special purpose

equipment with a unit cost of $5,000 or

more.

Unallowable Cost Items

These ten revised cost items are

already unallowable under OMB

Circulars A–21, ‘‘Cost Principles for

Educational Institutions,’’ and A–87,

‘‘Cost Principles for State, Local and

Indian Tribal Governments,’’ and/or the

Federal Acquisition Regulations. OMB

addressed the issue of trustees’ travel in

response to the comments received. For

the other items, consistency across

Federal cost regulations was a more

significant issue than most of the

commenters’ concerns. Comments

related to specific cost items are

presented below, followed by OMB’s

responses.

Advertising and Public Relations Costs

Comment: Current paragraph 37,

Public information service costs, should

be combined with the ‘‘Advertising’’

paragraph to be consistent with other

OMB cost principles in Circulars A–21

and A–87.
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Response: The commenter is correct.

The treatment of public information

service costs is now addressed in

revised paragraph 1, Advertising and

public relations costs. Current

paragraph 37 is deleted.

Comment: Clarify the types of

activities that are allowable as public

relations costs. Public relations costs to

carry out certain functions, such as

legitimate program outreach, that are

required under sponsored programs and

contracts should be allowable.

Response: The Circular is revised to

clarify that certain public relations costs

for the purpose of communicating

specific activities related to the

sponsored programs to the public or the

press are allowable costs. When they are

necessary for program outreach effort as

required by sponsored programs, public

relations costs are allowable. Costs of

advertising and public relations

incurred solely to promote the

organization are unallowable.

Comment: Clarify whether advertising

media costs such as radio and television

are allowable.

Response: As long as the public

relations costs are specifically required

by the sponsored programs or are

related to the promotion of sponsored

programs, any reasonable advertising

media, including magazines,

newspapers, radio, television, direct

mail, exhibits, and the like, can be used

and its costs are allowable. See

paragraph 1.a.

Comment: Community relation costs

should be allowable as part of program

outreach effort for Federal sponsored

programs.

Response: Community relations are

defined in subparagraph 1.b as ‘‘those

activities dedicated to maintain the

image of the organization or promoting

understanding and favorable relations

with the community or public at large

or any segment of the public.’’ Costs

related to community relations are

allowable when the costs are required or

necessary to the performance of the

sponsored programs.

Organization-Furnished Automobiles

for Personal Use

Comment: For security and economic

reasons, non-profit organizations often

furnish automobiles and housing for its

personnel working on Federal projects

(e.g., overseas projects sponsored by the

U.S. Agency for International

Development or the U.S. State

Department). These costs should be

allowable as direct costs.

Response: The Circular is revised to

allow these costs when they are

necessary to perform the Federal

projects, particularly the overseas

sponsored projects with prior approval

by the Federal awarding agency. These

costs are allowable only as direct costs

to the Federal projects, and not as fringe

benefit or indirect costs.

Comment: The Circular should

specify which types of automobiles are

allowable or unallowable (e.g., cars,

vans, trucks and buses).

Response: The types of automobiles

are irrelevant for the purpose of

determining the allowability of

automobile costs. Rather, the

determinant factors should be whether

the automobile costs are reasonable and

necessary for the performance of the

Federal projects and authorized by the

Federal awarding agency.

Defense and Prosecution of Criminal

and Civil Proceedings, Claims, Appeals

and Patent Infringements

Comment: Current paragraph 35.d,

Professional service costs, should be

combined with new paragraph 10.

Response: OMB agrees. Current

paragraph 35.d is deleted. Professional

service costs related to defense of

antitrust suits, prosecution of claims

against the Federal Government and

patent infringement litigation are

discussed in new paragraph 10.

Professional service costs incurred for

organization and reorganization are

discussed in paragraph 31, Organization

costs.

Comment: Clarification is needed as

to when legal costs related to claims,

appeals or proceeding become

unallowable. Commenters noted that

Federal agencies are inconsistent in the

determination of the allowability of

legal costs as one agency would allow

legal costs up to the point where the

case goes out of the Federal agency

appeal process and to the courts,

whereas other agencies would only

allow legal costs through the first phase

of appeals within the Federal agency.

Response: The policy makes

unallowable legal and related costs for

either defending against claims made by

the Federal Government or prosecuting

claims against the Government. As such,

once a final management decision letter

is issued by the agency (for example, a

disallowance letter), all legal and related

costs are unallowable from that point

forward. Unallowable costs would

include claims and defenses pursued

through agencies’ formal appeal

procedures such as administrative law

judges and agency appeal boards. Note

that legal and related costs may be

allowable if the non-profit

organization’s position is sustained by

the administrative appeal process or an

agreement is reached between the

organization and the Federal

Government (see subparagraghs 10.b,

10.c, 10.d and 10.e). This revision is

consistent with the language contained

in OMB Circular A–21, ‘‘Cost Principles

for Educational Institutions.’’

Comment: Some commenters objected

to the proposed 80 percent limitation on

reimbursement when the institution is

found innocent.

Response: The proposed revision was

retained because it provides consistency

with procurement contracts. This

limitation is based on the statutory

language of Public Law 100–700, Major

Fraud Act of 1988, November 19, 1988

(41 U.S.C., 256 (k)(5)), which only

allows recovery of 80 percent of the

legal costs.

Comment: Legal expenses to defend

against lawsuits brought by a foreign

government for violation of that

country’s law should be allowable.

Response: The Circular is revised in

subparagraph 10.d to authorize Federal

agencies to allow legal expenses to

defend against lawsuits brought by a

foreign government for violation of its

law when such costs were necessary or

were direct results of the performance of

Federal sponsored programs. The same

authorizations apply for legal costs for

defense against lawsuits brought by

state or local governments.

Comment: Legal fees to defend against

lawsuits filed by former employees for

termination or by subrecipients should

be allowable.

Response: Legal fees incurred in

defense of lawsuits not brought by a

Federal, State, local or foreign

government, except when the suits are

brought by former employees under

Section 2 of the Major Fraud Act of 1988

(Pub. L. 100–700), are allowable.

Housing and Living Expenses

Comment: For security and economic

reasons, non-profit organizations often

furnish automobiles and housing for its

personnel working on overseas Federal

projects (e.g., overseas projects

sponsored by the U.S. Agency for

International Development). These costs

should be allowable as direct costs.

Response: As previously noted (in the

discussion of automobiles), the Circular

is revised to allow these costs when

they are necessary to perform the

Federal projects and when they are

approved by the Federal awarding

agency. These costs are allowable only

as direct costs to the Federal projects,

and not as fringe benefit or indirect

costs.

Insurance

Comment: General and casualty

liability insurance costs for
29796 Federal Register / Vol. 63, No. 104 / Monday, June 1, 1998 / Notices

organization’s directors and

administrators should be allowable.

Response: General and casualty

liability insurance costs for

organization’s directors and

administrators are allowable, subject to

limitations, as described in

subparagraph 22.a.(2). New

subparagraph 22.a.(2).f, Insurance

against defects, prohibits the

reimbursement of costs against

Federally sponsored awards for product

(or services) liability insurance costs.

Comment: Medical liability insurance

costs for participants in Federal training

programs should be allowable.

Response: Medical liability insurance

costs associated with participants in

Federal training programs are allowable

to Federal programs as direct costs.

Comment: Malpractice insurance

costs for physicians should be direct

charged to Federal programs while

malpractice insurance costs for nurses

or laboratory assistants, which are

immaterial in most cases, should be

charged as indirect costs.

Response: Subparagraph B.2 of

Attachment A provides that when a

direct cost is of minor amounts, it may

be treated as an indirect cost for reasons

of practicality and efficiency, provided

that the accounting treatment for such

cost is consistently applied to all final

cost objectives. Therefore, when

malpractice insurance costs for nurses

or lab technicians are immaterial in

relation to its effect on the overall

indirect cost rates of the organization,

they may be treated as indirect costs.

Memberships

Comment: Membership costs in civic

and community organizations should be

allowable.

Response: Membership costs are

allowable for business and professional

organizations. The Circular is further

revised to allow membership costs in

civic and community organizations

when associations with these

organizations are essential to the

performance of the Federal programs (as

an outreach function). These

membership costs must be approved by

the Federal cognizant agency.

Comment: Costs of membership in

organizations that lobby should be

unallowable.

Response: Paragraph 25 of the

Circular disallows lobbying costs.

Membership dues to lobbying

organizations are therefore unallowable.

The unallowable portion of membership

dues is determined by the percentage of

lobbying activities versus other

allowable activities of the lobbying

organization.

Selling or Marketing of Goods and

Services

Comment: Clarification is needed for

what types of activities are considered

to be the selling or marketing of goods

and services.

Response: Selling or marketing of

goods and services generally include an

organization’s efforts to market the

organization’s products or services such

as through advertising, organizational

image enhancement, market planning

and direct selling. Direct selling efforts

are those acts or actions used to induce

particular customers to purchase

particular products or services of the

organization. The allowability

provisions for advertising costs are

described in paragraph 1.

Comment: The guidelines for selling

or marketing of goods and services

should be consistent with those in FAR

31.205.38(c)(1).

Response: FAR 31.205.38(c)(1) allows

direct selling costs at commercial

contractors if they are reasonable in

amount. By contrast to the commercial

contract context, direct selling costs are

generally not considered to be necessary

costs for the performance of Federal

sponsored programs by non-profit

organizations. In those cases where they

are essential for certain Federal

sponsored programs, these costs can be

charged as direct costs to the Federal

sponsored programs if they are

approved by the Federal awarding

agency.

Comment: Given that the Bayh-Dole

Act encouraged technology transfer,

selling or marketing costs of goods or

services should be allowable costs. At

the minimum, these costs should be

allowable as direct costs to the Federal

projects.

Response: The Circular is revised to

allow selling or marketing costs as

direct costs to some Federal sponsored

programs when approved by the Federal

awarding agency.

Severance Pay

Comment: Early retirement benefits

should be allowable costs.

Response: Early retirement benefit

costs are allowable costs, subject to

limitations, and are discussed in

subparagraph 6.f, Fringe Benefits, along

with other forms of fringe benefits.

Paragraph 49, Severance Pay, deals only

with severance policy, i.e., dismissal,

and the reimbursement of its costs.

Comment: Guidelines for costs of

severance pay to foreign nationals in

excess of customary or prevailing

practices should be consistent with

section 2151 of the Federal Acquisition

Streamlining Act of 1994 (FASA).

Response: OMB agrees. The Circular

is revised to be consistent with FASA

guidelines for severance pay to foreign

nationals in excess of customary or

prevailing practices. As a result, the

Federal awarding agency may allow

these costs when they are necessary for

the performance of the Federal

sponsored programs.

Trustees’ Travel

Comment: Several commenters

opposed the proposal to disallow

trustees’ travel costs citing the difficulty

of retaining or obtaining members to

serve voluntarily on the Board of

Trustees (or Directors) of a non-profit

organization, if Board members have to

pay for their own travel expenses to

attend Board meetings. The commenters

added that since serving on a non-profit

organization’s Board is often not as

prestigious and desirable as serving on

a University’s Board (where trustees’

travel costs are unallowable under

Circular A–21), non-reimbursement of

the travel costs would inhibit the

recruitment of Board members.

Response: OMB concurs that

disallowing the reimbursement of

trustees’ travel costs could inhibit the

recruitment of qualified Board members

(particularly at smaller non-profit

organizations), thereby hampering the

operations of a non-profit organization.

OMB also recognizes that trustees’ travel

costs are reasonable and necessary

business costs. As a result, trustees’

travel costs remain allowable.

Comment: Trustees’ travel costs

should be allowable if they are

reasonable. Some suggested tests for

reasonableness of trustees’ travel costs

are: limit number of allowed trips per

year, restriction of trips to organization’s

principal place of business or

reasonable surroundings, distinction

between scheduled Board meetings and

emergency Board meetings, and

disallowance of first-class airfare

travels.

Response: All costs charged to Federal

projects must satisfy a reasonableness

test. Although some of the suggested

reasonableness tests appear to be good,

OMB does not believe it is necessary at

this time to impose specific restrictions

on trustees’ travel expenses. The

reasonableness of a particular travel

expense remains at the judgement of

Federal negotiators.

Comment: At Head Start

organizations, some Trustee members

are first sent for training in the

operations of a Head Start program.

These travel costs related to training

should be allowable.

Response: Travel costs related to

training and education are allowable,
Federal Register / Vol. 63, No. 104 / Monday, June 1, 1998 / Notices 29797

subject to limitations, and are addressed

in paragraph 53 of the Circular, Training

and education costs.

Comment: At Head Start

organizations, there often are several

advisory boards in addition to the Board

of Trustees (or Directors). These

advisory boards are involved in day-today operations of the organizations and

often incur travel costs. Are these costs

subject to the same restrictions as

trustees’ travel?

Response: Travel costs for members of

advisory groups are allowable, subject to

the limitations in paragraph 55, Travel

costs.

Multiple Allocation Basis (MAB)

Comment: The multiple allocation

method for calculating indirect costs

rates is much more complicated and

burdensome than the simplified method

and it will cost non-profit organizations

much more to prepare the indirect cost

proposal. Several commenters

recommended the flexibility of using

one of the three different allocation

methods as they are currently described

in the Circular. The multiple allocation

basis (MAB) should remain an optional

allocation methodology rather than a

required methodology for certain

organizations.

Response: The use of MAB for major

non-profit organizations promotes

consistency in the calculation and the

reporting of indirect costs. It would

facilitate the accumulation of indirect

cost data by cost components (i.e.,

facilities and administration) and

provide comparable rates between major

research non-profit organizations and

universities. However, OMB recognizes

that a conversion to MAB may require

some substantial changes in the

organization’s accounting system and

that MAB is not practical for singlefunction organizations. Therefore, the

Circular continues to allow non-profit

organizations to use any of the current

three allocation methodologies.

Comment: Several commenters

suggested raising the threshold for the

requirement to $25 million in direct

Federal funding. Several commenters

also suggested an exemption from this

requirement for single-function

organizations regardless of Federal

funding levels.

Response: The Circular is revised to

allow the use of the current three

allocation methodologies for all nonprofit organizations. For organizations

that receive more than $10 million in

direct Federal funding, a breakout of

indirect costs into two components,

facilities and administration, is required

regardless of the selected allocation

methodology.

Comment: The allocation

methodology for general administration

under MAB on the basis of modified

total direct costs conflicts with the

required methodology under Cost

Accounting Standard (CAS) 410

applicable to contracts using the salaries

and wages basis. One commenter

suggested that a fully CAS-covered nonprofit organization be exempted from

the MAB requirement.

Response: MAB is not a requirement

for non-profit organizations and remains

one of the three available methodologies

in the Circular for computing indirect

costs. In addition, CAS-covered nonprofit organizations should continue to

follow CAS with respect to the

measurement, assignment and

allocation of costs.

Comment: The revision should clarify

that the modified total direct cost base

should only include the first $25,000 of

a subcontract regardless of the period

during which the project is started

(consistent with OMB Circular A–21).

Response: The modified total direct

cost base, described in subparagraph

D.3.f of the Circular, includes the first

$25,000 of each subgrant or subcontract

regardless of the period covered by the

subgrant or subcontract. Subgrant or

subcontract costs above $25,000 shall be

excluded from the modified total direct

cost base. For example, for a $300,000

subgrant that lasts three years, only the

first $25,000 incurred on the award

should be included in the modified total

direct cost base.

Administrative Cap of 26 Percent

Comment: Most commenters strongly

opposed the 26 percent administrative

cap stating that such limitation on cost

reimbursement is arbitrary, capricious,

and unnecessary. Some argued that a

cap would be financially disastrous to

non-profit organizations because they

receive most of their funding from

Federal sources (unlike universities). A

detailed analysis is urged to determine

the average administrative costs

applicable to non-profit organizations, if

an administrative cap is to be

implemented at non-profit

organizations.

Response: Based on the comments

against the implementation of an

administrative cap at non-profit

organizations, OMB defers the

consideration of establishing any

administrative cap until better data on

indirect costs at non-profit organizations

can be collected. If OMB believes that

an administrative cap should be

implemented, it would be proposed in

a subsequent notice.

Other

Comment: Attachment C of the

Circular should be updated since a few

listed organizations no longer exist.

Response: OMB agrees. Attachment C

is updated to delete those organizations

that no longer exist or are no longer

exempted from OMB Circular A–122.

Franklin D. Raines,

Director.

Attachments A, B and C of Circular

A–122 are revised as follows:

A. Attachment A

1. Add subparagraph 3 to paragraph C

(‘‘Indirect Costs’’).

3. Indirect costs shall be classified

within two broad categories: ‘‘Facilities’’

and ‘‘Administration.’’ ‘‘Facilities’’ is

defined as depreciation and use

allowances on buildings, equipment and

capital improvement, interest on debt

associated with certain buildings,

equipment and capital improvements,

and operations and maintenance

expenses. ‘‘Administration’’ is defined

as general administration and general

expenses such as the director’s office,

accounting, personnel, library expenses

and all other types of expenditures not

listed specifically under one of the

subcategories of ‘‘Facilities’’ (including

cross allocations from other pools,

where applicable). See indirect cost rate

reporting requirements in

subparagraphs D.2.e and D.3.g.

2. Add subparagraph 2.e to paragraph

D.

e. For an organization that receives

more than $10 million in Federal

funding of direct costs in a fiscal year,

a breakout of the indirect cost

component into two broad categories,

Facilities and Administration as defined

in subparagraph C.3, is required. The

rate in each case shall be stated as the

percentage which the amount of the

particular indirect cost category (i.e.,

Facilities or Administration) is of the

distribution base identified with that

category.

3. Replace subparagraph D.3 with the

following:

3. Multiple allocation base method.

a. General. Where an organization’s

indirect costs benefit its major functions

in varying degrees, indirect costs shall

be accumulated into separate cost

groupings, as described in subparagraph

b. Each grouping shall then be allocated

individually to benefitting functions by

means of a base which best measures

the relative benefits. The default

allocation bases by cost pool are

described in subparagraph c.

b. Identification of indirect costs. Cost

groupings shall be established so as to

permit the allocation of each grouping
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on the basis of benefits provided to the

major functions. Each grouping shall

constitute a pool of expenses that are of

like character in terms of functions they

benefit and in terms of the allocation

base which best measures the relative

benefits provided to each function. The

groupings are classified within the two

broad categories: ‘‘Facilities’’ and

‘‘Administration,’’ as described in

subparagraph C.3. The indirect cost

pools are defined as follows:

(1) Depreciation and use allowances.

The expenses under this heading are the

portion of the costs of the organization’s

buildings, capital improvements to land

and buildings, and equipment which are

computed in accordance with paragraph

11 of Attachment B (‘‘Depreciation and

use allowances’’).

(2) Interest. Interest on debt associated

with certain buildings, equipment and

capital improvements are computed in

accordance with paragraph 23 of

Attachment B (‘‘Interest, fund raising,

and investment management costs’’).

(3) Operation and maintenance

expenses. The expenses under this

heading are those that have been

incurred for the administration,

operation, maintenance, preservation,

and protection of the organization’s

physical plant. They include expenses

normally incurred for such items as:

janitorial and utility services; repairs

and ordinary or normal alterations of

buildings, furniture and equipment; care

of grounds; maintenance and operation

of buildings and other plant facilities;

security; earthquake and disaster

preparedness; environmental safety;

hazardous waste disposal; property,

liability and other insurance relating to

property; space and capital leasing;

facility planning and management; and,

central receiving. The operation and

maintenance expenses category shall

also include its allocable share of fringe

benefit costs, depreciation and use

allowances, and interest costs.

(4) General administration and

general expenses. The expenses under

this heading are those that have been

incurred for the overall general

executive and administrative offices of

the organization and other expenses of

a general nature which do not relate

solely to any major function of the

organization. This category shall also

include its allocable share of fringe

benefit costs, operation and

maintenance expense, depreciation and

use allowances, and interest costs.

Examples of this category include

central offices, such as the director’s

office, the office of finance, business

services, budget and planning,

personnel, safety and risk management,

general counsel, management

information systems, and library costs.

In developing this 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 indirect

costs. For example, salaries of technical

staff, project supplies, project

publication, telephone toll charges,

computer costs, travel costs, and

specialized services costs shall be

treated as direct costs wherever

identifiable to a particular program. The

salaries and wages of administrative and

pooled clerical staff should normally be

treated as indirect costs. Direct charging

of these costs may be appropriate where

a major project or activity explicitly

requires and budgets for administrative

or clerical services and other

individuals involved can be identified

with the program or activity. Items such

as office supplies, postage, local

telephone costs, periodicals and

memberships should normally be

treated as indirect costs.

c. Allocation bases. Actual conditions

shall be taken into account in selecting

the base to be used in allocating the

expenses in each grouping to benefitting

functions. The essential consideration

in selecting a method or a base is that

it is the one best suited for assigning the

pool of costs to cost objectives in

accordance with benefits derived; a

traceable cause and effect relationship;

or logic and reason, where neither the

cause nor the effect of the relationship

is determinable. When an allocation can

be made by assignment of a cost

grouping directly to the function

benefited, the allocation shall be made

in that manner. When the expenses in

a cost grouping are more general in

nature, the allocation shall be made

through the use of a selected base which

produces results that are equitable to

both the Federal Government and the

organization. The distribution shall be

made in accordance with the bases

described herein unless it can be

demonstrated that the use of a different

base would result in a more equitable

allocation of the costs, or that a more

readily available base would not

increase the costs charged to sponsored

awards. The results of special cost

studies (such as an engineering utility

study) shall not be used to determine

and allocate the indirect costs to

sponsored awards.

(1) Depreciation and use allowances.

Depreciation and use allowances

expenses shall be allocated in the

following manner:

(a) Depreciation or use allowances on

buildings used exclusively in the

conduct of a single function, and on

capital improvements and equipment

used in such buildings, shall be

assigned to that function.

(b) Depreciation or use allowances on

buildings used for more than one

function, and on capital improvements

and equipment used in such buildings,

shall be allocated to the individual

functions performed in each building on

the basis of usable square feet of space,

excluding common areas, such as

hallways, stairwells, and restrooms.

(c) Depreciation or use allowances on

buildings, capital improvements and

equipment related space (e.g.,

individual rooms, and laboratories) used

jointly by more than one function (as

determined by the users of the space)

shall be treated as follows. The cost of

each jointly used unit of space shall be

allocated to the benefitting functions on

the basis of:

(i) the employees and other users on

a full-time equivalent (FTE) basis or

salaries and wages of those individual

functions benefitting from the use of

that space; or

(ii) organization-wide employee FTEs

or salaries and wages applicable to the

benefitting functions of the

organization.

(d) Depreciation or use allowances on

certain capital improvements to land,

such as paved parking areas, fences,

sidewalks, and the like, not included in

the cost of buildings, shall be allocated

to user categories on a FTE basis and

distributed to major functions in

proportion to the salaries and wages of

all employees applicable to the

functions.

(2) Interest. Interest costs shall be

allocated in the same manner as the

depreciation or use allowances on the

buildings, equipment and capital

equipments to which the interest

relates.

(3) Operation and maintenance

expenses. Operation and maintenance

expenses shall be allocated in the same

manner as the depreciation and use

allowances.

(4) General administration and

general expenses. General

administration and general expenses

shall be allocated to benefitting

functions based on modified total direct

costs (MTDC), as described in

subparagraph D.3.f. The expenses

included in this category could be

grouped first according to major

functions of the organization to which

they render services or provide benefits.

The aggregate expenses of each group

shall then be allocated to benefitting

functions based on MTDC.

d. Order of distribution.

(1) Indirect cost categories consisting

of depreciation and use allowances,
Federal Register / Vol. 63, No. 104 / Monday, June 1, 1998 / Notices 29799

interest, operation and maintenance,

and general administration and general

expenses shall be allocated in that order

to the remaining indirect cost categories

as well as to the major functions of the

organization. Other cost categories

could be allocated in the order

determined to be most appropriate by

the organization. When cross allocation

of costs is made as provided in

subparagraph (2), this order of

allocation does not apply.

(2) Normally, an indirect cost category

will be considered closed once it has

been allocated to other cost objectives,

and costs shall not be subsequently

allocated to it. However, a cross

allocation of costs between two or more

indirect costs categories could be used

if such allocation will result in a more

equitable allocation of costs. If a cross

allocation is used, an appropriate

modification to the composition of the

indirect cost categories is required.

e. Application of indirect cost rate or

rates. Except where a special indirect

cost rate(s) is required in accordance

with subparagraph D.5, the separate

groupings of indirect costs allocated to

each major function shall be aggregated

and treated as a common pool for that

function. The costs in the common pool

shall then be distributed to individual

awards included in that function by use

of a single indirect cost rate.

f. Distribution basis. Indirect costs

shall be distributed to applicable

sponsored awards and other benefitting

activities within each major function on

the basis of MTDC. MTDC consists of all

salaries and wages, fringe benefits,

materials and supplies, services, travel,

and subgrants and subcontracts up to

the first $25,000 of each subgrant or

subcontract (regardless of the period

covered by the subgrant or subcontract).

Equipment, capital expenditures,

charges for patient care, rental costs and

the portion in excess of $25,000 shall be

excluded from MTDC. Participant

support costs shall generally be

excluded from MTDC. Other items may

only be excluded when the Federal cost

cognizant agency determines that an

exclusion is necessary to avoid a serious

inequity in the distribution of indirect

costs.

g. Individual Rate Components. An

indirect cost rate shall be determined for

each separate indirect cost pool

developed. The rate in each case shall

be stated as the percentage which the

amount of the particular indirect cost

pool is of the distribution base

identified with that pool. Each indirect

cost rate negotiation or determination

agreement shall include development of

the rate for each indirect cost pool as

well as the overall indirect cost rate.

The indirect cost pools shall be

classified within two broad categories:

‘‘Facilities’’ and ‘‘Administration,’’ as

described in subparagraph C.3.

B. Attachment B

Revise the following cost items in

Attachment B to Circular A–122

(‘‘Selected Items of Cost’’).

1. Revise the Table of Contents for

Attachment B to read:

1. Advertising and public relations costs

2. Alcoholic beverages

3. Bad debts

4. Bid and proposal costs (reserved)

5. Bonding costs

6. Communication costs

7. Compensation for personal services

8. Contingency provisions

9. Contributions

10. Defense and prosecution of criminal

and civil proceedings, claims,

appeals and patent infringement

11. Depreciation and use allowances

12. Donations

13. Employee morale, health, and

welfare costs and credits

14. Entertainment costs

15. Equipment and other capital

expenditures

16. Fines and penalties

17. Fringe benefits

18. Goods or services for personal use

19. Housing and personal living

expenses

20. Idle facilities and idle capacity

21. Independent research and

development (reserved)

22. Insurance and indemnification

23. Interest, fund raising, and

investment management costs

24. Labor relations costs

25. Lobbying costs

26. Losses on other awards

27. Maintenance and repair costs

28. Materials and supplies

29. Meetings and conferences

30. Memberships, subscriptions, and

professional activity costs

31. Organization costs

32. Overtime, extra-pay shift, and multishift premiums

33. Page charges in professional journals

34. Participant support costs

35. Patent costs

36. Pension plans

37. Plant security costs

38. Pre-award costs

39. Professional service costs

40. Profits and losses on disposition of

depreciable property or other

capital assets

41. Publication and printing costs

42. Rearrangement and alteration costs

43. Reconversion costs

44. Recruiting costs

45. Relocation costs

46. Rental costs

47. Royalties and other costs for use of

patents and copyrights

48. Selling and marketing

49. Severance pay

50. Specialized service facilities

51. Taxes

52. Termination costs

53. Training and education costs

54. Transportation costs

55. Travel costs

56. Trustees

2. Revise and retitle paragraph 1 to

read:

1. Advertising and public relations

costs.

a. The term advertising costs means

the costs of advertising media and

corollary administrative costs.

Advertising media include magazines,

newspapers, radio and television

programs, direct mail, exhibits, and the

like.

b. The term public relations includes

community relations and means those

activities dedicated to maintaining the

image of the organization or maintaining

or promoting understanding and

favorable relations with the community

or public at large or any segment of the

public.

c. The only allowable advertising

costs are those which are solely for:

(1) The recruitment of personnel

required for the performance by the

organization of obligations arising under

a sponsored award, when considered in

conjunction with all other recruitment

costs, as set forth in paragraph 44

(‘‘Recruiting costs’’);

(2) The procurement of goods and

services for the performance of a

sponsored award;

(3) The disposal of scrap or surplus

materials acquired in the performance of

a sponsored award except when

organizations are reimbursed for

disposal costs at a predetermined

amount in accordance with OMB

Circular A–110, Sec. lll.34,

‘‘Equipment’’; or

(4) Other specific purposes necessary

to meet the requirements of the

sponsored award.

d. The only allowable public relations

costs are:

(1) Costs specifically required by

sponsored awards;

(2) Costs of communicating with the

public and press pertaining to specific

activities or accomplishments which

result from performance of sponsored

awards (these costs are considered

necessary as part of the outreach effort

for the sponsored awards); or

(3) Costs of conducting general liaison

with news media and government

public relations officers, to the extent

that such activities are limited to

communication and liaison necessary to

keep the public informed on matters of
29800 Federal Register / Vol. 63, No. 104 / Monday, June 1, 1998 / Notices

public concern, such as notices of

contract/grant awards, financial matters,

etc.

e. Costs identified in subparagraphs c

and d if incurred for more than one

sponsored award or for both sponsored

work and other work of the

organization, are allowable to the extent

that the principles in paragraphs B

(‘‘Direct Costs’’) and C (‘‘Indirect Costs’’)

of Attachment A are observed.

f. Unallowable advertising and public

relations costs include the following:

(1) All advertising and public

relations costs other than as specified in

subparagraphs c, d, and e;

(2) Costs of meetings or other events

related to fund raising or other

organizational activities including:

(i) Costs of displays, demonstrations,

and exhibits;

(ii) Costs of meeting rooms,

hospitality suites, and other special

facilities used in conjunction with

shows and other special events; and

(iii) Salaries and wages of employees

or cost of services engaged in setting up

and displaying exhibits, making

demonstrations, and providing

briefings;

(3) Costs of promotional items and

memorabilia, including models, gifts,

and souvenirs;

(4) Costs of advertising and public

relations designed solely to promote the

organization.

3. Renumber current paragraphs 2

through 8 as paragraphs 3 through 9,

respectively.

4. Add the following new paragraph

2:

2. Alcoholic beverages. Costs of

alcoholic beverages are unallowable.

5. In paragraph 7 (‘‘Compensation for

personal services’’), as renumbered

above in item 3, rename the current

subparagraph g (‘‘Pension costs’’), as

subparagraph h. Add a new

subparagraph g:

g. Organization-furnished

automobiles. That portion of the cost of

organization-furnished automobiles that

relates to personal use by employees

(including transportation to and from

work) is unallowable as fringe benefit or

indirect costs regardless of whether the

cost is reported as taxable income to the

employees. These costs are allowable as

direct costs to sponsored award when

necessary for the performance of the

sponsored award and approved by

awarding agencies.

6. Renumber current paragraphs 9

through 15 as paragraphs 11 through 17,

respectively.

7. Add new paragraph 10:

10. Defense and prosecution of

criminal and civil proceedings, claims,

appeals and patent infringement.

a. Definitions.

(1) Conviction, as used herein, means

a judgment or a conviction of a criminal

offense by any court of competent

jurisdiction, whether entered upon as a

verdict or a plea, including a conviction

due to a plea of nolo contendere.

(2) Costs include, but are not limited

to, administrative and clerical expenses;

the cost of legal services, whether

performed by in-house or private

counsel; and the costs of the services of

accountants, consultants, or others

retained by the organization to assist it;

costs of employees, officers and trustees,

and any similar costs incurred before,

during, and after commencement of a

judicial or administrative proceeding

that bears a direct relationship to the

proceedings.

(3) Fraud, as used herein, means (i)

acts of fraud corruption or attempts to

defraud the Federal Government or to

corrupt its agents, (ii) acts that

constitute a cause for debarment or

suspension (as specified in agency

regulations), and (iii) acts which violate

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

3729–3731, or the Anti-Kickback Act, 41

U.S.C., sections 51 and 54.

(4) Penalty does not include

restitution, reimbursement, or

compensatory damages.

(5) Proceeding includes an

investigation.

b. (1) Except as otherwise described

herein, costs incurred in connection

with any criminal, civil or

administrative proceeding (including

filing of a false certification)

commenced by the Federal Government,

or a State, local or foreign government,

are not allowable if the proceeding: (1)

relates to a violation of, or failure to

comply with, a Federal, State, local or

foreign statute or regulation by the

organization (including its agents and

employees), and (2) results in any of the

following dispositions:

(a) In a criminal proceeding, a

conviction.

(b) In a civil or administrative

proceeding involving an allegation of

fraud or similar misconduct, a

determination of organizational liability.

(c) In the case of any civil or

administrative proceeding, the

imposition of a monetary penalty.

(d) A final decision by an appropriate

Federal official to debar or suspend the

organization, to rescind or void an

award, or to terminate an award for

default by reason of a violation or

failure to comply with a law or

regulation.

(e) A disposition by consent or

compromise, if the action could have

resulted in any of the dispositions

described in (a), (b), (c) or (d).

(2) If more than one proceeding

involves the same alleged misconduct,

the costs of all such proceedings shall

be unallowable if any one of them

results in one of the dispositions shown

in subparagraph b.(1).

c. If a proceeding referred to in

subparagraph b is commenced by the

Federal Government and is resolved by

consent or compromise pursuant to an

agreement entered into by the

organization and the Federal

Government, then the costs incurred by

the organization in connection with

such proceedings that are otherwise not

allowable under subparagraph b may be

allowed to the extent specifically

provided in such agreement.

d. If a proceeding referred to in

subparagraph b is commenced by a

State, local or foreign government, the

authorized Federal official may allow

the costs incurred by the organization

for such proceedings, if such authorized

official determines that the costs were

incurred as a result of (1) a specific term

or condition of a federally-sponsored

award, or (2) specific written direction

of an authorized official of the

sponsoring agency.

e. Costs incurred in connection with

proceedings described in subparagraph

b, but which are not made unallowable

by that subparagraph, may be allowed

by the Federal Government, but only to

the extent that:

(1) The costs are reasonable in

relation to the activities required to deal

with the proceeding and the underlying

cause of action;

(2) Payment of the costs incurred, as

allowable and allocable costs, is not

prohibited by any other provision(s) of

the sponsored award;

(3) The costs are not otherwise

recovered from the Federal Government

or a third party, either directly as a

result of the proceeding or otherwise;

and,

(4) The percentage of costs allowed

does not exceed the percentage

determined by an authorized Federal

official to be appropriate, considering

the complexity of the litigation,

generally accepted principles governing

the award of legal fees in civil actions

involving the United States as a party,

and such other factors as may be

appropriate. Such percentage shall not

exceed 80 percent. However, if an

agreement reached under subparagraph

c has explicitly considered this 80

percent limitation and permitted a

higher percentage, then the full amount

of costs resulting from that agreement

shall be allowable.

f. Costs incurred by the organization

in connection with the defense of suits

brought by its employees or ex-
Federal Register / Vol. 63, No. 104 / Monday, June 1, 1998 / Notices 29801

employees under section 2 of the Major

Fraud Act of 1988 (Pub. L. 100–700),

including the cost of all relief necessary

to make such employee whole, where

the organization was found liable or

settled, are unallowable.

g. Costs of legal, accounting, and

consultant services, and related costs,

incurred in connection with defense

against Federal Government claims or

appeals, antitrust suits, or the

prosecution of claims or appeals against

the Federal Government, are

unallowable.

h. Costs of legal, accounting, and

consultant services, and related costs,

incurred in connection with patent

infringement litigation, are unallowable

unless otherwise provided for in the

sponsored awards.

i. Costs which may be unallowable

under this paragraph, including directly

associated costs, shall be segregated and

accounted for by the organization

separately. During the pendency of any

proceeding covered by subparagraphs b

and f, the Federal Government shall

generally withhold payment of such

costs. However, if in the best interests

of the Federal Government, the Federal

Government may provide for

conditional payment upon provision of

adequate security, or other adequate

assurance, and agreements by the

organization to repay all unallowable

costs, plus interest, if the costs are

subsequently determined to be

unallowable.

8. In paragraph 15 (‘‘Equipment and

other capital expenditures’’), as

renumbered in item 6 above, replace

subparagraphs 15.a.(1) and 15.b.(2) to

read:

15.a.(1) ‘‘Equipment’’ means an article

of nonexpendable, tangible personal

property having a useful life of more

than one year and an acquisition cost

which equals or exceeds the lesser of (a)

the capitalization level established by

the organization for the financial

statement purposes, or (b) $5000. The

unamortized portion of any equipment

written off as a result of a change in

capitalization levels may be recovered

by continuing to claim the otherwise

allowable use allowances or

depreciation on the equipment, or by

amortizing the amount to be written off

over a period of years as negotiated with

the Federal cognizant agency.

15.b.(2) Capital expenditures for

special purpose equipment are

allowable as direct costs, provided that

items with a unit cost of $5000 or more

have the prior approval of awarding

agency.

9. Renumber current paragraphs 16

through 36 as paragraphs 20 through 40,

respectively.

10. Add new paragraph 18:

18. Goods or services for personal use.

Costs of goods or services for personal

use of the organization’s employees are

unallowable regardless of whether the

cost is reported as taxable income to the

employees.

11. Add new paragraph 19:

19. Housing and personal living

expenses.

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

maintenance, utilities, furnishings, rent,

etc.), housing allowances and personal

living expenses for/of the organization’s

officers are unallowable as fringe benefit

or indirect costs regardless of whether

the cost is reported as taxable income to

the employees. These costs are

allowable as direct costs to sponsored

awards when necessary for the

performance of the sponsored award

and approved by awarding agencies.

b. The term ‘‘officers’’ includes

current and past officers and employees.

12. Add to paragraph 22.a.(2)

(‘‘Insurance and indemnification’’), as

renumbered in item 9, subparagraphs (f)

and (g):

(f) Insurance against defects. Costs of

insurance with respect to any costs

incurred to correct defects in the

organization’s materials or

workmanship are unallowable.

(g) Medical liability (malpractice)

insurance. Medical liability insurance is

an allowable cost of Federal research

programs only to the extent that the

Federal research programs involve

human subjects or training of

participants in research techniques.

Medical liability insurance costs shall

be treated as a direct cost and shall be

assigned to individual projects based on

the manner in which the insurer

allocates the risk to the population

covered by the insurance.

13. Revise paragraph 30, as

renumbered in item 9, to read:

30. Memberships, subscriptions and

professional activity costs.

a. Costs of the organization’s

membership in business, technical, and

professional organizations are

allowable.

b. Costs of the organization’s

subscriptions to business, professional,

and technical periodicals are allowable.

c. Costs of meetings and conferences,

when the primary purpose is the

dissemination of technical information,

are allowable. This includes costs of

meals, transportation, rental of facilities,

and other items incidental to such

meetings or conferences.

d. Costs of membership in any civic

or community organization are

allowable with prior approval by

Federal cognizant agency.

e. Costs of membership in any country

club or social or dining club or

organization are unallowable.

14. Delete subparagraph 39.d, as

renumbered in item 9.

15. Delete current paragraph 37

(‘‘Public service costs’’).

16. Renumber current paragraphs 38

through 44 as paragraphs 41 through 47,

respectively.

17. Revise paragraph 44, as

renumbered in item 16, to read:

44. Recruiting costs.

a. Subject to subparagraphs b, c, and

d, and provided that the size of the staff

recruited and maintained is in keeping

with workload requirements, costs of

‘‘help wanted’’ advertising, operating

costs of an employment office necessary

to secure and maintain an adequate

staff, costs of operating an aptitude and

educational testing program, travel costs

of employees while engaged in

recruiting personnel, travel costs of

applicants for interviews for prospective

employment, and relocation costs

incurred incident to recruitment of new

employees, are allowable to the extent

that such costs are incurred pursuant to

a well-managed recruitment program.

Where the organization uses

employment agencies, costs that are not

in excess of standard commercial rates

for such services are allowable.

b. In publications, costs of help

wanted advertising that includes color,

includes advertising material for other

than recruitment purposes, or is

excessive in size (taking into

consideration recruitment purposes for

which intended and normal

organizational practices in this respect),

are unallowable.

c. Costs of help wanted advertising,

special emoluments, fringe benefits, and

salary allowances incurred to attract

professional personnel from other

organizations that do not meet the test

of reasonableness or do not conform

with the established practices of the

organization, are unallowable.

d. Where relocation costs incurred

incident to recruitment of a new

employee have been allowed either as

an allocable direct or indirect cost, and

the newly hired employee resigns for

reasons within his control within twelve

months after being hired, the

organization will be required to refund

or credit such relocation costs to the

Federal Government.

18. Renumber current paragraphs 45

through 51 as paragraphs 49 through 55,

respectively.

19. Add new paragraph 48:

48. Selling and marketing. Costs of

selling and marketing any products or

services of the organization (unless

allowed under paragraph 1 as allowable
29802 Federal Register / Vol. 63, No. 104 / Monday, June 1, 1998 / Notices

public relations costs) are unallowable.

These costs, however, are allowable as

direct costs, with prior approval by

awarding agencies, when they are

necessary for the performance of Federal

programs.

20. Add new subparagraphs c, d and

e to paragraph 49 (‘‘Severance pay’’), as

renumbered in item 18, as follow:

c. Costs incurred in certain severance

pay packages (commonly known as ‘‘a

golden parachute’’ payment) which are

in an amount in excess of the normal

severance pay paid by the organization

to an employee upon termination of

employment and are paid to the

employee contingent upon a change in

management control over, or ownership

of, the organization’s assets are

unallowable.

d. Severance payments to foreign

nationals employed by the organization

outside the United States, to the extent

that the amount exceeds the customary

or prevailing practices for the

organization in the United States are

unallowable, unless they are necessary

for the performance of Federal programs

and approved by awarding agencies.

e. Severance payments to foreign

nationals employed by the organization

outside the United States due to the

termination of the foreign national as a

result of the closing of, or curtailment of

activities by, the organization in that

country, are unallowable, unless they

are necessary for the performance of

Federal programs and approved by

awarding agencies.

21. Add new paragraph 56:

56. 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 paragraph 55.

C. Attachment C

1. Delete the following organizations

from Attachment C. These organizations

either no longer exist or are no longer

exempted from complying with Circular

A–122.

• Associated Universities,

Incorporated, Washington, D.C.

• Associated Universities for

Research and Astronomy, Tucson,

Arizona.

• Center for Energy and

Environmental Research (CEER),

(University of Puerto Rico),

Commonwealth of Puerto Rico.

• Comparative Animal Research

Laboratory (CARL), (University of

Tennessee), Oak Ridge, Tennessee.

• Institute of Gas Technology,

Chicago, Illinois.

• Montana Energy Research and

Development Institute, Inc., (MERDI),

Butte, Montana.

• Project Management Corporation,

Oak Ridge, Tennessee.

• Sandia Corporation, Albuquerque,

New Mexico.

• Universities Corporation for

Atmospheric Research, Boulder,

Colorado.

2. Change Argonne Universities

Association, Chicago, Illinois to

Argonne National Laboratory, Chicago,

Illinois.

3. Change the location of the Institute

for Defense Analysis in Virginia from

Arlington to Alexandria.

4. Replace Midwest Research

Institute, Headquartered in Kansas City,

Missouri to National Renewable Energy

Laboratory, Golden, Colorado.

D. A Recompilation of the Entire

Circular A–122, With All Its

Amendments, Follows:

Circular No. A–122 Revised

To the Heads of Executive Departments

and Establishments

Subject: Cost Principles for Non-Profit

Organizations

1. Purpose. This Circular establishes

principles for determining costs of

grants, contracts and other agreements

with non-profit organizations. It does

not apply to colleges and universities

which are covered by Office of

Management and Budget (OMB)

Circular A–21, ‘‘Cost Principles for

Educational Institutions’’; State, local,

and federally-recognized Indian tribal

governments which are covered by OMB

Circular A–87, ‘‘Cost Principles for

State, Local, and Indian Tribal

Governments’’; or hospitals. The

principles are designed to provide that

the Federal Government bear its fair

share of costs except where restricted or

prohibited by law. The principles do not

attempt to prescribe the extent of cost

sharing or matching on grants, contracts,

or other agreements. However, such cost

sharing or matching shall not be

accomplished through arbitrary

limitations on individual cost elements

by Federal agencies. Provision for profit

or other increment above cost is outside

the scope of this Circular.

2. Supersession. This Circular

supersedes cost principles issued by

individual agencies for non-profit

organizations.

3. Applicability.

a. These principles shall be used by

all Federal agencies in determining the

costs of work performed by non-profit

organizations under grants, cooperative

agreements, cost reimbursement

contracts, and other contracts in which

costs are used in pricing,

administration, or settlement. All of

these instruments are hereafter referred

to as awards. The principles do not

apply to awards under which an

organization is not required to account

to the Federal Government for actual

costs incurred.

b. All cost reimbursement subawards

(subgrants, subcontracts, etc.) are

subject to those Federal cost principles

applicable to the particular organization

concerned. Thus, if a subaward is to a

non-profit organization, this Circular

shall apply; if a subaward is to a

commercial organization, the cost

principles applicable to commercial

concerns shall apply; if a subaward is to

a college or university, Circular A–21

shall apply; if a subaward is to a State,

local, or federally-recognized Indian

tribal government, Circular A–87 shall

apply.

4. Definitions.

a. Non-profit organization means any

corporation, trust, association,

cooperative, or other organization

which:

(1) Is operated primarily for scientific,

educational, service, charitable, or

similar purposes in the public interest;

(2) Is not organized primarily for

profit; and

(3) Uses its net proceeds to maintain,

improve, and/or expand its operations.

For this purpose, the term ‘‘non-profit

organization’’ excludes (i) colleges and

universities; (ii) hospitals; (iii) State,

local, and federally-recognized Indian

tribal governments; and (iv) those nonprofit organizations which are excluded

from coverage of this Circular in

accordance with paragraph 5.

b. Prior approval means securing the

awarding agency’s permission in

advance to incur cost for those items

that are designated as requiring prior

approval by the Circular. Generally this

permission will be in writing. Where an

item of cost requiring prior approval is

specified in the budget of an award,

approval of the budget constitutes

approval of that cost.

5. Exclusion of some non-profit

organizations. Some non-profit

organizations, because of their size and

nature of operations, can be considered

to be similar to commercial concerns for

purpose of applicability of cost

principles. Such non-profit

organizations shall operate under

Federal cost principles applicable to

commercial concerns. A listing of these

organizations is contained in

Attachment C. Other organizations may

be added from time to time.

6. Responsibilities. Agencies

responsible for administering programs

that involve awards to non-profit
Federal Register / Vol. 63, No. 104 / Monday, June 1, 1998 / Notices 29803

organizations shall implement the

provisions of this Circular. Upon

request, implementing instruction shall

be furnished to OMB. Agencies shall

designate a liaison official to serve as

the agency representative on matters

relating to the implementation of this

Circular. The name and title of such

representative shall be furnished to

OMB within 30 days of the date of this

Circular.

7. Attachments. The principles and

related policy guides are set forth in the

following Attachments:

Attachment A—General Principles

Attachment B—Selected Items of Cost

Attachment C—Non-Profit

Organizations Not Subject To This

Circular

8. Requests for exceptions. OMB may

grant exceptions to the requirements of

this Circular when permissible under

existing law. However, in the interest of

achieving maximum uniformity,

exceptions will be permitted only in

highly unusual circumstances.

9. Effective Date. The provisions of

this Circular are effective immediately.

Implementation shall be phased in by

incorporating the provisions into new

awards made after the start of the

organization’s next fiscal year. For

existing awards, the new principles may

be applied if an organization and the

cognizant Federal agency agree. Earlier

implementation, or a delay in

implementation of individual

provisions, is also permitted by mutual

agreement between an organization and

the cognizant Federal agency.

10. Inquiries. Further information

concerning this Circular may be

obtained by contacting the Office of

Federal Financial Management, OMB,

Washington, DC 20503, telephone (202)

395–3993.

Attachments

Attachment A—Circular No. A–122

General Principles

Table of Contents

A. Basic Considerations

1. Composition of total costs

2. Factors affecting allowability of

costs

3. Reasonable costs

4. Allocable costs

5. Applicable credits

6. Advance understandings

7. Conditional exemptions

B. Direct Costs

C. Indirect Costs

D. Allocation of Indirect Costs and

Determination of Indirect Cost Rates

1. General

2. Simplified allocation method

3. Multiple allocation base method

4. Direct allocation method

5. Special indirect cost rates

E. Negotiation and Approval of Indirect

Cost Rates

1. Definitions

2. Negotiation and approval of rates

Attachment A—Circular No. A–122

General Principles

A. Basic Considerations

1. Composition of total costs. The

total cost of an award is the sum of the

allowable direct and allocable indirect

costs less any applicable credits.

2. Factors affecting allowability of

costs. To be allowable under an award,

costs must meet the following general

criteria:

a. Be reasonable for the performance

of the award and be allocable thereto

under these principles.

b. Conform to any limitations or

exclusions set forth in these principles

or in the award as to types or amount

of cost items.

c. Be consistent with policies and

procedures that apply uniformly to both

federally-financed and other activities of

the organization.

d. Be accorded consistent treatment.

e. Be determined in accordance with

generally accepted accounting

principles (GAAP).

f. Not be included as a cost or used

to meet cost sharing or matching

requirements of any other federallyfinanced program in either the current

or a prior period.

g. Be adequately documented.

3. Reasonable costs. A cost is

reasonable if, in its nature or amount, it

does not exceed that which would be

incurred by a prudent person under the

circumstances prevailing at the time the

decision was made to incur the costs.

The question of the reasonableness of

specific costs must be scrutinized with

particular care in connection with

organizations or separate divisions

thereof which receive the

preponderance of their support from

awards made by Federal agencies. In

determining the reasonableness of a

given cost, consideration shall be given

to:

a. Whether the cost is of a type

generally recognized as ordinary and

necessary for the operation of the

organization or the performance of the

award.

b. The restraints or requirements

imposed by such factors as generally

accepted sound business practices, arms

length bargaining, Federal and State

laws and regulations, and terms and

conditions of the award.

c. Whether the individuals concerned

acted with prudence in the

circumstances, considering their

responsibilities to the organization, its

members, employees, and clients, the

public at large, and the Federal

Government.

d. Significant deviations from the

established practices of the organization

which may unjustifiably increase the

award costs.

4. Allocable costs.

a. A cost is allocable to a particular

cost objective, such as a grant, contract,

project, service, or other activity, in

accordance with the relative benefits

received. A cost is allocable to a Federal

award if it is treated consistently with

other costs incurred for the same

purpose in like circumstances and if it:

(1) Is incurred specifically for the

award.

(2) Benefits both the award and other

work and can be distributed in

reasonable proportion to the benefits

received, or

(3) Is necessary to the overall

operation of the organization, although

a direct relationship to any particular

cost objective cannot be shown.

b. Any cost allocable to a particular

award or other cost objective under

these principles may not be shifted to

other Federal awards to overcome

funding deficiencies, or to avoid

restrictions imposed by law or by the

terms of the award.

5. Applicable credits.

a. The term applicable credits refers to

those receipts, or reduction of

expenditures which operate to offset or

reduce expense items that are allocable

to awards as direct or indirect costs.

Typical examples of such transactions

are: purchase discounts, rebates or

allowances, recoveries or indemnities

on losses, insurance refunds, and

adjustments of overpayments or

erroneous charges. To the extent that

such credits accruing or received by the

organization relate to allowable cost,

they shall be credited to the Federal

Government either as a cost reduction or

cash refund, as appropriate.

b. In some instances, the amounts

received from the Federal Government

to finance organizational activities or

service operations should be treated as

applicable credits. Specifically, the

concept of netting such credit items

against related expenditures should be

applied by the organization in

determining the rates or amounts to be

charged to Federal awards for services

rendered whenever the facilities or

other resources used in providing such

services have been financed directly, in

whole or in part, by Federal funds.

c. For rules covering program income

(i.e., gross income earned from

federally-supported activities) see Sec.
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ll.24 of Office of Management and

Budget (OMB) Circular A–110,

‘‘Uniform Administrative Requirements

for Grants and Agreements with

Institutions of Higher Education,

Hospitals, and Other Non-Profit

Organizations.’’

6. Advance understandings. Under

any given award, the reasonableness

and allocability of certain items of costs

may be difficult to determine. This is

particularly true in connection with

organizations that receive a

preponderance of their support from

Federal agencies. In order to avoid

subsequent disallowance or dispute

based on unreasonableness or

nonallocability, it is often desirable to

seek a written agreement with the

cognizant or awarding agency in

advance of the incurrence of special or

unusual costs. The absence of an

advance agreement on any element of

cost will not, in itself, affect the

reasonableness or allocability of that

element.

7. Conditional exemptions.

a. OMB authorizes conditional

exemption from OMB administrative

requirements and cost principles

circulars for certain Federal programs

with statutorily-authorized consolidated

planning and consolidated

administrative funding, that are

identified by a Federal agency and

approved by the head of the Executive

department or establishment. A Federal

agency shall consult with OMB during

its consideration of whether to grant

such an exemption.

b. To promote efficiency in State and

local program administration, when

Federal non-entitlement programs with

common purposes have specific

statutorily-authorized consolidated

planning and consolidated

administrative funding and where most

of the State agency’s resources come

from non-Federal sources, Federal

agencies may exempt these covered

State-administered, non-entitlement

grant programs from certain OMB grants

management requirements. The

exemptions would be from all but the

allocability of costs provisions of OMB

Circulars A–87 (Attachment A,

subsection C.3), ‘‘Cost Principles for

State, Local, and Indian Tribal

Governments,’’ A–21 (Section C, subpart

4), ‘‘Cost Principles for Educational

Institutions,’’ and A–122 (Attachment

A, subsection A.4), ‘‘Cost Principles for

Non-Profit Organizations,’’ and from all

of the administrative requirements

provisions of OMB Circular A–110,

‘‘Uniform Administrative Requirements

for Grants and Agreements with

Institutions of Higher Education,

Hospitals, and Other Non-Profit

Organizations,’’ and the agencies’ grants

management common rule.

c. When a Federal agency provides

this flexibility, as a prerequisite to a

State’s exercising this option, a State

must adopt its own written fiscal and

administrative requirements for

expending and accounting for all funds,

which are consistent with the

provisions of OMB Circular A–87, and

extend such policies to all

subrecipients. These fiscal and

administrative requirements must be

sufficiently specific to ensure that:

funds are used in compliance with all

applicable Federal statutory and

regulatory provisions, costs are

reasonable and necessary for operating

these programs, and funds are not be

used for general expenses required to

carry out other responsibilities of a State

or its subrecipients.

B. Direct Costs

1. Direct costs are those that can be

identified specifically with a particular

final cost objective, i.e., a particular

award, project, service, or other direct

activity of an organization. However, a

cost may not be assigned to an award as

a direct cost if any other cost incurred

for the same purpose, in like

circumstance, has been allocated to an

award as an indirect cost. Costs

identified specifically with awards are

direct costs of the awards and are to be

assigned directly thereto. Costs

identified specifically with other final

cost objectives of the organization are

direct costs of those cost objectives and

are not to be assigned to other awards

directly or indirectly.

2. Any direct cost of a minor amount

may be treated as an indirect cost for

reasons of practicality where the

accounting treatment for such cost is

consistently applied to all final cost

objectives.

3. The cost of certain activities are not

allowable as charges to Federal awards

(see, for example, fundraising costs in

paragraph 23 of Attachment B).

However, even though these costs are

unallowable for purposes of computing

charges to Federal awards, they

nonetheless must be treated as direct

costs for purposes of determining

indirect cost rates and be allocated their

share of the organization’s indirect costs

if they represent activities which (1)

include the salaries of personnel, (2)

occupy space, and (3) benefit from the

organization’s indirect costs.

4. The costs of activities performed

primarily as a service to members,

clients, or the general public when

significant and necessary to the

organization’s mission must be treated

as direct costs whether or not allowable

and be allocated an equitable share of

indirect costs. Some examples of these

types of activities include:

a. Maintenance of membership rolls,

subscriptions, publications, and related

functions.

b. Providing services and information

to members, legislative or

administrative bodies, or the public.

c. Promotion, lobbying, and other

forms of public relations.

d. Meetings and conferences except

those held to conduct the general

administration of the organization.

e. Maintenance, protection, and

investment of special funds not used in

operation of the organization.

f. Administration of group benefits on

behalf of members or clients, including

life and hospital insurance, annuity or

retirement plans, financial aid, etc.

C. Indirect Costs

1. Indirect costs are those that have

been incurred for common or joint

objectives and cannot be readily

identified with a particular final cost

objective. Direct cost of minor amounts

may be treated as indirect costs under

the conditions described in

subparagraph B.2. After direct costs

have been determined and assigned

directly to awards or other work as

appropriate, indirect costs are those

remaining to be allocated to benefiting

cost objectives. A cost may not be

allocated to an award as an indirect cost

if any other cost incurred for the same

purpose, in like circumstances, has been

assigned to an award as a direct cost.

2. Because of the diverse

characteristics and accounting practices

of non-profit organizations, it is not

possible to specify the types of cost

which may be classified as indirect cost

in all situations. However, typical

examples of indirect cost for many nonprofit organizations may include

depreciation or use allowances on

buildings and equipment, the costs of

operating and maintaining facilities, and

general administration and general

expenses, such as the salaries and

expenses of executive officers,

personnel administration, and

accounting.

3. Indirect costs shall be classified

within two broad categories: ‘‘Facilities’’

and ‘‘Administration.’’ ‘‘Facilities’’ is

defined as depreciation and use

allowances on buildings, equipment and

capital improvement, interest on debt

associated with certain buildings,

equipment and capital improvements,

and operations and maintenance

expenses. ‘‘Administration’’ is defined

as general administration and general

expenses such as the director’s office,

accounting, personnel, library expenses
Federal Register / Vol. 63, No. 104 / Monday, June 1, 1998 / Notices 29805

and all other types of expenditures not

listed specifically under one of the

subcategories of ‘‘Facilities’’ (including

cross allocations from other pools,

where applicable). See indirect cost rate

reporting requirements in

subparagraphs D.2.e and D.3.g.

D. Allocation of Indirect Costs and

Determination of Indirect Cost Rates

1. General.

a. Where a non-profit organization has

only one major function, or where all its

major functions benefit from its indirect

costs to approximately the same degree,

the allocation of indirect costs and the

computation of an indirect cost rate may

be accomplished through simplified

allocation procedures, as described in

subparagraph 2.

b. Where an organization has several

major functions which benefit from its

indirect costs in varying degrees,

allocation of indirect costs may require

the accumulation of such costs into

separate cost groupings which then are

allocated individually to benefiting

functions by means of a base which best

measures the relative degree of benefit.

The indirect costs allocated to each

function are then distributed to

individual awards and other activities

included in that function by means of

an indirect cost rate(s).

c. The determination of what

constitutes an organization’s major

functions will depend on its purpose in

being; the types of services it renders to

the public, its clients, and its members;

and the amount of effort it devotes to

such activities as fundraising, public

information and membership activities.

d. Specific methods for allocating

indirect costs and computing indirect

cost rates along with the conditions

under which each method should be

used are described in subparagraphs 2

through 5.

e. The base period for the allocation

of indirect costs is the period in which

such costs are incurred and

accumulated for allocation to work

performed in that period. The base

period normally should coincide with

the organization’s fiscal year but, in any

event, shall be so selected as to avoid

inequities in the allocation of the costs.

2. Simplified allocation method.

a. Where an organization’s major

functions benefit from its indirect costs

to approximately the same degree, the

allocation of indirect costs may be

accomplished by (i) separating the

organization’s total costs for the base

period as either direct or indirect, and

(ii) dividing the total allowable indirect

costs (net of applicable credits) by an

equitable distribution base. The result of

this process is an indirect cost rate

which is used to distribute indirect

costs to individual awards. The rate

should be expressed as the percentage

which the total amount of allowable

indirect costs bears to the base selected.

This method should also be used where

an organization has only one major

function encompassing a number of

individual projects or activities, and

may be used where the level of Federal

awards to an organization is relatively

small.

b. Both the direct costs and the

indirect costs shall exclude capital

expenditures and unallowable costs.

However, unallowable costs which

represent activities must be included in

the direct costs under the conditions

described in subparagraph B.3.

c. The distribution base may be total

direct costs (excluding capital

expenditures and other distorting items,

such as major subcontracts or

subgrants), direct salaries and wages, or

other base which results in an equitable

distribution. The distribution base shall

generally exclude participant support

costs as defined in paragraph 34 of

Attachment B.

d. Except where a special rate(s) is

required in accordance with

subparagraph 5, the indirect cost rate

developed under the above principles is

applicable to all awards at the

organization. If a special rate(s) is

required, appropriate modifications

shall be made in order to develop the

special rate(s).

e. For an organization that receives

more than $10 million in Federal

funding of direct costs in a fiscal year,

a breakout of the indirect cost

component into two broad categories,

Facilities and Administration as defined

in subparagraph C.3, is required. The

rate in each case shall be stated as the

percentage which the amount of the

particular indirect cost category (i.e.,

Facilities or Administration) is of the

distribution base identified with that

category.

3. Multiple allocation base method.

a. General. Where an organization’s

indirect costs benefit its major functions

in varying degrees, indirect costs shall

be accumulated into separate cost

groupings, as described in subparagraph

b. Each grouping shall then be allocated

individually to benefitting functions by

means of a base which best measures

the relative benefits. The default

allocation bases by cost pool are

described in subparagraph c.

b. Identification of indirect costs. Cost

groupings shall be established so as to

permit the allocation of each grouping

on the basis of benefits provided to the

major functions. Each grouping shall

constitute a pool of expenses that are of

like character in terms of functions they

benefit and in terms of the allocation

base which best measures the relative

benefits provided to each function. The

groupings are classified within the two

broad categories: ‘‘Facilities’’ and

‘‘Administration,’’ as described in

subparagraph C.3. The indirect cost

pools are defined as follows:

(1) Depreciation and use allowances.

The expenses under this heading are the

portion of the costs of the organization’s

buildings, capital improvements to land

and buildings, and equipment which are

computed in accordance with paragraph

11 of Attachment B (‘‘Depreciation and

use allowances’’).

(2) Interest. Interest on debt associated

with certain buildings, equipment and

capital improvements are computed in

accordance with paragraph 23 of

Attachment B (‘‘Interest, fundraising,

and investment management costs’’).

(3) Operation and maintenance

expenses. The expenses under this

heading are those that have been

incurred for the administration,

operation, maintenance, preservation,

and protection of the organization’s

physical plant. They include expenses

normally incurred for such items as:

janitorial and utility services; repairs

and ordinary or normal alterations of

buildings, furniture and equipment; care

of grounds; maintenance and operation

of buildings and other plant facilities;

security; earthquake and disaster

preparedness; environmental safety;

hazardous waste disposal; property,

liability and other insurance relating to

property; space and capital leasing;

facility planning and management; and,

central receiving. The operation and

maintenance expenses category shall

also include its allocable share of fringe

benefit costs, depreciation and use

allowances, and interest costs.

(4) General administration and

general expenses. The expenses under

this heading are those that have been

incurred for the overall general

executive and administrative offices of

the organization and other expenses of

a general nature which do not relate

solely to any major function of the

organization. This category shall also

include its allocable share of fringe

benefit costs, operation and

maintenance expense, depreciation and

use allowances, and interest costs.

Examples of this category include

central offices, such as the director’s

office, the office of finance, business

services, budget and planning,

personnel, safety and risk management,

general counsel, management

information systems, and library costs.

In developing this cost pool, special

care should be exercised to ensure that
29806 Federal Register / Vol. 63, No. 104 / Monday, June 1, 1998 / Notices

costs incurred for the same purpose in

like circumstances are treated

consistently as either direct or indirect

costs. For example, salaries of technical

staff, project supplies, project

publication, telephone toll charges,

computer costs, travel costs, and

specialized services costs shall be

treated as direct costs wherever

identifiable to a particular program. The

salaries and wages of administrative and

pooled clerical staff should normally be

treated as indirect costs. Direct charging

of these costs may be appropriate where

a major project or activity explicitly

requires and budgets for administrative

or clerical services and other

individuals involved can be identified

with the program or activity. Items such

as office supplies, postage, local

telephone costs, periodicals and

memberships should normally be

treated as indirect costs.

c. Allocation bases. Actual conditions

shall be taken into account in selecting

the base to be used in allocating the

expenses in each grouping to benefitting

functions. The essential consideration

in selecting a method or a base is that

it is the one best suited for assigning the

pool of costs to cost objectives in

accordance with benefits derived; a

traceable cause and effect relationship;

or logic and reason, where neither the

cause nor the effect of the relationship

is determinable. When an allocation can

be made by assignment of a cost

grouping directly to the function

benefited, the allocation shall be made

in that manner. When the expenses in

a cost grouping are more general in

nature, the allocation shall be made

through the use of a selected base which

produces results that are equitable to

both the Federal Government and the

organization. The distribution shall be

made in accordance with the bases

described herein unless it can be

demonstrated that the use of a different

base would result in a more equitable

allocation of the costs, or that a more

readily available base would not

increase the costs charged to sponsored

awards. The results of special cost

studies (such as an engineering utility

study) shall not be used to determine

and allocate the indirect costs to

sponsored awards.

(1) Depreciation and use allowances.

Depreciation and use allowances

expenses shall be allocated in the

following manner:

(a) Depreciation or use allowances on

buildings used exclusively in the

conduct of a single function, and on

capital improvements and equipment

used in such buildings, shall be

assigned to that function.

(b) Depreciation or use allowances on

buildings used for more than one

function, and on capital improvements

and equipment used in such buildings,

shall be allocated to the individual

functions performed in each building on

the basis of usable square feet of space,

excluding common areas, such as

hallways, stairwells, and restrooms.

(c) Depreciation or use allowances on

buildings, capital improvements and

equipment related space (e.g.,

individual rooms, and laboratories) used

jointly by more than one function (as

determined by the users of the space)

shall be treated as follows. The cost of

each jointly used unit of space shall be

allocated to the benefitting functions on

the basis of:

(i) the employees and other users on

a full-time equivalent (FTE) basis or

salaries and wages of those individual

functions benefitting from the use of

that space; or

(ii) organization-wide employee FTEs

or salaries and wages applicable to the

benefitting functions of the

organization.

(d) Depreciation or use allowances on

certain capital improvements to land,

such as paved parking areas, fences,

sidewalks, and the like, not included in

the cost of buildings, shall be allocated

to user categories on a FTE basis and

distributed to major functions in

proportion to the salaries and wages of

all employees applicable to the

functions.

(2) Interest. Interest costs shall be

allocated in the same manner as the

depreciation or use allowances on the

buildings, equipment and capital

equipments to which the interest

relates.

(3) Operation and maintenance

expenses. Operation and maintenance

expenses shall be allocated in the same

manner as the depreciation and use

allowances.

(4) General administration and

general expenses. General

administration and general expenses

shall be allocated to benefitting

functions based on modified total direct

costs (MTDC), as described in

subparagraph D.3.f. The expenses

included in this category could be

grouped first according to major

functions of the organization to which

they render services or provide benefits.

The aggregate expenses of each group

shall then be allocated to benefitting

functions based on MTDC.

d. Order of distribution.

(1) Indirect cost categories consisting

of depreciation and use allowances,

interest, operation and maintenance,

and general administration and general

expenses shall be allocated in that order

to the remaining indirect cost categories

as well as to the major functions of the

organization. Other cost categories

could be allocated in the order

determined to be most appropriate by

the organization. When cross allocation

of costs is made as provided in

subparagraph (2), this order of

allocation does not apply.

(2) Normally, an indirect cost category

will be considered closed once it has

been allocated to other cost objectives,

and costs shall not be subsequently

allocated to it. However, a cross

allocation of costs between two or more

indirect costs categories could be used

if such allocation will result in a more

equitable allocation of costs. If a cross

allocation is used, an appropriate

modification to the composition of the

indirect cost categories is required.

e. Application of indirect cost rate or

rates. Except where a special indirect

cost rate(s) is required in accordance

with subparagraph D.5, the separate

groupings of indirect costs allocated to

each major function shall be aggregated

and treated as a common pool for that

function. The costs in the common pool

shall then be distributed to individual

awards included in that function by use

of a single indirect cost rate.

f. Distribution basis. Indirect costs

shall be distributed to applicable

sponsored awards and other benefitting

activities within each major function on

the basis of MTDC. MTDC consists of all

salaries and wages, fringe benefits,

materials and supplies, services, travel,

and subgrants and subcontracts up to

the first $25,000 of each subgrant or

subcontract (regardless of the period

covered by the subgrant or subcontract).

Equipment, capital expenditures,

charges for patient care, rental costs and

the portion in excess of $25,000 shall be

excluded from MTDC. Participant

support costs shall generally be

excluded from MTDC. Other items may

only be excluded when the Federal cost

cognizant agency determines that an

exclusion is necessary to avoid a serious

inequity in the distribution of indirect

costs.

g. Individual Rate Components. An

indirect cost rate shall be determined for

each separate indirect cost pool

developed. The rate in each case shall

be stated as the percentage which the

amount of the particular indirect cost

pool is of the distribution base

identified with that pool. Each indirect

cost rate negotiation or determination

agreement shall include development of

the rate for each indirect cost pool as

well as the overall indirect cost rate.

The indirect cost pools shall be

classified within two broad categories:
Federal Register / Vol. 63, No. 104 / Monday, June 1, 1998 / Notices 29807

‘‘Facilities’’ and ‘‘Administration,’’ as

described in subparagraph C.3.

4. Direct allocation method.

a. Some non-profit organizations treat

all costs as direct costs except general

administration and general expenses.

These organizations generally separate

their costs into three basic categories: (i)

General administration and general

expenses, (ii) fundraising, and (iii) other

direct functions (including projects

performed under Federal awards). Joint

costs, such as depreciation, rental costs,

operation and maintenance of facilities,

telephone expenses, and the like are

prorated individually as direct costs to

each category and to each award or

other activity using a base most

appropriate to the particular cost being

prorated.

b. This method is acceptable,

provided each joint cost is prorated

using a base which accurately measures

the benefits provided to each award or

other activity. The bases must be

established in accordance with

reasonable criteria, and be supported by

current data. This method is compatible

with the Standards of Accounting and

Financial Reporting for Voluntary

Health and Welfare Organizations

issued jointly by the National Health

Council, Inc., the National Assembly of

Voluntary Health and Social Welfare

Organizations, and the United Way of

America.

c. Under this method, indirect costs

consist exclusively of general

administration and general expenses. In

all other respects, the organization’s

indirect cost rates shall be computed in

the same manner as that described in

subparagraph 2.

5. Special indirect cost rates. In some

instances, a single indirect cost rate for

all activities of an organization or for

each major function of the organization

may not be appropriate, since it would

not take into account those different

factors which may substantially affect

the indirect costs applicable to a

particular segment of work. For this

purpose, a particular segment of work

may be that performed under a single

award or it may consist of work under

a group of awards performed in a

common environment. These factors

may include the physical location of the

work, the level of administrative

support required, the nature of the

facilities or other resources employed,

the scientific disciplines or technical

skills involved, the organizational

arrangements used, or any combination

thereof. When a particular segment of

work is performed in an environment

which appears to generate a

significantly different level of indirect

costs, provisions should be made for a

separate indirect cost pool applicable to

such work. The separate indirect cost

pool should be developed during the

course of the regular allocation process,

and the separate indirect cost rate

resulting therefrom should be used,

provided it is determined that (i) the

rate differs significantly from that which

would have been obtained under

subparagraphs 2, 3, and 4, and (ii) the

volume of work to which the rate would

apply is material.

E. Negotiation and Approval of Indirect

Cost Rates

1. Definitions. As used in this section,

the following terms have the meanings

set forth below:

a. Cognizant agency means the

Federal agency responsible for

negotiating and approving indirect cost

rates for a non-profit organization on

behalf of all Federal agencies.

b. Predetermined rate means an

indirect cost rate, applicable to a

specified current or future period,

usually the organization’s fiscal year.

The rate is based on an estimate of the

costs to be incurred during the period.

A predetermined rate is not subject to

adjustment.

c. Fixed rate means an indirect cost

rate which has the same characteristics

as a predetermined rate, except that the

difference between the estimated costs

and the actual costs of the period

covered by the rate is carried forward as

an adjustment to the rate computation of

a subsequent period.

d. Final rate means an indirect cost

rate applicable to a specified past period

which is based on the actual costs of the

period. A final rate is not subject to

adjustment.

e. Provisional rate or billing rate

means a temporary indirect cost rate

applicable to a specified period which

is used for funding, interim

reimbursement, and reporting indirect

costs on awards pending the

establishment of a final rate for the

period.

f. Indirect cost proposal means the

documentation prepared by an

organization to substantiate its claim for

the reimbursement of indirect costs.

This proposal provides the basis for the

review and negotiation leading to the

establishment of an organization’s

indirect cost rate.

g. Cost objective means a function,

organizational subdivision, contract,

grant, or other work unit for which cost

data are desired and for which provision

is made to accumulate and measure the

cost of processes, projects, jobs and

capitalized projects.

2. Negotiation and approval of rates.

a. Unless different arrangements are

agreed to by the agencies concerned, the

Federal agency with the largest dollar

value of awards with an organization

will be designated as the cognizant

agency for the negotiation and approval

of the indirect cost rates and, where

necessary, other rates such as fringe

benefit and computer charge-out rates.

Once an agency is assigned cognizance

for a particular non-profit organization,

the assignment will not be changed

unless there is a major long-term shift in

the dollar volume of the Federal awards

to the organization. All concerned

Federal agencies shall be given the

opportunity to participate in the

negotiation process but, after a rate has

been agreed upon, it will be accepted by

all Federal agencies. When a Federal

agency has reason to believe that special

operating factors affecting its awards

necessitate special indirect cost rates in

accordance with subparagraph D.5, it

will, prior to the time the rates are

negotiated, notify the cognizant agency.

b. A non-profit organization which

has not previously established an

indirect cost rate with a Federal agency

shall submit its initial indirect cost

proposal immediately after the

organization is advised that an award

will be made and, in no event, later than

three months after the effective date of

the award.

c. Organizations that have previously

established indirect cost rates must

submit a new indirect cost proposal to

the cognizant agency within six months

after the close of each fiscal year.

d. A predetermined rate may be

negotiated for use on awards where

there is reasonable assurance, based on

past experience and reliable projection

of the organization’s costs, that the rate

is not likely to exceed a rate based on

the organization’s actual costs.

e. Fixed rates may be negotiated

where predetermined rates are not

considered appropriate. A fixed rate,

however, shall not be negotiated if (i) all

or a substantial portion of the

organization’s awards are expected to

expire before the carry-forward

adjustment can be made; (ii) the mix of

Federal and non-Federal work at the

organization is too erratic to permit an

equitable carry-forward adjustment; or

(iii) the organization’s operations

fluctuate significantly from year to year.

f. Provisional and final rates shall be

negotiated where neither predetermined

nor fixed rates are appropriate.

g. The results of each negotiation shall

be formalized in a written agreement

between the cognizant agency and the

non-profit organization. The cognizant

agency shall distribute copies of the
29808 Federal Register / Vol. 63, No. 104 / Monday, June 1, 1998 / Notices

agreement to all concerned Federal

agencies.

h. If a dispute arises in a negotiation

of an indirect cost rate between the

cognizant agency and the non-profit

organization, the dispute shall be

resolved in accordance with the appeals

procedures of the cognizant agency.

i. To the extent that problems are

encountered among the Federal agencies

in connection with the negotiation and

approval process, OMB will lend

assistance as required to resolve such

problems in a timely manner.

Attachment B—Circular No. A–122

Selected Items of Cost

Table of Contents

1. Advertising and public relations costs

2. Alcoholic beverages

3. Bad debts

4. Bid and proposal costs (reserved)

5. Bonding costs

6. Communication costs

7. Compensation for personal services

8. Contingency provisions

9. Contributions

10. Defense and prosecution of criminal

and civil proceedings, claims,

appeals and patent infringement

11. Depreciation and use allowances

12. Donations

13. Employee morale, health, and

welfare costs and credits

14. Entertainment costs

15. Equipment and other capital

expenditures

16. Fines and penalties

17. Fringe benefits

18. Goods or services for personal use

19. Housing and personal living

expenses

20. Idle facilities and idle capacity

21. Independent research and

development (reserved)

22. Insurance and indemnification

23. Interest, fund raising, and

investment management costs

24. Labor relations costs

25. Lobbying

26. Losses on other awards

27. Maintenance and repair costs

28. Materials and supplies

29. Meetings and conferences

30. Memberships, subscriptions, and

professional activity costs

31. Organization costs

32. Overtime, extra-pay shift, and multishift premiums

33. Page charges in professional journals

34. Participant support costs

35. Patent costs

36. Pension plans

37. Plant security costs

38. Pre-award costs

39. Professional service costs

40. Profits and losses on disposition of

depreciable property or other

capital assets

41. Publication and printing costs

42. Rearrangement and alteration costs

43. Reconversion costs

44. Recruiting costs

45. Relocation costs

46. Rental costs

47. Royalties and other costs for use of

patents and copyrights

48. Selling and marketing

49. Severance pay

50. Specialized service facilities

51. Taxes

52. Termination costs

53. Training and education costs

54. Transportation costs

55. Travel costs

56. Trustees

Attachment B—Circular No. A–122

Selected Items of Cost

Paragraphs 1 through 56 provide

principles to be applied in establishing

the allowability of certain items of cost.

These principles apply whether a cost is

treated as direct or indirect. Failure to

mention a particular item of cost is not

intended to imply that it is unallowable;

rather, determination as to allowability

in each case should be based on the

treatment or principles provided for

similar or related items of cost.

1. Advertising and public relations

costs.

a. The term advertising costs means

the costs of advertising media and

corollary administrative costs.

Advertising media include magazines,

newspapers, radio and television

programs, direct mail, exhibits, and the

like.

b. The term public relations includes

community relations and means those

activities dedicated to maintaining the

image of the organization or maintaining

or promoting understanding and

favorable relations with the community

or public at large or any segment of the

public.

c. The only allowable advertising

costs are those which are solely for:

(1) The recruitment of personnel

required for the performance by the

organization of obligations arising under

a sponsored award, when considered in

conjunction with all other recruitment

costs, as set forth in paragraph 44

(‘‘Recruiting costs’’);

(2) The procurement of goods and

services for the performance of a

sponsored award;

(3) The disposal of scrap or surplus

materials acquired in the performance of

a sponsored award except when

organizations are reimbursed for

disposal costs at a predetermined

amount in accordance with OMB

Circular A–110, Sec. l.34,

‘‘Equipment’’; or

(4) Other specific purposes necessary

to meet the requirements of the

sponsored award.

d. The only allowable public relations

costs are:

(1) Costs specifically required by

sponsored awards;

(2) Costs of communicating with the

public and press pertaining to specific

activities or accomplishments which

result from performance of sponsored

awards (these costs are considered

necessary as part of the outreach effort

for the sponsored awards); or

(3) Costs of conducting general liaison

with news media and government

public relations officers, to the extent

that such activities are limited to

communication and liaison necessary to

keep the public informed on matters of

public concern, such as notices of

contract/grant awards, financial matters,

etc.

e. Costs identified in subparagraphs c

and d if incurred for more than one

sponsored award or for both sponsored

work and other work of the

organization, are allowable to the extent

that the principles in paragraphs B

(‘‘Direct Costs’’) and C (‘‘Indirect Costs’’)

of Attachment A are observed.

f. Unallowable advertising and public

relations costs include the following:

(1) All advertising and public

relations costs other than as specified in

subparagraphs c, d, and e;

(2) Costs of meetings or other events

related to fund raising or other

organizational activities including:

(i) Costs of displays, demonstrations,

and exhibits;

(ii) Costs of meeting rooms,

hospitality suites, and other special

facilities used in conjunction with

shows and other special events; and

(iii) Salaries and wages of employees

or cost of services engaged in setting up

and displaying exhibits, making

demonstrations, and providing

briefings;

(3) Costs of promotional items and

memorabilia, including models, gifts,

and souvenirs;

(4) Costs of advertising and public

relations designed solely to promote the

organization.

2. Alcoholic beverages. Costs of

alcoholic beverages are unallowable.

3. Bad debts. Bad debts, including

losses (whether actual or estimated)

arising from uncollectible accounts and

other claims, related collection costs,

and related legal costs, are unallowable.

4. Bid and proposal costs. (reserved)

5. Bonding costs.

a. Bonding costs arise when the

Federal Government requires assurance

against financial loss to itself or others

by reason of the act or default of the
Federal Register / Vol. 63, No. 104 / Monday, June 1, 1998 / Notices 29809

organization. They arise also in

instances where the organization

requires similar assurance. Included are

such bonds as bid, performance,

payment, advance payment,

infringement, and fidelity bonds.

b. Costs of bonding required pursuant

to the terms of the award are allowable.

c. Costs of bonding required by the

organization in the general conduct of

its operations are allowable to the extent

that such bonding is in accordance with

sound business practice and the rates

and premiums are reasonable under the

circumstances.

6. Communication costs. Costs

incurred for telephone services, local

and long distance telephone calls,

telegrams, radiograms, postage and the

like are allowable.

7. Compensation for personal

services.

a. Definition. Compensation for

personal services includes all

compensation paid currently or accrued

by the organization for services of

employees rendered during the period

of the award (except as otherwise

provided in subparagraph h). It

includes, but is not limited to, salaries,

wages, director’s and executive

committee member’s fees, incentive

awards, fringe benefits, pension plan

costs, allowances for off-site pay,

incentive pay, location allowances,

hardship pay, and cost of living

differentials.

b. Allowability. Except as otherwise

specifically provided in this paragraph,

the costs of such compensation are

allowable to the extent that:

(1) Total compensation to individual

employees is reasonable for the services

rendered and conforms to the

established policy of the organization

consistently applied to both Federal and

non-Federal activities; and

(2) Charges to awards whether treated

as direct or indirect costs are

determined and supported as required

in this paragraph.

c. Reasonableness.

(1) When the organization is

predominantly engaged in activities

other than those sponsored by the

Federal Government, compensation for

employees on federally-sponsored work

will be considered reasonable to the

extent that it is consistent with that paid

for similar work in the organization’s

other activities.

(2) When the organization is

predominantly engaged in federallysponsored activities and in cases where

the kind of employees required for the

Federal activities are not found in the

organization’s other activities,

compensation for employees on

federally-sponsored work will be

considered reasonable to the extent that

it is comparable to that paid for similar

work in the labor markets in which the

organization competes for the kind of

employees involved.

d. Special considerations in

determining allowability. Certain

conditions require special consideration

and possible limitations in determining

costs under Federal awards where

amounts or types of compensation

appear unreasonable. Among such

conditions are the following:

(1) Compensation to members of nonprofit organizations, trustees, directors,

associates, officers, or the immediate

families thereof. Determination should

be made that such compensation is

reasonable for the actual personal

services rendered rather than a

distribution of earnings in excess of

costs.

(2) Any change in an organization’s

compensation policy resulting in a

substantial increase in the

organization’s level of compensation,

particularly when it was concurrent

with an increase in the ratio of Federal

awards to other activities of the

organization or any change in the

treatment of allowability of specific

types of compensation due to changes in

Federal policy.

e. Unallowable costs. Costs which are

unallowable under other paragraphs of

this Attachment shall not be allowable

under this paragraph solely on the basis

that they constitute personal

compensation.

f. Fringe benefits.

(1) Fringe benefits in the form of

regular compensation paid to employees

during periods of authorized absences

from the job, such as vacation leave,

sick leave, military leave, and the like,

are allowable, provided such costs are

absorbed by all organization activities in

proportion to the relative amount of

time or effort actually devoted to each.

(2) Fringe benefits in the form of

employer contributions or expenses for

social security, employee insurance,

workmen’s compensation insurance,

pension plan costs (see subparagraph h),

and the like, are allowable, provided

such benefits are granted in accordance

with established written organization

policies. Such benefits whether treated

as indirect costs or as direct costs, shall

be distributed to particular awards and

other activities in a manner consistent

with the pattern of benefits accruing to

the individuals or group of employees

whose salaries and wages are chargeable

to such awards and other activities.

(3) (a) Provisions for a reserve under

a self-insurance program for

unemployment compensation or

workers’ compensation are allowable to

the extent that the provisions represent

reasonable estimates of the liabilities for

such compensation, and the types of

coverage, extent of coverage, and rates

and premiums would have been

allowable had insurance been

purchased to cover the risks. However,

provisions for self-insured liabilities

which do not become payable for more

than one year after the provision is

made shall not exceed the present value

of the liability.

(b) Where an organization follows a

consistent policy of expensing actual

payments to, or on behalf of, employees

or former employees for unemployment

compensation or workers’

compensation, such payments are

allowable in the year of payment with

the prior approval of the awarding

agency, provided they are allocated to

all activities of the organization.

(4) Costs of insurance on the lives of

trustees, officers, or other employees

holding positions of similar

responsibility are allowable only to the

extent that the insurance represents

additional compensation. The costs of

such insurance when the organization is

named as beneficiary are unallowable.

g. Organization-furnished

automobiles. That portion of the cost of

organization-furnished automobiles that

relates to personal use by employees

(including transportation to and from

work) is unallowable as fringe benefit or

indirect costs regardless of whether the

cost is reported as taxable income to the

employees. These costs are allowable as

direct costs to sponsored award when

necessary for the performance of the

sponsored award and approved by

awarding agencies.

h. Pension plan costs.

(1) Costs of the organization’s pension

plan which are incurred in accordance

with the established policies of the

organization are allowable, provided:

(a) Such policies meet the test of

reasonableness;

(b) The methods of cost allocation are

not discriminatory;

(c) The cost assigned to each fiscal

year is determined in accordance with

generally accepted accounting

principles (GAAP), as prescribed in

Accounting Principles Board Opinion

No. 8 issued by the American Institute

of Certified Public Accountants; and

(d) The costs assigned to a given fiscal

year are funded for all plan participants

within six months after the end of that

year. However, increases to normal and

past service pension costs caused by a

delay in funding the actuarial liability

beyond 30 days after each quarter of the

year to which such costs are assignable

are unallowable.
29810 Federal Register / Vol. 63, No. 104 / Monday, June 1, 1998 / Notices

(2) Pension plan termination

insurance premiums paid pursuant to

the Employee Retirement Income

Security Act (ERISA) of 1974 (Pub. L.

93–406) are allowable. Late payment

charges on such premiums are

unallowable.

(3) Excise taxes on accumulated

funding deficiencies and other penalties

imposed under ERISA are unallowable.

i. Incentive compensation. Incentive

compensation to employees based on

cost reduction, or efficient performance,

suggestion awards, safety awards, etc.,

are allowable to the extent that the

overall compensation is determined to

be reasonable and such costs are paid or

accrued pursuant to an agreement

entered into in good faith between the

organization and the employees before

the services were rendered, or pursuant

to an established plan followed by the

organization so consistently as to imply,

in effect, an agreement to make such

payment.

j. Overtime, extra-pay shift, and multishift premiums. See paragraph 32.

k. Severance pay. See paragraph 49.

l. Training and education costs. See

paragraph 53.

m. Support of salaries and wages.

(1) Charges to awards for salaries and

wages, whether treated as direct costs or

indirect costs, will be based on

documented payrolls approved by a

responsible official(s) of the

organization. The distribution of salaries

and wages to awards must be supported

by personnel activity reports, as

prescribed in subparagraph (2), except

when a substitute system has been

approved in writing by the cognizant

agency. (See subparagraph E.2 of

Attachment A.)

(2) Reports reflecting the distribution

of activity of each employee must be

maintained for all staff members

(professionals and nonprofessionals)

whose compensation is charged, in

whole or in part, directly to awards. In

addition, in order to support the

allocation of indirect costs, such reports

must also be maintained for other

employees whose work involves two or

more functions or activities if a

distribution of their compensation

between such functions or activities is

needed in the determination of the

organization’s indirect cost rate(s) (e.g.,

an employee engaged part-time in

indirect cost activities and part-time in

a direct function). Reports maintained

by non-profit organizations to satisfy

these requirements must meet the

following standards:

(a) The reports must reflect an afterthe-fact determination of the actual

activity of each employee. Budget

estimates (i.e., estimates determined

before the services are performed) do

not qualify as support for charges to

awards.

(b) Each report must account for the

total activity for which employees are

compensated and which is required in

fulfillment of their obligations to the

organization.

(c) The reports must be signed by the

individual employee, or by a

responsible supervisory official having

first hand knowledge of the activities

performed by the employee, that the

distribution of activity represents a

reasonable estimate of the actual work

performed by the employee during the

periods covered by the reports.

(d) The reports must be prepared at

least monthly and must coincide with

one or more pay periods.

(3) Charges for the salaries and wages

of nonprofessional employees, in

addition to the supporting

documentation described in

subparagraphs (1) and (2), must also be

supported by records indicating the

total number of hours worked each day

maintained in conformance with

Department of Labor regulations

implementing the Fair Labor Standards

Act (FLSA) (29 CFR Part 516). For this

purpose, the term ‘‘nonprofessional

employee’’ shall have the same meaning

as ‘‘nonexempt employee,’’ under FLSA.

(4) Salaries and wages of employees

used in meeting cost sharing or

matching requirements on awards must

be supported in the same manner as

salaries and wages claimed for

reimbursement from awarding agencies.

8. Contingency provisions.

Contributions to a contingency reserve

or any similar provision made for events

the occurrence of which cannot be

foretold with certainty as to time,

intensity, or with an assurance of their

happening, are unallowable. The term

‘‘contingency reserve’’ excludes selfinsurance reserves (see subparagraphs

7.f(3) and 22.a(2)(d)); pension funds (see

subparagraph 7.h); and reserves for

normal severance pay (see subparagraph

49.b(1)).

9. Contributions. Contributions and

donations by the organization to others

are unallowable.

10. Defense and prosecution of

criminal and civil proceedings, claims,

appeals and patent infringement.

a. Definitions.

(1) Conviction, as used herein, means

a judgment or a conviction of a criminal

offense by any court of competent

jurisdiction, whether entered upon as a

verdict or a plea, including a conviction

due to a plea of nolo contendere.

(2) Costs include, but are not limited

to, administrative and clerical expenses;

the cost of legal services, whether

performed by in-house or private

counsel; and the costs of the services of

accountants, consultants, or others

retained by the organization to assist it;

costs of employees, officers and trustees,

and any similar costs incurred before,

during, and after commencement of a

judicial or administrative proceeding

that bears a direct relationship to the

proceedings.

(3) Fraud, as used herein, means (i)

acts of fraud, corruption or attempts to

defraud the Federal Government or to

corrupt its agents, (ii) acts that

constitute a cause for debarment or

suspension (as specified in agency

regulations), and (iii) acts which violate

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

3729–3731, or the Anti-Kickback Act, 41

U.S.C., sections 51 and 54.

(4) Penalty does not include

restitution, reimbursement, or

compensatory damages.

(5) Proceeding includes an

investigation.

b. (1) Except as otherwise described

herein, costs incurred in connection

with any criminal, civil or

administrative proceeding (including

filing of a false certification)

commenced by the Federal Government,

or a State, local or foreign government,

are not allowable if the proceeding: (1)

relates to a violation of, or failure to

comply with, a Federal, State, local or

foreign statute or regulation by the

organization (including its agents and

employees), and (2) results in any of the

following dispositions:

(a) In a criminal proceeding, a

conviction.

(b) In a civil or administrative

proceeding involving an allegation of

fraud or similar misconduct, a

determination of organizational liability.

(c) In the case of any civil or

administrative proceeding, the

imposition of a monetary penalty.

(d) A final decision by an appropriate

Federal official to debar or suspend the

organization, to rescind or void an

award, or to terminate an award for

default by reason of a violation or

failure to comply with a law or

regulation.

(e) A disposition by consent or

compromise, if the action could have

resulted in any of the dispositions

described in (a), (b), (c) or (d).

(2) If more than one proceeding

involves the same alleged misconduct,

the costs of all such proceedings shall

be unallowable if any one of them

results in one of the dispositions shown

in subparagraph b.(1).

c. If a proceeding referred to in

subparagraph b is commenced by the

Federal Government and is resolved by

consent or compromise pursuant to an
Federal Register / Vol. 63, No. 104 / Monday, June 1, 1998 / Notices 29811

agreement entered into by the

organization and the Federal

Government, then the costs incurred by

the organization in connection with

such proceedings that are otherwise not

allowable under subparagraph b may be

allowed to the extent specifically

provided in such agreement.

d. If a proceeding referred to in

subparagraph b is commenced by a

State, local or foreign government, the

authorized Federal official may allow

the costs incurred by the organization

for such proceedings, if such authorized

official determines that the costs were

incurred as a result of (1) a specific term

or condition of a federally-sponsored

award, or (2) specific written direction

of an authorized official of the

sponsoring agency.

e. Costs incurred in connection with

proceedings described in subparagraph

b, but which are not made unallowable

by that subparagraph, may be allowed

by the Federal Government, but only to

the extent that:

(1) The costs are reasonable in

relation to the activities required to deal

with the proceeding and the underlying

cause of action;

(2) Payment of the costs incurred, as

allowable and allocable costs, is not

prohibited by any other provision(s) of

the sponsored award;

(3) The costs are not otherwise

recovered from the Federal Government

or a third party, either directly as a

result of the proceeding or otherwise;

and,

(4) The percentage of costs allowed

does not exceed the percentage

determined by an authorized Federal

official to be appropriate, considering

the complexity of the litigation,

generally accepted principles governing

the award of legal fees in civil actions

involving the United States as a party,

and such other factors as may be

appropriate. Such percentage shall not

exceed 80 percent. However, if an

agreement reached under subparagraph

c has explicitly considered this 80

percent limitation and permitted a

higher percentage, then the full amount

of costs resulting from that agreement

shall be allowable.

f. Costs incurred by the organization

in connection with the defense of suits

brought by its employees or exemployees under section 2 of the Major

Fraud Act of 1988 (Pub. L. 100–700),

including the cost of all relief necessary

to make such employee whole, where

the organization was found liable or

settled, are unallowable.

g. Costs of legal, accounting, and

consultant services, and related costs,

incurred in connection with defense

against Federal Government claims or

appeals, antitrust suits, or the

prosecution of claims or appeals against

the Federal Government, are

unallowable.

h. Costs of legal, accounting, and

consultant services, and related costs,

incurred in connection with patent

infringement litigation, are unallowable

unless otherwise provided for in the

sponsored awards.

i. Costs which may be unallowable

under this paragraph, including directly

associated costs, shall be segregated and

accounted for by the organization

separately. During the pendency of any

proceeding covered by subparagraphs b

and f, the Federal Government shall

generally withhold payment of such

costs. However, if in the best interests

of the Federal Government, the Federal

Government may provide for

conditional payment upon provision of

adequate security, or other adequate

assurance, and agreements by the

organization to repay all unallowable

costs, plus interest, if the costs are

subsequently determined to be

unallowable.

11. Depreciation and use allowances.

a. Compensation for the use of

buildings, other capital improvements,

and equipment on hand may be made

through use allowances or depreciation.

However, except as provided in

subparagraph f, a combination of the

two methods may not be used in

connection with a single class of fixed

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

computer equipment, etc.).

b. The computation of use allowances

or depreciation shall be based on the

acquisition cost of the assets involved.

The acquisition cost of an asset donated

to the organization by a third party shall

be its fair market value at the time of the

donation.

c. The computation of use allowances

or depreciation will exclude:

(1) The cost of land;

(2) Any portion of the cost of

buildings and equipment borne by or

donated by the Federal Government

irrespective of where title was originally

vested or where it presently resides; and

(3) Any portion of the cost of

buildings and equipment contributed by

or for the organization in satisfaction of

a statutory matching requirement.

d. Where the use allowance method is

followed, the use allowance for

buildings and improvement (including

land improvements, such as paved

parking areas, fences, and sidewalks)

will be computed at an annual rate not

exceeding two percent of acquisition

cost. The use allowance for equipment

will be computed at an annual rate not

exceeding six and two-thirds percent of

acquisition cost. When the use

allowance method is used for buildings,

the entire building must be treated as a

single asset; the building’s components

(e.g., plumbing system, heating and air

conditioning, etc.) cannot be segregated

from the building’s shell. The two

percent limitation, however, need not be

applied to equipment which is merely

attached or fastened to the building but

not permanently fixed to it and which

is used as furnishings or decorations or

for specialized purposes (e.g., dentist

chairs and dental treatment units,

counters, laboratory benches bolted to

the floor, dishwashers, carpeting, etc.).

Such equipment will be considered as

not being permanently fixed to the

building if it can be removed without

the need for costly or extensive

alterations or repairs to the building or

the equipment. Equipment that meets

these criteria will be subject to the six

and two-thirds percent equipment use

allowance limitation.

e. Where depreciation method is

followed, the period of useful service

(useful life) established in each case for

usable capital assets must take into

consideration such factors as type of

construction, nature of the equipment

used, technological developments in the

particular program area, and the

renewal and replacement policies

followed for the individual items or

classes of assets involved. The method

of depreciation used to assign 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 or lesser in the

early portions of its useful life than in

the later portions, 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. When the

depreciation method is introduced for

application to assets previously subject

to a use allowance, the combination of

use allowances and depreciation

applicable to such assets must not

exceed the total acquisition cost of the

assets. When the depreciation method is

used for buildings, a building’s shell

may be segregated from each building

component (e.g., plumbing system,

heating, and air conditioning system,

etc.) and each item depreciated over its

estimated useful life; or the entire

building (i.e., the shell and all

components) may be treated as a single

asset and depreciated over a single

useful life.

f. When the depreciation method is

used for a particular class of assets, no
29812 Federal Register / Vol. 63, No. 104 / Monday, June 1, 1998 / Notices

depreciation may be allowed on any

such assets that, under subparagraph e,

would be viewed as fully depreciated.

However, a reasonable use allowance

may be negotiated for such assets if

warranted after taking into

consideration the amount of

depreciation previously charged to the

Federal Government, the estimated

useful life remaining at time of

negotiation, the effect of any increased

maintenance charges or decreased

efficiency due to age, and any other

factors pertinent to the utilization of the

asset for the purpose contemplated.

g. Charges for use allowances or

depreciation must be supported by

adequate property records and physical

inventories must be taken at least once

every two years (a statistical sampling

basis is acceptable) to ensure that assets

exist and are usable and needed. When

the depreciation method is followed,

adequate depreciation records

indicating the amount of depreciation

taken each period must also be

maintained.

12. Donations.

a. Services received.

(1) Donated or volunteer services may

be furnished to an organization by

professional and technical personnel,

consultants, and other skilled and

unskilled labor. The value of these

services is not reimbursable either as a

direct or indirect cost.

(2) The value of donated services

utilized in the performance of a direct

cost activity shall be considered in the

determination of the organization’s

indirect cost rate(s) and, accordingly,

shall be allocated a proportionate share

of applicable indirect costs when the

following circumstances exist:

(a) The aggregate value of the services

is material;

(b) The services are supported by a

significant amount of the indirect costs

incurred by the organization;

(c) The direct cost activity is not

pursued primarily for the benefit of the

Federal Government,

(3) In those instances where there is

no basis for determining the fair market

value of the services rendered, the

recipient and the cognizant agency shall

negotiate an appropriate allocation of

indirect cost to the services.

(4) Where donated services directly

benefit a project supported by an award,

the indirect costs allocated to the

services will be considered as a part of

the total costs of the project. Such

indirect costs may be reimbursed under

the award or used to meet cost sharing

or matching requirements.

(5) The value of the donated services

may be used to meet cost sharing or

matching requirements under

conditions described in Sec. lll.23

of Circular A–110. Where donated

services are treated as indirect costs,

indirect cost rates will separate the

value of the donations so that

reimbursement will not be made.

(6) Fair market value of donated

services shall be computed as follows:

(a) Rates for volunteer services. Rates

for volunteers shall be consistent with

those regular rates paid for similar work

in other activities of the organization. In

cases where the kinds of skills involved

are not found in other activities of the

organization, the rates used shall be

consistent with those paid for similar

work in the labor market in which the

organization competes for such skills.

(b) Services donated by other

organizations. When an employer

donates the services of an employee,

these services shall be valued at the

employee’s regular rate of pay

(exclusive of fringe benefits and indirect

costs), provided the services are in the

same skill for which the employee is

normally paid. If the services are not in

the same skill for which the employee

is normally paid, fair market value shall

be computed in accordance with

subparagraph (a).

b. Goods and space.

(1) Donated goods; i.e., expendable

personal property/supplies, and

donated use of space may be furnished

to an organization. The value of the

goods and space is not reimbursable

either as a direct or indirect cost.

(2) The value of the donations may be

used to meet cost sharing or matching

share requirements under the conditions

described in Sec. lll.23 of Circular

A–110. The value of the donations shall

be determined in accordance with Sec.

lll.23 of Circular A–110. Where

donations are treated as indirect costs,

indirect cost rates will separate the

value of the donations so that

reimbursement will not be made.

13. Employee morale, health, and

welfare costs and credits. The costs of

house publications, health or first-aid

clinics, and/or infirmaries, recreational

activities, employees’ counseling

services, and other expenses incurred in

accordance with the organization’s

established practice or custom for the

improvement of working conditions,

employer-employee relations, employee

morale, and employee performance are

allowable. Such costs will be equitably

apportioned to all activities of the

organization. Income generated from

any of these activities will be credited

to the cost thereof unless such income

has been irrevocably set over to

employee welfare organizations.

14. Entertainment costs. Costs of

amusement, diversion, social activities,

ceremonials, and costs relating thereto,

such as meals, lodging, rentals,

transportation, and gratuities are

unallowable (but see paragraphs 13 and

30).

15. Equipment and other capital

expenditures.

a. As used in this paragraph, the

following terms have the meanings set

forth below:

(1) ‘‘Equipment’’ means an article of

nonexpendable, tangible personal

property having a useful life of more

than one year and an acquisition cost

which equals or exceeds the lesser of (a)

the capitalization level established by

the organization for the financial

statement purposes, or (b) $5,000. The

unamortized portion of any equipment

written off as a result of a change in

capitalization levels may be recovered

by continuing to claim the otherwise

allowable use allowances or

depreciation on the equipment, or by

amortizing the amount to be written off

over a period of years as negotiated with

the Federal cognizant agency.

(2) Acquisition cost means the net

invoice unit price of an item of

equipment, including the cost of any

modifications, attachments, accessories,

or auxiliary apparatus necessary to

make it usable for the purpose for which

it is acquired. Ancillary charges, such as

taxes, duty, protective in-transit

insurance, freight, and installation shall

be included in or excluded from

acquisition cost in accordance with the

organization’s regular written

accounting practices.

(3) Special purpose equipment means

equipment which is usable only for

research, medical, scientific, or

technical activities. Examples of special

purpose equipment include

microscopes, x-ray machines, surgical

instruments, and spectrometers.

(4) General purpose equipment means

equipment which is usable for other

than research, medical, scientific, or

technical activities, whether or not

special modifications are needed to

make them suitable for a particular

purpose. Examples of general purpose

equipment include office equipment

and furnishings, air conditioning

equipment, reproduction and printing

equipment, motor vehicles, and

automatic data processing equipment.

b. (1) Capital expenditures for general

purpose equipment are unallowable as a

direct cost except with the prior

approval of the awarding agency.

(2) Capital expenditures for special

purpose equipment are allowable as

direct costs, provided that items with a

unit cost of $5,000 or more have the

prior approval of awarding agency.
Federal Register / Vol. 63, No. 104 / Monday, June 1, 1998 / Notices 29813

c. Capital expenditures for land or

buildings are unallowable as a direct

cost except with the prior approval of

the awarding agency.

d. Capital expenditures for

improvements to land, buildings, or

equipment which materially increase

their value or useful life are unallowable

as a direct cost except with the prior

approval of the awarding agency.

e. Equipment and other capital

expenditures are unallowable as

indirect costs. However, see paragraph

11 for allowability of use allowances or

depreciation on buildings, capital

improvements, and equipment. Also,

see paragraph 46 for allowability of

rental costs for land, buildings, and

equipment.

16. Fines and penalties. Costs of fines

and penalties resulting from violations

of, or failure of the organization to

comply with Federal, State, and local

laws and regulations are unallowable

except when incurred as a result of

compliance with specific provisions of

an award or instructions in writing from

the awarding agency.

17. Fringe benefits. See subparagraph

7.f.

18. Goods or services for personal use.

Costs of goods or services for personal

use of the organization’s employees are

unallowable regardless of whether the

cost is reported as taxable income to the

employees.

19. Housing and personal living

expenses.

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

maintenance, utilities, furnishings, rent,

etc.), housing allowances and personal

living expenses for/of the organization’s

officers are unallowable as fringe benefit

or indirect costs regardless of whether

the cost is reported as taxable income to

the employees. These costs are

allowable as direct costs to sponsored

award when necessary for the

performance of the sponsored award

and approved by awarding agencies.

b. The term ‘‘officers’’ includes

current and past officers and employees.

20. Idle facilities and idle capacity.

a. As used in this paragraph, the

following terms have the meanings set

forth below:

(1) Facilities means land and

buildings or any portion thereof,

equipment individually or collectively,

or any other tangible capital asset,

wherever located, and whether owned

or leased by the organization.

(2) Idle facilities means completely

unused facilities that are excess to the

organization’s current needs.

(3) Idle capacity means the unused

capacity of partially used facilities. It is

the difference between that which a

facility could achieve under 100 percent

operating time on a one-shift basis less

operating interruptions resulting from

time lost for repairs, setups,

unsatisfactory materials, and other

normal delays, and the extent to which

the facility was actually used to meet

demands during the accounting period.

A multi-shift basis may be used if it can

be shown that this amount of usage

could normally be expected for the type

of facility involved.

(4) Costs of idle facilities or idle

capacity means costs such as

maintenance, repair, housing, rent, and

other related costs, e.g., property taxes,

insurance, and depreciation or use

allowances.

b. The costs of idle facilities are

unallowable except to the extent that:

(1) They are necessary to meet

fluctuations in workload; or

(2) Although not necessary to meet

fluctuations in workload, they were

necessary when acquired and are now

idle because of changes in program

requirements, efforts to achieve more

economical operations, reorganization,

termination, or other causes which

could not have been reasonably

foreseen. Under the exception stated in

this subparagraph, costs of idle facilities

are allowable for a reasonable period of

time, ordinarily not to exceed one year,

depending upon the initiative taken to

use, lease, or dispose of such facilities

(but see subparagraphs 48.b and d).

c. The costs of idle capacity are

normal costs of doing business and are

a factor in the normal fluctuations of

usage or indirect cost rates from period

to period. Such costs are allowable,

provided the capacity is reasonably

anticipated to be necessary or was

originally reasonable and is not subject

to reduction or elimination by

subletting, renting, or sale, in

accordance with sound business,

economics, or security practices.

Widespread idle capacity throughout an

entire facility or among a group of assets

having substantially the same function

may be idle facilities.

21. Independent research and

development. [Reserved]

22. Insurance and indemnification.

a. Insurance includes insurance

which the organization is required to

carry, or which is approved, under the

terms of the award and any other

insurance which the organization

maintains in connection with the

general conduct of its operations. This

paragraph does not apply to insurance

which represents fringe benefits for

employees (see subparagraphs 7.f and

7.h(2)).

(1) Costs of insurance required or

approved, and maintained, pursuant to

the award are allowable.

(2) Costs of other insurance

maintained by the organization in

connection with the general conduct of

its operations are allowable subject to

the following limitations:

(a) Types and extent of coverage shall

be in accordance with sound business

practice and the rates and premiums

shall be reasonable under the

circumstances.

(b) Costs allowed for business

interruption or other similar insurance

shall be limited to exclude coverage of

management fees.

(c) Costs of insurance or of any

provisions for a reserve covering the risk

of loss or damage to Federal property

are allowable only to the extent that the

organization is liable for such loss or

damage.

(d) Provisions for a reserve under a

self-insurance program are allowable to

the extent that types of coverage, extent

of coverage, rates, and premiums would

have been allowed had insurance been

purchased to cover the risks. However,

provision for known or reasonably

estimated self-insured liabilities, which

do not become payable for more than

one year after the provision is made,

shall not exceed the present value of the

liability.

(e) Costs of insurance on the lives of

trustees, officers, or other employees

holding positions of similar

responsibilities are allowable only to the

extent that the insurance represents

additional compensation (see

subparagraph 7.f(4)). The cost of such

insurance when the organization is

identified as the beneficiary is

unallowable.

(f) Insurance against defects. Costs of

insurance with respect to any costs

incurred to correct defects in the

organization’s materials or

workmanship are unallowable.

(g) Medical liability (malpractice)

insurance. Medical liability insurance is

an allowable cost of Federal research

programs only to the extent that the

Federal research programs involve

human subjects or training of

participants in research techniques.

Medical liability insurance costs shall

be treated as a direct cost and shall be

assigned to individual projects based on

the manner in which the insurer

allocates the risk to the population

covered by the insurance.

(3) Actual losses which could have

been covered by permissible insurance

(through the purchase of insurance or a

self-insurance program) are unallowable

unless expressly provided for in the

award, except:

(a) Costs incurred because of losses

not covered under nominal deductible

insurance coverage provided in keeping
29814 Federal Register / Vol. 63, No. 104 / Monday, June 1, 1998 / Notices

with sound business practice are

allowable.

(b) Minor losses not covered by

insurance, such as spoilage, breakage,

and disappearance of supplies, which

occur in the ordinary course of

operations, are allowable.

b. Indemnification includes securing

the organization against liabilities to

third persons and any other loss or

damage, not compensated by insurance

or otherwise. The Federal Government

is obligated to indemnify the

organization only to the extent expressly

provided in the award.

23. Interest, fundraising, and

investment management costs.

a. Interest.

(1) Costs incurred for interest on

borrowed capital or temporary use of

endowment funds, however

represented, are unallowable. However,

interest on debt incurred after the

effective date of this revision to acquire

or replace capital assets (including

renovations, alterations, equipment,

land, and capital assets acquired

through capital leases), acquired after

the effective date of this revision and

used in support of sponsored

agreements is allowable, provided that:

(a) For facilities acquisitions

(excluding renovations and alterations)

costing over $10 million where the

Federal Government’s reimbursement is

expected to equal or exceed 40 percent

of an asset’s cost, the non-profit

organization prepares, prior to the

acquisition or replacement of the capital

asset(s), a justification that demonstrates

the need for the facility in the conduct

of federally-sponsored activities. Upon

request, the needs justification must be

provided to the Federal agency with

cost cognizance authority as a

prerequisite to the continued

allowability of interest on debt and

depreciation related to the facility. The

needs justification for the acquisition of

a facility should include, at a minimum,

the following:

• A statement of purpose and

justification for facility acquisition or

replacement.

• A statement as to why current

facilities are not adequate.

• A statement of planned future use

of the facility.

• A description of the financing

agreement to be arranged for the facility.

• A summary of the building contract

with estimated cost information and

statement of source and use of funds.

• A schedule of planned occupancy

dates.

(b) For facilities costing over

$500,000, the non-profit organization

prepares, prior to the acquisition or

replacement of the facility, a lease/

purchase analysis in accordance with

the provisions of Sec. lll.30 through

lll.37 of Circular A–110, which

shows that a financed purchase or

capital lease is less costly to the

organization than other leasing

alternatives, on a net present value

basis. Discount rates used should be

equal to the non-profit organization’s

anticipated interest rates and should be

no higher than the fair market rate

available to the non-profit organization

from an unrelated (‘‘arm’s length’’)

third-party. The lease/purchase analysis

shall include a comparison of the net

present value of the projected total cost

comparisons of both alternatives over

the period the asset is expected to be

used by the non-profit organization. The

cost comparisons associated with

purchasing the facility shall include the

estimated purchase price, anticipated

operating and maintenance costs

(including property taxes, if applicable)

not included in the debt financing, less

any estimated asset salvage value at the

end of the period defined above. The

cost comparison for a capital lease shall

include the estimated total lease

payments, any estimated bargain

purchase option, operating and

maintenance costs, and taxes not

included in the capital leasing

arrangement, less any estimated credits

due under the lease at the end of the

period defined above. Projected

operating lease costs shall be based on

the anticipated cost of leasing

comparable facilities at fair market rates

under rental agreements that would be

renewed or reestablished over the

period defined above, and any expected

maintenance costs and allowable

property taxes to be borne by the nonprofit organization directly or as part of

the lease arrangement.

(c) The actual interest cost claimed is

predicated upon interest rates that are

no higher than the fair market rate

available to the non-profit organization

from an unrelated (‘‘arm’s length’’) third

party.

(d) Investment earnings, including

interest income, on bond or loan

principal, pending payment of the

construction or acquisition costs, are

used to offset allowable interest cost.

Arbitrage earnings reportable to the

Internal Revenue Service are not

required to be offset against allowable

interest costs.

(e) Reimbursements are limited to the

least costly alternative based on the total

cost analysis required under

subparagraph (b). For example, if an

operating lease is determined to be less

costly than purchasing through debt

financing, then reimbursement is

limited to the amount determined if

leasing had been used. In all cases

where a lease/purchase analysis is

performed, Federal reimbursement shall

be based upon the least expensive

alternative.

(f) Non-profit organizations are also

subject to the following conditions:

(i) Interest on debt incurred to finance

or refinance assets acquired before or

reacquired after the effective date of this

Circular is not allowable.

(ii) For debt arrangements over $1

million, unless the non-profit

organization makes an initial equity

contribution to the asset purchase of 25

percent or more, non-profit

organizations shall reduce claims for

interest expense by an amount equal to

imputed interest earnings on excess

cash flow, which is to be calculated as

follows. Annually, non-profit

organizations shall prepare a cumulative

(from the inception of the project) report

of monthly cash flows that includes

inflows and outflows, regardless of the

funding source. Inflows consist of

depreciation expense, amortization of

capitalized construction interest, and

annual interest expense. For cash flow

calculations, the annual inflow figures

shall be divided by the number of

months in the year (usually 12) that the

building is in service for monthly

amounts. Outflows consist of initial

equity contributions, debt principal

payments (less the pro rata share

attributable to the unallowable costs of

land) and interest payments. Where

cumulative inflows exceed cumulative

outflows, interest shall be calculated on

the excess inflows for that period and be

treated as a reduction to allowable

interest expense. The rate of interest to

be used to compute earnings on excess

cash flows shall be the three month

Treasury Bill closing rate as of the last

business day of that month.

(iii) Substantial relocation of

federally-sponsored activities from a

facility financed by indebtedness, the

cost of which was funded in whole or

part through Federal reimbursements, to

another facility prior to the expiration of

a period of 20 years requires notice to

the Federal cognizant agency. The

extent of the relocation, the amount of

the Federal participation in the

financing, and the depreciation and

interest charged to date may require

negotiation and/or downward

adjustments of replacement space

charged to Federal programs in the

future.

(iv) The allowable costs to acquire

facilities and equipment are limited to

a fair market value available to the nonprofit organization from an unrelated

(‘‘arm’s length’’) third party.
Federal Register / Vol. 63, No. 104 / Monday, June 1, 1998 / Notices 29815

(2) For non-profit organizations

subject to ‘‘full coverage’’’ under the

Cost Accounting Standards (CAS) as

defined at 48 CFR 9903.201, the interest

allowability provisions of subparagraph

a do not apply. Instead, these

organizations’ sponsored agreements are

subject to CAS 414 (48 CFR 9903.414),

cost of money as an element of the cost

of facilities capital, and CAS 417 (48

CFR 9903.417), cost of money as an

element of the cost of capital assets

under construction.

(3) The following definitions are to be

used for purposes of paragraph 23:

(a) Re-acquired assets means assets

held by the non-profit organization prior

to the effective date of this revision that

have again come to be held by the

organization, whether through

repurchase or refinancing. It does not

include assets acquired to replace older

assets.

(b) Initial equity contribution means

the amount or value of contributions

made by non-Federal entities for the

acquisition of the asset or prior to

occupancy of facilities.

(c) Asset costs means the capitalizable

costs of an asset, including construction

costs, acquisition costs, and other such

costs capitalized in accordance with

GAAP.

b. Costs of organized fundraising,

including financial campaigns,

endowment drives, solicitation of gifts

and bequests, and similar expenses

incurred solely to raise capital or obtain

contributions are unallowable.

c. Costs of investment counsel and

staff and similar expenses incurred

solely to enhance income from

investments are unallowable.

d. Fundraising and investment

activities shall be allocated an

appropriate share of indirect costs under

the conditions described in

subparagraph B.3 of Attachment A.

24. Labor relations costs. Costs

incurred in maintaining satisfactory

relations between the organization and

its employees, including costs of labor

management committees, employee

publications, and other related activities

are allowable.

25. Lobbying.

a. Notwithstanding other provisions

of this Circular, costs associated with

the following activities are unallowable:

(1) Attempts to influence the

outcomes of any Federal, State, or local

election, referendum, initiative, or

similar procedure, through in kind or

cash contributions, endorsements,

publicity, or similar activity;

(2) Establishing, administering,

contributing to, or paying the expenses

of a political party, campaign, political

action committee, or other organization

established for the purpose of

influencing the outcomes of elections;

(3) Any attempt to influence: (i) The

introduction of Federal or State

legislation; or (ii) the enactment or

modification of any pending Federal or

State legislation through

communication with any member or

employee of the Congress or State

legislature (including efforts to

influence State or local officials to

engage in similar lobbying activity), or

with any Government official or

employee in connection with a decision

to sign or veto enrolled legislation;

(4) Any attempt to influence: (i) The

introduction of Federal or State

legislation; or (ii) the enactment or

modification of any pending Federal or

State legislation by preparing,

distributing or using publicity or

propaganda, or by urging members of

the general public or any segment

thereof to contribute to or participate in

any mass demonstration, march, rally,

fundraising drive, lobbying campaign or

letter writing or telephone campaign; or

(5) Legislative liaison activities,

including attendance at legislative

sessions or committee hearings,

gathering information regarding

legislation, and analyzing the effect of

legislation, when such activities are

carried on in support of or in knowing

preparation for an effort to engage in

unallowable lobbying.

b. The following activities are

excepted from the coverage of

subparagraph a:

(1) Providing a technical and factual

presentation of information on a topic

directly related to the performance of a

grant, contract or other agreement

through hearing testimony, statements

or letters to the Congress or a State

legislature, or subdivision, member, or

cognizant staff member thereof, in

response to a documented request

(including a Congressional Record

notice requesting testimony or

statements for the record at a regularly

scheduled hearing) made by the

recipient member, legislative body or

subdivision, or a cognizant staff member

thereof; provided such information is

readily obtainable and can be readily

put in deliverable form; and further

provided that costs under this section

for travel, lodging or meals are

unallowable unless incurred to offer

testimony at a regularly scheduled

Congressional hearing pursuant to a

written request for such presentation

made by the Chairman or Ranking

Minority Member of the Committee or

Subcommittee conducting such hearing.

(2) Any lobbying made unallowable

by subparagraph a(3) to influence State

legislation in order to directly reduce

the cost, or to avoid material

impairment of the organization’s

authority to perform the grant, contract,

or other agreement.

(3) Any activity specifically

authorized by statute to be undertaken

with funds from the grant, contract, or

other agreement.

c. (1) When an organization seeks

reimbursement for indirect costs, total

lobbying costs shall be separately

identified in the indirect cost rate

proposal, and thereafter treated as other

unallowable activity costs in accordance

with the procedures of subparagraph B.3

of Attachment A.

(2) Organizations shall submit, as part

of the annual indirect cost rate proposal,

a certification that the requirements and

standards of this paragraph have been

complied with.

(3) Organizations shall maintain

adequate records to demonstrate that the

determination of costs as being

allowable or unallowable pursuant to

paragraph 25 complies with the

requirements of this Circular.

(4) Time logs, calendars, or similar

records shall not be required to be

created for purposes of complying with

this paragraph during any particular

calendar month when: (1) the employee

engages in lobbying (as defined in

subparagraphs (a) and (b)) 25 percent or

less of the employee’s compensated

hours of employment during that

calendar month, and (2) within the

preceding five-year period, the

organization has not materially

misstated allowable or unallowable

costs of any nature, including legislative

lobbying costs. When conditions (1) and

(2) are met, organizations are not

required to establish records to support

the allowabliliy of claimed costs in

addition to records already required or

maintained. Also, when conditions (1)

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

calendars, or similar records will not

serve as a basis for disallowing costs by

contesting estimates of lobbying time

spent by employees during a calendar

month.

(5) Agencies shall establish

procedures for resolving in advance, in

consultation with OMB, any significant

questions or disagreements concerning

the interpretation or application of

paragraph 25. Any such advance

resolution shall be binding in any

subsequent settlements, audits or

investigations with respect to that grant

or contract for purposes of

interpretation of this Circular; provided,

however, that this shall not be

construed to prevent a contractor or

grantee from contesting the lawfulness

of such a determination.
29816 Federal Register / Vol. 63, No. 104 / Monday, June 1, 1998 / Notices

26. Losses on other awards. Any

excess of costs over income on any

award is unallowable as a cost of any

other award. This includes, but is not

limited to, the organization’s

contributed portion by reason of cost

sharing agreements or any underrecoveries through negotiation of lump

sums for, or ceilings on, indirect costs.

27. Maintenance and repair costs.

Costs incurred for necessary

maintenance, repair, or upkeep of

buildings and equipment (including

Federal property unless otherwise

provided for) which neither add to the

permanent value of the property nor

appreciably prolong its intended life,

but keep it in an efficient operating

condition, are allowable. Costs incurred

for improvements which add to the

permanent value of the buildings and

equipment or appreciably prolong their

intended life shall be treated as capital

expenditures (see paragraph 15).

28. Materials and supplies. The costs

of materials and supplies necessary to

carry out an award are allowable. Such

costs should be charged at their actual

prices after deducting all cash

discounts, trade discounts, rebates, and

allowances received by the organization.

Withdrawals from general stores or

stockrooms should be charged at cost

under any recognized method of pricing

consistently applied. Incoming

transportation charges may be a proper

part of material cost. Materials and

supplies charged as a direct cost should

include only the materials and supplies

actually used for the performance of the

contract or grant, and due credit should

be given for any excess materials or

supplies retained, or returned to

vendors.

29. Meetings and conferences.

a. Costs associated with the conduct

of meetings and conferences include the

cost of renting facilities, meals,

speakers’ fees, and the like. But see

paragraph 14, Entertainment costs, and

paragraph 34, Participant support costs.

b. To the extent that these costs are

identifiable with a particular cost

objective, they should be charged to that

objective (see paragraph B of

Attachment A). These costs are

allowable, provided that they meet the

general tests of allowability, shown in

paragraph A of Attachment A to this

Circular.

c. Costs of meetings and conferences

held to conduct the general

administration of the organization are

allowable.

30. Memberships, subscriptions, and

professional activity costs.

a. Costs of the organization’s

membership in business, technical, and

professional organizations are

allowable.

b. Costs of the organization’s

subscriptions to business, professional,

and technical periodicals are allowable.

c. Costs of meetings and conferences,

when the primary purpose is the

dissemination of technical information,

are allowable. This includes costs of

meals, transportation, rental of facilities,

and other items incidental to such

meetings or conferences.

d. Costs of membership in any civic

or community organization are

allowable with prior approval by

Federal cognizant agency.

e. Costs of membership in any country

club or social or dining club or

organization are unallowable.

31. Organization costs. Expenditures,

such as incorporation fees, brokers’ fees,

fees to promoters, organizers or

management consultants, attorneys,

accountants, or investment counselors,

whether or not employees of the

organization, in connection with

establishment or reorganization of an

organization, are unallowable except

with prior approval of the awarding

agency.

32. Overtime, extra-pay shift, and

multi-shift premiums. Premiums for

overtime, extra-pay shifts, and multishift work are allowable only with the

prior approval of the awarding agency

except:

a. When necessary to cope with

emergencies, such as those resulting

from accidents, natural disasters,

breakdowns of equipment, or occasional

operational bottlenecks of a sporadic

nature.

b. When employees are performing

indirect functions, such as

administration, maintenance, or

accounting.

c. In the performance of tests,

laboratory procedures, or other similar

operations which are continuous in

nature and cannot reasonably be

interrupted or otherwise completed.

d. When lower overall cost to the

Federal Government will result.

33. Page charges in professional

journals. Page charges for professional

journal publications are allowable as a

qnecessary part of research costs, where:

a. The research papers report work

supported by the Federal Government;

and

b. The charges are levied impartially

on all research papers published by the

journal, whether or not by federallysponsored authors.

34. Participant support costs.

Participant support costs are direct costs

for items such as stipends or subsistence

allowances, travel allowances, and

registration fees paid to or on behalf of

participants or trainees (but not

employees) in connection with

meetings, conferences, symposia, or

training projects. These costs are

allowable with the prior approval of the

awarding agency.

35. Patent costs.

a. Costs of (i) preparing disclosures,

reports, and other documents required

by the award and of searching the art to

the extent necessary to make such

disclosures, (ii) preparing documents

and any other patent costs in connection

with the filing and prosecution of a

United States patent application where

title or royalty-free license is required

by the Federal Government to be

conveyed to the Federal Government,

and (iii) general counseling services

relating to patent and copyright matters,

such as advice on patent and copyright

laws, regulations, clauses, and employee

agreements are allowable (but see

paragraph 39).

b. Cost of preparing disclosures,

reports, and other documents and of

searching the art to the extent necessary

to make disclosures, if not required by

the award, are unallowable. Costs in

connection with (i) filing and

prosecuting any foreign patent

application, or (ii) any United States

patent application, where the award

does not require conveying title or a

royalty-free license to the Federal

Government, are unallowable (also see

paragraph 47).

36. Pension plans. See subparagraph

7.h.

37. Plant security costs. Necessary

expenses incurred to comply with

Federal security requirements or for

facilities protection, including wages,

uniforms, and equipment of personnel

are allowable.

38. Pre-award costs. Pre-award costs

are those incurred prior to the effective

date of the award directly pursuant to

the negotiation and in anticipation of

the award where such costs are

necessary to comply with the proposed

delivery schedule or period of

performance. Such costs are allowable

only to the extent that they would have

been allowable if incurred after the date

of the award and only with the written

approval of the awarding agency.

39. Professional service costs.

a. Costs of professional and consultant

services rendered by persons who are

members of a particular profession or

possess a special skill, and who are not

officers or employees of the

organization, are allowable, subject to

subparagraphs b and c when reasonable

in relation to the services rendered and

when not contingent upon recovery of

the costs from the Federal Government.
Federal Register / Vol. 63, No. 104 / Monday, June 1, 1998 / Notices 29817

b. In determining the allowability of

costs in a particular case, no single

factor or any special combination of

factors is necessarily determinative.

However, the following factors are

relevant:

(1) The nature and scope of the

service rendered in relation to the

service required.

(2) The necessity of contracting for the

service, considering the organization’s

capability in the particular area.

(3) The past pattern of such costs,

particularly in the years prior to Federal

awards.

(4) The impact of Federal awards on

the organization’s business (i.e., what

new problems have arisen).

(5) Whether the proportion of Federal

work to the organization’s total business

is such as to influence the organization

in favor of incurring the cost,

particularly where the services rendered

are not of a continuing nature and have

little relationship to work under Federal

grants and contracts.

(6) Whether the service can be

performed more economically by direct

employment rather than contracting.

(7) The qualifications of the

individual or concern rendering the

service and the customary fees charged,

especially on non-Federal awards.

(8) Adequacy of the contractual

agreement for the service (e.g.,

description of the service, estimate of

time required, rate of compensation, and

termination provisions).

c. In addition to the factors in

subparagraph b, retainer fees to be

allowable must be supported by

evidence of bona fide services available

or rendered.

40. Profits and losses on disposition of

depreciable property or other capital

assets.

a. (1) Gains and losses on sale,

retirement, or other disposition of

depreciable property shall be included

in the year in which they occur as

credits or charges to cost grouping(s) in

which the depreciation applicable to

such property was included. The

amount of the gain or loss to be

included as a credit or charge to the

appropriate 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 reserve account

and is reflected in the depreciation

allowable under paragraph 11.

(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 subparagraph

22.a(3).

(d) Compensation for the use of the

property was provided through use

allowances in lieu of depreciation in

accordance with paragraph 11.

(e) Gains and losses arising from mass

or extraordinary sales, retirements, or

other dispositions shall be considered

on a case-by-case basis.

b. Gains or losses of any nature arising

from the sale or exchange of property

other than the property covered in

subparagraph a shall be excluded in

computing award costs.

41. Publication and printing costs.

a. Publication costs include the costs

of printing (including the processes of

composition, plate-making, press work,

binding, and the end products produced

by such processes), distribution,

promotion, mailing, and general

handling.

b. If these costs are not identifiable

with a particular cost objective, they

should be allocated as indirect costs to

all benefiting activities of the

organization.

c. Publication and printing costs are

unallowable as direct costs except with

the prior approval of the awarding

agency.

d. The cost of page charges in journals

is addressed in paragraph 33.

42. Rearrangement and alteration

costs. Costs incurred for ordinary or

normal rearrangement and alteration of

facilities are allowable. Special

arrangement and alteration costs

incurred specifically for the project are

allowable with the prior approval of the

awarding agency.

43. Reconversion costs. Costs incurred

in the restoration or rehabilitation of the

organization’s facilities to

approximately the same condition

existing immediately prior to

commencement of Federal awards, fair

wear and tear excepted, are allowable.

44. Recruiting costs.

a. Subject to subparagraphs b, c, and

d, and provided that the size of the staff

recruited and maintained is in keeping

with workload requirements, costs of

‘‘help wanted’’ advertising, operating

costs of an employment office necessary

to secure and maintain an adequate

staff, costs of operating an aptitude and

educational testing program, travel costs

of employees while engaged in

recruiting personnel, travel costs of

applicants for interviews for prospective

employment, and relocation costs

incurred incident to recruitment of new

employees, are allowable to the extent

that such costs are incurred pursuant to

a well-managed recruitment program.

Where the organization uses

employment agencies, costs that are not

in excess of standard commercial rates

for such services are allowable.

b. In publications, costs of help

wanted advertising that includes color,

includes advertising material for other

than recruitment purposes, or is

excessive in size (taking into

consideration recruitment purposes for

which intended and normal

organizational practices in this respect),

are unallowable.

c. Costs of help wanted advertising,

special emoluments, fringe benefits, and

salary allowances incurred to attract

professional personnel from other

organizations that do not meet the test

of reasonableness or do not conform

with the established practices of the

organization, are unallowable.

d. Where relocation costs incurred

incident to recruitment of a new

employee have been allowed either as

an allocable direct or indirect cost, and

the newly hired employee resigns for

reasons within his control within twelve

months after being hired, the

organization will be required to refund

or credit such relocation costs to the

Federal Government.

45. Relocation costs.

a. Relocation costs are costs incident

to the permanent change of duty

assignment (for an indefinite period or

for a stated period of not less than 12

months) of an existing employee or

upon recruitment of a new employee.

Relocation costs are allowable, subject

to the limitation described in

subparagraphs b, c, and d, provided

that:

(1) The move is for the benefit of the

employer.

(2) Reimbursement to the employee is

in accordance with an established

written policy consistently followed by

the employer.

(3) The reimbursement does not

exceed the employee’s actual (or

reasonably estimated) expenses.

b. Allowable relocation costs for

current employees are limited to the

following:

(1) The costs of transportation of the

employee, members of his immediate

family and his household, and personal

effects to the new location.

(2) The costs of finding a new home,

such as advance trips by employees and

spouses to locate living quarters and

temporary lodging during the transition

period, up to maximum period of 30

days, including advance trip time.

(3) Closing costs, such as brokerage,

legal, and appraisal fees, incident to the
29818 Federal Register / Vol. 63, No. 104 / Monday, June 1, 1998 / Notices

disposition of the employee’s former

home. These costs, together with those

described in (4), are limited to 8 per

cent of the sales price of the employee’s

former home.

(4) The continuing costs of ownership

of the vacant former home after the

settlement or lease date of the

employee’s new permanent home, such

as maintenance of buildings and

grounds (exclusive of fixing up

expenses), utilities, taxes, and property

insurance.

(5) Other necessary and reasonable

expenses normally incident to

relocation, such as the costs of canceling

an unexpired lease, disconnecting and

reinstalling household appliances, and

purchasing insurance against loss of or

damages to personal property. The cost

of canceling an unexpired lease is

limited to three times the monthly

rental.

c. Allowable relocation costs for new

employees are limited to those

described in (1) and (2) of subparagraph

b. When relocation costs incurred

incident to the recruitment of new

employees have been allowed either as

a direct or indirect cost and the

employee resigns for reasons within his

control within 12 months after hire, the

organization shall refund or credit the

Federal Government for its share of the

cost. However, the costs of travel to an

overseas location shall be considered

travel costs in accordance with

paragraph 55 and not relocation costs

for the purpose of this paragraph if

dependents are not permitted at the

location for any reason and the costs do

not include costs of transporting

household goods.

d. The following costs related to

relocation are unallowable:

(1) Fees and other costs associated

with acquiring a new home.

(2) A loss on the sale of a former

home.

(3) Continuing mortgage principal and

interest payments on a home being sold.

(4) Income taxes paid by an employee

related to reimbursed relocation costs.

46. Rental costs.

a. Subject to the limitations described

in subparagraphs b through d, rental

costs are allowable to the extent that the

rates are reasonable in light of such

factors as: rental costs of comparable

property, if any; market conditions in

the area; alternatives available; and the

type, life expectancy, condition, and

value of the property leased.

b. Rental costs under sale and

leaseback arrangements are allowable

only up to the amount that would be

allowed had the organization continued

to own the property.

c. Rental costs under less-than-armslength leases are allowable only up to

the amount that would be allowed had

title to the property vested in the

organization. For this purpose, a lessthan-arms-length lease is one under

which one party to the lease agreement

is able to control or substantially

influence the actions of the other. Such

leases include, but are not limited to

those between (i) divisions of an

organization; (ii) organizations under

common control through common

officers, directors, or members; and (iii)

an organization and a director, trustee,

officer, or key employee of the

organization or his immediate family

either directly or through corporations,

trusts, or similar arrangements in which

they hold a controlling interest.

d. Rental costs under leases which are

required to be treated as capital leases

under GAAP, are allowable only up to

the amount that would be allowed had

the organization purchased the property

on the date the lease agreement was

executed, i.e., to the amount that

minimally would pay for depreciation

or use allowances, maintenance, taxes,

and insurance. Interest costs related to

capitalized leases are allowable to the

extent they meet criteria in

subparagraph 23.a. Unallowable costs

include amounts paid for profit,

management fees, and taxes that would

not have been incurred had the

organization purchased the facility.

47. Royalties and other costs for use

of patents and copyrights.

a. Royalties on a patent or copyright

or amortization of the cost of acquiring

by purchase a copyright, patent, or

rights thereto, necessary for the proper

performance of the award are allowable

unless:

(1) The Federal Government has a

license or the right to free use of the

patent or copyright.

(2) The patent or copyright has been

adjudicated to be invalid, or has been

administratively determined to be

invalid.

(3) The patent or copyright is

considered to be unenforceable.

(4) The patent or copyright is expired.

b. Special care should be exercised in

determining reasonableness where the

royalties may have arrived at as a result

of less-than-arm’s-length bargaining,

e.g.:

(1) Royalties paid to persons,

including corporations, affiliated with

the organization.

(2) Royalties paid to unaffiliated

parties, including corporations, under

an agreement entered into in

contemplation that a Federal award

would be made.

(3) Royalties paid under an agreement

entered into after an award is made to

an organization.

c. In any case involving a patent or

copyright formerly owned by the

organization, the amount of royalty

allowed should not exceed the cost

which would have been allowed had the

organization retained title thereto.

48. Selling and marketing. Costs of

selling and marketing any products or

services of the organization (unless

allowed under paragraph 1 as allowable

public relations costs) are unallowable.

These costs, however, are allowable as

direct costs, with prior approval by

awarding agencies, when they are

necessary for the performance of Federal

programs.

49. Severance pay.

a. Severance pay, also commonly

referred to as dismissal wages, is a

payment in addition to regular salaries

and wages, by organizations to workers

whose employment is being terminated.

Costs of severance pay are allowable

only to the extent that in each case, it

is required by (i) law, (ii) employeremployee agreement, (iii) established

policy that constitutes, in effect, an

implied agreement on the organization’s

part, or (iv) circumstances of the

particular employment.

b. Costs of severance payments are

divided into two categories as follows:

(1) Actual normal turnover severance

payments shall be allocated to all

activities; or, where the organization

provides for a reserve for normal

severances, such method will be

acceptable if the charge to current

operations is reasonable in light of

payments actually made for normal

severances over a representative past

period, and if amounts charged are

allocated to all activities of the

organization.

(2) Abnormal or mass severance pay

is of such a conjectural nature that

measurement of costs by means of an

accrual will not achieve equity to both

parties. Thus, accruals for this purpose

are not allowable. However, the Federal

Government recognizes its obligation to

participate, to the extent of its fair share,

in any specific payment. Thus,

allowability will be considered on a

case-by-case basis in the event or

occurrence.

c. Costs incurred in certain severance

pay packages (commonly known as ‘‘a

golden parachute’’ payment) which are

in an amount in excess of the normal

severance pay paid by the organization

to an employee upon termination of

employment and are paid to the

employee contingent upon a change in

management control over, or ownership
Federal Register / Vol. 63, No. 104 / Monday, June 1, 1998 / Notices 29819

of, the organization’s assets are

unallowable.

d. Severance payments to foreign

nationals employed by the organization

outside the United States, to the extent

that the amount exceeds the customary

or prevailing practices for the

organization in the United States are

unallowable, unless they are necessary

for the performance of Federal programs

and approved by awarding agencies.

e. Severance payments to foreign

nationals employed by the organization

outside the United States due to the

termination of the foreign national as a

result of the closing of, or curtailment of

activities by, the organization in that

country, are unallowable, unless they

are necessary for the performance of

Federal programs and approved by

awarding agencies.

50. Specialized service facilities.

a. The costs of services provided by

highly complex or specialized facilities

operated by the organization, such as

electronic computers and wind tunnels,

are allowable, provided the charges for

the services meet the conditions of

either subparagraph b or c and, in

addition, take into account any items of

income or Federal financing that qualify

as applicable credits under

subparagraph A.5 of Attachment A.

b. The costs of such services, when

material, must be charged directly to

applicable awards based on actual usage

of the services on the basis of a schedule

of rates or established methodology that

(i) does not discriminate against

federally-supported activities of the

organization, including usage by the

organization for internal purposes, and

(ii) is designed to recover only the

aggregate costs of the services. The costs

of each service shall consist normally of

both its direct costs and its allocable

share of all indirect costs. Advance

agreements pursuant to subparagraph

A.6 of Attachment A are particularly

important in this situation.

c. Where the costs incurred for a

service are not material, they may be

allocated as indirect costs.

51. Taxes.

a. In general, taxes which the

organization is required to pay and

which are paid or accrued in accordance

with GAAP, and payments made to

local governments in lieu of taxes which

are commensurate with the local

government services received are

allowable, except for (i) taxes from

which exemptions are available to the

organization directly or which are

available to the organization based on

an exemption afforded the Federal

Government and in the latter case when

the awarding agency makes available

the necessary exemption certificates, (ii)

special assessments on land which

represent capital improvements, and

(iii) Federal income taxes.

b. Any refund of taxes, and any

payment to the organization of interest

thereon, which were allowed as award

costs, will be credited either as a cost

reduction or cash refund, as

appropriate, to the Federal Government.

52. Termination costs. Termination of

awards generally give rise to the

incurrence of costs, or the need for

special treatment of costs, which would

not have arisen had the award not been

terminated. Cost principles covering

these items are set forth below. They are

to be used in conjunction with the other

provisions of this Circular in

termination situations.

a. Common items. The cost of items

reasonably usable on the organization’s

other work shall not be allowable unless

the organization submits evidence that

it would not retain such items at cost

without sustaining a loss. In deciding

whether such items are reasonably

usable on other work of the

organization, the awarding agency

should consider the organization’s plans

and orders for current and scheduled

activity. Contemporaneous purchases of

common items by the organization shall

be regarded as evidence that such items

are reasonably usable on the

organization’s other work. Any

acceptance of common items as

allocable to the terminated portion of

the award shall be limited to the extent

that the quantities of such items on

hand, in transit, and on order are in

excess of the reasonable quantitative

requirements of other work.

b. Costs continuing after termination.

If in a particular case, despite all

reasonable efforts by the organization,

certain costs cannot be discontinued

immediately after the effective date of

termination, such costs are generally

allowable within the limitations set

forth in this Circular, except that any

such costs continuing after termination

due to the negligent or willful failure of

the organization to discontinue such

costs shall be unallowable.

c. Loss of useful value. Loss of useful

value of special tooling, machinery and

equipment which was not charged to

the award as a capital expenditure is

generally allowable if:

(1) Such special tooling, machinery,

or equipment is not reasonably capable

of use in the other work of the

organization.

(2) The interest of the Federal

Government is protected by transfer of

title or by other means deemed

appropriate by the awarding agency;

d. Rental costs. Rental costs under

unexpired leases are generally allowable

where clearly shown to have been

reasonably necessary for the

performance of the terminated award

less the residual value of such leases, if

(i) the amount of such rental claimed

does not exceed the reasonable use

value of the property leased for the

period of the award and such further

period as may be reasonable, and (ii) the

organization makes all reasonable efforts

to terminate, assign, settle, or otherwise

reduce the cost of such lease. There also

may be included the cost of alterations

of such leased property, provided such

alterations were necessary for the

performance of the award, and of

reasonable restoration required by the

provisions of the lease.

e. Settlement expenses. Settlement

expenses including the following are

generally allowable:

(1) Accounting, legal, clerical, and

similar costs reasonably necessary for:

(a) The preparation and presentation

to awarding agency of settlement claims

and supporting data with respect to the

terminated portion of the award, unless

the termination is for default (see Sec.

lll.61 of Circular A–110); and

(b) The termination and settlement of

subawards.

(2) Reasonable costs for the storage,

transportation, protection, and

disposition of property provided by the

Federal Government or acquired or

produced for the award, except when

grantees or contractors are reimbursed

for disposals at a predetermined amount

in accordance with Sec. lll.30

through lll.37 of Circular A–110.

(3) Indirect costs related to salaries

and wages incurred as settlement

expenses in subparagraphs (1) and (2).

Normally, such indirect costs shall be

limited to fringe benefits, occupancy

cost, and immediate supervision.

f. Claims under subawards. Claims

under subawards, including the

allocable portion of claims which are

common to the award, and to other

work of the organization are generally

allowable. An appropriate share of the

organization’s indirect expense may be

allocated to the amount of settlements

with subcontractors and/or subgrantees,

provided that the amount allocated is

otherwise consistent with the basic

guidelines contained in Attachment A.

The indirect expense so allocated shall

exclude the same and similar costs

claimed directly or indirectly as

settlement expenses.

53. Training and education costs.

a. Costs of preparation and

maintenance of a program of instruction

including but not limited to on-the-job,

classroom, and apprenticeship training,

designed to increase the vocational

effectiveness of employees, including
29820 Federal Register / Vol. 63, No. 104 / Monday, June 1, 1998 / Notices

training materials, textbooks, salaries or

wages of trainees (excluding overtime

compensation which might arise

therefrom), and (i) salaries of the

director of training and staff when the

training program is conducted by the

organization; or (ii) tuition and fees

when the training is in an institution

not operated by the organization, are

allowable.

b. Costs of part-time education, at an

undergraduate or post-graduate college

level, including that provided at the

organization’s own facilities, are

allowable only when the course or

degree pursued is relative to the field in

which the employee is now working or

may reasonably be expected to work,

and are limited to:

(1) Training materials.

(2) Textbooks.

(3) Fees charges by the educational

institution.

(4) Tuition charged by the educational

institution or, in lieu of tuition,

instructors’ salaries and the related

share of indirect costs of the educational

institution to the extent that the sum

thereof is not in excess of the tuition

which would have been paid to the

participating educational institution.

(5) Salaries and related costs of

instructors who are employees of the

organization.

(6) Straight-time compensation of

each employee for time spent attending

classes during working hours not in

excess of 156 hours per year and only

to the extent that circumstances do not

permit the operation of classes or

attendance at classes after regular

working hours; otherwise, such

compensation is unallowable.

c. Costs of tuition, fees, training

materials, and textbooks (but not

subsistence, salary, or any other

emoluments) in connection with fulltime education, including that provided

at the organization’s own facilities, at a

post-graduate (but not undergraduate)

college level, are allowable only when

the course or degree pursued is related

to the field in which the employee is

now working or may reasonably be

expected to work, and only where the

costs receive the prior approval of the

awarding agency. Such costs are limited

to the costs attributable to a total period

not to exceed one school year for each

employee so trained. In unusual cases

the period may be extended.

d. Costs of attendance of up to 16

weeks per employee per year at

specialized programs specifically

designed to enhance the effectiveness of

executives or managers or to prepare

employees for such positions are

allowable. Such costs include

enrollment fees, training materials,

textbooks and related charges,

employees’ salaries, subsistence, and

travel. Costs allowable under this

paragraph do not include those for

courses that are part of a degree-oriented

curriculum, which are allowable only to

the extent set forth in subparagraphs b

and c.

e. Maintenance expense, and normal

depreciation or fair rental, on facilities

owned or leased by the organization for

training purposes are allowable to the

extent set forth in paragraphs 11, 27,

and 46.

f. Contributions or donations to

educational or training institutions,

including the donation of facilities or

other properties, and scholarships or

fellowships, are unallowable.

g. Training and education costs in

excess of those otherwise allowable

under subparagraphs b and c may be

allowed with prior approval of the

awarding agency. To be considered for

approval, the organization must

demonstrate that such costs are

consistently incurred pursuant to an

established training and education

program, and that the course or degree

pursued is relative to the field in which

the employee is now working or may

reasonably be expected to work.

54. Transportation costs.

Transportation costs include freight,

express, cartage, and postage charges

relating either to goods purchased, in

process, or delivered. These costs are

allowable. When such costs can readily

be identified with the items involved,

they may be directly charged as

transportation costs or added to the cost

of such items (see paragraph 28). Where

identification with the materials

received cannot readily be made,

transportation costs may be charged to

the appropriate indirect cost accounts if

the organization follows a consistent,

equitable procedure in this respect.

55. Travel costs.

a. Travel costs are the expenses for

transportation, lodging, subsistence, and

related items incurred by employees

who are in travel status on official

business of the organization. Travel

costs are allowable subject to

subparagraphs b through e, when they

are directly attributable to specific work

under an award or are incurred in the

normal course of administration of the

organization.

b. Such costs may be charged on an

actual basis, on a per diem or mileage

basis in lieu of actual costs incurred, or

on a combination of the two, provided

the method used results in charges

consistent with those normally allowed

by the organization in its regular

operations.

c. The difference in cost between firstclass air accommodations and less than

first-class air accommodations is

unallowable except when less than firstclass air accommodations are not

reasonably available to meet necessary

mission requirements, such as where

less than first-class accommodations

would (i) require circuitous routing, (ii)

require travel during unreasonable

hours, (iii) greatly increase the duration

of the flight, (iv) result in additional

costs which would offset the

transportation savings, or (v) offer

accommodations which are not

reasonably adequate for the medical

needs of the traveler.

d. Necessary and reasonable costs of

family movements and personnel

movements of a special or mass nature

are allowable, pursuant to paragraphs 44

and 45, subject to allocation on the basis

of work or time period benefited when

appropriate. Advance agreements are

particularly important.

e. Direct charges for foreign travel

costs are allowable only when the travel

has received prior approval of the

awarding agency. Each separate foreign

trip must be approved. For purposes of

this provision, foreign travel is defined

as any travel outside of Canada and the

United States and its territories and

possessions. However, for an

organization located in foreign

countries, the term ‘‘foreign travel’’

means travel outside that country.

56. 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 paragraph 55.

Attachment C—Circular No. A–122

Non-Profit Organizations Not Subject to

This Circular

Aerospace Corporation, El Segundo,

California

Argonne National Laboratory, Chicago,

Illinois

Atomic Casualty Commission,

Washington, D.C.

Battelle Memorial Institute,

Headquartered in Columbus, Ohio

Brookhaven National Laboratory, Upton,

New York

Charles Stark Draper Laboratory,

Incorporated, Cambridge,

Massachusetts

Environmental Institute of Michigan,

Ann Arbor, Michigan

Hanford Environmental Health

Foundation, Richland, Washington

IIT Research Institute, Chicago, Illinois

Institute for Defense Analysis,

Alexandria, Virginia

Mitre Corporation, Bedford,

Massachusetts
Federal Register / Vol. 63, No. 104 / Monday, June 1, 1998 / Notices 29821

National Radiological Astronomy

Observatory, Green Bank, West

Virginia

National Renewable Energy Laboratory,

Golden, Colorado

Oak Ridge Associated Universities, Oak

Ridge, Tennessee

Rand Corporation, Santa Monica,

California

Research Triangle Institute, Research

Triangle Park, North Carolina

Riverside Research Institute, New York,

New York

Southern Research Institute,

Birmingham, Alabama

Southwest Research Institute, San

Antonio, Texas

SRI International, Menlo Park,

California

Syracuse Research Corporation,

Syracuse, New York

Universities Research Association,

Incorporated (National Acceleration

Lab), Argonne, Illinois

Non-profit insurance companies, such

as Blue Cross and Blue Shield

Organizations

Other non-profit organizations as

negotiated with awarding agencies

[FR Doc. 98–14080 Filed 5–29–98; 8:45 am]

BILLING CODE 3110–01–P