# Cost Principles for State, Local and Indian Tribal Governments

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/fr%3A95-11658

## Record

- **Collection:** Federal Register
- **Document type:** Notice
- **Published:** May 17, 1995
- **Citation:** 60 FR 26484

## Text

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A95-11658. Public record. Not legal advice.