20880 Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices

OFFICE OF MANAGEMENT AND

BUDGET

Cost Principles for Educational

Institutions

AGENCY: Office of Management and

Budget.

ACTION: Final Revision and

Recompilation of OMB Circular A–21.

SUMMARY: The Office of Management

and Budget (OMB) revises OMB Circular

A–21, ‘‘Cost Principles for Educational

Institutions,’’ by incorporating four Cost

Accounting Standards applicable to

educational institutions, issued by the

Cost Accounting Standards Board

(CASB) on November 8, 1994 (59 FR

55746), and extending these standards

to all sponsored agreements. The

revision also: requires certain large

institutions to disclose their cost

accounting practices by the submission

of a Disclosure Statement prescribed by

the CASB; amends the definition of

equipment; eliminates in 1998 the use

of special cost studies to allocate utility,

library and student services costs; and,

requires the use of fixed facilities and

administrative cost rates for the life of

sponsored agreements. Further, the

revision establishes cost negotiation

cognizant agency responsibilities,

replaces the term ‘‘indirect costs’’ with

‘‘facilities and administrative costs’’ (to

describe more accurately the various

cost components of sponsored

agreements), clarifies the policy for a

change from use allowance to

depreciation, adds criteria to interest

allowability, and disallows tuition

benefits for employee family members.

Finally, the revision rescinds OMB

Circular A–88, ‘‘Indirect Cost Rates,

Audits, and Audit Follow-up at

Educational Institutions,’’ in its entirety.

The recompilation of Circular A–21 in

its entirety appears after the revision.

EFFECTIVE DATES: The effective date of

this revision of Circular A–21 is May 8,

l996, unless otherwise noted within this

revision. Circular A–88 is rescinded

effective July 1, l996.

FOR FURTHER INFORMATION: Educational

institutions should contact the

educational institution’s cognizant

Federal agency. Federal agencies should

contact Gilbert Tran, Office of Financial

Federal Financial Management, Office

of Management and Budget, (202) 395–

3993.

SUPPLEMENTARY INFORMATION:

A. Purpose of Circular A–21

Office of Management and Budget

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

for Educational Institutions,’’

establishes principles for determining

costs applicable to Federal grants,

contracts, and other sponsored

agreements with educational

institutions.

B. Recent Prior Revisions

Circular A–21 was last amended in

1991 and 1993 (56 FR 50224 of 10/1/91

and 58 FR 39996 of 7/15/93,

respectively). The 1991 revisions made

certain specified costs unallowable for

Federal reimbursement and placed a

limit on the amount of reimbursable

administrative costs. That revision also

required a certification to accompany

each rate proposal. The 1991 revisions

also added Exhibit A containing a list of

colleges and universities subject to

Section J.12.F, Depreciation and Use

Allowance. The 1993 revisions further

clarified and standardized the Circular’s

principles for determining allowable

costs.

C. Current Revisions

On February 6, 1995, OMB proposed

revisions in 60 FR 7104 and 60 FR 7106.

In 60 FR 7104, OMB proposed the

extension of the four cost accounting

standards (CAS) applicable to

educational institutions to all sponsored

agreements and an amendment to the

definition of equipment. In 60 FR 7106,

OMB proposed eight additional

revisions, including the rescission of

OMB Circular A–88, ‘‘Indirect Cost Rate,

Audits, and Audit Follow-up at

Educational Institutions,’’ and

mentioned six other revisions for future

consideration.

Circular A–21 is revised to:

1. Incorporate the four CAS (48 CFR

9905) and the Disclosure Statement (the

Cost Accounting Standards Board’s

(CASB) form DS–2) and associated

administrative requirements

promulgated by the CASB for

educational institutions. This action

will extend the four CAS to all

sponsored agreements (see Sections

C.10, 11, 12 and 13 and Appendix A)

and extend the applicability of the DS–

2 (48 CFR 9903.202) to major

educational institutions (see Sections

C.14, K.2.b and Appendix B). Guidance

for the implementation and

administration of the CAS requirements

and the submission of required DS–2s is

also provided.

2. Replace the term ‘‘indirect’’ costs

with ‘‘facilities and administrative’’

(F&A) costs. F&A costs are synonymous

with ‘‘indirect’’ costs, as previously

used in this Circular and as currently

used in Appendices A and B.

3. Eliminate the use of special cost

studies to allocate utility, library and

student services costs effective July 1,

1998, at which time an alternative

methodology making payments on

utility costs will be in place (see Section

E.2.d(5)).

4. Require Federal funding agencies to

use F&A rates in effect at the time of an

initial award throughout the life of the

sponsored agreement (see Section G.7).

5. Rescind Circular A–88 and

establish cost negotiation cognizance for

educational institutions and cognizant

agency responsibilities in Circular A–21

(see Section G.11).

6. Eliminate the allowability of

dependent tuition benefits (see Section

J.8.f(2)).

7. Clarify the policy governing the

transition from use allowance to

depreciation (see Section J.12.b.(3)).

8. Amend the definition of equipment

by increasing the capitalization

threshold to the lesser of the amount

used for financial statement purposes or

$5000 (see Section J.16).

9. Establish criteria for reimbursement

of interest costs (see Section J.22.f).

Circular A–21, as amended by this

revision, consists of the Circular

published at 44 FR 12368 (2/26/79), as

amended by Transmittal Memoranda

Numbers 1 through 5, at 47 FR 33658

(7/23/82), 51 FR 20908 (6/9/86), 51 FR

43487 (12/2/86), 56 FR 50224

(10/01/91), 58 FR 39996 (7/15/93),

respectively, and the amendments

herein. A recompilation of the entire

Circular A–21 with all its amendments

to date appears at the end of this notice

and is available in electronic form on

the OMB Home Page at http://

www.whitehouse.gov/WH/EOP/OMB,

or in hard copy by calling OMB’s

Publication Office at (202) 395–7332.

D. Paperwork Reduction Act

This revision includes an information

collection requirement for educational

institutions receiving more than $25

million in federally-sponsored

agreements to file the CASB’s DS–2.

This revision’s information collection

requirement covers more educational

institutions than those subject to

CASB’s regulatory requirement for filing

the DS–2, pursuant to Public Law 100–

679, which was previously approved

and assigned OMB control number

0348–0055 (which expires August 31,

1997). On February 6, 1995 (60 FR

7104), OMB requested comments on this

proposed information collection

requirement in accordance with the

Paperwork Reduction Act (44 U.S.C.

Chapter 35 et seq.). The proposed

information requirement will not be

effective until another notice is

published in the Federal Register. The

subsequent notice will provide the

effective date and the OMB control

number.
Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices 20881

E. Comments and Responses

OMB received about 200 comments

from colleges and universities, Federal

agencies, professional organizations,

and accounting firms. The comments

and OMB’s responses are included in

this notice. Several of the comments

resulted in modifications to OMB’s

original proposal.

The comments received and OMB’s

responses are summarized below.

Cost Accounting Standards (CAS)

(Sections C.10–13 and Appendix A)

Comment: Many commenters stated

that OMB Circular A–21 currently

provides adequate rules and guidelines

regarding cost reimbursements for

Federal grants and contracts. Therefore,

they argued that the proposed

incorporation of the CAS would

duplicate Circular A–21’s requirements.

Response: OMB concurs that many of

the requirements covered under the

CAS currently exist in OMB Circular A–

21. However, the four CAS are being

incorporated since they provide more

explicit provisions and guidance

regarding the consistent application of

cost accounting practices at educational

institutions. To minimize potential

conflict between OMB policies and the

Cost Accounting Standards Board

(CASB) regulations at 48 CFR 9903, the

CASB has committed to perform an

analysis to identify administrative

requirements—especially those relating

to contract clauses, definitions of a cost

accounting practice, and the cost impact

process—that may not be readily

adaptable to colleges and universities.

The CASB will separately evaluate the

need to establish any unique or

alternative provisions that should be

applied to colleges and universities

based on the changes in Circular A–21.

Recognizing that the two sets of

documents should be compatible, the

CASB will, within the limitations

imposed by the statutory requirements

of the CASB’s organic statute, examine

the administrative requirements issue in

order to determine what improvements

can be made to the administrative

requirements of the CASB’s rules as

they effect colleges, universities and

Federal cognizant agencies.

Comment: The CAS language refers to

contracts. Language in the Circular

needs to be amended to cover sponsored

agreements.

Response: The CAS language in

Sections C.10, 11, 12 and 13 and

Appendix A of the Circular has been

changed to cover all forms of sponsored

agreements.

Comment: The proposal stated that

the CAS provisions will not go into

effect on January 9, 1995; however, no

other effective date was provided. When

will the CAS language become effective?

Response: For CAS-covered contracts,

the CASB’s effective date for the

application of CAS was January 9, 1995.

For other sponsored agreements, the

application of CAS is effective for the

educational institution’s fiscal year

starting on or after the publication date

of this revision.

Comment: The CAS were intended for

commercial enterprises and are not

appropriate for colleges and

universities. Also, commercial

enterprises are not limited by a 26

percent administrative cap; therefore,

they can recover additional

administrative costs to comply with

CAS.

Response: Commercial contractors are

subject to 19 CAS. Only four of those

CAS are being applied to universities.

The four CAS are for: (1) consistency in

estimating, accumulating and reporting

costs; (2) consistency in allocating costs

incurred for the same purpose; (3)

accounting for unallowable costs; and,

(4) cost accounting period. Since these

CAS merely strengthen the cost

principles currently in Circular A–21,

the implementation of CAS should not

significantly increase burden or result in

any additional costs to universities.

Comment: The revision limits an

educational institution’s flexibility to

take necessary or advantageous action in

a changing environment.

Response: The application of the four

CAS should not limit an educational

institution’s flexibility in a changing

business environment. The standards

only require that costs be treated

consistently and, if an educational

institution makes an accounting change

that materially impacts sponsored

agreement reimbursement, then the

change and its impact need to be

reported. These requirements currently

exist in Circular A–21. A change that

converts a cost from direct to F&A

(during a period where an educational

institution has a predetermined F&A

rate) normally is not considered a

significant change, because it does not

have a material impact on sponsored

agreement reimbursement.

Comment: Limit CAS coverage to

sponsored agreements in excess of

$500,000, which is consistent with CAS

coverage of contracts. Some universities

have several thousand agreements. Most

of them are smaller than the $500,000

threshold. The smaller agreements

should not be covered by these

requirements. To cover smaller

agreements would hold educational

institutions to a higher standard than

the industry’s standard. At issue is

whether or not a cost impact proposal

or some other form of submission for an

equitable adjustment should be made on

all agreements.

Response: The four CAS promote

consistency in cost accounting practices

used by an educational institution to

estimate, accumulate and report costs

charged against federally-sponsored

agreements. These underlining

principles currently exist in Circular A–

21 which covers all sponsored

agreements. The four CAS set forth more

explicit fundamental requirements,

techniques and illustrations on how to

comply with these principles.

Therefore, it is appropriate to extend

these CAS to all sponsored agreements.

Furthermore, a cost impact proposal

is not required to be prepared for each

agreement when an educational

institution changes accounting

practices. Instead, CAS regulations (48

CFR 9903.306 (e) and (f)) allow the use

of ‘‘any other suitable technique’’ for

cost impact adjustment. Thus, a cost

impact adjustment could be done

through the F&A cost negotiation

process and rate agreement if deemed

appropriate by the cognizant agency.

Comment: Educational institutions do

not have sufficient funds to build

accounting systems effective enough to

comply with CAS. Commenters

suggested an increase of the

administrative cap of 26 percent of

modified total direct costs (MTDC) to

cover the increased paperwork burden.

Failing this, the commenters requested

an increase of the alternative

administrative threshold rate from 24

percent, as allowed in Section G.8, to 26

percent.

Response: Compliance with CAS

should not require educational

institutions to acquire additional

accounting systems. Since the CAS only

clarify existing provisions for sponsored

agreements, existing accounting systems

that comply with §lll.21, Standards

for financial management systems, in

OMB Circular A–110, ‘‘Uniform

Administrative Requirements for Grants

and Agreements with Institutions of

Higher Education, Hospitals and NonProfit Organizations,’’ should require no

change.

Comment: The Circular should

stipulate that Federal agencies retain the

latitude to permit certain administrative

expenditures to be charged directly to a

project when they believe that these

costs are essential for the conduct of the

project.

Response: Section C.11 states that ‘‘all

costs incurred for the same purpose, in

like circumstances, are either direct

costs only or F&A costs only with

respect to final costs objectives.’’
20882 Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices

However, there are circumstances where

it is appropriate to direct charge costs,

such as administrative and clerical

salaries, when these costs are normally

charged indirectly. For example, direct

charging of these costs may be

appropriate where a major project or

activity requires a significant level of

administrative or clerical services and

individuals involved can be specifically

identified with the project or activity. In

this example, the administrative or

clerical service costs are not incurred for

the same purpose and under like

circumstances as are administrative and

clerical service costs associated with

general university functions, such

accounting operations or general

administrative activities, which do not

result from specifically identifiable

requirements.

Comment: CAS definitions (for direct

cost, ‘‘indirect’’ cost, consistency and

accounting change) are more limiting

than in Circular A–21. How will such

inconsistencies between the two

documents be handled?

Response: Inconsistency in

definitions and cost policy

interpretations do not exist between the

two documents. To further assure

consistency between the two

documents, all inquiries related to the

CAS applicable to educational

institutions will be addressed by OMB’s

Office of Federal Financial

Management, in coordination with the

CASB.

Comment: The precision required by

CAS would not be consistent with

future proposed systems of

benchmarking, thresholds, caps, and

other limiting factors. OMB is sending

out mixed messages.

Response: The purposes of the four

CAS and future proposed revisions to

Circular A–21 are different. The four

CAS incorporated in the Circular serve

to promote consistent treatment of

estimated costs proposed to the Federal

Government and actual costs charged as

reimbursable cost against federallysponsored agreements. The purposes of

the future proposed revisions are to

assure the consistent treatment of costs

proposed and charged to federallysponsored agreements.

Comment: Some small colleges have

training grants with 8 percent overhead

limits. Could CAS requirements and

disclosures be waived for those

educational institutions with low

overhead rates (perhaps 10 percent)?

Response: Small colleges with less

than $25 million in Federal funding

covered under this Circular will be

subject to the CAS but are exempt from

the Disclosure Statement filing

requirements.

Disclosure Statement (DS–2) (Section

C.14 and Appendix B)

Comment: Many commenters express

concerns that the preparation of the

Disclosure Statement (DS–2) can take as

much as 2500 hours. A suggestion was

made to require a submission only for

the year when the educational

institution is required to submit a F&A

cost rate proposal.

Response: OMB disagrees that the

DS–2 can take as much as 2500 hours

to complete unless a university does not

currently have adequate written cost

accounting policies. The DS–2 is a 20-

page document that provides a summary

of an educational institution’s cost

accounting system for Federal grants

and contracts. The cost accounting

practices used for Federal grants and

contracts should already be properly

documented as required by Subpart C,

§ lll.21, Standards for financial

management systems, in OMB Circular

A–110. Therefore, the effort to

summarize the existing practices in the

DS–2 should not be overly burdensome

to complete.

In addition, educational institutions

do not have to file the DS–2 on an

annual basis. Educational institutions

are only required to file an initial DS–

2 in accordance with the time frame

described in Section C.14 and thereafter,

educational institutions only need to

submit amendments of sections affected

by changes in cost accounting practices

deemed significant by the cognizant

agency. Section C.14.d discourages the

resubmission of a complete, updated

DS–2 except for extensive changes.

Furthermore, the DS–2 submission is

required only for educational

institutions receiving more than $25

million in federally-sponsored

agreements during their most recently

completed fiscal year.

Comment: The paperwork burden

imposed has not proven necessary and

the costs of providing the information

outweigh the benefits to be derived.

Response: OMB believes that the DS–

2 requires no more information than

would normally be provided to the

cognizant agency for review of an

educational institution’s F&A cost rate

proposal and for negotiation of the

associated rate agreement. OMB does

not intend for the paperwork to be an

arduous process, rather a reasonable

representation of the accounting

practices and policies that are used by

the educational institution in recovering

costs under Federal sponsored

programs.

Comment: The DS–2 will result in

additional work and expense, but,

because of the 26 percent cap,

educational institutions will not be

allowed to recover those amounts.

Response: OMB believes that the

information required by the DS–2 is of

the type that historically should have

been submitted during F&A cost rate

negotiations and made available for

audits of grants and contracts in

accordance OMB Circular A–133,

‘‘Audits of Institutions of Higher

Education and Other Non-Profit

Institutions.’’ Therefore, the only

additional time requirements should be

to put the same information in the

format required by the DS–2 and to

submit information on accounting

changes, as needed. Subsequently, the

information will not have to be

resubmitted every time a rate proposal

is submitted. Only changes in cost

accounting practices need to be

addressed as the changes are made. This

should result in administrative cost

savings in the long term.

Comment: The revision should clarify

what constitutes an accounting change,

and provide a materiality threshold so

that insignificant changes do not have to

be reported.

Response: OMB does not intend for

educational institutions to report

insignificant accounting changes.

Sections C.14.d and g emphasize that a

change is to be reported and approved

by the cognizant agency only when ‘‘the

change is expected to have a material

impact on the educational institution’s

negotiated F&A rates * * *’’ (emphasis

added). The determination of whether

an accounting change is significant and,

therefore, requires an amendment to the

DS–2 and possibly a cost impact

proposal is to be made by the cognizant

agency. However, educational

institutions are prohibited under the

allocability clauses of the Circular from

double-counting any costs to the Federal

Government which could result from a

change in accounting.

Comment: There were many

comments about confusion over the

submission dates for the initial DS–2

between the proposed dates stated in

the proposed revision to Circular A–21

and the dates published by the CASB on

November 8, 1994.

Response: In order to clarify the

submission dates for the initial DS–2,

and to prevent confusion, the DS–2

submission dates in this Circular for

CAS-covered educational institutions

are the same as those published by the

CASB on November 8, 1994. The DS–2

submission date for educational

institution not covered by the CASB

requirements is six months after the end

of the fiscal year which starts after the

publication date of this revision. In

addition, the cognizant agency has the
Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices 20883

authority to provide a filing date

extension on a case-by-case basis, unless

the DS–2 submission date is defined by

receipt of a CAS-covered contract by the

educational institution.

Comment: Small colleges and

universities are disproportionately

affected by the DS–2 submission

requirements since a small university

which received a CAS-covered contract

and $25 million in sponsored awards

could have the same submission due

date as the top 20 universities which

receive substantially more Federal

awards (approximately $150 million or

more).

Response: To provide consistency and

avoid confusion among all colleges and

universities regarding the submission

due dates for the DS–2, OMB has

revised the due dates to correspond

with the due dates published by the

CASB. A cognizant agency has the

authority to grant a filing date

extension.

Comment: A definition is needed for

‘‘a component unit’’ or the previouslydefined terms ‘‘segment’’ and ‘‘a

business unit’’ should be used.

Response: ‘‘A component unit’’ in

Section C.14 is replaced with ‘‘a

business unit.’’ A business unit at

colleges and universities means any unit

of an educational institution which is

not divided into segments. Segment

means one of two or more divisions,

campus locations, or other subdivisions

of an educational institution that

operate as independent organizational

entities under the auspices of the parent

educational institution and report

directly to an intermediary group office

or the governing central system office of

the parent educational institution.

Comment: For those educational

institutions that are required to file a

DS–2, there should be a transition time

period (e.g., within one year after

submittal) in which the cognizant

agency is required to identify any

procedures or descriptions that it

believes would lead to disallowance of

costs in the future and the educational

institution should be given an

opportunity to correct these procedures

or descriptions without a penalty. When

the document is found acceptable to the

cognizant agency, then it should receive

a written acknowledgment that, in the

agency’s opinion, the document

describes acceptable practices. An

educational institution would then only

be subject to disallowances if it is found

to be violating its described practices in

such a way that unallowable costs were

being incurred.

Response: OMB disagrees. The DS–2

should disclose the cost accounting

practices used to estimate, accumulate

and report the costs of sponsored

agreements over the award periods of

performance. If the cognizant agency

identifies established or disclosed cost

accounting practices that would lead to

disallowance of costs, it would require

the educational institution to correct the

practice and may also compute a cost

adjustment, if material, in accordance

with Section C.14.e.

Comment: Any subsequent cost

adjustments for procedures that are

inconsistent with those disclosed in the

DS–2 and result in unallowable costs

should be limited to the time period

beginning after acceptance of the DS–2

by the cognizant agency.

Response: While the purpose of the

DS–2 is to disclose an educational

institution’s current cost accounting

practices and is intended more for

future purposes than for a review of past

practices, it may be necessary to make

adjustments for some unallowable costs

that may have been reimbursed in the

past. These adjustments will be made at

the discretion of the cognizant agency.

Adjustments for the effects of deviations

from the practices disclosed in the DS–

2 can occur only after the filing.

However, the effect of deviations by an

educational institution from established

practices, whether or not a DS–2

submission is required, will continue to

be subject to adjustments in accordance

with Section C.8.

Comment: In resolving questions

about costs incurred, any claimed

disallowances should be based on

requirements of Circular A–21 with

regards to allowability of costs and not

some procedural issue related to

following a procedure described in the

DS–2.

Response: OMB agrees that Circular

A–21 should provide the basis of

allowability of costs. However, in some

instances, the DS–2 will help to clarify

how such costs are allocated and may

effect the reimbursement of costs

claimed as allocable and, therefore,

reimbursable costs.

Comment: The DS–2 will be difficult

to manage when the reporting entity

manages grants from various locations.

OMB should clarify disclosure

requirements for multi-campus and

multi-location educational institutions.

Response: OMB expects that

educational institutions’ accounting

policies would be the same, particularly

if the locations are all covered by the

same cost pools. If this is not the case,

OMB believes that preparation of the

DS–2 will help educational institutions

to develop consistent accounting

policies. However, if for some justified

reasons various locations maintain

different cost accounting practices, a

separate DS–2 should be submitted for

each business unit as stated in Section

C.14.a.

Terminology (‘‘Indirect’’ Costs)

Comment: Most commenters agreed

with the proposed change of

terminology from ‘‘indirect’’ costs to

‘‘facilities and administrative’’ costs.

However, some commenters noted that

this change will create confusion and

conflicts with other OMB cost

principles circulars and OMB grants

management circulars that still use the

term ‘‘indirect’’ costs.

Response: OMB agrees that

inconsistent terminology may cause

short term problems. However, this

change is needed to more accurately

describe the several cost pools for

sponsored agreements at educational

institutions. The replacement of the

term ‘‘indirect’’ costs will be limited to

Circular A–21 and not extended to other

OMB grants management circulars

because of the several cost pools that

exist only in Circular A–21. The term

‘‘indirect’’ costs still appears in

Appendix A—CASB’s Cost Accounting

Standards and Appendix B—Disclosure

Statement (DS–2) since these

appendices are directly from the CASB’s

regulations.

Special Cost Studies (Section E.2.d.)

Comment: The provision to limit

special cost studies to allocate utility,

library and student costs should be

delayed until reasonable benchmarks

can be established for the payment of

these costs.

Response: Benchmark studies to

develop alternative payment methods

for facility construction, utilities and

library costs are currently underway. In

the meantime, due to the ambiguous

nature of special cost studies that were

the source of disagreement between

cognizant agencies and institutions,

OMB plans to make utility, library and

student services cost recoveries based

on special cost studies unallowable

costs. This restriction’s effective date is

delayed until July 1, 1998 at which time

OMB will have in place an alternative

method to pay utility costs. Utility,

library and student services cost

allocations based on special cost studies

will be disallowed for administrative

and facilities payment rates negotiated

on or after July 1, 1998. The special cost

studies cannot be used to establish rates

beyond fiscal year ending in 1998,

unless a rate agreement in effect at the

time of this publication extends beyond

1998, in which case the use of special

cost studies will terminate at the end of

the rate agreement period. OMB is

currently reviewing proposals for
20884 Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices

alternative methodologies for making

payments on costs related to utilities.

OMB will publish the proposals for

public comments prior to July 1, 1997.

Comment: Instead of eliminating the

special cost studies, OMB should

develop standards, methodology and

criteria for conducting special cost

studies that would be acceptable for the

Federal Government.

Response: Special cost studies were

cited as an example of an area of

potential abuse and source of

disagreement and distrust between

cognizant agencies and institutions.

Rather than try to devise a set of

complex parameters that would

preclude any opportunity for abuse,

OMB decided to disallow any cost

allocations based upon those studies

and, instead, to provide an alternative

payment mechanism.

Fixed Rates (Section G.7)

Comment: Clarification of ‘‘life of

agreement’’ is needed since a project

can extend over a long period of time

exceeding ten or fifteen years at times.

Does it mean each continuing period of

an award or each competing renewal of

an award? Fixed rates should only apply

prospectively to new awards. ‘‘Life’’

should mean each competitive renewal

period. A commenter suggested that a

fixed rate apply for a period of three

years.

Response: OMB has clarified ‘‘life of

agreement’’ to mean each new

competitive segment. A competitive

segment is a period of years approved

for a project at the time of the award,

usually three to five years. Fixed rates

will apply only to awards made after the

publication date of this revision.

Comment: A clarification is needed

for the impact of a fixed rate throughout

the life of the award on the various

types of rates, i.e., provisional,

predetermined and fixed rates.

Response: The revision requires that

the Federal funding agencies use rates

in effect at time of award throughout the

life of the award, using the negotiated

rates (predetermined, fixed or

provisional) at the time of the award.

For example, if an educational

institution has a provisional rate of 40

percent at the time of the award, the 40

percent rate will be used for funding

and reimbursement throughout the life

of that award. If an educational

institution has predetermined rates of

40 percent (first year), 42 percent

(second year) and 45 percent (third

year), then a five-year project would

have rates of 40 percent (first year), 42

percent (second year) and 45 percent

(third, fourth and fifth years).

When an educational institution does

not have a negotiated rate with the

Federal Government at the time of the

award (because the educational

institution is a new grantee or the

parties cannot reach agreement on a

rate), the provisional rate used at the

time of the award will be adjusted after

a rate is negotiated and approved by the

cognizant agency.

Comment: To implement a fixed rate

throughout the life of an award

penalizes a university with growth in

facility costs. This would discourage

colleges and universities from investing

in facility costs.

Response: When entering into an

agreement with educational institutions

to perform a specific project, it is only

fair for the Federal Government to

commit funding and reimbursement

based on the conditions as they are

understood to exist at that time. Most

research project activities remain in the

same laboratory during the entire life of

the project and, therefore, the facility

costs should remain at the same level.

A fixed rate throughout the life of an

award would only adversely affect an

educational institution when, after the

award date, the educational institution

moved the project into a more modern

and expensive facility. Therefore, for

future awards, an educational

institution with growth in facility costs

should seek to establish future cost rates

(fixed or predetermined) that reflect the

growing cost pattern.

Comment: It is not clear what rate is

to be used when the educational

institution’s rate is decreasing during

the life of the award.

Response: In the case of anticipated

declining cost rates, the educational

institution should provide the basis for

the anticipated decline. Total funding

for the award would reflect the

anticipated decline. If a declining cost

rate is not anticipated at the time of

award, the educational institution may

recover the costs at the rates in effect at

the time of the award.

Comment: Fixed rates should not be

applied to primate centers that are

funded by the National Institutes of

Health P–51 awards, since these centers

are involved in a very long-term

agreement with the Federal Government

for specific research activities.

Response: The fixed rates concept

does not apply to the seven primate

animal care facilities that are involved

in special animal research funded under

the National Institutes of Health P–51—

Primate Research Center Grant. These

centers are primarily federally-funded

and are involved in a very long-term

agreement with the Federal

Government. The federally-funded F&A

costs that make up the rates are used to

charge the educational institution’s

users of the facility and are treated as

program income and returned to the

Federal awards.

Comment: Fixed rates should only be

used for funding a total project,

regardless of Federal reimbursement of

a university’s F&A costs. This policy is

consistent with the funding and

reimbursement policies for grants by the

National Science Foundation (NSF).

Response: Current NSF policies award

a fixed amount (direct and F&A costs)

for the conduct of an entire project. This

policy allows the educational institution

to recover more F&A costs than

originally budgeted as long as the total

reimbursement for the project does not

exceed the funding for the total award.

The revision in Section G.7 provides

that a fixed rate shall be used for both

funding and reimbursement of F&A

costs during an award’s life (or a

competitive segment’s life). This policy

assures that the Federal Government is

receiving the level of services (i.e.,

research) agreed to by the educational

institution and the Federal agency when

the award was made. If the fixed rate

concept is used only for funding of the

award and not reimbursement of F&A

costs, during periods of increasing rates,

while the total funding for the award

remains the same, then a shift of

funding available for direct costs to F&A

costs would occur. Therefore, the

funding available for direct cost

activities would decrease and so would

the level of services (or research).

Cost Negotiation Cognizance (Section

G.11)

Comment: The Circular should

address the effects that a change in cost

negotiation cognizance would have on

an educational institution’s

administrative functions.

Response: A change in cost

negotiation cognizance should have no

impact on an educational institution’s

administrative functions. The

consolidation of cognizant agencies for

cost negotiation will enhance the

consistency in the application and

interpretations of the Circular’s cost

principles and in the review of cost rate

proposals.

Comment: Several commenters

suggest that the period for cognizant

agency assignment should be ten years

rather than five since universities

frequently negotiate multiple year rates

for two or three years.

Response: The assignment period for

a cognizant agency will remain at five

years, as proposed. A five-year period

assignment should normally extend

over more than two normal negotiation
Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices 20885

cycles. Furthermore, since the funding

pattern from particular Federal agencies

at a particular university usually does

not change over a short time period, the

cognizance should remain reasonably

stable.

Comment: One commenter suggests

that financial statements rather National

Science Foundation (NSF) data should

be used in the determination of a

cognizant agency.

Response: The preferable source for

cognizant agency determination would

be the Schedule of Federal Awards, as

required by OMB Circular A–133, that

accompanies an educational

institution’s financial statements.

However, information on the Schedules

of Federal Awards has not yet been

automated in a Federal data base.

Therefore, the best source data are the

most recent three years of data

published by NSF in its annual report

(‘‘Selected Data on Federal Support to

Universities and Colleges’’), in the table

at page 5, entitled ‘‘Federal obligations

for science and engineering research

and development to universities and

colleges, ranked by total amount

received, by agency; fiscal year.’’ OMB

is revising Circular A–133 which will

establish a data base that can be used for

this purpose.

Comment: Which would be the

cognizant agency for educational

institutions that do not receive either

HHS or the Department of Defense,

Office of Naval Research (DOD)

funding? One commenter suggested that

an agency which has a predominant

interest and an on-site presence should

be the cognizant agency. The concern is

that the major funding agency may not

have the authority to address cost issues

that impact its funded projects.

Response: The Circular has been

revised to provide that an educational

institution will have an assigned

cognizant agency even when HHS or

DOD provides little or no funding at that

educational institution. Cognizance is

assigned to either HHS or DOD

depending on which of the two agencies

(HHS or DOD) provides more funds to

the educational institution. In cases

where neither HHS nor DOD provides

any funding, the cognizant agency

assignment shall default to HHS. Other

arrangements for cognizance of a

particular educational institution may

also be made based on mutual

agreement by both HHS and DOD.

Section G.11 also states that the

cognizant agency is responsible for

coordinating the formal negotiation and

arranging a pre-negotiation conference if

there is interest from another agency.

This process assures that an interested

major funding agency is not precluded

from participating in the negotiation

process.

Comment: The agency with Federal

audit cognizance (established by

Circular A–133) and cost negotiation

cognizance (established by Circular A–

21) should be the same for each

educational institution.

Response: With the rescission of OMB

A–88, which assigned a single Federal

cognizant agency for rate negotiation,

audit and audit follow-up, an

educational institution may have two

different agencies responsible for audit

and cost cognizance. OMB believes that

the audit function and cost negotiation

functions are different functions. This

division of responsibility works

effectively for State and local

governments under Circulars A–87,

‘‘Cost Principles for State, Local and

Indian Tribal Governments’’ (60 FR

26484; May 17, 1995), and A–128,

‘‘Audits of State and Local

Governments’’ (50 FR 19114; May 10,

1985).

Comment: Which agency would be

the cognizant cost negotiation agency

for the Federally-Funded Research and

Development Centers (FFRDCs)

associated with educational

institutions? Is the FFRDC included in

the total dollar amount received by the

educational institution for the

determination of a cognizant agency?

Response: Federal responsibilities

associated with FFRDCs are not affected

by the revision to Circular A–21.

FFRDCs associated with educational

institutions are independent

organizations that function outside the

operational activities of the educational

institutions. They are required to

comply with the CAS and rules and

regulations issued by the CASB set forth

in 48 CFR Chapter 99. The

determination of their cognizant agency

will continue to be based on the primary

funding source. Federal funding to

FFRDCs shall be excluded from the

determination of cost cognizance for an

educational institution.

Comment: Several commenters

suggested that Federal agencies do not

have the authority to use a F&A rate for

a class of sponsored agreements or a

single agreement other than the

negotiated rates. To allow this would

defeat the purpose of standardized rate

agreements.

Response: Under normal

circumstances, the negotiated rates

established between the educational

institution and the cognizant agency

should be used by all agencies. The

Circular has been revised to state that

only under special circumstances

prescribed by law or regulation can an

agency use a rate other than the

negotiated rate.

Comment: The proposed revision

stated that cognizant assignments as of

December 31, 1995, will continue in

effect through an educational

institution’s fiscal years ending during

1997. Is this based on the receipt of the

educational institution’s cost proposal

or is it based on the year for which the

proposal is prepared?

Response: The transfer of cognizance

assignment is based on the receipt date

of the cost proposal. The cognizant

agency for an educational institution as

of December 31, 1995, is responsible for

the review and negotiation of rates for

all cost proposals submitted to that

agency through fiscal years ending

during 1997. The cognizant agency is

also responsible for any disputes or

appeals that result from proposals

submitted through fiscal years ending

during 1997.

Dependent Tuition Benefits (Section J.8)

Comment: Most commenters stated

that dependent tuition benefits are

legitimate fringe benefit costs, as are

health benefits, and are commonly used

by a university to attract the best faculty

and staff. This benefit should not be

eliminated. A comparison of this benefit

to the private sector should not be made

since the salary for faculty and staff are

typically much lower and university

employees do not receive some benefits

offered by the private sector, such as

stock options. Eliminating the

dependent tuition benefit will cause

universities to raise wages for their

employees, thus ultimately resulting in

higher costs for Federal research.

Response: OMB disagrees for the

following reasons:

(1) Some universities charge federallysponsored agreements for dependent

tuition assistance even when there is no

actual cost incurred by the university.

For example, in the four universities

covered by a recent General Accounting

Office (GAO) study (‘‘University

Research—U.S. Reimbursement of

Tuition Costs for University Employee

Family Members,’’ GAO/NSIAD–95–19),

when a dependent attended the

university where an employee worked,

the four universities charged tuition in

full or in part to federally-sponsored

agreements. GAO’s report provided an

example in which an institution ‘‘would

have charged $18,000 to the fringe

benefit pool for a child of a tenured

faculty member attending the university

during 1993.’’ Generally, provision of

substantial fringe benefits that do not in

fact impose a measurable cost on an

entity are not a ‘‘cost’’ that is properly

chargeable to the government.
20886 Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices

(2) Since 1977, the Federal

Acquisition Regulation (FAR)(48 CFR

Subpart 31.205–44, ‘‘Training and

education costs’’), which applies to

Federal contracts with commercial

firms, has treated dependent tuition

benefit as an unallowable cost. This

change was made because the

procurement regulation review

committee, which studied changes to

the FAR in the mid 1970’s, believed that

there was no benefit to the government

from subsidizing tuition costs of

employee family members.

(3) Dependent tuition benefits are

unique to educational institutions, i.e.,

they are not available as a normal

business practice for the private sector

(subject to the FAR), State and local

governments (subject to OMB Circular

A–87), and non-profit organizations

(subject to OMB Circular A–122, ‘‘Cost

Principles for Non-Profit

Organizations’’). Allowing dependent

tuition benefits to educational

institutions would provide allowable

costs for only one group of grantees and

contractors.

(4) No evidence has been offered to

support the comment that compensation

for educational institution faculty and

staff currently is much lower than

compensation in the private sector for

the same discipline. If higher salary

levels are required to attract faculty and

staff, then such salaries will be

chargeable to Federal awards to the

extent allowable under this Circular and

the terms of the awards.

Based on the above reasons, the

Circular is revised to disallow

dependent tuition benefits for

educational institutions’ fiscal years

starting on or after September 30, 1998.

Comment: A phase-in period with an

effective date of 1998 should be allowed

for the total elimination of this benefit.

Response: Given existing contractual

commitments to faculty and staff, the

effective date for making the dependent

tuition an unallowable cost is the

educational institution’s fiscal years

beginning on or after September 30,

1998.

Use Allowance/Depreciation (Section

J.12)

Comment: The educational institution

should be allowed to depreciate the

remaining (full) value of the assets at the

time of conversion, using the

depreciation rate until the assets are

disposed.

Response: For claiming its costs on a

single class of assets, an educational

institution always has the choice of

selecting either the use allowance or

depreciation methodology. These two

methodologies are based on different

cost reimbursement principles (i.e., use

allowance allows cost recovery beyond

useful lives as long as the asset is in use,

while depreciation allows a quicker cost

recovery based on a depreciable life

only). The selection of recovery method

is up to the educational institution.

Circular A–21 does not require the

educational institution to convert from

the use allowance method to the

depreciation method. The revision in

Section J.12.b.(3) simply clarifies that,

in the case where an educational

institution, by its own choice, elects to

convert from use allowance to the

depreciation method, the conversion

should be made as if the depreciation

method had been used over the entire

life of the asset.

Additionally, the ‘‘allocability

principle’’ in Section C.4 of Circular A–

21 states that ‘‘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 or other equitable relationship’’

(emphasis added). 44 FR 12368

(February 26, 1979). The allocability

principle would be violated if

unclaimed costs could be charged to the

future periods that do not benefit from

the use of the asset.

Comment: Circular A–21 should

allow the use allowance method for old

buildings and the depreciation method

for new buildings rather than restrict the

use of one method of reimbursement for

one type of assets. The provision should

apply to new assets only and not all

assets. The commenter recommends

changing the language to ‘‘a

combination of the depreciation and use

allowances may not be used for new

assets.’’

Response: Section J.12.d has provided

that a combination of the depreciation

and use allowance may not be used, in

like circumstances, for a single class of

assets. To allow the use of both methods

for a single class of assets would violate

the consistent treatment principle of the

Circular, complicate the depreciation/

use allowance calculation process, and

create inequities in the recovery of asset

costs against Federal programs. This

provision prevents an educational

institution from both using depreciation

to recover the cost of assets with useful

lives that are shorter than the average

lives reflected in the use allowance rates

(50 years for buildings and 15 years for

equipment) AND using allowance for

the recovery of assets with longer useful

lives. The mix of the two methods for

a single class of assets is clearly

inequitable to the Federal Government

since the use allowance method is a

simplified recovery method that is

based on an averaging concept which

implicitly recognizes that certain assets

within each broad category have lives

that differ from the average. OMB does

not see the need to change this policy

since it is the educational institution’s

choice to select the appropriate method

of recovery for facility costs.

Comment: The provision should

allow full recovery of assets that are

converted from use allowance to

depreciation. This could be done by

allowing use allowance beyond the

asset’s depreciable ‘‘life’’—as long as the

assets are in use—until the full cost is

recovered. Authorization from the

cognizant agency shall be obtained.

Response: OMB disagrees. If the

depreciation method is used, Section

J.12.b.(5) provides that depreciation is

not allowed on any assets that have

outlived their depreciable lives.

However, Section J.12.c.(3) allows a

‘‘reasonable use allowance’’ for any

assets that are considered to be fully

depreciated after considering the

amount of depreciation previously

charged to the Federal Government, the

estimated useful life remaining at the

time of negotiation, the effect of any

increased maintenance charges,

decreased efficiency due to age, and any

other factors pertinent to the utilization

of the asset for the purposed

contemplated. The allowable amounts

are determined by the cognizant agency.

This provision allows a use allowance

for fully depreciated assets only under

the most extraordinary circumstances

and is not applicable when converting

from use allowance to depreciation.

This provision is intended to permit

reimbursement under unusual

circumstances where an asset is treated

as having outlived its useful life but

nevertheless has future cost

consequences that are not recoverable

through capitalized repair and

replacement costs or as current period

expenses.

An example of a ‘‘reasonable use

allowance’’ is for the use of an

electronic microscope by the

educational institution after its useful

life. At the start of its service life, a

reasonable estimate of the useful life of

an electronic microscope is five years.

However, after five years, when the

asset is fully depreciated and its costs

fully recovered, if it is still functional

and is used to support Federal projects,

then consideration may be given by the

cognizant agency for a reasonable use

allowance. This approach results in cost

savings both for the educational

institution and the Federal Government

since the educational institution could

have replaced the old electronic

microscope with a new, more expensive
Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices 20887

one and then appropriately charge a use

allowance to the Federal projects.

Equipment Definition (Section J.16)

Comment: The effective date of the

equipment definition change should be

prior to the expiration of an educational

institution’s F&A cost rate agreements.

Response: In order to simplify the

transition, the effective date of the

equipment definition change will be at

the beginning of the next F&A cost rate

agreement. An educational institution

with predetermined or fixed rates that

wishes to raise its equipment threshold

earlier should contact its cognizant

agency for approval. While educational

institutions are free to change their

capitalization policy at any time, there

should be limitations as to when

sponsoring agencies may recognize the

change. To do otherwise could result in

direct costs and F&A costs being

reimbursed under conditions different

from those upon which the F&A cost

rate was predicated. Federal sponsoring

agencies are to award, and grantees are

to claim, costs in accordance with the

policies in effect at the time the cost rate

agreement was issued. At the cognizant

agency’s discretion, revised cost rates

may be established based on an analysis

of the impact on cost rates of the

conversion.

Comment: Clarification is needed on

the treatment of depreciation of those

assets which had costs between the old

$500 threshold and the new $5000.

Response: In order to clarify the

accounting for the unamortized portion

of any equipment costs as a result of a

change in capitalization levels, language

has been added to Section J.16.a.(1) to

explain that the unamortized portion

may be recovered by continuing to

claim the otherwise allowable use

allowance or depreciation on the

equipment, or by amortizing the amount

to be written off over a period of years

negotiated with the cognizant agency.

Interest Criteria (Section J.22)

General

Comment: Clarifications are needed

for the calculations used in the leasepurchase analysis and the cash-flow

analysis.

Response: The commenter is correct.

The Circular has been revised to provide

the following clarifications for the

interest requirements. A threshold of

$500,000 has been set for the

requirement of a lease-purchase analysis

for a facility acquisition, a cash-flow

analysis is required for debt

arrangements over $1 million (when the

initial equity contribution by the

educational institution is less than 25

percent), and notification is required in

case of a substantial relocation from a

building funded in part or whole

through Federal reimbursements. The

same clarifications adopted in the final

revision of the interest provision of

Circular A–122 (60 FR 52516), have

been included in this revision to

Circular A–21 in Section J.22.f. This

will maintain conformity across the cost

principles circulars.

Comment: The requirements under

the interest criteria create an additional

administrative burden for colleges and

universities in a period when the

administrative costs are already capped.

Response: OMB recognizes that there

might be a nominal increase in an

administrative burden in a few cases.

However, OMB believes that these

requirements are needed to protect the

Federal Government against abusive

financing arrangements (such as

‘‘balloon financing method’’ where the

entire principal amount is made at the

end of the finance term).

Comment: The requirements should

only apply prospectively to future asset

acquisitions.

Response: OMB revises the provision

in Section J.22.f to state that the criteria

for interest allowability in this revision

apply only to facilities and equipment

acquired after the effective date of this

revision.

Comment: What are the

reimbursement limitations when the

least expensive alternative is not

chosen?

Response: As the revision in Section

J.22.f states, when a lease-purchase

analysis is required to be performed,

reimbursement will be limited to the

least expensive alternative available,

whether or not it is the chosen

alternative.

Comment: Where a facility is acquired

and the components are depreciated

over varying lives, can interest on debt

associated with fully depreciated assets

be claimed?

Response: No. Under the allocability

provisions of Section C.4.a, interest

costs on fully depreciated, retired,

scrapped, or nonexistent assets are

unallowable.

Comment: Where a new facility is

acquired or constructed with excess

capacity intended to meet future needs,

can interest costs be claimed for that

portion of the facility that is currently

excess and not in use?

Response: No. Under the allocability

provisions of Section C.4.a, interest

costs on excess or idle capacity are not

allocable to Federal programs and are,

therefore, unallowable. This provision

also applies to any related costs, such as

depreciation.

Lease-Purchase Analysis

Comment: A higher threshold should

be established for the requirement of the

lease-purchase analysis. Thresholds of

$50 million and $25 million were

recommended.

Response: Many commenters

indicated that lease-purchase analyses

are generally performed by the

educational institutions as a common

business practice. Such analyses

normally are performed for assets under

the suggested $25 million threshold,

whether or not Federal funds are

involved. The expense of the analysis is

justified when one considers the

considerably greater amounts that are at

stake in a real estate lease or purchase.

Also, by identifying the most

economical acquisition alternative, such

analyses can pay for themselves. Section

C.3 of Circular A–21 requires that, to be

allowable, costs must be reasonable. A

lease-purchase analysis provides such

supporting documentation. A threshold

of $25 million or $50 million is simply

too high to protect the interests of the

Federal Government

However, OMB recognizes that a

lease-purchase analysis may not be cost

effective for smaller facility

acquisitions. Therefore, a threshold of

$500,000 has been established in the

final revision for the lease-purchase

analysis requirement for facilities.

Additionally, the analysis is not

required to be submitted but is only to

be maintained on file for cognizant

agency review upon request. There is no

requirement for a lease-purchase

analysis for equipment.

Cash-Flow Analysis

Comment: The educational institution

should have the option of rolling

forward the ‘‘excess’’ cash recovery to

future years rather than being

disallowed in the year incurred since

interest costs are often based on a

declining principal balance and are not

spread evenly over the life of the

mortgage.

Response: The provision on ‘‘excess’’

cash flow addresses the interest costs to

the Federal Government in instances

where cash flow from depreciation

exceeds debt principal payments (e.g., a

‘‘balloon’’ payment arrangement). In

such case, where the entire principal

amount is paid at the end of the finance

period, the cash flow received by the

educational institution for

reimbursement of depreciation and

interest expenses on a facility would

exceed the payments made by the

educational institution for interest and

principal, thus resulting in an excessive

cash flow. The interest on the excess
20888 Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices

cash flow should be deducted from

interest costs in the year earned and not

spread out over the life of the mortgage

since the Federal Government pays its

proportionate share of future period

interest.

The provision requiring an

adjustment to allowable interest for

positive cash flow does not result in a

‘‘disallowance’’ of depreciation

exceeding principal payments. When

inflows exceed outflows, earnings are to

be imputed on the excess cash flow and

offset against interest costs for the 12-

month period. The educational

institution, however, retains the excess

cash flow which will be needed during

periods of negative cash flow.

A sample cash-flow analysis is

presented hereafter.

Comment: The provision requires that

earnings on positive cash flows be offset

against interest costs. If principal

payments include the cost of land, the

positive cash flow and imputed earnings

will be understated.

Response: OMB agrees. While interest

on debt to acquire land is allowable, the

cost of land is not. Accordingly, when

computing cash flows, each debt

principal payment shall be reduced by

an amount equal to the portion of the

principal payment attributed to the

acquisition of land. This requirement is

included in Section J.22.f.

BILLING CODE 3110–01–P
Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices 20889

BILLING CODE 3110–01–C
20890 Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices

Interagency Policy Group

Comment: The establishment of a

Federal interagency group for the

development of grant and contract

policy should be addressed in Circular

A–110 rather than Circular A–21. This

group should include representatives

from colleges and universities.

Response: The commenter is correct

that the interagency policy group should

be formed under broader auspices than

just Circular A–21. In response, the

proposal has been deleted from the final

revision of this Circular. This proposal

is not being pursued at this time.

Alice M. Rivlin,

Director.

EXECUTIVE OFFICE OF THE PRESIDENT

Office of Management and Budget

Circular No. A–21, Revised, Transmittal

Memorandum No. 6.

To the Heads of Executive Departments and

Establishments

Subject: Cost Principles for Educational

Institutions.

April 26, 1996.

This transmittal memorandum revises

OMB Circular No. A–21, ‘‘Cost Principles for

Educational Institutions.’’ The attached

revision further clarifies and standardizes the

Circular’s principles for determining costs

applicable to grants, contracts, and other

agreements with educational institutions,

and rescinds OMB Circular A–88, ‘‘Indirect

Cost Rates, Audits, and Audit Follow-up at

Educational Institutions.’’ This revision is

effective on the date of its publication in the

Federal Register, unless otherwise noted

within this revision.

Also attached is a recompilation of Circular

A–21 that consists of the original Circular

published at 44 FR 12368 (February 26,

1979), as amended by Transmittal

Memoranda Numbers 1 through 5, at 47 FR

33658 (July 23, 1982), 51 FR 20908 (June 9,

1986), 51 FR 43487 (December 2, 1986), 56

FR 50224 (October 1, 1991), 58 FR 39996

(July 15, 1993), respectively, and the

amendments herein.

Alice M. Rivlin,

Director.

Attachments.

I. Circular A–88 is rescinded, effective July

1, 1996.

II. Circular A–21 is revised as follows:

Revise Sections A, C, G, J and K as follows.

1. In Section A, add subsection 4 to read

as follows: 4. Inquiries. All inquiries from

Federal agencies concerning the cost

principles contained in this Circular,

including the administration and

implementation of the Cost Accounting

Standards (CAS) (described in Sections C.10

through C.13) and disclosure statement (DS–

2) requirements, shall be addressed by the

Office of Management and Budget (OMB),

Office of Federal Financial Management, in

coordination with the Cost Accounting

Standard Board (CASB) with respect to

inquiries concerning CAS. Educational

institutions’ inquiries should be addressed to

the cognizant agency.

2. In Section C, change subsection 8 as

follows. 8. Collection of unallowable costs,

excess costs due to noncompliance with cost

policies, increased costs due to failure to

follow a disclosed accounting practice and

increased costs resulting from a change in

cost accounting practice. The following costs

shall be refunded (including interest) in

accordance with applicable Federal agency

regulations:

a. Costs specifically identified as

unallowable in Section J, either directly or

indirectly, and charged to the Federal

Government.

b. Excess costs due to failure by the

educational institution to comply with the

cost policies in this Circular.

c. Increased costs due to a noncompliant

cost accounting practice used to estimate,

accumulate, or report costs.

d. Increased costs resulting from a change

in accounting practice.

3. In Section C, add subsection 10 to read

as follows: 10. Consistency in estimating,

accumulating and reporting costs.

a. An educational institution’s practices

used in estimating costs in pricing a proposal

shall be consistent with the educational

institution’s cost accounting practices used

in accumulating and reporting costs.

b. An educational institution’s cost

accounting practices used in accumulating

and reporting actual costs for a sponsored

agreement shall be consistent with the

educational institution’s practices used in

estimating costs in pricing the related

proposal or application.

c. The grouping of homogeneous costs in

estimates prepared for proposal purposes

shall not per se be deemed an inconsistent

application of cost accounting practices

under subsection a when such costs are

accumulated and reported in greater detail on

an actual cost basis during performance of

the sponsored agreement.

d. Appendix A also reflects this

requirement, along with the purpose,

definitions, and techniques for application,

all of which are authoritative.

4. In Section C, add subsection 11 to read

as follows: 11. Consistency in allocating costs

incurred for the same purpose.

a. All costs incurred for the same purpose,

in like circumstances, are either direct costs

only or F&A costs only with respect to final

cost objectives. No final cost objective shall

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

costs incurred for the same purpose, in like

circumstances, have been included as a

direct cost of that or any other final cost

objective. Further, no final cost objective

shall have allocated to it as a direct cost any

cost, if other costs incurred for the same

purpose, in like circumstances, have been

included in any F&A cost pool to be allocated

to that or any other final cost objective.

b. Appendix A reflects this requirement

along with its purpose, definitions,

techniques for application, illustrations and

interpretations, all of which are authoritative.

5. In Section C, add subsection 12 to read

as follows: 12. Accounting for unallowable

costs.

a. Costs expressly unallowable or mutually

agreed to be unallowable, including costs

mutually agreed to be unallowable directly

associated costs, shall be identified and

excluded from any billing, claim,

application, or proposal applicable to a

sponsored agreement.

b. Costs which specifically become

designated as unallowable as a result of a

written decision furnished by a Federal

official pursuant to sponsored agreement

disputes procedures shall be identified if

included in or used in the computation of

any billing, claim, or proposal applicable to

a sponsored agreement. This identification

requirement applies also to any costs

incurred for the same purpose under like

circumstances as the costs specifically

identified as unallowable under either this

subsection or subsection a.

c. Costs which, in a Federal official’s

written decision furnished pursuant to

sponsored agreement disputes procedures,

are designated as unallowable directly

associated costs of unallowable costs covered

by either subsection a or b shall be accorded

the identification required by subsection b.

d. The costs of any work project not

contractually authorized by a sponsored

agreement, whether or not related to

performance of a proposed or existing

sponsored agreement, shall be accounted for,

to the extent appropriate, in a manner which

permits ready separation from the costs of

authorized work projects.

e. All unallowable costs covered by

subsections a through d shall be subject to

the same cost accounting principles

governing cost allocability as allowable costs.

In circumstances where these unallowable

costs normally would be part of a regular

F&A cost allocation base or bases, they shall

remain in such base or bases. Where a

directly associated cost is part of a category

of costs normally included in a F&A cost

pool that shall be allocated over a base

containing the unallowable cost with which

it is associated, such a directly associated

cost shall be retained in the F&A cost pool

and be allocated through the regular

allocation process.

f. Where the total of the allocable and

otherwise allowable costs exceeds a

limitation-of-cost or ceiling-price provision

in a sponsored agreement, full direct and

F&A cost allocation shall be made to the

sponsored agreement cost objective, in

accordance with established cost accounting

practices and standards which regularly

govern a given entity’s allocations to

sponsored agreement cost objectives. In any

determination of a cost overrun, the amount

thereof shall be identified in terms of the

excess of allowable costs over the ceiling

amount, rather than through specific

identification of particular cost items or cost

elements.

g. Appendix A reflects this requirement,

along with its purpose, definitions,

techniques for application, and illustrations

of this standard, all of which are

authoritative.

6. In Section C, add subsection 13 to read

as follows: 13. Cost accounting period.

a. Educational institutions shall use their

fiscal year as their cost accounting period,

except that:

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

only a part of a cost accounting period may
Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices 20891

be allocated to cost objectives of that same

part of the period on the basis of data for that

part of the cost accounting period if the cost

is: (i) material in amount, (ii) accumulated in

a separate F&A cost pool or expense pool,

and (iii) allocated on the basis of an

appropriate direct measure of the activity or

output of the function during that part of the

period.

(2) An annual period other than the fiscal

year may, upon mutual agreement with the

Federal Government, be used as the cost

accounting period if the use of such period

is an established practice of the educational

institution and is consistently used for

managing and controlling revenues and

disbursements, and appropriate accruals,

deferrals or other adjustments are made with

respect to such annual periods.

(3) A transitional cost accounting period

other than a year shall be used whenever a

change of fiscal year occurs.

b. An educational institution shall follow

consistent practices in the selection of the

cost accounting period or periods in which

any types of expense and any types of

adjustment to expense (including priorperiod adjustments) are accumulated and

allocated.

c. The same cost accounting period shall be

used for accumulating costs in a F&A cost

pool as for establishing its allocation base,

except that the Federal Government and

educational institution may agree to use a

different period for establishing an allocation

base, provided:

(1) The practice is necessary to obtain

significant administrative convenience,

(2) The practice is consistently followed by

the educational institution,

(3) The annual period used is

representative of the activity of the cost

accounting period for which the F&A costs to

be allocated are accumulated, and

(4) The practice can reasonably be

estimated to provide a distribution to cost

objectives of the cost accounting period not

materially different from that which

otherwise would be obtained.

d. Appendix A reflects this requirement,

along with its purpose, definitions,

techniques for application and illustrations,

all of which are authoritative.

7. In Section C, add subsection 14 to read

as follows: 14. Disclosure Statement.

a. Educational institutions that received

aggregate sponsored agreements totaling $25

million or more subject to this Circular

during their most recently completed fiscal

year shall disclose their cost accounting

practices by filing a Disclosure Statement

(DS–2), which is reproduced in Appendix B.

With the approval of the cognizant agency,

an educational institution may meet the DS–

2 submission by submitting the DS–2 for

each business unit that received $25 million

or more in sponsored agreements.

b. The DS–2 shall be submitted to the

cognizant agency with a copy to the

educational institution’s audit cognizant

office.

c. Educational institutions receiving $25

million or more in sponsored agreements that

are not required to file a DS–2 pursuant to

48 CFR 9903.202–1 shall file a DS–2 covering

the first fiscal year beginning after the

publication date of this revision, within six

months after the end of that fiscal year.

Extensions beyond the above due date may

be granted by the cognizant agency on a caseby-case basis.

d. Educational institutions are responsible

for maintaining an accurate DS–2 and

complying with disclosed cost accounting

practices. Educational institutions must file

amendments to the DS–2 when disclosed

practices are changed to comply with a new

or modified standard, or when practices are

changed for other reasons. Amendments of a

DS–2 may be submitted at any time. If the

change is expected to have a material impact

on the educational institution’s negotiated

F&A cost rates, the revision shall be

approved by the cognizant agency before it is

implemented. Resubmission of a complete,

updated DS–2 is discouraged except when

there are extensive changes to disclosed

practices.

e. Cost and funding adjustments. Cost

adjustments shall be made by the cognizant

agency if an educational institution fails to

comply with the cost policies in this Circular

or fails to consistently follow its established

or disclosed cost accounting practices when

estimating, accumulating or reporting the

costs of sponsored agreements, if aggregate

cost impact on sponsored agreements is

material. The cost adjustment shall normally

be made on an aggregate basis for all affected

sponsored agreements through an adjustment

of the educational institution’s future F&A

costs rates or other means considered

appropriate by the cognizant agency. Under

the terms of CAS-covered contracts,

adjustments in the amount of funding

provided may also be required when the

estimated proposal costs were not

determined in accordance with established

cost accounting practices.

f. Overpayments. Excess amounts paid in

the aggregate by the Federal Government

under sponsored agreements due to a

noncompliant cost accounting practice used

to estimate, accumulate, or report costs shall

be credited or refunded, as deemed

appropriate by the cognizant agency. Interest

applicable to the excess amounts paid in the

aggregate during the period of

noncompliance shall also be determined and

collected in accordance with applicable

Federal agency regulations.

g. Compliant cost accounting practice

changes. Changes from one compliant cost

accounting practice to another compliant

practice that are approved by the cognizant

agency may require cost adjustments if the

change has a material effect on sponsored

agreements and the changes are deemed

appropriate by the cognizant agency.

h. Responsibilities. The cognizant agency

shall:

(1) Determine cost adjustments for all

sponsored agreements in the aggregate on

behalf of the Federal Government. Actions of

the cognizant agency official in making cost

adjustment determinations shall be

coordinated with all affected Federal

agencies to the extent necessary.

(2) Prescribe guidelines and establish

internal procedures to promptly determine

on behalf of the Federal Government that a

DS–2 adequately discloses the educational

institution’s cost accounting practices and

that the disclosed practices are compliant

with applicable CAS and the requirements of

this Circular.

(3) Distribute to all affected agencies any

DS–2 determination of adequacy and/or

noncompliance.

8. In Section E, add subsection 2.d(5) to

read as follows:

2.d(5) Notwithstanding subsection (3),

effective July 1, 1998, a cost analysis study

or base other than that in Section F shall not

be used to distribute utility, library or

student services costs. By that date, OMB

shall have in place an alternative

methodology for making payments on costs

related to utilities.

9. In Section G, add a new subsection 7 to

read as follows, and renumber all subsequent

subsections from 7, 8 and 9 to 8, 9 and 10,

respectively: 7. Fixed rates for the life of the

sponsored agreement.

a. Federal agencies shall use the negotiated

rates for F&A costs in effect at the time of the

initial award throughout the life of the

sponsored agreement. ‘‘Life’’ for the purpose

of this subsection means each competitive

segment of a project. A competitive segment

is a period of years approved by the Federal

funding agency at the time of the award. If

negotiated rate agreements do not extend

through the life of the sponsored agreement

at the time of the initial award, then the

negotiated rate for the last year of the

sponsored agreement shall be extended

through the end of the life of the sponsored

agreement. Award levels for sponsored

agreements may not be adjusted in future

years as a result of changes in negotiated

rates.

b. When an educational institution does

not have a negotiated rate with the Federal

Government at the time of the award

(because the educational institution is a new

grantee or the parties cannot reach agreement

on a rate), the provisional rate used at the

time of the award shall be adjusted once a

rate is negotiated and approved by the

cognizant agency.

10. In Section G, add subsection 11 to read

as follows: 11. Negotiation and approval of

F&A rate.

a. Cognizant agency assignments. ‘‘A

cognizant agency’’ means the Federal agency

responsible for negotiating and approving

F&A rates for an educational institution on

behalf of all Federal agencies.

(1) Cost negotiation cognizance is assigned

to the Department of Health and Human

Services (HHS) or the Department of

Defense’s Office of Naval Research (DOD),

normally depending on which of the two

agencies (HHS or DOD) provides more funds

to the educational institution for the most

recent three years. Information on funding

shall be derived from relevant data gathered

by the National Science Foundation. In cases

where neither HHS nor DOD provides

Federal funding to an educational institution,

the cognizant agency assignment shall

default to HHS. Notwithstanding the method

for cognizance determination described

above, other arrangements for cognizance of

a particular educational institution may also

be based in part on the types of research

performed at the educational institution and
20892 Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices

shall be decided based on mutual agreement

between HHS and DOD.

(2) Cognizant assignments as of December

31, 1995, shall continue in effect through

educational institutions’ fiscal years ending

during 1997, or the period covered by

negotiated agreements in effect on December

31, 1995, whichever is later, except for those

educational institutions with cognizant

agencies other than HHS or DOD. Cognizance

for these educational institutions shall

transfer to HHS or DOD at the end of the

period covered by the current negotiated rate

agreement. After cognizance is established, it

shall continue for a five-year period.

b. Acceptance of rates. The negotiated rates

shall be accepted by all Federal agencies.

Only under special circumstances, when

required by law or regulation, may an agency

use a rate different from the negotiated rate

for a class of sponsored agreements or a

single sponsored agreement.

c. Correcting deficiencies. The cognizant

agency shall negotiate changes needed to

correct systems deficiencies relating to

accountability for sponsored agreements.

Cognizant agencies shall address the

concerns of other affected agencies, as

appropriate.

d. Resolving questioned costs. The

cognizant agency shall conduct any

necessary negotiations with an educational

institution regarding amounts questioned by

audit that are due the Federal Government

related to costs covered by a negotiated

agreement.

e. Reimbursement. Reimbursement to

cognizant agencies for work performed under

Circular A–21 may be made by

reimbursement billing under the Economy

Act, 31 U.S.C. 1535.

f. Procedure for establishing facilities and

administrative rates. The cognizant agency

shall arrange with the educational institution

to provide copies of rate proposals to all

interested agencies. Agencies wanting such

copies should notify the cognizant agency.

Rates shall be established by one of the

following methods:

(1) Formal negotiation. The cognizant

agency is responsible for negotiating and

approving rates for an educational institution

on behalf of all Federal agencies. Noncognizant Federal agencies, which award

sponsored agreements to an educational

institution, shall notify the cognizant agency

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

special cost rates) which could affect the

negotiation process. The cognizant agency

shall address the concerns of all interested

agencies, as appropriate. A pre-negotiation

conference may be scheduled among all

interested agencies, if necessary. The

cognizant agency shall then arrange a

negotiation conference with the educational

institution.

(2) Other than formal negotiation. The

cognizant agency and educational institution

may reach an agreement on rates without a

formal negotiation conference; for example,

through correspondence or use of the

simplified method described in this Circular.

g. Formalizing determinations and

agreements. The cognizant agency shall

formalize all determinations or agreements

reached with an educational institution and

provide copies to other agencies having an

interest.

h. Disputes and disagreements. Where the

cognizant agency is unable to reach

agreement with an educational institution

with regard to rates or audit resolution, the

appeal system of the cognizant agency shall

be followed for resolution of the

disagreement.

11. In Section J, replace subsection 8.f.(2)

to read as follows:

8.f.(2) Fringe benefits in the form of

employer contributions or expenses for social

security, employee insurance, workmen’s

compensation insurance, tuition or remission

of tuition for individual employees are

allowable, provided such benefits are granted

in accordance with established educational

institutional policies, and are distributed to

all institutional activities on an equitable

basis. Tuition benefits for family members

other than the employee are unallowable for

fiscal years beginning after September 30,

1998. See Section J.41.b, Scholarships and

student aid costs, for treatment of tuition

remission provided to students.

12. In Section J, add subsection 12.b.(3) to

read as follows:

12.b.(3) Where the depreciation method is

introduced to replace the use allowance

method, depreciation shall be computed as if

the asset had been depreciated over its entire

life (i.e., from the date the asset was acquired

and ready for use to the date of disposal or

withdrawal from service). The aggregate

amount of use allowances and depreciation

attributable to an asset (including imputed

depreciation applicable to periods prior to

the conversion to the use allowance method

as well as depreciation after the conversion)

may be less than, and in no case, greater than

the total acquisition cost of the asset.

13. In Section J, add subsection 12 c.(4) to

read as follows: 12.c.(4) Notwithstanding

subsection(3), once an educational institution

converts from one cost recovery methodology

to another, acquisition costs not recovered

may not be used in the calculation of the use

allowance in subsection(3).

14. In Section J, amend subsections 16.a.(1)

and 16.b.(2) to read as follows:

16.a.(1) ‘‘Equipment’’ means an article of

nonexpendable, tangible personal property

having a useful life of more than one year

and an acquisition cost which equals or

exceeds the lesser of the capitalization level

established by the organization for financial

statement purposes, or $5000. The

unamortized portion of any equipment

written off as a result of a change in

capitalization levels may be recovered by

continuing to claim the otherwise allowable

use allowances or depreciation on the

equipment, or by amortizing the amount to

be written off over a period of years

negotiated with the cognizant agency.

16.b.(2) Expenditures for special purpose

equipment are allowable as direct charges

with the approval of the sponsoring agency.

15. In Section J, add subsection 22.f to read

as follows:

22.f. Interest on debt incurred after the

effective date of this revision to acquire,

replace or renovate capital assets (including

renovations, alterations, equipment, land,

and capital assets acquired through capital

leases), acquired after the effective date of

this revision and used in support of

sponsored agreements is subject to the

following conditions:

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

educational institution shall prepare, prior to

the acquisition or replacement of the facility,

a lease-purchase analysis in accordance with

§lll.44 of OMB Circular A–110, which

shows that a financed purchase, including a

capital lease is less costly to the educational

institution than other operating lease

alternatives, on a net present value basis.

Discount rates used shall be equal to the

educational institution’s anticipated interest

rates and shall be no higher than the fair

market rate available to the educational

institution from an unrelated (‘‘arm’s

length’’) third-party. The lease-purchase

analysis shall include a comparison of the

net present value of the projected total cost

comparisons of both alternatives over the

period the asset is expected to be used by the

educational institution. The cost

comparisons associated with purchasing the

facility shall include the estimated purchase

price, anticipated operating and maintenance

costs (including property taxes, if applicable)

not included in the debt financing, less any

estimated asset salvage value at the end of

the defined period. The cost comparison for

a capital lease shall include the estimated

total lease payments, any estimated bargain

purchase option, operating and maintenance

costs, and taxes not included in the capital

leasing arrangement, less any estimated

credits due under the lease at the end of the

defined period. Projected operating lease

costs shall be based on the anticipated cost

of leasing comparable facilities at fair market

rates under rental agreements that would be

renewed or reestablished over the period

defined above, and any expected

maintenance costs and allowable property

taxes to be borne by the educational

institution directly or as part of the lease

arrangement.

(2) The actual interest cost claimed is

predicated upon interest rates that are no

higher than the fair market rate available to

the educational institution from an unrelated

(arm’s length) third party.

(3) Investment earnings, including interest

income on bond or loan principal, pending

payment of the construction or acquisition

costs, are used to offset allowable interest

cost. Arbitrage earnings reportable to the

Internal Revenue Service are not required to

be offset against allowable interest costs.

(4) Reimbursements are limited to the least

costly alternative based on the total cost

analysis required under subsection (1). For

example, if an operating lease is determined

to be less costly than purchasing through

debt financing, then reimbursement is

limited to the amount determined if leasing

had been used. In all cases where a leasepurchase analysis is required to be

performed, Federal reimbursement shall be

based upon the least expensive alternative.

(5) Educational institutions are also subject

to the following conditions:

(a) For debt arrangements over $1 million,

unless the educational institution makes an

initial equity contribution to the asset

purchase of 25 percent or more, educational
Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices 20893

institutions shall reduce claims for interest

cost by an amount equal to imputed interest

earnings on excess cash flow, which is to be

calculated as follows. Annually, educational

institutions shall prepare a cumulative (from

the inception of the project) report of

monthly cash flows that includes inflows and

outflows, regardless of the funding source.

Inflows consist of depreciation expense,

amortization of capitalized construction

interest, and annual interest cost. For cash

flow calculations, the annual inflow figures

shall be divided by the number of months in

the year (i.e., usually 12) that the building is

in service for monthly amounts. Outflows

consist of initial equity contributions, debt

principal payments (less the pro rata share

attributable to the unallowable costs of land)

and interest payments. Where cumulative

inflows exceed cumulative outflows, interest

shall be calculated on the excess inflows for

that period and be treated as a reduction to

allowable interest cost. The rate of interest to

be used to compute earnings on excess cash

flows shall be the three-month Treasury bill

closing rate as of the last business day of that

month.

(b) Substantial relocation of federallysponsored activities from a facility financed

by indebtedness, the cost of which was

funded in whole or part through Federal

reimbursements, to another facility prior to

the expiration of a period of 20 years requires

notice to the cognizant agency. The extent of

the relocation, the amount of the Federal

participation in the financing, and the

depreciation and interest charged to date may

require negotiation and/or downward

adjustments of replacement space charged to

Federal programs in the future.

(c) The allowable costs to acquire facilities

and equipment are limited to a fair market

value available to the educational institution

from an unrelated (arm’s length) third party.

(6) The following definitions are to be used

for purposes of this section:

(a) ‘‘Initial equity contribution’’ means the

amount or value of contributions made by

non-Federal entities for the acquisition of the

asset prior to occupancy of facilities.

(b) ‘‘Asset costs’’ means the capitalizable

costs of an asset, including construction

costs, acquisition costs, and other such costs

capitalized in accordance with Generally

Accepted Accounting Principles (GAAP).

16. In Section K, add an instruction and

subsection 2.b(5) under the ‘‘Certificate of

F&A Costs’’ to read as follows:

For educational institutions that are

required to file a DS–2 in accordance with

Section C.14, the following statement shall be

added to the ‘‘Certificate of F&A Costs’’:

(5) The rate proposal is prepared using the

same cost accounting practices that are

disclosed in the DS–2, including its

amendments and revisions, filed with and

approved by the cognizant agency.

17. Throughout the entire Circular, except

for in Appendices A and B, replace the term

‘‘indirect costs’’ with ‘‘facilities and

administrative costs’’ and make the following

additional amendments:

a. In Section B, add the definition of

facilities and administrative (F&A) costs to

read as follows:

4. Facilities and administrative (F&A)

costs, for the purpose of this Circular, means

costs that are incurred for common or joint

objectives and, therefore, cannot be identified

readily and specifically with a particular

sponsored project, an instructional activity,

or any other institutional activity. F&A costs

are synonymous with ‘‘indirect’’ costs, as

previously used in this Circular and as

currently used in Appendices A and B. The

F&A cost categories are described in Section

F.1.

b. In Section E, replace subsection 1 to read

as follows:

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

incurred for common or joint objectives and

therefore cannot be identified readily and

specifically with a particular sponsored

project, an institutional activity, or any other

institutional activity. See Section F.1 for a

discussion of the components of F&A costs.

c. In Section E, replace subsection 2.e.(1)

to read as follows:

2.e.(1) F&A costs are the broad categories

of costs discussed in Section F.1.

d. In Section F, replace the first sentence

of subsection 1 to read as follows:

1. Definition of Facilities and

Administration. F&A costs are broad

categories of costs.

18. Add Appendices A and B for the

CASB’s Cost Accounting Standards (CAS)

and the CASB’s Disclosure Statement (DS–2).

19. In OMB’s recompilation of Circular A–

21 and its six Transmittal Memoranda,

throughout the Circular, consistent

conventions were introduced, including

some numbering changes, punctuation

changes, correction of typographical errors,

etc. In addition, in Section J, former

subsections 29, ‘‘Public information services

costs,’’ and 39, ‘‘Special services costs,’’ were

removed since their contents were merged

into subsections 1 and 3 in Transmittal

Memorandum No. 4.

EXECUTIVE OFFICE OF THE PRESIDENT

Office of Management and Budget

Circular No. A–21, Revised

To the Heads of Executive Departments and

Establishments

Subject: Cost principles for educational

institutions.

1. Purpose. This Circular establishes

principles for determining costs applicable to

grants, contracts, and other agreements with

educational institutions . The principles deal

with the subject of cost determination, and

make no attempt to identify the

circumstances or dictate the extent of agency

and institutional participation in the

financing of a particular project. The

principles are designed to provide that the

Federal Government bear its fair share of

total costs, determined in accordance with

generally accepted accounting principles,

except where restricted or prohibited by law.

Agencies are not expected to place additional

restrictions on individual items of cost.

Provision for profit or other increment above

cost is outside the scope of this Circular.

2. Supersession. The Circular supersedes

Federal Management Circular 73–8, dated

December 19, 1973. FMC 73–8 is revised and

reissued under its original designation of

OMB Circular No. A–21.

3. Applicability.

a. All Federal agencies that sponsor

research and development, training, and

other work at educational institutions shall

apply the provisions of this Circular in

determining the costs incurred for such work.

The principles shall also be used as a guide

in the pricing of fixed price or lump sum

agreements.

b. In addition, Federally Funded Research

and Development Centers associated with

educational institutions shall be required to

comply with the Cost Accounting Standards,

rules and regulations issued by the Cost

Accounting Standards Board, and set forth in

48 CFR part 99; provided that they are

subject thereto under defense related

contracts.

4. Responsibilities. The successful

application of cost accounting principles

requires development of mutual

understanding between representatives of

educational institutions and of the Federal

Government as to their scope,

implementation, and interpretation.

5. Attachment. The principles and related

policy guides are set forth in the Attachment,

‘‘Principles for determining costs applicable

to grants, contracts, and other agreements

with educational institutions.’’

6. Effective date. The provisions of this

Circular shall be effective October 1, 1979,

except for subsequent amendments

incorporated herein for which the effective

dates were specified in six Transmittal

Memoranda (47 FR 33658, 51 FR 20908, 51

FR 43487, 56 FR 50224, and 58 FR 39996 and

[insert today’s FR cite for this Part]). The

provisions shall be implemented by

institutions as of the start of their first fiscal

year beginning after that date. Earlier

implementation, or a delay in

implementation of individual provisions, is

permitted by mutual agreement between an

institution and the cognizant Federal agency.

7. Inquiries. Further information

concerning this Circular may be obtained by

contacting the Office of Federal Financial

Management, Office of Management and

Budget, Washington, DC 20503, telephone

(202) 395–3993.

Attachment.

Principles for Determining Costs Applicable

to Grants, Contracts, and Other Agreements

With Educational Institutions

Table of Contents

A. Purpose and scope

1. Objectives

2. Policy guides

3. Application

4. Inquiries

B. Definition of terms

1. Major functions of an institution

2. Sponsored agreement

3. Allocation

4. Facilities and administrative (F&A) costs

C. Basic considerations

1. Composition of total costs

2. Factors affecting allowability of costs

3. Reasonable costs

4. Allocable costs

5. Applicable credits

6. Costs incurred by State and local

governments

7. Limitations on allowance of costs

8. Collection of unallowable costs
20894 Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices

9. Adjustment of previously negotiated

F&A cost rates containing unallowable

costs

10. Consistency in estimating,

accumulating and reporting costs

11. Consistency in allocating costs incurred

for the same purpose

12. Accounting for unallowable costs

13. Cost accounting period

14. Disclosure statement

D. Direct costs

1. General

2. Application to sponsored agreements

E. F&A costs

1. General

2. Criteria for distribution

F. Identification and assignment of F&A costs

1. Definition of Facilities and

Administration

2. Depreciation and use allowances

3. Interest

4. Operation and maintenance expenses

5. General administration and general

expenses

6. Departmental administration expenses

7. Sponsored projects administration

8. Library expenses

9. Student administration and services

10. Offset for F&A expenses otherwise

provided for by the Federal Government

G. Determination and application of F&A cost

rate or rates

1. F&A cost pools

2. The distribution basis

3. Negotiated lump sum for F&A costs

4. Predetermined rates for F&A costs

5. Negotiated fixed rates and carry-forward

provisions

6. Provisional and final rates for F&A costs

7. Fixed rates for the life of the sponsored

agreement

8. Limitation on reimbursement of

administrative costs

9. Alternative method for administrative

costs

10. Individual rate components

11. Negotiation and approval of F&A rate

H. Simplified method for small institutions

1. General

2. Simplified procedure

I. Reserved

J. General provisions for selected items of

cost

1. Advertising and public relations costs

2. Alcoholic beverages

3. Alumni/ae activities

4. Bad debts

5. Civil defense costs

6. Commencement and convocation costs

7. Communication costs

8. Compensation for personal services

9. Contingency provisions

10. Deans of faculty and graduate schools

11. Defense and prosecution of criminal

and civil proceedings, claims, appeals

and patent infringement

12. Depreciation and use allowances

13. Donations and contributions

14. Employee morale, health, and welfare

costs and credits

15. Entertainment costs

16. Equipment and other capital

expenditures

17. Executive lobbying costs

18. Fines and penalties

19. Goods or services for personal use

20. Housing and personal living expenses

21. Insurance and indemnification

22. Interest, fund raising, and investment

management costs

23. Labor relations costs

24. Lobbying

25. Losses on other sponsored agreements

or contracts

26. Maintenance and repair costs

27. Material costs

28. Memberships, subscriptions and

professional activity costs

29. Patent costs

30. Plant security costs

31. Preagreement costs

32. Professional services costs

33. Profits and losses on disposition of

plant equipment or other capital assets

34. Proposal costs

35. Rearrangement and alteration costs

36. Reconversion costs

37. Recruiting costs

38. Rental cost of buildings and equipment

39. Royalties and other costs for use of

patents

40. Sabbatical leave costs

41. Scholarships and student aid costs

42. Selling and marketing

43. Severance pay

44. Specialized service facilities

45. Student activity costs

46. Taxes

47. Transportation costs

48. Travel costs

49. Termination costs applicable to

sponsored agreements

50. Trustees

K. Certification of charges

Exhibit A—List of Colleges and Universities

Subject to Section J.12.f of Circular A–21

Appendix A—CASB’s Cost Accounting

Standards (CAS)

Appendix B—CASB’s Disclosure Statement

(DS–2)

Principles for Determining Costs Applicable

to Grants, Contracts, and Other Agreements

With Educational Institutions

A. Purpose and Scope

1. Objectives. This Attachment provides

principles for determining the costs

applicable to research and development,

training, and other sponsored work

performed by colleges and universities under

grants, contracts, and other agreements with

the Federal Government. These agreements

are referred to as sponsored agreements.

2. Policy guides. The successful application

of these cost accounting principles requires

development of mutual understanding

between representatives of universities and

of the Federal Government as to their scope,

implementation, and interpretation. It is

recognized that—

a. The arrangements for Federal agency and

institutional participation in the financing of

a research, training, or other project are

properly subject to negotiation between the

agency and the institution concerned, in

accordance with such governmentwide

criteria or legal requirements as may be

applicable.

b. Each institution, possessing its own

unique combination of staff, facilities, and

experience, should be encouraged to conduct

research and educational activities in a

manner consonant with its own academic

philosophies and institutional objectives.

c. The dual role of students engaged in

research and the resulting benefits to

sponsored agreements are fundamental to the

research effort and shall be recognized in the

application of these principles.

d. Each institution, in the fulfillment of its

obligations, should employ sound

management practices.

e. The application of these cost accounting

principles should require no significant

changes in the generally accepted accounting

practices of colleges and universities.

However, the accounting practices of

individual colleges and universities must

support the accumulation of costs as required

by the principles, and must provide for

adequate documentation to support costs

charged to sponsored agreements.

f. Cognizant Federal agencies involved in

negotiating facilities and administrative

(F&A) cost rates and auditing should assure

that institutions are generally applying these

cost accounting principles on a consistent

basis. Where wide variations exist in the

treatment of a given cost item among

institutions, the reasonableness and

equitableness of such treatments should be

fully considered during the rate negotiations

and audit.

3. Application. These principles shall be

used in determining the allowable costs of

work performed by colleges and universities

under sponsored agreements. The principles

shall also be used in determining the costs

of work performed by such institutions under

subgrants, cost-reimbursement subcontracts,

and other awards made to them under

sponsored agreements. They also shall be

used as a guide in the pricing of fixed-price

contracts and subcontracts where costs are

used in determining the appropriate price.

The principles do not apply to:

a. Arrangements under which Federal

financing is in the form of loans,

scholarships, fellowships, traineeships, or

other fixed amounts based on such items as

education allowance or published tuition

rates and fees of an institution.

b. Capitation awards.

c. Other awards under which the

institution is not required to account to the

Federal Government for actual costs

incurred.

4. Inquiries. All inquiries from Federal

agencies concerning the cost principles

contained in this Circular, including the

administration and implementation of the

Cost Accounting Standards (CAS) (described

in Sections C.10 through C.13) and disclosure

statement (DS–2) requirements, shall be

addressed by the Office of Management and

Budget (OMB), Office of Federal Financial

Management, in coordination with the Cost

Accounting Standard Board (CASB) with

respect to inquiries concerning CAS.

Educational institutions’ inquiries should be

addressed to the cognizant agency.

B. Definition of Terms

1. Major functions of an institution refers

to instruction, organized research, other

sponsored activities and other institutional

activities as defined below:

a. Instruction means the teaching and

training activities of an institution. Except for
Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices 20895

research training as provided in subsection b,

this term includes all teaching and training

activities, whether they are offered for credits

toward a degree or certificate or on a noncredit basis, and whether they are offered

through regular academic departments or

separate divisions, such as a summer school

division or an extension division. Also

considered part of this major function are

departmental research, and, where agreed to,

university research.

(1) Sponsored instruction and training

means specific instructional or training

activity established by grant, contract, or

cooperative agreement. For purposes of the

cost principles, this activity may be

considered a major function even though an

institution’s accounting treatment may

include it in the instruction function.

(2) Departmental research means research,

development and scholarly activities that are

not organized research and, consequently, are

not separately budgeted and accounted for.

Departmental research, for purposes of this

document, is not considered as a major

function, but as a part of the instruction

function of the institution.

b. Organized research means all research

and development activities of an institution

that are separately budgeted and accounted

for. It includes:

(1) Sponsored research means all research

and development activities that are

sponsored by Federal and non-Federal

agencies and organizations . This term

includes activities involving the training of

individuals in research techniques

(commonly called research training) where

such activities utilize the same facilities as

other research and development activities

and where such activities are not included in

the instruction function.

(2) University research means all research

and development activities that are

separately budgeted and accounted for by the

institution under an internal application of

institutional funds. University research, for

purposes of this document, shall be

combined with sponsored research under the

function of organized research.

c. Other sponsored activities means

programs and projects financed by Federal

and non-Federal agencies and organizations

which involve the performance of work other

than instruction and organized research.

Examples of such programs and projects are

health service projects, and community

service programs. However, when any of

these activities are undertaken by the

institution without outside support, they may

be classified as other institutional activities.

d. Other institutional activities means all

activities of an institution except:

(1) instruction, departmental research,

organized research, and other sponsored

activities, as defined above;

(2) F&A cost activities identified in Section

F; and

(3) specialized service facilities described

in Section J.44. Other institutional activities

include operation of residence halls, dining

halls, hospitals and clinics, student unions,

intercollegiate athletics, bookstores, faculty

housing, student apartments, guest houses,

chapels, theaters, public museums, and other

similar auxiliary enterprises. This definition

also includes any other categories of

activities, costs of which are ‘‘unallowable’’

to sponsored agreements, unless otherwise

indicated in the agreements.

2. Sponsored agreement, for purposes of

this Circular, means any grant, contract, or

other agreement between the institution and

the Federal Government.

3. Allocation means the process of

assigning a cost, or a group of costs, to one

or more cost objective, in reasonable and

realistic proportion to the benefit provided or

other equitable relationship. A cost objective

may be a major function of the institution, a

particular service or project, a sponsored

agreement, or a F&A cost activity, as

described in Section F. The process may

entail assigning a cost(s) directly to a final

cost objective or through one or more

intermediate cost objectives.

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

for the purpose of this Circular, means costs

that are incurred for common or joint

objectives and, therefore, cannot be identified

readily and specifically with a particular

sponsored project, an instructional activity,

or any other institutional activity. F&A costs

are synonymous with ‘‘indirect’’ costs, as

previously used in this Circular and as

currently used in Appendices A and B. The

F&A cost categories are described in Section

F.1.

C. Basic Considerations

1. Composition of total costs. The cost of

a sponsored agreement is comprised of the

allowable direct costs incident to its

performance, plus the allocable portion of the

allowable F&A costs of the institution, less

applicable credits as described in subsection

5.

2. Factors affecting allowability of costs.

The tests of allowability of costs under these

principles are: (a) They must be reasonable;

(b) they must be allocable to sponsored

agreements under the principles and

methods provided herein; (c) they must be

given consistent treatment through

application of those generally accepted

accounting principles appropriate to the

circumstances; and (d) they must conform to

any limitations or exclusions set forth in

these principles or in the sponsored

agreement as to types or amounts of cost

items.

3. Reasonable costs. A cost may be

considered reasonable if the nature of the

goods or services acquired or applied, and

the amount involved therefor, reflect the

action that a prudent person would have

taken under the circumstances prevailing at

the time the decision to incur the cost was

made. Major considerations involved in the

determination of the reasonableness of a cost

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

generally recognized as necessary for the

operation of the institution or the

performance of the sponsored agreement; (b)

the restraints or requirements imposed by

such factors as arm’s-length bargaining,

Federal and State laws and regulations, and

sponsored agreement terms and conditions;

(c) whether or not the individuals concerned

acted with due prudence in the

circumstances, considering their

responsibilities to the institution, its

employees, its students, the Federal

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

the extent to which the actions taken with

respect to the incurrence of the cost are

consistent with established institutional

policies and practices applicable to the work

of the institution generally, including

sponsored agreements.

4. Allocable costs. a. A cost is allocable to

a particular cost objective (i.e., a specific

function, project, sponsored agreement,

department, or the like) if the goods or

services involved are chargeable or

assignable to such cost objective in

accordance with relative benefits received or

other equitable relationship. Subject to the

foregoing, a cost is allocable to a sponsored

agreement if (1) it is incurred solely to

advance the work under the sponsored

agreement; (2) it benefits both the sponsored

agreement and other work of the institution,

in proportions that can be approximated

through use of reasonable methods, or (3) it

is necessary to the overall operation of the

institution and, in light of the principles

provided in this Circular, is deemed to be

assignable in part to sponsored projects.

Where the purchase of equipment or other

capital items is specifically authorized under

a sponsored agreement, the amounts thus

authorized for such purchases are assignable

to the sponsored agreement regardless of the

use that may subsequently be made of the

equipment or other capital items involved.

b. Any costs allocable to a particular

sponsored agreement under the standards

provided in this Circular may not be shifted

to other sponsored agreements in order to

meet deficiencies caused by overruns or

other fund considerations, to avoid

restrictions imposed by law or by terms of

the sponsored agreement, or for other reasons

of convenience.

c. Any costs allocable to activities

sponsored by industry, foreign governments

or other sponsors may not be shifted to

federally-sponsored agreements.

d. Allocation and documentation standard.

(1) Cost principles. The recipient

institution is responsible for ensuring that

costs charged to a sponsored agreement are

allowable, allocable, and reasonable under

these cost principles.

(2) Internal controls. The institution’s

financial management system shall ensure

that no one person has complete control over

all aspects of a financial transaction.

(3) Direct cost allocation principles. If a

cost benefits two or more projects or

activities in proportions that can be

determined without undue effort or cost, the

cost should be allocated to the projects based

on the proportional benefit. If a cost benefits

two or more projects or activities in

proportions that cannot be determined

because of the interrelationship of the work

involved, then, notwithstanding subsection

b, the costs may be allocated or transferred

to benefited projects on any reasonable basis,

consistent with subsections d. (1) and (2).

(4) Documentation. Federal requirements

for documentation are specified in this

Circular, Circular A–110, ‘‘Uniform

Administrative Requirements for Grants and

Agreements with Institutions of Higher

Education, Hospitals, and Other Non-Profit
20896 Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices

Organizations,’’ and specific agency policies

on cost transfers. If the institution authorizes

the principal investigator or other individual

to have primary responsibility, given the

requirements of subsection d.(2), for the

management of sponsored agreement funds,

then the institution’s documentation

requirements for the actions of those

individuals (e.g., signature or initials of the

principal investigator or designee or use of a

password) will normally be considered

sufficient.

5. Applicable credits. a. The term

‘‘applicable credits’’ refers to those receipts

or negative expenditures that operate to offset

or reduce direct or F&A cost items. Typical

examples of such transactions are: purchase

discounts, rebates, or allowances; recoveries

or indemnities on losses; and adjustments of

overpayments or erroneous charges. This

term also includes ‘‘educational discounts’’

on products or services provided specifically

to educational institutions, such as discounts

on computer equipment, except where the

arrangement is clearly and explicitly

identified as a gift by the vendor.

b. In some instances, the amounts received

from the Federal Government to finance

institutional activities or service operations

should be treated as applicable credits.

Specifically, the concept of netting such

credit items against related expenditures

should be applied by the institution in

determining the rates or amounts to be

charged to sponsored agreements for services

rendered whenever the facilities or other

resources used in providing such services

have been financed directly, in whole or in

part, by Federal funds. (See Sections F.10,

J.12.a, and J.44 for areas of potential

application in the matter of direct Federal

financing.)

6. Costs incurred by State and local

governments. Costs incurred or paid by State

or local governments on behalf of their

colleges and universities for fringe benefit

programs, such as pension costs and FICA

and any other costs specifically incurred on

behalf of, and in direct benefit to, the

institutions, are allowable costs of such

institutions whether or not these costs are

recorded in the accounting records of the

institutions, subject to the following:

a. The costs meet the requirements of

subsections 1 through 5.

b. The costs are properly supported by cost

allocation plans in accordance with

applicable Federal cost accounting

principles.

c. The costs are not otherwise borne

directly or indirectly by the Federal

Government.

7. Limitations on allowance of costs.

Sponsored agreements may be subject to

statutory requirements that limit the

allowance of costs. When the maximum

amount allowable under a limitation is less

than the total amount determined in

accordance with the principles in this

Circular, the amount not recoverable under a

sponsored agreement may not be charged to

other sponsored agreements.

8. Collection of unallowable costs, excess

costs due to noncompliance with cost

policies, increased costs due to failure to

follow a disclosed accounting practice and

increased costs resulting from a change in

cost accounting practice. The following costs

shall be refunded (including interest) in

accordance with applicable Federal agency

regulations:

a. Costs specifically identified as

unallowable in Section J, either directly or

indirectly, and charged to the Federal

Government.

b. Excess costs due to failure by the

educational institution to comply with the

cost policies in this Circular.

c. Increased costs due to a noncompliant

cost accounting practice used to estimate,

accumulate, or report costs.

d. Increased costs resulting from a change

in accounting practice.

9. Adjustment of previously negotiated

F&A cost rates containing unallowable costs.

Negotiated F&A cost rates based on a

proposal later found to have included costs

that (a) are unallowable as specified by (i)

law or regulation, (ii) Section J of this

Circular, (iii) terms and conditions of

sponsored agreements, or (b) are unallowable

because they are clearly not allocable to

sponsored agreements, shall be adjusted, or

a refund shall be made, in accordance with

the requirements of this section. These

adjustments or refunds are designed to

correct the proposals used to establish the

rates and do not constitute a reopening of the

rate negotiation. The adjustments or refunds

will be made regardless of the type of rate

negotiated (predetermined, final, fixed, or

provisional).

a. For rates covering a future fiscal year of

the institution, the unallowable costs will be

removed from the F&A cost pools and the

rates appropriately adjusted.

b. For rates covering a past period, the

Federal share of the unallowable costs will be

computed for each year involved and a cash

refund (including interest chargeable in

accordance with applicable regulations) will

be made to the Federal Government. If cash

refunds are made for past periods covered by

provisional or fixed rates, appropriate

adjustments will be made when the rates are

finalized to avoid duplicate recovery of the

unallowable costs by the Federal

Government.

c. For rates covering the current period,

either a rate adjustment or a refund, as

described in subsections a and b, shall be

required by the cognizant agency. The choice

of method shall be at the discretion of the

cognizant agency, based on its judgment as

to which method would be most practical.

d. The amount or proportion of

unallowable costs included in each year’s

rate will be assumed to be the same as the

amount or proportion of unallowable costs

included in the base year proposal used to

establish the rate.

10. Consistency in estimating,

accumulating and reporting costs.

a. An educational institution’s practices

used in estimating costs in pricing a proposal

shall be consistent with the educational

institution’s cost accounting practices used

in accumulating and reporting costs.

b. An educational institution’s cost

accounting practices used in accumulating

and reporting actual costs for a sponsored

agreement shall be consistent with the

educational institution’s practices used in

estimating costs in pricing the related

proposal or application.

c. The grouping of homogeneous costs in

estimates prepared for proposal purposes

shall not per se be deemed an inconsistent

application of cost accounting practices

under subsection a when such costs are

accumulated and reported in greater detail on

an actual cost basis during performance of

the sponsored agreement.

d. Appendix A also reflects this

requirement, along with the purpose,

definitions, and techniques for application,

all of which are authoritative.

11. Consistency in allocating costs incurred

for the same purpose.

a. All costs incurred for the same purpose,

in like circumstances, are either direct costs

only or F&A costs only with respect to final

cost objectives. No final cost objective shall

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

costs incurred for the same purpose, in like

circumstances, have been included as a

direct cost of that or any other final cost

objective. Further, no final cost objective

shall have allocated to it as a direct cost any

cost, if other costs incurred for the same

purpose, in like circumstances, have been

included in any F&A cost pool to be allocated

to that or any other final cost objective.

b. Appendix A reflects this requirement

along with its purpose, definitions,

techniques for application, illustrations and

interpretations, all of which are authoritative.

12. Accounting for unallowable costs.

a. Costs expressly unallowable or mutually

agreed to be unallowable, including costs

mutually agreed to be unallowable directly

associated costs, shall be identified and

excluded from any billing, claim,

application, or proposal applicable to a

sponsored agreement.

b. Costs which specifically become

designated as unallowable as a result of a

written decision furnished by a Federal

official pursuant to sponsored agreement

disputes procedures shall be identified if

included in or used in the computation of

any billing, claim, or proposal applicable to

a sponsored agreement. This identification

requirement applies also to any costs

incurred for the same purpose under like

circumstances as the costs specifically

identified as unallowable under either this

subsection or subsection a.

c. Costs which, in a Federal official’s

written decision furnished pursuant to

sponsored agreement disputes procedures,

are designated as unallowable directly

associated costs of unallowable costs covered

by either subsection a or b shall be accorded

the identification required by subsection b.

d. The costs of any work project not

contractually authorized by a sponsored

agreement, whether or not related to

performance of a proposed or existing

sponsored agreement, shall be accounted for,

to the extent appropriate, in a manner which

permits ready separation from the costs of

authorized work projects.

e. All unallowable costs covered by

subsections a through d shall be subject to

the same cost accounting principles

governing cost allocability as allowable costs.

In circumstances where these unallowable
Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices 20897

costs normally would be part of a regular

F&A cost allocation base or bases, they shall

remain in such base or bases. Where a

directly associated cost is part of a category

of costs normally included in a F&A cost

pool that shall be allocated over a base

containing the unallowable cost with which

it is associated, such a directly associated

cost shall be retained in the F&A cost pool

and be allocated through the regular

allocation process.

f. Where the total of the allocable and

otherwise allowable costs exceeds a

limitation-of-cost or ceiling-price provision

in a sponsored agreement, full direct and

F&A cost allocation shall be made to the

sponsored agreement cost objective, in

accordance with established cost accounting

practices and standards which regularly

govern a given entity’s allocations to

sponsored agreement cost objectives. In any

determination of a cost overrun, the amount

thereof shall be identified in terms of the

excess of allowable costs over the ceiling

amount, rather than through specific

identification of particular cost items or cost

elements.

g. Appendix A reflects this requirement,

along with its purpose, definitions,

techniques for application, and illustrations

of this standard, all of which are

authoritative.

13. Cost accounting period.

a. Educational institutions shall use their

fiscal year as their cost accounting period,

except that:

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

only a part of a cost accounting period may

be allocated to cost objectives of that same

part of the period on the basis of data for that

part of the cost accounting period if the cost

is: (i) material in amount, (ii) accumulated in

a separate F&A cost pool or expense pool,

and (iii) allocated on the basis of an

appropriate direct measure of the activity or

output of the function during that part of the

period.

(2) An annual period other than the fiscal

year may, upon mutual agreement with the

Federal Government, be used as the cost

accounting period if the use of such period

is an established practice of the educational

institution and is consistently used for

managing and controlling revenues and

disbursements, and appropriate accruals,

deferrals or other adjustments are made with

respect to such annual periods.

(3) A transitional cost accounting period

other than a year shall be used whenever a

change of fiscal year occurs.

b. An educational institution shall follow

consistent practices in the selection of the

cost accounting period or periods in which

any types of expense and any types of

adjustment to expense (including priorperiod adjustments) are accumulated and

allocated.

c. The same cost accounting period shall be

used for accumulating costs in a F&A cost

pool as for establishing its allocation base,

except that the Federal Government and

educational institution may agree to use a

different period for establishing an allocation

base, provided:

(1) The practice is necessary to obtain

significant administrative convenience,

(2) The practice is consistently followed by

the educational institution,

(3) The annual period used is

representative of the activity of the cost

accounting period for which the F&A costs to

be allocated are accumulated, and

(4) The practice can reasonably be

estimated to provide a distribution to cost

objectives of the cost accounting period not

materially different from that which

otherwise would be obtained.

d. Appendix A reflects this requirement,

along with its purpose, definitions,

techniques for application and illustrations,

all of which are authoritative.

14. Disclosure Statement. a. Educational

institutions that received aggregate sponsored

agreements totaling $25 million or more

subject to this Circular during their most

recently completed fiscal year shall disclose

their cost accounting practices by filing a

Disclosure Statement (DS–2), which is

reproduced in Appendix B. With the

approval of the cognizant agency, an

educational institution may meet the DS–2

submission by submitting the DS–2 for each

business unit that received $25 million or

more in sponsored agreements.

b. The DS–2 shall be submitted to the

cognizant agency with a copy to the

educational institution’s audit cognizant

office.

c. Educational institutions receiving $25

million or more in sponsored agreements that

are not required to file a DS–2 pursuant to

48 CFR 9903.202–1 shall file a DS–2 covering

the first fiscal year beginning after the

publication date of this revision, within six

months after the end of that fiscal year.

Extensions beyond the above due date may

be granted by the cognizant agency on a caseby-case basis.

d. Educational institutions are responsible

for maintaining an accurate DS–2 and

complying with disclosed cost accounting

practices. Educational institutions must file

amendments to the DS–2 when disclosed

practices are changed to comply with a new

or modified standard, or when practices are

changed for other reasons. Amendments of a

DS–2 may be submitted at any time. If the

change is expected to have a material impact

on the educational institution’s negotiated

F&A cost rates, the revision shall be

approved by the cognizant agency before it is

implemented. Resubmission of a complete,

updated DS–2 is discouraged except when

there are extensive changes to disclosed

practices.

e. Cost and funding adjustments. Cost

adjustments shall be made by the cognizant

agency if an educational institution fails to

comply with the cost policies in this Circular

or fails to consistently follow its established

or disclosed cost accounting practices when

estimating, accumulating or reporting the

costs of sponsored agreements, if aggregate

cost impact on sponsored agreements is

material. The cost adjustment shall normally

be made on an aggregate basis for all affected

sponsored agreements through an adjustment

of the educational institution’s future F&A

costs rates or other means considered

appropriate by the cognizant agency. Under

the terms of CAS-covered contracts,

adjustments in the amount of funding

provided may also be required when the

estimated proposal costs were not

determined in accordance with established

cost accounting practices.

f. Overpayments. Excess amounts paid in

the aggregate by the Federal Government

under sponsored agreements due to a

noncompliant cost accounting practice used

to estimate, accumulate, or report costs shall

be credited or refunded, as deemed

appropriate by the cognizant agency. Interest

applicable to the excess amounts paid in the

aggregate during the period of

noncompliance shall also be determined and

collected in accordance with applicable

Federal agency regulations.

g. Compliant cost accounting practice

changes. Changes from one compliant cost

accounting practice to another compliant

practice that are approved by the cognizant

agency may require cost adjustments if the

change has a material effect on sponsored

agreements and the changes are deemed

appropriate by the cognizant agency.

h. Responsibilities. The cognizant agency

shall:

(1) Determine cost adjustments for all

sponsored agreements in the aggregate on

behalf of the Federal Government. Actions of

the cognizant agency official in making cost

adjustment determinations shall be

coordinated with all affected Federal

agencies to the extent necessary.

(2) Prescribe guidelines and establish

internal procedures to promptly determine

on behalf of the Federal Government that a

DS–2 adequately discloses the educational

institution’s cost accounting practices and

that the disclosed practices are compliant

with applicable CAS and the requirements of

this Circular.

(3) Distribute to all affected agencies any

DS–2 determination of adequacy and/or

noncompliance.

D. Direct Costs

1. General. Direct costs are those costs that

can be identified specifically with a

particular sponsored project, an instructional

activity, or any other institutional activity, or

that can be directly assigned to such

activities relatively easily with a high degree

of accuracy. Costs incurred for the same

purpose in like circumstances must be

treated consistently as either direct or F&A

costs. Where an institution treats a particular

type of cost as a direct cost of sponsored

agreements, all costs incurred for the same

purpose in like circumstances shall be

treated as direct costs of all activities of the

institution.

2. Application to sponsored agreements.

Identification with the sponsored work rather

than the nature of the goods and services

involved is the determining factor in

distinguishing direct from F&A costs of

sponsored agreements. Typical costs charged

directly to a sponsored agreement are the

compensation of employees for performance

of work under the sponsored agreement,

including related fringe benefit costs to the

extent they are consistently treated, in like

circumstances, by the institution as direct

rather than F&A costs; the costs of materials

consumed or expended in the performance of

the work; and other items of expense
20898 Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices

incurred for the sponsored agreement,

including extraordinary utility consumption.

The cost of materials supplied from stock or

services rendered by specialized facilities or

other institutional service operations may be

included as direct costs of sponsored

agreements, provided such items are

consistently treated, in like circumstances, by

the institution as direct rather than F&A

costs, and are charged under a recognized

method of computing actual costs, and

conform to generally accepted cost

accounting practices consistently followed by

the institution.

E. F&A Costs

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

incurred for common or joint objectives and

therefore cannot be identified readily and

specifically with a particular sponsored

project, an instructional activity, or any other

institutional activity. See Section F.1 for a

discussion of the components of F&A costs.

2. Criteria for distribution. a. Base period.

A base period for distribution of F&A costs

is the period during which the costs are

incurred. The base period normally should

coincide with the fiscal year established by

the institution, but in any event the base

period should be so selected as to avoid

inequities in the distribution of costs.

b. Need for cost groupings. The overall

objective of the F&A cost allocation process

is to distribute the F&A costs described in

Section F to the major functions of the

institution in proportions reasonably

consistent with the nature and extent of their

use of the institution’s resources. In order to

achieve this objective, it may be necessary to

provide for selective distribution by

establishing separate groupings of cost within

one or more of the F&A cost categories

referred to in subsection 1. In general, the

cost groupings established within a category

should constitute, in each case, a pool of

those items of expense that are considered to

be of like nature in terms of their relative

contribution to (or degree of remoteness

from) the particular cost objectives to which

distribution is appropriate. Cost groupings

should be established considering the general

guides provided in subsection c. Each such

pool or cost grouping should then be

distributed individually to the related cost

objectives, using the distribution base or

method most appropriate in the light of the

guides set forth in subsection d.

c. General considerations on cost

groupings. The extent to which separate cost

groupings and selective distribution would

be appropriate at an institution is a matter of

judgment to be determined on a case-by-case

basis. Typical situations which may warrant

the establishment of two or more separate

cost groupings (based on account

classification or analysis) within a F&A cost

category include but are not limited to the

following:

(1) Where certain items or categories of

expense relate solely to one of the major

functions of the institution or to less than all

functions, such expenses should be set aside

as a separate cost grouping for direct

assignment or selective allocation in

accordance with the guides provided in

subsections b and d.

(2) Where any types of expense ordinarily

treated as general administration or

departmental administration are charged to

sponsored agreements as direct costs,

expenses applicable to other activities of the

institution when incurred for the same

purposes in like circumstances must, through

separate cost groupings, be excluded from the

F&A costs allocable to those sponsored

agreements and included in the direct cost of

other activities for cost allocation purposes.

(3) Where it is determined that certain

expenses are for the support of a service unit

or facility whose output is susceptible of

measurement on a workload or other

quantitative basis, such expenses should be

set aside as a separate cost grouping for

distribution on such basis to organized

research, instructional, and other activities at

the institution or within the department.

(4) Where activities provide their own

purchasing, personnel administration,

building maintenance or similar service, the

distribution of general administration and

general expenses, or operation and

maintenance expenses to such activities

should be accomplished through cost

groupings which include only that portion of

central F&A costs (such as for overall

management) which are properly allocable to

such activities.

(5) Where the institution elects to treat

fringe benefits as F&A charges, such costs

should be set aside as a separate cost

grouping for selective distribution to related

cost objectives.

(6) The number of separate cost groupings

within a category should be held within

practical limits, after taking into

consideration the materiality of the amounts

involved and the degree of precision

attainable through less selective methods of

distribution.

d. Selection of distribution method.

(1) Actual conditions must be taken into

account in selecting the method or base to be

used in distributing individual cost

groupings. The essential consideration in

selecting a base is that it be the one best

suited for assigning the pool of costs to cost

objectives in accordance with benefits

derived; a traceable cause and effect

relationship; or logic and reason, where

neither benefit nor cause and effect

relationship is determinable.

(2) Where a cost grouping can be identified

directly with the cost objective benefited, it

should be assigned to that cost objective.

(3) Where the expenses in a cost grouping

are more general in nature, the distribution

may be based on a cost analysis study which

results in an equitable distribution of the

costs. Such cost analysis studies may take

into consideration weighting factors,

population, or space occupied if appropriate.

Cost analysis studies, however, must (a) be

appropriately documented in sufficient detail

for subsequent review by the cognizant

Federal agency, (b) distribute the costs to the

related cost objectives in accordance with the

relative benefits derived, (c) be statistically

sound, (d) be performed specifically at the

institution at which the results are to be

used, and (e) be reviewed periodically, but

not less frequently than every two years,

updated if necessary, and used consistently.

Any assumptions made in the study must be

stated and explained. The use of cost analysis

studies and periodic changes in the method

of cost distribution must be fully justified.

(4) If a cost analysis study is not

performed, or if the study does not result in

an equitable distribution of the costs, the

distribution shall be made in accordance

with the appropriate base cited in Section F,

unless one of the following conditions is met:

(a) it can be demonstrated that the use of a

different base would result in a more

equitable allocation of the costs, or that a

more readily available base would not

increase the costs charged to sponsored

agreements, or (b) the institution qualifies

for, and elects to use, the simplified method

for computing F&A cost rates described in

Section H.

(5) Notwithstanding subsection (3),

effective July 1, 1998, a cost analysis study

or base other than that in Section F shall not

be used to distribute utility, library or

student services costs. By that date, OMB

shall have in place an alternative

methodology for making payments on costs

related to utilities.

e. Order of distribution. (1) F&A costs are

the broad categories of costs discussed in

Section F.1.

(2) Depreciation and use allowances,

operation and maintenance expenses, and

general administrative and general expenses

should be allocated in that order to the

remaining F&A cost categories as well as to

the major functions and specialized service

facilities of the institution. Other cost

categories may be allocated in the order

determined to be most appropriate by the

institutions. When cross allocation of costs is

made as provided in subsection (3), this

order of allocation does not apply.

(3) Normally a F&A cost category will be

considered closed once it has been allocated

to other cost objectives, and costs may not be

subsequently allocated to it. However, a cross

allocation of costs between two or more F&A

cost categories may be used if such allocation

will result in a more equitable allocation of

costs. If a cross allocation is used, an

appropriate modification to the composition

of the F&A cost categories described in

Section F is required.

F. Identification and Assignment of F&A

Costs

1. Definition of Facilities and

Administration. F&A costs are broad

categories of costs. ‘‘Facilities’’ is defined as

depreciation and use allowances, interest on

debt associated with certain buildings,

equipment and capital improvements,

operation and maintenance expenses, and

library expenses. ‘‘Administration’’ is

defined as general administration and general

expenses, departmental administration,

sponsored projects administration, student

administration and services, and all other

types of expenditures not listed specifically

under one of the subcategories of Facilities

(including cross allocations from other

pools).

2. Depreciation and use allowances. a. The

expenses under this heading are the portion

of the costs of the institution’s buildings,

capital improvements to land and buildings,
Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices 20899

and equipment which are computed in

accordance with Section J.12.

b. In the absence of the alternatives

provided for in Section E.2.d, the expenses

included in this category shall be allocated

in the following manner:

(1) Depreciation or use allowances on

buildings used exclusively in the conduct of

a single function, and on capital

improvements and equipment used in such

buildings, shall be assigned to that function.

(2) Depreciation or use allowances on

buildings used for more than one function,

and on capital improvements and equipment

used in such buildings, shall be allocated to

the individual functions performed in each

building on the basis of usable square feet of

space, excluding common areas such as

hallways, stairwells, and rest rooms.

(3) Depreciation or use allowances on

buildings, capital improvements and

equipment related to space (e.g., individual

rooms, laboratories) used jointly by more

than one function (as determined by the

users of the space) shall be treated as follows.

The cost of each jointly used unit of space

shall be allocated to benefiting functions on

the basis of:

(a) the employee full-time equivalents

(FTEs) or salaries and wages of those

individual functions benefiting from the use

of that space; or

(b) institution-wide employee FTEs or

salaries and wages applicable to the

benefiting major functions (see Section B.1)

of the institution.

(4) Depreciation or use allowances on

certain capital improvements to land, such as

paved parking areas, fences, sidewalks, and

the like, not included in the cost of buildings,

shall be allocated to user categories of

students and employees on a full-time

equivalent basis. The amount allocated to the

student category shall be assigned to the

instruction function of the institution. The

amount allocated to the employee category

shall be further allocated to the major

functions of the institution in proportion to

the salaries and wages of all employees

applicable to those functions.

3. Interest. Interest on debt associated with

certain buildings, equipment and capital

improvements, as defined in Sections J.22.e

and f, shall be classified as an expenditure

under the category Facilities. These costs

shall be allocated in the same manner as the

depreciation or use allowances on the

buildings, equipment and capital

improvements to which the interest relates.

4. Operation and maintenance expenses. a.

The expenses under this heading are those

that have been incurred for the

administration, supervision, operation,

maintenance, preservation, and protection of

the institution’s physical plant. They include

expenses normally incurred for such items as

janitorial and utility services; repairs and

ordinary or normal alterations of buildings,

furniture and equipment; care of grounds;

maintenance and operation of buildings and

other plant facilities; security; earthquake

and disaster preparedness; environmental

safety; hazardous waste disposal; property,

liability and all other insurance relating to

property; space and capital leasing; facility

planning and management; and, central

receiving. The operation and maintenance

expense category should also include its

allocable share of fringe benefit costs,

depreciation and use allowances, and interest

costs.

b. In the absence of the alternatives

provided for in Section E.2.d, the expenses

included in this category shall be allocated

in the same manner as described in

subsection 2.b for depreciation and use

allowances.

5. General administration and general

expenses. a. The expenses under this heading

are those that have been incurred for the

general executive and administrative offices

of educational institutions and other expense

of a general character which do not relate

solely to any major function of the

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

organized research, (3) other sponsored

activities, or (4) other institutional activities.

The general administration and general

expense category should also include its

allocable share of fringe benefit costs,

operation and maintenance expense,

depreciation and use allowances, and interest

costs. Examples of general administration

and general expenses include: those expenses

incurred by administrative offices that serve

the entire university system of which the

institution is a part; central offices of the

institution such as the President’s or

Chancellor’s office, the offices for institutionwide financial management, business

services, budget and planning, personnel

management, and safety and risk

management; the office of the General

Counsel; and, the operations of the central

administrative management information

systems. General administration and general

expenses shall not include expenses incurred

within non- university-wide deans’ offices,

academic departments, organized research

units, or similar organizational units. (See

subsection 6, Departmental administration

expenses.)

b. In the absence of the alternatives

provided for in Section E.2.d, the expenses

included in this category shall be grouped

first according to common major functions of

the institution to which they render services

or provide benefits. The aggregate expenses

of each group shall then be allocated to

serviced or benefited functions on the

modified total cost basis. Modified total costs

consist of the same elements as those in

Section G.2. When an activity included in

this F&A cost category provides a service or

product to another institution or

organization, an appropriate adjustment must

be made to either the expenses or the basis

of allocation or both, to assure a proper

allocation of costs.

6. Departmental administration expenses.

a. The expenses under this heading are those

that have been incurred for administrative

and supporting services that benefit common

or joint departmental activities or objectives

in academic deans’ offices, academic

departments and divisions, and organized

research units. Organized research units

include such units as institutes, study

centers, and research centers. Departmental

administration expenses are subject to the

following limitations.

(1) Academic deans’ offices. Salaries and

operating expenses are limited to those

attributable to administrative functions.

(2) Academic departments:

(a) Salaries and fringe benefits attributable

to the administrative work (including bid and

proposal preparation) of faculty (including

department heads), and other professional

personnel conducting research and/or

instruction, shall be allowed at a rate of 3.6

percent of modified total direct costs. This

category does not include professional

business or professional administrative

officers. This allowance shall be added to the

computation of the F&A cost rate for major

functions in Section G; the expenses covered

by the allowance shall be excluded from the

departmental administration cost pool. No

documentation is required to support this

allowance.

(b) Other administrative and supporting

expenses incurred within academic

departments are allowable provided they are

treated consistently in like circumstances.

This would include expenses such as the

salaries of secretarial and clerical staffs, the

salaries of administrative officers and

assistants, travel, office supplies, stockrooms,

and the like.

(3) Other fringe benefit costs applicable to

the salaries and wages included in

subsections (1) and (2) are allowable, as well

as an appropriate share of general

administration and general expenses,

operation and maintenance expenses, and

depreciation and/or use allowances.

(4) Federal agencies may authorize

reimbursement of additional costs for

department heads and faculty only in

exceptional cases where an institution can

demonstrate undue hardship or detriment to

project performance.

b. In developing the departmental

administration cost pool, special care should

be exercised to ensure that costs incurred for

the same purpose in like circumstances are

treated consistently as either direct or F&A

costs. For example, salaries of technical staff,

laboratory supplies (e.g., chemicals),

telephone toll charges, animals, animal care

costs, computer costs, travel costs, and

specialized shop costs shall be treated as

direct cost wherever identifiable to a

particular cost objective. Direct charging of

these costs may be accomplished through

specific identification of individual costs to

benefiting cost objectives, or through

recharge centers or specialized service

facilities, as appropriate under the

circumstances. The salaries of administrative

and clerical staff should normally be treated

as F&A costs. Direct charging of these costs

may be appropriate where a major project or

activity explicitly budgets for administrative

or clerical services and individuals involved

can be specifically identified with the project

or activity. Items such as office supplies,

postage, local telephone costs, and

memberships shall normally be treated as

F&A costs.

c. In the absence of the alternatives

provided for in Section E.2.d, the expenses

included in this category shall be allocated

as follows:

(1) The administrative expenses of the

dean’s office of each college and school shall
20900 Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices

be allocated to the academic departments

within that college or school on the modified

total cost basis.

(2) The administrative expenses of each

academic department, and the department’s

share of the expenses allocated in subsection

(1) shall be allocated to the appropriate

functions of the department on the modified

total cost basis.

7. Sponsored projects administration. a.

The expenses under this heading are limited

to those incurred by a separate

organization(s) established primarily to

administer sponsored projects, including

such functions as grant and contract

administration (Federal and non-Federal),

special security, purchasing, personnel,

administration, and editing and publishing of

research and other reports. They include the

salaries and expenses of the head of such

organization, assistants, and immediate staff,

together with the salaries and expenses of

personnel engaged in supporting activities

maintained by the organization, such as stock

rooms, stenographic pools and the like. This

category also includes an allocable share of

fringe benefit costs, general administration

and general expenses, operation and

maintenance expenses, depreciation/use

allowances. Appropriate adjustments will be

made for services provided to other functions

or organizations.

b. In the absence of the alternatives

provided for in Section E.2.d, the expenses

included in this category shall be allocated

to the major functions of the institution

under which the sponsored projects are

conducted on the basis of the modified total

cost of sponsored projects.

c. An appropriate adjustment shall be

made to eliminate any duplicate charges to

sponsored agreements when this category

includes similar or identical activities as

those included in the general administration

and general expense category or other F&A

cost items, such as accounting, procurement,

or personnel administration.

8. Library expenses. a. The expenses under

this heading are those that have been

incurred for the operation of the library,

including the cost of books and library

materials purchased for the library, less any

items of library income that qualify as

applicable credits under Section C.5. The

library expense category should also include

the fringe benefits applicable to the salaries

and wages included therein, an appropriate

share of general administration and general

expense, operation and maintenance

expense, and depreciation and use

allowances. Costs incurred in the purchases

of rare books (museum-type books) with no

value to sponsored agreements should not be

allocated to them.

b. In the absence of the alternatives

provided for in Section E.2.d, the expenses

included in this category shall be allocated

first on the basis of primary categories of

users, including students, professional

employees, and other users.

(1) The student category shall consist of

full-time equivalent students enrolled at the

institution, regardless of whether they earn

credits toward a degree or certificate.

(2) The professional employee category

shall consist of all faculty members and other

professional employees of the institution, on

a full-time equivalent basis.

(3) The other users category shall consist

of all other users of library facilities.

c. Amount allocated in subsection b shall

be assigned further as follows:

(1) The amount in the student category

shall be assigned to the instruction function

of the institution.

(2) The amount in the professional

employee category shall be assigned to the

major functions of the institution in

proportion to the salaries and wages of all

faculty members and other professional

employees applicable to those functions.

(3) The amount in the other users category

shall be assigned to the other institutional

activities function of the institution.

9. Student administration and services. a.

The expenses under this heading are those

that have been incurred for the

administration of student affairs and for

services to students, including expenses of

such activities as deans of students,

admissions, registrar, counseling and

placement services, student advisers, student

health and infirmary services, catalogs, and

commencements and convocations. The

salaries of members of the academic staff

whose responsibilities to the institution

require administrative work that benefits

sponsored projects may also be included to

the extent that the portion charged to student

administration is determined in accordance

with Section J.8. This expense category also

includes the fringe benefit costs applicable to

the salaries and wages included therein, an

appropriate share of general administration

and general expenses, operation and

maintenance, and use allowances and/or

depreciation.

b. In the absence of the alternatives

provided for in Section E.2.d, the expenses

in this category shall be allocated to the

instruction function, and subsequently to

sponsored agreements in that function.

10. Offset for F&A expenses otherwise

provided for by the Federal Government. a.

The items to be accumulated under this

heading are the reimbursements and other

payments from the Federal Government

which are made to the institution to support

solely, specifically, and directly, in whole or

in part, any of the administrative or service

activities described in subsections 2 through

9.

b. The items in this group shall be treated

as a credit to the affected individual F&A cost

category before that category is allocated to

benefiting functions.

G. Determination and Application of F&A

Cost Rate or Rates

1. F&A cost pools. a. (1) Subject to

subsection b, the separate categories of F&A

costs allocated to each major function of the

institution as prescribed in Section F shall be

aggregated and treated as a common pool for

that function. The amount in each pool shall

be divided by the distribution base described

in subsection 2 to arrive at a single F&A cost

rate for each function.

(2) The rate for each function is used to

distribute F&A costs to individual sponsored

agreements of that function. Since a common

pool is established for each major function of

the institution, a separate F&A cost rate

would be established for each of the major

functions described in Section B.1 under

which sponsored agreements are carried out.

(3) Each institution’s F&A cost rate process

must be appropriately designed to ensure

that Federal sponsors do not in any way

subsidize the F&A costs of other sponsors,

specifically activities sponsored by industry

and foreign governments. Accordingly, each

allocation method used to identify and

allocate the F&A cost pools, as described in

Sections E.2 and F.2 through F.9, must

contain the full amount of the institution’s

modified total costs or other appropriate

units of measurement used to make the

computations. In addition, the final rate

distribution base (as defined in subsection 2)

for each major function (organized research,

instruction, etc., as described in Section B.1)

shall contain all the programs or activities

which utilize the F&A costs allocated to that

major function. At the time a F&A cost

proposal is submitted to a cognizant Federal

agency, each institution must describe the

process it uses to ensure that Federal funds

are not used to subsidize industry and

foreign government funded programs.

b. In some instances a single rate basis for

use across the board on all work within a

major function at an institution may not be

appropriate. A single rate for research, for

example, might not take into account those

different environmental factors and other

conditions which may affect substantially the

F&A costs applicable to a particular segment

of research at the institution. A particular

segment of research may be that performed

under a single sponsored agreement or it may

consist of research under a group of

sponsored agreements performed in a

common environment. The environmental

factors are not limited to the physical

location of the work. Other important factors

are the level of the administrative support

required, the nature of the facilities or other

resources employed, the scientific disciplines

or technical skills involved, the

organizational arrangements used, or any

combination thereof. Where a particular

segment of a sponsored agreement is

performed within an environment which

appears to generate a significantly different

level of F&A costs, provisions should be

made for a separate F&A cost pool applicable

to such work. The separate F&A cost pool

should be developed during the regular

course of the rate determination process and

the separate F&A cost rate resulting

therefrom should be utilized; provided it is

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

significantly from that which would have

been obtained under subsection a, and (2) the

volume of work to which such rate would

apply is material in relation to other

sponsored agreements at the institution.

2. The distribution basis. F&A costs shall

be distributed to applicable sponsored

agreements and other benefiting activities

within each major function (see Section B.1)

on the basis of modified total direct costs,

consisting of all salaries and wages, fringe

benefits, materials and supplies, services,

travel, and subgrants and subcontracts up to

the first $25,000 of each subgrant or

subcontract (regardless of the period covered
Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices 20901

by the subgrant or subcontract). Equipment,

capital expenditures, charges for patient care

and tuition remission, rental costs,

scholarships, and fellowships as well as the

portion of each subgrant and subcontract in

excess of $25,000 shall be excluded from

modified total direct costs. Other items may

only be excluded where necessary to avoid

a serious inequity in the distribution of F&A

costs. For this purpose, a F&A cost rate

should be determined for each of the separate

F&A cost pools developed pursuant to

subsection 1. The rate in each case should be

stated as the percentage which the amount of

the particular F&A cost pool is of the

modified total direct costs identified with

such pool.

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

negotiated fixed amount in lieu of F&A costs

may be appropriate for self-contained, offcampus, or primarily subcontracted activities

where the benefits derived from an

institution’s F&A services cannot be readily

determined. Such negotiated F&A costs will

be treated as an offset before allocation to

instruction, organized research, other

sponsored activities, and other institutional

activities. The base on which such remaining

expenses are allocated should be

appropriately adjusted.

4. Predetermined rates for F&A costs.

Public Law 87–638 (76 Stat. 437) authorizes

the use of predetermined rates in

determining the ‘‘indirect costs’’ (F&A costs

in this Circular) applicable under research

agreements with educational institutions.

The stated objectives of the law are to

simplify the administration of cost-type

research and development contracts

(including grants) with educational

institutions, to facilitate the preparation of

their budgets, and to permit more

expeditious closeout of such contracts when

the work is completed. In view of the

potential advantages offered by this

procedure, negotiation of predetermined

rates for F&A costs for a period of two to four

years should be the norm in those situations

where the cost experience and other

pertinent facts available are deemed

sufficient to enable the parties involved to

reach an informed judgment as to the

probable level of F&A costs during the

ensuing accounting periods.

5. Negotiated fixed rates and carry-forward

provisions. When a fixed rate is negotiated in

advance for a fiscal year (or other time

period), the over- or under-recovery for that

year may be included as an adjustment to the

F&A cost for the next rate negotiation. When

the rate is negotiated before the carry-forward

adjustment is determined, the carry-forward

amount may be applied to the next

subsequent rate negotiation. When such

adjustments are to be made, each fixed rate

negotiated in advance for a given period will

be computed by applying the expected F&A

costs allocable to sponsored agreements for

the forecast period plus or minus the carryforward adjustment (over- or under-recovery)

from the prior period, to the forecast

distribution base. Unrecovered amounts

under lump-sum agreements or cost-sharing

provisions of prior years shall not be carried

forward for consideration in the new rate

negotiation. There must, however, be an

advance understanding in each case between

the institution and the cognizant Federal

agency as to whether these differences will

be considered in the rate negotiation rather

than making the determination after the

differences are known. Further, institutions

electing to use this carry-forward provision

may not subsequently change without prior

approval of the cognizant Federal agency. In

the event that an institution returns to a

postdetermined rate, any over- or underrecovery during the period in which

negotiated fixed rates and carry-forward

provisions were followed will be included in

the subsequent postdetermined rates. Where

multiple rates are used, the same procedure

will be applicable for determining each rate.

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

Where the cognizant agency determines that

cost experience and other pertinent facts do

not justify the use of predetermined rates, or

a fixed rate with a carry-forward, or if the

parties cannot agree on an equitable rate, a

provisional rate shall be established. To

prevent substantial overpayment or

underpayment, the provisional rate may be

adjusted by the cognizant agency during the

institution’s fiscal year. Predetermined or

fixed rates may replace provisional rates at

any time prior to the close of the institution’s

fiscal year. If a provisional rate is not

replaced by a predetermined or fixed rate

prior to the end of the institution’s fiscal

year, a final rate will be established and

upward or downward adjustments will be

made based on the actual allowable costs

incurred for the period involved.

7. Fixed rates for the life of the sponsored

agreement. a. Federal agencies shall use the

negotiated rates for F&A costs in effect at the

time of the initial award throughout the life

of the sponsored agreement. ‘‘Life’’ for the

purpose of this subsection means each

competitive segment of a project. A

competitive segment is a period of years

approved by the Federal funding agency at

the time of the award. If negotiated rate

agreements do not extend through the life of

the sponsored agreement at the time of the

initial award, then the negotiated rate for the

last year of the sponsored agreement shall be

extended through the end of the life of the

sponsored agreement. Award levels for

sponsored agreements may not be adjusted in

future years as a result of changes in

negotiated rates.

b. When an educational institution does

not have a negotiated rate with the Federal

Government at the time of the award

(because the educational institution is a new

grantee or the parties cannot reach agreement

on a rate), the provisional rate used at the

time of the award shall be adjusted once a

rate is negotiated and approved by the

cognizant agency.

8. Limitation on reimbursement of

administrative costs. a. Notwithstanding the

provisions of subsection 1.a, the

administrative costs charged to sponsored

agreements awarded or amended (including

continuation and renewal awards) with

effective dates beginning on or after the start

of the institution’s first fiscal year which

begins on or after October 1, 1991, shall be

limited to 26% of modified total direct costs

(as defined in subsection 2) for the total of

General Administration and General

Expenses, Departmental Administration,

Sponsored Projects Administration, and

Student Administration and Services

(including their allocable share of

depreciation and/or use allowances, interest

costs, operation and maintenance expenses,

and fringe benefits costs, as provided by

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

types of expenditures not listed specifically

under one of the subcategories of facilities in

Section F.

b. Existing F&A cost rates that affect

institutions’ fiscal years which begin on or

after October 1, 1991, shall be unilaterally

amended by the cognizant Federal agency to

reflect the cost limitation in subsection a.

c. Permanent rates established prior to this

revision which have been amended in

accordance with subsection b may be

renegotiated. However, no such renegotiated

rate may exceed the rate which would have

been in effect if the agreement had remained

in effect; nor may the administrative portion

of any renegotiated rate exceed the limitation

in subsection a.

d. Institutions should not change their

accounting or cost allocation methods which

were in effect on May 1, 1991, if the effect

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

type of cost from F&A to direct, or (ii)

reclassify costs, or increase allocations, from

the administrative pools identified in

subsection a to the other F&A cost pools or

fringe benefits. Cognizant Federal agencies

are authorized to permit changes where an

institution’s charging practices are at

variance with acceptable practices followed

by a substantial majority of other institutions.

9. Alternative method for administrative

costs. a. Notwithstanding the provisions of

subsection 1.a, an institution may elect to

claim fixed allowance for the

‘‘Administration’’ portion of F&A costs. The

allowance could be either 24% of modified

total direct costs or a percentage equal to

95% of the most recently negotiated fixed or

predetermined rate for the cost pools

included under ‘‘Administration’’ as defined

in Section F.1, whichever is less, provided

that no accounting or cost allocation changes

with the effects described in subsection 8.d

have occurred. Under this alternative, no cost

proposal need be prepared for the

‘‘Administration’’ portion of the F&A cost

rate nor is further identification or

documentation of these costs required (see

subsection c). Where a negotiated F&A cost

agreement includes this alternative, an

institution shall make no further charges for

the expenditure categories described in

Sections F.5, F.6, F.7 and F.9.

b. In negotiations of rates for subsequent

periods, an institution that has elected the

option of subsection a may continue to

exercise it at the same rate without further

identification or documentation of costs,

provided that no accounting or cost

allocation changes with the effects described

in subsection 8.d have occurred.

c. If an institution elects to accept a

threshold rate, it is not required to perform

a detailed analysis of its administrative costs.

However, in order to compute the facilities

components of its F&A cost rate, the

institution must reconcile its F&A cost
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proposal to its financial statements and make

appropriate adjustments and reclassifications

to identify the costs of each major function

as defined in Section B.1, as well as to

identify and allocate the facilities

components. Administrative costs that are

not identified as such by the institution’s

accounting system (such as those incurred in

academic departments) will be classified as

instructional costs for purposes of

reconciling F&A cost proposals to financial

statements and allocating facilities costs.

10. Individual rate components. In order to

satisfy the requirements of Section J.12.f and

to provide mutually agreed upon information

for management purposes, each F&A cost rate

negotiation or determination shall include

development of a rate for each F&A cost pool

as well as the overall F&A cost rate.

11. Negotiation and approval of F&A rate.

a. Cognizant agency assignments. ‘‘A

cognizant agency’’ means the Federal agency

responsible for negotiating and approving

F&A rates for an educational institution on

behalf of all Federal agencies.

(1) Cost negotiation cognizance is assigned

to the Department of Health and Human

Services (HHS) or the Department of

Defense’s Office of Naval Research (DOD),

normally depending on which of the two

agencies (HHS or DOD) provides more funds

to the educational institution for the most

recent three years. Information on funding

shall be derived from relevant data gathered

by the National Science Foundation. In cases

where neither HHS nor DOD provides

Federal funding to an educational institution,

the cognizant agency assignment shall

default to HHS. Notwithstanding the method

for cognizance determination described

above, other arrangements for cognizance of

a particular educational institution may also

be based in part on the types of research

performed at the educational institution and

shall be decided based on mutual agreement

between HHS and DOD.

(2) Cognizant assignments as of December

31, 1995, shall continue in effect through

educational institutions’ fiscal years ending

during 1997, or the period covered by

negotiated agreements in effect on December

31, 1995, whichever is later, except for those

educational institutions with cognizant

agencies other than HHS or DOD. Cognizance

for these educational institutions shall

transfer to HHS or DOD at the end of the

period covered by the current negotiated rate

agreement. After cognizance is established, it

shall continue for a five-year period.

b. Acceptance of rates. The negotiated rates

shall be accepted by all Federal agencies.

Only under special circumstances, when

required by law or regulation, may an agency

use a rate different from the negotiated rate

for a class of sponsored agreements or a

single sponsored agreement.

c. Correcting deficiencies. The cognizant

agency shall negotiate changes needed to

correct systems deficiencies relating to

accountability for sponsored agreements.

Cognizant agencies shall address the

concerns of other affected agencies, as

appropriate.

d. Resolving questioned costs. The

cognizant agency shall conduct any

necessary negotiations with an educational

institution regarding amounts questioned by

audit that are due the Federal Government

related to costs covered by a negotiated

agreement.

e. Reimbursement. Reimbursement to

cognizant agencies for work performed under

Circular A–21 may be made by

reimbursement billing under the Economy

Act, 31 U.S.C. 1535.

f. Procedure for establishing facilities and

administrative rates. The cognizant agency

shall arrange with the educational institution

to provide copies of rate proposals to all

interested agencies. Agencies wanting such

copies should notify the cognizant agency.

Rates shall be established by one of the

following methods:

(1) Formal negotiation. The cognizant

agency is responsible for negotiating and

approving rates for an educational institution

on behalf of all Federal agencies. Noncognizant Federal agencies, which award

sponsored agreements to an educational

institution, shall notify the cognizant agency

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

special cost rates) which could affect the

negotiation process. The cognizant agency

shall address the concerns of all interested

agencies, as appropriate. A pre-negotiation

conference may be scheduled among all

interested agencies, if necessary. The

cognizant agency shall then arrange a

negotiation conference with the educational

institution.

(2) Other than formal negotiation. The

cognizant agency and educational institution

may reach an agreement on rates without a

formal negotiation conference; for example,

through correspondence or use of the

simplified method described in this Circular.

g. Formalizing determinations and

agreements. The cognizant agency shall

formalize all determinations or agreements

reached with an educational institution and

provide copies to other agencies having an

interest.

h. Disputes and disagreements. Where the

cognizant agency is unable to reach

agreement with an educational institution

with regard to rates or audit resolution, the

appeal system of the cognizant agency shall

be followed for resolution of the

disagreement.

H. Simplified Method for Small Institutions.

1. General. a. Where the total direct cost of

work covered by this Circular at an

institution does not exceed $10 million in a

fiscal year, the use of the simplified

procedure described in subsection 2, may be

used in determining allowable F&A costs.

Under this simplified procedure, the

institution’s most recent annual financial

report and immediately available supporting

information with salaries and wages

segregated from other costs, will be utilized

as a basis for determining the F&A cost rate

applicable to all sponsored agreements.

b. The simplified procedure should not be

used where it produces results which appear

inequitable to the Federal Government or the

institution. In any such case, F&A costs

should be determined through use of the

regular procedure.

2. Simplified procedure. a. Establish the

total amount of salaries and wages paid to all

employees of the institution.

b. Establish a F&A cost pool consisting of

the expenditures (exclusive of capital items

and other costs specifically identified as

unallowable) which customarily are

classified under the following titles or their

equivalents:

(1) General administration and general

expenses (exclusive of costs of student

administration and services, student

activities, student aid, and scholarships).

(2) Operation and maintenance of physical

plant; and depreciation and use allowances;

after appropriate adjustment for costs

applicable to other institutional activities.

(3) Library.

(4) Department administration expenses,

which will be computed as 20 percent of the

salaries and expenses of deans and heads of

departments.

In those cases where expenditures

classified under subsection (1) have

previously been allocated to other

institutional activities, they may be included

in the F&A cost pool. The total amount of

salaries and wages included in the F&A cost

pool must be separately identified.

c. Establish a salary and wage distribution

base, determined by deducting from the total

of salaries and wages as established in

subsection a the amount of salaries and

wages included under subsection b.

d. Establish the F&A cost rate, determined

by dividing the amount in the F&A cost pool,

subsection b, by the amount of the

distribution base, subsection c.

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

and wages for individual agreements to

determine the amount of F&A costs allocable

to such agreements.

J. General Provisions for Selected Items of

Cost

Sections 1 through 50 provide principles to

be applied in establishing the allowability of

certain items involved in determining cost.

These principles should apply irrespective of

whether a particular item of cost is properly

treated as direct cost or F&A cost. Failure to

mention a particular item of cost is not

intended to imply that it is either allowable

or unallowable; rather, determination as to

allowability in each case should be based on

the treatment provided for similar or related

items of cost. In case of a discrepancy

between the provisions of a specific

sponsored agreement and the provisions

below, the agreement should govern.

1. Advertising and public relations costs. a.

The term advertising costs means the costs of

advertising media and corollary

administrative costs. Advertising media

include magazines, newspapers, radio and

television 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 institution or maintaining or

promoting understanding and favorable

relations with the community or public at

large or any segment of the public.

c. The only allowable advertising costs are

those which are solely for:

(1) The recruitment of personnel required

for the performance by the institution of

obligations arising under the sponsored
Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices 20903

agreement, when considered in conjunction

with all other recruitment costs, as set forth

in Section J.37;

(2) The procurement of goods and services

for the performance of the sponsored

agreement;

(3) The disposal of scrap or surplus

materials acquired in the performance of the

sponsored agreement except when

institutions are reimbursed for disposal costs

at a predetermined amount in accordance

with Circular A–110; or

(4) Other specific purposes necessary to

meet the requirements of the sponsored

agreement.

d. The only allowable public relations

costs are:

(1) Costs specifically required by

sponsored agreements;

(2) Costs of communicating with the public

and press pertaining to specific activities or

accomplishments which result from

performance of sponsored agreements; or

(3) Costs of conducting general liaison with

news media and government public relations

officers, to the extent that such activities are

limited to communication and liaison

necessary to keep the public informed on

matters of public concern, such as notices of

contract/grant awards, financial matters, etc.

e. Costs identified in subsections c and d

if incurred for more than one sponsored

agreement or for both sponsored work and

other work of the institution, are allowable to

the extent that the principles in Sections D

and E are observed.

f. Unallowable advertising and public

relations costs include the following:

(1) All advertising and public relations

costs other than as specified in subsections

c, d, and e;

(2) Costs of convocations or other events

related to instruction or other institutional

activities including:

(i) Costs of displays, demonstrations, and

exhibits;

(ii) Costs of meeting rooms, hospitality

suites, and other special facilities used in

conjunction with shows and other special

events; and

(iii) Salaries and wages of employees

engaged in setting up and displaying

exhibits, making demonstrations, and

providing briefings;

(3) Costs of promotional items and

memorabilia, including models, gifts, and

souvenirs;

(4) Costs of advertising and public relations

designed solely to promote the institution.

2. Alcoholic beverages. Costs of alcoholic

beverages are unallowable.

3. Alumni/ae activities. Costs incurred for,

or in support of, alumni/ae activities and

similar services are unallowable.

4. Bad debts. Any losses, whether actual or

estimated, arising from uncollectible

accounts and other claims, related collections

costs, and related legal costs, are

unallowable.

5. Civil defense costs. Civil defense costs

are those incurred in planning for, and the

protection of life and property against, the

possible effects of enemy attack. Reasonable

costs of civil defense measures (including

costs in excess of normal plant protection

costs, first-aid training and supplies,

firefighting training, posting of additional

exit notices and directions, and other

approved civil defense measures) undertaken

on the institution’s premises pursuant to

suggestions or requirements of civil defense

authorities are allowable when distributed to

all activities of the institution. Capital

expenditures for civil defense purposes will

not be allowed, but a use allowance or

depreciation may be permitted in accordance

with provisions set forth in Section J.12.

Costs of local civil defense projects not on

the institution’s premises are unallowable.

6. Commencement and convocation costs.

Costs incurred for commencements and

convocations are unallowable, except as

provided for in Section F.9.

7. Communication costs. Costs incurred for

telephone services, local and long distance

telephone calls, telegrams, radiograms,

postage and the like, are allowable.

8. Compensation for personal services. a.

General. Compensation for personal services

covers all amounts paid currently or accrued

by the institution for services of employees

rendered during the period of performance

under sponsored agreements. Such amounts

include salaries, wages, and fringe benefits

(see subsection f). These costs are allowable

to the extent that the total compensation to

individual employees conforms to the

established policies of the institution,

consistently applied, and provided that the

charges for work performed directly on

sponsored agreements and for other work

allocable as F&A costs are determined and

supported as provided below. Charges to

sponsored agreements may include

reasonable amounts for activities

contributing and intimately related to work

under the agreements, such as delivering

special lectures about specific aspects of the

ongoing activity, writing reports and articles,

participating in appropriate seminars,

consulting with colleagues and graduate

students, and attending meetings and

conferences. Incidental work (that in excess

of normal for the individual), for which

supplemental compensation is paid by an

institution under institutional policy, need

not be included in the payroll distribution

systems described below, provided such

work and compensation are separately

identified and documented in the financial

management system of the institution.

b. Payroll distribution. (1) General

Principles. (a) The distribution of salaries and

wages, whether treated as direct or F&A

costs, will be based on payrolls documented

in accordance with the generally accepted

practices of colleges and universities.

Institutions may include in a residual

category all activities that are not directly

charged to sponsored agreements, and that

need not be distributed to more than one

activity for purposes of identifying F&A costs

and the functions to which they are allocable.

The components of the residual category are

not required to be separately documented.

(b) The apportionment of employees’

salaries and wages which are chargeable to

more than one sponsored agreement or other

cost objective will be accomplished by

methods which will (1) be in accordance

with Sections A.2 and C, (2) produce an

equitable distribution of charges for

employee’s activities, and (3) distinguish the

employees’ direct activities from their F&A

activities.

(c) In the use of any methods for

apportioning salaries, it is recognized that, in

an academic setting, teaching, research,

service, and administration are often

inextricably intermingled. A precise

assessment of factors that contribute to costs

is not always feasible, nor is it expected.

Reliance, therefore, is placed on estimates in

which a degree of tolerance is appropriate.

(d) There is no single best method for

documenting the distribution of charges for

personal services. Methods for apportioning

salaries and wages, however, must meet the

criteria specified in subsection b.(2).

Examples of acceptable methods are

contained in subsection c. Other methods

which meet the criteria specified in

subsection b.(2) also shall be deemed

acceptable, if a mutually satisfactory

alternative agreement is reached.

(2) Criteria for Acceptable Methods. (a) The

payroll distribution system will (i) be

incorporated into the official records of the

institution, (ii) reasonably reflect the activity

for which the employee is compensated by

the institution, and (iii) encompass both

sponsored and all other activities on an

integrated basis, but may include the use of

subsidiary records. (Compensation for

incidental work described in Section J.8.a

need not be included.)

(b) The method must recognize the

principle of after-the-fact confirmation or

determination so that costs distributed

represent actual costs, unless a mutually

satisfactory alternative agreement is reached.

Direct cost activities and F&A cost activities

may be confirmed by responsible persons

with suitable means of verification that the

work was performed. Confirmation by the

employee is not a requirement for either

direct or F&A cost activities if other

responsible persons make appropriate

confirmations.

(c) The payroll distribution system will

allow confirmation of activity allocable to

each sponsored agreement and each of the

categories of activity needed to identify F&A

costs and the functions to which they are

allocable. The activities chargeable to F&A

cost categories or the major functions of the

institution for employees whose salaries

must be apportioned (see subsection b.(1)(b)),

if not initially identified as separate

categories, may be subsequently distributed

by any reasonable method mutually agreed

to, including, but not limited to, suitably

conducted surveys, statistical sampling

procedures, or the application of negotiated

fixed rates.

(d) Practices vary among institutions and

within institutions as to the activity

constituting a full workload. Therefore, the

payroll distribution system may reflect

categories of activities expressed as a

percentage distribution of total activities.

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

initially to sponsored agreements on the basis

of estimates made before services are

performed. When such estimates are used,

significant changes in the corresponding

work activity must be identified and entered

into the payroll distribution system. Short-
20904 Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices

term (such as one or two months) fluctuation

between workload categories need not be

considered as long as the distribution of

salaries and wages is reasonable over the

longer term, such as an academic period.

(f) The system will provide for

independent internal evaluations to ensure

the system’s effectiveness and compliance

with the above standards.

(g) For systems which meet these

standards, the institution will not be required

to provide additional support or

documentation for the effort actually

performed.

c. Examples of Acceptable Methods for

Payroll Distribution: (1) Plan-Confirmation:

Under this method, the distribution of

salaries and wages of professorial and

professional staff applicable to sponsored

agreements is based on budgeted, planned, or

assigned work activity, updated to reflect any

significant changes in work distribution. A

plan-confirmation system used for salaries

and wages charged directly or indirectly to

sponsored agreements will meet the

following standards:

(a) A system of budgeted, planned, or

assigned work activity will be incorporated

into the official records of the institution and

encompass both sponsored and all other

activities on an integrated basis. The system

may include the use of subsidiary records.

(b) The system will reasonably reflect only

the activity for which the employee is

compensated by the institution

(compensation for incidental work described

in subsection a need not be included).

Practices vary among institutions and within

institutions as to the activity constituting a

full workload. Hence, the system will reflect

categories of activities expressed as a

percentage distribution of total activities.

(See Section H for treatment of F&A costs

under the simplified method for small

institutions.)

(c) The system will reflect activity

applicable to each sponsored agreement and

to each category needed to identify F&A costs

and the functions to which they are allocable.

The system may treat F&A cost activities

initially within a residual category and

subsequently determine them by alternate

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

(d) The system will provide for

modification of an individual’s salary or

salary distribution commensurate with a

significant change in the employee’s work

activity. Short-term (such as one or two

months) fluctuation between workload

categories need not be considered as long as

the distribution of salaries and wages is

reasonable over the longer term, such as an

academic period. Whenever it is apparent

that a significant change in work activity

which is directly or indirectly charged to

sponsored agreements will occur or has

occurred, the change will be documented

over the signature of a responsible official

and entered into the system.

(e) At least annually a statement will be

signed by the employee, principal

investigator, or responsible official(s) using

suitable means of verification that the work

was performed, stating that salaries and

wages charged to sponsored agreements as

direct charges, and to residual, F&A cost or

other categories are reasonable in relation to

work performed.

(f) The system will provide for

independent internal evaluation to ensure

the system’s integrity and compliance with

the above standards.

(g) In the use of this method, an institution

shall not be required to provide additional

support or documentation for the effort

actually performed.

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

this system the distribution of salaries and

wages by the institution will be supported by

activity reports as prescribed below.

(a) Activity reports will reflect the

distribution of activity expended by

employees covered by the system

(compensation for incidental work as

described in subsection a need not be

included).

(b) These reports will reflect an after-thefact reporting of the percentage distribution

of activity of employees. Charges may be

made initially on the basis of estimates made

before the services are performed, provided

that such charges are promptly adjusted if

significant differences are indicated by

activity records.

(c) Reports will reasonably reflect the

activities for which employees are

compensated by the institution. To confirm

that the distribution of activity represents a

reasonable estimate of the work performed by

the employee during the period, the reports

will be signed by the employee, principal

investigator, or responsible official(s) using

suitable means of verification that the work

was performed.

(d) The system will reflect activity

applicable to each sponsored agreement and

to each category needed to identify F&A costs

and the functions to which they are allocable.

The system may treat F&A cost activities

initially within a residual category and

subsequently determine them by alternate

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

(e) For professorial and professional staff,

the reports will be prepared each academic

term, but no less frequently than every six

months. For other employees, unless

alternate arrangements are agreed to, the

reports will be prepared no less frequently

than monthly and will coincide with one or

more pay periods.

(f) Where the institution uses time cards or

other forms of after-the-fact payroll

documents as original documentation for

payroll and payroll charges, such documents

shall qualify as records for this purpose,

provided that they meet the requirements in

subsections (a) through (e).

(3) Multiple Confirmation Records: Under

this system, the distribution of salaries and

wages of professorial and professional staff

will be supported by records which certify

separately for direct and F&A cost activities

as prescribed below.

(a) For employees covered by the system,

there will be direct cost records to reflect the

distribution of that activity expended which

is to be allocable as direct cost to each

sponsored agreement. There will also be F&A

cost records to reflect the distribution of that

activity to F&A costs. These records may be

kept jointly or separately (but are to be

certified separately, see below).

(b) Salary and wage charges may be made

initially on the basis of estimates made before

the services are performed, provided that

such charges are promptly adjusted if

significant differences occur.

(c) Institutional records will reasonably

reflect only the activity for which employees

are compensated by the institution

(compensation for incidental work as

described in subsection a need not be

included).

(d) The system will reflect activity

applicable to each sponsored agreement and

to each category needed to identify F&A costs

and the functions to which they are allocable.

(e) To confirm that distribution of activity

represents a reasonable estimate of the work

performed by the employee during the

period, the record for each employee will

include: (i) the signature of the employee or

of a person having direct knowledge of the

work, confirming that the record of activities

allocable as direct costs of each sponsored

agreement is appropriate; and, (ii) the record

of F&A costs will include the signature of

responsible person(s) who use suitable means

of verification that the work was performed

and is consistent with the overall distribution

of the employee’s compensated activities.

These signatures may all be on the same

document.

(f) The reports will be prepared each

academic term, but no less frequently than

every six months.

(g) Where the institution uses time cards or

other forms of after-the-fact payroll

documents as original documentation for

payroll and payroll charges, such documents

shall qualify as records for this purposes,

provided they meet the requirements in

subsections (a) through (f).

d. Salary rates for faculty members. (1)

Salary rates for academic year. Charges for

work performed on sponsored agreements by

faculty members during the academic year

will be based on the individual faculty

member’s regular compensation for the

continuous period which, under the policy of

the institution concerned, constitutes the

basis of his salary. Charges for work

performed on sponsored agreements during

all or any portion of such period are

allowable at the base salary rate. In no event

will charges to sponsored agreements,

irrespective of the basis of computation,

exceed the proportionate share of the base

salary for that period. This principle applies

to all members of the faculty at an institution.

Since intra-university consulting is assumed

to be undertaken as a university obligation

requiring no compensation in addition to

full-time base salary, the principle also

applies to faculty members who function as

consultants or otherwise contribute to a

sponsored agreement conducted by another

faculty member of the same institution.

However, in unusual cases where

consultation is across departmental lines or

involves a separate or remote operation, and

the work performed by the consultant is in

addition to his regular departmental load,

any charges for such work representing extra

compensation above the base salary are

allowable provided that such consulting

arrangements are specifically provided for in

the agreement or approved in writing by the

sponsoring agency.
Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices 20905

(2) Periods outside the academic year. (a)

Except as otherwise specified for teaching

activity in subsection (b), charges for work

performed by faculty members on sponsored

agreements during the summer months or

other period not included in the base salary

period will be determined for each faculty

member at a rate not in excess of the base

salary divided by the period to which the

base salary relates, and will be limited to

charges made in accordance with other parts

of this section. The base salary period used

in computing charges for work performed

during the summer months will be the

number of months covered by the faculty

member’s official academic year

appointment.

(b) Charges for teaching activities

performed by faculty members on sponsored

agreements during the summer months or

other periods not included in the base salary

period will be based on the normal policy of

the institution governing compensation to

faculty members for teaching assignments

during such periods.

(3) Part-time faculty. Charges for work

performed on sponsored agreements by

faculty members having only part-time

appointments will be determined at a rate not

in excess of that regularly paid for the parttime assignments. For example, an institution

pays $5000 to a faculty member for half-time

teaching during the academic year. He

devoted one-half of his remaining time to a

sponsored agreement. Thus, his additional

compensation, chargeable by the institution

to the agreement, would be one-half of $5000,

or $2500.

e. Noninstitutional professional activities.

Unless an arrangement is specifically

authorized by a Federal sponsoring agency,

an institution must follow its institutionwide policies and practices concerning the

permissible extent of professional services

that can be provided outside the institution

for noninstitutional compensation. Where

such institution-wide policies do not exist or

do not adequately define the permissible

extent of consulting or other noninstitutional

activities undertaken for extra outside pay,

the Federal Government may require that the

effort of professional staff working on

sponsored agreements be allocated between

(1) institutional activities, and (2)

noninstitutional professional activities. If the

sponsoring agency considers the extent of

noninstitutional professional effort excessive,

appropriate arrangements governing

compensation will be negotiated on a caseby-case basis.

f. Fringe benefits. (1) Fringe benefits in the

form of regular compensation paid to

employees during periods of authorized

absences from the job, such as for annual

leave, sick leave, military leave, and the like,

are allowable, provided such costs are

distributed to all institutional activities in

proportion to the relative amount of time or

effort actually devoted by the employees. See

Section J.40 for treatment of sabbatical leave.

(2) Fringe benefits in the form of employer

contributions or expenses for social security,

employee insurance, workmen’s

compensation insurance, tuition or remission

of tuition for individual employees are

allowable, provided such benefits are granted

in accordance with established educational

institutional policies, and are distributed to

all institutional activities on an equitable

basis. Tuition benefits for family members

other than the employee are unallowable for

fiscal years beginning after September 30,

1998. See Section J.41.b, Scholarships and

student aid costs, for treatment of tuition

remission provided to students.

(3) Rules for pension plan costs are as

follows:

(a) Costs of the institution’s pension plan

which are incurred in accordance with the

established policies of the institution are

allowable, provided: (i) such policies meet

the test of reasonableness, (ii) the methods of

cost allocation are equitable for all activities,

(iii) the amount of pension cost assigned to

each fiscal year is determined in accordance

with subsection (b), and (iv) the cost assigned

to a given fiscal year is paid or funded for

all plan participants within six months after

the end of that year. However, increases to

normal and past service pension costs caused

by a delay in funding the actuarial liability

beyond 30 days after each quarter of the year

to which such costs are assignable are

unallowable.

(b) The amount of pension cost assigned to

each fiscal year shall be determined in

accordance with generally accepted

accounting principles. Institutions may elect

to follow the ‘‘Cost Accounting Standard for

Composition and Measurement of Pension

Cost’’ (48 Part 9904–412).

(c) Premiums paid for pension plan

termination insurance pursuant to the

Employee Retirement Income Security Act

(ERISA) of 1974 (Pub. L. 93–406) are

allowable. Late payment charges on such

premiums are unallowable. Excise taxes on

accumulated funding deficiencies and

prohibited transactions of pension plan

fiduciaries imposed under ERISA are also

unallowable.

(4) Fringe benefits may be assigned to cost

objectives by identifying specific benefits to

specific individual employees or by

allocating on the basis of institution-wide

salaries and wages of the employees

receiving the benefits. When the allocation

method is used, separate allocations must be

made to selective groupings of employees,

unless the institution demonstrates that costs

in relationship to salaries and wages do not

differ significantly for different groups of

employees. Fringe benefits shall be treated in

the same manner as the salaries and wages

of the employees receiving the benefits. The

benefits related to salaries and wages treated

as direct costs shall also be treated as direct

costs; the benefits related to salaries and

wages treated as F&A costs shall be treated

as F&A costs.

g. Institution-furnished automobiles. That

portion of the cost of institution-furnished

automobiles that relates to personal use by

employees (including transportation to and

from work) is unallowable regardless of

whether the cost is reported as taxable

income to the employees.

9. Contingency provisions. Contributions to

a contingency reserve or any similar

provision made for events, the occurrence of

which cannot be foretold with certainty as to

time, intensity, or with an assurance of their

happening, are unallowable. (See also

Section J.21.c.)

10. Deans of faculty and graduate schools.

The salaries and expenses of deans of faculty

and graduate schools, or their equivalents,

and their staffs, are allowable.

11. Defense and prosecution of criminal

and civil proceedings, claims, appeals and

patent infringement.

a. Definitions. ‘‘Conviction,’’ as used

herein, means a judgment or conviction of a

criminal offense by any court of competent

jurisdiction, whether entered upon verdict or

a plea, including a conviction due to a plea

of nolo contendere.

‘‘Costs,’’ include, but are not limited to,

administrative and clerical expenses; the cost

of legal services, whether performed by inhouse or private counsel; the costs of the

services of accountants, consultants, or

others retained by the institution to assist it;

costs of employees, officers and trustees, and

any similar costs incurred before, during, and

after commencement of a judicial or

administrative proceeding that bears a direct

relationship to the proceedings.

‘‘Fraud,’’ as used herein, means (i) acts of

fraud or corruption or attempts to defraud the

Federal Government or to corrupt its agents,

(ii) acts that constitute a cause for debarment

or suspension (as specified in agency

regulations), and (iii) acts which violate the

False Claims Act, 31 U.S.C., sections 3729–

3731, or the Anti-kickback Act, 41 U.S.C.,

sections 51 and 54.

‘‘Penalty,’’ does not include restitution,

reimbursement, or compensatory damages.

‘‘Proceeding,’’ includes an investigation.

b. (1) Except as otherwise described herein,

costs incurred in connection with any

criminal, civil or administrative proceeding

(including filing of a false certification)

commenced by the Federal Government, or a

State, local or foreign government, are not

allowable if the proceeding (a) relates to a

violation of, or failure to comply with, a

Federal, State, local or foreign statute or

regulation, by the institution (including its

agents and employees); and (b) results in any

of the following dispositions:

(i) In a criminal proceeding, a conviction.

(ii) In a civil or administrative proceeding

involving an allegation of fraud or similar

misconduct, a determination of institutional

liability.

(iii) In the case of any civil or

administrative proceeding, the imposition of

a monetary penalty.

(iv) A final decision by an appropriate

Federal official to debar or suspend the

institution, to rescind or void an award, or

to terminate an award for default by reason

of a violation or failure to comply with a law

or regulation.

(v) A disposition by consent or

compromise, if the action could have

resulted in any of the dispositions described

in subsections (i) through (iv).

(2) If more than one proceeding involves

the same alleged misconduct, the costs of all

such proceedings shall be unallowable if any

one of them results in one of the dispositions

shown in subsection b.

c. If a proceeding referred to in subsection

b is commenced by the Federal Government

and is resolved by consent or compromise
20906 Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices

pursuant to an agreement entered into by the

institution and the Federal Government, then

the costs incurred by the institution in

connection with such proceedings that are

otherwise not allowable under subsection b

may be allowed to the extent specifically

provided in such agreement.

d. If a proceeding referred to in subsection

b is commenced by a State, local or foreign

government, the authorized Federal official

may allow the costs incurred by the

institution for such proceedings, if such

authorized official determines that the costs

were incurred as a result of (1) a specific term

or condition of a federally-sponsored

agreement, or (2) specific written direction of

an authorized official of the sponsoring

agency.

e. Costs incurred in connection with

proceedings described in subsection b, but

which are not made unallowable by that

subsection, may be allowed by the Federal

Government, but only to the extent that:

(1) The costs are reasonable in relation to

the activities required to deal with the

proceeding and the underlying cause of

action;

(2) Payment of the costs incurred, as

allowable and allocable costs, is not

prohibited by any other provision(s) of the

sponsored agreement;

(3) The costs are not otherwise recovered

from the Federal Government or a third

party, either directly as a result of the

proceeding or otherwise; and,

(4) The percentage of costs allowed does

not exceed the percentage determined by an

authorized Federal official to be appropriate

considering the complexity of procurement

litigation, generally accepted principles

governing the award of legal fees in civil

actions involving the United States as a

party, and such other factors as may be

appropriate. Such percentage shall not

exceed 80 percent. However, if an agreement

reached under subsection c has explicitly

considered this 80 percent limitation and

permitted a higher percentage, then the full

amount of costs resulting from that

agreement shall be allowable.

f. Costs incurred by the institution in

connection with the defense of suits brought

by its employees or ex-employees under

section 2 of the Major Fraud Act of 1988

(Pub. L. 100–700), including the cost of all

relief necessary to make such employee

whole, where the institution was found liable

or settled, are unallowable.

g. Costs of legal, accounting, and

consultant services, and related costs,

incurred in connection with defense against

Federal Government claims or appeals, or the

prosecution of claims or appeals against the

Federal Government, are unallowable.

h. Costs of legal, accounting, and

consultant services, and related costs,

incurred in connection with patent

infringement litigation, are unallowable

unless otherwise provided for in the

sponsored agreements.

i. Costs which may be unallowable under

this section, including directly associated

costs, shall be segregated and accounted for

by the institution separately. During the

pendency of any proceeding covered by

subsections b and f, the Federal Government

shall generally withhold payment of such

costs. However, if in the best interests of the

Federal Government, the Federal

Government may provide for conditional

payment upon provision of adequate

security, or other adequate assurance, and

agreement by the institution to repay all

unallowable costs, plus interest, if the costs

are subsequently determined to be

unallowable.

12. Depreciation and use allowances.

Institutions may be compensated for the use

of their buildings, capital improvements, and

equipment, provided that they are used,

needed in the institutions’ activities, and

properly allocable to sponsored agreements.

Such compensation shall be made by

computing either depreciation or use

allowance. Use allowances are the means of

providing such compensation when

depreciation or other equivalent costs are not

computed. The allocation for depreciation or

use allowance shall be made in accordance

with Section F.2. Depreciation and use

allowances are computed applying the

following rules:

a. The computation of depreciation or use

allowances shall be based on the acquisition

cost of the assets involved. For this purpose,

the acquisition cost will exclude (1) the cost

of land; (2) any portion of the cost of

buildings and equipment borne by or

donated by the Federal Government,

irrespective of where title was originally

vested or where it is presently located; and

(3) any portion of the cost of buildings and

equipment contributed by or for the

institution where law or agreement prohibit

recovery. For an asset donated to the

institution by a third party, its fair market

value at the time of the donation shall be

considered as the acquisition cost.

b. In the use of the depreciation method,

the following shall be observed:

(1) The period of useful service or useful

life established in each case for usable capital

assets must take into consideration such

factors as type of construction, nature of the

equipment, technological developments in

the particular area, and the renewal and

replacement policies followed for the

individual items or classes of assets involved.

(2) The depreciation method used to charge

the cost of an asset (or group of assets) to

accounting periods shall reflect the pattern of

consumption of the asset during its useful

life. In the absence of clear evidence

indicating that the expected consumption of

the asset will be significantly greater in the

early portions than in the later portions of its

useful life, the straight-line method shall be

presumed to be the appropriate method.

Depreciation methods once used shall not be

changed unless approved in advance by the

cognizant Federal agency.

(3) Where the depreciation method is

introduced to replace the use allowance

method, depreciation shall be computed as if

the asset had been depreciated over its entire

life (i.e., from the date the asset was acquired

and ready for use to the date of disposal or

withdrawal from service). The aggregate

amount of use allowances and depreciation

attributable to an asset (including imputed

depreciation applicable to periods prior to

the conversion to the use allowance method

as well as depreciation after the conversion)

may be less than, and in no case, greater than

the total acquisition cost of the asset.

(4) When the depreciation method is used

for buildings, a building ‘‘shell’’ may be

treated separately from other building

components, such as plumbing system and

heating and air conditioning system. Each

component item may then be depreciated

over its estimated useful life. On the other

hand, the entire building, including the shell

and all components, may be treated as a

single asset and depreciated over a single

useful life.

(5) Where the depreciation method is used

for a particular class of assets, no

depreciation may be allowed on any such

assets that have outlived their depreciable

lives. (See also subsection c.(3).)

c. Under the use allowance method, the

following shall be observed:

(1) The use allowance for buildings and

improvements (including improvements such

as paved parking areas, fences, and

sidewalks) will be computed at an annual

rate not exceeding two percent of acquisition

cost. The use allowance for equipment will

be computed at an annual rate not exceeding

six and two-thirds percent of acquisition

cost.

(2) In contrast to the depreciation method,

the entire building must be treated as a single

asset without separating its ‘‘shell’’ from

other building components under the use

allowance method. The entire building must

be treated as a single asset, and the twopercent use allowance limitation must be

applied to all parts of the building. The twopercent limitation, however, need not be

applied to equipment or other assets that are

merely attached or fastened to the building

but not permanently fixed and are used as

furnishings, decorations or for specialized

purposes (e.g., dentist chairs and dental

treatment units, counters, laboratory benches

bolted to the floor, dishwashers, and

carpeting). Such equipment and assets will

be considered as not being permanently fixed

to the building if they can be removed

without the need for costly or extensive

alterations or repairs to the building to make

the space usable for other purposes.

Equipment and assets which meet these

criteria will be subject to the six and twothirds percent equipment use allowance.

(3) A reasonable use allowance may be

negotiated for any assets that are considered

to be fully depreciated, after taking into

consideration the amount of depreciation

previously charged to the Federal

Government, the estimated useful life

remaining at the time of negotiation, the

effect of any increased maintenance charges,

decreased efficiency due to age, and any

other factors pertinent to the utilization of

the asset for the purpose contemplated.

(4) Notwithstanding subsection (3), once an

educational institution converts from one

cost recovery methodology to another,

acquisition costs not recovered may not be

used in the calculation of the use allowance

in subsection (3).

d. Except as otherwise provided in

subsections b and c, a combination of the

depreciation and use allowance methods may

not be used, in like circumstances, for a
Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices 20907

single class of assets (e.g., buildings, office

equipment, and computer equipment).

e. Charges for use allowances or

depreciation must be supported by adequate

property records, and physical inventories

must be taken at least once every two years

to ensure that the assets exist and are usable,

used, and needed. Statistical sampling

techniques may be used in taking these

inventories. In addition, when the

depreciation method is used, adequate

depreciation records showing the amount of

depreciation taken each period must also be

maintained.

f. This section applies to the largest college

and university recipients of Federal research

and development funds as displayed in

Exhibit A.

(1) Institutions shall expend currently, or

reserve for expenditure within the next five

years, the portion of F&A cost payments

made for depreciation or use allowances

under sponsored research agreements,

consistent with Section F.2, to acquire or

improve research facilities. This provision

applies only to Federal agreements which

reimburse F&A costs at a full negotiated rate.

These funds may only be used for (a)

liquidation of the principal of debts incurred

to acquire assets that are used directly for

organized research activities, or (b) payments

to acquire, repair, renovate, or improve

buildings or equipment directly used for

organized research. For buildings or

equipment not exclusively used for organized

research activity, only appropriately

proportionate amounts will be considered to

have been expended for research facilities.

(2) An assurance that an amount equal to

the Federal reimbursements has been

appropriately expended or reserved to

acquire or improve research facilities shall be

submitted as part of each F&A cost proposal

submitted to the cognizant Federal agency

which is based on costs incurred on or after

October 1, 1991. This assurance will cover

the cumulative amounts of funds received

and expended during the period beginning

after the period covered by the previous

assurance and ending with the fiscal year on

which the proposal is based. The assurance

shall also cover any amounts reserved from

a prior period in which the funds received

exceeded the amounts expended.

13. Donations and contributions. a. The

value of donated services and property are

not allowable either as a direct or F&A cost,

except that depreciation or use allowances on

donated assets are permitted in accordance

with Section J.12.a. The value of donated

services and property may be used to meet

cost sharing or matching requirements, in

accordance with Circular A–110.

b. Donations or contributions made by the

institution, regardless of the recipient, are

unallowable.

14. Employee morale, health, and welfare

costs and credits. The costs of house

publications, health or first-aid clinics and/

or infirmaries, recreational activities, food

services, employees’ counseling services, and

other expenses incurred in accordance with

the institution’s established practice or

custom for the improvement of working

conditions, employer-employee relations,

employee morale, and employee

performance, are allowable. Such costs will

be equitably apportioned to all activities of

the institution. Income generated from any of

these activities will be credited to the cost

thereof unless such income has been

irrevocably set over to employee welfare

organizations. Losses resulting from

operating food services are allowable only if

the institution’s objective is to operate such

services on a break-even basis. Losses

sustained because of operating objectives

other than the above are allowable only (a)

where the institution can demonstrate

unusual circumstances, and (b) with the

approval of the cognizant Federal agency.

15. Entertainment costs. Costs of

entertainment, including amusement,

diversion, and social activities and any costs

directly associated with such costs (such as

tickets to shows or sports events, meals,

lodging, rentals, transportation, and

gratuities) are unallowable.

16. Equipment and other capital

expenditures. a. For purposes of this

subsection, the following definitions apply:

(1) ‘‘Equipment’’ means an article of

nonexpendable, tangible personal property

having a useful life of more than one year

and an acquisition cost which equals or

exceeds the lesser of the capitalization level

established by the organization for financial

statement purposes, or $5000. The

unamortized portion of any equipment

written off as a result of a change in

capitalization levels may be recovered by

continuing to claim the otherwise allowable

use allowances or depreciation on the

equipment, or by amortizing the amount to

be written off over a period of years

negotiated with the cognizant agency.

(2) ‘‘Capital expenditures’’ means the cost

of the asset including the cost to put it in

place. Capital expenditure for equipment, for

example, means the net invoice price of the

equipment, including the cost of any

modifications, attachments, accessories, or

auxiliary apparatus necessary to make it

usable for the purpose for which it is

acquired. Ancillary charges, such as taxes,

duty, protective in transit insurance, freight,

and installation may be included in, or

excluded from, capital expenditure cost in

accordance with the institution’s regular

accounting practices.

(3) ‘‘Special purpose equipment’’ means

equipment which is used only for research,

medical, scientific, or other technical

activities.

(4) ‘‘General purpose equipment’’ means

equipment, the use of which is not limited

only to research, medical, scientific or other

technical activities. Examples of general

purpose equipment include office equipment

and furnishings, air conditioning equipment,

reproduction and printing equipment, motor

vehicles, and automatic data processing

equipment.

b. The following rules of allowability shall

apply to equipment and other capital

expenditures:

(1) Capital expenditures for general

purpose equipment, buildings, and land are

unallowable as direct charges, except where

approved in advance by the sponsoring

agency.

(2) Expenditures for special purpose

equipment are allowable as direct charges

with the approval of the sponsoring agency.

(3) Capital expenditures for improvements

to land, buildings, or equipment which

materially increase their value or useful life

are unallowable as direct charges, except

where approved in advance by the

sponsoring agency.

(4) Capital expenditures are unallowable as

F&A costs. See Section J.12 for allowability

of depreciation or use allowances on

buildings, capital improvements, and

equipment. Also see Section J.38 for

allowability of rental costs on land,

buildings, and equipment.

17. Executive lobbying costs. Costs

incurred in attempting to improperly

influence either directly or indirectly, an

employee or officer of the Executive Branch

of the Federal Government to give

consideration or to act regarding a sponsored

agreement or a regulatory matter are

unallowable. Improper influence means any

influence that induces or tends to induce a

Federal employee or officer to give

consideration or to act regarding a federallysponsored agreement or regulatory matter on

any basis other than the merits of the matter.

18. Fines and penalties. Costs resulting

from violations of, or failure of the institution

to comply with, Federal, State, and local or

foreign laws and regulations are unallowable,

except when incurred as a result of

compliance with specific provisions of the

sponsored agreement, or instructions in

writing from the authorized official of the

sponsoring agency authorizing in advance

such payments.

19. Goods or services for personal use.

Costs of goods or services for personal use of

the institution’s employees are unallowable

regardless of whether the cost is reported as

taxable income to the employees.

20. Housing and personal living expenses.

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

maintenance, utilities, furnishings, rent, etc.),

housing allowances and personal living

expenses for/of the institution’s officers are

unallowable regardless of whether the cost is

reported as taxable income to the employees.

b. The term ‘‘officers’’ includes current and

past officers.

21. Insurance and indemnification. a. Costs

of insurance required or approved, and

maintained, pursuant to the sponsored

agreement, are allowable.

b. Costs of other insurance maintained by

the institution in connection with the general

conduct of its activities, are allowable subject

to the following limitations: (1) types and

extent and cost of coverage must be in

accordance with sound institutional practice;

(2) costs of insurance or of any contributions

to any reserve covering the risk of loss of or

damage to federally-owned property are

unallowable, except to the extent that the

Federal Government has specifically required

or approved such costs; and (3) costs of

insurance on the lives of officers or trustees

are unallowable except where such insurance

is part of an employee plan which is not

unduly restricted.

c. Contributions to a reserve for a selfinsurance program are allowable, to the

extent that the types of coverage, extent of
20908 Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices

coverage, and the rates and premiums would

have been allowed had insurance been

purchased to cover the risks.

d. Actual losses which could have been

covered by permissible insurance (whether

through purchased insurance or selfinsurance) are unallowable, unless expressly

provided for in the sponsored agreement,

except that costs incurred because of losses

not covered under existing deductible

clauses for insurance coverage provided in

keeping with sound management practice as

well as minor losses not covered by

insurance, such as spoilage, breakage and

disappearance of small hand tools, which

occur in the ordinary course of operations,

are allowable.

e. Indemnification includes securing the

institution against liabilities to third persons

and other losses not compensated by

insurance or otherwise. The Federal

Government is obligated to indemnify the

institution only to the extent expressly

provided for in the sponsored agreement,

except as provided in subsection d.

f. Insurance against defects. Costs of

insurance with respect to any costs incurred

to correct defects in the institution’s

materials or workmanship are unallowable.

g. Medical liability (malpractice) insurance

is an allowable cost of research programs

only to the extent that the research involves

human subjects. Medical liability insurance

costs shall be treated as a direct cost and

shall be assigned to individual projects based

on the manner in which the insurer allocates

the risk to the population covered by the

insurance.

22. Interest, fund raising, and investment

management costs. a. Costs incurred for

interest on borrowed capital or temporary use

of endowment funds, however represented,

are unallowable, except as indicated in

subsection e.

b. Costs of organized fund raising,

including financial campaigns, endowment

drives, solicitation of gifts and bequests, and

similar expenses incurred solely to raise

capital or obtain contributions, are

unallowable.

c. Costs of investment counsel and staff

and similar expenses incurred solely to

enhance income from investments are

unallowable.

d. Costs related to the physical custody and

control of monies and securities are

allowable.

e. The cost of interest paid to an external

party is allowable where associated with the

following assets, provided the assets are used

in support of sponsored agreements, and the

total cost (including depreciation or use

allowance, operation and maintenance costs,

interest, etc.) does not exceed the rental cost

of comparable assets in the same locality.

(1) Buildings acquired or completed on or

after July 1, 1982.

(2) Major reconstruction and remodeling of

existing buildings completed on or after July

1, 1982.

(3) Acquisition or fabrication of capital

equipment (as defined in Section J.16,

Equipment and other capital expenditures)

completed on or after July 1, 1982, costing

$10,000 or more, if agreed to by the Federal

Government.

f. Interest on debt incurred after the

effective date of this revision to acquire,

replace or renovate capital assets (including

renovations, alterations, equipment, land,

and capital assets acquired through capital

leases), acquired after the effective date of

this revision and used in support of

sponsored agreements is subject to the

following conditions:

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

educational institution shall prepare, prior to

the acquisition or replacement of the facility,

a lease-purchase analysis in accordance with

§ll.44 of OMB Circular A–110, which

shows that a financed purchase, including a

capital lease, is less costly to the educational

institution than other operating lease

alternatives, on a net present value basis.

Discount rates used shall be equal to the

educational institution’s anticipated interest

rates and shall be no higher than the fair

market rate available to the educational

institution from an unrelated (‘‘arm’s

length’’) third party. The lease-purchase

analysis shall include a comparison of the

net present value of the projected total cost

comparisons of both alternatives over the

period the asset is expected to be used by the

educational institution. The cost

comparisons associated with purchasing the

facility shall include the estimated purchase

price, anticipated operating and maintenance

costs (including property taxes, if applicable)

not included in the debt financing, less any

estimated asset salvage value at the end of

the defined period. The cost comparison for

a capital lease shall include the estimated

total lease payments, any estimated bargain

purchase option, operating and maintenance

costs, and taxes not included in the capital

leasing arrangement, less any estimated

credits due under the lease at the end of the

defined period. Projected operating lease

costs shall be based on the anticipated cost

of leasing comparable facilities at fair market

rates under rental agreements that would be

renewed or reestablished over the period

defined above, and any expected

maintenance costs and allowable property

taxes to be borne by the educational

institution directly or as part of the lease

arrangement.

(2) The actual interest cost claimed is

predicated upon interest rates that are no

higher than the fair market rate available to

the educational institution from an unrelated

(arm’s length) third party.

(3) Investment earnings, including interest

income on bond or loan principal, pending

payment of the construction or acquisition

costs, are used to offset allowable interest

cost. Arbitrage earnings reportable to the

Internal Revenue Service are not required to

be offset against allowable interest costs.

(4) Reimbursements are limited to the least

costly alternative based on the total cost

analysis required under subsection (1). For

example, if an operating lease is determined

to be less costly than purchasing through

debt financing, then reimbursement is

limited to the amount determined if leasing

had been used. In all cases where a leasepurchase analysis is required to be

performed, Federal reimbursement shall be

based upon the least expensive alternative.

(5) Educational institutions are also subject

to the following conditions:

(a) For debt arrangements over $1 million,

unless the educational institution makes an

initial equity contribution to the asset

purchase of 25 percent or more, educational

institutions shall reduce claims for interest

cost by an amount equal to imputed interest

earnings on excess cash flow, which is to be

calculated as follows. Annually, educational

institutions shall prepare a cumulative (from

the inception of the project) report of

monthly cash flows that includes inflows and

outflows, regardless of the funding source.

Inflows consist of depreciation expense,

amortization of capitalized construction

interest, and annual interest cost. For cash

flow calculations, the annual inflow figures

shall be divided by the number of months in

the year (i.e., usually 12) that the building is

in service for monthly amounts. Outflows

consist of initial equity contributions, debt

principal payments (less the pro rata share

attributable to the unallowable costs of land)

and interest payments. Where cumulative

inflows exceed cumulative outflows, interest

shall be calculated on the excess inflows for

that period and be treated as a reduction to

allowable interest cost. The rate of interest to

be used to compute earnings on excess cash

flows shall be the three-month Treasury bill

closing rate as of the last business day of that

month.

(b) Substantial relocation of federallysponsored activities from a facility financed

by indebtedness, the cost of which was

funded in whole or part through Federal

reimbursements, to another facility prior to

the expiration of a period of 20 years requires

notice to the cognizant agency. The extent of

the relocation, the amount of the Federal

participation in the financing, and the

depreciation and interest charged to date may

require negotiation and/or downward

adjustments of replacement space charged to

Federal programs in the future.

(c) The allowable costs to acquire facilities

and equipment are limited to a fair market

value available to the educational institution

from an unrelated (arm’s length) third party.

(6) The following definitions are to be used

for purposes of this section:

(a) ‘‘Initial equity contribution’’ means the

amount or value of contributions made by

non-Federal entities for the acquisition of the

asset prior to occupancy of facilities.

(b) ‘‘Asset costs’’ means the capitalizable

costs of an asset, including construction

costs, acquisition costs, and other such costs

capitalized in accordance with Generally

Accepted Accounting Principles (GAAP).

23. Labor relations costs. Costs incurred in

maintaining satisfactory relations between

the institution and its employees, including

costs of labor management committees,

employees’ publications, and other related

activities, are allowable.

24. Lobbying. Reference is made to the

common rule published at 55 FR 6736 (2/26/

90), and OMB’s governmentwide guidance,

amendments to OMB’s governmentwide

guidance, and OMB’s clarification notices

published at 54 FR 52306 (12/20/89), 61 FR

1412 (1/19/96), 55 FR 24540 (6/15/90) and 57

FR 1772 (1/15/92), respectively. In addition,

the following restrictions shall apply:

a. Notwithstanding other provisions of this

Circular, costs associated with the following

activities are unallowable:
Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices 20909

(1) Attempts to influence the outcomes of

any Federal, State, or local election,

referendum, initiative, or similar procedure,

through in kind or cash contributions,

endorsements, publicity, or similar activity;

(2) Establishing, administering,

contributing to, or paying the expenses of a

political party, campaign, political action

committee, or other organization established

for the purpose of influencing the outcomes

of elections;

(3) Any attempt to influence (i) the

introduction of Federal or State legislation,

(ii) the enactment or modification of any

pending Federal or State legislation through

communication with any member or

employee of the Congress or State legislature

(including efforts to influence State or local

officials to engage in similar lobbying

activity, or (iii) any government official or

employee in connection with a decision to

sign or veto enrolled legislation;

(4) Any attempt to influence (i) the

introduction of Federal or State legislation; or

(ii) the enactment or modification of any

pending Federal or State legislation by

preparing, distributing, or using publicity or

propaganda, or by urging members of the

general public, or any segment thereof, to

contribute to or participate in any mass

demonstration, march, rally, fund raising

drive, lobbying campaign or letter writing or

telephone campaign; or

(5) Legislative liaison activities, including

attendance at legislative sessions or

committee hearings, gathering information

regarding legislation, and analyzing the effect

of legislation, when such activities are

carried on in support of or in knowing

preparation for an effort to engage in

unallowable lobbying.

b. The following activities are excepted

from the coverage of subsection a:

(1) Technical and factual presentations on

topics directly related to the performance of

a grant, contract, or other agreement (through

hearing testimony, statements, or letters to

the Congress or a State legislature, or

subdivision, member, or cognizant staff

member thereof), in response to a

documented request (including a

Congressional Record notice requesting

testimony or statements for the record at a

regularly scheduled hearing) made by the

recipient member, legislative body or

subdivision, or a cognizant staff member

thereof, provided such information is readily

obtainable and can be readily put in

deliverable form, and further provided that

costs under this section for travel, lodging or

meals are unallowable unless incurred to

offer testimony at a regularly scheduled

Congressional hearing pursuant to a written

request for such presentation made by the

Chairman or Ranking Minority Member of

the Committee or Subcommittee conducting

such hearings;

(2) Any lobbying made unallowable by

subsection a.(3) to influence State legislation

in order to directly reduce the cost, or to

avoid material impairment of the institution’s

authority to perform the grant, contract, or

other agreement; or

(3) Any activity specifically authorized by

statute to be undertaken with funds from the

grant, contract, or other agreement.

c. When an institution seeks

reimbursement for F&A costs, total lobbying

costs shall be separately identified in the

F&A cost rate proposal, and thereafter treated

as other unallowable activity costs in

accordance with the procedures of Section

B.1.d.

d. Institutions shall submit as part of their

annual F&A cost rate proposal a certification

that the requirements and standards of this

section have been complied with.

e. Institutions shall maintain adequate

records to demonstrate that the

determination of costs as being allowable or

unallowable pursuant to this section

complies with the requirements of this

Circular.

f. Time logs, calendars, or similar records

shall not be required to be created for

purposes of complying with this section

during any particular calendar month when:

(1) the employee engages in lobbying (as

defined in subsections a and b) 25 percent or

less of the employee’s compensated hours of

employment during that calendar month, and

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

institution has not materially misstated

allowable or unallowable costs of any nature,

including legislative lobbying costs. When

conditions (1) and (2) are met, institutions

are not required to establish records to

support the allowability of claimed costs in

addition to records already required or

maintained. Also, when conditions (1) and

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

calendars, or similar records will not serve as

a basis for disallowing costs by contesting

estimates of lobbying time spent by

employees during a calendar month.

g. Agencies shall establish procedures for

resolving in advance, in consultation with

OMB, any significant questions or

disagreements concerning the interpretation

or application of this section. Any such

advance resolutions shall be binding in any

subsequent settlements, audits, or

investigations with respect to that grant or

contract for purposes of interpretation of this

Circular, provided, however, that this shall

not be construed to prevent a contractor or

grantee from contesting the lawfulness of

such a determination.

25. Losses on other sponsored agreements

or contracts. Any excess of costs over income

under any other sponsored agreement or

contract of any nature is unallowable. This

includes, but is not limited to, the

institution’s contributed portion by reason of

cost-sharing agreements or any underrecoveries through negotiation of flat

amounts for F&A costs.

26. Maintenance and repair costs. Costs

incurred for necessary maintenance, repair or

upkeep of property (including Federal

property unless otherwise provided for)

which neither add to the permanent value of

the property nor appreciably prolong its

intended life but keep it in an efficient

operating condition, are allowable.

27. Material costs. Costs incurred for

purchased materials, supplies, and fabricated

parts directly or indirectly related to the

sponsored agreement, are allowable.

Purchases made specifically for the

sponsored agreement should be charged

thereto at their actual prices after deducting

all cash discounts, trade discounts, rebates,

and allowances received by the institution.

Withdrawals from general stores or

stockrooms should be charged at their cost

under any recognized method of pricing

stores withdrawals conforming to sound

accounting practices consistently followed by

the institution. Incoming transportation

charges are a proper part of material cost.

Direct material cost should include only the

materials and supplies actually used for the

performance of the sponsored agreement, and

due credit should be given for any excess

materials retained, or returned to vendors.

Due credit should be given for all proceeds

or value received for any scrap resulting from

work under the sponsored agreement. Where

federally-donated or furnished materials is

used in performing the sponsored agreement,

such material will be used without charge.

28. Memberships, subscriptions and

professional activity costs.

a. Costs of the institution’s membership in

business, technical, and professional

organizations are allowable.

b. Costs of the institution’s subscriptions to

business, professional, and technical

periodicals are allowable.

c. Costs of meetings and conferences, when

the primary purpose is the dissemination of

technical information, are allowable. This

includes costs of meals, transportation, rental

of facilities, and other items incidental to

such meetings or conferences.

d. Costs of membership in any civic or

community organization are unallowable.

e. Costs of membership in any country club

or social or dining club or organization are

unallowable.

29. Patent costs. Costs of preparing

disclosures, reports, and other documents

required by the sponsored agreement, and of

searching the art to the extent necessary to

make such invention disclosures, are

allowable. In accordance with the clauses of

the sponsored agreement relating to patents,

costs of preparing documents and any other

patent costs, in connection with the filing of

a patent application where title is conveyed

to the Federal Government, are allowable.

(See also Section J.39.)

30. Plant security costs. Necessary

expenses incurred to comply with security

requirements, including wages, uniforms and

equipment of personnel engaged in plant

protection, are allowable.

31. Preagreement costs. Costs incurred

prior to the effective date of the sponsored

agreement, whether or not they would have

been allowable thereunder if incurred after

such date, are unallowable thereunder if

incurred after such date, are unallowable

unless approved by the sponsoring agency.

32. Professional services costs. a. Costs of

professional and consulting services,

including legal services rendered by the

members of a particular profession who are

not employees of the institution, are

allowable, subject to subsection b and

Section J.11 when reasonable in relation to

the services rendered and when not

contingent upon recovery of the costs from

the Federal Government. Retainer fees, to be

allowable, must be reasonably supported by

evidence of services rendered.

b. Factors to be considered in determining

the allowability of costs in a particular case
20910 Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices

include (1) the past pattern of such costs,

particularly in the years prior to the award

of sponsored agreements; (2) the impact of

sponsored agreements on the institution’s

total activity; (3) the nature and scope of

managerial services expected of the

institution’s own organizations; and (4)

whether the proportion of Federal

Government work to the institution’s total

activity is such as to influence the institution

in favor of incurring the cost, particularly

where the services rendered are not of a

continuing nature and have little relationship

to work under sponsored agreements.

33. Profits and losses on disposition of

plant equipment or other capital assets.

Profits or losses arising from the sale or

exchange of plant, facilities, equipment or

other capital assets, including sale or

exchange of either short-term or long-term

investments, shall not be considered in

computing the costs of sponsored agreements

except for pension plans as provided in

Section J.8.f. When assets acquired with

Federal funds, in part or wholly, are disposed

of, the distribution of the proceeds shall be

made in accordance with Circular A–110.

34. Proposal costs. Proposal costs are the

costs of preparing bids or proposals on

potential federally and non-federallysponsored agreements or projects, including

the development of data necessary to support

the institution’s bids or proposals. Proposal

costs of the current accounting period of both

successful and unsuccessful bids and

proposals normally should be treated as F&A

costs and allocated currently to all activities

of the institution, and no proposal costs of

past accounting periods will be allocable to

the current period. However, the institution’s

established practices may be to treat proposal

costs by some other recognized method.

Regardless of the method used, the results

obtained may be accepted only if found to be

reasonable and equitable.

35. Rearrangement and alteration costs.

Costs incurred for ordinary or normal

rearrangement and alteration of facilities are

allowable. Special arrangement and

alteration costs incurred specifically for the

project are allowable when such work has

been approved in advance by the sponsoring

agency.

36. Reconversion costs. Costs incurred in

the restoration or rehabilitation of the

institution’s facilities to approximately the

same condition existing immediately prior to

commencement of a sponsored agreement,

fair wear and tear excepted, are allowable.

37. Recruiting costs. a. Subject to

subsections b, c, and d, and provided that the

size of the staff recruited and maintained is

in keeping with workload requirements, costs

of ‘‘help wanted’’ advertising, operating costs

of an employment office necessary to secure

and maintain an adequate staff, costs of

operating an aptitude and educational testing

program, travel costs of employees while

engaged in recruiting personnel, travel costs

of applicants for interviews for prospective

employment, and relocation costs incurred

incident to recruitment of new employees,

are allowable to the extent that such costs are

incurred pursuant to a well-managed

recruitment program. Where the institution

uses employment agencies, costs not in

excess of standard commercial rates for such

services are allowable.

b. In publications, costs of help wanted

advertising that includes color, includes

advertising material for other than

recruitment purposes, or is excessive in size

(taking into consideration recruitment

purposes for which intended and normal

institutional practices in this respect), are

unallowable.

c. Costs of help wanted advertising, special

emoluments, fringe benefits, and salary

allowances incurred to attract professional

personnel from other institutions that do not

meet the test of reasonableness or do not

conform with the established practices of the

institution, are unallowable.

d. Where relocation costs incurred incident

to recruitment of a new employee have been

allowed either as an allocable direct or F&A

cost, and the newly hired employee resigns

for reasons within his control within 12

months after hire, the institution will be

required to refund or credit such relocation

costs to the Federal Government.

38. Rental cost of buildings and equipment.

a. Rental costs of buildings or equipment are

allowable to the extent that the decision to

rent or lease is in accordance with Section

C.3. Rental arrangements should be reviewed

periodically to determine if circumstances

have changed and other options are available.

b. Rental costs under ‘‘sale and lease back’’

arrangements are allowable only up to the

amount that would be allowed if the

institution continued to own the property.

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

amount that would be allowed if the

institution owned the property. For this

purpose, a less-than-arms-length lease is one

under which one party to the lease agreement

is able to control or substantially influence

the actions of the other.

d. Where significant rental costs are

incurred under leases which create a material

equity in the leased property, they are

allowable only up to the amount that would

be allowed if the institution purchased the

property on the date the lease agreement was

executed. For this purpose, a material equity

in the property exists when the lease:

(1) Is noncancelable or is cancelable only

upon the occurrence of some remote

contingency, and

(2) Has one or more of the following

characteristics:

(a) Title to the property passes to the

institution at some time during or after the

lease period.

(b) The term of the lease corresponds

substantially to the estimated useful life of

the property (i.e., the period of economic

usefulness to the legal owner of the

property).

(c) The initial term is less than the useful

life of the property and the institution has the

option to renew the lease for the remaining

useful life at substantially less than fair rental

value.

(d) The property was acquired by the leaser

to meet the special needs of the institution

and will probably be usable only for that

purpose and only by the institution.

(e) The institution has the right, during or

at the expiration of the lease, to purchase the

property at a price which at the inception of

the lease appears to be substantially less than

the probable fair market value at the time it

is permitted to purchase the property

(commonly called a lease with a bargain

purchase option), except for any discount

normally given to educational institutions.

39. Royalties and other costs for use of

patents. Royalties on a patent or amortization

of the cost of acquiring a patent or invention

or rights thereto, necessary for the proper

performance of the sponsored agreement and

applicable to tasks or processes thereunder,

are allowable unless the Federal Government

has a license or the right to free use of the

patent, the patent has been adjudicated to be

invalid or has been administratively

determined to be invalid, the patent is

considered to be unenforceable, or the patent

has expired.

40. Sabbatical leave costs. Costs of leave of

absence by employees for performance of

graduate work or sabbatical study, travel, or

research are allowable provided the

institution has a uniform policy on sabbatical

leave for persons engaged in instruction and

persons engaged in research. Such costs will

be allocated on an equitable basis among all

related activities of the institution. Where

sabbatical leave is included in fringe benefits

for which a cost is determined for assessment

as a direct charge, the aggregate amount of

such assessments applicable to all work of

the institution during the base period must

be reasonable in relation to the institution’s

actual experience under its sabbatical leave

policy.

41. Scholarships and student aid costs. a.

Costs of scholarships, fellowships, and other

programs of student aid are allowable only

when the purpose of the sponsored

agreement is to provide training to selected

participants and the charge is approved by

the sponsoring agency. However, tuition

remission and other forms of compensation

paid as, or in lieu of, wages to students

performing necessary work are allowable

provided that (1) there is a bona fide

employer-employee relationship between the

student and the institution for the work

performed, (2) the tuition or other payments

are reasonable compensation for the work

performed and are conditioned explicitly

upon the performance of necessary work, and

(3) it is the institution’s practice to similarly

compensate students in nonsponsored as

well as sponsored activities.

b. Charges for tuition remission and other

forms of compensation paid to students as, or

in lieu of, salaries and wages shall be subject

to the reporting requirements stipulated in

Section J.8, and shall be treated as direct or

F&A cost in accordance with the actual work

being performed. Tuition remission may be

charged on an average rate basis.

42. Selling and marketing. Costs of selling

and marketing any products or services of the

institution (unless allowed under Section

J.1.c. or J.34) are unallowable.

43. Severance pay. a. Severance pay is

compensation in addition to regular salary

and wages which is paid by an institution to

employees whose services are being

terminated. Costs of severance pay are

allowable only to the extent that such

payments are required by law, by employer-
Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices 20911

employee agreement, by established policy

that constitutes in effect an implied

agreement on the institution’s part, or by

circumstances of the particular employment.

b. Severance payments that are due to

normal recurring turnover and which

otherwise meet the conditions of subsection

a may be allowed provided the actual costs

of such severance payments are regarded as

expenses applicable to the current fiscal year

and are equitably distributed among the

institution’s activities during that period.

c. Severance payments that are due to

abnormal or mass terminations are of such

conjectural nature that allowability must be

determined on a case-by-case basis. However,

the Federal Government recognizes its

obligation to participate, to the extent of its

fair share, in any specific payment.

d. Costs incurred in excess of the

institution’s normal severance pay policy

applicable to all persons employed by the

institution upon termination of employment

are unallowable.

44. Specialized service facilities. a. The

costs of institutional services involving the

use of highly complex or specialized

facilities such as electronic computers, wind

tunnels, and reactors are allowable, provided

the charge for the service meets the

conditions of subsections b through d.

b. The cost of each service normally shall

consist of both its direct costs and its

allocable share of F&A costs with deductions

for appropriate income of Federal financing

as described in Section C.5.

c. The cost of such institutional services

when material in amount will be charged

directly to users, including sponsored

agreements based on actual use of the

services and a schedule of rates that does not

discriminate between federally and nonfederally supported activities of the

institution, including use by the institution

for internal purposes. Charges for the use of

specialized facilities should be designed to

recover not more than the aggregate cost of

the services over a long-term period agreed

to by the institution and the cognizant

Federal agency. Accordingly, it is not

necessary that the rates charged for services

be equal to the cost of providing those

services during any one fiscal year as long as

rates are reviewed periodically for

consistency with the long-term plan and

adjusted if necessary.

d. Where the costs incurred for such

institutional services are not material, they

may be allocated as F&A costs. Such

arrangements must be agreed to by the

institution and the cognizant Federal agency.

e. Where it is in the best interest of the

Federal Government and the institution to

establish alternative costing arrangements,

such arrangements may be worked out with

the cognizant Federal agency.

45. Student activity costs. Costs incurred

for intramural activities, student

publications, student clubs, and other

student activities, are unallowable, unless

specifically provided for in the sponsored

agreements.

46. Taxes. a. In general, taxes which the

institution is required to pay and which are

paid or accrued in accordance with generally

accepted accounting principles are allowable.

Payments made to local governments in lieu

of taxes which are commensurate with the

local government services received are

allowable, except for (1) taxes from which

exemptions are available to the institution

directly or which are available to the

institution based on an exemption afforded

the Federal Government, and in the latter

case when the sponsoring agency makes

available the necessary exemption

certificates; and (2) special assessments on

land which represent capital improvements.

b. Any refund of taxes, interest, or

penalties, and any payment to the institution

of interest thereon, attributable to taxes,

interest, or penalties which were allowed as

sponsored agreement costs, will be credited

or paid to the Federal Government in the

manner directed by the Federal Government.

However, any interest actually paid or

credited to an institution incident to a refund

of tax, interest, and penalty will be paid or

credited to the Federal Government only to

the extent that such interest accrued over the

period during which the institution has been

reimbursed by the Federal Government for

the taxes, interest, and penalties.

47. Transportation costs. Costs incurred for

freight, express, cartage, postage, and other

transportation services relating either to

goods purchased, in process, or delivered, are

allowable. When such costs can readily be

identified with the items involved, they may

be charged directly as transportation costs or

added to the cost of such items. Where

identification with the materials received

cannot readily be made, inbound

transportation cost may be charged to the

appropriate F&A cost accounts if the

institution follows a consistent, equitable

procedure in this respect. Outbound freight,

if reimbursable under the terms of the

sponsored agreement, should be treated as a

direct cost.

48. Travel costs. a. General. Travel costs

are the expenses for transportation, lodging,

subsistence, and related items incurred by

employees who are in travel status on official

business of the institution. Such costs may be

charged on an actual basis, on a per diem or

mileage basis in lieu of actual costs incurred,

or on a combination of the two, provided the

method used is applied to an entire trip and

not to selected days of the trip, results in

reasonable charges, and is in accordance with

the institution’s travel policy and practices

consistently applied to all institutional travel

activities.

b. Lodging and subsistence. Costs incurred

by employees and officers for travel,

including costs of lodging, other subsistence,

and incidental expenses, shall be considered

reasonable and allowable only to the extent

such costs do not exceed charges normally

allowed by the institution in its regular

operations as a result of an institutional

policy and the amounts claimed under

sponsored agreements represent reasonable

and allocable costs. In the absence of an

acceptable institutional policy regarding

travel costs, the rates and amounts

established under subchapter I of Chapter 57

of Title 5, United States Code, or by the

Administrator of General Services, or the

President (or his or her designee) pursuant to

any provisions of such subchapter shall

apply to sponsored agreements (41 U.S.C.

420).

c. Commercial air travel. Airfare costs in

excess of the lowest available commercial

discount airfare, Federal Government

contract airfare (where authorized and

available), or 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 costs that would

offset transportation savings; or offer

accommodations not reasonably adequate for

the medical needs of the traveler. Where an

institution can reasonably demonstrate to the

sponsoring agency either the nonavailability

of discount airfare or Federal contract airfare

for individual trips or, on an overall basis,

that it is the institution’s practice to make

routine use of such airfare, specific

determinations of nonavailability will

generally not be questioned by the Federal

Government, 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 institution 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 institution-owned,

-leased, or -chartered aircraft,’’ as used in this

subsection, includes the cost of lease, charter,

operation (including personnel costs),

maintenance, depreciation, insurance, and

other related costs. Costs of travel via

institution-owned, -leased, or -chartered

aircraft shall not exceed the cost of allowable

commercial air travel, as provided for in

subsection c.

49. Termination costs applicable to

sponsored agreement. a. Termination of

sponsored agreements generally gives rise to

the incurrence of costs or to the need for

special treatment of costs, which would not

have arisen had the agreement not been

terminated. Items peculiar to termination are

set forth below. They are to be used in

conjunction with all other provisions of this

Circular in the case of termination.

b. The cost of common items of material

reasonably usable on the institution’s other

work will not be allowable unless the

institution submits evidence that it could not

retain such items at cost without sustaining

a loss. In deciding whether such items are

reasonably usable on other work of the

institution, consideration should be given to

the institution’s plans and orders for current

and scheduled work. Contemporaneous

purchases of common items by the

institution will be regarded as evidence that

such items are reasonably usable on the

institution’s other work. Any acceptance of

common items as allowable to the terminated

portion of the agreement should be limited to

the extent that the quantities of such items

on hand, in transit, and on order are in

excess of the reasonable quantitative

requirements of other work.

c. If in a particular case, despite all

reasonable efforts by the institution, certain

costs cannot be discontinued immediately

after the effective date of the termination,
20912 Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices

such costs are generally allowable within the

limitations set forth in this Circular, except

that any such costs continuing after

termination due to the negligent or willful

failure of the institution to discontinue such

costs will be considered unacceptable.

d. Loss of useful value of special tooling,

and special machinery and equipment is

generally allowable, provided (1) such

special tooling, machinery, or equipment is

not reasonably capable of use in the other

work of the institution; (2) the interest of the

Federal Government is protected by transfer

of title or by other means deemed appropriate

by the contracting officer or equivalent; and

(3) the loss of useful value as to any one

terminated agreement is limited to that

portion of the acquisition cost which bears

the same ratio to the total acquisition cost as

the terminated portion of the agreement bears

to the entire terminated agreement and other

Federal agreements for which the special

tooling, special machinery, or equipment was

acquired.

e. Rental costs under unexpired leases are

generally allowable where clearly shown to

have been reasonably necessary for the

performance of the terminated agreement,

less the residual value of such leases, if (1)

the amount of such rental claimed does not

exceed the reasonable use value of the

property leased for the period of the

agreement and such further period as may be

reasonable; and (2) the institution makes all

reasonable efforts to terminate, assign, settle,

or otherwise reduce the cost of such lease.

There also may be included the cost of

alterations of such leased property, provided

such alternations were necessary for the

performance of the agreement, and of

reasonable restoration required by the

provisions of the lease.

f. Settlement expenses including the

following are generally allowable: (1)

accounting, legal, clerical, and similar costs

reasonably necessary for the preparation and

presentation to contracting officers or

equivalent of settlement claims and

supporting data with respect to the

terminated portion of the agreement, and the

termination and settlement of subagreements;

and (2) reasonable costs for the storage,

transportation, protection, and disposition of

property provided by the Federal

Government or acquired or produced by the

institution for the agreement, except when

the institution is reimbursed for disposals at

a predetermined amount in accordance with

the provisions of Circular A–110.

g. Claims under subagreements, including

the allocable portion of claims which are

common to the agreement and to other work

of the institution, are generally allowable.

50. Trustees. Travel and subsistence costs

of trustees, regardless of the purpose of the

trip, are unallowable.

K. Certification of Charges

1. To assure that expenditures for

sponsored agreements are proper and in

accordance with the agreement documents

and approved project budgets, the annual

and/or final fiscal reports or vouchers

requesting payment under the agreements

will include a certification, signed by an

authorized official of the university, which

reads essentially as follows: ‘‘I certify that all

expenditures reported (or payment

requested) are for appropriate purposes and

in accordance with the provisions of the

application and award documents.’’

2. Certification of F&A costs. a. Policy. (1)

No proposal to establish F&A cost rates shall

be acceptable unless such costs have been

certified by the educational institution using

the Certificate of F&A Costs set forth in

subsection b. The certificate must be signed

on behalf of the institution by an individual

at a level no lower than vice president or

chief financial officer of the institution that

submits the proposal.

(2) No F&A cost rate shall be binding upon

the Federal Government if the most recent

required proposal from the institution has

not been certified. Where it is necessary to

establish F&A cost rates, and the institution

has not submitted a certified proposal for

establishing such rates in accordance with

the requirements of this section, the Federal

Government shall unilaterally establish such

rates. Such rates may be based upon audited

historical data or such other data that have

been furnished to the cognizant Federal

agency and for which it can be demonstrated

that all unallowable costs have been

excluded. When F&A cost rates are

unilaterally established by the Federal

Government because of failure of the

institution to submit a certified proposal for

establishing such rates in accordance with

this section, the rates established will be set

at a level low enough to ensure that

potentially unallowable costs will not be

reimbursed.

b. Certificate. The certificate required by

this section shall be in the following form:

Certificate of F&A Costs

This is to certify that to the best of my

knowledge and belief:

(1) I have reviewed the F&A cost proposal

submitted herewith;

(2) All costs included in this proposal

[identify date] to establish billing or final

F&A costs rate for [identify period covered by

rate] are allowable in accordance with the

requirements of the Federal agreement(s) to

which they apply and with the cost

principles applicable to those agreements.

(3) This proposal does not include any

costs which are unallowable under

applicable cost principles such as (without

limitation): advertising and public relations

costs, contributions and donations,

entertainment costs, fines and penalties,

lobbying costs, and defense of fraud

proceedings; and

(4) All costs included in this proposal are

properly allocable to Federal agreements on

the basis of a beneficial or causal relationship

between the expenses incurred and the

agreements to which they are allocated in

accordance with applicable requirements.

For educational institutions that are

required to file a DS–2 in accordance with

Section C.14, the following statement shall be

added to the ‘‘Certificate of F&A Costs’’:

(5) The rate proposal is prepared using the

same cost accounting practices that are

disclosed in the DS–2, including its

amendments and revisions, filed with and

approved by the cognizant agency.

I declare under penalty of perjury that the

foregoing is true and correct.

Institution: lllllllllllllll

Signature: llllllllllllllll

Name of Official: llllllllllll

Title: llllllllllllllllll

Date of Execution: llllllllllll

Exhibit A—List of Colleges and Universities;

Subject to Section J.12.f of Circular A–21

1. Johns Hopkins University

2. Stanford University

3. Massachusetts Institute of Technology

4. University of Washington

5. University of California-Los Angeles

6. University of Michigan

7. University of California-San Diego

8. University of California-San Francisco

9. University of Wisconsin-Madison

10. Columbia University

11. Yale University

12. Harvard University

13. Cornell University

14. University of Pennsylvania

15. University of California-Berkeley

16. University of Minnesota

17. Pennsylvania State University

18. University of Southern California

19. Duke University

20. Washington University

21. University of Colorado

22. University of Illinois-Urbana

23. University of Rochester

24. University of North Carolina-Chapel Hill

25. University of Pittsburgh

26. University of Chicago

27. University of Texas-Austin

28. University of Arizona

29. New York University

30. University of Iowa

31. Ohio State University

32. University of Alabama-Birmingham

33. Case Western Reserve

34. Baylor College of Medicine

35. California Institute of Technology

36. Yeshiva University

37. University of Massachusetts

38. Vanderbilt University

39. Purdue University

40. University of Utah

41. Georgia Institute of Technology

42. University of Maryland-College Park

43. University of Miami

44. University of California-Davis

45. Boston University

46. University of Florida

47. Carnegie-Mellon University

48. Northwestern University

49. Indiana University

50. Michigan State University

51. University of Virginia

52. University of Texas-SW Medical Center

53. University of California-Irvine

54. Princeton University

55. Tulane University of Louisiana

56. Emory University

57. University of Georgia

58. Texas A&M University-all campuses

59. New Mexico State University

60. North Carolina State University-Raleigh

61. University of Illinois-Chicago

62. Utah State University

63. Virginia Commonwealth University

64. Oregon State University

65. SUNY-Stony Brook

66. University of Cincinnati
Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices 20913

67. CUNY-Mount Sinai School of Medicine

68. University of Connecticut

69. Louisiana State University

70. Tufts University

71. University of California-Santa Barbara

72. University of Hawaii-Manoa

73. Rutgers State University of New Jersey

74. Colorado State University

75. Rockefeller University

76. University of Maryland-Baltimore

77. Virginia Polytechnic Institute & State

University

78. SUNY-Buffalo

79. Brown University

80. University of Medicine & Dentistry of

New Jersey

81. University of Texas-Health Science

Center San Antonio

82. University of Vermont

83. University of Texas-Health Science

Center Houston

84. Florida State University

85. University of Texas-MD Anderson Cancer

Center

86. University of Kentucky

87. Wake Forest University

88. Wayne State University

89. Iowa State University of Science &

Technology

90. University of New Mexico

91. Georgetown University

92. Dartmouth College

93. University of Kansas

94. Oregon Health Sciences University

95. University of Texas-Medical BranchGalveston

96. University of Missouri-Columbia

97. Temple University

98. George Washington University

99. University of Dayton

Appendix A—Part 99005—Cost Accounting

Standards for Educational Institutions

CAS 9905.501—Consistency in Estimating,

Accumulating and Reporting Costs by

Educational Institutions

Purpose

The purpose of this standard is to ensure

that each educational institution’s practices

used in estimating costs for a proposal are

consistent with cost accounting practices

used by the educational institution in

accumulating and reporting costs.

Consistency in the application of cost

accounting practices is necessary to enhance

the likelihood that comparable transactions

are treated alike. With respect to individual

sponsored agreements, the consistent

application of cost accounting practices will

facilitate the preparation of reliable cost

estimates used in pricing a proposal and their

comparison with the costs of performance of

the resulting sponsored agreement. Such

comparisons provide one important basis for

financial control over costs during sponsored

agreement performance and aid in

establishing accountability for costs in the

manner agreed to by both parties at the time

of agreement. The comparisons also provide

an improved basis for evaluating estimating

capabilities.

Definitions

(a) The following are definitions of terms

which are prominent in this standard.

(1) Accumulating costs means the

collecting of cost data in an organized

manner, such as through a system of

accounts.

(2) Actual cost means an amount

determined on the basis of cost incurred (as

distinguished from forecasted cost),

including standard cost properly adjusted for

applicable variance.

(3) Estimating costs means the process of

forecasting a future result in terms of cost,

based upon information available at the time.

(4) Indirect cost pool means a grouping of

incurred costs identified with two or more

objectives but not identified specifically with

any final cost objective.

(5) Pricing means the process of

establishing the amount or amounts to be

paid in return for goods or services.

(6) Proposal means any offer or other

submission used as a basis for pricing a

sponsored agreement, sponsored agreement

modification or termination settlement or for

securing payments thereunder.

(7) Reporting costs means the providing of

cost information to others.

Fundamental Requirement

An educational institution’s practices used

in estimating costs in pricing a proposal shall

be consistent with the educational

institution’s cost accounting practices used

in accumulating and reporting costs.

An educational institution’s cost

accounting practices used in accumulating

and reporting actual costs for a sponsored

agreement shall be consistent with the

educational institution’s practices used in

estimating costs in the related proposal or

application.

The grouping of homogeneous costs in

estimates prepared for proposal purposes

shall not per se be deemed an inconsistent

application of cost accounting practices of

this paragraph when such costs are

accumulated in reported in greater detail on

an actual costs basis during performance of

the sponsored agreement.

Techniques for Application

(a) The standard allows grouping of

homogeneous costs in order to cover those

cases where it is not practicable to estimate

sponsored agreement costs by individual cost

element. However, costs estimated for

proposal purposes shall be presented in such

a manner and in such detail that any

significant cost can be compared with the

actual cost accumulated and reported

therefor. In any event, the cost accounting

practices used in estimating costs in pricing

a proposal and in accumulating and reporting

costs on the resulting sponsored agreement

shall be consistent with respect to:

(1) The classification of elements of cost as

direct or indirect; (2) the indirect cost pools

to which each element of cost is charged or

proposed to be charged; and (3) the methods

of allocating indirect costs to the sponsored

agreement.

(b) Adherence to the requirement of this

standard shall be determined as of the date

of award of the sponsored agreement, unless

the sponsored agreement has submitted cost

or pricing data pursuant to 10 U.S.C. 2306(a)

or 41 U.S.C. 254(d) (Pub. L. 87–653), in

which case adherence to the requirement of

this standard shall be determined as of the

date of final agreement on price, as shown on

the signed certificate of current cost or

pricing data. Notwithstanding 9905.501–

40(b), changes in established cost accounting

practices during sponsored agreement

performance may be made in accordance

with Part 9903 (48 CFR 9903).

(b) The standard does not prescribe the

amount of detail required in accumulating

and reporting costs. The basic requirement

which must be met, however, is that for any

significant amount of estimated cost, the

sponsored agreement must be able to

accumulate and report actual cost at a level

which permits sufficient and meaningful

comparison with its estimates. The amount of

detail required may vary considerably

depending on how the proposed costs were

estimated, the data presented in justification

or lack thereof, and the significance of each

situation. Accordingly, it is neither

appropriate nor practical to prescribe a single

set of accounting practices which would be

consistent in all situations with the practices

of estimating costs. Therefore, the amount of

accounting and statistical detail to be

required and maintained in accounting for

estimated costs has been and continues to be

a matter to be decided by Government

procurement authorities on the basis of the

individual facts and circumstances.

CAS 9905.502—Consistency in Allocating

Costs Incurred for the Same Purpose by

Educational Institutions

Purpose

The purpose of this standard is to require

that each type of cost is allocated only once

and on only one basis to any sponsored

agreement or other cost objective. The criteria

for determining the allocation of costs to a

sponsored agreement or other cost objective

should be the same for all similar objectives.

Adherence to these cost accounting concepts

is necessary to guard against the overcharging

of some cost objectives and to prevent double

counting. Double counting occurs most

commonly when cost items are allocated

directly to a cost objective without

eliminating like cost items from indirect cost

pools which are allocated to that cost

objective.

Definitions

(a) The following are definitions of terms

which are prominent in this standard.

(1) Allocate means to assign an item of

cost, or a group of items of cost, to one or

more cost objectives. This term includes both

direct assignment of cost and the

reassignment of a share from an indirect cost

pool.

(2) Cost objective means a function,

organizational subdivision, sponsored

agreement, or other work unit for which cost

data are desired and for which provision is

made to accumulate and measure the cost of

processes, products, jobs, capitalized

projects, etc.

(3) Direct cost means any cost which is

identified specifically with a particular final

cost objective. Direct costs are not limited to

items which are incorporated in the end

product as material or labor. Costs identified

specifically with a sponsored agreement are
20914 Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices

direct costs of that sponsored agreement. All

costs identified specifically with other final

cost objectives of the educational institution

are direct costs of those cost objectives.

(4) Final cost objective means a cost

objective which has allocated to it both direct

and indirect costs, and in the educational

institution’s accumulation system, is one of

the final accumulation points.

(5) Indirect cost means any cost not

directly identified with a single final cost

objective, but identified with two or more

final cost objectives or with at least one

intermediate cost objective.

(6) Indirect cost pool means a grouping of

incurred costs identified with two or more

cost objectives but not identified with any

final cost objective.

(7) Intermediate cost objective means a cost

objective that is used to accumulate indirect

costs or service center costs that are

subsequently allocated to one or more

indirect cost pools and/or final cost

objectives.

Fundamental Requirement

All costs incurred for the same purpose, in

like circumstances, are either direct costs

only or indirect costs only with respect to

final cost objectives. No final cost objective

shall have allocated to it as an indirect cost

any cost, if other costs incurred for the same

purpose, in like circumstances, have been

included as a direct cost of that or any other

final cost objective. Further, no final cost

objective shall have allocated to it as a direct

cost any cost, if other costs incurred for the

same purpose, in like circumstances, have

been included in any indirect cost pool to be

allocated to that or any other final cost

objective.

Techniques for Application

(a) The Fundamental Requirement is stated

in terms of cost incurred and is equally

applicable to estimates of costs to be incurred

as used in sponsored agreement proposals.

(b) The Disclosure Statement to be

submitted by the educational institution will

require that the educational institution set

forth its cost accounting practices with regard

to the distinction between direct and indirect

costs. In addition, for those types of cost

which are sometimes accounted for as direct

and sometimes accounted for as indirect, the

educational institution will set forth in its

Disclosure Statement the specific criteria and

circumstances for making such distinctions.

In essence, the Disclosure Statement

submitted by the educational institution, by

distinguishing between direct and indirect

costs, and by describing the criteria and

circumstances for allocating those items

which are sometimes direct and sometimes

indirect, will be determinative as to whether

or not costs are incurred for the same

purpose. Disclosure Statement as used herein

refers to the statement required to be

submitted by educational institutions in

Section C.14.

(c) In the event that an educational

institution has not submitted a Disclosure

Statement, the determination of whether

specific costs are directly allocable to

sponsored agreements shall be based upon

the educational institution’s cost accounting

practices used at the time of sponsored

agreement proposal.

(d) Whenever costs which serve the same

purpose cannot equitably be indirectly

allocated to one or more final cost objectives

in accordance with the educational

institution’s disclosed accounting practices,

the educational institution may either (1) use

a method for reassigning all such costs which

would provide an equitable distribution to all

final cost objectives, or (2) directly assign all

such costs to final cost objectives with which

they are specifically identified. In the event

the educational institution decides to make a

change for either purpose, the Disclosure

Statement shall be amended to reflect the

revised accounting practices involved.

(e) Any direct cost of minor dollar amount

may be treated as an indirect cost for reasons

of practicality where the accounting

treatment for such cost is consistently

applied to all final cost objectives, provided

that such treatment produces results which

are substantially the same as the results

which would have been obtained if such cost

had been treated as a direct cost.

Illustrations

(a) Illustrations of costs which are incurred

for the same purpose:

(1) An educational institution normally

allocates all travel as an indirect cost and

previously disclosed this accounting practice

to the Government. For purposes of a new

proposal, the educational institution intends

to allocate the travel costs of personnel

whose time is accounted for as direct labor

directly to the sponsored agreement. Since

travel costs of personnel whose time is

accounted for as direct labor working on

other sponsored agreements are costs which

are incurred for the same purpose, these costs

may no longer be included within indirect

cost pools for purposes of allocation to any

covered Government sponsored agreement.

The educational institution’s Disclosure

Statement must be amended for the proposed

changes in accounting practices.

(2) An educational institution normally

allocates purchasing activity costs indirectly

and allocates this cost to instruction and

research on the basis of modified total costs.

A proposal for a new sponsored agreement

requires a disproportionate amount of

subcontract administration to be performed

by the purchasing activity. The educational

institution prefers to continue to allocate

purchasing activity costs indirectly. In order

to equitably allocate the total purchasing

activity costs, the educational institution may

use a method for allocating all such costs

which would provide an equitable

distribution to all applicable indirect cost

pools. For example, the educational

institution may use the number of

transactions processed rather than its former

allocation base of modified total costs. The

educational institution’s Disclosure

Statement must be amended for the proposed

changes in accounting practices.

(b) Illustrations of costs which are not

incurred for the same purpose:

(1) An educational institution normally

allocates special test equipment costs directly

to sponsored agreements. The costs of general

purpose test equipment are normally

included in the indirect cost pool which is

allocated to sponsored agreements. Both of

these accounting practices were previously

disclosed to the Government. Since both

types of costs involved were not incurred for

the same purpose in accordance with the

criteria set forth in the educational

institution’s Disclosure Statement, the

allocation of general purpose test equipment

costs from the indirect cost pool to the

sponsored agreement, in addition to the

directly allocated special test equipment

costs, is not considered a violation of the

standard.

(2) An educational institution proposes to

perform a sponsored agreement which will

require three firemen on 24-hour duty at a

fixed-post to provide protection against

damage to highly inflammable materials used

on the sponsored agreement. The educational

institution presently has a firefighting force

of 10 employees for general protection of its

facilities. The educational institution’s costs

for these latter firemen are treated as indirect

costs and allocated to all sponsored

agreements; however, it wants to allocate the

three fixed-post firemen directly to the

particular sponsored agreement requiring

them and also allocate a portion of the cost

of the general firefighting force to the same

sponsored agreement. The educational

institution may do so but only on condition

that its disclosed practices indicate that the

costs of the separate classes of firemen serve

different purposes and that it is the

educational institution’s practice to allocate

the general firefighting force indirectly and to

allocate fixed-post firemen directly.

Interpretation

(a) Consistency in Allocating Costs

Incurred for the Same Purpose by

Educational Institutions, provides, in this

standard, that ‘‘* * * no final cost objective

shall have allocated to it as a direct cost any

cost, if other costs incurred for the same

purpose, in like circumstances, have been

included in any indirect cost pool to be

allocated to that or any other final cost

objective.’’

(b) This interpretation deals with the way

this standard applies to the treatment of costs

incurred in preparing, submitting, and

supporting proposals. In essence, it is

addressed to whether or not, under the

standard, all such costs are incurred for the

same purpose, in like circumstances.

(c) Under this standard, costs incurred in

preparing, submitting, and supporting

proposals pursuant to a specific requirement

of an existing sponsored agreement are

considered to have been incurred in different

circumstances from the circumstances under

which costs are incurred in preparing

proposals which do not result from such

specific requirement. The circumstances are

different because the costs of preparing

proposals specifically required by the

provisions of an existing sponsored

agreement relate only to that sponsored

agreement while other proposal costs relate

to all work of the educational institution.

(d) This interpretation does not preclude

the allocation, as indirect costs, of costs

incurred in preparing all proposals. The cost

accounting practices used by the educational

institution, however, must be followed

consistently and the method used to

reallocate such costs, of course, must provide
Federal Register / Vol. 61, No. 90 / Wednesday, May 8, 1996 / Notices 20915

an equitable distribution to all final cost

objectives.

CAS 9905.505—Accounting for Unallowable

Costs—Educational Institutions

Purpose

(a) The purpose of this standard is to

facilitate the negotiation, audit,

administration and settlement of sponsored

agreements by establishing guidelines

covering (1) identification of costs

specifically described as unallowable, at the

time such costs first become defined or

authoritatively designated as unallowable,

and (2) the cost accounting treatment to be

accorded such identified unallowable costs

in order to promote the consistent

application of sound cost accounting

principles covering all incurred costs. The

standard is predicated on the proposition

that costs incurred in carrying on the

activities of an educational institution—

regardless of the allowability of such costs

under Government sponsored agreements—

are allocable to the cost objectives with

which they are identified on the basis of their

beneficial or causal relationships.

(b) This standard does not govern the

allowability of costs. This is a function of the

appropriate procurement or reviewing

authority.

Definitions

(a) The following are definitions of terms

which are prominent in this standard.

(1) Directly associated cost means any cost

which is generated solely as a result of the

incurrence of another cost, and which would

not have been incurred had the other cost not

been incurred.

(2) Expressly unallowable cost means a

particular item or type of cost which, under

the express provisions of an applicable law,

regulation, or sponsored agreement, is

specifically named and stated to be

unallowable.

(3) Indirect cost means any cost not

directly identified with a single final cost

objective, but identified with two or more

final cost objectives or with at least one

intermediate cost objective.

(4) Unallowable cost means any cost

which, under the provisions of any pertinent

law, regulation, or sponsored agreement,

cannot be included in prices, cost

reimbursements, or settlements under a

Government sponsored agreement to which it

is allocable.

Fundamental Requirement

(a) Costs expressly unallowable or

mutually agreed to be unallowable, including

costs mutually agreed to be unallowable

directly associated costs, shall be identified

and excluded from any billing, claim,

application, or proposal applicable to a

Government Sponsored Agreement.

(b) Costs which specifically become

designated as unallowable as a result of a

written decision furnished by a Federal

official pursuant to sponsored agreement

disputes procedures shall be identified if

included in or used in the computation of

any billing, claim, or proposal applicable to

a sponsored agreement. This identification

requirement applies also to any costs

incurred for the same purpose under like

circumstances as the costs specifically

identified as unallowable under either this

paragraph or paragraph (a) of this subsection.

(c) Costs which, in a Federal official’s

written decision furnished pursuant to

disputes procedures, are designated as

unallowable directly associated costs of

unallowable costs covered by either

paragraph (a) or (b) of this subsection shall

be accorded the identification required by

paragraph b. of this subsection.

(d) The costs of any work project not

contractually authorized, whether or not

related to performance of a proposed or

existing contract, shall be accounted for, to

the extent appropriate, in a manner which

permits ready separation from the costs of

authorized work projects.

(e) All unallowable costs covered by

paragraphs (a) through (d) of this subsection

shall be subject to the same cost accounting

principles governing cost allocability as

allowable costs. In circumstances where

these unallowable costs normally would be

part of a regular indirect-cost allocation base

or bases, they shall remain in such base or

bases. Where a directly associated cost is part

of a category of costs normally included in

an indirect-cost pool that will be allocated

over a base containing the unallowable cost

with which it is associated, such a directly

associated cost shall be retained in the

indirect-cost pool and be allocated through

the regular allocation process.

(f) Where the total of the allocable and

otherwise allowable costs exceeds a

limitation-of-cost or ceiling-price provision

in a sponsored agreement, full direct and

indirect cost allocation shall be made to the

cost objective, in accordance with established

cost accounting practices and Standards

which regularly govern a given entity’s

allocations to Government sponsored

agreement cost objectives. In any

determination of unallowable cost overrun,

the amount thereof shall be identified in

terms of the excess of allowable costs over

the ceiling amount, rather than through

specific identification of particular cost items

or cost elements.

Techniques for Application

(a) The detail and depth of records

required as backup support for proposals,

billings, or claims shall be that which is

adequate to establish and maintain visibility

of identified unallowable costs (including

directly associated costs), their accounting

status in terms of their allocability to

sponsored agreement cost objectives, and the

cost accounting treatment which has been

accorded such costs. Adherence to this cost

accounting principle does not require that

allocation of unallowable costs to final cost

objectives be made in the detailed cost

accounting records. It does require that

unallowable costs be given appropriate

consideration in any cost accounting

determinations governing the content of

allocation bases used for distributing indirect

costs to cost objectives. Unallowable costs

involved in the determination of rates used

for standard costs, or for indirect-cost

bidding or billing, need be identified only at

the time rates are proposed, established,

revised or adjusted.

(b) The visibility requirement of paragraph

(a) of this subsection, may be satisfied by any

form of cost identification which is adequate

for purposes of sponsored agreement cost

determination and verification. The standard

does not require such cost identification for

purposes which are not relevant to the

determination of Government sponsored

agreement cost. Thus, to provide visibility for

incurred costs, acceptable alternative

practices would include (1) the segregation of

unallowable costs in separate accounts

maintained for this purpose in the regular

books of account, (2) the development and

maintenance of separate accounting records

or workpapers, or (3) the use of any less

formal cost accounting techniques which

establishes and maintains adequate cost

identification to permit audit verification of

the accounting recognition given unallowable

costs. Educational institutions may satisfy

the visibility requirements for estimated costs

either (1) by designation and description (in

backup data, workpapers, etc.) of the

amounts and types of any unallowable costs

which have specifically been identified and

recognized in making the estimates, or (2) by

description of any other estimating technique

employed to provide appropriate recognition

of any unallowable costs pertinent to the

estimates.

(c) Specific identification of unallowable

costs is not required in circumstances where,

based upon considerations of materiality, the

Government and the educational institution

reach agreement on an alternate method that

satisfies the purpose of the standard.

Illustrations

(a) An auditor recommends disallowance

of certain direct labor and direct material

costs, for which a billing has been submitted

under a sponsored agreement, on the basis

that these particular costs were not required

for performance and were not authorized by

the sponsored agreement. The Federal officer

issues a written decision which supports the

auditor’s position that the questioned costs

are unallowable. Following receipt of the

Federal officer’s decision, the educational

institution must clearly identify the

disallowed direct labor and direct material

costs in the educational institution’s

accounting records and reports covering any

subsequent submission which includes such

costs. Also, if the educational institution’s

base for allocation of any indirect cost pool

relevant to the subject sponsored agreement

consists of direct labor, direct material, total

prime cost, total cost input, etc., the

educational institution must include the

disallowed direct labor and material costs in

its allocation base for such pool. Had the

Federal officer’s decision been against the

auditor, the educational institution would

not, of course, have been required to account

separately for the costs questioned by the

auditor.

(b) An educational institution incurs, and

separately identifies, as a part of a service

center or expense pool, certain costs which

are expressly unallowable under the existing

and currently effective regulations. If the

costs of the service center or indirect expense

pool are regularly a part of the educational

institution’s base for allocation of general

administration and general expenses
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(GA&GE) or other indirect expenses, the

educational institution must allocate the

GA&GE or other indirect expenses to

sponsored agreements and other final cost

objectives by means of a base which includes

the identified unallowable indirect costs.

(c) An auditor recommends disallowance

of certain indirect costs. The educational

institution claims that the costs in question

are allowable under the provisions of Office

Of Management and Budget Circular A–21,

Cost Principles For Educational Institutions;

the auditor disagrees. The issue is referred to

the Federal officer for resolution pursuant to

the sponsored agreement disputes clause.

The Federal officer issues a written decision

supporting the auditor’s position that the

total costs questioned are unallowable under

the Circular. Following receipt of the Federal

officer’s decision, the educational institution

must identify the disallowed costs and

specific other costs incurred for the same

purpose in like circumstances in any

subsequent estimating, cost accumulation or

reporting for Government sponsored

agreements, in which such costs are

included. If the Federal officer’s decision had

supported the educational institution’s

contention, the costs questioned by the

auditor would have been allowable and the

educational institution would not have been

required to provide special identification.

(d) An educational institution incurred

certain unallowable costs that were charged

indirectly as general administration and

general expenses (GA&GE). In the

educational institution’s proposals for final

indirect cost rates to be applied in

determining allowable sponsored agreement

costs, the educational institution identified

and excluded the expressly unallowable

costs. In addition, during the course of

negotiation of indirect cost rates to be used

for bidding and billing purposes, the

educational institution agreed to classify as

unallowable cost, various directly associated

costs of the identifiable unallowable costs.

On the basis of negotiations and agreements

between the educational institution and the

Federal officer’s authorized representatives,

indirect cost rates were established, based on

the net balance of allowable GA&GE.

Application of the rates negotiated to

proposals, and to billings, for covered

sponsored agreements constitutes

compliance with the standard.

(e) An employee, whose salary, travel, and

subsistence expenses are charged regularly to

the general administration and general

expenses (GA&GE) pool, takes several

business associates on what is clearly a

business entertainment trip. The

entertainment costs of such trips is expressly

unallowable because it constitutes

entertainment expense prohibited by OMB

Circular A–21, and is separately identified by

the educational institution. The educational

institution does not regularly include its

GA&GE in any indirect-expense allocation

base. In these circumstances, the employee’s

travel and subsistence expenses would be

directly associated costs for identification

with the unallowable entertainment expense.

However, unless this type of activity

constituted a significant part of the

employee’s regular duties and

responsibilities on which his salary was

based, no part of the employee’s salary would

be required to be identified as a directly

associated cost of the unallowable

entertainment expense.

CAS 9905.506—Cost Accounting Period

—Educational Institutions

Purpose

The purpose of this standard is to provide

criteria for the selection of the time periods

to be used as cost accounting periods for

sponsored agreement cost estimating,

accumulating, and reporting. This standard

will reduce the effects of variations in the

flow of costs within each cost accounting

period. It will also enhance objectivity,

consistency, and verifiability, and promote

uniformity and comparability in sponsored

agreement cost measurements.

Definitions

(a) The following are definitions of terms

which are prominent in this standard.

(1) Allocate means to assign an item of

cost, or a group of items of cost, to one or

more cost objectives. This term includes both

direct assignment of cost and the

reassignment of a share from an indirect cost

pool.

(2) Cost Objective means a function,

organizational subdivision, sponsored

agreement, or other work unit for which cost

data are desired and for which provision is

made to accumulate and measure the cost of

processes, products, jobs, capitalized

projects, etc.

(3) Fiscal year means the accounting period

for which annual financial statements are

regularly prepared, generally a period of 12

months, 52 weeks, or 53 weeks.

(4) Indirect cost pool means a grouping of

incurred costs identified with two or more

cost objectives but not identified specifically

with any final cost objective.

Fundamental Requirement

Educational institutions shall use their

fiscal year as their cost accounting period,

except that:

Costs of an indirect function which exists

for only a part of a cost accounting period

may be allocated to cost objectives of that

same part of the period.

An annual period other than the fiscal year

may be used as the cost accounting period if

its use is an established practice of the

educational institution.

A transitional cost accounting period other

than a year shall be used whenever a change

of fiscal year occurs.

An educational institution shall follow

consistent practices in the selection of the

cost accounting period or periods in which

any types of expense and any types of

adjustment to expense (including priorperiod adjustments) are accumulated and

allocated.

The same cost accounting period shall be

used for accumulating costs in an indirect

cost pool as for establishing its allocation

base, except that the contracting parties may

agree to use a different period for establishing

an allocation base.

Techniques for Application

(a) The cost of an indirect function which

exists for only a part of a cost accounting

period may be allocated on the basis of data

for that part of the cost accounting period if

the cost is (1) material in amount, (2)

accumulated in a separate indirect cost pool

or expense pool, and (3) allocated on the

basis of an appropriate direct measure of the

activity or output of the function during that

part of the period.

(b) The practices required by this standard

shall include appropriate practices for

deferrals, accruals, and other adjustments to

be used in identifying the cost accounting

periods among which any types of expense

and any types of adjustment to expense are

distributed. If an expense, such as insurance

or employee leave, is identified with a fixed,

recurring, annual period which is different

from the educational institution’s cost

accounting period, the standard permits

continued use of that different period. Such

expenses shall be distributed to cost

accounting periods in accordance with the

educational institution’s established

practices for accruals, deferrals, and other

adjustments.

(c) Indirect cost allocation rates, based on

estimates, which are used for the purpose of

expediting the closing of sponsored

agreements which are terminated or

completed prior to the end of a cost

accounting period need not be those finally

determined or negotiated for that cost

accounting period. They shall, however, be

developed to represent a full cost accounting

period, except as provided in paragraph (a)

of this subsection.

(d) An educational institution may, upon

mutual agreement with the Government, use

as its cost accounting period a fixed annual

period other than its fiscal year, if the use of

such a period is an established practice of the

educational institution and is consistently

used for managing and controlling revenues

and disbursements, and appropriate accruals,

deferrals or other adjustments are made with

respect to such annual periods.

(e) The parties may agree to use an annual

period which does not coincide precisely

with the cost accounting period for

developing the data used in establishing an

allocation base: Provided,

(1) The practice is necessary to obtain

significant administrative convenience, (2)

the practice is consistently followed by the

educational institution, (3) the annual period

used is representative of the activity of the

cost accounting period for which the indirect

costs to be allocated are accumulated, and (4)

the practice can reasonably be estimated to

provide a distribution to cost objectives of

the cost accounting period not materially

different from that which otherwise would be

obtained.

(f) When a transitional cost accounting

period is required, educational institution

may select any one of the following: (1) the

period, less than a year in length, extending

from the end of its previous cost accounting

period to the beginning of its next regular

cost accounting period, (2) a period in excess

of a year, but not longer than 15 months,

obtained by combining the period described

in subparagraph (f)(1) of this subsection with

the previous cost accounting period, or (3) a

period in excess of a year, but not longer than

15 months, obtained by combining the period
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described in subparagraph (f)(1) of this

subsection with the next regular cost

accounting period. A change in the

educational institution’s cost accounting

period is a change in accounting practices for

which an adjustment in the sponsored

agreement price may be required.

Illustrations

(a) An educational institution allocates

indirect expenses for Organized Research on

the basis of a modified total direct cost base.

In a proposal for a sponsored agreement, it

estimates the allocable expenses based solely

on the estimated amount of indirect costs

allocated to Organized Research and the

amount of the modified total direct cost base

estimated to be incurred during the 8 months

in which performance is scheduled to be

commenced and completed. Such a proposal

would be in violation of the requirements of

this standard that the calculation of the

amounts of both the indirect cost pools and

the allocation bases be based on the

educational institution’s cost accounting

period.

(b) An educational institution whose cost

accounting period is the calendar year,

installs a computer service center to begin

operations on May 1. The operating expense

related to the new service center is expected

to be material in amount, will be

accumulated in an intermediate cost

objective, and will be allocated to the

benefiting cost objectives on the basis of

measured usage. The total operating expenses

of the computer service center for the 8-

month part of the cost accounting period may

be allocated to the benefiting cost objectives

of that same 8-month period.

(c) An educational institution changes its

fiscal year from a calendar year to the 12-

month period ending May 31. For financial

reporting purposes, it has a 5-month

transitional ‘‘fiscal year.’’ The same 5-month

period must be used as the transitional cost

accounting period; it may not be combined,

because the transitional period would be

longer than 15 months. The new fiscal year

must be adopted thereafter as its regular cost

accounting period. The change in its cost

accounting period is a change in accounting

practices; adjustments of the sponsored

agreement prices may thereafter be required.

(d) Financial reports are prepared on a

calendar year basis on a university-wide

basis. However, the contracting segment does

all internal financial planning, budgeting,

and internal reporting on the basis of a

twelve month period ended June 30. The

contracting parties agree to use the period

ended June 30 and they agree to overhead

rates on the June 30 basis. They also agree

on a technique for prorating fiscal year

assignment of the university’s central system

office expenses between such June 30

periods. This practice is permitted by the

standard.

(e) Most financial accounts and sponsored

agreement cost records are maintained on the

basis of a fiscal year which ends November

30 each year. However, employee vacation

allowances are regularly managed on the

basis of a ‘‘vacation year’’ which ends

September 30 each year. Vacation expenses

are estimated uniformly during each

‘‘vacation year.’’ Adjustments are made each

October to adjust the accrued liability to

actual, and the estimating rates are modified

to the extent deemed appropriate. This use of

a separate annual period for determining the

amounts of vacation expense is permitted.

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Appendix B—Disclosure Statement (DS–2) for Educational Institutions
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[FR Doc. 96–11111 Filed 5–7–96; 8:45 am]

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