Cost Principles for State, Local and Indian Tribal Governments

SUMMARY: An interagency task force was established to review existing

cost principles for Federal awards to State and local governments. The

task force studied Inspector General reports and recommendations,

solicited suggestions for changes to the Circular from State and local

governments, and compared for consistency the provisions of other

Office of Management and Budget cost principles covering non-profit

organizations and universities. Proposed revisions reflecting the

results of those efforts were published on October 12, 1988 (53 FR

40352-40367) and August 19, 1993 (58 FR 44212-44234). The extensive

comments received on these proposed revisions, discussions with

interested groups, and other related developments were considered in

developing this final revision.

DATES: Agencies shall issue codified regulations to implement the

provisions of this Circular by September 1, 1995.

ADDRESSES: Office of Management and Budget, Office of Federal Financial

Management, Financial Standards and Reporting Branch, Room 6025, New

Executive Office Building, Washington, DC 20503. For a copy of the

revised Circular, contact Office of Administration, Publications

Office, Room 2200, New Executive Office Building, Washington, DC 20503,

or telephone (202)395-7332.

FOR FURTHER INFORMATION CONTACT: Non-Federal organizations should

contact the organization's cognizant Federal funding agency. Federal

agencies should contact Gilbert H. Tran, Financial Standards and

Reporting Branch, Office of Federal Financial Management, Office of

Management and Budget, telephone: (202)395-3993.

SUPPLEMENTARY INFORMATION:

A. Background

The Office of Management and Budget (OMB) received about 200

comments from governmental units, Federal agencies, professional

organizations and others in response to the Federal Register notice of

August 19, 1993 (58 FR 44212). All comments were considered in

developing this final revision.

OMB also considered the National Performance Review's

recommendations to reduce paperwork and red tape. Changes were made to

the Circular to streamline the cost negotiation process and defer to

State and local accounting procedures whenever possible. Also, the

policy guides in the Circular were amended to provide that Federal

agencies should work with States or localities which wish to test

alternative mechanisms for paying costs for administering Federal

programs.

Section B presents a summary of the major public comments grouped

by subject and a response to each comment. Other changes have been made

to increase clarity and readability. Section C addresses procurement

issues. Section D discusses the Federal Acquisition Streamlining Act of

1994.

B. Public Comments and Responses

Basic Circular

Comment: The policy subsection states that ``no provision for

profit or increment above allowable cost is intended.'' This statement

is currently contained in the Circular, but it is different from that

contained in other OMB cost principles circulars and is literally

incorrect. This seems to say no profit or increment above cost is

permitted.

Response: This sentence was changed to conform with the other OMB

cost principles circulars. There is no policy change intended by this

change.

General Principles for Determining Allowable Costs--Attachment A

Comment: The requirement in the basic guidelines that ``a cost may

not be assigned to a Federal award as a direct cost if any other cost

incurred for the same purpose in like circumstances has been allocated

to a Federal award as an indirect cost'' appears to be too expansive

and should be clarified.

Response: There is no policy change intended from that in the

existing Circular. The wording in the consistency provision was changed

to make it clear that all costs incurred for the same purpose in like

circumstances are either direct costs only or indirect costs only with

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

objective shall have allocated to it as an indirect cost any cost if

other costs incurred for the same purpose, in like circumstances, have

been included as a direct cost of that or any other final cost

objective. For example, a grantee normally allocates all travel as an

indirect cost. For purposes of a new grant proposal, the grantee

intends to allocate the travel costs of personnel whose time is

accounted for as direct labor directly to the grant. Since travel costs

of personnel whose time is accounted for as direct labor working on

other grants are costs which are incurred for the same purpose, these

costs may no longer be included within indirect cost pools for purposes

of allocation to any other grant.

Comment: The Circular lists the market price of comparable goods or

services as one test of reasonableness. This statement may cause

problems for State agencies that are required to make purchases from

State-wide contracts.

Response: OMB recognizes that market fluctuations may result in a

State paying higher prices on State-wide contracts. However,

significant differences between State prices and market prices should

be analyzed. For example, Federal awards should not be paying higher

prices for State awards based on geographical preferences.

Comment: The prohibition against shifting costs allocable to a

particular Federal award or other cost objective to other Federal

awards needs to be clarified. Governmental units should not be

precluded from shifting allowable cost in accordance with program

agreements.

Response: This section was expanded to recognize that there are

instances when it may be appropriate for governmental units to transfer

costs from one cost objective to another cost objective.

Comment: It is not logical to require governmental units to

allocate indirect costs to all activities including donated services.

Response: The Circular is designed to provide that Federal awards

bear their fair share of costs. If non-Federal activities use donated

services that require a substantial amount of support costs, it would

be inequitable to charge these costs to Federal awards.

Comment: The section on applicable credits needs to be clarified.

Response: The language in this section has been revised to remove

inappropriate examples of applicable credits and references to program

income which are covered by the grants management common rule.

Selected Items of Cost--Attachment B

Advertising and Public Relations Costs

Comment: Clarify the allowability of certain public relations type

costs, such as job fairs and activities to promote ridership on public

transportation.

Response: The allowability of these types of costs depends upon the

circumstances surrounding the individual case. In determining whether

[[Page 26485]] Federal awards should participate in these types of

costs, the recipient should consider how similar types of costs are

charged, and whether there is a direct benefit to Federal awards

resulting from these costs.

Audit Services

Comment: The Circular limits the allowability of audit costs to

single audits and does not provide reimbursement for audits of a less

comprehensive nature.

Response: This section was revised to allow the costs of other

audits.

Automatic Electronic Data Processing

Comment: The requirement for governmental units to amortize the

costs associated with the development and testing of automated systems

would impose an unreasonable financial and administrative burden on the

governmental units.

Response: OMB eliminated the requirement for governmental units to

amortize the costs of developing and testing automated systems until a

uniform Federal policy covering all types of recipients of Federal

awards can be developed.

Compensation for Personnel Services

Comment: The potential paperwork burdens associated with accounting

for employee leave payments and accruals could be substantial.

Response: This section was simplified by modifying many of the

prescriptive accounting rules for leave.

Comment: Interest cost associated with pension contributions should

be allowed if the governmental unit's contributions are delayed.

Response: References to interest payments were deleted. However,

language was inserted into the Circular to make it clear that Federal

reimbursement of pension cost must be adjusted when the governmental

unit's payments to the fund are late. The adjustment should compensate

for the additional cost because of the timing of the charges to the

Federal Government and the governmental unit's contribution to the

pension fund.

Comment: Governmental units should not be required to use separate

cost allocation procedures for classes of employees that experience

different actuarial gains and losses (e.g., police and fire

departments).

Response: This requirement was deleted from the Circular.

Comment: The requirement that a governmental unit obtain Federal

approval for changing its method for determining pension and post-

retirement health benefit costs should be deleted.

Response: This requirement was deleted. Pension costs and post-

retirement health benefit costs determined in accordance with Generally

Accepted Accounting Principles (GAAP) and the provisions of the

Circular will be allowable. For contracts covered under Cost Accounting

Standards (CAS), CAS 412 and 413 promulgated by the Cost Accounting

Standards Board shall establish the allocability of pension costs.

Comment: The current principles applicable to support of personnel

costs have worked well and require no change.

Response: OMB believes additional guidance is necessary. Federal

agencies have found that the absence of sufficient guidance on

documentation to support salaries charged to Federal awards has caused

numerous audit findings and resulted in endless wasted hours of

negotiation between Federal agencies and governmental units. Based on

the comments received, OMB made a number of changes to the requirements

in this section of the Circular to clarify and simplify Federal

requirements for documenting salaries charged to Federal awards.

Defense and Prosecution of Criminal and Civil Proceedings, and Claims

Comment: OMB proposed to substantially amend the provisions on the

allowability of legal and related expenses. In the 1981 version of the

Circular, this provision is found at Attachment B, section 16 (46 FR

9552). In the latest proposal, the proposed revisions were at

Attachment B, section 14 (58 FR 44222).

State and local governments contended that the proposed revisions

on the allowability of legal and related expenses would be unfair and

would deny them due process.

State and local governments also objected to the specific proposed

revisions dealing with legal proceedings based on the Major Fraud Act

and the Federal Acquisition Regulation (48 CFR 31.205-47) in Attachment

B, sections 14.a. through f. State and local governments contended that

those provisions are ambiguous, inconsistent and overly broad. In

addition, these commenters argued that the provisions were designed for

commercial contractors and should not be applied to grants.

Response: After reviewing the comments on the proposed revisions,

OMB decided not to amend the current provision on the allowability of

legal and related expenses. In the revised Circular, this provision is

now found at section 14.b.

In this revision, OMB has added a provision at section 14.a. This

provision, which was in the proposal, simply restates the currently-

applicable, statutory restrictions in 10 U.S.C. 2324(k).

Depreciation and Use Allowances

Comment: It is unclear if a use charge can be charged while an

asset is in service.

Response: The Circular now provides that a reasonable use allowance

may be negotiated for fully depreciated assets; therefore, OMB believes

a reasonable use allowance could be negotiated for an asset for as long

as the asset is in service.

Comment: It is not clear whether accelerated depreciation is

allowed.

Response: The preferred method of depreciation is the straight line

method. However, other methods may be used when there is evidence that

an asset will be used up faster in the earlier portion of its useful

life.

Comment: The estimated useful lives of equipment and buildings used

to compute use allowances should be shortened.

Response: No changes were made. Governmental units have the option

of claiming depreciation which is usually based on the actual life of

the asset.

Comment: It is not clear why classes of assets needed to be

determined on a State-wide, local-wide, or Tribal-wide basis.

Response: This section was amended to say classes of assets shall

be determined on the same bases used for the governmental unit's

financial statements.

Equipment and Other Capital Expenditures

Comment: The capitalization level for equipment seems to be

arbitrarily low. The criterion of $25,000, which is recognized by the

Department of Health and Human Services (HHS), might be more

appropriate.

Response: The $5000 criterion is in line with capitalization levels

used by government contractors and others. The HHS criterion is limited

to equipment used on a few very large programs where equipment

purchases are a very small percentage of total program costs. For CAS-

covered contracts subject to ``full coverage'', the threshold for

equipment is $1500 as established under CAS 404.

Comment: Clarify the term ``article'' as used in the definition of

equipment. The Circular defines equipment ``as [[Page 26486]] being an

article of nonexpendable property.''

Response: The definition of ``capital expenditure'' was added to

further define the term ``equipment.'' However, if further guidance is

needed in this area, governmental units should follow their own

accounting practices when defining equipment.

Comment: It is not clear what is meant by ``The total acquisition

costs are not allowable as indirect costs during the period acquired.''

Response: This section was clarified. It now says that capital

expenditures which are not authorized to be charged directly to an

award may be recovered through use allowances or depreciation.

Comment: The impact of depreciation as proposed in the Circular

would shift costs to the governmental unit, not make any provision for

the time value of money, increase administrative costs to track

resulting depreciation schedules, and erode the partner relationship

between Federal agencies and governmental units.

Response: The accounting treatment for depreciation as prescribed

by the Circular is based on GAAP. Further, the provisions ensure that

the Federal Government pays its fair share of costs, including interest

on financing.

Fund Raising and Investment Management Costs

Comment: It is not clear whether costs related to raising funds

from employees within an organization for charitable activities, such

as the United Way, would be allowable since the Circular disallows fund

raising costs.

Response: Generally, the prohibition on fund raising activities

covered by the Circular is for those activities where the governmental

unit raises funds for its own use. Incidental fund raising from an

organization's own employees for charitable organizations, such as the

United Way, is considered part of normal operating expenses and,

therefore, allowable.

Gains and Losses on Disposition of Depreciable Property and Other

Capital Assets and Substantial Relocation of Federal Programs

Comment: The provisions which would require governmental units to

reimburse the Federal Government when Federal awards were relocated

from facilities where the Federal Government participated in the

financing is inappropriate.

Response: This section was amended. It now requires governmental

units to obtain prior approval from the cognizant agency for

substantial relocations of Federal awards from buildings for which the

Federal Government participated in the financing.

Insurance and Indemnification

Comment: It is not apparent why provisions for liabilities, which

do not become payable for more than one year after a self insurance

provision is made, are limited to the discounted value of the

liability.

Response: This requirement is designed to cover only those cases

where the amount of the liability is firm or reasonably certain. This

provision helps to avoid excessive reserve balances for the current

fiscal year. It limits current year premiums to the present value of

the future (known or reasonably certain) liability. When that future

liability becomes due, prior years premiums plus earnings (i.e.,

interest or investment income) from those premiums will be available to

satisfy that debt.

Comment: The Circular states that self-insurance reserves must be

based on sound actuarial principles using the most likely assumptions.

This seems to be an attempt to limit sound actuarial principles.

Response: This language was not intended to restrict sound

actuarial principles. The language was changed to clarify that sound

actuarial assumptions should recognize actual past, as well as probable

future, events when determining premiums and reserve levels.

Interest

Comment: Interest expense should be allowable not only for building

modifications, as provided in the 1981 revision of Circular A-87, but

also for acquisitions of equipment made prior to the issuance date of

the revised Circular. The proposed provision is objectionable because

it would require dual records and impose an unreasonable and

unnecessary administrative burden on State and local governments.

Response: The provision was rewritten to allow interest expense

paid or incurred on or after the revised Circular's effective date to

be charged to Federal awards for existing as well as newly-acquired

equipment.

Historically, OMB has not allowed interest on debt issued prior to

the effective date of an interest policy revision (pre-revision debt).

In 1980, OMB allowed State and local governments interest on debt

issued to acquire buildings, but not on pre-revision debt (45 FR

27363). In 1982, in a revision to Circular A-21, ``Cost Principles for

Educational Institutions,'' OMB allowed interest on debt issued to

acquire buildings and equipment, but not on pre-revision debt (47 FR

33658). In 1994, in a proposed revision to Circular A-122, ``Cost

Principles for Non-Profit Organizations,'' OMB proposed to allow

interest debt issued to acquire buildings and equipment, but not on

pre-revision debt (59 FR 49091).

In view of the fact that pre-revision debt was incurred with full

knowledge of the cost policy that was in effect at that time, OMB does

not believe that grantees should expect the Federal Government to allow

interest on this debt without such a decision being cost-justified from

the Federal Government's perspective. OMB believes the Federal

Government should only allow interest on pre-revision debt when the

cost of maintaining dual records on pre-revision and post-revision

assets and related debt (all or a portion of these recordkeeping costs

are chargeable to the Federal programs as administrative costs) is less

than the interest cost on pre-revision debt.

With respect to debt incurred to purchase buildings, OMB believes

that the cost of maintaining dual records is cost-justified in view of

the limited number of buildings and debt issues for which separate

records would have to be maintained, and the substantial interest cost

associated with long term debt used to finance buildings. Thus, as OMB

has previously explained, ``[a]applying the new rules to old buildings

would appear to provide a windfall recovery, and might drive up

overhead costs of federally assisted programs'' (47 FR 33658, also see

45 FR 27363).

Equipment acquired by State and local governments (except

computers), while substantial in terms of the number of pieces, is

relatively nominal in cost and has a relatively short life span. As a

result, the outstanding interest on debt issued to finance this

equipment is relatively nominal. Moreover, State and local governments

would still bear the major share of the financing costs, even if pre-

revision debt were allowable. By contrast, the cost of maintaining dual

records for a large number of items and related debt would likely be

substantial. Given the different balance between administrative and

interest costs, OMB has decided that, in this instance, the

administrative costs associated with maintaining separate records to

track pre-revision and post-revision debt is not cost-justifiable from

the Federal Government's perspective.

The basis for the allowance of pre-revision debt for equipment of

State and local governments is consistent with the basis for OMB's

treatment of such debt for educational institutions (in 1982) and OMB's

proposed treatment of such [[Page 26487]] debt for non-profit

organizations (in 1994). The cost of equipment acquired by educational

institutions and non-profit organizations through debt financing can be

significant (e.g., over $650,000 for x-ray crystallography equipment,

$348,000 for a vantage flow cytometer for high speed cell analysis, and

$265,000 for an electron microscope). Equipment of this type and

related debt has a longer life, and in turn, significantly higher

interest cost. Moreover, as with buildings, there are only a limited

number of pieces of such equipment, which reduces the administrative

costs of dual records. Given the amount of interest involved in the

financing of these assets compared with the relatively nominal

administrative burden associated with maintaining dual records, OMB

believes the cost of maintaining dual records is justifiable.

Comment: The requirement for a governmental unit to document, as

part of its decisionmaking process, that capital leasing is the most

economical option does not belong in Circular A-87.

Response: The requirement for lease analysis as part of the

governmental unit's decisionmaking process and its proper documentation

is addressed in the Grants Management Common Rule under Section

____.36(b)(4). This requirement is not addressed in Circular A-87.

Comment: Governmental units would not recover their full costs

because of provisions in the Circular which provide that a credit is

due the Federal Government when Federal payments for interest,

depreciation, use charges and other contributions for building use

exceed the interest and principal payments made by the government

(positive cash flow).

Response: OMB deleted the provisions in the Circular which would

require credits under the conditions described above. However,

governmental units will be required to negotiate the amount of

allowable interest whenever cash payments (interest, use allowances,

depreciation and contributions) exceed governmental unit cash payments

and other governmental unit contributions. OMB will study this matter

further to ensure fair and equitable policies are established for the

States and the Federal Government.

Memberships, Subscriptions, and Professional Activities

Comment: Membership costs in some civic and community organizations

should be allowable when the purpose is to promote services provided by

the Federal award.

Response: The language has been revised to allow memberships in

civic and community organizations as a direct cost with the prior

approval of the Federal awarding agency.

Professional Service Costs

Comment: Simplify the section on professional service costs by

eliminating the factors to consider in determining the allowability of

professional service costs.

Response: Eight subsections listing the factors were deleted.

Proposal Costs

Comment: It is not clear why proposal costs should normally be

treated as indirect costs and allocated to all activities. Such costs

should be treated as direct costs if they can be identified with a

specific award.

Response: OMB added a provision to allow governmental units to

charge proposal costs directly to a Federal award with the prior

approval of the Federal awarding agency.

Taxes

Comment: If OMB adopts the proposed revision affecting sales tax

reimbursement, the revision should become effective at some later date

to allow time to change State and local laws.

Response: OMB agrees that there should be a phase-in period. The

Circular allows governmental units three years to phase-in the change.

Comment: If the sales tax proposal were adopted, it would become a

burden to separately account for State sales taxes paid on Federal

grant purchases.

Response: The Circular allows reasonable approximations to be used

where the identification of the actual amount of unallowed taxes would

require an inordinate amount of effort.

Comment: State sales taxes should be allowable when a governmental

unit is in a position that makes exclusion administratively impossible,

i.e., when employees in travel status must pay sales taxes upon receipt

of goods and services.

Response: States should attempt a reasonable approximation.

Comment: Some State and local governments and Indian Tribal

governments would lose substantial amounts of revenue if sales taxes

were not chargeable to purchases made in connection with federally-

funded programs.

Response: The intention of the tax provision is to address State or

local government taxes, or changes in tax policy, that

disproportionately affect a federally-funded program. Under the

Circular, such taxes are unallowable. (As explained in the next

comment-and-response, where a Federal statute prescribes a different

treatment for taxes, that statute controls.)

For example, a tax would disproportionately affect a Federal

program if the tax were defined or applied so that it was imposed only

in connection with that program, or only in connection with Federal

programs generally. Another example would be if a sales tax were

imposed on a good or service that in practice is used solely or

disproportionately in connection with Federal programs. These examples

are for illustration, and are not meant to be exclusive. Whether a

particular tax, or change in tax policy, would disproportionately

affect a Federal program will have to be determined based on a review

of the tax and the Federal programs in question.

When a governmental unit pays a tax to itself, that self-assessed

tax is not a true cost to the governmental unit. Especially where a

self-assessed tax disproportionately affects a Federal program, it is

not appropriate for the governmental unit to be able to characterize

that tax as a ``cost'' of its participation in the Federal program. If

such disproportionate, self-assessed taxes were treated as allowable,

even though they disproportionately affect Federal programs,

governmental units could define or apply taxes in such a way that their

net impact would largely be to increase the Federal Government's

contribution, rather than to raise revenues from the taxpayer. To the

extent that making such taxes unallowable would result in a loss of

Federal assistance awards, the Circular allows three years for

governmental units to phase-out any existing taxes that

disproportionately affect Federal programs. (For the larger formula

grant programs, the disallowance of such taxes would not result in any

loss of Federal assistance awards; the funds which are now used to pay

self-assessed taxes could be used to further the objectives of the

Federal assistance.)

Comment: The proposed revision on sales taxes is directly contrary

to the legislative intent of Public Law 102-234, ``Medicaid Voluntary

Contributions and Provider Specific Tax Amendments of 1991.'' The

proposal should be revised to preclude its application to broad-based

health care related taxes paid by public entities.

Response: The Circular would not take precedence over a statute. If

any statute specifically prescribes policies [[Page 26488]] and

specific requirements that differ from the Circular, the statute will

govern.

Comment: State sales taxes collected by another level of government

should be exempt from the provisions of the Circular.

Response: As noted above, the Circular's disallowance is directed

at self-assessed taxes. Thus, if a local government receives an award

directly from the Federal Government, and pays a State sales tax on

purchases made in connection with that award, the tax is an allowable

cost. (However, as previously noted, the Circular does not restrict the

authority of Federal agencies to identify taxes where Federal

participation is inappropriate.)

However, if the local government does not receive the award

directly from the Federal Government, but instead receives the award

indirectly by virtue of a State pass-through, then the sales tax that

the local government pays the State is in reality a self-assessed tax,

which would be unallowable if the tax disproportionately affects a

Federal program.

Comment: It is not clear whether the prohibition on payment of

sales taxes applies to out-of-state sales tax.

Response: Since they are not self-assessed, taxes assessed by other

States, or political subdivisions of other States, are not unallowable

under the Circular. (However, as previously noted, the Circular does

not restrict the authority of Federal agencies to identify taxes where

Federal participation is inappropriate.)

Travel Costs

Comment: Airfare costs in excess of the lowest available commercial

discount fare are unallowable. With today's confusing array of super

savers and fare wars, the burden involved in proving the lowest airfare

would be considerable.

Response: The travel provisions were changed to say travel costs in

excess of the customary standard (coach or equivalent) airfare are

unallowable.

State/Local-Wide Central Service Cost Allocation Plans--Attachment C

Comment: Working capital reserves in many cases should not be

limited to 60 days cash expenses. Time consuming collections, uneven

usage levels, and unanticipated demand for services are some of the

reasons for authorizing a larger reserve.

Response: OMB believes the 60 day reserve should provide the

flexibility required by most funds to operate from one billing cycle to

the next. However, the Circular was amended to provide for a larger

reserve in exceptional cases when approved by the cognizant Federal

agency.

Comment: The Circular should not restrict governmental units from

engaging an accounting firm to prepare an indirect cost proposal and

then engaging the same firm to make subsequent audits.

Response: This provision was deleted from the Circular. This issue

will be addressed as part of OMB policy changes to other OMB grants

management circulars.

Comment: What are the criteria OMB uses for making cognizant

assignments and for defining ``major governments''?

Response: OMB is in the process of reviewing the cognizant

assignments for governmental units. Only governmental units receiving

substantial amounts of direct Federal assistance will be assigned a

Federal cognizant agency and be required to submit plans to those

cognizant agencies. Because the mix of Federal awards has changed so

much since the last list was issued, OMB needs to develop a new dollar

criterion for defining ``major.''

Comment: States and other prime grantees should not be required to

monitor subrecipient cost allocation plans and/or negotiate sub-

recipient indirect costs.

Response: The grants management common rule requires governmental

units to monitor subawards to assure compliance with applicable Federal

requirements. These requirements include compliance with the cost

principles. In those cases where the subrecipient does not receive any

Federal awards directly from the Federal Government, Federal agencies

would not have any direct responsibility for negotiating indirect

costs.

Comment: Attachment C, Section E states that ``The documentation

requirements in this section may be modified, expanded, or reduced by

the cognizant agency on a case-by-case basis.'' This specific sentence

might allow a Federal cognizant agency to unreasonably and unilaterally

expand the documentation requirements.

Response: Federal agencies should have the flexibility to obtain

additional data, when necessary. However, OMB agrees that this type of

request should be the exception rather than the rule.

Comment: Documentation for internal service funds seems excessive

since these areas are audited. This documentation is more appropriately

included in a State or local government's financial statements and work

papers for the fiscal year rather than in the entity's cost allocation

plan.

Response: OMB amended this section to require only the largest

funds to submit data. If the required data are included in the

governmental unit's financial statements, submission of the financial

statements to the Federal cognizant agency will meet the requirements

of the Circular.

Comment: OMB proposed to add provisions requiring the certification

of cost allocation plans and of indirect cost rates (see preamble (58

FR 44218); Attachment C, Section E.4 (58 FR 44229); Attachment D,

Section D.3 (58 FR 44230-31); and Attachment E, Section D.3 (58 FR

44233)). States objected to the inclusion of the phrase ``under penalty

of perjury'' in the proposed certification. They contended that the

phrase is unnecessary.

Response: OMB has decided to amend the Circular to add the proposed

certifications, but OMB has accepted the commenters' suggestion that

the phrase ``under penalty of perjury'' not be included in the

certifications. OMB believes that, when the Federal Government is

dealing with State and local governments, it is unnecessary to require

that the certifying government official sign a certification stating

that it is made ``under penalty of perjury.'' State and local officials

should not conclude, however, that the omission of the phrase ``under

penalty of perjury'' means that no potential legal liability is

associated with a certification's submission. In this regard, note the

provision in Federal law imposing criminal penalties for ``false,

fictitious or fraudulent statements or representations'' (18 U.S.C.

1001). The Department of Justice is responsible for enforcing this

provision (and other laws regarding false statements and claims). OMB

expresses no opinion concerning the potential legal liabilities that

are associated with making the certifications in the revised Circular.

Comment: Restricting the authority to reopen Central Service Plans

to the Federal cognizant agency is inequitable.

Response: This section was changed to state that agreements may be

subject to reopening only if the agreement is subsequently found to

violate a statute or the information upon which the plan was negotiated

is later found to be materially incomplete or inaccurate.

Comment: GAAP for State and local governments do not require

internal service activities to be accounted for and reported in

proprietary accounts.

Response: The requirement for internal service activities to be

accounted for in proprietary accounts was deleted.

Comment: Remove the requirement that a carry forward adjustment is

not [[Page 26489]] permitted for a central service activity that was

not included in the approved plan.

Response: The carry forward technique was intended to permit

adjustments for differences between actual and estimated costs of

services included in a cost allocation plan. It was not intended to

shift the entire cost of an activity excluded from the year of the plan

to a future year. There may be circumstances where a change to the plan

should be considered (e.g., the service did not exist when the plan was

established and was initiated during the year covered by the plan).

This type of amendment should modify the plan itself and would not be

handled through a carry forward adjustment.

Comment: Adjustments of billed services do not provide a workable

solution for the larger central services of the States. The dollar

limitation of $50,000 for making adjustments through allocated central

services is too low.

Response: This section was rewritten to provide governmental units

more options and flexibility in making adjustments to Federal awards.

Public Assistance Cost Allocation Plans--Attachment D

Comment: The public assistance cost allocation plans are narrative

descriptions of cost allocation procedures rather than allocations of

actual costs. The provisions dealing with refunds or adjustments

related to unallowable costs and the certification of cost allowability

do not appear appropriate.

Response: The certification and the provisions dealing with refunds

and adjustments were deleted.

State and Local Indirect Cost Rate Proposals--Attachment E

Comment: The Circular is silent on the time period for use of

predetermined rates.

Response: The Circular was amended to encourage the use of indirect

cost rates for a period of two to four years.

Comment: Governmental units should notify the Federal Government of

any accounting changes that might make it necessary to renegotiate the

predetermined rate.

Response: A provision was added to the certification which requires

the governmental unit to notify the Federal Government of any

accounting changes that would effect the application of the

predetermined rate.

C. Procurement Issues

Several procurement issues arose during the Federal Government's

internal review process. This section clarifies the procurement issues.

Effective Date for Governmental Units With Predetermined Rates Beyond

September 1, 1995

For a governmental unit that already has established indirect cost

rates beyond September 1, 1995, the effective date of the revised

Circular shall be at the start of the next accounting period beginning

on or after September 1, 1995, for which the governmental unit has not

yet established a predetermined indirect cost rate.

Depreciation Method(s) for CAS-Covered Contracts

CAS-covered contracts subject to ``full coverage'' under CASB shall

follow the standards promulgated by CASB in the computation of

depreciation.

Allowability of Interest Expenses for CAS-Covered Contracts

For contracts subject to CAS 414 (48 CFR 9903.414, cost of money as

an element of the cost of capital), and CAS 417 (48 CFR 9903.417, cost

of money as an element of the cost of capital assets under

construction), the imputed cost of money determined allocable in

accordance with CAS 414 and 417 may be claimed as an allowable cost.

When cost of money is claimed, interest shall not be an allowable

direct or indirect cost under such contracts.

D. Federal Acquisition Streamline Act

The Federal Acquisition Streamlining Act (FASA) of 1994, enacted on

October 13, 1994, amended Section 306(e) of the Federal Property and

Administrative Services Act of 1949 (41 U.S.C. 256, Public Law 103-355,

Section 2151, 108 Stat. 3309-12), to specify certain items of costs as

not allowable under Federal covered contracts. OMB is undertaking a

review of these FASA provisions, for the purpose of determining whether

the unallowable cost provisions of Circular A-87, and of OMB's other

cost principles circulars, should be amended in light of the FASA

provisions on unallowable costs. If OMB ultimately concludes that

amendments may be appropriate, OMB will issue a proposal seeking public

comment on the proposed revisions.

John B. Arthur,

Associate Director for Administration.

Executive Office of The President

Office of Management and Budget

Washington, DC 20503

May 4, 1995.

Circular No. A-87 Revised

To the Heads of Executive Departments and Establishments

From: Alice M. Rivlin, Director

Subject: Cost Principles for State, Local, and Indian Tribal

Governments

1. Purpose. This Circular establishes principles and standards

for determining costs for Federal awards carried out through grants,

cost reimbursement contracts, and other agreements with State and

local governments and federally-recognized Indian tribal governments

(governmental units).

2. Authority. This Circular is issued under the authority of the

Budget and Accounting Act of 1921, as amended; the Budget and

Accounting Procedures Act of 1950, as amended; the Chief Financial

Officers Act of 1990; Reorganization Plan No. 2 of 1970; and

Executive Order No. 11541 (``Prescribing the Duties of the Office of

Management and Budget and the Domestic Policy Council in the

Executive Office of the President'').

3. Background. An interagency task force was established in 1987

to review existing cost principles for Federal awards to State,

local, and Indian tribal governments. The task force studied

Inspector General reports and recommendations, solicited suggestions

for changes to the Circular from governmental units, and compared

for consistency the provisions of other OMB cost principles

circulars covering non-profit organizations and universities. A

proposed revised Circular reflecting the results of those efforts

was issued on October 12, 1988, and August 19, 1993. Extensive

comments on the proposed revisions, discussions with interest

groups, and related developments were considered in developing this

revision.

4. Rescissions. This Circular rescinds and supersedes Circular

A-87, issued January 15, 1981.

5. Policy. This Circular establishes principles and standards to

provide a uniform approach for determining costs and to promote

effective program delivery, efficiency, and better relationships

between governmental units and the Federal Government. The

principles are for determining allowable costs only. They are not

intended to identify the circumstances or to dictate the extent of

Federal and governmental unit participation in the financing of a

particular Federal award. Provision for profit or other increment

above cost is outside the scope of this Circular.

6. Definitions. Definitions of key terms used in this Circular

are contained in Attachment A, Section B.

7. Required Action. Agencies responsible for administering

programs that involve cost reimbursement contracts, grants, and

other agreements with governmental units shall [[Page 26490]] issue

codified regulations to implement the provisions of this Circular

and its Attachments by September 1, 1995.

8. OMB Responsibilities. The Office of Management and Budget

(OMB) will review agency regulations and implementation of this

Circular, and will provide policy interpretations and assistance to

insure effective and efficient implementation. Any exceptions will

be subject to approval by OMB. Exceptions will only be made in

particular cases where adequate justification is presented.

9. Information Contact. Further information concerning this

Circular may be obtained by contacting the Office of Federal

Financial Management, Financial Standards and Reporting Branch,

Office of Management and Budget, Washington, DC 20503, telephone

202-395-3993.

10. Policy Review Date. OMB Circular A-87 will have a policy

review three years from the date of issuance.

11. Effective Date. This Circular is effective as follows:

--For costs charged indirectly or otherwise covered by the cost

allocation plans described in Attachments C, D and E, this revision

shall be applied to cost allocation plans and indirect cost

proposals submitted or prepared for a governmental unit's fiscal

year that begins on or after September 1, 1995.

--For other costs, this revision shall be applied to all awards or

amendments, including continuation or renewal awards, made on or

after September 1, 1995.

OMB Circular No. A-87--Cost Principles for State, Local and Indian

Tribal Governments

Table of Contents

Attachment A--General Principles for Determining Allowable Costs

Attachment B--Selected Items of Cost

Attachment C--State/Local-Wide Central Service Cost Allocation Plans

Attachment D--Public Assistance Cost Allocation Plans

Attachment E--State and Local Indirect Cost Rate Proposals

Attachment A--General Principles for Determining Allowable Costs

Table of Contents

A. Purpose and Scope

1. Objectives

2. Policy guides

3. Application

B. Definitions

1. Approval or authorization of the awarding or cognizant

Federal agency

2. Award

3. Awarding agency

4. Central service cost allocation plan

5. Claim

6. Cognizant agency

7. Common rule

8. Contract

9. Cost

10. Cost allocation plan

11. Cost objective

12. Federally-recognized Indian tribal government

13. Governmental unit

14. Grantee department or agency

15. Indirect cost rate proposal

16. Local government

17. Public assistance cost allocation plan

18. State

C. Basic Guidelines

1. Factors affecting allowability of costs

2. Reasonable costs

3. Allocable costs

4. Applicable credits

D. Composition of Cost

1. Total cost

2. Classification of costs

E. Direct Costs

1. General

2. Application

3. Minor items

F. Indirect Costs

1. General

2. Cost allocation plans and indirect cost proposals

3. Limitation on indirect or administrative costs

G. Interagency Services

H. Required Certifications

A. Purpose and Scope

1. Objectives. This Attachment establishes principles for

determining the allowable costs incurred by State, local, and

federally-recognized Indian tribal governments (governmental units)

under grants, cost reimbursement contracts, and other agreements with

the Federal Government (collectively referred to in this Circular as

``Federal awards''). The principles are for the purpose of cost

determination and are not intended to identify the circumstances or

dictate the extent of Federal or governmental unit participation in the

financing of a particular program or project. The principles are

designed to provide that Federal awards bear their fair share of cost

recognized under these principles except where restricted or prohibited

by law. Provision for profit or other increment above cost is outside

the scope of this Circular.

2. Policy guides.

a. The application of these principles is based on the fundamental

premises that:

(1) Governmental units are responsible for the efficient and

effective administration of Federal awards through the application of

sound management practices.

(2) Governmental units assume responsibility for administering

Federal funds in a manner consistent with underlying agreements,

program objectives, and the terms and conditions of the Federal award.

(3) Each governmental unit, in recognition of its own unique

combination of staff, facilities, and experience, will have the primary

responsibility for employing whatever form of organization and

management techniques may be necessary to assure proper and efficient

administration of Federal awards.

b. Federal agencies should work with States or localities which

wish to test alternative mechanisms for paying costs for administering

Federal programs. The Office of Management and Budget (OMB) encourages

Federal agencies to test fee-for-service alternatives as a replacement

for current cost-reimbursement payment methods in response to the

National Performance Review's (NPR) recommendation. The NPR recommended

the fee-for-service approach to reduce the burden associated with

maintaining systems for charging administrative costs to Federal

programs and preparing and approving cost allocation plans. This

approach should also increase incentives for administrative

efficiencies and improve outcomes.

3. Application.

a. These principles will be applied by all Federal agencies in

determining costs incurred by governmental units under Federal awards

(including subawards) except those with (1) Publicly-financed

educational institutions subject to OMB Circular A-21, ``Cost

Principles for Educational Institutions,'' and (2) programs

administered by publicly-owned hospitals and other providers of medical

care that are subject to requirements promulgated by the sponsoring

Federal agencies. However, this Circular does apply to all central

service and department/agency costs that are allocated or billed to

those educational institutions, hospitals, and other providers of

medical care or services by other State and local government

departments and agencies.

b. All subawards are subject to those Federal cost principles

applicable to the particular organization concerned. Thus, if a

subaward is to a governmental unit (other than a college, university or

hospital), this Circular shall apply; if a subaward is to a commercial

organization, the cost principles applicable to commercial

organizations shall apply; if a subaward is to a college or university,

Circular A-21 shall apply; if a subaward is to a hospital, the cost

principles used by the Federal awarding agency for awards to hospitals

shall apply, subject to the provisions of subsection A.3.a. of this

Attachment; if a subaward is to some other non-profit organization,

Circular A-122, ``Cost Principles for Non-Profit Organizations,'' shall

apply.

c. These principles shall be used as a guide in the pricing of

fixed price arrangements where costs are used in determining the

appropriate price. [[Page 26491]]

d. Where a Federal contract awarded to a governmental unit

incorporates a Cost Accounting Standards (CAS) clause, the requirements

of that clause shall apply. In such cases, the governmental unit and

the cognizant Federal agency shall establish an appropriate advance

agreement on how the governmental unit will comply with applicable CAS

requirements when estimating, accumulating and reporting costs under

CAS-covered contracts. The agreement shall indicate that OMB Circular

A-87 requirements will be applied to other Federal awards. In all

cases, only one set of records needs to be maintained by the

governmental unit.

B. Definitions

1. ``Approval or authorization of the awarding or cognizant Federal

agency'' means documentation evidencing consent prior to incurring a

specific cost. If such costs are specifically identified in a Federal

award document, approval of the document constitutes approval of the

costs. If the costs are covered by a State/local-wide cost allocation

plan or an indirect cost proposal, approval of the plan constitutes the

approval.

2. ``Award'' means grants, cost reimbursement contracts and other

agreements between a State, local and Indian tribal government and the

Federal Government.

3. ``Awarding agency'' means (a) with respect to a grant,

cooperative agreement, or cost reimbursement contract, the Federal

agency, and (b) with respect to a subaward, the party that awarded the

subaward.

4. ``Central service cost allocation plan'' means the documentation

identifying, accumulating, and allocating or developing billing rates

based on the allowable costs of services provided by a governmental

unit on a centralized basis to its departments and agencies. The costs

of these services may be allocated or billed to users.

5. ``Claim'' means a written demand or written assertion by the

governmental unit or grantor seeking, as a matter of right, the payment

of money in a sum certain, the adjustment or interpretation of award

terms, or other relief arising under or relating to the award. A

voucher, invoice or other routine request for payment that is not a

dispute when submitted is not a claim. Appeals, such as those filed by

a governmental unit in response to questioned audit costs, are not

considered claims until a final management decision is made by the

Federal awarding agency.

6. ``Cognizant agency'' means the Federal agency responsible for

reviewing, negotiating, and approving cost allocation plans or indirect

cost proposals developed under this Circular on behalf of all Federal

agencies. OMB publishes a listing of cognizant agencies.

7. ``Common Rule'' means the ``Uniform Administrative Requirements

for Grants and Cooperative Agreements to State and Local Governments;

Final Rule'' originally issued at 53 FR 8034-8103 (March 11, 1988).

Other common rules will be referred to by their specific titles.

8. ``Contract'' means a mutually binding legal relationship

obligating the seller to furnish the supplies or services (including

construction) and the buyer to pay for them. It includes all types of

commitments that obligate the government to an expenditure of

appropriated funds and that, except as otherwise authorized, are in

writing. In addition to bilateral instruments, contracts include (but

are not limited to): awards and notices of awards; job orders or task

orders issued under basic ordering agreements; letter contracts;

orders, such as purchase orders, under which the contract becomes

effective by written acceptance or performance; and, bilateral contract

modifications. Contracts do not include grants and cooperative

agreements covered by 31 U.S.C. 6301 et seq.

9. ``Cost'' means an amount as determined on a cash, accrual, or

other basis acceptable to the Federal awarding or cognizant agency. It

does not include transfers to a general or similar fund.

10. ``Cost allocation plan'' means central service cost allocation

plan, public assistance cost allocation plan, and indirect cost rate

proposal. Each of these terms are further defined in this section.

11. ``Cost objective'' means a function, organizational

subdivision, contract, grant, or other activity for which cost data are

needed and for which costs are incurred.

12. ``Federally-recognized Indian tribal government'' means the

governing body or a governmental agency of any Indian tribe, band,

nation, or other organized group or community (including any native

village as defined in Section 3 of the Alaska Native Claims Settlement

Act, 85 Stat. 688) certified by the Secretary of the Interior as

eligible for the special programs and services provided through the

Bureau of Indian Affairs.

13. ``Governmental unit'' means the entire State, local, or

federally-recognized Indian tribal government, including any component

thereof. Components of governmental units may function independently of

the governmental unit in accordance with the term of the award.

14. ``Grantee department or agency'' means the component of a

State, local, or federally-recognized Indian tribal government which is

responsible for the performance or administration of all or some part

of a Federal award.

15. ``Indirect cost rate proposal'' means the documentation

prepared by a governmental unit or component thereof to substantiate

its request for the establishment of an indirect cost rate as described

in Attachment E of this Circular.

16. ``Local government'' means a county, municipality, city, town,

township, local public authority, school district, special district,

intrastate district, council of governments (whether or not

incorporated as a non-profit corporation under State law), any other

regional or interstate government entity, or any agency or

instrumentality of a local government.

17. ``Public assistance cost allocation plan'' means a narrative

description of the procedures that will be used in identifying,

measuring and allocating all administrative costs to all of the

programs administered or supervised by State public assistance agencies

as described in Attachment D of this Circular.

18. ``State'' means any of the several States of the United States,

the District of Columbia, the Commonwealth of Puerto Rico, any

territory or possession of the United States, or any agency or

instrumentality of a State exclusive of local governments.

C. Basic Guidelines

1. Factors affecting allowability of costs. To be allowable under

Federal awards, costs must meet the following general criteria:

a. Be necessary and reasonable for proper and efficient performance

and administration of Federal awards.

b. Be allocable to Federal awards under the provisions of this

Circular.

c. Be authorized or not prohibited under State or local laws or

regulations.

d. Conform to any limitations or exclusions set forth in these

principles, Federal laws, terms and conditions of the Federal award, or

other governing regulations as to types or amounts of cost items.

e. Be consistent with policies, regulations, and procedures that

apply uniformly to both Federal awards and other activities of the

governmental unit.

f. Be accorded consistent treatment. A cost may not be assigned to

a Federal award as a direct cost if any other cost incurred for the

same purpose in like [[Page 26492]] circumstances has been allocated to

the Federal award as an indirect cost.

g. Except as otherwise provided for in this Circular, be determined

in accordance with generally accepted accounting principles.

h. Not be included as a cost or used to meet cost sharing or

matching requirements of any other Federal award in either the current

or a prior period, except as specifically provided by Federal law or

regulation.

i. Be the net of all applicable credits.

j. Be adequately documented.

2. Reasonable costs. A cost is reasonable if, in its nature and

amount, it does not exceed that which would be incurred by a prudent

person under the circumstances prevailing at the time the decision was

made to incur the cost. The question of reasonableness is particularly

important when governmental units or components are predominately

federally-funded. In determining reasonableness of a given cost,

consideration shall be given to:

a. Whether the cost is of a type generally recognized as ordinary

and necessary for the operation of the governmental unit or the

performance of the Federal award.

b. The restraints or requirements imposed by such factors as: sound

business practices; arms length bargaining; Federal, State and other

laws and regulations; and, terms and conditions of the Federal award.

c. Market prices for comparable goods or services.

d. Whether the individuals concerned acted with prudence in the

circumstances considering their responsibilities to the governmental

unit, its employees, the public at large, and the Federal Government.

e. Significant deviations from the established practices of the

governmental unit which may unjustifiably increase the Federal award's

cost.

3. Allocable costs.

a. A cost is allocable to a particular cost objective if the goods

or services involved are chargeable or assignable to such cost

objective in accordance with relative benefits received.

b. All activities which benefit from the governmental unit's

indirect cost, including unallowable activities and services donated to

the governmental unit by third parties, will receive an appropriate

allocation of indirect costs.

c. Any cost allocable to a particular Federal award or cost

objective under the principles provided for in this Circular may not be

charged to other Federal awards to overcome fund deficiencies, to avoid

restrictions imposed by law or terms of the Federal awards, or for

other reasons. However, this prohibition would not preclude

governmental units from shifting costs that are allowable under two or

more awards in accordance with existing program agreements.

d. Where an accumulation of indirect costs will ultimately result

in charges to a Federal award, a cost allocation plan will be required

as described in Attachments C, D, and E.

4. Applicable credits.

a. Applicable credits refer to those receipts or reduction of

expenditure-type transactions that offset or reduce expense items

allocable to Federal awards as direct or indirect costs. Examples of

such transactions are: purchase discounts, rebates or allowances,

recoveries or indemnities on losses, insurance refunds or rebates, and

adjustments of overpayments or erroneous charges. To the extent that

such credits accruing to or received by the governmental unit relate to

allowable costs, they shall be credited to the Federal award either as

a cost reduction or cash refund, as appropriate.

b. In some instances, the amounts received from the Federal

Government to finance activities or service operations of the

governmental unit should be treated as applicable credits.

Specifically, the concept of netting such credit items (including any

amounts used to meet cost sharing or matching requirements) should be

recognized in determining the rates or amounts to be charged to Federal

awards. (See Attachment B, item 15, ``Depreciation and use

allowances,'' for areas of potential application in the matter of

Federal financing of activities.)

D. Composition of Cost

1. Total cost. The total cost of Federal awards is comprised of the

allowable direct cost of the program, plus its allocable portion of

allowable indirect costs, less applicable credits.

2. Classification of costs. There is no universal rule for

classifying certain costs as either direct or indirect under every

accounting system. A cost may be direct with respect to some specific

service or function, but indirect with respect to the Federal award or

other final cost objective. Therefore, it is essential that each item

of cost be treated consistently in like circumstances either as a

direct or an indirect cost. Guidelines for determining direct and

indirect costs charged to Federal awards are provided in the sections

that follow.

E. Direct Costs

1. General. Direct costs are those that can be identified

specifically with a particular final cost objective.

2. Application. Typical direct costs chargeable to Federal awards

are:

a. Compensation of employees for the time devoted and identified

specifically to the performance of those awards.

b. Cost of materials acquired, consumed, or expended specifically

for the purpose of those awards.

c. Equipment and other approved capital expenditures.

d. Travel expenses incurred specifically to carry out the award.

3. Minor items. Any direct cost of a minor amount may be treated as

an indirect cost for reasons of practicality where such accounting

treatment for that item of cost is consistently applied to all cost

objectives.

F. Indirect Costs

1. General. Indirect costs are those: (a) incurred for a common or

joint purpose benefiting more than one cost objective, and (b) not

readily assignable to the cost objectives specifically benefitted,

without effort disproportionate to the results achieved. The term

``indirect costs,'' as used herein, applies to costs of this type

originating in the grantee department, as well as those incurred by

other departments in supplying goods, services, and facilities. To

facilitate equitable distribution of indirect expenses to the cost

objectives served, it may be necessary to establish a number of pools

of indirect costs within a governmental unit department or in other

agencies providing services to a governmental unit department. Indirect

cost pools should be distributed to benefitted cost objectives on bases

that will produce an equitable result in consideration of relative

benefits derived.

2. Cost allocation plans and indirect cost proposals. Requirements

for development and submission of cost allocation plans and indirect

cost rate proposals are contained in Attachments C, D, and E.

3. Limitation on indirect or administrative costs.

a. In addition to restrictions contained in this Circular, there

may be laws that further limit the amount of administrative or indirect

cost allowed.

b. Amounts not recoverable as indirect costs or administrative

costs under one Federal award may not be shifted to another Federal

award, unless specifically authorized by Federal legislation or

regulation. [[Page 26493]]

G. Interagency Services

The cost of services provided by one agency to another within the

governmental unit may include allowable direct costs of the service

plus a pro rate share of indirect costs. A standard indirect cost

allowance equal to ten percent of the direct salary and wage cost of

providing the service (excluding overtime, shift premiums, and fringe

benefits) may be used in lieu of determining the actual indirect costs

of the service. These services do not include centralized services

included in central service cost allocation plans as described in

Attachment C.

H. Required Certifications

Each cost allocation plan or indirect cost rate proposal required

by Attachments C and E must comply with the following:

1. No proposal to establish a cost allocation plan or an indirect

cost rate, whether submitted to a Federal cognizant agency or

maintained on file by the governmental unit, shall be acceptable unless

such costs have been certified by the governmental unit using the

Certificate of Cost Allocation Plan or Certificate of Indirect Costs as

set forth in Attachments C and E. The certificate must be signed on

behalf of the governmental unit by an individual at a level no lower

than chief financial officer of the governmental unit that submits the

proposal or component covered by the proposal.

2. No cost allocation plan or indirect cost rate shall be approved

by the Federal Government unless the plan or rate proposal has been

certified. Where it is necessary to establish a cost allocation plan or

an indirect cost rate and the governmental unit has not submitted a

certified proposal for establishing such a plan or rate in accordance

with the requirements, the Federal Government may either disallow all

indirect costs or unilaterally establish such a plan or rate. Such a

plan or rate may be based upon audited historical data or such other

data that have been furnished to the cognizant Federal agency and for

which it can be demonstrated that all unallowable costs have been

excluded. When a cost allocation plan or indirect cost rate is

unilaterally established by the Federal Government because of failure

of the governmental unit to submit a certified proposal, the plan or

rate established will be set to ensure that potentially unallowable

costs will not be reimbursed.

Attachment B--Selected Items of Cost

Table of Contents

1. Accounting

2. Advertising and public relations costs

3. Advisory councils

4. Alcoholic beverages

5. Audit services

6. Automatic electronic data processing

7. Bad debts

8. Bonding costs

9. Budgeting

10. Communications

11. Compensation for personnel services

a. General

b. Reasonableness

c. Unallowable costs

d. Fringe benefits

e. Pension plan costs

f. Post-retirement health benefits

g. Severance pay

h. Support of salaries and wages

i. Donated services

12. Contingencies

13. Contributions and donations

14. Defense and prosecution of criminal and civil proceedings, and

claims

15. Depreciation and use allowances

16. Disbursing service

17. Employee morale, health, and welfare costs

18. Entertainment

19. Equipment and other capital expenditures

20. Fines and penalties

21. Fund raising and investment management costs

22. Gains and losses on disposition of depreciable property and

other capital assets and substantial relocation of Federal programs

23. General government expenses

24. Idle facilities and idle capacity

25. Insurance and indemnification

26. Interest

27. Lobbying

28. Maintenance, operations, and repairs

29. Materials and supplies

30. Memberships, subscriptions, and professional activities

31. Motor pools

32. Pre-award costs

33. Professional service costs

34. Proposal costs

35. Publication and printing costs

36. Rearrangements and alterations

37. Reconversion costs

38. Rental costs

39. Taxes

40. Training

41. Travel costs

42. Underrecovery of costs under Federal agreements

Sections 1 through 42 provide principles to be applied in

establishing the allowability or unallowability of certain items of

cost. These principles apply whether a cost is treated as direct or

indirect. A cost is allowable for Federal reimbursement only to the

extent of benefits received by Federal awards and its conformance with

the general policies and principles stated in Attachment A to this

Circular. Failure to mention a particular item of cost in these

sections is not intended to imply that it is either allowable or

unallowable; rather, determination of allowability in each case should

be based on the treatment or standards provided for similar or related

items of cost.

1. Accounting. The cost of establishing and maintaining accounting

and other information systems is allowable.

2. Advertising and public relations costs.

a. The term ``advertising costs'' means the costs of advertising

media and corollary administrative costs. Advertising media include

magazines, newspapers, radio and television programs, direct mail,

exhibits, and the like.

b. The term ``public relations'' includes community relations and

means those activities dedicated to maintaining the image of the

governmental unit or maintaining or promoting understanding and

favorable relations with the community or public at large or any

segment of the public.

c. Advertising costs are allowable only when incurred for the

recruitment of personnel, the procurement of goods and services, the

disposal of surplus materials, and any other specific purposes

necessary to meet the requirements of the Federal award. Advertising

costs associated with the disposal of surplus materials are not

allowable where all disposal costs are reimbursed based on a standard

rate as specified in the grants management common rule.

d. Public relations costs are allowable when:

(1) Specifically required by the Federal award and then only as a

direct cost;

(2) Incurred to communicate with the public and press pertaining to

specific activities or accomplishments that result from performance of

the Federal award and then only as a direct cost; or

(3) Necessary to conduct general liaison with news media and

government public relations officers, to the extent that such

activities are limited to communication and liaison necessary to keep

the public informed on matters of public concern, such as notices of

Federal contract/grant awards, financial matters, etc.

e. Unallowable advertising and public relations costs include the

following:

(1) All advertising and public relations costs other than as

specified in subsections c. and d.;

(2) Except as otherwise permitted by these cost principles, costs

of conventions, meetings, or other events [[Page 26494]] related to

other activities of the governmental unit including:

(a) Costs of displays, demonstrations, and exhibits;

(b) Costs of meeting rooms, hospitality suites, and other special

facilities used in conjunction with shows and other special events; and

(c) Salaries and wages of employees engaged in setting up and

displaying exhibits, making demonstrations, and providing briefings;

(3) Costs of promotional items and memorabilia, including models,

gifts, and souvenirs; and

(4) Costs of advertising and public relations designed solely to

promote the governmental unit.

3. Advisory councils. Costs incurred by advisory councils or

committees are allowable as a direct cost where authorized by the

Federal awarding agency or as an indirect cost where allocable to

Federal awards.

4. Alcoholic beverages. Costs of alcoholic beverages are

unallowable.

5. Audit services. The costs of audits are allowable provided that

the audits were performed in accordance with the Single Audit Act, as

implemented by Circular A-128, ``Audits of State and Local

Governments.'' Generally, the percentage of costs charged to Federal

awards for a single audit shall not exceed the percentage derived by

dividing Federal funds expended by total funds expended by the

recipient or subrecipient (including program matching funds) during the

fiscal year. The percentage may be exceeded only if appropriate

documentation demonstrates higher actual costs.

Other audit costs are allowable if specifically approved by the

awarding or cognizant agency as a direct cost to an award or included

as an indirect cost in a cost allocation plan or rate.

6. Automatic electronic data processing. The cost of data

processing services is allowable (but see section 19, Equipment and

other capital expenditures).

7. Bad debts. Any losses arising from uncollectible accounts and

other claims, and related costs, are unallowable unless provided for in

Federal program award regulations.

8. Bonding costs. Costs of bonding employees and officials are

allowable to the extent that such bonding is in accordance with sound

business practice.

9. Budgeting. Costs incurred for the development, preparation,

presentation, and execution of budgets are allowable.

10. Communications. Costs of telephone, mail, messenger, and

similar communication services are allowable.

11. Compensation for personnel services.

a. General. Compensation for personnel services includes all

remuneration, paid currently or accrued, for services rendered during

the period of performance under Federal awards, including but not

necessarily limited to wages, salaries, and fringe benefits. The costs

of such compensation are allowable to the extent that they satisfy the

specific requirements of this Circular, and that the total compensation

for individual employees:

(1) Is reasonable for the services rendered and conforms to the

established policy of the governmental unit consistently applied to

both Federal and non-Federal activities;

(2) Follows an appointment made in accordance with a governmental

unit's laws and rules and meets merit system or other requirements

required by Federal law, where applicable; and

(3) Is determined and supported as provided in subsection h.

b. Reasonableness. Compensation for employees engaged in work on

Federal awards will be considered reasonable to the extent that it is

consistent with that paid for similar work in other activities of the

governmental unit. In cases where the kinds of employees required for

Federal awards are not found in the other activities of the

governmental unit, compensation will be considered reasonable to the

extent that it is comparable to that paid for similar work in the labor

market in which the employing government competes for the kind of

employees involved. Compensation surveys providing data representative

of the labor market involved will be an acceptable basis for evaluating

reasonableness.

c. Unallowable costs. Costs which are unallowable under other

sections of these principles shall not be allowable under this section

solely on the basis that they constitute personnel compensation.

d. Fringe benefits.

(1) Fringe benefits are allowances and services provided by

employers to their employees as compensation in addition to regular

salaries and wages. Fringe benefits include, but are not limited to,

the costs of leave, employee insurance, pensions, and unemployment

benefit plans. Except as provided elsewhere in these principles, the

costs of fringe benefits are allowable to the extent that the benefits

are reasonable and are required by law, governmental unit-employee

agreement, or an established policy of the governmental unit.

(2) The cost of fringe benefits in the form of regular compensation

paid to employees during periods of authorized absences from the job,

such as for annual leave, sick leave, holidays, court leave, military

leave, and other similar benefits, are allowable if: (a) they are

provided under established written leave policies; (b) the costs are

equitably allocated to all related activities, including Federal

awards; and, (c) the accounting basis (cash or accrual) selected for

costing each type of leave is consistently followed by the governmental

unit.

(3) When a governmental unit uses the cash basis of accounting, the

cost of leave is recognized in the period that the leave is taken and

paid for. Payments for unused leave when an employee retires or

terminates employment are allowable in the year of payment provided

they are allocated as a general administrative expense to all

activities of the governmental unit or component.

(4) The accrual basis may be only used for those types of leave for

which a liability as defined by Generally Accepted Accounting

Principles (GAAP) exists when the leave is earned. When a governmental

unit uses the accrual basis of accounting, in accordance with GAAP,

allowable leave costs are the lesser of the amount accrued or funded.

(5) The cost of fringe benefits in the form of employer

contributions or expenses for social security; employee life, health,

unemployment, and worker's compensation insurance (except as indicated

in section 25, Insurance and indemnification); pension plan costs (see

subsection e.); and other similar benefits are allowable, provided such

benefits are granted under established written policies. Such benefits,

whether treated as indirect costs or as direct costs, shall be

allocated to Federal awards and all other activities in a manner

consistent with the pattern of benefits attributable to the individuals

or group(s) of employees whose salaries and wages are chargeable to

such Federal awards and other activities.

e. Pension plan costs. Pension plan costs may be computed using a

pay-as-you-go method or an acceptable actuarial cost method in

accordance with established written policies of the governmental unit.

(1) For pension plans financed on a pay-as-you-go method, allowable

costs will be limited to those representing actual payments to retirees

or their beneficiaries.

(2) Pension costs calculated using an actuarial cost-based method

recognized by GAAP are allowable for a given fiscal year if they are

funded for that year [[Page 26495]] within six months after the end of

that year. Costs funded after the six month period (or a later period

agreed to by the cognizant agency) are allowable in the year funded.

The cognizant agency may agree to an extension of the six month period

if an appropriate adjustment is made to compensate for the timing of

the charges to the Federal Government and related Federal reimbursement

and the governmental unit's contribution to the pension fund.

Adjustments may be made by cash refund or other equitable procedures to

compensate the Federal Government for the time value of Federal

reimbursements in excess of contributions to the pension fund.

(3) Amounts funded by the governmental unit in excess of the

actuarially determined amount for a fiscal year may be used as the

governmental unit's contribution in future periods.

(4) When a governmental unit converts to an acceptable actuarial

cost method, as defined by GAAP, and funds pension costs in accordance

with this method, the unfunded liability at the time of conversion

shall be allowable if amortized over a period of years in accordance

with GAAP.

(5) The Federal Government shall receive an equitable share of any

previously allowed pension costs (including earnings thereon) which

revert or inure to the governmental unit in the form of a refund,

withdrawal, or other credit.

f. Post-retirement health benefits. Post-retirement health benefits

(PRHB) refers to costs of health insurance or health services not

included in a pension plan covered by subsection e. for retirees and

their spouses, dependents, and survivors. PRHB costs may be computed

using a pay-as-you-go method or an acceptable actuarial cost method in

accordance with established written polices of the governmental unit.

(1) For PRHB financed on a pay as-you-go method, allowable costs

will be limited to those representing actual payments to retirees or

their beneficiaries.

(2) PRHB costs calculated using an actuarial cost method recognized

by GAAP are allowable if they are funded for that year within six

months after the end of that year. Costs funded after the six month

period (or a later period agreed to by the cognizant agency) are

allowable in the year funded. The cognizant agency may agree to an

extension of the six month period if an appropriate adjustment is made

to compensate for the timing of the charges to the Federal Government

and related Federal reimbursements and the governmental unit's

contributions to the PRHB fund. Adjustments may be made by cash refund,

reduction in current year's PRHB costs, or other equitable procedures

to compensate the Federal Government for the time value of Federal

reimbursements in excess of contributions to the PRHB fund.

(3) Amounts funded in excess of the actuarially determined amount

for a fiscal year may be used as the government's contribution in a

future period.

(4) When a governmental unit converts to an acceptable actuarial

cost method and funds PRHB costs in accordance with this method, the

initial unfunded liability attributable to prior years shall be

allowable if amortized over a period of years in accordance with GAAP,

or, if no such GAAP period exists, over a period negotiated with the

cognizant agency.

(5) To be allowable in the current year, the PRHB costs must be

paid either to:

(a) An insurer or other benefit provider as current year costs or

premiums, or

(b) An insurer or trustee to maintain a trust fund or reserve for

the sole purpose of providing post-retirement benefits to retirees and

other beneficiaries.

(6) The Federal Government shall receive an equitable share of any

amounts of previously allowed post-retirement benefit costs (including

earnings thereon) which revert or inure to the governmental unit in the

form of a refund, withdrawal, or other credit.

g. Severance pay.

(1) Payments in addition to regular salaries and wages made to

workers whose employment is being terminated are allowable to the

extent that, in each case, they are required by (a) law, (b) employer-

employee agreement, or (c) established written policy.

(2) Severance payments (but not accruals) associated with normal

turnover are allowable. Such payments shall be allocated to all

activities of the governmental unit as an indirect cost.

(3) Abnormal or mass severance pay will be considered on a case-by-

case basis and is allowable only if approved by the cognizant Federal

agency.

h. Support of salaries and wages. These standards regarding time

distribution are in addition to the standards for payroll

documentation.

(1) Charges to Federal awards for salaries and wages, whether

treated as direct or indirect costs, will be based on payrolls

documented in accordance with generally accepted practice of the

governmental unit and approved by a responsible official(s) of the

governmental unit.

(2) No further documentation is required for the salaries and wages

of employees who work in a single indirect cost activity.

(3) Where employees are expected to work solely on a single Federal

award or cost objective, charges for their salaries and wages will be

supported by periodic certifications that the employees worked solely

on that program for the period covered by the certification. These

certifications will be prepared at least semi-annually and will be

signed by the employee or supervisory official having first hand

knowledge of the work performed by the employee.

(4) Where employees work on multiple activities or cost objectives,

a distribution of their salaries or wages will be supported by

personnel activity reports or equivalent documentation which meets the

standards in subsection (5) unless a statistical sampling system (see

subsection (6)) or other substitute system has been approved by the

cognizant Federal agency. Such documentary support will be required

where employees work on:

(a) More than one Federal award,

(b) A Federal award and a non-Federal award,

(c) An indirect cost activity and a direct cost activity,

(d) Two or more indirect activities which are allocated using

different allocation bases, or

(e) An unallowable activity and a direct or indirect cost

activity.

(5) Personnel activity reports or equivalent documentation must

meet the following standards:

(a) They must reflect an after-the-fact distribution of the actual

activity of each employee,

(b) They must account for the total activity for which each

employee is compensated,

(c) They must be prepared at least monthly and must coincide with

one or more pay periods, and

(d) They must be signed by the employee.

(e) Budget estimates or other distribution percentages determined

before the services are performed do not qualify as support for charges

to Federal awards but may be used for interim accounting purposes,

provided that:

(i) The governmental unit's system for establishing the estimates

produces reasonable approximations of the activity actually performed;

(ii) At least quarterly, comparisons of actual costs to budgeted

distributions based on the monthly activity reports are made. Costs

charged to Federal [[Page 26496]] awards to reflect adjustments made as

a result of the activity actually performed may be recorded annually if

the quarterly comparisons show the differences between budgeted and

actual costs are less than ten percent; and

(iii) The budget estimates or other distribution percentages are

revised at least quarterly, if necessary, to reflect changed

circumstances.

(6) Substitute systems for allocating salaries and wages to Federal

awards may be used in place of activity reports. These systems are

subject to approval if required by the cognizant agency. Such systems

may include, but are not limited to, random moment sampling, case

counts, or other quantifiable measures of employee effort.

(a) Substitute systems which use sampling methods (primarily for

Aid to Families with Dependent Children (AFDC), Medicaid, and other

public assistance programs) must meet acceptable statistical sampling

standards including:

(i) The sampling universe must include all of the employees whose

salaries and wages are to be allocated based on sample results except

as provided in subsection (c);

(ii) The entire time period involved must be covered by the

sample; and

(iii) The results must be statistically valid and applied to the

period being sampled.

(b) Allocating charges for the sampled employees' supervisors,

clerical and support staffs, based on the results of the sampled

employees, will be acceptable.

(c) Less than full compliance with the statistical sampling

standards noted in subsection (a) may be accepted by the cognizant

agency if it concludes that the amounts to be allocated to Federal

awards will be minimal, or if it concludes that the system proposed by

the governmental unit will result in lower costs to Federal awards than

a system which complies with the standards.

(7) Salaries and wages of employees used in meeting cost sharing or

matching requirements of Federal awards must be supported in the same

manner as those claimed as allowable costs under Federal awards.

i. Donated services.

(1) Donated or volunteer services may be furnished to a

governmental unit by professional and technical personnel, consultants,

and other skilled and unskilled labor. The value of these services is

not reimbursable either as a direct or indirect cost. However, the

value of donated services may be used to meet cost sharing or matching

requirements in accordance with the provisions of the Common Rule.

(2) The value of donated services utilized in the performance of a

direct cost activity shall, when material in amount, be considered in

the determination of the governmental unit's indirect costs or rate(s)

and, accordingly, shall be allocated a proportionate share of

applicable indirect costs.

(3) To the extent feasible, donated services will be supported by

the same methods used by the governmental unit to support the

allocability of regular personnel services.

12. Contingencies. Contributions to a contingency reserve or any

similar provision made for events the occurrence of which cannot be

foretold with certainty as to time, or intensity, or with an assurance

of their happening, are unallowable. The term ``contingency reserve''

excludes self-insurance reserves (see subsection 25.c.), pension plan

reserves (see subsection 11.e.), and post-retirement health and other

benefit reserves (see subsection 11.f.) computed using acceptable

actuarial cost methods.

13. Contributions and donations. Contributions and donations,

including cash, property, and services, by governmental units to

others, regardless of the recipient, are unallowable.

14. Defense and prosecution of criminal and civil proceedings, and

claims.

a. The following costs are unallowable for contracts covered by 10

U.S.C. 2324(k), ``Allowable costs under defense contracts.''

(1) Costs incurred in defense of any civil or criminal fraud

proceeding or similar proceeding (including filing of false

certification brought by the United States where the contractor is

found liable or has pleaded nolo contendere to a charge of fraud or

similar proceeding (including filing of a false certification).

(2) Costs incurred by a contractor in connection with any criminal,

civil or administrative proceedings commenced by the United States or a

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

b. Legal expenses required in the administration of Federal

programs are allowable. Legal expenses for prosecution of claims

against the Federal Government are unallowable.

15. Depreciation and use allowances.

a. Depreciation and use allowances are means of allocating the cost

of fixed assets to periods benefitting from asset use. Compensation for

the use of fixed assets on hand may be made through depreciation or use

allowances. A combination of the two methods may not be used in

connection with a single class of fixed assets (e.g., buildings, office

equipment, computer equipment, etc.) except as provided in subsection

g. Except for enterprise funds and internal service funds that are

included as part of a State/local cost allocation plan, classes of

assets shall be determined on the same basis used for the 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 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 [[Page 26497]] criteria will be subject to the 6\2/3\ percent

equipment use allowance limitation.

e. Where the depreciation method is followed, the period of useful

service (useful life) established in each case for usable capital

assets must take into consideration such factors as type of

construction, nature of the equipment used, historical usage patterns,

technological developments, and the renewal and replacement policies of

the governmental unit followed for the individual items or classes of

assets involved. In the absence of clear evidence indicating that the

expected consumption of the asset will be significantly greater in the

early portions than in the later portions of its useful life, the

straight line method of depreciation shall be used. Depreciation

methods once used shall not be changed unless approved by the Federal

cognizant or awarding agency. When the depreciation method is

introduced for application to an asset previously subject to a use

allowance, the annual depreciation charge thereon may not exceed the

amount that would have resulted had the depreciation method been in

effect from the date of acquisition of the asset. The combination of

use allowances and depreciation applicable to the asset shall not

exceed the total acquisition cost of the asset or fair market value at

time of donation.

f. When the depreciation method is used for buildings, a building's

shell may be segregated from the major component of the building (e.g.,

plumbing system, heating, and air conditioning system, etc.) and each

major component depreciated over its estimated useful life, or the

entire building (i.e., the shell and all components) may be treated as

a single asset and depreciated over a single useful life.

g. A reasonable use allowance may be negotiated for any assets that

are considered to be fully depreciated, after taking into consideration

the amount of depreciation previously charged to the government, the

estimated useful life remaining at the time of negotiation, the effect

of any increased maintenance charges, decreased efficiency due to age,

and any other factors pertinent to the utilization of the asset for the

purpose contemplated.

h. Charges for use allowances or depreciation must be supported by

adequate property records. Physical inventories must be taken at least

once every two years (a statistical sampling approach is acceptable) to

ensure that assets exist, and are in use. Governmental units will

manage equipment in accordance with State laws and procedures. When the

depreciation method is followed, depreciation records indicating the

amount of depreciation taken each period must also be maintained.

16. Disbursing service. The cost of disbursing funds by the

Treasurer or other designated officer is allowable.

17. Employee morale, health, and welfare costs. The costs of health

or first-aid clinics and/or infirmaries, recreational facilities,

employee counseling services, employee information publications, and

any related expenses incurred in accordance with a governmental unit's

policy are allowable. Income generated from any of these activities

will be offset against expenses.

18. Entertainment. Costs of entertainment, including amusement,

diversion, and social activities and any costs directly associated with

such costs (such as tickets to shows or sports events, meals, lodging,

rentals, transportation, and gratuities) are unallowable.

19. Equipment and other capital expenditures.

a. As used in this section the following terms have the meanings as

set forth below:

(1) ``Capital expenditure'' means the cost of the asset including

the cost to put it in place. Capital expenditure for equipment means

the net invoice price of the equipment, including the cost of any

modifications, attachments, accessories, or auxiliary apparatus

necessary to make it usable for the purpose for which it is acquired.

Ancillary charges, such as taxes, duty, protective in transit

insurance, freight, and installation may be included in, or excluded

from, capital expenditure cost in accordance with the governmental

unit's regular accounting practices.

(2) ``Equipment'' means an article of nonexpendable, tangible

personal property having a useful life of more than one year and an

acquisition cost which equals the lesser of (a) the capitalization

level established by the governmental unit for financial statement

purposes, or (b) $5000.

(3) ``Other capital assets'' mean buildings, land, and improvements

to buildings or land that materially increase their value or useful

life.

b. Capital expenditures which are not charged directly to a Federal

award may be recovered through use allowances or depreciation on

buildings, capital improvements, and equipment (see section 15). See

also section 38 for allowability of rental costs for buildings and

equipment.

c. Capital expenditures for equipment, including replacement

equipment, other capital assets, and improvements which materially

increase the value or useful life of equipment or other capital assets

are allowable as a direct cost when approved by the awarding agency.

Federal awarding agencies are authorized at their option to waive or

delegate this approval requirement.

d. Items of equipment with an acquisition cost of less than $5000

are considered to be supplies and are allowable as direct costs of

Federal awards without specific awarding agency approval.

e. The unamortized portion of any equipment written off as a result

of a change in capitalization levels may be recovered by (1) continuing

to claim the otherwise allowable use allowances or depreciation charges

on the equipment or by (2) amortizing the amount to be written off over

a period of years negotiated with the cognizant agency.

f. When replacing equipment purchased in whole or in part with

Federal funds, the governmental unit may use the equipment to be

replaced as a trade-in or sell the property and use the proceeds to

offset the cost of the replacement property.

20. Fines and penalties. Fines, penalties, damages, and other

settlements resulting from violations (or alleged violations) of, or

failure of the governmental unit to comply with, Federal, State, local,

or Indian tribal laws and regulations are unallowable except when

incurred as a result of compliance with specific provisions of the

Federal award or written instructions by the awarding agency

authorizing in advance such payments.

21. Fund raising and investment management costs.

a. Costs of organized fund raising, including financial campaigns,

solicitation of gifts and bequests, and similar expenses incurred to

raise capital or obtain contributions are unallowable, regardless of

the purpose for which the funds will be used.

b. Costs of investment counsel and staff and similar expenses

incurred to enhance income from investments are unallowable. However,

such costs associated with investments covering pension, self-

insurance, or other funds which include Federal participation allowed

by this Circular are allowable.

c. Fund raising and investment activities shall be allocated an

appropriate share of indirect costs under the conditions described in

subsection C.3.b. of Attachment A.

22. Gains and losses on disposition of depreciable property and

other capital assets and substantial relocation of Federal programs.

[[Page 26498]]

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

disposition of depreciable property shall be included in the year in

which they occur as credits or charges to the asset cost grouping(s) in

which the property was included. The amount of the gain or loss to be

included as a credit or charge to the appropriate asset cost

grouping(s) shall be the difference between the amount realized on the

property and the undepreciated basis of the property.

(2) Gains and losses on the disposition of depreciable property

shall not be recognized as a separate credit or charge under the

following conditions:

(a) The gain or loss is processed through a depreciation account

and is reflected in the depreciation allowable under sections 15 and

19.

(b) The property is given in exchange as part of the purchase price

of a similar item and the gain or loss is taken into account in

determining the depreciation cost basis of the new item.

(c) A loss results from the failure to maintain permissible

insurance, except as otherwise provided in subsection 25.d.

(d) Compensation for the use of the property was provided through

use allowances in lieu of depreciation.

b. Substantial relocation of Federal awards from a facility where

the Federal Government participated in the financing to another

facility prior to the expiration of the useful life of the financed

facility requires Federal agency approval. The extent of the

relocation, the amount of the Federal participation in the financing,

and the depreciation charged to date may require negotiation of space

charges for Federal awards.

c. Gains or losses of any nature arising from the sale or exchange

of property other than the property covered in subsection a., e.g.,

land or included in the fair market value used in any adjustment

resulting from a relocation of Federal awards covered in subsection b.

shall be excluded in computing Federal award costs.

23. General government expenses.

a. The general costs of government are unallowable (except as

provided in section 41). These include:

(1) Salaries and expenses of the Office of the Governor of a State

or the chief executive of a political subdivision or the chief

executives of federally-recognized Indian tribal governments;

(2) Salaries and other expenses of State legislatures, tribal

councils, or similar local governmental bodies, such as county

supervisors, city councils, school boards, etc., whether incurred for

purposes of legislation or executive direction;

(3) Cost of the judiciary branch of a government;

(4) Cost of prosecutorial activities unless treated as a direct

cost to a specific program when authorized by program regulations

(however, this does not preclude the allowability of other legal

activities of the Attorney General); and

(5) Other general types of government services normally provided to

the general public, such as fire and police, unless provided for as a

direct cost in program regulations.

b. For federally-recognized Indian tribal governments and Councils

Of Governments (COGs), the portion of salaries and expenses directly

attributable to managing and operating Federal programs by the chief

executive and his staff is allowable.

24. Idle facilities and idle capacity.

a. As used in this section the following terms have the meanings

set forth below:

(1) ``Facilities'' means land and buildings or any portion thereof,

equipment individually or collectively, or any other tangible capital

asset, wherever located, and whether owned or leased by the

governmental unit.

(2) ``Idle facilities'' means completely unused facilities that are

excess to the governmental unit's current needs.

(3) ``Idle capacity'' means the unused capacity of partially used

facilities. It is the difference between (a) that which a facility

could achieve under 100 percent operating time on a one-shift basis

less operating interruptions resulting from time lost for repairs,

setups, unsatisfactory materials, and other normal delays and (b) the

extent to which the facility was actually used to meet demands during

the accounting period. A multi-shift basis should be used if it can be

shown that this amount of usage would normally be expected for the type

of facility involved.

(4) ``Cost of idle facilities or idle capacity'' means costs such

as maintenance, repair, housing, rent, and other related costs, e.g.,

insurance, interest, and depreciation or use allowances.

b. The costs of idle facilities are unallowable except to the

extent that:

(1) They are necessary to meet fluctuations in workload; or

(2) Although not necessary to meet fluctuations in workload, they

were necessary when acquired and are now idle because of changes in

program requirements, efforts to achieve more economical operations,

reorganization, termination, or other causes which could not have been

reasonably foreseen. Under the exception stated in this subsection,

costs of idle facilities are allowable for a reasonable period of time,

ordinarily not to exceed one year, depending on the initiative taken to

use, lease, or dispose of such facilities.

c. The costs of idle capacity are normal costs of doing business

and are a factor in the normal fluctuations of usage or indirect cost

rates from period to period. Such costs are allowable, provided that

the capacity is reasonably anticipated to be necessary or was

originally reasonable and is not subject to reduction or elimination by

use on other Federal awards, subletting, renting, or sale, in

accordance with sound business, economic, or security practices.

Widespread idle capacity throughout an entire facility or among a group

of assets having substantially the same function may be considered idle

facilities.

25. Insurance and indemnification.

a. Costs of insurance required or approved and maintained, pursuant

to the Federal award, are allowable.

b. Costs of other insurance in connection with the general conduct

of activities are allowable subject to the following limitations:

(1) Types and extent and cost of coverage are in accordance with

the governmental unit's policy and sound business practice.

(2) Costs of insurance or of contributions to any reserve covering

the risk of loss of, or damage to, Federal Government property are

unallowable except to the extent that the awarding agency has

specifically required or approved such costs.

c. Actual losses which could have been covered by permissible

insurance (through a self-insurance program or otherwise) are

unallowable, unless expressly provided for in the Federal award or as

described below. However, the Federal Government will participate in

actual losses of a self insurance fund that are in excess of reserves.

Costs incurred because of losses not covered under nominal deductible

insurance coverage provided in keeping with sound management practice,

and minor losses not covered by insurance, such as spoilage, breakage,

and disappearance of small hand tools, which occur in the ordinary

course of operations, are allowable.

d. Contributions to a reserve for certain self-insurance programs

including workers compensation, unemployment compensation, and

severance pay are allowable subject to the following provisions:

(1) The type of coverage and the extent of coverage and the rates

and premiums would have been allowed had insurance (including

reinsurance) been purchased to cover the risks. [[Page 26499]] However,

provision for known or reasonably estimated self-insured liabilities,

which do not become payable for more than one year after the provision

is made, shall not exceed the discounted present value of the

liability. The rate used for discounting the liability must be

determined by giving consideration to such factors as the governmental

unit's settlement rate for those liabilities and its investment rate of

return.

(2) Earnings or investment income on reserves must be credited to

those reserves.

(3) Contributions to reserves must be based on sound actuarial

principles using historical experience and reasonable assumptions.

Reserve levels must be analyzed and updated at least biennially for

each major risk being insured and take into account any reinsurance,

coinsurance, etc. Reserve levels related to employee-related coverages

will normally be limited to the value of claims (a) submitted and

adjudicated but not paid, (b) submitted but not adjudicated, and (c)

incurred but not submitted. Reserve levels in excess of the amounts

based on the above must be identified and justified in the cost

allocation plan or indirect cost rate proposal.

(4) Accounting records, actuarial studies, and cost allocations (or

billings) must recognize any significant differences due to types of

insured risk and losses generated by the various insured activities or

agencies of the governmental unit. If individual departments or

agencies of the governmental unit experience significantly different

levels of claims for a particular risk, those differences are to be

recognized by the use of separate allocations or other techniques

resulting in an equitable allocation.

(5) Whenever funds are transferred from a self-insurance reserve to

other accounts (e.g., general fund), refunds shall be made to the

Federal Government for its share of funds transferred, including earned

or imputed interest from the date of transfer.

e. Actual claims paid to or on behalf of employees or former

employees for workers' compensation, unemployment compensation,

severance pay, and similar employee benefits (e.g., subsection 11.f.

for post retirement health benefits), are allowable in the year of

payment provided (1) the governmental unit follows a consistent costing

policy and (2) they are allocated as a general administrative expense

to all activities of the governmental unit.

f. Insurance refunds shall be credited against insurance costs in

the year the refund is received.

g. Indemnification includes securing the governmental unit against

liabilities to third persons and other losses not compensated by

insurance or otherwise. The Federal Government is obligated to

indemnify the governmental unit only to the extent expressly provided

for in the Federal award, except as provided in subsection d.

h. Costs of commercial insurance that protects against the costs of

the contractor for correction of the contractor's own defects in

materials or workmanship are unallowable.

26. Interest.

a. Costs incurred for interest on borrowed capital or the use of a

governmental unit's own funds, however represented, are unallowable

except as specifically provided in subsection b. or authorized by

Federal legislation.

b. Financing costs (including interest) paid or incurred on or

after the effective date of this Circular associated with the otherwise

allowable costs of building acquisition, construction, or fabrication,

reconstruction or remodeling completed on or after October 1, 1980 is

allowable, subject to the conditions in (1)-(4). Financing costs

(including interest) paid or incurred on or after the effective date of

this Circular associated with otherwise allowable costs of equipment is

allowable, subject to the conditions in (1)-(4).

(1) The financing is provided (from other than tax or user fee

sources) by a bona fide third party external to the governmental unit;

(2) The assets are used in support of Federal awards;

(3) Earnings on debt service reserve funds or interest earned on

borrowed funds pending payment of the construction or acquisition costs

are used to offset the current period's cost or the capitalized

interest, as appropriate. Earnings subject to being reported to the

Federal Internal Revenue Service under arbitrage requirements are

excludable.

(4) Governmental units will negotiate the amount of allowable

interest whenever cash payments (interest, depreciation, use

allowances, and contributions) exceed the governmental unit's cash

payments and other contributions attributable to that portion of real

property used for Federal awards.

27. Lobbying. The cost of certain influencing activities associated

with obtaining grants, contracts, cooperative agreements, or loans is

an unallowable cost. Lobbying with respect to certain grants,

contracts, cooperative agreements, and loans shall be governed by the

common rule, ``New Restrictions on Lobbying'' published at 55 FR 6736

(February 26, 1990), including definitions, and the Office of

Management and Budget ``Government-wide Guidance for New Restrictions

on Lobbying'' and notices published at 54 FR 52306 (December 20, 1989),

55 FR 24540 (June 15, 1990), and 57 FR 1772 (January 15, 1992),

respectively.

28. Maintenance, operations, and repairs. Unless prohibited by law,

the cost of utilities, insurance, security, janitorial services,

elevator service, upkeep of grounds, necessary maintenance, normal

repairs and alterations, and the like are allowable to the extent that

they: (1) keep property (including Federal property, unless otherwise

provided for) in an efficient operating condition, (2) do not add to

the permanent value of property or appreciably prolong its intended

life, and (3) are not otherwise included in rental or other charges for

space. Costs which add to the permanent value of property or

appreciably prolong its intended life shall be treated as capital

expenditures (see sections 15 and 19).

29. Materials and supplies. The cost of materials and supplies is

allowable. Purchases should be charged at their actual prices after

deducting all cash discounts, trade discounts, rebates, and allowances

received. Withdrawals from general stores or stockrooms should be

charged at cost under any recognized method of pricing, consistently

applied. Incoming transportation charges are a proper part of materials

and supply costs.

30. Memberships, subscriptions, and professional activities.

a. Costs of the governmental unit's memberships in business,

technical, and professional organizations are allowable.

b. Costs of the governmental unit's subscriptions to business,

professional, and technical periodicals are allowable.

c. Costs of meetings and conferences where the primary purpose is

the dissemination of technical information, including meals,

transportation, rental of meeting facilities, and other incidental

costs are allowable.

d. Costs of membership in civic and community, social organizations

are allowable as a direct cost with the approval of the Federal

awarding agency.

e. Costs of membership in organizations substantially engaged in

lobbying are unallowable.

31. Motor pools. The costs of a service organization which provides

automobiles to user governmental units at a mileage or fixed rate and/

or [[Page 26500]] provides vehicle maintenance, inspection, and repair

services are allowable.

32. Pre-award costs. Pre-award costs are those incurred prior to

the effective date of the award directly pursuant to the negotiation

and in anticipation of the award where such costs are necessary to

comply with the proposed delivery schedule or period of performance.

Such costs are allowable only to the extent that they would have been

allowable if incurred after the date of the award and only with the

written approval of the awarding agency.

33. Professional service costs.

a. Cost of professional and consultant services rendered by persons

or organizations that are members of a particular profession or possess

a special skill, whether or not officers or employees of the

governmental unit, are allowable, subject to section 14 when reasonable

in relation to the services rendered and when not contingent upon

recovery of the costs from the Federal Government.

b. Retainer fees supported by evidence of bona fide services

available or rendered are allowable.

34. Proposal costs. Costs of preparing proposals for potential

Federal awards are allowable. Proposal costs should normally be treated

as indirect costs and should be allocated to all activities of the

governmental unit utilizing the cost allocation plan and indirect cost

rate proposal. However, proposal costs may be charged directly to

Federal awards with the prior approval of the Federal awarding agency.

35. Publication and printing costs. Publication costs, including

the costs of printing (including the processes of composition, plate-

making, press work, and binding, and the end products produced by such

processes), distribution, promotion, mailing, and general handling are

allowable.

36. Rearrangements and alterations. Costs incurred for ordinary and

normal rearrangement and alteration of facilities are allowable.

Special arrangements and alterations costs incurred specifically for a

Federal award are allowable with the prior approval of the Federal

awarding agency.

37. Reconversion costs. Costs incurred in the restoration or

rehabilitation of the governmental unit's facilities to approximately

the same condition existing immediately prior to commencement of

Federal awards, less costs related to normal wear and tear, are

allowable.

38. Rental costs.

a. Subject to the limitations described in subsections b. through

d. of this section, rental costs are allowable to the extent that the

rates are reasonable in light of such factors as: rental costs of

comparable property, if any; market conditions in the area;

alternatives available; and, the type, life expectancy, condition, and

value of the property leased.

b. Rental costs under sale and leaseback arrangements are allowable

only up to the amount that would be allowed had the governmental unit

continued to own the property.

c. Rental costs under less-than-arms-length leases are allowable

only up to the amount that would be allowed had title to the property

vested in the governmental unit. For this purpose, less-than-arms-

length leases include, but are not limited to, those where:

(1) One party to the lease is able to control or substantially

influence the actions of the other;

(2) Both parties are parts of the same governmental unit; or

(3) The governmental unit creates an authority or similar entity to

acquire and lease the facilities to the governmental unit and other

parties.

d. Rental costs under leases which are required to be treated as

capital leases under GAAP are allowable only up to the amount that

would be allowed had the governmental unit purchased the property on

the date the lease agreement was executed. This amount would include

expenses such as depreciation or use allowance, maintenance, and

insurance. The provisions of Financial Accounting Standards Board

Statement 13 shall be used to determine whether a lease is a capital

lease. Interest costs related to capital leases are allowable to the

extent they meet the criteria in section 26.

39. Taxes.

a. Taxes that a governmental unit is legally required to pay are

allowable, except for self-assessed taxes that disproportionately

affect Federal programs or changes in tax policies that

disproportionately affect Federal programs. This provision becomes

effective for taxes paid during the governmental unit's first fiscal

year that begins on or after January 1, 1998, and applies thereafter.

b. Gasoline taxes, motor vehicle fees, and other taxes that are in

effect user fees for benefits provided to the Federal Government are

allowable.

c. This provision does not restrict the authority of Federal

agencies to identify taxes where Federal participation is

inappropriate. Where the identification of the amount of unallowable

taxes would require an inordinate amount of effort, the cognizant

agency may accept a reasonable approximation thereof.

40. Training. The cost of training provided for employee

development is allowable.

41. Travel costs.

a. General. Travel costs are allowable for expenses for

transportation, lodging, subsistence, and related items incurred by

employees traveling on official business. Such costs may be charged on

an actual cost basis, on a per diem or mileage basis in lieu of actual

costs incurred, or on a combination of the two, provided the method

used is applied to an entire trip, and results in charges consistent

with those normally allowed in like circumstances in non-federally-

sponsored activities. Notwithstanding the provisions of section 23,

travel costs of officials covered by that section, when specifically

related to Federal awards, are allowable with the prior approval of a

grantor agency.

b. Lodging and subsistence. Costs incurred by employees and

officers for travel, including costs of lodging, other subsistence, and

incidental expenses, shall be considered reasonable and allowable only

to the extent such costs do not exceed charges normally allowed by the

governmental unit in its regular operations as a result of the

governmental unit's policy. In the absence of a written governmental

unit policy regarding travel costs, the rates and amounts established

under subchapter I of Chapter 57 of Title 5, United States Code

``Travel and Subsistence Expenses; Mileage Allowances,'' or by the

Administrator of General Services, or the President (or his designee)

pursuant to any provisions of such subchapter shall be used as guidance

for travel under Federal awards (41 U.S.C. 420, ``Travel Expenses of

Government Contractors'').

c. Commercial air travel. Airfare costs in excess of the customary

standard (coach or equivalent) airfare, are unallowable except when

such accommodations would: require circuitous routing, require travel

during unreasonable hours, excessively prolong travel, greatly increase

the duration of the flight, result in increased cost that would offset

transportation savings, or offer accommodations not reasonably adequate

for the medical needs of the traveler. Where a governmental unit can

reasonably demonstrate to the awarding agency either the

nonavailability of customary standard airfare or Federal Government

contract airfare for individual trips or, on an overall basis, that it

is the governmental unit's practice to make routine use of such

airfare, specific determinations of nonavailability will generally not

be questioned by the Federal Government, [[Page 26501]] unless a

pattern of avoidance is detected. However, in order for airfare costs

in excess of the customary standard commercial airfare to be allowable,

e.g., use of first-class airfare, the governmental unit must justify

and document on a case-by-case basis the applicable condition(s) set

forth above.

d. Air travel by other than commercial carrier. Cost of travel by

governmental unit-owned, -leased, or -chartered aircraft, as used in

this section, includes the cost of lease, charter, operation (including

personnel costs), maintenance, depreciation, interest, insurance, and

other related costs. Costs of travel via governmental unit-owned, -

leased, or -chartered aircraft are unallowable to the extent they

exceed the cost of allowable commercial air travel, as provided for in

subsection c.

42. Underrecovery of costs under Federal agreements. Any excess

costs over the Federal contribution under one award agreement are

unallowable under other award agreements.

Table of Contents

A. General

B. Definitions

1. Billed central services

2. Allocated central services

3. Agency or operating agency

C. Scope of the Central Service Cost Allocation Plans

D. Submission Requirements

E. Documentation Requirements for Submitted Plans

1. General

2. Allocated central services

3. Billed services

a. General

b. Internal service funds

c. Self-insurance funds

d. Fringe benefits

44. Required certification

F. Negotiation and Approval of Central Service Plans

G. Other Policies

1. Billed central service activities

2. Working capital reserves

3. Carry-forward adjustments of allocated central service costs

4. Adjustments of billed central services

5. Records retention

6. Appeals

7. OMB assistance

A. General

1. Most governmental units provide certain services, such as motor

pools, computer centers, purchasing, accounting, etc., to operating

agencies on a centralized basis. Since federally-supported awards are

performed within the individual operating agencies, there needs to be a

process whereby these central service costs can be identified and

assigned to benefitted activities on a reasonable and consistent basis.

The central service cost allocation plan provides that process. All

costs and other data used to distribute the costs included in the plan

should be supported by formal accounting and other records that will

support the propriety of the costs assigned to Federal awards.

2. Guidelines and illustrations of central service cost allocation

plans are provided in a brochure published by the Department of Health

and Human Services entitled ``A Guide for State and Local Government

Agencies: Cost Principles and Procedures for Establishing Cost

Allocation Plans and Indirect Cost Rates for Grants and Contracts with

the Federal Government.'' A copy of this brochure may be obtained from

the Superintendent of Documents, U.S. Government Printing Office.

B. Definitions

1. ``Billed central services'' means central services that are

billed to benefitted agencies and/or programs on an individual fee-for-

service or similar basis. Typical examples of billed central services

include computer services, transportation services, insurance, and

fringe benefits.

2. ``Allocated central services'' means central services that

benefit operating agencies but are not billed to the agencies on a fee-

for-service or similar basis. These costs are allocated to benefitted

agencies on some reasonable basis. Examples of such services might

include general accounting, personnel administration, purchasing, etc.

3. ``Agency or operating agency'' means an organizational unit or

sub-division within a governmental unit that is responsible for the

performance or administration of awards or activities of the

governmental unit.

C. Scope of the Central Service Cost Allocation Plans

The central service cost allocation plan will include all central

service costs that will be claimed (either as a billed or an allocated

cost) under Federal awards and will be documented as described in

section E. Costs of central services omitted from the plan will not be

reimbursed.

D. Submission Requirements

1. Each State will submit a plan to the Department of Health and

Human Services for each year in which it claims central service costs

under Federal awards. The plan should include (a) a projection of the

next year's allocated central service cost (based either on actual

costs for the most recently completed year or the budget projection for

the coming year), and (b) a reconciliation of actual allocated central

service costs to the estimated costs used for either the most recently

completed year or the year immediately preceding the most recently

completed year.

2. Each local government that has been designated as a ``major

local government'' by the Office of Management and Budget (OMB) is also

required to submit a plan to its cognizant agency annually. OMB

periodically lists major local governments in the Federal Register.

3. All other local governments claiming central service costs must

develop a plan in accordance with the requirements described in this

Circular and maintain the plan and related supporting documentation for

audit. These local governments are not required to submit their plans

for Federal approval unless they are specifically requested to do so by

the cognizant agency. Where a local government only receives funds as a

sub-recipient, the primary recipient will be responsible for

negotiating indirect cost rates and/or monitoring the sub-recipient's

plan.

4. All central service cost allocation plans will be prepared and,

when required, submitted within six months prior to the beginning of

each of the governmental unit's fiscal years in which it proposes to

claim central service costs. Extensions may be granted by the cognizant

agency on a case-by-case basis.

E. Documentation Requirements for Submitted Plans

The documentation requirements described in this section may be

modified, expanded, or reduced by the cognizant agency on a case-by-

case basis. For example, the requirements may be reduced for those

central services which have little or no impact on Federal awards.

Conversely, if a review of a plan indicates that certain additional

information is needed, and will likely be needed in future years, it

may be routinely requested in future plan submissions. Items marked

with an asterisk (*) should be submitted only once; subsequent plans

should merely indicate any changes since the last plan.

1. General. All proposed plans must be accompanied by the

following: an organization chart sufficiently detailed to show

operations including the central service activities of the State/local

government whether or not they are shown as benefiting from central

service functions; a copy of the Comprehensive Annual Financial Report

(or a copy of the Executive Budget if budgeted costs are being

proposed) to support the allowable costs of each central service

activity included in the plan; and, a [[Page 26502]] certification (see

subsection 4.) that the plan was prepared in accordance with this

Circular, contains only allowable costs, and was prepared in a manner

that treated similar costs consistently among the various Federal

awards and between Federal and non-Federal awards/activities.

2. Allocated central services. For each allocated central service,

the plan must also include the following: a brief description of the

service*, an identification of the unit rendering the service and the

operating agencies receiving the service, the items of expense included

in the cost of the service, the method used to distribute the cost of

the service to benefitted agencies, and a summary schedule showing the

allocation of each service to the specific benefitted agencies. If any

self-insurance funds or fringe benefits costs are treated as allocated

(rather than billed) central services, documentation discussed in

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

3. Billed services.

a. General. The information described below shall be provided for

all billed central services, including internal service funds, self-

insurance funds, and fringe benefit funds.

b. Internal service funds.

(1) For each internal service fund or similar activity with an

operating budget of $5 million or more, the plan shall include: a brief

description of each service; a balance sheet for each fund based on

individual accounts contained in the governmental unit's accounting

system; a revenue/expenses statement, with revenues broken out by

source, e.g., regular billings, interest earned, etc.; a listing of all

non-operating transfers (as defined by Generally Accepted Accounting

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

procedures (methodology) used to charge the costs of each service to

users, including how billing rates are determined; a schedule of

current rates; and, a schedule comparing total revenues (including

imputed revenues) generated by the service to the allowable costs of

the service, as determined under this Circular, with an explanation of

how variances will be handled.

(2) Revenues shall consist of all revenues generated by the

service, including unbilled and uncollected revenues. If some users

were not billed for the services (or were not billed at the full rate

for that class of users), a schedule showing the full imputed revenues

associated with these users shall be provided. Expenses shall be broken

out by object cost categories (e.g., salaries, supplies, etc.).

c. Self-insurance funds. For each self-insurance fund, the plan

shall include: the fund balance sheet; a statement of revenue and

expenses including a summary of billings and claims paid by agency; a

listing of all non-operating transfers into and out of the fund; the

type(s) of risk(s) covered by the fund (e.g., automobile liability,

workers' compensation, etc.); an explanation of how the level of fund

contributions are determined, including a copy of the current actuarial

report (with the actuarial assumptions used) if the contributions are

determined on an actuarial basis; and, a description of the procedures

used to charge or allocate fund contributions to benefitted activities.

Reserve levels in excess of claims (1) submitted and adjudicated but

not paid, (2) submitted but not adjudicated, and (3) incurred but not

submitted must be identified and explained.

d. Fringe benefits. For fringe benefit costs, the plan shall

include: a listing of fringe benefits provided to covered employees,

and the overall annual cost of each type of benefit; current fringe

benefit policies*; and procedures used to charge or allocate the costs

of the benefits to benefitted activities. In addition, for pension and

post-retirement health insurance plans, the following information shall

be provided: the governmental unit's funding policies, e.g.,

legislative bills, trust agreements, or State-mandated contribution

rules, if different from actuarially determined rates; the pension

plan's costs accrued for the year; the amount funded, and date(s) of

funding; a copy of the current actuarial report (including the

actuarial assumptions); the plan trustee's report; and, a schedule from

the activity showing the value of the interest cost associated with

late funding.

4. Required certification. Each central service cost allocation

plan will be accompanied by a certification in the following form:

Certificate of Cost Allocation Plan

This is to certify that I have reviewed the cost allocation plan

submitted herewith and to the best of my knowledge and belief:

(1) All costs included in this proposal [identify date] to

establish cost allocations or billings for [identify period covered

by plan] are allowable in accordance with the requirements of OMB

Circular A-87, ``Cost Principles for State and Local Governments,''

and the Federal award(s) to which they apply. Unallowable costs have

been adjusted for in allocating costs as indicated in the cost

allocation plan.

(2) All costs included in this proposal are properly allocable

to Federal awards on the basis of a beneficial or causal

relationship between the expenses incurred and the awards to which

they are allocated in accordance with applicable requirements.

Further, the same costs that have been treated as indirect costs

have not been claimed as direct costs. Similar types of costs have

been accounted for consistently.

I declare that the foregoing is true and correct.

Governmental Unit ----------------------------------------------------

Signature ------------------------------------------------------------

Name of Official -----------------------------------------------------

Title ----------------------------------------------------------------

Date of Execution ----------------------------------------------------

F. Negotiation and Approval of Central Service Plans

1. All proposed central service cost allocation plans that are

required to be submitted will be reviewed, negotiated, and approved by

the Federal cognizant agency on a timely basis. The cognizant agency

will review the proposal within six months of receipt of the proposal

and either negotiate/approve the proposal or advise the governmental

unit of the additional documentation needed to support/evaluate the

proposed plan or the changes required to make the proposal acceptable.

Once an agreement with the governmental unit has been reached, the

agreement will be accepted and used by all Federal agencies, unless

prohibited or limited by statute. Where a Federal funding agency has

reason to believe that special operating factors affecting its awards

necessitate special consideration, the funding agency will, prior to

the time the plans are negotiated, notify the cognizant agency.

2. The results of each negotiation shall be formalized in a written

agreement between the cognizant agency and the governmental unit. This

agreement will be subject to re-opening if the agreement is

subsequently found to violate a statute or the information upon which

the plan was negotiated is later found to be materially incomplete or

inaccurate. The results of the negotiation shall be made available to

all Federal agencies for their use.

3. Negotiated cost allocation plans based on a proposal later found

to have included costs that: (a) are unallowable (i) as specified by

law or regulation, (ii) as identified in Attachment B of this Circular,

or (iii) by the terms and conditions of Federal awards, or (b) are

unallowable because they are clearly not allocable to Federal awards,

shall be adjusted, or a refund shall be made at the option of the

Federal cognizant agency. These adjustments or refunds are designed to

correct the plans and do not constitute a reopening of the negotiation.

[[Page 26503]]

G. Other Policies

1. Billed central service activities. Each billed central service

activity must separately account for all revenues (including imputed

revenues) generated by the service, expenses incurred to furnish the

service, and profit/loss.

2. Working capital reserves. Internal service funds are dependent

upon a reasonable level of working capital reserve to operate from one

billing cycle to the next. Charges by an internal service activity to

provide for the establishment and maintenance of a reasonable level of

working capital reserve, in addition to the full recovery of costs, are

allowable. A working capital reserve as part of retained earnings of up

to 60 days cash expenses for normal operating purposes is considered

reasonable. A working capital reserve exceeding 60 days may be approved

by the cognizant Federal agency in exceptional cases.

3. Carry-forward adjustments of allocated central service costs.

Allocated central service costs are usually negotiated and approved for

a future fiscal year on a ``fixed with carry-forward'' basis. Under

this procedure, the fixed amounts for the future year covered by

agreement are not subject to adjustment for that year. However, when

the actual costs of the year involved become known, the differences

between the fixed amounts previously approved and the actual costs will

be carried forward and used as an adjustment to the fixed amounts

established for a later year. This ``carry-forward'' procedure applies

to all central services whose costs were fixed in the approved plan.

However, a carry-forward adjustment is not permitted, for a central

service activity that was not included in the approved plan, or for

unallowable costs that must be reimbursed immediately.

4. Adjustments of billed central services. Billing rates used to

charge Federal awards shall be based on the estimated costs of

providing the services, including an estimate of the allocable central

service costs. A comparison of the revenue generated by each billed

service (including total revenues whether or not billed or collected)

to the actual allowable costs of the service will be made at least

annually, and an adjustment will be made for the difference between the

revenue and the allowable costs. These adjustments will be made through

one of the following adjustment methods: (a) a cash refund to the

Federal Government for the Federal share of the adjustment, (b) credits

to the amounts charged to the individual programs, (c) adjustments to

future billing rates, or (d) adjustments to allocated central service

costs. Adjustments to allocated central services will not be permitted

where the total amount of the adjustment for a particular service

(Federal share and non-Federal) share exceeds $500,000.

5. Records retention. All central service cost allocation plans and

related documentation used as a basis for claiming costs under Federal

awards must be retained for audit in accordance with the records

retention requirements contained in the Common Rule.

6. Appeals. If a dispute arises in the negotiation of a plan

between the cognizant agency and the governmental unit, the dispute

shall be resolved in accordance with the appeals procedures of the

cognizant agency.

7. OMB assistance. To the extent that problems are encountered

among the Federal agencies and/or governmental units in connection with

the negotiation and approval process, OMB will lend assistance, as

required, to resolve such problems in a timely manner.

Attachment D--Public Assistance Cost Allocation Plans

Table of Contents

A. General

B. Definitions

1. State public assistance agency

2. State public assistance agency costs

C. Policy

D. Submission, Documentation, and Approval of Public Assistance Cost

Allocation Plans

E. Review of Implementation of Approved Plans

F. Unallowable Costs

A. General

Federally-financed programs administered by State public assistance

agencies are funded predominately by the Department of Health and Human

Services (HHS). In support of its stewardship requirements, HHS has

published requirements for the development, documentation, submission,

negotiation, and approval of public assistance cost allocation plans in

Subpart E of 45 CFR Part 95. All administrative costs (direct and

indirect) are normally charged to Federal awards by implementing the

public assistance cost allocation plan. This Attachment extends these

requirements to all Federal agencies whose programs are administered by

a State public assistance agency. Major federally-financed programs

typically administered by State public assistance agencies include: Aid

to Families with Dependent Children, Medicaid, Food Stamps, Child

Support Enforcement, Adoption Assistance and Foster Care, and Social

Services Block Grant.

B. Definitions

1. ``State public assistance agency'' means a State agency

administering or supervising the administration of one or more public

assistance programs operated by the State as identified in Subpart E of

45 CFR Part 95. For the purpose of this Attachment, these programs

include all programs administered by the State public assistance

agency.

2. ``State public assistance agency costs'' means all costs

incurred by, or allocable to, the State public assistance agency,

except expenditures for financial assistance, medical vendor payments,

food stamps, and payments for services and goods provided directly to

program recipients.

C. Policy

State public assistance agencies will develop, document and

implement, and the Federal Government will review, negotiate, and

approve, public assistance cost allocation plans in accordance with

Subpart E of 45 CFR Part 95. The plan will include all programs

administered by the State public assistance agency. Where a letter of

approval or disapproval is transmitted to a State public assistance

agency in accordance with Subpart E, the letter will apply to all

Federal agencies and programs. The remaining sections of this

Attachment (except for the requirement for certification) summarize the

provisions of Subpart E of 45 CFR Part 95.

D. Submission, Documentation, and Approval of Public Assistance Cost

Allocation Plans

1. State public assistance agencies are required to promptly submit

amendments to the cost allocation plan to HHS for review and approval.

2. Under the coordination process outlined in subsection E,

affected Federal agencies will review all new plans and plan amendments

and provide comments, as appropriate, to HHS. The effective date of the

plan or plan amendment will be the first day of the quarter following

the submission of the plan or amendment, unless another date is

specifically approved by HHS. HHS, as the cognizant agency acting on

behalf of all affected Federal agencies, will, as necessary, conduct

negotiations with the State public assistance agency and will inform

the State agency of the action taken on the plan or plan amendment.

E. Review of Implementation of Approved Plans

1. Since public assistance cost allocation plans are of a narrative

[[Page 26504]] nature, the review during the plan approval process

consists of evaluating the appropriateness of the proposed groupings of

costs (cost centers) and the related allocation bases. As such, the

Federal Government needs some assurance that the cost allocation plan

has been implemented as approved. This is accomplished by reviews by

the funding agencies, single audits, or audits conducted by the

cognizant audit agency.

2. Where inappropriate charges affecting more than one funding

agency are identified, the cognizant HHS cost negotiation office will

be advised and will take the lead in resolving the issue(s) as provided

for in Subpart E of 45 CFR Part 95.

3. If a dispute arises in the negotiation of a plan or from a

disallowance involving two or more funding agencies, the dispute shall

be resolved in accordance with the appeals procedures set out in 45 CFR

Part 75. Disputes involving only one funding agency will be resolved in

accordance with the funding agency's appeal process.

4. To the extent that problems are encountered among the Federal

agencies and/or governmental units in connection with the negotiation

and approval process, the Office of Management and Budget will lend

assistance, as required, to resolve such problems in a timely manner.

F. Unallowable Costs

Claims developed under approved cost allocation plans will be based

on allowable costs as identified in this Circular. Where unallowable

costs have been claimed and reimbursed, they will be refunded to the

program that reimbursed the unallowable cost using one of the following

methods: (a) a cash refund, (b) offset to a subsequent claim, or (c)

credits to the amounts charged to individual awards.

Attachment E--State and Local Indirect Cost Rate Proposals

Table of Contents

A. General

B. Definitions

1. Indirect cost rate proposal

2. Indirect cost rate

3. Indirect cost pool

4. Base

5. Predetermined rate

6. Fixed rate

7. Provisional rate

8. Final rate

9. Base period

C. Allocation of Indirect Costs and Determination of Indirect Cost

Rates

1. General

2. Simplified method

3. Multiple allocation base method

4. Special indirect cost rates

D. Submission and Documentation of Proposals

1. Submission of indirect cost rate proposals

2. Documentation of proposals

3. Required certification

E. Negotiation and Approval of Rates

F. Other Policies

1. Fringe benefit rates

2. Billed services provided by the grantee agency

3. Indirect cost allocations not using rates

4. Appeals

5. Collections of unallowable costs and erroneous payments

6. OMB assistance

A. General

1. Indirect costs are those that have been incurred for common or

joint purposes. These costs benefit more than one cost objective and

cannot be readily identified with a particular final cost objective

without effort disproportionate to the results achieved. After direct

costs have been determined and assigned directly to Federal awards and

other activities as appropriate, indirect costs are those remaining to

be allocated to benefitted cost objectives. A cost may not be allocated

to a Federal award as an indirect cost if any other cost incurred for

the same purpose, in like circumstances, has been assigned to a Federal

award as a direct cost.

2. Indirect costs include (a) the indirect costs originating in

each department or agency of the governmental unit carrying out Federal

awards and (b) the costs of central governmental services distributed

through the central service cost allocation plan (as described in

Attachment C) and not otherwise treated as direct costs.

3. Indirect costs are normally charged to Federal awards by the use

of an indirect cost rate. A separate indirect cost rate(s) is usually

necessary for each department or agency of the governmental unit

claiming indirect costs under Federal awards. Guidelines and

illustrations of indirect cost proposals are provided in a brochure

published by the Department of Health and Human Services entitled ``A

Guide for State and Local Government Agencies: Cost Principles and

Procedures for Establishing Cost Allocation Plans and Indirect Cost

Rates for Grants and Contracts with the Federal Government.'' A copy of

this brochure may be obtained from the Superintendent of Documents,

U.S. Government Printing Office.

4. Because of the diverse characteristics and accounting practices

of governmental units, the types of costs which may be classified as

indirect costs cannot be specified in all situations. However, typical

examples of indirect costs may include certain State/local-wide central

service costs, general administration of the grantee department or

agency, accounting and personnel services performed within the grantee

department or agency, depreciation or use allowances on buildings and

equipment, the costs of operating and maintaining facilities, etc.

5. This Attachment does not apply to State public assistance

agencies. These agencies should refer instead to Attachment D.

B. Definitions

1. ``Indirect cost rate proposal'' means the documentation prepared

by a governmental unit or subdivision thereof to substantiate its

request for the establishment of an indirect cost rate.

2. ``Indirect cost rate'' is a device for determining in a

reasonable manner the proportion of indirect costs each program should

bear. It is the ratio (expressed as a percentage) of the indirect costs

to a direct cost base.

3. ``Indirect cost pool'' is the accumulated costs that jointly

benefit two or more programs or other cost objectives.

4. ``Base'' means the accumulated direct costs (normally either

total direct salaries and wages or total direct costs exclusive of any

extraordinary or distorting expenditures) used to distribute indirect

costs to individual Federal awards. The direct cost base selected

should result in each award bearing a fair share of the indirect costs

in reasonable relation to the benefits received from the costs.

5. ``Predetermined rate'' means an indirect cost rate, applicable

to a specified current or future period, usually the governmental

unit's fiscal year. This rate is based on an estimate of the costs to

be incurred during the period. Except under very unusual circumstances,

a predetermined rate is not subject to adjustment. (Because of legal

constraints, predetermined rates are not permitted for Federal

contracts; they may, however, be used for grants or cooperative

agreements.) Predetermined rates may not be used by governmental units

that have not submitted and negotiated the rate with the cognizant

agency. In view of the potential advantages offered by this procedure,

negotiation of predetermined rates for indirect costs for a period of

two to four years should be the norm in those situations where the cost

experience and other pertinent facts available are deemed sufficient to

enable the parties involved to reach an informed judgment as to the

probable [[Page 26505]] level of indirect costs during the ensuing

accounting periods.

6. ``Fixed rate'' means an indirect cost rate which has the same

characteristics as a predetermined rate, except that the difference

between the estimated costs and the actual, allowable costs of the

period covered by the rate is carried forward as an adjustment to the

rate computation of a subsequent period.

7. ``Provisional rate'' means a temporary indirect cost rate

applicable to a specified period which is used for funding, interim

reimbursement, and reporting indirect costs on Federal awards pending

the establishment of a ``final'' rate for that period.

8. ``Final rate'' means an indirect cost rate applicable to a

specified past period which is based on the actual allowable costs of

the period. A final audited rate is not subject to adjustment.

9. ``Base period'' for the allocation of indirect costs is the

period in which such costs are incurred and accumulated for allocation

to activities performed in that period. The base period normally should

coincide with the governmental unit's fiscal year, but in any event,

shall be so selected as to avoid inequities in the allocation of costs.

C. Allocation of Indirect Costs and Determination of Indirect Cost

Rates

1. General.

a. Where a governmental unit's department or agency has only one

major function, or where all its major functions benefit from the

indirect costs to approximately the same degree, the allocation of

indirect costs and the computation of an indirect cost rate may be

accomplished through simplified allocation procedures as described in

subsection 2.

b. Where a governmental unit's department or agency has several

major functions which benefit from its indirect costs in varying

degrees, the allocation of indirect costs may require the accumulation

of such costs into separate cost groupings which then are allocated

individually to benefitted functions by means of a base which best

measures the relative degree of benefit. The indirect costs allocated

to each function are then distributed to individual awards and other

activities included in that function by means of an indirect cost

rate(s).

c. Specific methods for allocating indirect costs and computing

indirect cost rates along with the conditions under which each method

should be used are described in subsections 2, 3 and 4.

2. Simplified method.

a. Where a grantee agency's major functions benefit from its

indirect costs to approximately the same degree, the allocation of

indirect costs may be accomplished by (1) classifying the grantee

agency's total costs for the base period as either direct or indirect,

and (2) dividing the total allowable indirect costs (net of applicable

credits) by an equitable distribution base. The result of this process

is an indirect cost rate which is used to distribute indirect costs to

individual Federal awards. The rate should be expressed as the

percentage which the total amount of allowable indirect costs bears to

the base selected. This method should also be used where a governmental

unit's department or agency has only one major function encompassing a

number of individual projects or activities, and may be used where the

level of Federal awards to that department or agency is relatively

small.

b. Both the direct costs and the indirect costs shall exclude

capital expenditures and unallowable costs. However, unallowable costs

must be included in the direct costs if they represent activities to

which indirect costs are properly allocable.

c. The distribution base may be (1) total direct costs (excluding

capital expenditures and other distorting items, such as pass-through

funds, major subcontracts, etc.), (2) direct salaries and wages, or (3)

another base which results in an equitable distribution.

3. Multiple allocation base method.

a. Where a grantee agency's indirect costs benefit its major

functions in varying degrees, such costs shall be accumulated into

separate cost groupings. Each grouping shall then be allocated

individually to benefitted functions by means of a base which best

measures the relative benefits.

b. The cost groupings should be established so as to permit the

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

major functions. Each grouping should constitute a pool of expenses

that are of like character in terms of the functions they benefit and

in terms of the allocation base which best measures the relative

benefits provided to each function. The number of separate groupings

should be held within practical limits, taking into consideration the

materiality of the amounts involved and the degree of precision needed.

c. Actual conditions must be taken into account in selecting the

base to be used in allocating the expenses in each grouping to

benefitted functions. When an allocation can be made by assignment of a

cost grouping directly to the function benefitted, the allocation shall

be made in that manner. When the expenses in a grouping are more

general in nature, the allocation should be made through the use of a

selected base which produces results that are equitable to both the

Federal Government and the governmental unit. In general, any cost

element or related factor associated with the governmental unit's

activities is potentially adaptable for use as an allocation base

provided that: (1) it can readily be expressed in terms of dollars or

other quantitative measures (total direct costs, direct salaries and

wages, staff hours applied, square feet used, hours of usage, number of

documents processed, population served, and the like), and (2) it is

common to the benefitted functions during the base period.

d. Except where a special indirect cost rate(s) is required in

accordance with subsection 4, the separate groupings of indirect costs

allocated to each major function shall be aggregated and treated as a

common pool for that function. The costs in the common pool shall then

be distributed to individual Federal awards included in that function

by use of a single indirect cost rate.

e. The distribution base used in computing the indirect cost rate

for each function may be (1) total direct costs (excluding capital

expenditures and other distorting items such as pass-through funds,

major subcontracts, etc.), (2) direct salaries and wages, or (3)

another base which results in an equitable distribution. An indirect

cost rate should be developed for each separate indirect cost pool

developed. The rate in each case should be stated as the percentage

relationship between the particular indirect cost pool and the

distribution base identified with that pool.

4. Special indirect cost rates.

a. In some instances, a single indirect cost rate for all

activities of a grantee department or agency or for each major function

of the agency may not be appropriate. It may not take into account

those different factors which may substantially affect the indirect

costs applicable to a particular program or group of programs. The

factors may include the physical location of the work, the level of

administrative support required, the nature of the facilities or other

resources employed, the organizational arrangements used, or any

combination thereof. When a particular award is carried out in an

environment which appears to generate a significantly different level

of indirect costs, provisions should be made for a separate indirect

cost pool applicable to that award. The separate indirect cost

[[Page 26506]] pool should be developed during the course of the

regular allocation process, and the separate indirect cost rate

resulting therefrom should be used, provided that: (1) the rate differs

significantly from the rate which would have been developed under

subsections 2. and 3., and (2) the award to which the rate would apply

is material in amount.

b. Although this Circular adopts the concept of the full allocation

of indirect costs, there are some Federal statutes which restrict the

reimbursement of certain indirect costs. Where such restrictions exist,

it may be necessary to develop a special rate for the affected award.

Where a ``restricted rate'' is required, the procedure for developing a

non-restricted rate will be used except for the additional step of the

elimination from the indirect cost pool those costs for which the law

prohibits reimbursement.

D. Submission and Documentation of Proposals

1. Submission of indirect cost rate proposals.

a. All departments or agencies of the governmental unit desiring to

claim indirect costs under Federal awards must prepare an indirect cost

rate proposal and related documentation to support those costs. The

proposal and related

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