26484 Federal Register / Vol. 60, No. 95 / Wednesday, May 17, 1995 / Notices

OFFICE OF MANAGEMENT AND

BUDGET

Cost Principles for State, Local and

Indian Tribal Governments

AGENCY: Office of Management and

Budget.

ACTION: Final Revision to OMB Circular

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

and Indian Tribal Governments’’.

SUMMARY: An interagency task force was

established to review existing cost

principles for Federal awards to State

and local governments. The task force

studied Inspector General reports and

recommendations, solicited suggestions

for changes to the Circular from State

and local governments, and compared

for consistency the provisions of other

Office of Management and Budget cost

principles covering non-profit

organizations and universities. Proposed

revisions reflecting the results of those

efforts were published on October 12,

1988 (53 FR 40352–40367) and August

19, 1993 (58 FR 44212–44234). The

extensive comments received on these

proposed revisions, discussions with

interested groups, and other related

developments were considered in

developing this final revision.

DATES: Agencies shall issue codified

regulations to implement the provisions

of this Circular by September 1, 1995.

ADDRESSES: Office of Management and

Budget, Office of Federal Financial

Management, Financial Standards and

Reporting Branch, Room 6025, New

Executive Office Building, Washington,

DC 20503. For a copy of the revised

Circular, contact Office of

Administration, Publications Office,

Room 2200, New Executive Office

Building, Washington, DC 20503, or

telephone (202)395–7332.

FOR FURTHER INFORMATION CONTACT:

Non-Federal organizations should

contact the organization’s cognizant

Federal funding agency. Federal

agencies should contact Gilbert H. Tran,

Financial Standards and Reporting

Branch, Office of Federal Financial

Management, Office of Management and

Budget, telephone: (202)395–3993.

SUPPLEMENTARY INFORMATION:

A. Background

The Office of Management and Budget

(OMB) received about 200 comments

from governmental units, Federal

agencies, professional organizations and

others in response to the Federal

Register notice of August 19, 1993 (58

FR 44212). All comments were

considered in developing this final

revision.

OMB also considered the National

Performance Review’s recommendations

to reduce paperwork and red tape.

Changes were made to the Circular to

streamline the cost negotiation process

and defer to State and local accounting

procedures whenever possible. Also, the

policy guides in the Circular were

amended to provide that Federal

agencies should work with States or

localities which wish to test alternative

mechanisms for paying costs for

administering Federal programs.

Section B presents a summary of the

major public comments grouped by

subject and a response to each

comment. Other changes have been

made to increase clarity and readability.

Section C addresses procurement issues.

Section D discusses the Federal

Acquisition Streamlining Act of 1994.

B. Public Comments and Responses

Basic Circular

Comment: The policy subsection

states that ‘‘no provision for profit or

increment above allowable cost is

intended.’’ This statement is currently

contained in the Circular, but it is

different from that contained in other

OMB cost principles circulars and is

literally incorrect. This seems to say no

profit or increment above cost is

permitted.

Response: This sentence was changed

to conform with the other OMB cost

principles circulars. There is no policy

change intended by this change.

General Principles for Determining

Allowable Costs—Attachment A

Comment: The requirement in the

basic guidelines that ‘‘a cost may not be

assigned to a Federal award as a direct

cost if any other cost incurred for the

same purpose in like circumstances has

been allocated to a Federal award as an

indirect cost’’ appears to be too

expansive and should be clarified.

Response: There is no policy change

intended from that in the existing

Circular. The wording in the

consistency provision was changed to

make it clear that all costs incurred for

the same purpose in like circumstances

are either direct costs only or indirect

costs only with respect to final cost

objectives (e.g., grants). No final cost

objective shall have allocated to it as an

indirect cost any cost if other costs

incurred for the same purpose, in like

circumstances, have been included as a

direct cost of that or any other final cost

objective. For example, a grantee

normally allocates all travel as an

indirect cost. For purposes of a new

grant proposal, the grantee intends to

allocate the travel costs of personnel

whose time is accounted for as direct

labor directly to the grant. Since travel

costs of personnel whose time is

accounted for as direct labor working on

other grants are costs which are

incurred for the same purpose, these

costs may no longer be included within

indirect cost pools for purposes of

allocation to any other grant.

Comment: The Circular lists the

market price of comparable goods or

services as one test of reasonableness.

This statement may cause problems for

State agencies that are required to make

purchases from State-wide contracts.

Response: OMB recognizes that

market fluctuations may result in a State

paying higher prices on State-wide

contracts. However, significant

differences between State prices and

market prices should be analyzed. For

example, Federal awards should not be

paying higher prices for State awards

based on geographical preferences.

Comment: The prohibition against

shifting costs allocable to a particular

Federal award or other cost objective to

other Federal awards needs to be

clarified. Governmental units should

not be precluded from shifting

allowable cost in accordance with

program agreements.

Response: This section was expanded

to recognize that there are instances

when it may be appropriate for

governmental units to transfer costs

from one cost objective to another cost

objective.

Comment: It is not logical to require

governmental units to allocate indirect

costs to all activities including donated

services.

Response: The Circular is designed to

provide that Federal awards bear their

fair share of costs. If non-Federal

activities use donated services that

require a substantial amount of support

costs, it would be inequitable to charge

these costs to Federal awards.

Comment: The section on applicable

credits needs to be clarified.

Response: The language in this

section has been revised to remove

inappropriate examples of applicable

credits and references to program

income which are covered by the grants

management common rule.

Selected Items of Cost—Attachment B

Advertising and Public Relations Costs

Comment: Clarify the allowability of

certain public relations type costs, such

as job fairs and activities to promote

ridership on public transportation.

Response: The allowability of these

types of costs depends upon the

circumstances surrounding the

individual case. In determining whether
Federal Register / Vol. 60, No. 95 / Wednesday, May 17, 1995 / Notices 26485

Federal awards should participate in

these types of costs, the recipient should

consider how similar types of costs are

charged, and whether there is a direct

benefit to Federal awards resulting from

these costs.

Audit Services

Comment: The Circular limits the

allowability of audit costs to single

audits and does not provide

reimbursement for audits of a less

comprehensive nature.

Response: This section was revised to

allow the costs of other audits.

Automatic Electronic Data Processing

Comment: The requirement for

governmental units to amortize the costs

associated with the development and

testing of automated systems would

impose an unreasonable financial and

administrative burden on the

governmental units.

Response: OMB eliminated the

requirement for governmental units to

amortize the costs of developing and

testing automated systems until a

uniform Federal policy covering all

types of recipients of Federal awards

can be developed.

Compensation for Personnel Services

Comment: The potential paperwork

burdens associated with accounting for

employee leave payments and accruals

could be substantial.

Response: This section was simplified

by modifying many of the prescriptive

accounting rules for leave.

Comment: Interest cost associated

with pension contributions should be

allowed if the governmental unit’s

contributions are delayed.

Response: References to interest

payments were deleted. However,

language was inserted into the Circular

to make it clear that Federal

reimbursement of pension cost must be

adjusted when the governmental unit’s

payments to the fund are late. The

adjustment should compensate for the

additional cost because of the timing of

the charges to the Federal Government

and the governmental unit’s

contribution to the pension fund.

Comment: Governmental units should

not be required to use separate cost

allocation procedures for classes of

employees that experience different

actuarial gains and losses (e.g., police

and fire departments).

Response: This requirement was

deleted from the Circular.

Comment: The requirement that a

governmental unit obtain Federal

approval for changing its method for

determining pension and postretirement health benefit costs should

be deleted.

Response: This requirement was

deleted. Pension costs and postretirement health benefit costs

determined in accordance with

Generally Accepted Accounting

Principles (GAAP) and the provisions of

the Circular will be allowable. For

contracts covered under Cost

Accounting Standards (CAS), CAS 412

and 413 promulgated by the Cost

Accounting Standards Board shall

establish the allocability of pension

costs.

Comment: The current principles

applicable to support of personnel costs

have worked well and require no

change.

Response: OMB believes additional

guidance is necessary. Federal agencies

have found that the absence of sufficient

guidance on documentation to support

salaries charged to Federal awards has

caused numerous audit findings and

resulted in endless wasted hours of

negotiation between Federal agencies

and governmental units. Based on the

comments received, OMB made a

number of changes to the requirements

in this section of the Circular to clarify

and simplify Federal requirements for

documenting salaries charged to Federal

awards.

Defense and Prosecution of Criminal

and Civil Proceedings, and Claims

Comment: OMB proposed to

substantially amend the provisions on

the allowability of legal and related

expenses. In the 1981 version of the

Circular, this provision is found at

Attachment B, section 16 (46 FR 9552).

In the latest proposal, the proposed

revisions were at Attachment B, section

14 (58 FR 44222).

State and local governments

contended that the proposed revisions

on the allowability of legal and related

expenses would be unfair and would

deny them due process.

State and local governments also

objected to the specific proposed

revisions dealing with legal proceedings

based on the Major Fraud Act and the

Federal Acquisition Regulation (48 CFR

31.205–47) in Attachment B, sections

14.a. through f. State and local

governments contended that those

provisions are ambiguous, inconsistent

and overly broad. In addition, these

commenters argued that the provisions

were designed for commercial

contractors and should not be applied to

grants.

Response: After reviewing the

comments on the proposed revisions,

OMB decided not to amend the current

provision on the allowability of legal

and related expenses. In the revised

Circular, this provision is now found at

section 14.b.

In this revision, OMB has added a

provision at section 14.a. This

provision, which was in the proposal,

simply restates the currently-applicable,

statutory restrictions in 10 U.S.C.

2324(k).

Depreciation and Use Allowances

Comment: It is unclear if a use charge

can be charged while an asset is in

service.

Response: The Circular now provides

that a reasonable use allowance may be

negotiated for fully depreciated assets;

therefore, OMB believes a reasonable

use allowance could be negotiated for

an asset for as long as the asset is in

service.

Comment: It is not clear whether

accelerated depreciation is allowed.

Response: The preferred method of

depreciation is the straight line method.

However, other methods may be used

when there is evidence that an asset will

be used up faster in the earlier portion

of its useful life.

Comment: The estimated useful lives

of equipment and buildings used to

compute use allowances should be

shortened.

Response: No changes were made.

Governmental units have the option of

claiming depreciation which is usually

based on the actual life of the asset.

Comment: It is not clear why classes

of assets needed to be determined on a

State-wide, local-wide, or Tribal-wide

basis.

Response: This section was amended

to say classes of assets shall be

determined on the same bases used for

the governmental unit’s financial

statements.

Equipment and Other Capital

Expenditures

Comment: The capitalization level for

equipment seems to be arbitrarily low.

The criterion of $25,000, which is

recognized by the Department of Health

and Human Services (HHS), might be

more appropriate.

Response: The $5000 criterion is in

line with capitalization levels used by

government contractors and others. The

HHS criterion is limited to equipment

used on a few very large programs

where equipment purchases are a very

small percentage of total program costs.

For CAS-covered contracts subject to

‘‘full coverage’’, the threshold for

equipment is $1500 as established

under CAS 404.

Comment: Clarify the term ‘‘article’’

as used in the definition of equipment.

The Circular defines equipment ‘‘as
26486 Federal Register / Vol. 60, No. 95 / Wednesday, May 17, 1995 / Notices

being an article of nonexpendable

property.’’

Response: The definition of ‘‘capital

expenditure’’ was added to further

define the term ‘‘equipment.’’ However,

if further guidance is needed in this

area, governmental units should follow

their own accounting practices when

defining equipment.

Comment: It is not clear what is

meant by ‘‘The total acquisition costs

are not allowable as indirect costs

during the period acquired.’’

Response: This section was clarified.

It now says that capital expenditures

which are not authorized to be charged

directly to an award may be recovered

through use allowances or depreciation.

Comment: The impact of depreciation

as proposed in the Circular would shift

costs to the governmental unit, not make

any provision for the time value of

money, increase administrative costs to

track resulting depreciation schedules,

and erode the partner relationship

between Federal agencies and

governmental units.

Response: The accounting treatment

for depreciation as prescribed by the

Circular is based on GAAP. Further, the

provisions ensure that the Federal

Government pays its fair share of costs,

including interest on financing.

Fund Raising and Investment

Management Costs

Comment: It is not clear whether costs

related to raising funds from employees

within an organization for charitable

activities, such as the United Way,

would be allowable since the Circular

disallows fund raising costs.

Response: Generally, the prohibition

on fund raising activities covered by the

Circular is for those activities where the

governmental unit raises funds for its

own use. Incidental fund raising from

an organization’s own employees for

charitable organizations, such as the

United Way, is considered part of

normal operating expenses and,

therefore, allowable.

Gains and Losses on Disposition of

Depreciable Property and Other Capital

Assets and Substantial Relocation of

Federal Programs

Comment: The provisions which

would require governmental units to

reimburse the Federal Government

when Federal awards were relocated

from facilities where the Federal

Government participated in the

financing is inappropriate.

Response: This section was amended.

It now requires governmental units to

obtain prior approval from the cognizant

agency for substantial relocations of

Federal awards from buildings for

which the Federal Government

participated in the financing.

Insurance and Indemnification

Comment: It is not apparent why

provisions for liabilities, which do not

become payable for more than one year

after a self insurance provision is made,

are limited to the discounted value of

the liability.

Response: This requirement is

designed to cover only those cases

where the amount of the liability is firm

or reasonably certain. This provision

helps to avoid excessive reserve

balances for the current fiscal year. It

limits current year premiums to the

present value of the future (known or

reasonably certain) liability. When that

future liability becomes due, prior years

premiums plus earnings (i.e., interest or

investment income) from those

premiums will be available to satisfy

that debt.

Comment: The Circular states that

self-insurance reserves must be based on

sound actuarial principles using the

most likely assumptions. This seems to

be an attempt to limit sound actuarial

principles.

Response: This language was not

intended to restrict sound actuarial

principles. The language was changed to

clarify that sound actuarial assumptions

should recognize actual past, as well as

probable future, events when

determining premiums and reserve

levels.

Interest

Comment: Interest expense should be

allowable not only for building

modifications, as provided in the 1981

revision of Circular A–87, but also for

acquisitions of equipment made prior to

the issuance date of the revised Circular.

The proposed provision is objectionable

because it would require dual records

and impose an unreasonable and

unnecessary administrative burden on

State and local governments.

Response: The provision was

rewritten to allow interest expense paid

or incurred on or after the revised

Circular’s effective date to be charged to

Federal awards for existing as well as

newly-acquired equipment.

Historically, OMB has not allowed

interest on debt issued prior to the

effective date of an interest policy

revision (pre-revision debt). In 1980,

OMB allowed State and local

governments interest on debt issued to

acquire buildings, but not on prerevision debt (45 FR 27363). In 1982, in

a revision to Circular A–21, ‘‘Cost

Principles for Educational Institutions,’’

OMB allowed interest on debt issued to

acquire buildings and equipment, but

not on pre-revision debt (47 FR 33658).

In 1994, in a proposed revision to

Circular A–122, ‘‘Cost Principles for

Non-Profit Organizations,’’ OMB

proposed to allow interest debt issued to

acquire buildings and equipment, but

not on pre-revision debt (59 FR 49091).

In view of the fact that pre-revision

debt was incurred with full knowledge

of the cost policy that was in effect at

that time, OMB does not believe that

grantees should expect the Federal

Government to allow interest on this

debt without such a decision being costjustified from the Federal Government’s

perspective. OMB believes the Federal

Government should only allow interest

on pre-revision debt when the cost of

maintaining dual records on prerevision and post-revision assets and

related debt (all or a portion of these

recordkeeping costs are chargeable to

the Federal programs as administrative

costs) is less than the interest cost on

pre-revision debt.

With respect to debt incurred to

purchase buildings, OMB believes that

the cost of maintaining dual records is

cost-justified in view of the limited

number of buildings and debt issues for

which separate records would have to

be maintained, and the substantial

interest cost associated with long term

debt used to finance buildings. Thus, as

OMB has previously explained,

‘‘[a]applying the new rules to old

buildings would appear to provide a

windfall recovery, and might drive up

overhead costs of federally assisted

programs’’ (47 FR 33658, also see 45 FR

27363).

Equipment acquired by State and

local governments (except computers),

while substantial in terms of the number

of pieces, is relatively nominal in cost

and has a relatively short life span. As

a result, the outstanding interest on debt

issued to finance this equipment is

relatively nominal. Moreover, State and

local governments would still bear the

major share of the financing costs, even

if pre-revision debt were allowable. By

contrast, the cost of maintaining dual

records for a large number of items and

related debt would likely be substantial.

Given the different balance between

administrative and interest costs, OMB

has decided that, in this instance, the

administrative costs associated with

maintaining separate records to track

pre-revision and post-revision debt is

not cost-justifiable from the Federal

Government’s perspective.

The basis for the allowance of prerevision debt for equipment of State and

local governments is consistent with the

basis for OMB’s treatment of such debt

for educational institutions (in 1982)

and OMB’s proposed treatment of such
Federal Register / Vol. 60, No. 95 / Wednesday, May 17, 1995 / Notices 26487

debt for non-profit organizations (in

1994). The cost of equipment acquired

by educational institutions and nonprofit organizations through debt

financing can be significant (e.g., over

$650,000 for x-ray crystallography

equipment, $348,000 for a vantage flow

cytometer for high speed cell analysis,

and $265,000 for an electron

microscope). Equipment of this type and

related debt has a longer life, and in

turn, significantly higher interest cost.

Moreover, as with buildings, there are

only a limited number of pieces of such

equipment, which reduces the

administrative costs of dual records.

Given the amount of interest involved in

the financing of these assets compared

with the relatively nominal

administrative burden associated with

maintaining dual records, OMB believes

the cost of maintaining dual records is

justifiable.

Comment: The requirement for a

governmental unit to document, as part

of its decisionmaking process, that

capital leasing is the most economical

option does not belong in Circular A–

87.

Response: The requirement for lease

analysis as part of the governmental

unit’s decisionmaking process and its

proper documentation is addressed in

the Grants Management Common Rule

under Section ll.36(b)(4). This

requirement is not addressed in Circular

A–87.

Comment: Governmental units would

not recover their full costs because of

provisions in the Circular which

provide that a credit is due the Federal

Government when Federal payments for

interest, depreciation, use charges and

other contributions for building use

exceed the interest and principal

payments made by the government

(positive cash flow).

Response: OMB deleted the

provisions in the Circular which would

require credits under the conditions

described above. However,

governmental units will be required to

negotiate the amount of allowable

interest whenever cash payments

(interest, use allowances, depreciation

and contributions) exceed governmental

unit cash payments and other

governmental unit contributions. OMB

will study this matter further to ensure

fair and equitable policies are

established for the States and the

Federal Government.

Memberships, Subscriptions, and

Professional Activities

Comment: Membership costs in some

civic and community organizations

should be allowable when the purpose

is to promote services provided by the

Federal award.

Response: The language has been

revised to allow memberships in civic

and community organizations as a direct

cost with the prior approval of the

Federal awarding agency.

Professional Service Costs

Comment: Simplify the section on

professional service costs by eliminating

the factors to consider in determining

the allowability of professional service

costs.

Response: Eight subsections listing

the factors were deleted.

Proposal Costs

Comment: It is not clear why proposal

costs should normally be treated as

indirect costs and allocated to all

activities. Such costs should be treated

as direct costs if they can be identified

with a specific award.

Response: OMB added a provision to

allow governmental units to charge

proposal costs directly to a Federal

award with the prior approval of the

Federal awarding agency.

Taxes

Comment: If OMB adopts the

proposed revision affecting sales tax

reimbursement, the revision should

become effective at some later date to

allow time to change State and local

laws.

Response: OMB agrees that there

should be a phase-in period. The

Circular allows governmental units

three years to phase-in the change.

Comment: If the sales tax proposal

were adopted, it would become a

burden to separately account for State

sales taxes paid on Federal grant

purchases.

Response: The Circular allows

reasonable approximations to be used

where the identification of the actual

amount of unallowed taxes would

require an inordinate amount of effort.

Comment: State sales taxes should be

allowable when a governmental unit is

in a position that makes exclusion

administratively impossible, i.e., when

employees in travel status must pay

sales taxes upon receipt of goods and

services.

Response: States should attempt a

reasonable approximation.

Comment: Some State and local

governments and Indian Tribal

governments would lose substantial

amounts of revenue if sales taxes were

not chargeable to purchases made in

connection with federally-funded

programs.

Response: The intention of the tax

provision is to address State or local

government taxes, or changes in tax

policy, that disproportionately affect a

federally-funded program. Under the

Circular, such taxes are unallowable.

(As explained in the next comment-andresponse, where a Federal statute

prescribes a different treatment for

taxes, that statute controls.)

For example, a tax would

disproportionately affect a Federal

program if the tax were defined or

applied so that it was imposed only in

connection with that program, or only

in connection with Federal programs

generally. Another example would be if

a sales tax were imposed on a good or

service that in practice is used solely or

disproportionately in connection with

Federal programs. These examples are

for illustration, and are not meant to be

exclusive. Whether a particular tax, or

change in tax policy, would

disproportionately affect a Federal

program will have to be determined

based on a review of the tax and the

Federal programs in question.

When a governmental unit pays a tax

to itself, that self-assessed tax is not a

true cost to the governmental unit.

Especially where a self-assessed tax

disproportionately affects a Federal

program, it is not appropriate for the

governmental unit to be able to

characterize that tax as a ‘‘cost’’ of its

participation in the Federal program. If

such disproportionate, self-assessed

taxes were treated as allowable, even

though they disproportionately affect

Federal programs, governmental units

could define or apply taxes in such a

way that their net impact would largely

be to increase the Federal Government’s

contribution, rather than to raise

revenues from the taxpayer. To the

extent that making such taxes

unallowable would result in a loss of

Federal assistance awards, the Circular

allows three years for governmental

units to phase-out any existing taxes

that disproportionately affect Federal

programs. (For the larger formula grant

programs, the disallowance of such

taxes would not result in any loss of

Federal assistance awards; the funds

which are now used to pay self-assessed

taxes could be used to further the

objectives of the Federal assistance.)

Comment: The proposed revision on

sales taxes is directly contrary to the

legislative intent of Public Law 102–

234, ‘‘Medicaid Voluntary Contributions

and Provider Specific Tax Amendments

of 1991.’’ The proposal should be

revised to preclude its application to

broad-based health care related taxes

paid by public entities.

Response: The Circular would not

take precedence over a statute. If any

statute specifically prescribes policies
26488 Federal Register / Vol. 60, No. 95 / Wednesday, May 17, 1995 / Notices

and specific requirements that differ

from the Circular, the statute will

govern.

Comment: State sales taxes collected

by another level of government should

be exempt from the provisions of the

Circular.

Response: As noted above, the

Circular’s disallowance is directed at

self-assessed taxes. Thus, if a local

government receives an award directly

from the Federal Government, and pays

a State sales tax on purchases made in

connection with that award, the tax is

an allowable cost. (However, as

previously noted, the Circular does not

restrict the authority of Federal agencies

to identify taxes where Federal

participation is inappropriate.)

However, if the local government does

not receive the award directly from the

Federal Government, but instead

receives the award indirectly by virtue

of a State pass-through, then the sales

tax that the local government pays the

State is in reality a self-assessed tax,

which would be unallowable if the tax

disproportionately affects a Federal

program.

Comment: It is not clear whether the

prohibition on payment of sales taxes

applies to out-of-state sales tax.

Response: Since they are not selfassessed, taxes assessed by other States,

or political subdivisions of other States,

are not unallowable under the Circular.

(However, as previously noted, the

Circular does not restrict the authority

of Federal agencies to identify taxes

where Federal participation is

inappropriate.)

Travel Costs

Comment: Airfare costs in excess of

the lowest available commercial

discount fare are unallowable. With

today’s confusing array of super savers

and fare wars, the burden involved in

proving the lowest airfare would be

considerable.

Response: The travel provisions were

changed to say travel costs in excess of

the customary standard (coach or

equivalent) airfare are unallowable.

State/Local-Wide Central Service Cost

Allocation Plans—Attachment C

Comment: Working capital reserves in

many cases should not be limited to 60

days cash expenses. Time consuming

collections, uneven usage levels, and

unanticipated demand for services are

some of the reasons for authorizing a

larger reserve.

Response: OMB believes the 60 day

reserve should provide the flexibility

required by most funds to operate from

one billing cycle to the next. However,

the Circular was amended to provide for

a larger reserve in exceptional cases

when approved by the cognizant

Federal agency.

Comment: The Circular should not

restrict governmental units from

engaging an accounting firm to prepare

an indirect cost proposal and then

engaging the same firm to make

subsequent audits.

Response: This provision was deleted

from the Circular. This issue will be

addressed as part of OMB policy

changes to other OMB grants

management circulars.

Comment: What are the criteria OMB

uses for making cognizant assignments

and for defining ‘‘major governments’’?

Response: OMB is in the process of

reviewing the cognizant assignments for

governmental units. Only governmental

units receiving substantial amounts of

direct Federal assistance will be

assigned a Federal cognizant agency and

be required to submit plans to those

cognizant agencies. Because the mix of

Federal awards has changed so much

since the last list was issued, OMB

needs to develop a new dollar criterion

for defining ‘‘major.’’

Comment: States and other prime

grantees should not be required to

monitor subrecipient cost allocation

plans and/or negotiate sub-recipient

indirect costs.

Response: The grants management

common rule requires governmental

units to monitor subawards to assure

compliance with applicable Federal

requirements. These requirements

include compliance with the cost

principles. In those cases where the

subrecipient does not receive any

Federal awards directly from the

Federal Government, Federal agencies

would not have any direct responsibility

for negotiating indirect costs.

Comment: Attachment C, Section E

states that ‘‘The documentation

requirements in this section may be

modified, expanded, or reduced by the

cognizant agency on a case-by-case

basis.’’ This specific sentence might

allow a Federal cognizant agency to

unreasonably and unilaterally expand

the documentation requirements.

Response: Federal agencies should

have the flexibility to obtain additional

data, when necessary. However, OMB

agrees that this type of request should

be the exception rather than the rule.

Comment: Documentation for internal

service funds seems excessive since

these areas are audited. This

documentation is more appropriately

included in a State or local

government’s financial statements and

work papers for the fiscal year rather

than in the entity’s cost allocation plan.

Response: OMB amended this section

to require only the largest funds to

submit data. If the required data are

included in the governmental unit’s

financial statements, submission of the

financial statements to the Federal

cognizant agency will meet the

requirements of the Circular.

Comment: OMB proposed to add

provisions requiring the certification of

cost allocation plans and of indirect cost

rates (see preamble (58 FR 44218);

Attachment C, Section E.4 (58 FR

44229); Attachment D, Section D.3 (58

FR 44230–31); and Attachment E,

Section D.3 (58 FR 44233)). States

objected to the inclusion of the phrase

‘‘under penalty of perjury’’ in the

proposed certification. They contended

that the phrase is unnecessary.

Response: OMB has decided to amend

the Circular to add the proposed

certifications, but OMB has accepted the

commenters’ suggestion that the phrase

‘‘under penalty of perjury’’ not be

included in the certifications. OMB

believes that, when the Federal

Government is dealing with State and

local governments, it is unnecessary to

require that the certifying government

official sign a certification stating that it

is made ‘‘under penalty of perjury.’’

State and local officials should not

conclude, however, that the omission of

the phrase ‘‘under penalty of perjury’’

means that no potential legal liability is

associated with a certification’s

submission. In this regard, note the

provision in Federal law imposing

criminal penalties for ‘‘false, fictitious

or fraudulent statements or

representations’’ (18 U.S.C. 1001). The

Department of Justice is responsible for

enforcing this provision (and other laws

regarding false statements and claims).

OMB expresses no opinion concerning

the potential legal liabilities that are

associated with making the

certifications in the revised Circular.

Comment: Restricting the authority to

reopen Central Service Plans to the

Federal cognizant agency is inequitable.

Response: This section was changed

to state that agreements may be subject

to reopening only if the agreement is

subsequently found to violate a statute

or the information upon which the plan

was negotiated is later found to be

materially incomplete or inaccurate.

Comment: GAAP for State and local

governments do not require internal

service activities to be accounted for

and reported in proprietary accounts.

Response: The requirement for

internal service activities to be

accounted for in proprietary accounts

was deleted.

Comment: Remove the requirement

that a carry forward adjustment is not
Federal Register / Vol. 60, No. 95 / Wednesday, May 17, 1995 / Notices 26489

permitted for a central service activity

that was not included in the approved

plan.

Response: The carry forward

technique was intended to permit

adjustments for differences between

actual and estimated costs of services

included in a cost allocation plan. It was

not intended to shift the entire cost of

an activity excluded from the year of the

plan to a future year. There may be

circumstances where a change to the

plan should be considered (e.g., the

service did not exist when the plan was

established and was initiated during the

year covered by the plan). This type of

amendment should modify the plan

itself and would not be handled through

a carry forward adjustment.

Comment: Adjustments of billed

services do not provide a workable

solution for the larger central services of

the States. The dollar limitation of

$50,000 for making adjustments through

allocated central services is too low.

Response: This section was rewritten

to provide governmental units more

options and flexibility in making

adjustments to Federal awards.

Public Assistance Cost Allocation

Plans—Attachment D

Comment: The public assistance cost

allocation plans are narrative

descriptions of cost allocation

procedures rather than allocations of

actual costs. The provisions dealing

with refunds or adjustments related to

unallowable costs and the certification

of cost allowability do not appear

appropriate.

Response: The certification and the

provisions dealing with refunds and

adjustments were deleted.

State and Local Indirect Cost Rate

Proposals—Attachment E

Comment: The Circular is silent on

the time period for use of predetermined

rates.

Response: The Circular was amended

to encourage the use of indirect cost

rates for a period of two to four years.

Comment: Governmental units should

notify the Federal Government of any

accounting changes that might make it

necessary to renegotiate the

predetermined rate.

Response: A provision was added to

the certification which requires the

governmental unit to notify the Federal

Government of any accounting changes

that would effect the application of the

predetermined rate.

C. Procurement Issues

Several procurement issues arose

during the Federal Government’s

internal review process. This section

clarifies the procurement issues.

Effective Date for Governmental Units

With Predetermined Rates Beyond

September 1, 1995

For a governmental unit that already

has established indirect cost rates

beyond September 1, 1995, the effective

date of the revised Circular shall be at

the start of the next accounting period

beginning on or after September 1, 1995,

for which the governmental unit has not

yet established a predetermined indirect

cost rate.

Depreciation Method(s) for CASCovered Contracts

CAS-covered contracts subject to ‘‘full

coverage’’ under CASB shall follow the

standards promulgated by CASB in the

computation of depreciation.

Allowability of Interest Expenses for

CAS-Covered Contracts

For contracts subject to CAS 414 (48

CFR 9903.414, cost of money as an

element of the cost of capital), and CAS

417 (48 CFR 9903.417, cost of money as

an element of the cost of capital assets

under construction), the imputed cost of

money determined allocable in

accordance with CAS 414 and 417 may

be claimed as an allowable cost. When

cost of money is claimed, interest shall

not be an allowable direct or indirect

cost under such contracts.

D. Federal Acquisition Streamline Act

The Federal Acquisition Streamlining

Act (FASA) of 1994, enacted on October

13, 1994, amended Section 306(e) of the

Federal Property and Administrative

Services Act of 1949 (41 U.S.C. 256,

Public Law 103–355, Section 2151, 108

Stat. 3309–12), to specify certain items

of costs as not allowable under Federal

covered contracts. OMB is undertaking

a review of these FASA provisions, for

the purpose of determining whether the

unallowable cost provisions of Circular

A–87, and of OMB’s other cost

principles circulars, should be amended

in light of the FASA provisions on

unallowable costs. If OMB ultimately

concludes that amendments may be

appropriate, OMB will issue a proposal

seeking public comment on the

proposed revisions.

John B. Arthur,

Associate Director for Administration.

Executive Office of The President

Office of Management and Budget

Washington, DC 20503

May 4, 1995.

Circular No. A–87 Revised

To the Heads of Executive Departments and

Establishments

From: Alice M. Rivlin, Director

Subject: Cost Principles for State, Local, and

Indian Tribal Governments

1. Purpose. This Circular establishes

principles and standards for determining

costs for Federal awards carried out through

grants, cost reimbursement contracts, and

other agreements with State and local

governments and federally-recognized Indian

tribal governments (governmental units).

2. Authority. This Circular is issued under

the authority of the Budget and Accounting

Act of 1921, as amended; the Budget and

Accounting Procedures Act of 1950, as

amended; the Chief Financial Officers Act of

1990; Reorganization Plan No. 2 of 1970; and

Executive Order No. 11541 (‘‘Prescribing the

Duties of the Office of Management and

Budget and the Domestic Policy Council in

the Executive Office of the President’’).

3. Background. An interagency task force

was established in 1987 to review existing

cost principles for Federal awards to State,

local, and Indian tribal governments. The

task force studied Inspector General reports

and recommendations, solicited suggestions

for changes to the Circular from

governmental units, and compared for

consistency the provisions of other OMB cost

principles circulars covering non-profit

organizations and universities. A proposed

revised Circular reflecting the results of those

efforts was issued on October 12, 1988, and

August 19, 1993. Extensive comments on the

proposed revisions, discussions with interest

groups, and related developments were

considered in developing this revision.

4. Rescissions. This Circular rescinds and

supersedes Circular A–87, issued January 15,

1981.

5. Policy. This Circular establishes

principles and standards to provide a

uniform approach for determining costs and

to promote effective program delivery,

efficiency, and better relationships between

governmental units and the Federal

Government. The principles are for

determining allowable costs only. They are

not intended to identify the circumstances or

to dictate the extent of Federal and

governmental unit participation in the

financing of a particular Federal award.

Provision for profit or other increment above

cost is outside the scope of this Circular.

6. Definitions. Definitions of key terms

used in this Circular are contained in

Attachment A, Section B.

7. Required Action. Agencies responsible

for administering programs that involve cost

reimbursement contracts, grants, and other

agreements with governmental units shall
26490 Federal Register / Vol. 60, No. 95 / Wednesday, May 17, 1995 / Notices

issue codified regulations to implement the

provisions of this Circular and its

Attachments by September 1, 1995.

8. OMB Responsibilities. The Office of

Management and Budget (OMB) will review

agency regulations and implementation of

this Circular, and will provide policy

interpretations and assistance to insure

effective and efficient implementation. Any

exceptions will be subject to approval by

OMB. Exceptions will only be made in

particular cases where adequate justification

is presented.

9. Information Contact. Further

information concerning this Circular may be

obtained by contacting the Office of Federal

Financial Management, Financial Standards

and Reporting Branch, Office of Management

and Budget, Washington, DC 20503,

telephone 202–395–3993.

10. Policy Review Date. OMB Circular A–

87 will have a policy review three years from

the date of issuance.

11. Effective Date. This Circular is effective

as follows:

—For costs charged indirectly or otherwise

covered by the cost allocation plans

described in Attachments C, D and E, this

revision shall be applied to cost allocation

plans and indirect cost proposals

submitted or prepared for a governmental

unit’s fiscal year that begins on or after

September 1, 1995.

—For other costs, this revision shall be

applied to all awards or amendments,

including continuation or renewal awards,

made on or after September 1, 1995.

OMB Circular No. A–87—Cost

Principles for State, Local and Indian

Tribal Governments

Table of Contents

Attachment A—General Principles for

Determining Allowable Costs

Attachment B—Selected Items of Cost

Attachment C—State/Local-Wide Central

Service Cost Allocation Plans

Attachment D—Public Assistance Cost

Allocation Plans

Attachment E—State and Local Indirect Cost

Rate Proposals

Attachment A—General Principles for

Determining Allowable Costs

Table of Contents

A. Purpose and Scope

1. Objectives

2. Policy guides

3. Application

B. Definitions

1. Approval or authorization of the

awarding or cognizant Federal agency

2. Award

3. Awarding agency

4. Central service cost allocation plan

5. Claim

6. Cognizant agency

7. Common rule

8. Contract

9. Cost

10. Cost allocation plan

11. Cost objective

12. Federally-recognized Indian tribal

government

13. Governmental unit

14. Grantee department or agency

15. Indirect cost rate proposal

16. Local government

17. Public assistance cost allocation plan

18. State

C. Basic Guidelines

1. Factors affecting allowability of costs

2. Reasonable costs

3. Allocable costs

4. Applicable credits

D. Composition of Cost

1. Total cost

2. Classification of costs

E. Direct Costs

1. General

2. Application

3. Minor items

F. Indirect Costs

1. General

2. Cost allocation plans and indirect cost

proposals

3. Limitation on indirect or administrative

costs

G. Interagency Services

H. Required Certifications

A. Purpose and Scope

1. Objectives. This Attachment

establishes principles for determining

the allowable costs incurred by State,

local, and federally-recognized Indian

tribal governments (governmental units)

under grants, cost reimbursement

contracts, and other agreements with the

Federal Government (collectively

referred to in this Circular as ‘‘Federal

awards’’). The principles are for the

purpose of cost determination and are

not intended to identify the

circumstances or dictate the extent of

Federal or governmental unit

participation in the financing of a

particular program or project. The

principles are designed to provide that

Federal awards bear their fair share of

cost recognized under these principles

except where restricted or prohibited by

law. Provision for profit or other

increment above cost is outside the

scope of this Circular.

2. Policy guides.

a. The application of these principles

is based on the fundamental premises

that:

(1) Governmental units are

responsible for the efficient and

effective administration of Federal

awards through the application of sound

management practices.

(2) Governmental units assume

responsibility for administering Federal

funds in a manner consistent with

underlying agreements, program

objectives, and the terms and conditions

of the Federal award.

(3) Each governmental unit, in

recognition of its own unique

combination of staff, facilities, and

experience, will have the primary

responsibility for employing whatever

form of organization and management

techniques may be necessary to assure

proper and efficient administration of

Federal awards.

b. Federal agencies should work with

States or localities which wish to test

alternative mechanisms for paying costs

for administering Federal programs. The

Office of Management and Budget

(OMB) encourages Federal agencies to

test fee-for-service alternatives as a

replacement for current costreimbursement payment methods in

response to the National Performance

Review’s (NPR) recommendation. The

NPR recommended the fee-for-service

approach to reduce the burden

associated with maintaining systems for

charging administrative costs to Federal

programs and preparing and approving

cost allocation plans. This approach

should also increase incentives for

administrative efficiencies and improve

outcomes.

3. Application.

a. These principles will be applied by

all Federal agencies in determining

costs incurred by governmental units

under Federal awards (including

subawards) except those with (1)

Publicly-financed educational

institutions subject to OMB Circular A–

21, ‘‘Cost Principles for Educational

Institutions,’’ and (2) programs

administered by publicly-owned

hospitals and other providers of medical

care that are subject to requirements

promulgated by the sponsoring Federal

agencies. However, this Circular does

apply to all central service and

department/agency costs that are

allocated or billed to those educational

institutions, hospitals, and other

providers of medical care or services by

other State and local government

departments and agencies.

b. All subawards are subject to those

Federal cost principles applicable to the

particular organization concerned.

Thus, if a subaward is to a governmental

unit (other than a college, university or

hospital), this Circular shall apply; if a

subaward is to a commercial

organization, the cost principles

applicable to commercial organizations

shall apply; if a subaward is to a college

or university, Circular A–21 shall apply;

if a subaward is to a hospital, the cost

principles used by the Federal awarding

agency for awards to hospitals shall

apply, subject to the provisions of

subsection A.3.a. of this Attachment; if

a subaward is to some other non-profit

organization, Circular A–122, ‘‘Cost

Principles for Non-Profit

Organizations,’’ shall apply.

c. These principles shall be used as a

guide in the pricing of fixed price

arrangements where costs are used in

determining the appropriate price.
Federal Register / Vol. 60, No. 95 / Wednesday, May 17, 1995 / Notices 26491

d. Where a Federal contract awarded

to a governmental unit incorporates a

Cost Accounting Standards (CAS)

clause, the requirements of that clause

shall apply. In such cases, the

governmental unit and the cognizant

Federal agency shall establish an

appropriate advance agreement on how

the governmental unit will comply with

applicable CAS requirements when

estimating, accumulating and reporting

costs under CAS-covered contracts. The

agreement shall indicate that OMB

Circular A–87 requirements will be

applied to other Federal awards. In all

cases, only one set of records needs to

be maintained by the governmental unit.

B. Definitions

1. ‘‘Approval or authorization of the

awarding or cognizant Federal agency’’

means documentation evidencing

consent prior to incurring a specific

cost. If such costs are specifically

identified in a Federal award document,

approval of the document constitutes

approval of the costs. If the costs are

covered by a State/local-wide cost

allocation plan or an indirect cost

proposal, approval of the plan

constitutes the approval.

2. ‘‘Award’’ means grants, cost

reimbursement contracts and other

agreements between a State, local and

Indian tribal government and the

Federal Government.

3. ‘‘Awarding agency’’ means (a) with

respect to a grant, cooperative

agreement, or cost reimbursement

contract, the Federal agency, and (b)

with respect to a subaward, the party

that awarded the subaward.

4. ‘‘Central service cost allocation

plan’’ means the documentation

identifying, accumulating, and

allocating or developing billing rates

based on the allowable costs of services

provided by a governmental unit on a

centralized basis to its departments and

agencies. The costs of these services

may be allocated or billed to users.

5. ‘‘Claim’’ means a written demand

or written assertion by the governmental

unit or grantor seeking, as a matter of

right, the payment of money in a sum

certain, the adjustment or interpretation

of award terms, or other relief arising

under or relating to the award. A

voucher, invoice or other routine

request for payment that is not a dispute

when submitted is not a claim. Appeals,

such as those filed by a governmental

unit in response to questioned audit

costs, are not considered claims until a

final management decision is made by

the Federal awarding agency.

6. ‘‘Cognizant agency’’ means the

Federal agency responsible for

reviewing, negotiating, and approving

cost allocation plans or indirect cost

proposals developed under this Circular

on behalf of all Federal agencies. OMB

publishes a listing of cognizant

agencies.

7. ‘‘Common Rule’’ means the

‘‘Uniform Administrative Requirements

for Grants and Cooperative Agreements

to State and Local Governments; Final

Rule’’ originally issued at 53 FR 8034–

8103 (March 11, 1988). Other common

rules will be referred to by their specific

titles.

8. ‘‘Contract’’ means a mutually

binding legal relationship obligating the

seller to furnish the supplies or services

(including construction) and the buyer

to pay for them. It includes all types of

commitments that obligate the

government to an expenditure of

appropriated funds and that, except as

otherwise authorized, are in writing. In

addition to bilateral instruments,

contracts include (but are not limited

to): awards and notices of awards; job

orders or task orders issued under basic

ordering agreements; letter contracts;

orders, such as purchase orders, under

which the contract becomes effective by

written acceptance or performance; and,

bilateral contract modifications.

Contracts do not include grants and

cooperative agreements covered by 31

U.S.C. 6301 et seq.

9. ‘‘Cost’’ means an amount as

determined on a cash, accrual, or other

basis acceptable to the Federal awarding

or cognizant agency. It does not include

transfers to a general or similar fund.

10. ‘‘Cost allocation plan’’ means

central service cost allocation plan,

public assistance cost allocation plan,

and indirect cost rate proposal. Each of

these terms are further defined in this

section.

11. ‘‘Cost objective’’ means a function,

organizational subdivision, contract,

grant, or other activity for which cost

data are needed and for which costs are

incurred.

12. ‘‘Federally-recognized Indian

tribal government’’ means the governing

body or a governmental agency of any

Indian tribe, band, nation, or other

organized group or community

(including any native village as defined

in Section 3 of the Alaska Native Claims

Settlement Act, 85 Stat. 688) certified by

the Secretary of the Interior as eligible

for the special programs and services

provided through the Bureau of Indian

Affairs.

13. ‘‘Governmental unit’’ means the

entire State, local, or federallyrecognized Indian tribal government,

including any component thereof.

Components of governmental units may

function independently of the

governmental unit in accordance with

the term of the award.

14. ‘‘Grantee department or agency’’

means the component of a State, local,

or federally-recognized Indian tribal

government which is responsible for the

performance or administration of all or

some part of a Federal award.

15. ‘‘Indirect cost rate proposal’’

means the documentation prepared by a

governmental unit or component thereof

to substantiate its request for the

establishment of an indirect cost rate as

described in Attachment E of this

Circular.

16. ‘‘Local government’’ means a

county, municipality, city, town,

township, local public authority, school

district, special district, intrastate

district, council of governments

(whether or not incorporated as a nonprofit corporation under State law), any

other regional or interstate government

entity, or any agency or instrumentality

of a local government.

17. ‘‘Public assistance cost allocation

plan’’ means a narrative description of

the procedures that will be used in

identifying, measuring and allocating all

administrative costs to all of the

programs administered or supervised by

State public assistance agencies as

described in Attachment D of this

Circular.

18. ‘‘State’’ means any of the several

States of the United States, the District

of Columbia, the Commonwealth of

Puerto Rico, any territory or possession

of the United States, or any agency or

instrumentality of a State exclusive of

local governments.

C. Basic Guidelines

1. Factors affecting allowability of

costs. To be allowable under Federal

awards, costs must meet the following

general criteria:

a. Be necessary and reasonable for

proper and efficient performance and

administration of Federal awards.

b. Be allocable to Federal awards

under the provisions of this Circular.

c. Be authorized or not prohibited

under State or local laws or regulations.

d. Conform to any limitations or

exclusions set forth in these principles,

Federal laws, terms and conditions of

the Federal award, or other governing

regulations as to types or amounts of

cost items.

e. Be consistent with policies,

regulations, and procedures that apply

uniformly to both Federal awards and

other activities of the governmental

unit.

f. Be accorded consistent treatment. A

cost may not be assigned to a Federal

award as a direct cost if any other cost

incurred for the same purpose in like
26492 Federal Register / Vol. 60, No. 95 / Wednesday, May 17, 1995 / Notices

circumstances has been allocated to the

Federal award as an indirect cost.

g. Except as otherwise provided for in

this Circular, be determined in

accordance with generally accepted

accounting principles.

h. Not be included as a cost or used

to meet cost sharing or matching

requirements of any other Federal award

in either the current or a prior period,

except as specifically provided by

Federal law or regulation.

i. Be the net of all applicable credits.

j. Be adequately documented.

2. Reasonable costs. A cost is

reasonable if, in its nature and 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 cost.

The question of reasonableness is

particularly important when

governmental units or components are

predominately federally-funded. In

determining 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

governmental unit or the performance of

the Federal award.

b. The restraints or requirements

imposed by such factors as: sound

business practices; arms length

bargaining; Federal, State and other

laws and regulations; and, terms and

conditions of the Federal award.

c. Market prices for comparable goods

or services.

d. Whether the individuals concerned

acted with prudence in the

circumstances considering their

responsibilities to the governmental

unit, its employees, the public at large,

and the Federal Government.

e. Significant deviations from the

established practices of the

governmental unit which may

unjustifiably increase the Federal

award’s cost.

3. Allocable costs.

a. A cost is allocable to a particular

cost objective if the goods or services

involved are chargeable or assignable to

such cost objective in accordance with

relative benefits received.

b. All activities which benefit from

the governmental unit’s indirect cost,

including unallowable activities and

services donated to the governmental

unit by third parties, will receive an

appropriate allocation of indirect costs.

c. Any cost allocable to a particular

Federal award or cost objective under

the principles provided for in this

Circular may not be charged to other

Federal awards to overcome fund

deficiencies, to avoid restrictions

imposed by law or terms of the Federal

awards, or for other reasons. However,

this prohibition would not preclude

governmental units from shifting costs

that are allowable under two or more

awards in accordance with existing

program agreements.

d. Where an accumulation of indirect

costs will ultimately result in charges to

a Federal award, a cost allocation plan

will be required as described in

Attachments C, D, and E.

4. Applicable credits.

a. Applicable credits refer to those

receipts or reduction of expendituretype transactions that offset or reduce

expense items allocable to Federal

awards as direct or indirect costs.

Examples of such transactions are:

purchase discounts, rebates or

allowances, recoveries or indemnities

on losses, insurance refunds or rebates,

and adjustments of overpayments or

erroneous charges. To the extent that

such credits accruing to or received by

the governmental unit relate to

allowable costs, they shall be credited to

the Federal award either as a cost

reduction or cash refund, as

appropriate.

b. In some instances, the amounts

received from the Federal Government

to finance activities or service

operations of the governmental unit

should be treated as applicable credits.

Specifically, the concept of netting such

credit items (including any amounts

used to meet cost sharing or matching

requirements) should be recognized in

determining the rates or amounts to be

charged to Federal awards. (See

Attachment B, item 15, ‘‘Depreciation

and use allowances,’’ for areas of

potential application in the matter of

Federal financing of activities.)

D. Composition of Cost

1. Total cost. The total cost of Federal

awards is comprised of the allowable

direct cost of the program, plus its

allocable portion of allowable indirect

costs, less applicable credits.

2. Classification of costs. There is no

universal rule for classifying certain

costs as either direct or indirect under

every accounting system. A cost may be

direct with respect to some specific

service or function, but indirect with

respect to the Federal award or other

final cost objective. Therefore, it is

essential that each item of cost be

treated consistently in like

circumstances either as a direct or an

indirect cost. Guidelines for

determining direct and indirect costs

charged to Federal awards are provided

in the sections that follow.

E. Direct Costs

1. General. Direct costs are those that

can be identified specifically with a

particular final cost objective.

2. Application. Typical direct costs

chargeable to Federal awards are:

a. Compensation of employees for the

time devoted and identified specifically

to the performance of those awards.

b. Cost of materials acquired,

consumed, or expended specifically for

the purpose of those awards.

c. Equipment and other approved

capital expenditures.

d. Travel expenses incurred

specifically to carry out the award.

3. Minor items. Any direct cost of a

minor amount may be treated as an

indirect cost for reasons of practicality

where such accounting treatment for

that item of cost is consistently applied

to all cost objectives.

F. Indirect Costs

1. General. Indirect costs are those: (a)

incurred for a common or joint purpose

benefiting more than one cost objective,

and (b) not readily assignable to the cost

objectives specifically benefitted,

without effort disproportionate to the

results achieved. The term ‘‘indirect

costs,’’ as used herein, applies to costs

of this type originating in the grantee

department, as well as those incurred by

other departments in supplying goods,

services, and facilities. To facilitate

equitable distribution of indirect

expenses to the cost objectives served, it

may be necessary to establish a number

of pools of indirect costs within a

governmental unit department or in

other agencies providing services to a

governmental unit department. Indirect

cost pools should be distributed to

benefitted cost objectives on bases that

will produce an equitable result in

consideration of relative benefits

derived.

2. Cost allocation plans and indirect

cost proposals. Requirements for

development and submission of cost

allocation plans and indirect cost rate

proposals are contained in Attachments

C, D, and E.

3. Limitation on indirect or

administrative costs.

a. In addition to restrictions contained

in this Circular, there may be laws that

further limit the amount of

administrative or indirect cost allowed.

b. Amounts not recoverable as

indirect costs or administrative costs

under one Federal award may not be

shifted to another Federal award, unless

specifically authorized by Federal

legislation or regulation.
Federal Register / Vol. 60, No. 95 / Wednesday, May 17, 1995 / Notices 26493

G. Interagency Services

The cost of services provided by one

agency to another within the

governmental unit may include

allowable direct costs of the service plus

a pro rate share of indirect costs. A

standard indirect cost allowance equal

to ten percent of the direct salary and

wage cost of providing the service

(excluding overtime, shift premiums,

and fringe benefits) may be used in lieu

of determining the actual indirect costs

of the service. These services do not

include centralized services included in

central service cost allocation plans as

described in Attachment C.

H. Required Certifications

Each cost allocation plan or indirect

cost rate proposal required by

Attachments C and E must comply with

the following:

1. No proposal to establish a cost

allocation plan or an indirect cost rate,

whether submitted to a Federal

cognizant agency or maintained on file

by the governmental unit, shall be

acceptable unless such costs have been

certified by the governmental unit using

the Certificate of Cost Allocation Plan or

Certificate of Indirect Costs as set forth

in Attachments C and E. The certificate

must be signed on behalf of the

governmental unit by an individual at a

level no lower than chief financial

officer of the governmental unit that

submits the proposal or component

covered by the proposal.

2. No cost allocation plan or indirect

cost rate shall be approved by the

Federal Government unless the plan or

rate proposal has been certified. Where

it is necessary to establish a cost

allocation plan or an indirect cost rate

and the governmental unit has not

submitted a certified proposal for

establishing such a plan or rate in

accordance with the requirements, the

Federal Government may either

disallow all indirect costs or unilaterally

establish such a plan or rate. Such a

plan or rate may be based upon audited

historical data or such other data that

have been furnished to the cognizant

Federal agency and for which it can be

demonstrated that all unallowable costs

have been excluded. When a cost

allocation plan or indirect cost rate is

unilaterally established by the Federal

Government because of failure of the

governmental unit to submit a certified

proposal, the plan or rate established

will be set to ensure that potentially

unallowable costs will not be

reimbursed.

Attachment B—Selected Items of Cost

Table of Contents

1. Accounting

2. Advertising and public relations costs

3. Advisory councils

4. Alcoholic beverages

5. Audit services

6. Automatic electronic data processing

7. Bad debts

8. Bonding costs

9. Budgeting

10. Communications

11. Compensation for personnel services

a. General

b. Reasonableness

c. Unallowable costs

d. Fringe benefits

e. Pension plan costs

f. Post-retirement health benefits

g. Severance pay

h. Support of salaries and wages

i. Donated services

12. Contingencies

13. Contributions and donations

14. Defense and prosecution of criminal and

civil proceedings, and claims

15. Depreciation and use allowances

16. Disbursing service

17. Employee morale, health, and welfare

costs

18. Entertainment

19. Equipment and other capital

expenditures

20. Fines and penalties

21. Fund raising and investment management

costs

22. Gains and losses on disposition of

depreciable property and other capital

assets and substantial relocation of

Federal programs

23. General government expenses

24. Idle facilities and idle capacity

25. Insurance and indemnification

26. Interest

27. Lobbying

28. Maintenance, operations, and repairs

29. Materials and supplies

30. Memberships, subscriptions, and

professional activities

31. Motor pools

32. Pre-award costs

33. Professional service costs

34. Proposal costs

35. Publication and printing costs

36. Rearrangements and alterations

37. Reconversion costs

38. Rental costs

39. Taxes

40. Training

41. Travel costs

42. Underrecovery of costs under Federal

agreements

Sections 1 through 42 provide

principles to be applied in establishing

the allowability or unallowability of

certain items of cost. These principles

apply whether a cost is treated as direct

or indirect. A cost is allowable for

Federal reimbursement only to the

extent of benefits received by Federal

awards and its conformance with the

general policies and principles stated in

Attachment A to this Circular. Failure to

mention a particular item of cost in

these sections is not intended to imply

that it is either allowable or

unallowable; rather, determination of

allowability in each case should be

based on the treatment or standards

provided for similar or related items of

cost.

1. Accounting. The cost of

establishing and maintaining accounting

and other information systems is

allowable.

2. 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

governmental unit or maintaining or

promoting understanding and favorable

relations with the community or public

at large or any segment of the public.

c. Advertising costs are allowable

only when incurred for the recruitment

of personnel, the procurement of goods

and services, the disposal of surplus

materials, and any other specific

purposes necessary to meet the

requirements of the Federal award.

Advertising costs associated with the

disposal of surplus materials are not

allowable where all disposal costs are

reimbursed based on a standard rate as

specified in the grants management

common rule.

d. Public relations costs are allowable

when:

(1) Specifically required by the

Federal award and then only as a direct

cost;

(2) Incurred to communicate with the

public and press pertaining to specific

activities or accomplishments that result

from performance of the Federal award

and then only as a direct cost; or

(3) Necessary to conduct 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 Federal contract/grant

awards, financial matters, etc.

e. Unallowable advertising and public

relations costs include the following:

(1) All advertising and public

relations costs other than as specified in

subsections c. and d.;

(2) Except as otherwise permitted by

these cost principles, costs of

conventions, meetings, or other events
26494 Federal Register / Vol. 60, No. 95 / Wednesday, May 17, 1995 / Notices

related to other activities of the

governmental unit including:

(a) Costs of displays, demonstrations,

and exhibits;

(b) Costs of meeting rooms, hospitality

suites, and other special facilities used

in conjunction with shows and other

special events; and

(c) Salaries and wages of employees

engaged in setting up and displaying

exhibits, making demonstrations, and

providing briefings;

(3) Costs of promotional items and

memorabilia, including models, gifts,

and souvenirs; and

(4) Costs of advertising and public

relations designed solely to promote the

governmental unit.

3. Advisory councils. Costs incurred

by advisory councils or committees are

allowable as a direct cost where

authorized by the Federal awarding

agency or as an indirect cost where

allocable to Federal awards.

4. Alcoholic beverages. Costs of

alcoholic beverages are unallowable.

5. Audit services. The costs of audits

are allowable provided that the audits

were performed in accordance with the

Single Audit Act, as implemented by

Circular A–128, ‘‘Audits of State and

Local Governments.’’ Generally, the

percentage of costs charged to Federal

awards for a single audit shall not

exceed the percentage derived by

dividing Federal funds expended by

total funds expended by the recipient or

subrecipient (including program

matching funds) during the fiscal year.

The percentage may be exceeded only if

appropriate documentation

demonstrates higher actual costs.

Other audit costs are allowable if

specifically approved by the awarding

or cognizant agency as a direct cost to

an award or included as an indirect cost

in a cost allocation plan or rate.

6. Automatic electronic data

processing. The cost of data processing

services is allowable (but see section 19,

Equipment and other capital

expenditures).

7. Bad debts. Any losses arising from

uncollectible accounts and other claims,

and related costs, are unallowable

unless provided for in Federal program

award regulations.

8. Bonding costs. Costs of bonding

employees and officials are allowable to

the extent that such bonding is in

accordance with sound business

practice.

9. Budgeting. Costs incurred for the

development, preparation, presentation,

and execution of budgets are allowable.

10. Communications. Costs of

telephone, mail, messenger, and similar

communication services are allowable.

11. Compensation for personnel

services.

a. General. Compensation for

personnel services includes all

remuneration, paid currently or

accrued, for services rendered during

the period of performance under Federal

awards, including but not necessarily

limited to wages, salaries, and fringe

benefits. The costs of such

compensation are allowable to the

extent that they satisfy the specific

requirements of this Circular, and that

the total compensation for individual

employees:

(1) Is reasonable for the services

rendered and conforms to the

established policy of the governmental

unit consistently applied to both

Federal and non-Federal activities;

(2) Follows an appointment made in

accordance with a governmental unit’s

laws and rules and meets merit system

or other requirements required by

Federal law, where applicable; and

(3) Is determined and supported as

provided in subsection h.

b. Reasonableness. Compensation for

employees engaged in work on Federal

awards will be considered reasonable to

the extent that it is consistent with that

paid for similar work in other activities

of the governmental unit. In cases where

the kinds of employees required for

Federal awards are not found in the

other activities of the governmental

unit, compensation will be considered

reasonable to the extent that it is

comparable to that paid for similar work

in the labor market in which the

employing government competes for the

kind of employees involved.

Compensation surveys providing data

representative of the labor market

involved will be an acceptable basis for

evaluating reasonableness.

c. Unallowable costs. Costs which are

unallowable under other sections of

these principles shall not be allowable

under this section solely on the basis

that they constitute personnel

compensation.

d. Fringe benefits.

(1) Fringe benefits are allowances and

services provided by employers to their

employees as compensation in addition

to regular salaries and wages. Fringe

benefits include, but are not limited to,

the costs of leave, employee insurance,

pensions, and unemployment benefit

plans. Except as provided elsewhere in

these principles, the costs of fringe

benefits are allowable to the extent that

the benefits are reasonable and are

required by law, governmental unitemployee agreement, or an established

policy of the governmental unit.

(2) The cost of fringe benefits in the

form of regular compensation paid to

employees during periods of authorized

absences from the job, such as for

annual leave, sick leave, holidays, court

leave, military leave, and other similar

benefits, are allowable if: (a) they are

provided under established written

leave policies; (b) the costs are equitably

allocated to all related activities,

including Federal awards; and, (c) the

accounting basis (cash or accrual)

selected for costing each type of leave is

consistently followed by the

governmental unit.

(3) When a governmental unit uses

the cash basis of accounting, the cost of

leave is recognized in the period that

the leave is taken and paid for.

Payments for unused leave when an

employee retires or terminates

employment are allowable in the year of

payment provided they are allocated as

a general administrative expense to all

activities of the governmental unit or

component.

(4) The accrual basis may be only

used for those types of leave for which

a liability as defined by Generally

Accepted Accounting Principles

(GAAP) exists when the leave is earned.

When a governmental unit uses the

accrual basis of accounting, in

accordance with GAAP, allowable leave

costs are the lesser of the amount

accrued or funded.

(5) The cost of fringe benefits in the

form of employer contributions or

expenses for social security; employee

life, health, unemployment, and

worker’s compensation insurance

(except as indicated in section 25,

Insurance and indemnification);

pension plan costs (see subsection e.);

and other similar benefits are allowable,

provided such benefits are granted

under established written policies. Such

benefits, whether treated as indirect

costs or as direct costs, shall be

allocated to Federal awards and all

other activities in a manner consistent

with the pattern of benefits attributable

to the individuals or group(s) of

employees whose salaries and wages are

chargeable to such Federal awards and

other activities.

e. Pension plan costs. Pension plan

costs may be computed using a pay-asyou-go method or an acceptable

actuarial cost method in accordance

with established written policies of the

governmental unit.

(1) For pension plans financed on a

pay-as-you-go method, allowable costs

will be limited to those representing

actual payments to retirees or their

beneficiaries.

(2) Pension costs calculated using an

actuarial cost-based method recognized

by GAAP are allowable for a given fiscal

year if they are funded for that year
Federal Register / Vol. 60, No. 95 / Wednesday, May 17, 1995 / Notices 26495

within six months after the end of that

year. Costs funded after the six month

period (or a later period agreed to by the

cognizant agency) are allowable in the

year funded. The cognizant agency may

agree to an extension of the six month

period if an appropriate adjustment is

made to compensate for the timing of

the charges to the Federal Government

and related Federal reimbursement and

the governmental unit’s contribution to

the pension fund. Adjustments may be

made by cash refund or other equitable

procedures to compensate the Federal

Government for the time value of

Federal reimbursements in excess of

contributions to the pension fund.

(3) Amounts funded by the

governmental unit in excess of the

actuarially determined amount for a

fiscal year may be used as the

governmental unit’s contribution in

future periods.

(4) When a governmental unit

converts to an acceptable actuarial cost

method, as defined by GAAP, and funds

pension costs in accordance with this

method, the unfunded liability at the

time of conversion shall be allowable if

amortized over a period of years in

accordance with GAAP.

(5) The Federal Government shall

receive an equitable share of any

previously allowed pension costs

(including earnings thereon) which

revert or inure to the governmental unit

in the form of a refund, withdrawal, or

other credit.

f. Post-retirement health benefits.

Post-retirement health benefits (PRHB)

refers to costs of health insurance or

health services not included in a

pension plan covered by subsection e.

for retirees and their spouses,

dependents, and survivors. PRHB costs

may be computed using a pay-as-you-go

method or an acceptable actuarial cost

method in accordance with established

written polices of the governmental

unit.

(1) For PRHB financed on a pay asyou-go method, allowable costs will be

limited to those representing actual

payments to retirees or their

beneficiaries.

(2) PRHB costs calculated using an

actuarial cost method recognized by

GAAP are allowable if they are funded

for that year within six months after the

end of that year. Costs funded after the

six month period (or a later period

agreed to by the cognizant agency) are

allowable in the year funded. The

cognizant agency may agree to an

extension of the six month period if an

appropriate adjustment is made to

compensate for the timing of the charges

to the Federal Government and related

Federal reimbursements and the

governmental unit’s contributions to the

PRHB fund. Adjustments may be made

by cash refund, reduction in current

year’s PRHB costs, or other equitable

procedures to compensate the Federal

Government for the time value of

Federal reimbursements in excess of

contributions to the PRHB fund.

(3) Amounts funded in excess of the

actuarially determined amount for a

fiscal year may be used as the

government’s contribution in a future

period.

(4) When a governmental unit

converts to an acceptable actuarial cost

method and funds PRHB costs in

accordance with this method, the initial

unfunded liability attributable to prior

years shall be allowable if amortized

over a period of years in accordance

with GAAP, or, if no such GAAP period

exists, over a period negotiated with the

cognizant agency.

(5) To be allowable in the current

year, the PRHB costs must be paid either

to:

(a) An insurer or other benefit

provider as current year costs or

premiums, or

(b) An insurer or trustee to maintain

a trust fund or reserve for the sole

purpose of providing post-retirement

benefits to retirees and other

beneficiaries.

(6) The Federal Government shall

receive an equitable share of any

amounts of previously allowed postretirement benefit costs (including

earnings thereon) which revert or inure

to the governmental unit in the form of

a refund, withdrawal, or other credit.

g. Severance pay.

(1) Payments in addition to regular

salaries and wages made to workers

whose employment is being terminated

are allowable to the extent that, in each

case, they are required by (a) law, (b)

employer-employee agreement, or (c)

established written policy.

(2) Severance payments (but not

accruals) associated with normal

turnover are allowable. Such payments

shall be allocated to all activities of the

governmental unit as an indirect cost.

(3) Abnormal or mass severance pay

will be considered on a case-by-case

basis and is allowable only if approved

by the cognizant Federal agency.

h. Support of salaries and wages.

These standards regarding time

distribution are in addition to the

standards for payroll documentation.

(1) Charges to Federal awards for

salaries and wages, whether treated as

direct or indirect costs, will be based on

payrolls documented in accordance

with generally accepted practice of the

governmental unit and approved by a

responsible official(s) of the

governmental unit.

(2) No further documentation is

required for the salaries and wages of

employees who work in a single indirect

cost activity.

(3) Where employees are expected to

work solely on a single Federal award

or cost objective, charges for their

salaries and wages will be supported by

periodic certifications that the

employees worked solely on that

program for the period covered by the

certification. These certifications will be

prepared at least semi-annually and will

be signed by the employee or

supervisory official having first hand

knowledge of the work performed by the

employee.

(4) Where employees work on

multiple activities or cost objectives, a

distribution of their salaries or wages

will be supported by personnel activity

reports or equivalent documentation

which meets the standards in subsection

(5) unless a statistical sampling system

(see subsection (6)) or other substitute

system has been approved by the

cognizant Federal agency. Such

documentary support will be required

where employees work on:

(a) More than one Federal award,

(b) A Federal award and a nonFederal award,

(c) An indirect cost activity and a

direct cost activity,

(d) Two or more indirect activities

which are allocated using different

allocation bases, or

(e) An unallowable activity and a

direct or indirect cost activity.

(5) Personnel activity reports or

equivalent documentation must meet

the following standards:

(a) They must reflect an after-the-fact

distribution of the actual activity of each

employee,

(b) They must account for the total

activity for which each employee is

compensated,

(c) They must be prepared at least

monthly and must coincide with one or

more pay periods, and

(d) They must be signed by the

employee.

(e) Budget estimates or other

distribution percentages determined

before the services are performed do not

qualify as support for charges to Federal

awards but may be used for interim

accounting purposes, provided that:

(i) The governmental unit’s system for

establishing the estimates produces

reasonable approximations of the

activity actually performed;

(ii) At least quarterly, comparisons of

actual costs to budgeted distributions

based on the monthly activity reports

are made. Costs charged to Federal
26496 Federal Register / Vol. 60, No. 95 / Wednesday, May 17, 1995 / Notices

awards to reflect adjustments made as a

result of the activity actually performed

may be recorded annually if the

quarterly comparisons show the

differences between budgeted and

actual costs are less than ten percent;

and

(iii) The budget estimates or other

distribution percentages are revised at

least quarterly, if necessary, to reflect

changed circumstances.

(6) Substitute systems for allocating

salaries and wages to Federal awards

may be used in place of activity reports.

These systems are subject to approval if

required by the cognizant agency. Such

systems may include, but are not

limited to, random moment sampling,

case counts, or other quantifiable

measures of employee effort.

(a) Substitute systems which use

sampling methods (primarily for Aid to

Families with Dependent Children

(AFDC), Medicaid, and other public

assistance programs) must meet

acceptable statistical sampling

standards including:

(i) The sampling universe must

include all of the employees whose

salaries and wages are to be allocated

based on sample results except as

provided in subsection (c);

(ii) The entire time period involved

must be covered by the sample; and

(iii) The results must be statistically

valid and applied to the period being

sampled.

(b) Allocating charges for the sampled

employees’ supervisors, clerical and

support staffs, based on the results of

the sampled employees, will be

acceptable.

(c) Less than full compliance with the

statistical sampling standards noted in

subsection (a) may be accepted by the

cognizant agency if it concludes that the

amounts to be allocated to Federal

awards will be minimal, or if it

concludes that the system proposed by

the governmental unit will result in

lower costs to Federal awards than a

system which complies with the

standards.

(7) Salaries and wages of employees

used in meeting cost sharing or

matching requirements of Federal

awards must be supported in the same

manner as those claimed as allowable

costs under Federal awards.

i. Donated services.

(1) Donated or volunteer services may

be furnished to a governmental unit 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. However, the

value of donated services may be used

to meet cost sharing or matching

requirements in accordance with the

provisions of the Common Rule.

(2) The value of donated services

utilized in the performance of a direct

cost activity shall, when material in

amount, be considered in the

determination of the governmental

unit’s indirect costs or rate(s) and,

accordingly, shall be allocated a

proportionate share of applicable

indirect costs.

(3) To the extent feasible, donated

services will be supported by the same

methods used by the governmental unit

to support the allocability of regular

personnel services.

12. Contingencies. Contributions to a

contingency reserve or any similar

provision made for events the

occurrence of which cannot be foretold

with certainty as to time, or intensity, or

with an assurance of their happening,

are unallowable. The term ‘‘contingency

reserve’’ excludes self-insurance

reserves (see subsection 25.c.), pension

plan reserves (see subsection 11.e.), and

post-retirement health and other benefit

reserves (see subsection 11.f.) computed

using acceptable actuarial cost methods.

13. Contributions and donations.

Contributions and donations, including

cash, property, and services, by

governmental units to others, regardless

of the recipient, are unallowable.

14. Defense and prosecution of

criminal and civil proceedings, and

claims.

a. The following costs are unallowable

for contracts covered by 10 U.S.C.

2324(k), ‘‘Allowable costs under defense

contracts.’’

(1) Costs incurred in defense of any

civil or criminal fraud proceeding or

similar proceeding (including filing of

false certification brought by the United

States where the contractor is found

liable or has pleaded nolo contendere to

a charge of fraud or similar proceeding

(including filing of a false certification).

(2) Costs incurred by a contractor in

connection with any criminal, civil or

administrative proceedings commenced

by the United States or a State to the

extent provided in 10 U.S.C. 2324(k).

b. Legal expenses required in the

administration of Federal programs are

allowable. Legal expenses for

prosecution of claims against the

Federal Government are unallowable.

15. Depreciation and use allowances.

a. Depreciation and use allowances

are means of allocating the cost of fixed

assets to periods benefitting from asset

use. Compensation for the use of fixed

assets on hand may be made through

depreciation or use allowances. 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.) except as provided in subsection g.

Except for enterprise funds and internal

service funds that are included as part

of a State/local cost allocation plan,

classes of assets shall be determined on

the same basis used for the governmentwide financial statements.

b. The computation of depreciation or

use allowances shall be based on the

acquisition cost of the assets involved.

Where actual cost records have not been

maintained, a reasonable estimate of the

original acquisition cost may be used.

The value of an asset donated to the

governmental unit by an unrelated third

party shall be its fair market value at the

time of donation. Governmental or

quasi-governmental organizations

located within the same State shall not

be considered unrelated third parties for

this purpose.

c. The computation of depreciation or

use allowances 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 governmental unit, or a related

donor organization, in satisfaction of a

matching requirement.

d. Where the use allowance method is

followed, the use allowance for

buildings and improvements (including

land improvements, such as paved

parking areas, fences, and sidewalks)

will be computed at an annual rate not

exceeding two percent of acquisition

costs. The use allowance for equipment

will be computed at an annual rate not

exceeding 62⁄3 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 condition, 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, modular furniture,

carpeting, etc.). Such equipment will be

considered as not being permanently

fixed to the building if it can be

removed without the destruction of, or

need for costly or extensive alterations

or repairs, to the building or the

equipment. Equipment that meets these
Federal Register / Vol. 60, No. 95 / Wednesday, May 17, 1995 / Notices 26497

criteria will be subject to the 62⁄3 percent

equipment use allowance limitation.

e. Where the 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, historical usage patterns,

technological developments, and the

renewal and replacement policies of the

governmental unit followed for the

individual items or classes of assets

involved. In the absence of clear

evidence indicating that the expected

consumption of the asset will be

significantly greater in the early

portions than in the later portions of its

useful life, the straight line method of

depreciation shall be used. Depreciation

methods once used shall not be changed

unless approved by the Federal

cognizant or awarding agency. When the

depreciation method is introduced for

application to an asset previously

subject to a use allowance, the annual

depreciation charge thereon may not

exceed the amount that would have

resulted had the depreciation method

been in effect from the date of

acquisition of the asset. The

combination of use allowances and

depreciation applicable to the asset

shall not exceed the total acquisition

cost of the asset or fair market value at

time of donation.

f. When the depreciation method is

used for buildings, a building’s shell

may be segregated from the major

component of the building (e.g.,

plumbing system, heating, and air

conditioning system, etc.) and each

major component 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.

g. A reasonable use allowance may be

negotiated for any assets that are

considered to be fully depreciated, after

taking into consideration the amount of

depreciation previously charged to the

government, the estimated useful life

remaining at the time of negotiation, the

effect of any increased maintenance

charges, decreased efficiency due to age,

and any other factors pertinent to the

utilization of the asset for the purpose

contemplated.

h. Charges for use allowances or

depreciation must be supported by

adequate property records. Physical

inventories must be taken at least once

every two years (a statistical sampling

approach is acceptable) to ensure that

assets exist, and are in use.

Governmental units will manage

equipment in accordance with State

laws and procedures. When the

depreciation method is followed,

depreciation records indicating the

amount of depreciation taken each

period must also be maintained.

16. Disbursing service. The cost of

disbursing funds by the Treasurer or

other designated officer is allowable.

17. Employee morale, health, and

welfare costs. The costs of health or

first-aid clinics and/or infirmaries,

recreational facilities, employee

counseling services, employee

information publications, and any

related expenses incurred in accordance

with a governmental unit’s policy are

allowable. Income generated from any of

these activities will be offset against

expenses.

18. Entertainment. Costs of

entertainment, including amusement,

diversion, and social activities and any

costs directly associated with such costs

(such as tickets to shows or sports

events, meals, lodging, rentals,

transportation, and gratuities) are

unallowable.

19. Equipment and other capital

expenditures.

a. As used in this section the

following terms have the meanings as

set forth below:

(1) ‘‘Capital expenditure’’ means the

cost of the asset including the cost to

put it in place. Capital expenditure for

equipment means the net invoice price

of the equipment, including the cost of

any modifications, attachments,

accessories, or auxiliary apparatus

necessary to make it usable for the

purpose for which it is acquired.

Ancillary charges, such as taxes, duty,

protective in transit insurance, freight,

and installation may be included in, or

excluded from, capital expenditure cost

in accordance with the governmental

unit’s regular accounting practices.

(2) ‘‘Equipment’’ means an article of

nonexpendable, tangible personal

property having a useful life of more

than one year and an acquisition cost

which equals the lesser of (a) the

capitalization level established by the

governmental unit for financial

statement purposes, or (b) $5000.

(3) ‘‘Other capital assets’’ mean

buildings, land, and improvements to

buildings or land that materially

increase their value or useful life.

b. Capital expenditures which are not

charged directly to a Federal award may

be recovered through use allowances or

depreciation on buildings, capital

improvements, and equipment (see

section 15). See also section 38 for

allowability of rental costs for buildings

and equipment.

c. Capital expenditures for equipment,

including replacement equipment, other

capital assets, and improvements which

materially increase the value or useful

life of equipment or other capital assets

are allowable as a direct cost when

approved by the awarding agency.

Federal awarding agencies are

authorized at their option to waive or

delegate this approval requirement.

d. Items of equipment with an

acquisition cost of less than $5000 are

considered to be supplies and are

allowable as direct costs of Federal

awards without specific awarding

agency approval.

e. The unamortized portion of any

equipment written off as a result of a

change in capitalization levels may be

recovered by (1) continuing to claim the

otherwise allowable use allowances or

depreciation charges on the equipment

or by (2) amortizing the amount to be

written off over a period of years

negotiated with the cognizant agency.

f. When replacing equipment

purchased in whole or in part with

Federal funds, the governmental unit

may use the equipment to be replaced

as a trade-in or sell the property and use

the proceeds to offset the cost of the

replacement property.

20. Fines and penalties. Fines,

penalties, damages, and other

settlements resulting from violations (or

alleged violations) of, or failure of the

governmental unit to comply with,

Federal, State, local, or Indian tribal

laws and regulations are unallowable

except when incurred as a result of

compliance with specific provisions of

the Federal award or written

instructions by the awarding agency

authorizing in advance such payments.

21. Fund raising and investment

management costs.

a. Costs of organized fund raising,

including financial campaigns,

solicitation of gifts and bequests, and

similar expenses incurred to raise

capital or obtain contributions are

unallowable, regardless of the purpose

for which the funds will be used.

b. Costs of investment counsel and

staff and similar expenses incurred to

enhance income from investments are

unallowable. However, such costs

associated with investments covering

pension, self-insurance, or other funds

which include Federal participation

allowed by this Circular are allowable.

c. Fund raising and investment

activities shall be allocated an

appropriate share of indirect costs under

the conditions described in subsection

C.3.b. of Attachment A.

22. Gains and losses on disposition of

depreciable property and other capital

assets and substantial relocation of

Federal programs.
26498 Federal Register / Vol. 60, No. 95 / Wednesday, May 17, 1995 / Notices

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

retirement, or other disposition of

depreciable property shall be included

in the year in which they occur as

credits or charges to the asset cost

grouping(s) in which the property was

included. The amount of the gain or loss

to be included as a credit or charge to

the appropriate asset cost grouping(s)

shall be the difference between the

amount realized on the property and the

undepreciated basis of the property.

(2) Gains and losses on the

disposition of depreciable property shall

not be recognized as a separate credit or

charge under the following conditions:

(a) The gain or loss is processed

through a depreciation account and is

reflected in the depreciation allowable

under sections 15 and 19.

(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 subsection

25.d.

(d) Compensation for the use of the

property was provided through use

allowances in lieu of depreciation.

b. Substantial relocation of Federal

awards from a facility where the Federal

Government participated in the

financing to another facility prior to the

expiration of the useful life of the

financed facility requires Federal agency

approval. The extent of the relocation,

the amount of the Federal participation

in the financing, and the depreciation

charged to date may require negotiation

of space charges for Federal awards.

c. Gains or losses of any nature arising

from the sale or exchange of property

other than the property covered in

subsection a., e.g., land or included in

the fair market value used in any

adjustment resulting from a relocation

of Federal awards covered in subsection

b. shall be excluded in computing

Federal award costs.

23. General government expenses.

a. The general costs of government are

unallowable (except as provided in

section 41). These include:

(1) Salaries and expenses of the Office

of the Governor of a State or the chief

executive of a political subdivision or

the chief executives of federallyrecognized Indian tribal governments;

(2) Salaries and other expenses of

State legislatures, tribal councils, or

similar local governmental bodies, such

as county supervisors, city councils,

school boards, etc., whether incurred for

purposes of legislation or executive

direction;

(3) Cost of the judiciary branch of a

government;

(4) Cost of prosecutorial activities

unless treated as a direct cost to a

specific program when authorized by

program regulations (however, this does

not preclude the allowability of other

legal activities of the Attorney General);

and

(5) Other general types of government

services normally provided to the

general public, such as fire and police,

unless provided for as a direct cost in

program regulations.

b. For federally-recognized Indian

tribal governments and Councils Of

Governments (COGs), the portion of

salaries and expenses directly

attributable to managing and operating

Federal programs by the chief executive

and his staff is allowable.

24. Idle facilities and idle capacity.

a. As used in this section the

following terms have the meanings set

forth below:

(1) ‘‘Facilities’’ means land and

buildings or any portion thereof,

equipment individually or collectively,

or any other tangible capital asset,

wherever located, and whether owned

or leased by the governmental unit.

(2) ‘‘Idle facilities’’ means completely

unused facilities that are excess to the

governmental unit’s current needs.

(3) ‘‘Idle capacity’’ means the unused

capacity of partially used facilities. It is

the difference between (a) that which a

facility could achieve under 100 percent

operating time on a one-shift basis less

operating interruptions resulting from

time lost for repairs, setups,

unsatisfactory materials, and other

normal delays and (b) the extent to

which the facility was actually used to

meet demands during the accounting

period. A multi-shift basis should be

used if it can be shown that this amount

of usage would normally be expected for

the type of facility involved.

(4) ‘‘Cost of idle facilities or idle

capacity’’ means costs such as

maintenance, repair, housing, rent, and

other related costs, e.g., insurance,

interest, and depreciation or use

allowances.

b. The costs of idle facilities are

unallowable except to the extent that:

(1) They are necessary to meet

fluctuations in workload; or

(2) Although not necessary to meet

fluctuations in workload, they were

necessary when acquired and are now

idle because of changes in program

requirements, efforts to achieve more

economical operations, reorganization,

termination, or other causes which

could not have been reasonably

foreseen. Under the exception stated in

this subsection, costs of idle facilities

are allowable for a reasonable period of

time, ordinarily not to exceed one year,

depending on the initiative taken to use,

lease, or dispose of such facilities.

c. The costs of idle capacity are

normal costs of doing business and are

a factor in the normal fluctuations of

usage or indirect cost rates from period

to period. Such costs are allowable,

provided that the capacity is reasonably

anticipated to be necessary or was

originally reasonable and is not subject

to reduction or elimination by use on

other Federal awards, subletting,

renting, or sale, in accordance with

sound business, economic, or security

practices. Widespread idle capacity

throughout an entire facility or among a

group of assets having substantially the

same function may be considered idle

facilities.

25. Insurance and indemnification.

a. Costs of insurance required or

approved and maintained, pursuant to

the Federal award, are allowable.

b. Costs of other insurance in

connection with the general conduct of

activities are allowable subject to the

following limitations:

(1) Types and extent and cost of

coverage are in accordance with the

governmental unit’s policy and sound

business practice.

(2) Costs of insurance or of

contributions to any reserve covering

the risk of loss of, or damage to, Federal

Government property are unallowable

except to the extent that the awarding

agency has specifically required or

approved such costs.

c. Actual losses which could have

been covered by permissible insurance

(through a self-insurance program or

otherwise) are unallowable, unless

expressly provided for in the Federal

award or as described below. However,

the Federal Government will participate

in actual losses of a self insurance fund

that are in excess of reserves. Costs

incurred because of losses not covered

under nominal deductible insurance

coverage provided in keeping with

sound management practice, and minor

losses not covered by insurance, such as

spoilage, breakage, and disappearance of

small hand tools, which occur in the

ordinary course of operations, are

allowable.

d. Contributions to a reserve for

certain self-insurance programs

including workers compensation,

unemployment compensation, and

severance pay are allowable subject to

the following provisions:

(1) The type of coverage and the

extent of coverage and the rates and

premiums would have been allowed

had insurance (including reinsurance)

been purchased to cover the risks.
Federal Register / Vol. 60, No. 95 / Wednesday, May 17, 1995 / Notices 26499

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

discounted present value of the liability.

The rate used for discounting the

liability must be determined by giving

consideration to such factors as the

governmental unit’s settlement rate for

those liabilities and its investment rate

of return.

(2) Earnings or investment income on

reserves must be credited to those

reserves.

(3) Contributions to reserves must be

based on sound actuarial principles

using historical experience and

reasonable assumptions. Reserve levels

must be analyzed and updated at least

biennially for each major risk being

insured and take into account any

reinsurance, coinsurance, etc. Reserve

levels related to employee-related

coverages will normally be limited to

the value of claims (a) submitted and

adjudicated but not paid, (b) submitted

but not adjudicated, and (c) incurred but

not submitted. Reserve levels in excess

of the amounts based on the above must

be identified and justified in the cost

allocation plan or indirect cost rate

proposal.

(4) Accounting records, actuarial

studies, and cost allocations (or billings)

must recognize any significant

differences due to types of insured risk

and losses generated by the various

insured activities or agencies of the

governmental unit. If individual

departments or agencies of the

governmental unit experience

significantly different levels of claims

for a particular risk, those differences

are to be recognized by the use of

separate allocations or other techniques

resulting in an equitable allocation.

(5) Whenever funds are transferred

from a self-insurance reserve to other

accounts (e.g., general fund), refunds

shall be made to the Federal

Government for its share of funds

transferred, including earned or

imputed interest from the date of

transfer.

e. Actual claims paid to or on behalf

of employees or former employees for

workers’ compensation, unemployment

compensation, severance pay, and

similar employee benefits (e.g.,

subsection 11.f. for post retirement

health benefits), are allowable in the

year of payment provided (1) the

governmental unit follows a consistent

costing policy and (2) they are allocated

as a general administrative expense to

all activities of the governmental unit.

f. Insurance refunds shall be credited

against insurance costs in the year the

refund is received.

g. Indemnification includes securing

the governmental unit against liabilities

to third persons and other losses not

compensated by insurance or otherwise.

The Federal Government is obligated to

indemnify the governmental unit only

to the extent expressly provided for in

the Federal award, except as provided

in subsection d.

h. Costs of commercial insurance that

protects against the costs of the

contractor for correction of the

contractor’s own defects in materials or

workmanship are unallowable.

26. Interest.

a. Costs incurred for interest on

borrowed capital or the use of a

governmental unit’s own funds,

however represented, are unallowable

except as specifically provided in

subsection b. or authorized by Federal

legislation.

b. Financing costs (including interest)

paid or incurred on or after the effective

date of this Circular associated with the

otherwise allowable costs of building

acquisition, construction, or fabrication,

reconstruction or remodeling completed

on or after October 1, 1980 is allowable,

subject to the conditions in (1)–(4).

Financing costs (including interest) paid

or incurred on or after the effective date

of this Circular associated with

otherwise allowable costs of equipment

is allowable, subject to the conditions in

(1)–(4).

(1) The financing is provided (from

other than tax or user fee sources) by a

bona fide third party external to the

governmental unit;

(2) The assets are used in support of

Federal awards;

(3) Earnings on debt service reserve

funds or interest earned on borrowed

funds pending payment of the

construction or acquisition costs are

used to offset the current period’s cost

or the capitalized interest, as

appropriate. Earnings subject to being

reported to the Federal Internal Revenue

Service under arbitrage requirements are

excludable.

(4) Governmental units will negotiate

the amount of allowable interest

whenever cash payments (interest,

depreciation, use allowances, and

contributions) exceed the governmental

unit’s cash payments and other

contributions attributable to that portion

of real property used for Federal awards.

27. Lobbying. The cost of certain

influencing activities associated with

obtaining grants, contracts, cooperative

agreements, or loans is an unallowable

cost. Lobbying with respect to certain

grants, contracts, cooperative

agreements, and loans shall be governed

by the common rule, ‘‘New Restrictions

on Lobbying’’ published at 55 FR 6736

(February 26, 1990), including

definitions, and the Office of

Management and Budget ‘‘Governmentwide Guidance for New Restrictions on

Lobbying’’ and notices published at 54

FR 52306 (December 20, 1989), 55 FR

24540 (June 15, 1990), and 57 FR 1772

(January 15, 1992), respectively.

28. Maintenance, operations, and

repairs. Unless prohibited by law, the

cost of utilities, insurance, security,

janitorial services, elevator service,

upkeep of grounds, necessary

maintenance, normal repairs and

alterations, and the like are allowable to

the extent that they: (1) keep property

(including Federal property, unless

otherwise provided for) in an efficient

operating condition, (2) do not add to

the permanent value of property or

appreciably prolong its intended life,

and (3) are not otherwise included in

rental or other charges for space. Costs

which add to the permanent value of

property or appreciably prolong its

intended life shall be treated as capital

expenditures (see sections 15 and 19).

29. Materials and supplies. The cost

of materials and supplies is allowable.

Purchases should be charged at their

actual prices after deducting all cash

discounts, trade discounts, rebates, and

allowances received. Withdrawals from

general stores or stockrooms should be

charged at cost under any recognized

method of pricing, consistently applied.

Incoming transportation charges are a

proper part of materials and supply

costs.

30. Memberships, subscriptions, and

professional activities.

a. Costs of the governmental unit’s

memberships in business, technical, and

professional organizations are

allowable.

b. Costs of the governmental unit’s

subscriptions to business, professional,

and technical periodicals are allowable.

c. Costs of meetings and conferences

where the primary purpose is the

dissemination of technical information,

including meals, transportation, rental

of meeting facilities, and other

incidental costs are allowable.

d. Costs of membership in civic and

community, social organizations are

allowable as a direct cost with the

approval of the Federal awarding

agency.

e. Costs of membership in

organizations substantially engaged in

lobbying are unallowable.

31. Motor pools. The costs of a service

organization which provides

automobiles to user governmental units

at a mileage or fixed rate and/or
26500 Federal Register / Vol. 60, No. 95 / Wednesday, May 17, 1995 / Notices

provides vehicle maintenance,

inspection, and repair services are

allowable.

32. 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.

33. Professional service costs.

a. Cost of professional and consultant

services rendered by persons or

organizations that are members of a

particular profession or possess a

special skill, whether or not officers or

employees of the governmental unit, are

allowable, subject to section 14 when

reasonable in relation to the services

rendered and when not contingent upon

recovery of the costs from the Federal

Government.

b. Retainer fees supported by

evidence of bona fide services available

or rendered are allowable.

34. Proposal costs. Costs of preparing

proposals for potential Federal awards

are allowable. Proposal costs should

normally be treated as indirect costs and

should be allocated to all activities of

the governmental unit utilizing the cost

allocation plan and indirect cost rate

proposal. However, proposal costs may

be charged directly to Federal awards

with the prior approval of the Federal

awarding agency.

35. Publication and printing costs.

Publication costs, including the costs of

printing (including the processes of

composition, plate-making, press work,

and binding, and the end products

produced by such processes),

distribution, promotion, mailing, and

general handling are allowable.

36. Rearrangements and alterations.

Costs incurred for ordinary and normal

rearrangement and alteration of facilities

are allowable. Special arrangements and

alterations costs incurred specifically

for a Federal award are allowable with

the prior approval of the Federal

awarding agency.

37. Reconversion costs. Costs incurred

in the restoration or rehabilitation of the

governmental unit’s facilities to

approximately the same condition

existing immediately prior to

commencement of Federal awards, less

costs related to normal wear and tear,

are allowable.

38. Rental costs.

a. Subject to the limitations described

in subsections b. through d. of this

section, rental costs are allowable to the

extent that the rates are reasonable in

light of such factors as: rental costs of

comparable property, if any; market

conditions in the area; alternatives

available; and, the type, life expectancy,

condition, and value of the property

leased.

b. Rental costs under sale and

leaseback arrangements are allowable

only up to the amount that would be

allowed had the governmental unit

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

governmental unit. For this purpose,

less-than-arms-length leases include,

but are not limited to, those where:

(1) One party to the lease is able to

control or substantially influence the

actions of the other;

(2) Both parties are parts of the same

governmental unit; or

(3) The governmental unit creates an

authority or similar entity to acquire

and lease the facilities to the

governmental unit and other parties.

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 governmental unit purchased the

property on the date the lease agreement

was executed. This amount would

include expenses such as depreciation

or use allowance, maintenance, and

insurance. The provisions of Financial

Accounting Standards Board Statement

13 shall be used to determine whether

a lease is a capital lease. Interest costs

related to capital leases are allowable to

the extent they meet the criteria in

section 26.

39. Taxes.

a. Taxes that a governmental unit is

legally required to pay are allowable,

except for self-assessed taxes that

disproportionately affect Federal

programs or changes in tax policies that

disproportionately affect Federal

programs. This provision becomes

effective for taxes paid during the

governmental unit’s first fiscal year that

begins on or after January 1, 1998, and

applies thereafter.

b. Gasoline taxes, motor vehicle fees,

and other taxes that are in effect user

fees for benefits provided to the Federal

Government are allowable.

c. This provision does not restrict the

authority of Federal agencies to identify

taxes where Federal participation is

inappropriate. Where the identification

of the amount of unallowable taxes

would require an inordinate amount of

effort, the cognizant agency may accept

a reasonable approximation thereof.

40. Training. The cost of training

provided for employee development is

allowable.

41. Travel costs.

a. General. Travel costs are allowable

for expenses for transportation, lodging,

subsistence, and related items incurred

by employees traveling on official

business. Such costs may be charged on

an actual cost basis, on a per diem or

mileage basis in lieu of actual costs

incurred, or on a combination of the

two, provided the method used is

applied to an entire trip, and results in

charges consistent with those normally

allowed in like circumstances in nonfederally-sponsored activities.

Notwithstanding the provisions of

section 23, travel costs of officials

covered by that section, when

specifically related to Federal awards,

are allowable with the prior approval of

a grantor agency.

b. Lodging and subsistence. Costs

incurred by employees and officers for

travel, including costs of lodging, other

subsistence, and incidental expenses,

shall be considered reasonable and

allowable only to the extent such costs

do not exceed charges normally allowed

by the governmental unit in its regular

operations as a result of the

governmental unit’s policy. In the

absence of a written governmental unit

policy regarding travel costs, the rates

and amounts established under

subchapter I of Chapter 57 of Title 5,

United States Code ‘‘Travel and

Subsistence Expenses; Mileage

Allowances,’’ or by the Administrator of

General Services, or the President (or

his designee) pursuant to any provisions

of such subchapter shall be used as

guidance for travel under Federal

awards (41 U.S.C. 420, ‘‘Travel

Expenses of Government Contractors’’).

c. Commercial air travel. Airfare costs

in excess of the customary standard

(coach or equivalent) airfare, are

unallowable except when such

accommodations would: require

circuitous routing, require travel during

unreasonable hours, excessively prolong

travel, greatly increase the duration of

the flight, result in increased cost that

would offset transportation savings, or

offer accommodations not reasonably

adequate for the medical needs of the

traveler. Where a governmental unit can

reasonably demonstrate to the awarding

agency either the nonavailability of

customary standard airfare or Federal

Government contract airfare for

individual trips or, on an overall basis,

that it is the governmental unit’s

practice to make routine use of such

airfare, specific determinations of

nonavailability will generally not be

questioned by the Federal Government,
Federal Register / Vol. 60, No. 95 / Wednesday, May 17, 1995 / Notices 26501

unless a pattern of avoidance is

detected. However, in order for airfare

costs in excess of the customary

standard commercial airfare to be

allowable, e.g., use of first-class airfare,

the governmental unit must justify and

document on a case-by-case basis the

applicable condition(s) set forth above.

d. Air travel by other than commercial

carrier. Cost of travel by governmental

unit-owned, -leased, or -chartered

aircraft, as used in this section, includes

the cost of lease, charter, operation

(including personnel costs),

maintenance, depreciation, interest,

insurance, and other related costs. Costs

of travel via governmental unit-owned,

-leased, or -chartered aircraft are

unallowable to the extent they exceed

the cost of allowable commercial air

travel, as provided for in subsection c.

42. Underrecovery of costs under

Federal agreements. Any excess costs

over the Federal contribution under one

award agreement are unallowable under

other award agreements.

Table of Contents

A. General

B. Definitions

1. Billed central services

2. Allocated central services

3. Agency or operating agency

C. Scope of the Central Service Cost

Allocation Plans

D. Submission Requirements

E. Documentation Requirements for

Submitted Plans

1. General

2. Allocated central services

3. Billed services

a. General

b. Internal service funds

c. Self-insurance funds

d. Fringe benefits

44. Required certification

F. Negotiation and Approval of Central

Service Plans

G. Other Policies

1. Billed central service activities

2. Working capital reserves

3. Carry-forward adjustments of allocated

central service costs

4. Adjustments of billed central services

5. Records retention

6. Appeals

7. OMB assistance

A. General

1. Most governmental units provide

certain services, such as motor pools,

computer centers, purchasing,

accounting, etc., to operating agencies

on a centralized basis. Since federallysupported awards are performed within

the individual operating agencies, there

needs to be a process whereby these

central service costs can be identified

and assigned to benefitted activities on

a reasonable and consistent basis. The

central service cost allocation plan

provides that process. All costs and

other data used to distribute the costs

included in the plan should be

supported by formal accounting and

other records that will support the

propriety of the costs assigned to

Federal awards.

2. Guidelines and illustrations of

central service cost allocation plans are

provided in a brochure published by the

Department of Health and Human

Services entitled ‘‘A Guide for State and

Local Government Agencies: Cost

Principles and Procedures for

Establishing Cost Allocation Plans and

Indirect Cost Rates for Grants and

Contracts with the Federal

Government.’’ A copy of this brochure

may be obtained from the

Superintendent of Documents, U.S.

Government Printing Office.

B. Definitions

1. ‘‘Billed central services’’ means

central services that are billed to

benefitted agencies and/or programs on

an individual fee-for-service or similar

basis. Typical examples of billed central

services include computer services,

transportation services, insurance, and

fringe benefits.

2. ‘‘Allocated central services’’ means

central services that benefit operating

agencies but are not billed to the

agencies on a fee-for-service or similar

basis. These costs are allocated to

benefitted agencies on some reasonable

basis. Examples of such services might

include general accounting, personnel

administration, purchasing, etc.

3. ‘‘Agency or operating agency’’

means an organizational unit or subdivision within a governmental unit that

is responsible for the performance or

administration of awards or activities of

the governmental unit.

C. Scope of the Central Service Cost

Allocation Plans

The central service cost allocation

plan will include all central service

costs that will be claimed (either as a

billed or an allocated cost) under

Federal awards and will be documented

as described in section E. Costs of

central services omitted from the plan

will not be reimbursed.

D. Submission Requirements

1. Each State will submit a plan to the

Department of Health and Human

Services for each year in which it claims

central service costs under Federal

awards. The plan should include (a) a

projection of the next year’s allocated

central service cost (based either on

actual costs for the most recently

completed year or the budget projection

for the coming year), and (b) a

reconciliation of actual allocated central

service costs to the estimated costs used

for either the most recently completed

year or the year immediately preceding

the most recently completed year.

2. Each local government that has

been designated as a ‘‘major local

government’’ by the Office of

Management and Budget (OMB) is also

required to submit a plan to its

cognizant agency annually. OMB

periodically lists major local

governments in the Federal Register.

3. All other local governments

claiming central service costs must

develop a plan in accordance with the

requirements described in this Circular

and maintain the plan and related

supporting documentation for audit.

These local governments are not

required to submit their plans for

Federal approval unless they are

specifically requested to do so by the

cognizant agency. Where a local

government only receives funds as a

sub-recipient, the primary recipient will

be responsible for negotiating indirect

cost rates and/or monitoring the subrecipient’s plan.

4. All central service cost allocation

plans will be prepared and, when

required, submitted within six months

prior to the beginning of each of the

governmental unit’s fiscal years in

which it proposes to claim central

service costs. Extensions may be granted

by the cognizant agency on a case-bycase basis.

E. Documentation Requirements for

Submitted Plans

The documentation requirements

described in this section may be

modified, expanded, or reduced by the

cognizant agency on a case-by-case

basis. For example, the requirements

may be reduced for those central

services which have little or no impact

on Federal awards. Conversely, if a

review of a plan indicates that certain

additional information is needed, and

will likely be needed in future years, it

may be routinely requested in future

plan submissions. Items marked with an

asterisk (*) should be submitted only

once; subsequent plans should merely

indicate any changes since the last plan.

1. General. All proposed plans must

be accompanied by the following: an

organization chart sufficiently detailed

to show operations including the central

service activities of the State/local

government whether or not they are

shown as benefiting from central service

functions; a copy of the Comprehensive

Annual Financial Report (or a copy of

the Executive Budget if budgeted costs

are being proposed) to support the

allowable costs of each central service

activity included in the plan; and, a
26502 Federal Register / Vol. 60, No. 95 / Wednesday, May 17, 1995 / Notices

certification (see subsection 4.) that the

plan was prepared in accordance with

this Circular, contains only allowable

costs, and was prepared in a manner

that treated similar costs consistently

among the various Federal awards and

between Federal and non-Federal

awards/activities.

2. Allocated central services. For each

allocated central service, the plan must

also include the following: a brief

description of the service*, an

identification of the unit rendering the

service and the operating agencies

receiving the service, the items of

expense included in the cost of the

service, the method used to distribute

the cost of the service to benefitted

agencies, and a summary schedule

showing the allocation of each service to

the specific benefitted agencies. If any

self-insurance funds or fringe benefits

costs are treated as allocated (rather

than billed) central services,

documentation discussed in subsections

3.b. and c. shall also be included.

3. Billed services.

a. General. The information described

below shall be provided for all billed

central services, including internal

service funds, self-insurance funds, and

fringe benefit funds.

b. Internal service funds.

(1) For each internal service fund or

similar activity with an operating

budget of $5 million or more, the plan

shall include: a brief description of each

service; a balance sheet for each fund

based on individual accounts contained

in the governmental unit’s accounting

system; a revenue/expenses statement,

with revenues broken out by source,

e.g., regular billings, interest earned,

etc.; a listing of all non-operating

transfers (as defined by Generally

Accepted Accounting Principles

(GAAP)) into and out of the fund; a

description of the procedures

(methodology) used to charge the costs

of each service to users, including how

billing rates are determined; a schedule

of current rates; and, a schedule

comparing total revenues (including

imputed revenues) generated by the

service to the allowable costs of the

service, as determined under this

Circular, with an explanation of how

variances will be handled.

(2) Revenues shall consist of all

revenues generated by the service,

including unbilled and uncollected

revenues. If some users were not billed

for the services (or were not billed at the

full rate for that class of users), a

schedule showing the full imputed

revenues associated with these users

shall be provided. Expenses shall be

broken out by object cost categories

(e.g., salaries, supplies, etc.).

c. Self-insurance funds. For each selfinsurance fund, the plan shall include:

the fund balance sheet; a statement of

revenue and expenses including a

summary of billings and claims paid by

agency; a listing of all non-operating

transfers into and out of the fund; the

type(s) of risk(s) covered by the fund

(e.g., automobile liability, workers’

compensation, etc.); an explanation of

how the level of fund contributions are

determined, including a copy of the

current actuarial report (with the

actuarial assumptions used) if the

contributions are determined on an

actuarial basis; and, a description of the

procedures used to charge or allocate

fund contributions to benefitted

activities. Reserve levels in excess of

claims (1) submitted and adjudicated

but not paid, (2) submitted but not

adjudicated, and (3) incurred but not

submitted must be identified and

explained.

d. Fringe benefits. For fringe benefit

costs, the plan shall include: a listing of

fringe benefits provided to covered

employees, and the overall annual cost

of each type of benefit; current fringe

benefit policies*; and procedures used

to charge or allocate the costs of the

benefits to benefitted activities. In

addition, for pension and postretirement health insurance plans, the

following information shall be provided:

the governmental unit’s funding

policies, e.g., legislative bills, trust

agreements, or State-mandated

contribution rules, if different from

actuarially determined rates; the

pension plan’s costs accrued for the

year; the amount funded, and date(s) of

funding; a copy of the current actuarial

report (including the actuarial

assumptions); the plan trustee’s report;

and, a schedule from the activity

showing the value of the interest cost

associated with late funding.

4. Required certification. Each central

service cost allocation plan will be

accompanied by a certification in the

following form:

Certificate of Cost Allocation Plan

This is to certify that I have reviewed the

cost allocation plan submitted herewith and

to the best of my knowledge and belief:

(1) All costs included in this proposal

[identify date] to establish cost allocations or

billings for [identify period covered by plan]

are allowable in accordance with the

requirements of OMB Circular A–87, ‘‘Cost

Principles for State and Local Governments,’’

and the Federal award(s) to which they

apply. Unallowable costs have been adjusted

for in allocating costs as indicated in the cost

allocation plan.

(2) All costs included in this proposal are

properly allocable to Federal awards on the

basis of a beneficial or causal relationship

between the expenses incurred and the

awards to which they are allocated in

accordance with applicable requirements.

Further, the same costs that have been treated

as indirect costs have not been claimed as

direct costs. Similar types of costs have been

accounted for consistently.

I declare that the foregoing is true and

correct.

Governmental Unit lllllllllll

Signature llllllllllllllll

Name of Official llllllllllll

Title llllllllllllllllll

Date of Execution llllllllllll

F. Negotiation and Approval of Central

Service Plans

1. All proposed central service cost

allocation plans that are required to be

submitted will be reviewed, negotiated,

and approved by the Federal cognizant

agency on a timely basis. The cognizant

agency will review the proposal within

six months of receipt of the proposal

and either negotiate/approve the

proposal or advise the governmental

unit of the additional documentation

needed to support/evaluate the

proposed plan or the changes required

to make the proposal acceptable. Once

an agreement with the governmental

unit has been reached, the agreement

will be accepted and used by all Federal

agencies, unless prohibited or limited

by statute. Where a Federal funding

agency has reason to believe that special

operating factors affecting its awards

necessitate special consideration, the

funding agency will, prior to the time

the plans are negotiated, notify the

cognizant agency.

2. The results of each negotiation

shall be formalized in a written

agreement between the cognizant

agency and the governmental unit. This

agreement will be subject to re-opening

if the agreement is subsequently found

to violate a statute or the information

upon which the plan was negotiated is

later found to be materially incomplete

or inaccurate. The results of the

negotiation shall be made available to

all Federal agencies for their use.

3. Negotiated cost allocation plans

based on a proposal later found to have

included costs that: (a) are unallowable

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

as identified in Attachment B of this

Circular, or (iii) by the terms and

conditions of Federal awards, or (b) are

unallowable because they are clearly not

allocable to Federal awards, shall be

adjusted, or a refund shall be made at

the option of the Federal cognizant

agency. These adjustments or refunds

are designed to correct the plans and do

not constitute a reopening of the

negotiation.
Federal Register / Vol. 60, No. 95 / Wednesday, May 17, 1995 / Notices 26503

G. Other Policies

1. Billed central service activities.

Each billed central service activity must

separately account for all revenues

(including imputed revenues) generated

by the service, expenses incurred to

furnish the service, and profit/loss.

2. Working capital reserves. Internal

service funds are dependent upon a

reasonable level of working capital

reserve to operate from one billing cycle

to the next. Charges by an internal

service activity to provide for the

establishment and maintenance of a

reasonable level of working capital

reserve, in addition to the full recovery

of costs, are allowable. A working

capital reserve as part of retained

earnings of up to 60 days cash expenses

for normal operating purposes is

considered reasonable. A working

capital reserve exceeding 60 days may

be approved by the cognizant Federal

agency in exceptional cases.

3. Carry-forward adjustments of

allocated central service costs.

Allocated central service costs are

usually negotiated and approved for a

future fiscal year on a ‘‘fixed with carryforward’’ basis. Under this procedure,

the fixed amounts for the future year

covered by agreement are not subject to

adjustment for that year. However,

when the actual costs of the year

involved become known, the differences

between the fixed amounts previously

approved and the actual costs will be

carried forward and used as an

adjustment to the fixed amounts

established for a later year. This ‘‘carryforward’’ procedure applies to all

central services whose costs were fixed

in the approved plan. However, a carryforward adjustment is not permitted, for

a central service activity that was not

included in the approved plan, or for

unallowable costs that must be

reimbursed immediately.

4. Adjustments of billed central

services. Billing rates used to charge

Federal awards shall be based on the

estimated costs of providing the

services, including an estimate of the

allocable central service costs. A

comparison of the revenue generated by

each billed service (including total

revenues whether or not billed or

collected) to the actual allowable costs

of the service will be made at least

annually, and an adjustment will be

made for the difference between the

revenue and the allowable costs. These

adjustments will be made through one

of the following adjustment methods: (a)

a cash refund to the Federal

Government for the Federal share of the

adjustment, (b) credits to the amounts

charged to the individual programs, (c)

adjustments to future billing rates, or (d)

adjustments to allocated central service

costs. Adjustments to allocated central

services will not be permitted where the

total amount of the adjustment for a

particular service (Federal share and

non-Federal) share exceeds $500,000.

5. Records retention. All central

service cost allocation plans and related

documentation used as a basis for

claiming costs under Federal awards

must be retained for audit in accordance

with the records retention requirements

contained in the Common Rule.

6. Appeals. If a dispute arises in the

negotiation of a plan between the

cognizant agency and the governmental

unit, the dispute shall be resolved in

accordance with the appeals procedures

of the cognizant agency.

7. OMB assistance. To the extent that

problems are encountered among the

Federal agencies and/or governmental

units in connection with the negotiation

and approval process, OMB will lend

assistance, as required, to resolve such

problems in a timely manner.

Attachment D—Public Assistance Cost

Allocation Plans

Table of Contents

A. General

B. Definitions

1. State public assistance agency

2. State public assistance agency costs

C. Policy

D. Submission, Documentation, and

Approval of Public Assistance Cost

Allocation Plans

E. Review of Implementation of Approved

Plans

F. Unallowable Costs

A. General

Federally-financed programs

administered by State public assistance

agencies are funded predominately by

the Department of Health and Human

Services (HHS). In support of its

stewardship requirements, HHS has

published requirements for the

development, documentation,

submission, negotiation, and approval

of public assistance cost allocation

plans in Subpart E of 45 CFR Part 95.

All administrative costs (direct and

indirect) are normally charged to

Federal awards by implementing the

public assistance cost allocation plan.

This Attachment extends these

requirements to all Federal agencies

whose programs are administered by a

State public assistance agency. Major

federally-financed programs typically

administered by State public assistance

agencies include: Aid to Families with

Dependent Children, Medicaid, Food

Stamps, Child Support Enforcement,

Adoption Assistance and Foster Care,

and Social Services Block Grant.

B. Definitions

1. ‘‘State public assistance agency’’

means a State agency administering or

supervising the administration of one or

more public assistance programs

operated by the State as identified in

Subpart E of 45 CFR Part 95. For the

purpose of this Attachment, these

programs include all programs

administered by the State public

assistance agency.

2. ‘‘State public assistance agency

costs’’ means all costs incurred by, or

allocable to, the State public assistance

agency, except expenditures for

financial assistance, medical vendor

payments, food stamps, and payments

for services and goods provided directly

to program recipients.

C. Policy

State public assistance agencies will

develop, document and implement, and

the Federal Government will review,

negotiate, and approve, public

assistance cost allocation plans in

accordance with Subpart E of 45 CFR

Part 95. The plan will include all

programs administered by the State

public assistance agency. Where a letter

of approval or disapproval is

transmitted to a State public assistance

agency in accordance with Subpart E,

the letter will apply to all Federal

agencies and programs. The remaining

sections of this Attachment (except for

the requirement for certification)

summarize the provisions of Subpart E

of 45 CFR Part 95.

D. Submission, Documentation, and

Approval of Public Assistance Cost

Allocation Plans

1. State public assistance agencies are

required to promptly submit

amendments to the cost allocation plan

to HHS for review and approval.

2. Under the coordination process

outlined in subsection E, affected

Federal agencies will review all new

plans and plan amendments and

provide comments, as appropriate, to

HHS. The effective date of the plan or

plan amendment will be the first day of

the quarter following the submission of

the plan or amendment, unless another

date is specifically approved by HHS.

HHS, as the cognizant agency acting on

behalf of all affected Federal agencies,

will, as necessary, conduct negotiations

with the State public assistance agency

and will inform the State agency of the

action taken on the plan or plan

amendment.

E. Review of Implementation of

Approved Plans

1. Since public assistance cost

allocation plans are of a narrative
26504 Federal Register / Vol. 60, No. 95 / Wednesday, May 17, 1995 / Notices

nature, the review during the plan

approval process consists of evaluating

the appropriateness of the proposed

groupings of costs (cost centers) and the

related allocation bases. As such, the

Federal Government needs some

assurance that the cost allocation plan

has been implemented as approved.

This is accomplished by reviews by the

funding agencies, single audits, or

audits conducted by the cognizant audit

agency.

2. Where inappropriate charges

affecting more than one funding agency

are identified, the cognizant HHS cost

negotiation office will be advised and

will take the lead in resolving the

issue(s) as provided for in Subpart E of

45 CFR Part 95.

3. If a dispute arises in the negotiation

of a plan or from a disallowance

involving two or more funding agencies,

the dispute shall be resolved in

accordance with the appeals procedures

set out in 45 CFR Part 75. Disputes

involving only one funding agency will

be resolved in accordance with the

funding agency’s appeal process.

4. To the extent that problems are

encountered among the Federal agencies

and/or governmental units in

connection with the negotiation and

approval process, the Office of

Management and Budget will lend

assistance, as required, to resolve such

problems in a timely manner.

F. Unallowable Costs

Claims developed under approved

cost allocation plans will be based on

allowable costs as identified in this

Circular. Where unallowable costs have

been claimed and reimbursed, they will

be refunded to the program that

reimbursed the unallowable cost using

one of the following methods: (a) a cash

refund, (b) offset to a subsequent claim,

or (c) credits to the amounts charged to

individual awards.

Attachment E—State and Local Indirect

Cost Rate Proposals

Table of Contents

A. General

B. Definitions

1. Indirect cost rate proposal

2. Indirect cost rate

3. Indirect cost pool

4. Base

5. Predetermined rate

6. Fixed rate

7. Provisional rate

8. Final rate

9. Base period

C. Allocation of Indirect Costs and

Determination of Indirect Cost Rates

1. General

2. Simplified method

3. Multiple allocation base method

4. Special indirect cost rates

D. Submission and Documentation of

Proposals

1. Submission of indirect cost rate

proposals

2. Documentation of proposals

3. Required certification

E. Negotiation and Approval of Rates

F. Other Policies

1. Fringe benefit rates

2. Billed services provided by the grantee

agency

3. Indirect cost allocations not using rates

4. Appeals

5. Collections of unallowable costs and

erroneous payments

6. OMB assistance

A. General

1. Indirect costs are those that have

been incurred for common or joint

purposes. These costs benefit more than

one cost objective and cannot be readily

identified with a particular final cost

objective without effort disproportionate

to the results achieved. After direct

costs have been determined and

assigned directly to Federal awards and

other activities as appropriate, indirect

costs are those remaining to be allocated

to benefitted cost objectives. A cost may

not be allocated to a Federal award as

an indirect cost if any other cost

incurred for the same purpose, in like

circumstances, has been assigned to a

Federal award as a direct cost.

2. Indirect costs include (a) the

indirect costs originating in each

department or agency of the

governmental unit carrying out Federal

awards and (b) the costs of central

governmental services distributed

through the central service cost

allocation plan (as described in

Attachment C) and not otherwise treated

as direct costs.

3. Indirect costs are normally charged

to Federal awards by the use of an

indirect cost rate. A separate indirect

cost rate(s) is usually necessary for each

department or agency of the

governmental unit claiming indirect

costs under Federal awards. Guidelines

and illustrations of indirect cost

proposals are provided in a brochure

published by the Department of Health

and Human Services entitled ‘‘A Guide

for State and Local Government

Agencies: Cost Principles and

Procedures for Establishing Cost

Allocation Plans and Indirect Cost Rates

for Grants and Contracts with the

Federal Government.’’ A copy of this

brochure may be obtained from the

Superintendent of Documents, U.S.

Government Printing Office.

4. Because of the diverse

characteristics and accounting practices

of governmental units, the types of costs

which may be classified as indirect

costs cannot be specified in all

situations. However, typical examples of

indirect costs may include certain State/

local-wide central service costs, general

administration of the grantee

department or agency, accounting and

personnel services performed within the

grantee department or agency,

depreciation or use allowances on

buildings and equipment, the costs of

operating and maintaining facilities, etc.

5. This Attachment does not apply to

State public assistance agencies. These

agencies should refer instead to

Attachment D.

B. Definitions

1. ‘‘Indirect cost rate proposal’’ means

the documentation prepared by a

governmental unit or subdivision

thereof to substantiate its request for the

establishment of an indirect cost rate.

2. ‘‘Indirect cost rate’’ is a device for

determining in a reasonable manner the

proportion of indirect costs each

program should bear. It is the ratio

(expressed as a percentage) of the

indirect costs to a direct cost base.

3. ‘‘Indirect cost pool’’ is the

accumulated costs that jointly benefit

two or more programs or other cost

objectives.

4. ‘‘Base’’ means the accumulated

direct costs (normally either total direct

salaries and wages or total direct costs

exclusive of any extraordinary or

distorting expenditures) used to

distribute indirect costs to individual

Federal awards. The direct cost base

selected should result in each award

bearing a fair share of the indirect costs

in reasonable relation to the benefits

received from the costs.

5. ‘‘Predetermined rate’’ means an

indirect cost rate, applicable to a

specified current or future period,

usually the governmental unit’s fiscal

year. This rate is based on an estimate

of the costs to be incurred during the

period. Except under very unusual

circumstances, a predetermined rate is

not subject to adjustment. (Because of

legal constraints, predetermined rates

are not permitted for Federal contracts;

they may, however, be used for grants

or cooperative agreements.)

Predetermined rates may not be used by

governmental units that have not

submitted and negotiated the rate with

the cognizant agency. In view of the

potential advantages offered by this

procedure, negotiation of predetermined

rates for indirect costs for a period of

two to four years should be the norm in

those situations where the cost

experience and other pertinent facts

available are deemed sufficient to

enable the parties involved to reach an

informed judgment as to the probable
Federal Register / Vol. 60, No. 95 / Wednesday, May 17, 1995 / Notices 26505

level of indirect costs during the

ensuing accounting periods.

6. ‘‘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, allowable costs of the

period covered by the rate is carried

forward as an adjustment to the rate

computation of a subsequent period.

7. ‘‘Provisional rate’’ means a

temporary indirect cost rate applicable

to a specified period which is used for

funding, interim reimbursement, and

reporting indirect costs on Federal

awards pending the establishment of a

‘‘final’’ rate for that period.

8. ‘‘Final rate’’ means an indirect cost

rate applicable to a specified past period

which is based on the actual allowable

costs of the period. A final audited rate

is not subject to adjustment.

9. ‘‘Base period’’ for the allocation of

indirect costs is the period in which

such costs are incurred and

accumulated for allocation to activities

performed in that period. The base

period normally should coincide with

the governmental unit’s fiscal year, but

in any event, shall be so selected as to

avoid inequities in the allocation of

costs.

C. Allocation of Indirect Costs and

Determination of Indirect Cost Rates

1. General.

a. Where a governmental unit’s

department or agency has only one

major function, or where all its major

functions benefit from the indirect costs

to approximately the same degree, the

allocation of indirect costs and the

computation of an indirect cost rate may

be accomplished through simplified

allocation procedures as described in

subsection 2.

b. Where a governmental unit’s

department or agency has several major

functions which benefit from its indirect

costs in varying degrees, the allocation

of indirect costs may require the

accumulation of such costs into separate

cost groupings which then are allocated

individually to benefitted 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. 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 subsections 2, 3

and 4.

2. Simplified method.

a. Where a grantee agency’s major

functions benefit from its indirect costs

to approximately the same degree, the

allocation of indirect costs may be

accomplished by (1) classifying the

grantee agency’s total costs for the base

period as either direct or indirect, and

(2) 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 Federal awards. The

rate should be expressed as the

percentage which the total amount of

allowable indirect costs bears to the

base selected. This method should also

be used where a governmental unit’s

department or agency has only one

major function encompassing a number

of individual projects or activities, and

may be used where the level of Federal

awards to that department or agency is

relatively small.

b. Both the direct costs and the

indirect costs shall exclude capital

expenditures and unallowable costs.

However, unallowable costs must be

included in the direct costs if they

represent activities to which indirect

costs are properly allocable.

c. The distribution base may be (1)

total direct costs (excluding capital

expenditures and other distorting items,

such as pass-through funds, major

subcontracts, etc.), (2) direct salaries

and wages, or (3) another base which

results in an equitable distribution.

3. Multiple allocation base method.

a. Where a grantee agency’s indirect

costs benefit its major functions in

varying degrees, such costs shall be

accumulated into separate cost

groupings. Each grouping shall then be

allocated individually to benefitted

functions by means of a base which best

measures the relative benefits.

b. The cost groupings should be

established so as to permit the

allocation of each grouping on the basis

of benefits provided to the major

functions. Each grouping should

constitute a pool of expenses that are of

like character in terms of the functions

they benefit and in terms of the

allocation base which best measures the

relative benefits provided to each

function. The number of separate

groupings should be held within

practical limits, taking into

consideration the materiality of the

amounts involved and the degree of

precision needed.

c. Actual conditions must be taken

into account in selecting the base to be

used in allocating the expenses in each

grouping to benefitted functions. When

an allocation can be made by

assignment of a cost grouping directly to

the function benefitted, the allocation

shall be made in that manner. When the

expenses in a grouping are more general

in nature, the allocation should be made

through the use of a selected base which

produces results that are equitable to

both the Federal Government and the

governmental unit. In general, any cost

element or related factor associated with

the governmental unit’s activities is

potentially adaptable for use as an

allocation base provided that: (1) it can

readily be expressed in terms of dollars

or other quantitative measures (total

direct costs, direct salaries and wages,

staff hours applied, square feet used,

hours of usage, number of documents

processed, population served, and the

like), and (2) it is common to the

benefitted functions during the base

period.

d. Except where a special indirect cost

rate(s) is required in accordance with

subsection 4, 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 Federal awards

included in that function by use of a

single indirect cost rate.

e. The distribution base used in

computing the indirect cost rate for each

function may be (1) total direct costs

(excluding capital expenditures and

other distorting items such as passthrough funds, major subcontracts, etc.),

(2) direct salaries and wages, or (3)

another base which results in an

equitable distribution. An indirect cost

rate should be developed for each

separate indirect cost pool developed.

The rate in each case should be stated

as the percentage relationship between

the particular indirect cost pool and the

distribution base identified with that

pool.

4. Special indirect cost rates.

a. In some instances, a single indirect

cost rate for all activities of a grantee

department or agency or for each major

function of the agency may not be

appropriate. It may not take into

account those different factors which

may substantially affect the indirect

costs applicable to a particular program

or group of programs. The 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 organizational arrangements used, or

any combination thereof. When a

particular award is carried out in an

environment which appears to generate

a significantly different level of indirect

costs, provisions should be made for a

separate indirect cost pool applicable to

that award. The separate indirect cost
26506 Federal Register / Vol. 60, No. 95 / Wednesday, May 17, 1995 / Notices

pool should be developed during the

course of the regular allocation process,

and the separate indirect cost rate

resulting therefrom should be used,

provided that: (1) the rate differs

significantly from the rate which would

have been developed under subsections

2. and 3., and (2) the award to which the

rate would apply is material in amount.

b. Although this Circular adopts the

concept of the full allocation of indirect

costs, there are some Federal statutes

which restrict the reimbursement of

certain indirect costs. Where such

restrictions exist, it may be necessary to

develop a special rate for the affected

award. Where a ‘‘restricted rate’’ is

required, the procedure for developing a

non-restricted rate will be used except

for the additional step of the elimination

from the indirect cost pool those costs

for which the law prohibits

reimbursement.

D. Submission and Documentation of

Proposals

1. Submission of indirect cost rate

proposals.

a. All departments or agencies of the

governmental unit desiring to claim

indirect costs under Federal awards

must prepare an indirect cost rate

proposal and related documentation to

support those costs. The proposal and

related documentation must be retained

for audit in accordance with the records

retention requirements contained in the

Common Rule.

b. A governmental unit for which a

cognizant agency assignment has been

specifically designated must submit its

indirect cost rate proposal to its

cognizant agency. The Office of

Management and Budget (OMB) will

periodically publish lists of

governmental units identifying the

appropriate Federal cognizant agencies.

The cognizant agency for all

governmental units or agencies not

identified by OMB will be determined

based on the Federal agency providing

the largest amount of Federal funds. In

these cases, a governmental unit must

develop an indirect cost proposal in

accordance with the requirements of

this Circular and maintain the proposal

and related supporting documentation

for audit. These governmental units are

not required to submit their proposals

unless they are specifically requested to

do so by the cognizant agency. Where a

local government only receives funds as

a sub-recipient, the primary recipient

will be responsible for negotiating and/

or monitoring the sub-recipient’s plan.

c. Each Indian tribal government

desiring reimbursement of indirect costs

must submit its indirect cost proposal to

the Department of the Interior (its

cognizant Federal agency).

d. Indirect cost proposals must be

developed (and, when required,

submitted) within six months after the

close of the governmental unit’s fiscal

year, unless an exception is approved by

the cognizant Federal agency. If the

proposed central service cost allocation

plan for the same period has not been

approved by that time, the indirect cost

proposal may be prepared including an

amount for central services that is based

on the latest federally-approved central

service cost allocation plan. The

difference between these central service

amounts and the amounts ultimately

approved will be compensated for by an

adjustment in a subsequent period.

2. Documentation of proposals. The

following shall be included with each

indirect cost proposal:

a. The rates proposed, including

subsidiary work sheets and other

relevant data, cross referenced and

reconciled to the financial data noted in

subsection b. Allocated central service

costs will be supported by the summary

table included in the approved central

service cost allocation plan. This

summary table is not required to be

submitted with the indirect cost

proposal if the central service cost

allocation plan for the same fiscal year

has been approved by the cognizant

agency and is available to the funding

agency.

b. A copy of the financial data

(financial statements, comprehensive

annual financial report, executive

budgets, accounting reports, etc.) upon

which the rate is based. Adjustments

resulting from the use of unaudited data

will be recognized, where appropriate,

by the Federal cognizant agency in a

subsequent proposal.

c. The approximate amount of direct

base costs incurred under Federal

awards. These costs should be broken

out between salaries and wages and

other direct costs.

d. A chart showing the organizational

structure of the agency during the

period for which the proposal applies,

along with a functional statement(s)

noting the duties and/or responsibilities

of all units that comprise the agency.

(Once this is submitted, only revisions

need be submitted with subsequent

proposals.)

3. Required certification. Each

indirect cost rate proposal shall be

accompanied by a certification in the

following form:

Certificate of Indirect Costs

This is to certify that I have reviewed the

indirect cost rate proposal submitted

herewith and to the best of my knowledge

and belief:

(1) All costs included in this proposal

[identify date] to establish billing or final

indirect costs rates for [identify period

covered by rate] are allowable in accordance

with the requirements of the Federal award(s)

to which they apply and OMB Circular A–

87, ‘‘Cost Principles for State and Local

Governments.’’ Unallowable costs have been

adjusted for in allocating costs as indicated

in the cost allocation plan.

(2) All costs included in this proposal are

properly allocable to Federal awards on the

basis of a beneficial or causal relationship

between the expenses incurred and the

agreements to which they are allocated in

accordance with applicable requirements.

Further, the same costs that have been treated

as indirect costs have not been claimed as

direct costs. Similar types of costs have been

accounted for consistently and the Federal

Government will be notified of any

accounting changes that would affect the

predetermined rate.

I declare that the foregoing is true and

correct.

Governmental Unit lllllllllll

Signature llllllllllllllll

Name of Official lllllllllllll

Title llllllllllllllllll

Date of Execution: llllllllllll

E. Negotiation and Approval of Rates

1. Indirect cost rates will be reviewed,

negotiated, and approved by the

cognizant Federal agency on a timely

basis. Once a rate has been agreed upon,

it will be accepted and used by all

Federal agencies unless prohibited or

limited by statute. Where a Federal

funding agency has reason to believe

that special operating factors affecting

its awards necessitate special indirect

cost rates, the funding agency will, prior

to the time the rates are negotiated,

notify the cognizant Federal agency.

2. The use of predetermined rates, if

allowed, is encouraged where the

cognizant agency has reasonable

assurance based on past experience and

reliable projection of the grantee

agency’s costs, that the rate is not likely

to exceed a rate based on actual costs.

Long-term agreements utilizing

predetermined rates extending over two

or more years are encouraged, where

appropriate.

3. The results of each negotiation

shall be formalized in a written

agreement between the cognizant

agency and the governmental unit. This

agreement will be subject to re-opening

if the agreement is subsequently found

to violate a statute, or the information

upon which the plan was negotiated is

later found to be materially incomplete

or inaccurate. The agreed upon rates

shall be made available to all Federal

agencies for their use.

4. Refunds shall be made if proposals

are later found to have included costs

that (a) are unallowable (i) as specified
Federal Register / Vol. 60, No. 95 / Wednesday, May 17, 1995 / Notices 26507

by law or regulation, (ii) as identified in

Attachment B of this Circular, or (iii) by

the terms and conditions of Federal

awards, or (b) are unallowable because

they are clearly not allocable to Federal

awards. These adjustments or refunds

will be made regardless of the type of

rate negotiated (predetermined, final,

fixed, or provisional).

F. Other Policies

1. Fringe benefit rates. If overall fringe

benefit rates are not approved for the

governmental unit as part of the central

service cost allocation plan, these rates

will be reviewed, negotiated and

approved for individual grantee

agencies during the indirect cost

negotiation process. In these cases, a

proposed fringe benefit rate

computation should accompany the

indirect cost proposal. If fringe benefit

rates are not used at the grantee agency

level (i.e., the agency specifically

identifies fringe benefit costs to

individual employees), the

governmental unit should so advise the

cognizant agency.

2. Billed services provided by the

grantee agency. In some cases,

governmental units provide and bill for

services similar to those covered by

central service cost allocation plans

(e.g., computer centers). Where this

occurs, the governmental unit should be

guided by the requirements in

Attachment C relating to the

development of billing rates and

documentation requirements, and

should advise the cognizant agency of

any billed services. Reviews of these

types of services (including reviews of

costing/billing methodology, profits or

losses, etc.) will be made on a case-bycase basis as warranted by the

circumstances involved.

3. Indirect cost allocations not using

rates. In certain situations, a

governmental unit, because of the

nature of its awards, may be required to

develop a cost allocation plan that

distributes indirect (and, in some cases,

direct) costs to the specific funding

sources. In these cases, a narrative cost

allocation methodology should be

developed, documented, maintained for

audit, or submitted, as appropriate, to

the cognizant agency for review,

negotiation, and approval.

4. Appeals. If a dispute arises in a

negotiation of an indirect cost rate (or

other rate) between the cognizant

agency and the governmental unit, the

dispute shall be resolved in accordance

with the appeals procedures of the

cognizant agency.

5. Collection of unallowable costs and

erroneous payments. Costs specifically

identified as unallowable and charged

to Federal awards either directly or

indirectly will be refunded (including

interest chargeable in accordance with

applicable Federal agency regulations).

6. OMB assistance. To the extent that

problems are encountered among the

Federal agencies and/or governmental

units in connection with the negotiation

and approval process, OMB will lend

assistance, as required, to resolve such

problems in a timely manner.

[FR Doc. 95–11658 Filed 5–16–95; 8:45 am]

BILLING CODE 3110–01–P