[Federal Register Volume 69, Number 90 (Monday, May 10, 2004)]
[Notices]
[Pages 25970-25995]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-10350]
[[Page 25969]]
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Part III
Office of Management and Budget
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Cost Principles for Educational Institutions; State, Local, and Indian
Tribal Governments; and Non-Profit Organizations; Notice
Federal Register / Vol. 69, No. 90 / Monday, May 10, 2004 / Notices
[[Page 25970]]
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OFFICE OF MANAGEMENT AND BUDGET
Cost Principles for Educational Institutions; State, Local, and
Indian Tribal Governments; and Non-Profit Organizations
AGENCY: Office of Management and Budget.
ACTION: Revisions to OMB Circulars A-21, A-87 and A-122.
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SUMMARY: The Office of Management and Budget (OMB) amends the cost
principles in OMB Circulars A-21, A-87 and A-122. These changes are
intended to further the objectives of Public Law 106-107, the Federal
Financial Assistance Management Improvement Act, (``the Act''). One of
the actions taken by the agencies under the Act was to simplify the
cost principles, making the descriptions of similar cost items
consistent across the Circulars where possible, and reducing the
possibility of misinterpretation.
DATES: These final cost principles are effective June 9, 2004.
ADDRESSES: OMB intends to keep these cost principles current with
changes in laws, modifications to accounting standards and advances in
technology. If you have comments on ways to improve these principles,
please submit your comments to Gilbert Tran, Office of Federal
Financial Management, Office of Management and Budget, 725 17th Street,
NW., Room 6025, Washington 20503. Due to potential delays in OMB's
receipt and processing of mail sent thru the U.S. Postal Service, we
encourage you to submit comments electronically to [email protected] with your name, title, organization and postal address
in the text of the message. You may also submit comments via facsimile
by sending your comment to (202) 395-4915.
FOR FURTHER INFORMATION CONTACT: Gilbert Tran, Office of Federal
Financial Management, Office of Management and Budget, (202) 395-3993.
SUPPLEMENTARY INFORMATION:
Background
The background for this effort was fully described in the preamble
to the proposed changes to the circulars, published in the Federal
Register on August 12, 2002 at 67 FR 52558. Briefly, the Federal
Financial Assistance Management Improvement Act of 1999 (Pub. L. 106-
107, ``the Act'') directs the Office of Management and Budget (OMB) and
executive branch agencies to simplify and consolidate requirements and
procedures for the receipt and administration of financial assistance.
Federal financial assistance includes grants, cooperative agreements,
loans, loan guarantees, scholarships, and other forms of assistance.
The grant and cooperative agreement portion of Federal financial
assistance, hereafter referred as ``grants,'' involves more than 600
programs, with awards of more than $400 billion a year, administered by
26 Federal agencies.
Grant recipients deal with increasingly complex problems that
require the delivery and coordination of many kinds of services. The
support for these services increasingly comes from more than one
Federal agency. Grant recipients' need to respond to the numerous
Federal grant administration requirements of these agencies and
programs only adds to that complexity.
OMB, working with the Department of Health and Human Services as
lead agency and the Chief Financial Officers' Council, established an
interagency group charged with reviewing the cost principles in Office
of Management and Budget Circulars A-21 (A-21), Cost Principles for
Educational Institutions, A-87 (A-87), Cost Principles for State, Local
and Indian Tribal Governments, and A-122 (A-122), Cost Principles for
Non-Profit Organizations. The goal of this group is to ensure that the
cost principles in OMB Circulars A-21, A-87, and A-122 are current,
consistent, and appropriate for covered recipients. The objectives of
the group are to make the descriptions of similar cost items
consistent, across the Circulars, where possible, and reduce the
possibility of misinterpretation by clarifying existing policies rather
than by adding restrictions or modifying current requirements.
Presentation of the Circulars
When we proposed the changes to the three circulars, we posted them
on the OMB Web site (http://www.omb.gov) as a chart so that readers
could easily compare the changes to the selected items of cost among
the three circulars. We will again post a chart that displays the final
revisions to the cost items across the three circulars so readers could
easily compare the final outcomes to the circulars. In this Federal
Register notice, we set out the specific changes to the selected items
of cost of the three circulars separately. In addition, we will post on
the OMB Web site the revised versions of the three circulars so that
each community can see the final revisions incorporated into each cost
principle circular.
Items for Future Consideration
In addition to comments on the proposed items, we received various
comments for improvement to the circulars that were not included in our
original proposal. We appreciated these comments. However, these
recommendations are beyond the scope of the current project. We will
consider them at a later phase of the cost consistency streamlining
project.
Responses to Comments
We received 184 comments on the proposal: 147 from universities, 13
from State and local governments, 8 from Federal agencies, 4 from not-
for-profit organizations and 12 other individuals and entities.
We have reviewed and given consideration to each comment in light
of the overall objectives and goals of the project. Many comments
resulted in changes in the proposed language while other comments
resulted in the withdrawal of certain proposals. We believe that the
final revisions accomplished our stated objectives to simplify the cost
principles, making the description of similar items consistent and
reducing the possibility of misunderstanding.
In summary, we made revisions to our proposed language for 24 cost
items and withdrew proposed language for 6 cost items. Forty-five of
the proposed changes are made final as proposed. The following chart
summarizes the final actions to the proposed items. The detailed
discussion of the comments and how those comments were resolved are
presented on the OMB Web site along with the revised circulars and the
final comparison chart. See http://www.omb.gov.
Dated: April 29, 2004.
Joshua B. Bolten,
Director.
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Adopted as Adopted as Proposal
Cost items in 3 circulars Proposal proposed amended withdrawn
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1. Advertising and public Consistent language ................. X .................
relations. across all 3
circulars.
2. Alcoholic beverages........... No proposed change.. ................. ................. X
3. Bad debts..................... Consistent language ................. X .................
across all 3
circulars.
[[Page 25971]]
4. Communication costs........... Consistent language ................. X .................
across all 3
circulars.
5. Compensation for personal Various relocation X ................. .................
services. of cost items into
this section.
6. Contingency provisions........ Consistent language ................. X .................
across all 3
circulars.
7. Donations and contributions... Consistent language ................. X .................
across all 3
circulars.
8. Defense and prosecution of No proposed change.. X ................. .................
criminal and civil proceedings,
claims, appeals and patent
infringement.
9. Depreciation and use Consistent language ................. X .................
allowances. across all 3
circulars.
10. Employee morale, health, and Consistent language X ................. .................
welfare costs. across all 3
circulars.
11. Entertainment costs.......... Consistent language X ................. .................
across all 3
circulars.
12. Equipment and other capital Consistent language ................. X .................
expenditures. across all 3
circulars.
13. Fines and penalties.......... Consistent language X ................. .................
across all 3
circulars.
14. (Interest), Fund raising and Consistent language ................. ................. X
investment management costs. across all 3
circulars.
15. Insurance and indemnification No proposed change.. X ................. .................
16. Interest..................... Consistent language ................. X .................
across all 3
circulars.
17. Gain and losses on No proposed change.. X ................. .................
depreciable assets.
18. Profits and losses on Rename to ``Gain and X ................. .................
disposition of plant, equipment losses on
or other capital assets. depreciable
assets'' in all 3
circulars.
19. Lobbying..................... No proposed change.. X ................. .................
20. Losses on other sponsored No proposed change.. X ................. .................
agreements or contracts.
21. Maintenance and repair costs. Consistent language ................. X .................
across all 3
circulars.
22. Material costs............... Consistent language ................. X .................
across all 3
circulars.
23. Memberships, subscriptions Consistent language X ................. .................
and professional activity costs. across all 3
circulars.
24. Pre-agreement costs.......... Consistent language ................. ................. X
across all 3
circulars.
25. Professional service costs... Consistent language X ................. .................
across all 3
circulars.
26. Rearrangement and alteration Revised language to X ................. .................
costs. A-21.
27. Reconversion costs........... Consistent language X ................. .................
across all 3
circulars.
28. Rental costs of buildings and Consistent language ................. X .................
equipment. across all 3
circulars.
29. Taxes........................ No proposed change.. X ................. .................
30. Travel costs................. Consistent language ................. X .................
across all 3
circulars.
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Adopted as Adopted as Proposal
Cost items in only two circulars Proposal proposed amended withdrawn
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1. Bonding costs................. Consistent language X ................. .................
across all 3
circulars.
2. Goods or services for personal Consistent language ................. X .................
use. across all 3
circulars.
3. Housing and personal living No proposed change.. X ................. .................
expenses.
4. Idle facilities and idle Consistent language ................. X .................
capacity. across all 3
circulars.
5. Labor relations costs......... No proposed change.. X ................. .................
6. Patent costs.................. Consistent language ................. X .................
across all 3
circulars.
7. Plant security costs.......... Consistent language ................. X .................
across all 3
circulars.
8. Proposal costs................ No proposed change.. X ................. .................
9. Publication and printing costs Consistent language ................. X .................
across all 3
circulars.
10. Recruiting costs............. Consistent language ................. ................. X
across all 3
circulars.
11. Royalties and other costs for Consistent language X ................. .................
use of patents. across all 3
circulars.
12. Selling and marketing........ Consistent language X ................. .................
across all 3
circulars.
13. Severance pay................ Relocate to the X ................. .................
``Compensation for
personal services''
part of A-21 and A-
122.
14. Specialized service Consistent language ................. X .................
facilities. to A-21 and A-122.
15. Termination costs applicable Consistent language ................. X .................
to sponsored agreements. across all 3
circulars.
16. Training..................... Consistent language ................. X .................
across all 3
circulars.
17. Transportation costs......... No proposed change.. X ................. .................
18. Trustees..................... No proposed change.. X ................. .................
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Adopted as Adopted as Proposal
Cost items in only one circular Proposal proposed amended withdrawn
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1. Accounting.................... Deleted............. X ................. .................
2. Advisory Councils............. Consistent language X ................. .................
across all 3
circulars.
3. Alumni/ae activities.......... No proposed change.. X ................. .................
4. Audit costs and related Consistent language ................. X .................
services. across all 3
circulars.
5. Automatic electronic data Deleted............. X ................. .................
processing.
6. Bid and Proposal costs........ Deleted............. X ................. .................
7. Budgeting..................... Deleted............. X ................. .................
8. Civil defense costs........... Deleted............. ................. X .................
[[Page 25972]]
9. Commencement and convocation No proposed change.. X ................. .................
costs.
10. Deans of faculty and graduate No proposed change.. X ................. .................
schools.
11. Disbursing service........... Deleted............. X ................. .................
12. Executive lobbying costs..... Consistent language X ................. .................
across all 3
circulars under
``lobbying''.
13. Fringe benefits.............. Deleted............. X ................. .................
14. General government expenses.. Revised language for X ................. .................
A-87.
15. Independent research and Deleted............. X ................. .................
development.
16. Meeting and Conferences...... Consistent language ................. X .................
across all 3
circulars.
17. Motor pools.................. Deleted............. X ................. .................
18. Organization costs........... No proposed change.. X ................. .................
19. Overtime, extra-pay shift, Consistent language ................. ................. X
and multi shift premiums. across all 3
circulars.
20. Page charges in professional Consistent language ................. X .................
journals. across all 3
circulars.
21. Participant support costs.... Consistent language ................. ................. X
across all 3
circulars.
22. Pension plans................ Deleted............. X ................. .................
23. Relocation costs............. Consistent language ................. ................. X
across all 3
circulars.
24. Sabbatical leave costs....... Relocate under X ................. .................
``Compensation for
personal services''
of A-21.
25. Scholarships and student aid Proposed revision X ................. .................
costs. for A-21.
26. Student activity costs....... No proposed change.. X ................. .................
27. Under recovery of costs under Deleted............. X ................. .................
Federal agreements.
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Final Revisions
We amend Circulars A-21, A-87 and A-122 under the following three
headings:
A. Amendments to Circular A-21.
B. Amendments to Circular A-87.
C. Amendments to Circular A-122.
A. Amendments to Circular A-21
1. Revise the table of contents for section J. to read as follows:
J. General provisions for selected items of cost
1. Advertising and public relations costs
2. Advisory councils
3. Alcoholic beverages
4. Alumni/ae activities
5. Audit costs and related services
6. Bad debts
7. Bonding costs
8. Commencement and convocation costs
9. Communication costs
10. Compensation for personal services
11. Contingency provisions
12. Deans of faculty and graduate schools
13. Defense and prosecution of criminal and civil proceedings,
claims, appeals and patent infringement
14. Depreciation and use allowances
15. Donations and contributions
16. Employee morale, health, and welfare costs
17. Entertainment costs
18. Equipment and other capital expenditures
19. Fines and penalties
20. Fundraising
21. Gains and losses on depreciable assets
22. Goods or services for personal use
23. Housing and personal living expenses
24. Idle facilities and idle capital
25. Insurance and indemnification
26. Interest
27. Labor relations costs
28. Lobbying
29. Losses on other sponsored agreements or contracts
30. Maintenance and repair costs
31. Material and supplies costs
32. Meetings and conferences
33. Memberships, subscriptions and professional activity costs
34. Patent costs
35. Plant and Homeland security costs
36. Pre-agreement costs
37. Professional service costs
38. Proposal costs
39. Publication and printing costs
40. Rearrangement and alteration costs
41. Reconversion costs
42. Recruiting costs
43. Rental costs of buildings and equipment
44. Royalties and other costs for use of patents
45. Scholarships and student aid costs
46. Selling and marketing
47. Specialized service facilities
48. Student activity costs
49. Taxes
50. Termination costs applicable to sponsored agreements
51. Training costs
52. Transportation costs
53. Travel costs
54. Trustees
2. Redesignate the sections in paragraph J. as follows:
a. Section J.2. is redesignated as section J.3.
b. Section J.3. is redesignated as section J.4.
c. Section J.6. is redesignated as section J.8.
d. Section J.8. is redesignated as section J.10.
e. Section J.40. is redesignated as section J.10.h.
f. Section J.10. is redesignated as section J.12.
g. Section J.11. is redesignated as section J.13.
h. Section J.19. is redesignated as section J.22.
i. Section J.20. is redesignated as section J.23.
j. Section J.21. is redesignated as section J.25.
k. Section J.13. is redesignated as section J.27.
l. Section J.24. is redesignated as section J.28.
m. Section J.25. is redesignated as section J.29.
n. Section J.31. is redesignated as section J.36.
o. Section J.34. is redesignated as section J.38.
p. Section J.37. is redesignated as section J.42.
q. Section J.45. is redesignated as section J.48.
r. Section J.46. is redesignated as section J.49.
s. Section J.47. is redesignated as section J.52.
t. Section J.50. is redesignated as section J.54.
3. Section J.1. is revised to read as follows:
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, direct mail, exhibits,
electronic or computer transmittals, 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
[[Page 25973]]
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 that are solely
for:
(1) The recruitment of personnel required for the performance by
the institution of obligations arising under a sponsored agreement (See
also subsection b. of section J.42, Recruiting.);
(2) The procurement of goods and services for the performance of a
sponsored agreement;
(3) The disposal of scrap or surplus materials acquired in the
performance of a sponsored agreement except when institutions are
reimbursed for disposal costs at a predetermined amount; 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 the sponsored agreement;
(2) Costs of communicating with the public and press pertaining to
specific activities or accomplishments which result from performance of
sponsored agreements (these costs are considered necessary as part of
the outreach effort for the sponsored agreement); 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 keep the
public informed on matters of public concern, such as notices of
Federal 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. (``Direct Costs'') and E. (``F & A Costs'') 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 1.c, 1.d, and 1.e;
(2) Costs of meetings, conventions, convocations, or other events
related to other activities of the institution, including:
(a) Costs of displays, demonstrations, and exhibits;
(b) Costs of meeting rooms, hospitality suites, and other special
facilities used in conjunction with shows and other special events; and
(c) Salaries and wages of employees engaged in setting up and
displaying exhibits, making demonstrations, and providing briefings;
(3) Costs of promotional items and memorabilia, including models,
gifts, and souvenirs;
(4) Costs of advertising and public relations designed solely to
promote the institution.
4. Section J.2. is revised to read as follows:
2. Advisory councils.
Costs incurred by advisory councils or committees are allowable as
a direct cost where authorized by the Federal awarding agency or as an
indirect cost where allocable to sponsored agreements.
5. Section J.5. is revised to read as follows:
5. Audit costs and related services.
a. The costs of audits required by, and performed in accordance
with, the Single Audit Act, as implemented by Circular A-133, ``Audits
of States, Local Governments, and Non-Profit Organizations'' are
allowable. Also see 31 U.S.C. 7505(b) and section --.230 (``Audit
Costs'') of Circular A-133.
b. Other audit costs are allowable if included in an indirect cost
rate proposal, or if specifically approved by the awarding agency as a
direct cost to an award.
c. The cost of agreed-upon procedures engagements to monitor
subrecipients who are exempted from A-133 under section --.200(d) are
allowable, subject to the conditions listed in A-133, section
--.230(b)(2).
6. Section J.6. is revised to read as follows:
6. Bad Debts.
Bad debts, including losses (whether actual or estimated) arising
from uncollectable accounts and other claims, related collection costs,
and related legal costs, are unallowable.
7. Section J.7. is revised to read as follows:
7. Bonding costs.
a. Bonding costs arise when the Federal Government requires
assurance against financial loss to itself or others by reason of the
act or default of the institution. They arise also in instances where
the institution requires similar assurance. Included are such bonds as
bid, performance, payment, advance payment, infringement, and fidelity
bonds.
b. Costs of bonding required pursuant to the terms of the award are
allowable.
c. Costs of bonding required by the institution in the general
conduct of its operations are allowable to the extent that such bonding
is in accordance with sound business practice and the rates and
premiums are reasonable under the circumstances.
8. Section J.9. is revised to read as follows:
9. Communication costs.
Costs incurred for telephone services, local and long distance
telephone calls, telegrams, postage, messenger, electronic or computer
transmittal services and the like are allowable.
9. Amend redesignated section J.10. by redesignating former section
J.10.f.(4) as section J.10.f.(5), adding a new section J.10.f.(4), and
adding a new section J.10.h. to read as follows:
10. Compensation for personal services.
* * * * *
f. Fringe benefits.
* * * * *
(4) Rules for sabbatical leave are as follows:
(a) 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.
(b) 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.
* * * * *
h. Severance pay.
(1) Severance pay is compensation in addition to regular salary and
wages which are 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-employee
agreement, by established policy that constitutes in effect an implied
agreement on the institution's part, or by circumstances of the
particular employment.
(2) 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.
(3) 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.
[[Page 25974]]
(4) 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.
20. Section J.11. is revised to read as follows:
11. 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, except as noted in the cost principles in
this circular regarding self insurance, pensions, severance and post-
retirement health costs.
11. Sections J.14. through 18. are revised to read as follows:
14. Depreciation and use allowances.
a. 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:
b. The computation of depreciation or use allowances shall be based
on the acquisition cost of the assets involved. The acquisition cost of
an asset donated to the institution by a third party shall be its fair
market value at the time of the donation.
c. 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 prohibits recovery.
d. In the use of the depreciation method, the following shall be
observed:
(1) The period of useful service (useful life) established in each
case for usable capital assets must take into consideration such
factors as type of construction, nature of the equipment, 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. The depreciation methods
used to calculate the depreciation amounts for F&A rate purposes shall
be the same methods used by the institution for its financial
statements. This requirement does not apply to those institutions
(e.g., public institutions of higher education) which are not required
to record depreciation by applicable generally accepted accounting
principles (GAAP).
(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) The entire building, including the shell and all components,
may be treated as a single asset and depreciated over a single useful
life. A building may also be divided into multiple components. Each
component item may then be depreciated over its estimated useful life.
The building components shall be grouped into three general components
of a building: building shell (including construction and design
costs), building services systems (e.g., elevators, HVAC, plumbing
system and heating and air-conditioning system) and fixed equipment
(e.g., sterilizers, casework, fume hoods, cold rooms and glassware/
washers). In exceptional cases, a Federal cognizant agency may
authorize an institution to use more than these three groupings. When
an institutiton elects to depreciate its buildings by its components,
the same depreciation methods must be used for F&A purposes and
financial statement purposes, as described in subsection d.(2).
(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 e.(3))
e. 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) shall
be computed at an annual rate not exceeding two percent of acquisition
cost.
The use allowance for equipment shall be computed at an annual rate
not exceeding six and two-thirds percent of acquisition cost. Use
allowance recovery is limited to the acquisition cost of the assets.
For donated assets, use allowance recovery is limited to the fair
market value of the assets at the time of donation.
(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, modular furniture, 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 that meet these
criteria will be subject to the 6\2/3\ 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 e.(3), once an institution converts
from one cost recovery methodology to another, acquisition costs not
recovered may not
[[Page 25975]]
be used in the calculation of the use allowance in subsection e.(3).
f. Except as otherwise provided in subsections b. through e., a
combination of the depreciation and use allowance methods may not be
used, in like circumstances, for a single class of assets (e.g.,
buildings, office equipment, and computer equipment).
g. Charges for use allowances or depreciation must be supported by
adequate property records, and physical inventories must be taken at
least once every two years 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.
h. This section applies to the largest college and university
recipients of Federal research and development funds as displayed in
Exhibit A, List of Colleges and Universities Subject to Section J.14.f
of Circular A-21.
(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.
15. Donations and contributions.
a. Contributions or donations rendered.
Contributions or donations, including cash, property, and services,
made by the institution, regardless of the recipient, are unallowable.
b. Donated services received.
Donated or volunteer services may be furnished to an institution by
professional and technical personnel, consultants, and other skilled
and unskilled labor. The value of these services is not reimbursable
either as a direct or F&A cost. However, the value of donated services
may be used to meet cost sharing or matching requirements in accordance
with Circular A-110.
c. Donated property.
The value of donated property is not reimbursable either as a
direct or F&A cost, except that depreciation or use allowances on
donated assets are permitted in accordance with Section J.14. The value
of donated property may be used to meet cost sharing or matching
requirements, in accordance with Circular A-110.
16. Employee morale, health, and welfare costs.
a. The costs of employee information publications, health or first-
aid clinics and/or infirmaries, recreational activities, employee
counseling services, and any 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.
b. 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.
c. 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.
17. 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.
18. Equipment and other capital expenditures.
a. For purposes of this subsection, the following definitions
apply:
(1) ``Capital Expenditures'' means expenditures for the acquisition
cost of capital assets (equipment, buildings, and land), or
expenditures to make improvements to capital assets that materially
increase their value or useful life. Acquisition cost means the cost of
the asset including the cost to put it in place. Acquisition cost 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 the acquisition cost in accordance with
the institution's regular accounting practices.
(2) ``Equipment'' means an article of nonexpendable, tangible
personal property having a useful life of more than one year and an
acquisition cost which equals or exceeds the lesser of the
capitalization level established by the institution for financial
statement purposes, or $5000.
(3) ``Special purpose equipment'' means equipment which is used
only for research, medical, scientific, or other technical activities.
Examples of special purpose equipment include microscopes, x-ray
machines, surgical instruments, and spectrometers.
(4) ``General purpose equipment'' means equipment, which is not
limited to research, medical, scientific or other technical activities.
Examples include office equipment and furnishings, modular offices,
telephone networks, information technology equipment and systems, air
conditioning equipment, reproduction and printing equipment, and motor
vehicles.
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 awarding agency.
(2) Capital expenditures for special purpose equipment are
allowable as direct costs, provided that items with a unit cost of
$5000 or more have the prior approval of the awarding agency.
(3) Capital expenditures for improvements to land, buildings, or
equipment which materially increase their value or useful life are
unallowable as a direct cost except with the prior approval of the
awarding agency.
(4) When approved as a direct charge pursuant to subsections
J.18.b.(1)
[[Page 25976]]
through (3), capital expenditures will be charged in the period in
which the expenditure is incurred, or as otherwise determined
appropriate by and negotiated with the awarding agency.
(5) Equipment and other capital expenditures are unallowable as
indirect costs. However, see section J.14, Depreciation and use
allowance, for rules on the allowability of use allowances or
depreciation on buildings, capital improvements, and equipment. Also,
see section J.43, Rental costs of buildings and equipment, for rules on
the allowability of rental costs for land, buildings, and equipment.
(6) 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.
12. Sections J.20. and 21. are revised to read as follows:
20. Fund raising and investment costs.
a. 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.
b. Costs of investment counsel and staff and similar expenses
incurred solely to enhance income from investments are unallowable.
c. Costs related to the physical custody and control of monies and
securities are allowable.
21. Gain and losses on depreciable assets.
a. (1) Gains and losses on the sale, retirement, or other
disposition of depreciable property shall be included in the year in
which they occur as credits or charges to the asset cost grouping(s) in
which the property was included. The amount of the gain or loss to be
included as a credit or charge to the appropriate asset cost
grouping(s) shall be the difference between the amount realized on the
property and the undepreciated basis of the property.
(2) Gains and losses on the disposition of depreciable property
shall not be recognized as a separate credit or charge under the
following conditions:
(a) The gain or loss is processed through a depreciation account
and is reflected in the depreciation allowable under section J.14.
(b) The property is given in exchange as part of the purchase price
of a similar item and the gain or loss is taken into account in
determining the depreciation cost basis of the new item.
(c) A loss results from the failure to maintain permissible
insurance, except as otherwise provided in Section J.24.
(d) Compensation for the use of the property was provided through
use allowances in lieu of depreciation.
b. Gains or losses of any nature arising from the sale or exchange
of property other than the property covered in subsection a shall be
excluded in computing sponsored agreement costs.
c. When assets acquired with Federal funds, in part or wholly, are
disposed of, the distribution of the proceeds shall be made in
accordance with Circular A-110, ``Uniform Administrative Requirements
for Grants and Agreements with Institutions of Higher Education,
Hospitals, and Other Non-Profit Organizations.''
13. Section J.24. is revised to read as follows:
24. Idle facilities and idle capacity.
a. As used in this section the following terms have the meanings
set forth below:
(1) ``Facilities'' means land and buildings or any portion thereof,
equipment individually or collectively, or any other tangible capital
asset, wherever located, and whether owned or leased by the
institution.
(2) ``Idle facilities'' means completely unused facilities that are
excess to the institution's current needs.
(3) ``Idle capacity'' means the unused capacity of partially used
facilities. It is the difference between:
(a) That which a facility could achieve under 100 percent operating
time on a one-shift basis less operating interruptions resulting from
time lost for repairs, setups, unsatisfactory materials, and other
normal delays; and
(b) The extent to which the facility was actually used to meet
demands during the accounting period. A multi-shift basis should be
used if it can be shown that this amount of usage would normally be
expected for the type of facility involved.
(4) ``Cost of idle facilities or idle capacity'' means costs such
as maintenance, repair, housing, rent, and other related costs, e.g.,
insurance, interest, property taxes and depreciation or use allowances.
b. The costs of idle facilities are unallowable except to the
extent that:
(1) They are necessary to meet fluctuations in workload; or
(2) Although not necessary to meet fluctuations in workload, they
were necessary when acquired and are now idle because of changes in
program requirements, efforts to achieve more economical operations,
reorganization, termination, or other causes which could not have been
reasonably foreseen. Under the exception stated in this subsection,
costs of idle facilities are allowable for a reasonable period of time,
ordinarily not to exceed one year, depending on the initiative taken to
use, lease, or dispose of such facilities.
c. The costs of idle capacity are normal costs of doing business
and are a factor in the normal fluctuations of usage or indirect cost
rates from period to period. Such costs are allowable, provided that
the capacity is reasonably anticipated to be necessary or was
originally reasonable and is not subject to reduction or elimination by
use on other sponsored agreements, subletting, renting, or sale, in
accordance with sound business, economic, or security practices.
Widespread idle capacity throughout an entire facility or among a group
of assets having substantially the same function may be considered idle
facilities.
14. Section J.26. is revised to read as follows:
26. Interest.
a. Costs incurred for interest on borrowed capital, temporary use
of endowment funds, or the use of the institution's own funds, however
represented, are unallowable. However, interest on debt incurred after
July 1, 1982 to acquire buildings, major reconstruction and remodeling,
or the acquisition or fabrication of capital equipment costing $10,000
or more, is allowable.
b. Interest on debt incurred after May 8, 1996 to acquire or
replace capital assets (including construction, renovations,
alterations, equipment, land, and capital assets acquired through
capital leases) acquired after that date and used in support of
sponsored agreements is allowable, subject to the following conditions:
(1) For facilities costing over $500,000, the institution shall
prepare, prior to acquisition or replacement of the facility, a lease-
purchase analysis in accordance with the provisions of Sec.--.30
through--.37 of OMB Circular A-110, which shows that a financed
purchase, including a capital lease is less costly to the institution
than other operating lease alternatives, on a net present value basis.
Discount rates used shall be equal to the institution's anticipated
interest rates and shall be no higher than the fair market rate
available to the 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
institution. The cost comparisons
[[Page 25977]]
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 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
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) For debt arrangements over $1 million, unless the institution
makes an initial equity contribution to the asset purchase of 25
percent or more, the institution shall reduce claims for interest
expense by an amount equal to imputed interest earnings on excess cash
flow, which is to be calculated as follows. Annually, 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.
(6) 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.
(7) The allowable costs to acquire facilities and equipment are
limited to a fair market value available to the institution from an
unrelated (arm's length) third party.
c. Institutions are also subject to the following conditions:
(1) Interest on debt incurred to finance or refinance assets re-
acquired after the applicable effective dates stipulated above is
unallowable.
(2) Interest attributable to fully depreciated assets is
unallowable.
d. The following definitions are to be used for purposes of this
section:
(1) ``Re-acquired'' assets means assets held by the institution
prior to the applicable effective dates stipulated above that have
again come to be held by the institution, whether through repurchase or
refinancing. It does not include assets acquired to replace older
assets.
(2) ``Initial equity contribution'' means the amount or value of
contributions made by institutions for the acquisition of the asset
prior to occupancy of facilities.
(3) ``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).
15. Add a new subsection h. to the redesignated section J.28., to
read as follows.
28. Lobbying.
* * * * *
h. 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.
16. Sections J.30. through 35. are revised to read as follows:
30. Maintenance and repair costs.
Costs incurred for necessary maintenance, repair, or upkeep of
buildings and equipment (including Federal property unless otherwise
provided for) which neither add to the permanent value of the property
nor appreciably prolong its intended life, but keep it in an efficient
operating condition, are allowable. Costs incurred for improvements
which add to the permanent value of the buildings and equipment or
appreciably prolong their intended life shall be treated as capital
expenditures (see section 18.a.(1)).
31. Material and supplies costs.
a. Costs incurred for materials, supplies, and fabricated parts
necessary to carry out a sponsored agreement are allowable.
b. Purchased materials and supplies shall be charged at their
actual prices, net of applicable credits. Withdrawals from general
stores or stockrooms should be charged at their actual net cost under
any recognized method of pricing inventory withdrawals, consistently
applied. Incoming transportation charges are a proper part of materials
and supplies costs.
c. Only materials and supplies actually used for the performance of
a sponsored agreement may be charged as direct costs.
d. Where federally-donated or furnished materials are used in
performing the sponsored agreement, such materials will be used without
charge.
32. Meetings and conferences.
Costs of meetings and conferences, the primary purpose of which is
the dissemination of technical information, are allowable. This
includes costs of meals, transportation, rental of facilities,
speakers' fees, and other items
[[Page 25978]]
incidental to such meetings or conferences. But see section J.17,
Entertainment costs.
33. 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 membership in any civic or community organization are
unallowable.
d. Costs of membership in any country club or social or dining club
or organization are unallowable.
34. Patent costs.
a. The following costs relating to patent and copyright matters are
allowable:
(1) Cost of preparing disclosures, reports, and other documents
required by the sponsored agreement and of searching the art to the
extent necessary to make such disclosures;
(2) Cost of preparing documents and any other patent costs in
connection with the filing and prosecution of a United States patent
application where title or royalty-free license is required by the
Federal Government to be conveyed to the Federal Government; and
(3) General counseling services relating to patent and copyright
matters, such as advice on patent and copyright laws, regulations,
clauses, and employee agreements (but see sections J.37., Professional
services costs, and J.44., Royalties and other costs for use of
patents).
b. The following costs related to patent and copyright matter are
unallowable:
(i) Cost of preparing disclosures, reports, and other documents and
of searching the art to the extent necessary to make disclosures not
required by the award
(ii) Costs in connection with filing and prosecuting any foreign
patent application, or any United States patent application, where the
sponsored agreement does not require conveying title or a royalty-free
license to the Federal Government, (but see section J.44, Royalties and
other costs for use of patents).
35. Plant and homeland security costs.
Necessary and reasonable expenses incurred for routine and homeland
security to protect facilities, personnel, and work products are
allowable. Such costs include, but are not limited to, wages and
uniforms of personnel engaged in security activities; equipment;
barriers; contractual security services; consultants; etc. Capital
expenditures for homeland and plant security purposes are subject to
section J.18, Equipment and other capital expenditures, of this
Circular.
17. Revise section J.37. to read as follows:
37. Professional service costs.
a. Costs of professional and consultant services rendered by
persons who are members of a particular profession or possess a special
skill, and who are not officers or employees of the institution, are
allowable, subject to subsections b and c when reasonable in relation
to the services rendered and when not contingent upon recovery of the
costs from the Federal Government. In addition, legal and related
services are limited under section J.13.
b. In determining the allowability of costs in a particular case,
no single factor or any special combination of factors is necessarily
determinative. However, the following factors are relevant:
(1) The nature and scope of the service rendered in relation to the
service required.
(2) The necessity of contracting for the service, considering the
institution's capability in the particular area.
(3) The past pattern of such costs, particularly in the years prior
to sponsored agreements.
(4) The impact of sponsored agreements on the institution's
business (i.e., what new problems have arisen).
(5) Whether the proportion of Federal work to the institution's
total business 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 Federal
grants and contracts.
(6) Whether the service can be performed more economically by
direct employment rather than contracting.
(7) The qualifications of the individual or concern rendering the
service and the customary fees charged, especially on non-sponsored
agreements.
(8) Adequacy of the contractual agreement for the service (e.g.,
description of the service, estimate of time required, rate of
compensation, and termination provisions).
c. In addition to the factors in subsection b, retainer fees to be
allowable must be supported by evidence of bona fide services available
or rendered.
18. Sections J.39., J.40. and J.41. are revised to read as follows:
39. Publication and printing costs.
a. Publication costs include the costs of printing (including the
processes of composition, plate-making, press work, binding, and the
end products produced by such processes), distribution, promotion,
mailing, and general handling. Publication costs also include page
charges in professional publications.
b. If these costs are not identifiable with a particular cost
objective, they should be allocated as indirect costs to all benefiting
activities of the institution.
c. Page charges for professional journal publications are allowable
as a necessary part of research costs where:
(1) The research papers report work supported by the Federal
Government: and
(2) The charges are levied impartially on all research papers
published by the journal, whether or not by federally-sponsored
authors.
40. Rearrangement and alteration costs.
Costs incurred for ordinary or normal rearrangement and alteration
of facilities are allowable. Special arrangement and alteration costs
incurred specifically for the project are allowable with the prior
approval of the sponsoring agency.
41. 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.
19. Revise sections J.43. through J.47. to read as follows:
43. Rental costs of buildings and equipment.
a. Subject to the limitations described in subsections b. through
d. of this section, rental costs are allowable to the extent that the
rates are reasonable in light of such factors as: rental costs of
comparable property, if any; market conditions in the area;
alternatives available; and, the type, life expectancy, condition, and
value of the property leased. 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 had the
institution continued to own the property. This amount would include
expenses such as depreciation or use allowance, maintenance, taxes, and
insurance.
c. Rental costs under ``less-than-arms-length'' leases are
allowable only up to the amount (as explained in subsection b) that
would be allowed had title to the property vested in the institution.
For this purpose, a less-than-arms-length
[[Page 25979]]
lease is one under which one party to the lease agreement is able to
control or substantially influence the actions of the other. Such
leases include, but are not limited to those between--
(1) divisions of an institution;
(2) institutions under common control through common officers,
directors, or members; and
(3) an institution and a director, trustee, officer, or key
employee of the institution or his immediate family, either directly or
through corporations, trusts, or similar arrangements in which they
hold a controlling interest. For example, an institution may establish
a separate corporation for the sole purpose of owning property and
leasing it back to the institution.
d. Rental costs under leases which are required to be treated as
capital leases under GAAP are allowable only up to the amount (as
explained in subsection b) that would be allowed had the institution
purchased the property on the date the lease agreement was executed.
The provisions of Financial Accounting Standards Board Statement 13,
Accounting for Leases, shall be used to determine whether a lease is a
capital lease. Interest costs related to capital leases are allowable
to the extent they meet the criteria in section J.25. Unallowable costs
include amounts paid for profit, management fees, and taxes that would
not have been incurred had the institution purchased the facility.
44. Royalties and other costs for use of patents.
a. Royalties on a patent or copyright or amortization of the cost
of acquiring by purchase a copyright, patent, or rights thereto,
necessary for the proper performance of the award are allowable unless:
(1) The Federal Government has a license or the right to free use
of the patent or copyright.
(2) The patent or copyright has been adjudicated to be invalid, or
has been administratively determined to be invalid.
(3) The patent or copyright is considered to be unenforceable.
(4) The patent or copyright is expired.
b. Special care should be exercised in determining reasonableness
where the royalties may have been arrived at as a result of less-than-
arm's-length bargaining, e.g.:
(1) Royalties paid to persons, including corporations, affiliated
with the institution.
(2) Royalties paid to unaffiliated parties, including corporations,
under an agreement entered into in contemplation that a sponsored
agreement would be made.
(3) Royalties paid under an agreement entered into after an award
is made to an institution.
c. In any case involving a patent or copyright formerly owned by
the institution, the amount of royalty allowed should not exceed the
cost which would have been allowed had the institution retained title
thereto.
45. 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) The individual is conducting activities necessary to the
sponsored agreement;
(2) Tuition remission and other support are provided in accordance
with established educational institutional policy and consistently
provided in a like manner to students in return for similar activities
conducted in nonsponsored as well as sponsored activities; and
(3) During the academic period, the student is enrolled in an
advanced degree program at a grantee or affiliated institution and the
activities of the student in relation to the Federally-sponsored
research project are related to the degree program;
(4) the tuition or other payments are reasonable compensation for
the work performed and are conditioned explicitly upon the performance
of necessary work; and
(5) 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.10, 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.
46. Selling and marketing.
Costs of selling and marketing any products or services of the
institution are unallowable (unless allowed under section J.1 as
allowable public relations costs or under section J.38 as allowable
proposal costs).
47. Specialized service facilities.
a. The costs of services provided by highly complex or specialized
facilities operated by the institution, such as computers, wind
tunnels, and reactors are allowable, provided the charges for the
services meet the conditions of either subsection 47.b. or 47.c. and,
in addition, take into account any items of income or Federal financing
that qualify as applicable credits under section C.5 of this Circular.
b. The costs of such services, when material, must be charged
directly to applicable awards based on actual usage of the services on
the basis of a schedule of rates or established methodology that
(1) does not discriminate against federally-supported activities of
the institution, including usage by the institution for internal
purposes, and
(2) is designed to recover only the aggregate costs of the
services. The costs of each service shall consist normally of both its
direct costs and its allocable share of all F&A costs. Rates shall be
adjusted at least biennially, and shall take into consideration over/
under applied costs of the previous period(s).
c. Where the costs incurred for a service are not material, they
may be allocated as F&A costs.
d. Under some extraordinary circumstances, 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.
20. Section J.50. is revised to read as follows:
50. Termination costs applicable to sponsored agreements.
Termination of awards generally gives rise to the incurrence of
costs, or the need for special treatment of costs, which would not have
arisen had the sponsored agreement not been terminated. Cost principles
covering these items are set forth below. They are to be used in
conjunction with the other provisions of this Circular in termination
situations.
a. The cost of items reasonably usable on the institution's other
work shall not be allowable unless the institution submits evidence
that it would not retain such items at cost without sustaining a loss.
In deciding whether such items are reasonably usable on other work of
the institution, the awarding agency should consider the institution's
plans and orders for current and scheduled activity.
Contemporaneous purchases of common items by the institution shall
be regarded as evidence that such items are reasonably usable on the
institution's other work. Any acceptance of common items as allocable
to the terminated portion of the sponsored agreement shall be limited
to the extent that the quantities of such items on
[[Page 25980]]
hand, in transit, and on order are in excess of the reasonable
quantitative requirements of other work.
b. If in a particular case, despite all reasonable efforts by the
institution, certain costs cannot be discontinued immediately after the
effective date of termination, such costs are generally allowable
within the limitations set forth in this Circular, except that any such
costs continuing after termination due to the negligent or willful
failure of the institution to discontinue such costs shall be
unallowable.
c. Loss of useful value of special tooling, machinery, and
equipment is generally allowable if:
(1) Such special tooling, special 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 awarding agency,
and
(3) The loss of useful value for any one terminated sponsored
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 sponsored agreement bears to the entire terminated
sponsored agreement and other sponsored agreements for which the
special tooling, machinery, or equipment was acquired.
d. Rental costs under unexpired leases are generally allowable
where clearly shown to have been reasonably necessary for the
performance of the terminated sponsored 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
sponsored 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 alterations were necessary for the performance of the
sponsored agreement, and of reasonable restoration required by the
provisions of the lease.
e. Settlement expenses including the following are generally
allowable:
(1) Accounting, legal, clerical, and similar costs reasonably
necessary for:
(a) The preparation and presentation to the awarding agency of
settlement claims and supporting data with respect to the terminated
portion of the sponsored agreement, unless the termination is for
default (see Subpart --.61 of Circular A-110); and
(b) The termination and settlement of subawards.
(2) Reasonable costs for the storage, transportation, protection,
and disposition of property provided by the Federal Government or
acquired or produced for the sponsored agreement, except when grantees
or contractors are reimbursed for disposals at a predetermined amount
in accordance with sections --.32 through --.37 of Circular A-110.
(3) F&A costs related to salaries and wages incurred as settlement
expenses in subsections b.(1) and (2) of this section 50. Normally,
such F&A costs shall be limited to fringe benefits, occupancy cost, and
immediate supervision.
f. Claims under subawards, including the allocable portion of
claims which are common to the sponsored agreement and to other work of
the institution, are generally allowable.
An appropriate share of the institution's F&A costs may be
allocated to the amount of settlements with subcontractors and/or
subgrantees, provided that the amount allocated is otherwise consistent
with the basic guidelines contained in section E, F&A costs. The F&A
costs so allocated shall exclude the same and similar costs claimed
directly or indirectly as settlement expenses.
21. Add a new section J.51. to read as follows:
51. Training costs.
The cost of training provided for employee development is
allowable.
22. Add a new section J.53. to read as follows:
53. 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 cost basis, on a per diem or mileage basis in lieu
of actual costs incurred, or on a combination of the two, provided the
method used is applied to an entire trip and not to selected days of
the trip, and results in charges consistent with those normally allowed
in like circumstances in the institution's non-federally-sponsored
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 the result of the institution's written travel policy. In
the absence of an acceptable, written institution policy regarding
travel costs, the rates and amounts established under subchapter I of
Chapter 57, Title 5, United States Code (``Travel and Subsistence
Expenses; Mileage Allowances''), or by the Administrator of General
Services, or by the President (or his or her designee) pursuant to any
provisions of such subchapter shall apply to travel under sponsored
agreements (48 CFR 31.205-46(a)).
c. Commercial air travel.
(1) Airfare costs in excess of the customary standard commercial
airfare (coach or equivalent), Federal Government contract airfare
(where authorized and available), or the lowest commercial discount
airfare are unallowable except when such accommodations would:
(a) require circuitous routing;
(b) require travel during unreasonable hours;
(c) excessively prolong travel;
(d) result in additional costs that would offset the transportation
savings; or
(e) offer accommodations not reasonably adequate for the traveler's
medical needs. The institution must justify and document these
conditions on a case-by-case basis in order for the use of first-class
airfare to be allowable in such cases.
(2) Unless a pattern of avoidance is detected, the Federal
Government will generally not question an institution's determinations
that customary standard airfare or other discount airfare is
unavailable for specific trips if the institution can demonstrate
either of the following:
(a) That such airfare was not available in the specific case; or
(b) That it is the institution's overall practice to make routine
use of such airfare.
d. Air travel by other than commercial carrier.
Costs of travel by institution-owned, -leased, or -chartered
aircraft include the cost of lease, charter, operation (including
personnel costs), maintenance, depreciation, insurance, and other
related costs. The portion of such costs that exceeds the cost of
allowable commercial air travel, as provided for in subsection J.53.c.,
is unallowable.
B. Amendments to Circular A-87
1. Revise Attachment A, section C.3.c., of OMB Circular A-87, to
read as follows:
[[Page 25981]]
C. Basic Guidelines
* * * * *
3. Allocable costs
* * * * *
c. Any cost allocable to a particular Federal award or cost
objective under the principles provided for in this Circular may not be
charged to other Federal awards to overcome fund deficiencies, to avoid
restrictions imposed by law or terms of the Federal awards, or for
other reasons.
2. Revise the table of contents to Attachment B as follows:
Attachment B.--Selected Items of Cost
Table of Contents
1. Advertising and public relations costs
2. Advisory councils
3. Alcoholic beverages
4. Audit costs and related services
5. Bad debts
6. Bonding costs
7. Communication costs
8. Compensation for personal services
9. Contingency provisions
10. Defense and prosecution of criminal and civil proceedings, and
claims
11. Depreciation and use allowances
12. Donations and contributions
13. Employee morale, health, and welfare costs
14. Entertainment costs
15. Equipment and other capital expenditures
16. Fines and penalties
17. Fund raising and investment management costs
18. Gains and losses on disposition of depreciable property and
other capital assets and substantial relocation of Federal programs
19. General government expenses
20. Goods or services for personal use
21. Idle facilities and idle capacity
22. Insurance and indemnification
23. Interest
24. Lobbying
25. Maintenance, operations, and repairs
26. Materials and supplies costs
27. Meetings and conferences
28. Memberships, subscriptions, and professional activity costs
29. Patent costs
30. Plant and homeland security costs
31. Pre-award costs
32. Professional service costs
33. Proposal costs
34. Publication and printing costs
35. Rearrangement and alteration costs
36. Reconversion costs
37. Rental costs of building and equipment
38. Royalties and other costs for the use of patents
39. Selling and marketing
40. Taxes
41. Termination costs applicable to Federal awards
42. Training costs
43. Travel costs
3. Redesignate the sections in Attachment B as follows:
a. Section 3. is redesignated as section 2.
b. Section 4. is redesignated as section 3.
c. Section 11. is redesignated as section 8.
d. Section 14. is redesignated as section 10.
e. Section 20. is redesignated as section 16.
f. Section 21. is redesignated as section 17.
g. Section 22. is redesignated as section 18.
h. Section 25. is redesignated as section 22.
i. Section 27. is redesignated as section 24.
j. Section 28. is redesignated as section 25.
k. Section 32. is redesignated as section 31.
l. Section 34. is redesignated as section 33.
m. Section 36. is redesignated as section 35.
n. Section 39. is redesignated as section 40.
o. Section 40. is redesignated as section 42.
4. Attachment B, section 1. is revised to read as follows:
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, direct mail, exhibits, electronic or computer transmittals,
and the like.
b. The term public relations includes community relations and means
those activities dedicated to maintaining the image of the governmental
unit or maintaining or promoting understanding and favorable relations
with the community or public at large or any segment of the public.
c. The only allowable advertising costs are those which are solely
for:
(1) The recruitment of personnel required for the performance by
the governmental unit of obligations arising under a Federal award;
(2) The procurement of goods and services for the performance of a
Federal award;
(3) The disposal of scrap or surplus materials acquired in the
performance of a Federal award except when institutions are reimbursed
for disposal costs at a predetermined amount; or
(4) Other specific purposes necessary to meet the requirements of
the Federal award.
d. The only allowable public relations costs are:
(1) Costs specifically required by the Federal award;
(2) Costs of communicating with the public and press pertaining to
specific activities or accomplishments which result from performance of
Federal awards (these costs are considered necessary as part of the
outreach effort for the Federal award); 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 keep the
public informed on matters of public concern, such as notices of
Federal contract/grant awards, financial matters, etc.
e. Costs identified in sections 1.c and 1.d, if incurred for more
than one Federal award or for both sponsored work and other work of the
governmental unit, are allowable to the extent that the principles in
Attachment A, sections E. (``Direct Costs'') and F. (``Indirect
Costs'') 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 meetings, conventions, convocations, or other events
related to other activities of the governmental unit, including:
(a) Costs of displays, demonstrations, and exhibits;
(b) Costs of meeting rooms, hospitality suites, and other special
facilities used in conjunction with shows and other special events; and
(c) Salaries and wages of employees engaged in setting up and
displaying exhibits, making demonstrations, and providing briefings;
(3) Costs of promotional items and memorabilia, including models,
gifts, and souvenirs;
(4) Costs of advertising and public relations designed solely to
promote the governmental unit.
5. Attachment B, sections 4, 5, 6 and 7 are revised to read as
follows:
4. Audit costs and related services.
a. The costs of audits required by, and performed in accordance
with, the Single Audit Act, as implemented by Circular A-133, ``Audits
of States, Local Governments, and Non-Profit Organizations'' are
allowable. Also see 31 U.S.C. 7505(b) and section 230 (``Audit Costs'')
of Circular A-133.
b. Other audit costs are allowable if included in a cost allocation
plan or indirect cost proposal, or if specifically approved by the
awarding agency as a direct cost to an award.
c. The cost of agreed-upon procedures engagements to monitor
subrecipients who are exempted from A-133 under section 200(d) are
allowable, subject to the conditions listed in A-133, section
230(b)(2).
[[Page 25982]]
5. Bad debts. Bad debts, including losses (whether actual or
estimated) arising from uncollectable accounts and other claims,
related collection costs, and related legal costs, are unallowable.
Costs incurred for telephone services, local and long distance
telephone calls, telegrams, postage, messenger, electronic or computer
transmittal services and the like are allowable.
6. Bonding costs.
a. Bonding costs arise when the Federal Government requires
assurance against financial loss to itself or others by reason of the
act or default of the governmental unit. They arise also in instances
where the governmental unit requires similar assurance. Included are
such bonds as bid, performance, payment, advance payment, infringement,
and fidelity bonds.
b. Costs of bonding required pursuant to the terms of the award are
allowable.
c. Costs of bonding required by the governmental unit in the
general conduct of its operations are allowable to the extent that such
bonding is in accordance with sound business practice and the rates and
premiums are reasonable under the circumstances.
7. Communication costs. Costs incurred for telephone services,
local and long distance telephone calls, telegrams, postage, messenger,
electronic or computer transmittal services and the like are allowable.
6. Attachment B, section 9. is revised to read as follows:
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. The term ``contingency reserve''
excludes self-insurance reserves (see Attachment B, section 22.c.),
pension plan reserves (see Attachment B, section 8.e.), and post-
retirement health and other benefit reserves (see Attachment B, section
8.f.) computed using acceptable actuarial cost methods.
7. Attachment B, sections 11. through 15. are revised to read as
follows:
11. Depreciation and use allowances.
a. Depreciation and use allowances are means of allocating the cost
of fixed assets to periods benefiting from asset use. Compensation for
the use of fixed assets on hand may be made through depreciation or use
allowances. A combination of the two methods may not be used in
connection with a single class of fixed assets (e.g., buildings, office
equipment, computer equipment, etc.) except as provided for in
subsection g. Except for enterprise funds and internal service funds
that are included as part of a State/local cost allocation plan,
classes of assets shall be determined on the same basis used for the
government-wide financial statements.
b. The computation of depreciation or use allowances shall be based
on the acquisition cost of the assets involved. Where actual cost
records have not been maintained, a reasonable estimate of the original
acquisition cost may be used. The value of an asset donated to the
governmental unit by an unrelated third party shall be its fair market
value at the time of donation. Governmental or quasi-governmental
organizations located within the same State shall not be considered
unrelated third parties for this purpose.
c. The computation of depreciation or use allowances will exclude:
(1) The cost of land;
(2) Any portion of the cost of buildings and equipment borne by or
donated by the Federal Government irrespective of where title was
originally vested or where it presently resides; and
(3) Any portion of the cost of buildings and equipment contributed
by or for the governmental unit, or a related donor organization, in
satisfaction of a matching requirement.
d. Where the depreciation method is followed, the period of useful
service (useful life) established in each case for usable capital
assets must take into consideration such factors as type of
construction, nature of the equipment used, historical usage patterns,
technological developments, and the renewal and replacement policies of
the governmental unit followed for the individual items or classes of
assets involved. In the absence of clear evidence indicating that the
expected consumption of the asset will be significantly greater in the
early portions than in the later portions of its useful life, the
straight line method of depreciation shall be used.
Depreciation methods once used shall not be changed unless approved
by the Federal cognizant or awarding agency. When the depreciation
method is introduced for application to an asset previously subject to
a use allowance, the annual depreciation charge thereon may not exceed
the amount that would have resulted had the depreciation method been in
effect from the date of acquisition of the asset. The combination of
use allowances and depreciation applicable to the asset shall not
exceed the total acquisition cost of the asset or fair market value at
time of donation.
e. When the depreciation method is used for buildings, a building's
shell may be segregated from the major component of the building (e.g.,
plumbing system, heating, and air conditioning system, etc.) and each
major component depreciated over its estimated useful life, or the
entire building (i.e., the shell and all components) may be treated as
a single asset and depreciated over a single useful life.
f. Where the use allowance method is followed, the use allowance
for buildings and improvements (including land improvements, such as
paved parking areas, fences, and sidewalks) will be computed at an
annual rate not exceeding two percent of acquisition costs. The use
allowance for equipment will be computed at an annual rate not
exceeding 6\2/3\ percent of acquisition cost. When the use allowance
method is used for buildings, the entire building must be treated as a
single asset; the building's components (e.g., plumbing system, heating
and air condition, etc.) cannot be segregated from the building's
shell.
The two percent limitation, however, need not be applied to
equipment which is merely attached or fastened to the building but not
permanently fixed to it and which is used as furnishings or decorations
or for specialized purposes (e.g., dentist chairs and dental treatment
units, counters, laboratory benches bolted to the floor, dishwashers,
modular furniture, carpeting, etc.). Such equipment will be considered
as not being permanently fixed to the building if it can be removed
without the destruction of, or need for costly or extensive alterations
or repairs, to the building or the equipment. Equipment that meets
these criteria will be subject to the 6\2/3\ percent equipment use
allowance limitation.
g. A reasonable use allowance may be negotiated for any assets that
are considered to be fully depreciated, after taking into consideration
the amount of depreciation previously charged to the government, the
estimated useful life remaining at the time of negotiation, the effect
of any increased maintenance charges, decreased efficiency due to age,
and any other factors pertinent to the utilization of the asset for the
purpose contemplated.
h. Charges for use allowances or depreciation must be supported by
adequate property records. Physical inventories must be taken at least
once every two years (a statistical sampling approach is acceptable) to
ensure that assets exist, and are in use. Governmental units will
manage equipment in accordance with State laws and procedures. When the
depreciation method is followed, depreciation records indicating the
[[Page 25983]]
amount of depreciation taken each period must also be maintained.
12. Donations and contributions.
a. Contributions or donations rendered. Contributions or donations,
including cash, property, and services, made by the governmental unit,
regardless of the recipient, are unallowable.
b. Donated services received:
(1) Donated or volunteer services may be furnished to a
governmental unit by professional and technical personnel, consultants,
and other skilled and unskilled labor. The value of these services is
not reimbursable either as a direct or indirect cost. However, the
value of donated services may be used to meet cost sharing or matching
requirements in accordance with the Federal Grant Common Rule.
(2) The value of donated services utilized in the performance of a
direct cost activity shall, when material in amount, be considered in
the determination of the governmental unit's indirect costs or rate(s)
and, accordingly, shall be allocated a proportionate share of
applicable indirect costs.
(3) To the extent feasible, donated services will be supported by
the same methods used by the governmental unit to support the
allocability of regular personnel services.
13. Employee morale, health, and welfare costs.
a. The costs of employee information publications, health or first-
aid clinics and/or infirmaries, recreational activities, employee
counseling services, and any other expenses incurred in accordance with
the governmental unit's established practice or custom for the
improvement of working conditions, employer-employee relations,
employee morale, and employee performance are allowable.
b. Such costs will be equitably apportioned to all activities of
the governmental unit. Income generated from any of these activities
will be offset against expenses.
14. 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.
15. Equipment and other capital expenditures.
a. For purposes of this section 15, the following definitions
apply:
(1) ``Capital Expenditures'' means expenditures for the acquisition
cost of capital assets (equipment, buildings, land), or expenditures to
make improvements to capital assets that materially increase their
value or useful life. Acquisition cost means the cost of the asset
including the cost to put it in place. Acquisition cost 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 the acquisition cost in accordance with the governmental unit's
regular accounting practices.
(2) ``Equipment'' means an article of nonexpendable, tangible
personal property having a useful life of more than one year and an
acquisition cost which equals or exceeds the lesser of the
capitalization level established by the governmental unit for financial
statement purposes, or $5000.
(3) ``Special purpose equipment'' means equipment which is used
only for research, medical, scientific, or other technical activities.
Examples of special purpose equipment include microscopes, x-ray
machines, surgical instruments, and spectrometers.
(4) ``General purpose equipment'' means equipment, which is not
limited to research, medical, scientific or other technical activities.
Examples include office equipment and furnishings, modular offices,
telephone networks, information technology equipment and systems, air
conditioning equipment, reproduction and printing equipment, and motor
vehicles.
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 awarding agency.
(2) Capital expenditures for special purpose equipment are
allowable as direct costs, provided that items with a unit cost of
$5000 or more have the prior approval of the awarding agency.
(3) Capital expenditures for improvements to land, buildings, or
equipment which materially increase their value or useful life are
unallowable as a direct cost except with the prior approval of the
awarding agency.
(4) When approved as a direct charge pursuant to Attachment B,
section 15.b.(1), (2), and (3), capital expenditures will be charged in
the period in which the expenditure is incurred, or as otherwise
determined appropriate and negotiated with the awarding agency. In
addition, Federal awarding agencies are authorized at their option to
waive or delegate the prior approval requirement.
(5) Equipment and other capital expenditures are unallowable as
indirect costs. However, see section 11, Depreciation and use
allowance, for rules on the allowability of use allowances or
depreciation on buildings, capital improvements, and equipment. Also,
see section 37, Rental costs, concerning the allowability of rental
costs for land, buildings, and equipment.
(6) 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.
(7) When replacing equipment purchased in whole or in part with
Federal funds, the governmental unit may use the equipment to be
replaced as a trade-in or sell the property and use the proceeds to
offset the cost of the replacement property.
8. Attachment B, sections 19. through 21. are revised to read
follows:
19. General government expenses.
a. The general costs of government are unallowable (except as
provided in Attachment B, section 43, Travel costs). These include:
(1) Salaries and expenses of the Office of the Governor of a State
or the chief executive of a political subdivision or the chief
executive of federally-recognized Indian tribal government;
(2) Salaries and other expenses of a State legislature, tribal
council, or similar local governmental body, such as a county
supervisor, city council, school board, etc., whether incurred for
purposes of legislation or executive direction;
(3) Costs of the judiciary branch of a government;
(4) Costs of prosecutorial activities unless treated as a direct
cost to a specific program if authorized by program statute or
regulation (however, this does not preclude the allowability of other
legal activities of the Attorney General); and
(5) Costs of other general types of government services normally
provided to the general public, such as fire and police, unless
provided for as a direct cost under a program statute or regulation.
b. For federally-recognized Indian tribal governments and Councils
of Governments (COGs), the portion of salaries and expenses directly
attributable to managing and operating
[[Page 25984]]
Federal programs by the chief executive and his staff is allowable.
20. Goods or services for personal use. Costs of goods or services
for personal use of the governmental unit's employees are unallowable
regardless of whether the cost is reported as taxable income to the
employees.
21. Idle facilities and idle capacity.
a. As used in this section the following terms have the meanings
set forth below:
(1) ``Facilities'' means land and buildings or any portion thereof,
equipment individually or collectively, or any other tangible capital
asset, wherever located, and whether owned or leased by the
governmental unit.
(2) ``Idle facilities'' means completely unused facilities that are
excess to the governmental unit's current needs.
(3) ``Idle capacity'' means the unused capacity of partially used
facilities. It is the difference between: (a) That which a facility
could achieve under 100 percent operating time on a one-shift basis
less operating interruptions resulting from time lost for repairs,
setups, unsatisfactory materials, and other normal delays; and (b) the
extent to which the facility was actually used to meet demands during
the accounting period. A multi-shift basis should be used if it can be
shown that this amount of usage would normally be expected for the type
of facility involved.
(4) ``Cost of idle facilities or idle capacity'' means costs such
as maintenance, repair, housing, rent, and other related costs, e.g.,
insurance, interest, property taxes and depreciation or use allowances.
b. The costs of idle facilities are unallowable except to the
extent that:
(1) They are necessary to meet fluctuations in workload; or
(2) Although not necessary to meet fluctuations in workload, they
were necessary when acquired and are now idle because of changes in
program requirements, efforts to achieve more economical operations,
reorganization, termination, or other causes which could not have been
reasonably foreseen. Under the exception stated in this subsection,
costs of idle facilities are allowable for a reasonable period of time,
ordinarily not to exceed one year, depending on the initiative taken to
use, lease, or dispose of such facilities.
c. The costs of idle capacity are normal costs of doing business
and are a factor in the normal fluctuations of usage or indirect cost
rates from period to period. Such costs are allowable, provided that
the capacity is reasonably anticipated to be necessary or was
originally reasonable and is not subject to reduction or elimination by
use on other Federal awards, subletting, renting, or sale, in
accordance with sound business, economic, or security practices.
Widespread idle capacity throughout an entire facility or among a group
of assets having substantially the same function may be considered idle
facilities.
9. Attachment B, section 23. is revised to read as follows:
23. Interest.
a. Costs incurred for interest on borrowed capital or the use of a
governmental unit's own funds, however represented, are unallowable
except as specifically provided in this section 23.b. or authorized by
Federal legislation.
b. Financing costs (including interest) paid or incurred which are
associated with the otherwise allowable costs of building acquisition,
construction, or fabrication, reconstruction or remodeling completed on
or after October 1, 1980 is allowable subject to the conditions in
sections (1) through (4) of this section 23.b. Financing costs
(including interest) paid or incurred on or after September 1, 1995 for
land or associated with otherwise allowable costs of equipment is
allowable, subject to the conditions in (1) through (4).
(1) The financing is provided (from other than tax or user fee
sources) by a bona fide third party external to the governmental unit;
(2) The assets are used in support of Federal awards;
(3) Earnings on debt service reserve funds or interest earned on
borrowed funds pending payment of the construction or acquisition costs
are used to offset the current period's cost or the capitalized
interest, as appropriate. Earnings subject to being reported to the
Federal Internal Revenue Service under arbitrage requirements are
excludable.
(4) For debt arrangements over $1 million, unless the governmental
unit makes an initial equity contribution to the asset purchase of 25
percent or more, the governmental unit 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, governmental
units 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.
(5) Interest attributable to fully depreciated assets is
unallowable.
10. Redesignated Attachment B, section 24. is amended by
designating the current text as section a. and adding a new section
24.b. to read as follows:
24. Lobbying.
* * * * *
b. 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.
11. Attachment B, sections 26. through 30. are revised to read as
follows:
26. Materials and supplies costs.
a. Costs incurred for materials, supplies, and fabricated parts
necessary to carry out a Federal award are allowable.
b. Purchased materials and supplies shall be charged at their
actual prices, net of applicable credits. Withdrawals from general
stores or stockrooms should be charged at their actual net cost under
any recognized method of pricing inventory withdrawals, consistently
applied. Incoming transportation charges are a proper part of materials
and supplies costs.
c. Only materials and supplies actually used for the performance of
a Federal award may be charged as direct costs.
d. Where federally-donated or furnished materials are used in
performing the Federal award, such materials will be used without
charge.
27. Meetings and conferences.
Costs of meetings and conferences, the primary purpose of which is
the dissemination of technical information,
[[Page 25985]]
are allowable. This includes costs of meals, transportation, rental of
facilities, speakers' fees, and other items incidental to such meetings
or conferences. But see Attachment B, section 14, Entertainment.
28. Memberships, subscriptions, and professional activity costs.
a. Costs of the governmental unit's memberships in business,
technical, and professional organizations are allowable.
b. Costs of the governmental unit's subscriptions to business,
professional, and technical periodicals are allowable.
c. Costs of membership in civic and community, social organizations
are allowable as a direct cost with the approval of the Federal
awarding agency.
d. Costs of membership in organizations substantially engaged in
lobbying are unallowable.
29. Patent costs.
a. The following costs relating to patent and copyright matters are
allowable:
(1) Cost of preparing disclosures, reports, and other documents
required by the Federal award and of searching the art to the extent
necessary to make such disclosures;
(2) Cost of preparing documents and any other patent costs in
connection with the filing and prosecution of a United States patent
application where title or royalty-free license is required by the
Federal Government to be conveyed to the Federal Government; and
(3) General counseling services relating to patent and copyright
matters, such as advice on patent and copyright laws, regulations,
clauses, and employee agreements (but see Attachment B, sections 32,
Professional service costs, and 38, Royalties and other costs for use
of patents and copyrights).
b. The following costs related to patent and copyright matter are
unallowable:
(1) Cost of preparing disclosures, reports, and other documents and
of searching the art to the extent necessary to make disclosures not
required by the award,
(2) Costs in connection with filing and prosecuting any foreign
patent application, or
(3) Any United States patent application, where the Federal award
does not require conveying title or a royalty-free license to the
Federal Government (but see Attachment B, section 38., Royalties and
other costs for use of patents and copyrights).
30. Plant and homeland security costs.
Necessary and reasonable expenses incurred for routine and homeland
security to protect facilities, personnel, and work products are
allowable. Such costs include, but are not limited to, wages and
uniforms of personnel engaged in security activities; equipment;
barriers; contractual security services; consultants; etc. Capital
expenditures for homeland and plant security purposes are subject to
section 15., Equipment and other capital expenditures, of this
circular.
12. Attachment B, section 32. is revised to read as follows:
32. Professional service costs.
a. Costs of professional and consultant services rendered by
persons who are members of a particular profession or possess a special
skill, and who are not officers or employees of the governmental unit,
are allowable, subject to sections 32.b. and c. when reasonable in
relation to the services rendered and when not contingent upon recovery
of the costs from the Federal Government.
In addition, legal and related services are limited under
Attachment B, section 10.
b. In determining the allowability of costs in a particular case,
no single factor or any special combination of factors is necessarily
determinative. However, the following factors are relevant:
(1) The nature and scope of the service rendered in relation to the
service required.
(2) The necessity of contracting for the service, considering the
governmental unit's capability in the particular area.
(3) The past pattern of such costs, particularly in the years prior
to Federal awards.
(4) The impact of Federal awards on the governmental unit's
business (i.e., what new problems have arisen).
(5) Whether the proportion of Federal work to the governmental
unit's total business is such as to influence the governmental unit in
favor of incurring the cost, particularly where the services rendered
are not of a continuing nature and have little relationship to work
under Federal grants and contracts.
(6) Whether the service can be performed more economically by
direct employment rather than contracting.
(7) The qualifications of the individual or concern rendering the
service and the customary fees charged, especially on non-Federal
awards.
(8) Adequacy of the contractual agreement for the service (e.g.,
description of the service, estimate of time required, rate of
compensation, and termination provisions).
c. In addition to the factors in section 32.b, retainer fees to be
allowable must be supported by available or rendered evidence of bona
fide services available or rendered.
13. Attachment B, section 34. is revised to read as follows:
34. Publication and printing costs.
a. Publication costs include the costs of printing (including the
processes of composition, plate-making, press work, binding, and the
end products produced by such processes), distribution, promotion,
mailing, and general handling. Publication costs also include page
charges in professional publications.
b. If these costs are not identifiable with a particular cost
objective, they should be allocated as indirect costs to all benefiting
activities of the governmental unit.
c. Page charges for professional journal publications are allowable
as a necessary part of research costs where:
(1) The research papers report work supported by the Federal
Government; and
(2) The charges are levied impartially on all research papers
published by the journal, whether or not by federally-sponsored
authors.
14. Attachment B, sections 36. through 39. are revised to read as
follows:
36. Reconversion costs. Costs incurred in the restoration or
rehabilitation of the governmental unit's facilities to approximately
the same condition existing immediately prior to commencement of
Federal awards, less costs related to normal wear and tear, are
allowable.
37. Rental costs of buildings and equipment.
a. Subject to the limitations described in sections b. through d.
of this section 37, rental costs are allowable to the extent that the
rates are reasonable in light of such factors as: rental costs of
comparable property, if any; market conditions in the area;
alternatives available; and, the type, life expectancy, condition, and
value of the property leased. 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 had the
governmental unit continued to own the property. This amount would
include expenses such as depreciation or use allowance, maintenance,
taxes, and insurance.
c. Rental costs under ``less-than-arms-length'' leases are
allowable only up to the amount (as explained in Attachment B, section
37.b.) that would be allowed had title to the property vested in the
[[Page 25986]]
governmental unit. 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. Such leases include,
but are not limited to those between (i) divisions of a governmental
unit; (ii) governmental units under common control through common
officers, directors, or members; and (iii) a governmental unit and a
director, trustee, officer, or key employee of the governmental unit or
his immediate family, either directly or through corporations, trusts,
or similar arrangements in which they hold a controlling interest. For
example, a governmental unit may establish a separate corporation for
the sole purpose of owning property and leasing it back to the
governmental unit.
d. Rental costs under leases which are required to be treated as
capital leases under GAAP are allowable only up to the amount (as
explained in subsection b) that would be allowed had the governmental
unit purchased the property on the date the lease agreement was
executed. The provisions of Financial Accounting Standards Board
Statement 13, Accounting for Leases, shall be used to determine whether
a lease is a capital lease. Interest costs related to capital leases
are allowable to the extent they meet the criteria in Attachment B,
section 23. Unallowable costs include amounts paid for profit,
management fees, and taxes that would not have been incurred had the
governmental unit purchased the facility.
38. Royalties and other costs for the use of patents.
a. Royalties on a patent or copyright or amortization of the cost
of acquiring by purchase a copyright, patent, or rights thereto,
necessary for the proper performance of the award are allowable unless:
(1) The Federal Government has a license or the right to free use
of the patent or copyright.
(2) The patent or copyright has been adjudicated to be invalid, or
has been administratively determined to be invalid.
(3) The patent or copyright is considered to be unenforceable.
(4) The patent or copyright is expired.
b. Special care should be exercised in determining reasonableness
where the royalties may have been arrived at as a result of less-than-
arm's-length bargaining, e.g.:
(1) Royalties paid to persons, including corporations, affiliated
with the governmental unit.
(2) Royalties paid to unaffiliated parties, including corporations,
under an agreement entered into in contemplation that a Federal award
would be made.
(3) Royalties paid under an agreement entered into after an award
is made to a governmental unit.
c. In any case involving a patent or copyright formerly owned by
the governmental unit, the amount of royalty allowed should not exceed
the cost which would have been allowed had the governmental unit
retained title thereto.
39. Selling and marketing. Costs of selling and marketing any
products or services of the governmental unit are unallowable (unless
allowed under Attachment B, section 1. as allowable public relations
costs or under Attachment B, section 33. as allowable proposal costs.
22. Attachment B, section 41. is revised to read as follows:
41. Termination costs applicable to Federal awards.
Termination of awards generally gives rise to the incurrence of
costs, or the need for special treatment of costs, which would not have
arisen had the Federal award not been terminated. Cost principles
covering these items are set forth below. They are to be used in
conjunction with the other provisions of this Circular in termination
situations.
a. The cost of items reasonably usable on the governmental unit's
other work shall not be allowable unless the governmental unit submits
evidence that it would not retain such items at cost without sustaining
a loss. In deciding whether such items are reasonably usable on other
work of the governmental unit, the awarding agency should consider the
governmental unit's plans and orders for current and scheduled
activity.
Contemporaneous purchases of common items by the governmental unit
shall be regarded as evidence that such items are reasonably usable on
the governmental unit's other work. Any acceptance of common items as
allocable to the terminated portion of the Federal award shall be
limited to the extent that the quantities of such items on hand, in
transit, and on order are in excess of the reasonable quantitative
requirements of other work.
b. If in a particular case, despite all reasonable efforts by the
governmental unit, certain costs cannot be discontinued immediately
after the effective date of termination, such costs are generally
allowable within the limitations set forth in this Circular, except
that any such costs continuing after termination due to the negligent
or willful failure of the governmental unit to discontinue such costs
shall be unallowable.
c. Loss of useful value of special tooling, machinery, and
equipment is generally allowable if:
(1) Such special tooling, special machinery, or equipment is not
reasonably capable of use in the other work of the governmental unit,
(2) The interest of the Federal Government is protected by transfer
of title or by other means deemed appropriate by the awarding agency,
and
(3) The loss of useful value for any one terminated Federal award
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
Federal award bears to the entire terminated Federal award and other
Federal awards for which the special tooling, machinery, or equipment
was acquired.
d. Rental costs under unexpired leases are generally allowable
where clearly shown to have been reasonably necessary for the
performance of the terminated Federal award 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
Federal award and such further period as may be reasonable, and
(2) the governmental unit makes all reasonable efforts to
terminate, assign, settle, or otherwise reduce the cost of such lease.
There also may be included the cost of alterations of such leased
property, provided such alterations were necessary for the performance
of the Federal award, and of reasonable restoration required by the
provisions of the lease.
e. Settlement expenses including the following are generally
allowable:
(1) Accounting, legal, clerical, and similar costs reasonably
necessary for:
(a) The preparation and presentation to the awarding agency of
settlement claims and supporting data with respect to the terminated
portion of the Federal award, unless the termination is for default
(see section--.44 of the Grants Management Common Rule implementing OMB
Circular A-102); and
(b) The termination and settlement of subawards.
(2) Reasonable costs for the storage, transportation, protection,
and disposition of property provided by the Federal Government or
acquired or produced for the Federal award, except when grantees or
contractors are reimbursed for disposals at a predetermined amount in
accordance with sections--.31 and --.32 of the
[[Page 25987]]
Grants Management Common Rule implementing OMB Circular A-102.
f. Claims under subawards, including the allocable portion of
claims which are common to the Federal award, and to other work of the
governmental unit are generally allowable.
An appropriate share of the governmental unit's indirect expense
may be allocated to the amount of settlements with subcontractors and/
or subgrantees, provided that the amount allocated is otherwise
consistent with the basic guidelines contained in Attachment A. The
indirect expense so allocated shall exclude the same and similar costs
claimed directly or indirectly as settlement expenses.
15. Attachment B, section 43. is revised to read as follows:
43. 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 governmental unit. Such
costs may be charged on an actual cost basis, on a per diem or mileage
basis in lieu of actual costs incurred, or on a combination of the two,
provided the method used is applied to an entire trip and not to
selected days of the trip, and results in charges consistent with those
normally allowed in like circumstances in the governmental unit's non-
federally-sponsored activities. Notwithstanding the provisions of
Attachment B, section 19, General government expenses, travel costs of
officials covered by that section are allowable with the prior approval
of an awarding agency when they are specifically related to Federal
awards.
b. Lodging and subsistence. Costs incurred by employees and
officers for travel, including costs of lodging, other subsistence, and
incidental expenses, shall be considered reasonable and allowable only
to the extent such costs do not exceed charges normally allowed by the
governmental unit in its regular operations as the result of the
governmental unit's written travel policy. In the absence of an
acceptable, written governmental unit policy regarding travel costs,
the rates and amounts established under subchapter I of Chapter 57,
Title 5, United States Code (``Travel and Subsistence Expenses; Mileage
Allowances''), or by the Administrator of General Services, or by the
President (or his or her designee) pursuant to any provisions of such
subchapter shall apply to travel under Federal awards (48 CFR 31.205-
46(a)).
c. Commercial air travel.
(1) Airfare costs in excess of the customary standard commercial
airfare (coach or equivalent), Federal Government contract airfare
(where authorized and available), or the lowest commercial discount
airfare are unallowable except when such accommodations would:
(a) require circuitous routing;
(b) require travel during unreasonable hours;
(c) excessively prolong travel;
(d) result in additional costs that would offset the transportation
savings; or
(e) offer accommodations not reasonably adequate for the traveler's
medical needs. The governmental unit must justify and document these
conditions on a case-by-case basis in order for the use of first-class
airfare to be allowable in such cases.
(2) Unless a pattern of avoidance is detected, the Federal
Government will generally not question a governmental unit's
determinations that customary standard airfare or other discount
airfare is unavailable for specific trips if the governmental unit can
demonstrate either of the following: (a) that such airfare was not
available in the specific case; or (b) that it is the governmental
unit's overall practice to make routine use of such airfare.
d. Air travel by other than commercial carrier. Costs of travel by
governmental unit-owned, -leased, or -chartered aircraft include the
cost of lease, charter, operation (including personnel costs),
maintenance, depreciation, insurance, and other related costs. The
portion of such costs that exceeds the cost of allowable commercial air
travel, as provided for in section 43.c., is unallowable.
e. Foreign travel. Direct charges for foreign travel costs are
allowable only when the travel has received prior approval of the
awarding agency. Each separate foreign trip must receive such approval.
For purposes of this provision, ``foreign travel'' includes any travel
outside Canada, Mexico, the United States, and any United States
territories and possessions. However, the term ``foreign travel'' for a
governmental unit located in a foreign country means travel outside
that country.
C. Amendments to A-122
1. Revise the table of contents to Attachment B as follows:
Attachment B.--Selected Items of Cost
Table of Contents
1. Advertising and public relations costs
2. Advisory councils
3. Alcoholic beverages
4. Audit costs and related services
5. Bad debts
6. Bonding costs
7. Communication costs
8. Compensation for personal services
9. Contingency provisions
10. Defense and prosecution of criminal and civil proceedings,
claims, appeals and patent infringement
11. Depreciation and use allowances
12. Donations and contributions
13. Employee morale, health, and welfare costs
14. Entertainment costs
15. Equipment and other capital expenditures
16. Fines and penalties
17. Fund raising and investment management costs
18. Gains and losses on depreciable assets
19. Goods or services for personal use
20. Housing and personal living expenses
21. Idle facilities and idle capacity
22. Insurance and indemnification
23. Interest
24. Labor relations costs
25. Lobbying
26. Losses on other awards or contracts
27. Maintenance and repair costs
28. Materials and supplies costs
29. Meetings and conferences
30. Memberships, subscriptions, and professional activity costs
31. Organization costs
32. Page charges in professional journals
33. Participant support costs
34. Patent costs
35. Plant and homeland security costs
36. Pre-agreement costs
37. Professional services costs
38. Publication and printing costs
39. Rearrangement and alteration costs
40. Reconversion costs
41. Recruiting costs
42. Relocation costs
43. Rental costs of buildings and equipment
44. Royalties and other costs for use of patents and copyrights
45. Selling and marketing
46. Specialized service facilities
47. Taxes
48. Termination costs applicable to Federal awards
49. Training costs
50. Transportation costs
51. Travel costs
52. Trustees
2. Redesignate the following paragraphs in Appendix B:
a. Paragraph 2. is redesignated as paragraph 3.
b. Paragraph 7. is redesignated as paragraph 8.
c. Paragraph 18. is redesignated as paragraph 19.
d. Paragraph 19. is redesignated as paragraph 20.
e. Paragraph 33. is redesignated as paragraph 32.
f. Paragraph 34. is redesignated as paragraph 33.
g. Paragraph 38. is redesignated as paragraph 36.
h. Paragraph 42. is redesignated as paragraph 39.
i. Paragraph 44. is redesignated as paragraph 41.
[[Page 25988]]
j. Paragraph 45. is redesignated as paragraph 42.
k. Paragraph 51. is redesignated as paragraph 47.
l. Paragraph 53. is redesignated as paragraph 49.
m. Paragraph 54. is redesignated as paragraph 50.
n. Paragraph 56. is redesignated as paragraph 52.
3. Attachment B, paragraphs 1. and 2. are revised to read as
follows:
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, direct mail, exhibits,
electronic or computer transmittals, and the like.
b. The term public relations includes community relations and means
those activities dedicated to maintaining the image of the organization
or maintaining or promoting understanding and favorable relations with
the community or public at large or any segment of the public.
c. The only allowable advertising costs are those which are solely
for:
(1) The recruitment of personnel required for the performance by
the organization of obligations arising under a Federal award (See also
Attachment B, paragraphs 42., Recruiting, and paragraph 43., Relocation
costs.);
(2) The procurement of goods and services for the performance of a
Federal award;
(3) The disposal of scrap or surplus materials acquired in the
performance of a Federal award except when governmental units are
reimbursed for disposal costs at a predetermined amount; or
(4) Other specific purposes necessary to meet the requirements of
the Federal award.
d. The only allowable public relations costs are:
(1) Costs specifically required by the Federal award;
(2) Costs of communicating with the public and press pertaining to
specific activities or accomplishments which result from performance of
Federal awards (these costs are considered necessary as part of the
outreach effort for the Federal award); 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 keep the
public informed on matters of public concern, such as notices of
Federal contract/grant awards, financial matters, etc.
e. Costs identified in subparagraphs c and d if incurred for more
than one Federal award or for both sponsored work and other work of the
organization, are allowable to the extent that the principles in
Attachment A, paragraphs B. (``Direct Costs'') and C. (``Indirect
Costs'') are observed.
f. Unallowable advertising and public relations costs include the
following:
(1) All advertising and public relations costs other than as
specified in paragraphs 1.c., d., and e.;
(2) Costs of meetings, conventions, convocations, or other events
related to other activities of the organization, including:
(a) Costs of displays, demonstrations, and exhibits;
(b) Costs of meeting rooms, hospitality suites, and other special
facilities used in conjunction with shows and other special events; and
(c) Salaries and wages of employees engaged in setting up and
displaying exhibits, making demonstrations, and providing briefings;
(3) Costs of promotional items and memorabilia, including models,
gifts, and souvenirs;
(4) Costs of advertising and public relations designed solely to
promote the organization.
2. Advisory councils.
Costs incurred by advisory councils or committees are allowable as
a direct cost where authorized by the Federal awarding agency or as an
indirect cost where allocable to Federal awards.
4. Attachment B, paragraphs 4. through 7. are revised to read as
follows:
4. Audit costs and related services.
a. The costs of audits required by, and performed in accordance
with, the Single Audit Act, as implemented by Circular A-133, ``Audits
of States, Local Governments, and Non-Profit Organizations'' are
allowable. Also see 31 U.S.C. 7505(b) and section 230 (``Audit Costs'')
of Circular A-133.
b. Other audit costs are allowable if included in an indirect cost
rate proposal, or if specifically approved by the awarding agency as a
direct cost to an award.
c. The cost of agreed-upon procedures engagements to monitor
subrecipients who are exempted from A-133 under section 200(d) are
allowable, subject to the conditions listed in A-133, section
230(b)(2).
5. Bad debts. Bad debts, including losses (whether actual or
estimated) arising from uncollectable accounts and other claims,
related collection costs, and related legal costs, are unallowable.
6. Bonding costs.
a. Bonding costs arise when the Federal Government requires
assurance against financial loss to itself or others by reason of the
act or default of the organization. They arise also in instances where
the organization requires similar assurance. Included are such bonds as
bid, performance, payment, advance payment, infringement, and fidelity
bonds.
b. Costs of bonding required pursuant to the terms of the award are
allowable.
c. Costs of bonding required by the organization in the general
conduct of its operations are allowable to the extent that such bonding
is in accordance with sound business practice and the rates and
premiums are reasonable under the circumstances.
7. Communication costs. Costs incurred for telephone services,
local and long distance telephone calls, telegrams, postage, messenger,
electronic or computer transmittal services and the like are allowable.
5. In Attachment B, redesignated paragraph 8. is amended by
redesignating paragraphs 8.f. through 8.i. as paragraphs 8.g. through
8.j. adding a new paragraph 8.f. and adding a new paragraph 8.k. to
read as follows.
8. Compensation for personal services.
* * * * *
f. Overtime, extra-pay shift, and multi-shift premiums. Premiums
for overtime, extra-pay shifts, and multi-shift work are allowable only
with the prior approval of the awarding agency except:
(1) When necessary to cope with emergencies, such as those
resulting from accidents, natural disasters, breakdowns of equipment,
or occasional operational bottlenecks of a sporadic nature.
(2) When employees are performing indirect functions, such as
administration, maintenance, or accounting.
(3) In the performance of tests, laboratory procedures, or other
similar operations which are continuous in nature and cannot reasonably
be interrupted or otherwise completed.
(4) When lower overall cost to the Federal Government will result.
* * * * *
k. Severance pay.
(1) Severance pay, also commonly referred to as dismissal wages, is
a payment in addition to regular salaries and wages, by organizations
to workers whose employment is being terminated. Costs of severance pay
are allowable only to the extent that in each case, it is required by
(a) Law,
(b) Employer-employee agreement,
[[Page 25989]]
(c) Established policy that constitutes, in effect, an implied
agreement on the organization's part, or
(d) Circumstances of the particular employment.
(2) Costs of severance payments are divided into two categories as
follows:
(a) Actual normal turnover severance payments shall be allocated to
all activities; or, where the organization provides for a reserve for
normal severances, such method will be acceptable if the charge to
current operations is reasonable in light of payments actually made for
normal severances over a representative past period, and if amounts
charged are allocated to all activities of the organization.
(b) Abnormal or mass severance pay is of such a conjectural nature
that measurement of costs by means of an accrual will not achieve
equity to both parties. Thus, accruals for this purpose are not
allowable. However, the Federal Government recognizes its obligation to
participate, to the extent of its fair share, in any specific payment.
Thus, allowability will be considered on a case-by-case basis in the
event or occurrence.
(c) Costs incurred in certain severance pay packages (commonly
known as ``a golden parachute'' payment) which are in an amount in
excess of the normal severance pay paid by the organization to an
employee upon termination of employment and are paid to the employee
contingent upon a change in management control over, or ownership of,
the organization's assets are unallowable.
(d) Severance payments to foreign nationals employed by the
organization outside the United States, to the extent that the amount
exceeds the customary or prevailing practices for the organization in
the United States are unallowable, unless they are necessary for the
performance of Federal programs and approved by awarding agencies.
(e) Severance payments to foreign nationals employed by the
organization outside the United States due to the termination of the
foreign national as a result of the closing of, or curtailment of
activities by, the organization in that country, are unallowable,
unless they are necessary for the performance of Federal programs and
approved by awarding agencies.
6. Attachment B, paragraph 9. is revised to read as follows:
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.
The term ``contingency reserve'' excludes self-insurance reserves
(see paragraphs Attachment B, 8.g.(3) and 22.a.(2)(d); pension funds
(see paragraph 8.i.): and reserves for normal severance pay (see
paragraph 8.k.).
7. Attachment B, paragraphs 11. through 15. are revised to read as
follows:
11. Depreciation and use allowances.
a. Compensation for the use of buildings, other capital
improvements, and equipment on hand may be made through use allowance
or depreciation. However, except as provided in Attachment B, paragraph
11.f., a combination of the two methods may not be used in connection
with a single class of fixed assets (e.g., buildings, office equipment,
computer equipment, etc.).
b. The computation of use allowances or depreciation shall be based
on the acquisition cost of the assets involved. The acquisition cost of
an asset donated to the organization by a third party shall be its fair
market value at the time of the donation.
c. The computation of use allowances or depreciation will exclude:
(1) The cost of land;
(2) Any portion of the cost of buildings and equipment borne by or
donated by the Federal Government irrespective of where title was
originally vested or where it presently resides; and
(3) Any portion of the cost of buildings and equipment contributed
by or for the organization in satisfaction of a statutory matching
requirement.
d. Where depreciation method is followed, the period of useful
service (useful life) established in each case for usable capital
assets must take into consideration such factors as type of
construction, nature of the equipment used, technological developments
in the particular program area, and the renewal and replacement
policies followed for the individual items or classes of assets
involved. The method of depreciation used to assign the cost of an
asset (or group of assets) to accounting periods shall reflect the
pattern of consumption of the asset during its useful life.
In the absence of clear evidence indicating that the expected
consumption of the asset will be significantly greater or lesser in the
early portions of its useful life than in the later portions, the
straight-line method shall be presumed to be the appropriate method.
Depreciation methods once used shall not be changed unless approved
in advance by the cognizant Federal agency. When the depreciation
method is introduced for application to assets previously subject to a
use allowance, the combination of use allowances and depreciation
applicable to such assets must not exceed the total acquisition cost of
the assets.
e. When the depreciation method is used for buildings, a building's
shell may be segregated from each building component (e.g., plumbing
system, heating, and air conditioning system, etc.) and each item
depreciated over its estimated useful life; or the entire building
(i.e., the shell and all components) may be treated as a single asset
and depreciated over a single useful life.
f. When the depreciation method is used for a particular class of
assets, no depreciation may be allowed on any such assets that, under
subparagraph d, would be viewed as fully depreciated. However, a
reasonable use allowance may be negotiated for such assets if warranted
after taking into consideration the amount of depreciation previously
charged to the Federal Government, the estimated useful life remaining
at time of negotiation, the effect of any increased maintenance charges
or decreased efficiency due to age, and any other factors pertinent to
the utilization of the asset for the purpose contemplated.
g. Where the use allowance method is followed, the use allowance
for buildings and improvement (including land improvements, such as
paved parking areas, fences, and sidewalks) will be computed at an
annual rate not exceeding two percent of acquisition cost.
The use allowance for equipment will be computed at an annual rate
not exceeding 6\2/3\ percent of acquisition cost. When the use
allowance method is used for buildings, the entire building must be
treated as a single asset; the building's components (e.g., plumbing
system, heating and air conditioning, etc.) cannot be segregated from
the building's shell.
The two percent limitation, however, need not be applied to
equipment which is merely attached or fastened to the building but not
permanently fixed to it and which is used as furnishings or decorations
or for specialized purposes (e.g., dentist chairs and dental treatment
units, counters, laboratory benches bolted to the floor, dishwashers,
modular furniture, carpeting, etc.). Such equipment will be considered
as not being permanently fixed to the building if it can be removed
without the need for costly or extensive alterations or repairs to the
building or the equipment. Equipment that meets these criteria will
[[Page 25990]]
be subject to the 6\2/3\ percent equipment use allowance limitation.
h. Charges for use allowances or depreciation must be supported by
adequate property records and physical inventories must be taken at
least once every two years (a statistical sampling basis is acceptable)
to ensure that assets exist and are usable and needed. When the
depreciation method is followed, adequate depreciation records
indicating the amount of depreciation taken each period must also be
maintained.
12. Donations and contributions.
a. Contributions or donations rendered. Contributions or donations,
including cash, property, and services, made by the organization,
regardless of the recipient, are unallowable.
b. Donated services received:
(1) Donated or volunteer services may be furnished to a
organization by professional and technical personnel, consultants, and
other skilled and unskilled labor. The value of these services is not
reimbursable either as a direct or indirect cost. However, the value of
donated services may be used to meet cost sharing or matching
requirements in accordance with OMB Circular A-110.
(2) The value of donated services utilized in the performance of a
direct cost activity shall, when material in amount, be considered in
the determination of the organization's indirect costs or rate(s) and,
accordingly, shall be allocated a proportionate share of applicable
indirect costs when the following exist:
(a) The aggregate value of the services is material;
(b) The services are supported by a significant amount of the
indirect costs incurred by the organization; and
(c) The direct cost activity is not pursued primarily for the
benefit of the Federal Government.
(3) In those instances where there is no basis for determining the
fair market value of the services rendered, the recipient and the
cognizant agency shall negotiate an appropriate allocation of indirect
cost to the services.
(4) Where donated services directly benefit a project supported by
an award, the indirect costs allocated to the services will be
considered as a part of the total costs of the project. Such indirect
costs may be reimbursed under the award or used to meet cost sharing or
matching requirements.
(5) The value of the donated services may be used to meet cost
sharing or matching requirements under conditions described in Sec.
--.23 of Circular A-110. Where donated services are treated as indirect
costs, indirect cost rates will separate the value of the donations so
that reimbursement will not be made.
c. Donated goods or space.
(1) Donated goods; i.e., expendable personal property/supplies, and
donated use of space may be furnished to a organization. The value of
the goods and space is not reimbursable either as a direct or indirect
cost.
(2) The value of the donations may be used to meet cost sharing or
matching share requirements under the conditions described in Circular
A-110. Where donations are treated as indirect costs, indirect cost
rates will separate the value of the donations so that reimbursement
will not be made.
13. Employee morale, health, and welfare costs.
a. The costs of employee information publications, health or first-
aid clinics and/or infirmaries, recreational activities, employee
counseling services, and any other expenses incurred in accordance with
the organization's established practice or custom for the improvement
of working conditions, employer-employee relations, employee morale,
and employee performance are allowable.
b. Such costs will be equitably apportioned to all activities of
the organization. Income generated from any of these activities will be
credited to the cost thereof unless such income has been irrevocably
set over to employee welfare organizations.
14. Entertainment costs.
Costs of 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.
15. Equipment and other capital expenditures.
a. For purposes of this subparagraph, the following definitions
apply:
(1) ``Capital Expenditures'' means expenditures for the acquisition
cost of capital assets (equipment, buildings, land), or expenditures to
make improvements to capital assets that materially increase their
value or useful life. Acquisition cost means the cost of the asset
including the cost to put it in place. Acquisition cost 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 the acquisition cost in accordance with the organization's regular
accounting practices.
(2) ``Equipment'' means an article of nonexpendable, tangible
personal property having a useful life of more than one year and an
acquisition cost which equals or exceeds the lesser of the
capitalization level established by the organization for financial
statement purposes, or $5000.
(3) ``Special purpose equipment'' means equipment which is used
only for research, medical, scientific, or other technical activities.
Examples of special purpose equipment include microscopes, x-ray
machines, surgical instruments, and spectrometers.
(4) ``General purpose equipment'' means equipment, which is not
limited to research, medical, scientific or other technical activities.
Examples include office equipment and furnishings, modular offices,
telephone networks, information technology equipment and systems, air
conditioning equipment, reproduction and printing equipment, and motor
vehicles.
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 awarding agency.
(2) Capital expenditures for special purpose equipment are
allowable as direct costs, provided that items with a unit cost of
$5000 or more have the prior approval of the awarding agency.
(3) Capital expenditures for improvements to land, buildings, or
equipment which materially increase their value or useful life are
unallowable as a direct cost except with the prior approval of the
awarding agency.
(4) When approved as a direct charge pursuant to this paragraph
15.b.(1), (2), and (3), capital expenditures will be charged in the
period in which the expenditure is incurred, or as otherwise determined
appropriate by and negotiated with the awarding agency.
(5) Equipment and other capital expenditures are unallowable as
indirect costs. However, see Attachment B, paragraph 11., Depreciation
and use allowance, for rules on the allowability of use allowances or
depreciation on buildings, capital improvements, and equipment. Also,
see Attachment B, paragraph 44., Rental costs of buildings and
equipment, for rules on the allowability of rental costs for land,
buildings, and equipment.
(6) 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
[[Page 25991]]
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.
8. Attachment B, paragraphs 17. and 18., are revised to read as
follows:
17. Fund raising and investment management costs.
a. Costs of organized fundraising, including financial campaigns,
endowment drives, solicitation of gifts and bequests, and similar
expenses incurred solely to raise capital or obtain contributions are
unallowable.
b. Costs of investment counsel and staff and similar expenses
incurred solely to enhance income from investments are unallowable.
c. Fundraising and investment activities shall be allocated an
appropriate share of indirect costs under the conditions described in
subparagraph B.3 of Attachment A.
18. Gains and losses on depreciable assets.
a.(1) Gains and losses on sale, retirement, or other disposition of
depreciable property shall be included in the year in which they occur
as credits or charges to cost grouping(s) in which the depreciation
applicable to such property was included. The amount of the gain or
loss to be included as a credit or charge to the appropriate cost
grouping(s) shall be the difference between the amount realized on the
property and the undepreciated basis of the property.
(2) Gains and losses on the disposition of depreciable property
shall not be recognized as a separate credit or charge under the
following conditions:
(a) The gain or loss is processed through a depreciation account
and is reflected in the depreciation allowable under Attachment B,
paragraph 11.
(b) The property is given in exchange as part of the purchase price
of a similar item and the gain or loss is taken into account in
determining the depreciation cost basis of the new item.
(c) A loss results from the failure to maintain permissible
insurance, except as otherwise provided in Attachment B, paragraph 22.
(d) Compensation for the use of the property was provided through
use allowances in lieu of depreciation in accordance with paragraph 11.
(e) Gains and losses arising from mass or extraordinary sales,
retirements, or other dispositions shall be considered on a case-by-
case basis.
b. Gains or losses of any nature arising from the sale or exchange
of property other than the property covered in subparagraph a shall be
excluded in computing award costs.
9. Attachment B, paragraph 21. is revised to read as follows:
21. Idle facilities and idle capacity.
a. As used in this paragraph the following terms have the meanings
set forth below:
(1) ``Facilities'' means land and buildings or any portion thereof,
equipment individually or collectively, or any other tangible capital
asset, wherever located, and whether owned or leased by the
organization.
(2) ``Idle facilities'' means completely unused facilities that are
excess to the organization's current needs.
(3) ``Idle capacity'' means the unused capacity of partially used
facilities. It is the difference between: (a) That which a facility
could achieve under 100 percent operating time on a one-shift basis
less operating interruptions resulting from time lost for repairs,
setups, unsatisfactory materials, and other normal delays; and (b) the
extent to which the facility was actually used to meet demands during
the accounting period. A multi-shift basis should be used if it can be
shown that this amount of usage would normally be expected for the type
of facility involved.
(4) ``Cost of idle facilities or idle capacity'' means costs such
as maintenance, repair, housing, rent, and other related costs, e.g.,
insurance, interest, property taxes and depreciation or use allowances.
b. The costs of idle facilities are unallowable except to the
extent that:
(1) They are necessary to meet fluctuations in workload; or
(2) Although not necessary to meet fluctuations in workload, they
were necessary when acquired and are now idle because of changes in
program requirements, efforts to achieve more economical operations,
reorganization, termination, or other causes which could not have been
reasonably foreseen. Under the exception stated in this subparagraph,
costs of idle facilities are allowable for a reasonable period of time,
ordinarily not to exceed one year, depending on the initiative taken to
use, lease, or dispose of such facilities.
c. The costs of idle capacity are normal costs of doing business
and are a factor in the normal fluctuations of usage or indirect cost
rates from period to period. Such costs are allowable, provided that
the capacity is reasonably anticipated to be necessary or was
originally reasonable and is not subject to reduction or elimination by
use on other Federal awards, subletting, renting, or sale, in
accordance with sound business, economic, or security practices.
Widespread idle capacity throughout an entire facility or among a group
of assets having substantially the same function may be considered idle
facilities.
10. Attachment B, paragraph 23. is revised to read as follows:
23. Interest. a. Costs incurred for interest on borrowed capital,
temporary use of endowment funds, or the use of the organization's own
funds, however represented, are unallowable. However, interest on debt
incurred after September 29, 1995 to acquire or replace capital assets
(including renovations, alterations, equipment, land, and capital
assets acquired through capital leases), acquired after September 29,
1995 and used in support of Federal awards is allowable, provided that:
(1) For facilities acquisitions (excluding renovations and
alterations) costing over $10 million where the Federal Government's
reimbursement is expected to equal or exceed 40 percent of an asset's
cost, the organization prepares, prior to the acquisition or
replacement of the capital asset(s), a justification that demonstrates
the need for the facility in the conduct of federally-sponsored
activities. Upon request, the needs justification must be provided to
the Federal agency with cost cognizance authority as a prerequisite to
the continued allowability of interest on debt and depreciation related
to the facility. The needs justification for the acquisition of a
facility should include, at a minimum, the following:
(a) A statement of purpose and justification for facility
acquisition or replacement;
(b) A statement as to why current facilities are not adequate;
(c) A statement of planned future use of the facility;
(d) A description of the financing agreement to be arranged for the
facility;
(e) A summary of the building contract with estimated cost
information and statement of source and use of funds;
(f) A schedule of planned occupancy dates.
(2) For facilities costing over $500,000, the non-profit
organization prepares, prior to the acquisition or replacement of the
facility, a lease/purchase analysis in accordance with the provisions
of Sections --.30 through --.37 of Circular A-110, which shows that a
financed purchase or capital lease is less costly to the organization
than other leasing alternatives, on a net present value basis. Discount
rates used should be equal to the non-profit organization's anticipated
interest rates and should be no higher than the fair market rate
available to the non-profit organization from an unrelated (``arm's
[[Page 25992]]
length'') third-party. The lease/purchase analysis shall include a
comparison of the net present value of the projected total cost
comparisons of both alternatives over the period the asset is expected
to be used by the non-profit organization. The cost comparisons
associated with purchasing the facility shall include the estimated
purchase price, anticipated operating and maintenance costs (including
property taxes, if applicable) not included in the debt financing, less
any estimated asset salvage value at the end of the period defined
above. The cost comparison for a capital lease shall include the
estimated total lease payments, any estimated bargain purchase option,
operating and maintenance costs, and taxes not included in the capital
leasing arrangement, less any estimated credits due under the lease at
the end of the period defined above. Projected operating lease costs
shall be based on the anticipated cost of leasing comparable facilities
at fair market rates under rental agreements that would be renewed or
reestablished over the period defined above, and any expected
maintenance costs and allowable property taxes to be borne by the non-
profit organization directly or as part of the lease arrangement.
(3) The actual interest cost claimed is predicated upon interest
rates that are no higher than the fair market rate available to the
non-profit organization from an unrelated (``arm's length'') third
party.
(4) 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.
(5) Reimbursements are limited to the least costly alternative
based on the total cost analysis required under subparagraph (b). For
example, if an operating lease is determined to be less costly than
purchasing through debt financing, then reimbursement is limited to the
amount determined if leasing had been used. In all cases where a lease/
purchase analysis is performed, Federal reimbursement shall be based
upon the least expensive alternative.
(6) Organizations are also subject to the following conditions:
(a) Interest on debt incurred to finance or refinance assets
acquired before or reacquired after September 29, 1995, is not
allowable.
(b) Interest attributable to fully depreciated assets is
unallowable.
(c) For debt arrangements over $1 million, unless the non-profit
organization makes an initial equity contribution to the asset purchase
of 25 percent or more, non-profit organizations shall reduce claims for
interest expense by an amount equal to imputed interest earnings on
excess cash flow, which is to be calculated as follows. Annually, non-
profit organizations shall prepare a cumulative (from the inception of
the project) report of monthly cash flows that includes inflows and
outflows, regardless of the funding source. Inflows consist of
depreciation expense, amortization of capitalized construction
interest, and annual interest expense. For cash flow calculations, the
annual inflow figures shall be divided by the number of months in the
year (usually 12) that the building is in service for monthly amounts.
Outflows consist of initial equity contributions, debt principal
payments (less the pro rata share attributable to the unallowable costs
of land) and interest payments. Where cumulative inflows exceed
cumulative outflows, interest shall be calculated on the excess inflows
for that period and be treated as a reduction to allowable interest
expense. The rate of interest to be used to compute earnings on excess
cash flows shall be the three month Treasury Bill closing rate as of
the last business day of that month.
(d) Substantial relocation of federally-sponsored activities from a
facility financed by indebtedness, the cost of which was funded in
whole or part through Federal reimbursements, to another facility prior
to the expiration of a period of 20 years requires notice to the
Federal cognizant agency. The extent of the relocation, the amount of
the Federal participation in the financing, and the depreciation and
interest charged to date may require negotiation and/or downward
adjustments of replacement space charged to Federal programs in the
future.
(e) The allowable costs to acquire facilities and equipment are
limited to a fair market value available to the non-profit organization
from an unrelated (``arm's length'') third party.
b. For non-profit organizations subject to ``full coverage'' under
the Cost Accounting Standards (CAS) as defined at 48 CFR 9903.201, the
interest allowability provisions of subparagraph a do not apply.
Instead, these organizations' sponsored agreements are subject to CAS
414 (48 CFR 9903.414), cost of money as an element of the cost of
facilities capital, and CAS 417 (48 CFR 9903.417), cost of money as an
element of the cost of capital assets under construction.
c. The following definitions are to be used for purposes of this
paragraph:
(1) Re-acquired assets means assets held by the non-profit
organization prior to September 29, 1995 that have again come to be
held by the organization, whether through repurchase or refinancing. It
does not include assets acquired to replace older assets.
(2) Initial equity contribution means the amount or value of
contributions made by organizations for the acquisition of the asset or
prior to occupancy of facilities.
(3) Asset costs means the capitalizable costs of an asset,
including construction costs, acquisition costs, and other such costs
capitalized in accordance with GAAP.
11. Attachment B, paragraph 25. is amended by adding a new sub-
paragraph d. at the end to read as follows:
25. Lobbying.
* * * * *
d. 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.
12. Attachment B, paragraph 26. is amended by revising the title to
read as follows:
26. Losses on other awards or contracts.
* * * * *
13. Attachment B, paragraphs 27. through 30. are revised to read as
follows:
27. Maintenance and repair costs.
Costs incurred for necessary maintenance, repair, or upkeep of
buildings and equipment (including Federal property unless otherwise
provided for) which neither add to the permanent value of the property
nor appreciably prolong its intended life, but keep it in an efficient
operating condition, are allowable. Costs incurred for improvements
which add to the permanent value of the buildings and equipment or
appreciably prolong their intended life shall be treated as capital
expenditures (see Attachment B paragraph 15.).
28. Materials and supplies costs.
[[Page 25993]]
a. Costs incurred for materials, supplies, and fabricated parts
necessary to carry out a Federal award are allowable.
b. Purchased materials and supplies shall be charged at their
actual prices, net of applicable credits. Withdrawals from general
stores or stockrooms should be charged at their actual net cost under
any recognized method of pricing inventory withdrawals, consistently
applied. Incoming transportation charges are a proper part of materials
and supplies costs.
c. Only materials and supplies actually used for the performance of
a Federal award may be charged as direct costs.
d. Where federally-donated or furnished materials are used in
performing the Federal award, such materials will be used without
charge.
29. Meetings and conferences.
Costs of meetings and conferences, the primary purpose of which is
the dissemination of technical information, are allowable. This
includes costs of meals, transportation, rental of facilities,
speakers' fees, and other items incidental to such meetings or
conferences. But see Attachment B, paragraphs 14., Entertainment, and
34., Participant support costs.
30. Memberships, subscriptions, and professional activities.
a. Costs of the organization's membership in business, technical,
and professional organizations are allowable.
b. Costs of the organization's subscriptions to business,
professional, and technical periodicals are allowable.
c. Costs of membership in any civic or community organization are
allowable with prior approval by Federal cognizant agency.
d. Costs of membership in any country club or social or dining club
or organization are unallowable.
14. Attachment B, paragraphs 34. and 35. are revised to read as
follows:
34. Patent costs.
a. The following costs relating to patent and copyright matters are
allowable:
(1) Cost of preparing disclosures, reports, and other documents
required by the Federal award and of searching the art to the extent
necessary to make such disclosures;
(2) Cost of preparing documents and any other patent costs in
connection with the filing and prosecution of a United States patent
application where title or royalty-free license is required by the
Federal Government to be conveyed to the Federal Government; and
(3) General counseling services relating to patent and copyright
matters, such as advice on patent and copyright laws, regulations,
clauses, and employee agreements (but see Attachment B, paragraphs 37.,
Professional service costs, and 44., Royalties and other costs for use
of patents and copyrights).
b. The following costs related to patent and copyright matter are
unallowable:
(1) Cost of preparing disclosures, reports, and other documents and
of searching the art to the extent necessary to make disclosures not
required by the award.
(2) Costs in connection with filing and prosecuting any foreign
patent application, or any United States patent application, where the
Federal award does not require conveying title or a royalty-free
license to the Federal Government (but see Attachment B, paragraph 44.,
Royalties and other costs for use of patents and copyrights).
35. Plant and homeland security costs.
Necessary and reasonable expenses incurred for routine and homeland
security to protect facilities, personnel, and work products are
allowable. Such costs include, but are not limited to, wages and
uniforms of personnel engaged in security activities; equipment;
barriers; contractual security services; consultants; etc. Capital
expenditures for homeland and plant security purposes are subject to
Attachment B, paragraph 15., Equipment and other capital expenditures,
of this circular.
15. In Attachment B, redesignated paragraph 36. is amended by
revising the title to read as follows:
36. Pre-agreement costs.
* * * * *
16. Attachment B, paragraphs 37. and 38. are revised to read as
follows:
37. Professional service costs.
a. Costs of professional and consultant services rendered by
persons who are members of a particular profession or possess a special
skill, and who are not officers or employees of the organization, are
allowable, subject to subparagraphs b. and c. of this paragraph 37.
when reasonable in relation to the services rendered and when not
contingent upon recovery of the costs from the Federal Government.
In addition, legal and related services are limited under
Attachment B, paragraph 10.
b. In determining the allowability of costs in a particular case,
no single factor or any special combination of factors is necessarily
determinative. However, the following factors are relevant:
(1) The nature and scope of the service rendered in relation to the
service required.
(2) The necessity of contracting for the service, considering the
organization's capability in the particular area.
(3) The past pattern of such costs, particularly in the years prior
to Federal awards.
(4) The impact of Federal awards on the organization's business
(i.e., what new problems have arisen).
(5) Whether the proportion of Federal work to the organization's
total business is such as to influence the organization in favor of
incurring the cost, particularly where the services rendered are not of
a continuing nature and have little relationship to work under Federal
grants and contracts.
(6) Whether the service can be performed more economically by
direct employment rather than contracting.
(7) The qualifications of the individual or concern rendering the
service and the customary fees charged, especially on non-Federal
awards.
(8) Adequacy of the contractual agreement for the service (e.g.,
description of the service, estimate of time required, rate of
compensation, and termination provisions).
c. In addition to the factors in this Attachment B, paragraph
37.b., retainer fees to be allowable must be supported by evidence of
bona fide services available or rendered.
38. Publication and printing costs.
a. Publication costs include the costs of printing (including the
processes of composition, plate-making, press work, binding, and the
end products produced by such processes), distribution, promotion,
mailing, and general handling. Publication costs also include page
charges in professional publications.
b. If these costs are not identifiable with a particular cost
objective, they should be allocated as indirect costs to all benefiting
activities of the organization.
c. Page charges for professional journal publications are allowable
as a necessary part of research costs where:
(1) The research papers report work supported by the Federal
Government; and
(2) The charges are levied impartially on all research papers
published by the journal, whether or not by federally-sponsored
authors.
17. Attachment B, paragraph 40 is revised to read as follows:
40. Reconversion costs. Costs incurred in the restoration or
rehabilitation of the organization's facilities to approximately the
same condition
[[Page 25994]]
existing immediately prior to commencement of Federal awards, less
costs related to normal wear and tear, are allowable.
18. Attachment B, paragraphs 43. through 46., are revised to read
as follows:
43. Rental costs of buildings and equipment.
a. Subject to the limitations described in subparagraphs b. through
d. of this paragraph 43., rental costs are allowable to the extent that
the rates are reasonable in light of such factors as: rental costs of
comparable property, if any; market conditions in the area;
alternatives available; and the type, life expectancy, condition, and
value of the property leased. 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 had the
organization continued to own the property. This amount would include
expenses such as depreciation or use allowance, maintenance, taxes, and
insurance.
c. Rental costs under ``less-than-arm's-length'' leases are
allowable only up to the amount (as explained in subparagraph b. of
this paragraph 43.) that would be allowed had title to the property
vested in the organization. For this purpose, a less-than-arm's-length
lease is one under which one party to the lease agreement is able to
control or substantially influence the actions of the other. Such
leases include, but are not limited to those between:
(1) Divisions of an organization;
(2) Organizations under common control through common officers,
directors, or members; and
(3) An organization and a director, trustee, officer, or key
employee of the organization or his immediate family, either directly
or through corporations, trusts, or similar arrangements in which they
hold a controlling interest.
For example, an organization may establish a separate corporation
for the sole purpose of owning property and leasing it back to the
organization.
d. Rental costs under leases which are required to be treated as
capital leases under GAAP are allowable only up to the amount (as
explained in subparagraph b. of this paragaph 43.) that would be
allowed had the organization purchased the property on the date the
lease agreement was executed. The provisions of Financial Accounting
Standards Board Statement 13, Accounting for Leases, shall be used to
determine whether a lease is a capital lease. Interest costs related to
capital leases are allowable to the extent they meet the criteria in
Attachment B, paragraph 23. Unallowable costs include amounts paid for
profit, management fees, and taxes that would not have been incurred
had the organization purchased the facility.
44. Royalties and other costs for use of patents and copyrights.
a. Royalties on a patent or copyright or amortization of the cost
of acquiring by purchase a copyright, patent, or rights thereto,
necessary for the proper performance of the award are allowable unless:
(1) The Federal Government has a license or the right to free use
of the patent or copyright.
(2) The patent or copyright has been adjudicated to be invalid, or
has been administratively determined to be invalid.
(3) The patent or copyright is considered to be unenforceable.
(4) The patent or copyright is expired.
b. Special care should be exercised in determining reasonableness
where the royalties may have arrived at as a result of less-than-arm's-
length bargaining, e.g.:
(1) Royalties paid to persons, including corporations, affiliated
with the organization.
(2) Royalties paid to unaffiliated parties, including corporations,
under an agreement entered into in contemplation that a Federal award
would be made.
(3) Royalties paid under an agreement entered into after an award
is made to an organization.
c. In any case involving a patent or copyright formerly owned by
the organization, the amount of royalty allowed should not exceed the
cost which would have been allowed had the organization retained title
thereto.
45. Selling and marketing. Costs of selling and marketing any
products or services of the organization are unallowable (unless
allowed under Attachment B, paragraph 1, as allowable public relations
cost. However, these costs are allowable as direct costs, with prior
approval by awarding agencies, when they are necessary for the
performance of Federal programs.
46. Specialized service facilities.
a. The costs of services provided by highly complex or specialized
facilities operated by the organization, such as computers, wind
tunnels, and reactors are allowable, provided the charges for the
services meet the conditions of either 46.b. or c. and, in addition,
take into account any items of income or Federal financing that qualify
as applicable credits under Attachment A, paragraph 5, of this
circular.
b. The costs of such services, when material, must be charged
directly to applicable awards based on actual usage of the services on
the basis of a schedule of rates or established methodology that:
(1) Does not discriminate against federally-supported activities of
the organization, including usage by the organization for internal
purposes; and
(2) Is designed to recover only the aggregate costs of the
services. The costs of each service shall consist normally of both its
direct costs and its allocable share of all indirect costs. Rates shall
be adjusted at least biennially, and shall take into consideration
over/under applied costs of the previous period(s).
c. Where the costs incurred for a service are not material, they
may be allocated as indirect costs.
d. Under some extraordinary circumstances, where it is in the best
interest of the Federal Government and the organization to establish
alternative costing arrangements, such arrangements may be worked out
with the cognizant Federal agency.
19. Attachment B, paragraph 48, is revised to read as follows:
48. Termination costs applicable to Federal awards.
Termination of awards generally gives rise to the incurrence of
costs, or the need for special treatment of costs, which would not have
arisen had the Federal award not been terminated. Cost principles
covering these items are set forth below. They are to be used in
conjunction with the other provisions of this Circular in termination
situations.
a. The cost of items reasonably usable on the organization's other
work shall not be allowable unless the organization submits evidence
that it would not retain such items at cost without sustaining a loss.
In deciding whether such items are reasonably usable on other work of
the organization, the awarding agency should consider the
organization's plans and orders for current and scheduled activity.
Contemporaneous purchases of common items by the organization shall
be regarded as evidence that such items are reasonably usable on the
organization's other work. Any acceptance of common items as allocable
to the terminated portion of the Federal award shall be limited to the
extent that the quantities of such items on hand, in transit, and on
order are in excess of the reasonable quantitative requirements of
other work.
b. If in a particular case, despite all reasonable efforts by the
organization, certain costs cannot be discontinued
[[Page 25995]]
immediately after the effective date of termination, such costs are
generally allowable within the limitations set forth in this Circular,
except that any such costs continuing after termination due to the
negligent or willful failure of the organization to discontinue such
costs shall be unallowable.
c. Loss of useful value of special tooling, machinery, and is
generally allowable if:
(1) Such special tooling, special machinery, or equipment is not
reasonably capable of use in the other work of the organization,
(2) The interest of the Federal Government is protected by transfer
of title or by other means deemed appropriate by the awarding agency,
and
(3) The loss of useful value for any one terminated Federal award
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
Federal award bears to the entire terminated Federal award and other
Federal awards for which the special tooling, special machinery, or
equipment was acquired.
d. Rental costs under unexpired leases are generally allowable
where clearly shown to have been reasonably necessary for the
performance of the terminated Federal award 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
Federal award and such further period as may be reasonable, and
(2) the organization makes all reasonable efforts to terminate,
assign, settle, or otherwise reduce the cost of such lease. There also
may be included the cost of alterations of such leased property,
provided such alterations were necessary for the performance of the
Federal award, and of reasonable restoration required by the provisions
of the lease.
e. Settlement expenses including the following are generally
allowable:
(1) Accounting, legal, clerical, and similar costs reasonably
necessary for:
(a) The preparation and presentation to the awarding agency of
settlement claims and supporting data with respect to the terminated
portion of the Federal award, unless the termination is for default
(see section --.61 of Circular A-110); and
(b) The termination and settlement of subawards.
(2) Reasonable costs for the storage, transportation, protection,
and disposition of property provided by the Federal Government or
acquired or produced for the Federal award, except when grantees or
contractors are reimbursed for disposals at a predetermined amount in
accordance with sections --.32 through --.37 of Circular A-110.
(3) Indirect costs related to salaries and wages incurred as
settlement expenses in subparagraphs e.(1) and (2) of this paragraph
48. Normally, such indirect costs shall be limited to fringe benefits,
occupancy cost, and immediate supervision.
f. Claims under sub awards, including the allocable portion of
claims which are common to the Federal award, and to other work of the
organization are generally allowable.
An appropriate share of the organization's indirect expense may be
allocated to the amount of settlements with subcontractors and/or
subgrantees, provided that the amount allocated is otherwise consistent
with the basic guidelines contained in Attachment A. The indirect
expense so allocated shall exclude the same and similar costs claimed
directly or indirectly as settlement expenses.
20. In Attachment B, redesignated paragraph 49. is amended by
revising the title to read as follows:
49. Training costs.
* * * * *
21. Attachment B, paragraph 51. is revised to read as follows:
51. 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 organization. Such costs
may be charged on an actual cost basis, on a per diem or mileage basis
in lieu of actual costs incurred, or on a combination of the two,
provided the method used is applied to an entire trip and not to
selected days of the trip, and results in charges consistent with those
normally allowed in like circumstances in the organization's non-
federally-sponsored 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
organization in its regular operations as the result of the
organization's written travel policy. In the absence of an acceptable,
written organization policy regarding travel costs, the rates and
amounts established under subchapter I of Chapter 57, Title 5, United
States Code (``Travel and Subsistence Expenses; Mileage Allowances''),
or by the Administrator of General Services, or by the President (or
his or her designee) pursuant to any provisions of such subchapter
shall apply to travel under Federal awards (48 CFR 31.205-46(a)).
c. Commercial air travel.
(1) Airfare costs in excess of the customary standard commercial
airfare (coach or equivalent), Federal Government contract airfare
(where authorized and available), or the lowest commercial discount
airfare are unallowable except when such accommodations would:
(a) Require circuitous routing;
(b) Require travel during unreasonable hours;
(c) Excessively prolong travel;
(d) Result in additional costs that would offset the transportation
savings; or
(e) Offer accommodations not reasonably adequate for the traveler's
medical needs. The organization must justify and document these
conditions on a case-by-case basis in order for the use of first-class
airfare to be allowable in such cases.
(2) Unless a pattern of avoidance is detected, the Federal
Government will generally not question an organization's determinations
that customary standard airfare or other discount airfare is
unavailable for specific trips if the organization can demonstrate
either of the following: (a) that such airfare was not available in the
specific case; or (b) that it is the organization's overall practice to
make routine use of such airfare.
d. Air travel by other than commercial carrier. Costs of travel by
organization-owned, -leased, or -chartered aircraft include the cost of
lease, charter, operation (including personnel costs), maintenance,
depreciation, insurance, and other related costs. The portion of such
costs that exceeds the cost of allowable commercial air travel, as
provided for in paragraph c. of this paragraph 51., is unallowable.
e. Foreign travel. Direct charges for foreign travel costs are
allowable only when the travel has received prior approval of the
awarding agency. Each separate foreign trip must receive such approval.
For purposes of this provision, ``foreign travel'' includes any travel
outside Canada, Mexico, the United States, and any United States
territories and possessions. However, the term ``foreign travel'' for
an organization located in a foreign country means travel outside that
country.
[FR Doc. 04-10350 Filed 5-7-04; 8:45 am]
BILLING CODE 3110-01-P