[Federal Register Volume 61, Number 90 (Wednesday, May 8, 1996)]
[Notices]
[Pages 20880-20941]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-11111]




[[Page 20879]]


_______________________________________________________________________

Part II





Office of Management and Budget





_______________________________________________________________________



Cost Principles for Educational Institutions; Notice

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

[[Page 20880]]



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.

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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A-88 is rescinded effective July 1, l996.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.

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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 Sec. ______.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 Non-Profit 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.''

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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 federally- sponsored agreements. The purposes 
of the future proposed revisions are to assure the consistent treatment 
of costs proposed and charged to federally-sponsored 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, Sec. ______.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

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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 
previously-defined 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

[[Page 20884]]

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

[[Page 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 federally-sponsored 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.

[[Page 20886]]

    (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

[[Page 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 
lease-purchase 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

[[Page 20888]]

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

[[Page 20889]]

[GRAPHIC] [TIFF OMITTED] TN08MY96.024



BILLING CODE 3110-01-C

[[Page 20890]]

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

[[Page 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 prior-period 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 case-by-
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

[[Page 20892]]

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. Non- cognizant 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 
Sec. ______.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 
lease-purchase 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

[[Page 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 federally-sponsored activities 
from a facility financed by indebtedness, the cost of which was 
funded in whole or part through Federal reimbursements, to another 
facility prior to the expiration of a period of 20 years requires 
notice to the 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

[[Page 20894]]

    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

[[Page 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 non-credit 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

[[Page 20896]]

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

[[Page 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 prior-period 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 case-by-
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

[[Page 20898]]

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,

[[Page 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 institution-wide 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

[[Page 20900]]

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

[[Page 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, off-
campus, 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 carry-forward 
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 under-recovery 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

[[Page 20902]]

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. Non-cognizant 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

[[Page 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-

[[Page 20904]]

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-the-fact 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.

[[Page 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 part-time 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 institution-wide 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 case-by-
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 
in-house 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

[[Page 20906]]

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 two-
percent use allowance limitation must be applied to all parts of the 
building. The two-percent 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 two-thirds 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

[[Page 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 federally-
sponsored 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 self-insurance program are 
allowable, to the extent that the types of coverage, extent of

[[Page 20908]]

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 self-insurance) 
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 
Sec. ____.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 
lease-purchase 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 federally-sponsored activities 
from a facility financed by indebtedness, the cost of which was 
funded in whole or part through Federal reimbursements, to another 
facility prior to the expiration of a period of 20 years requires 
notice to the 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:

[[Page 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 under-recoveries 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

[[Page 20910]]

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-federally-sponsored 
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-arms-length'' 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-

[[Page 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 non-federally 
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,

[[Page 20912]]

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:-----------------------------------------------------------
Signature:-------------------------------------------------------------
Name of Official:------------------------------------------------------
Title:-----------------------------------------------------------------
Date of Execution:-----------------------------------------------------

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

[[Page 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 Branch-Galveston
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

[[Page 20914]]

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

[[Page 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

[[Page 20916]]

(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 
prior-period 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

[[Page 20917]]

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.
BILLING CODE 3110-01-P

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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]
BILLING CODE 3110-01-C