Cost Principles for Non-Profit Organizations; Proposed Revisions

OFFICE OF MANAGEMENT AND BUDGET

Cost Principles for Non-Profit Organizations; Proposed Revisions

AGENCY: Office of Management and Budget.

ACTION: Proposed revisions to OMB Circular A-122, ``Cost Principles for

Non-Profit Organizations''.

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SUMMARY: This notice proposes changes to OMB Circular A-122, ``Cost

Principles for Non-Profit Organizations,'' to revise the definition of

equipment, to make certain additional costs unallowable, to modify the

multiple allocation base method for computing indirect cost rate(s),

and to place a ceiling on the administrative portion of indirect costs

for organizations with Federal funding over $10 million. The proposed

changes provide consistency across OMB's cost principles Circulars A-

122; A-87, ``Cost Principles for State and Local Governments;'' and A-

21, ``Cost Principles for Educational Institutions.''

DATES: Comments on these proposals are due December 5, 1995.

ADDRESSES: Comments should be mailed to Financial Standards and

Reporting Branch, Office of Federal Financial Management, Office of

Management and Budget, 725 17th Street, N.W., Room 6025, Washington, DC

20503. Comments up to three pages in length may be submitted via

facsimile to 202-395-3952. Electronic mail comments may be submitted

via Internet to [email protected] Please include the full body of

electronic mail comments in the text and not as an attachment. Please

include the name, title, organization, postal address, and E-mail

address in the text of the message.

FOR FURTHER INFORMATION CONTACT: Non-Federal organizations should

contact the organization's cognizant Federal agency. Federal agencies

should contact Gilbert Tran, Financial Standards and Reporting Branch,

Office of Federal Financial Management, Office of Management and

Budget, (202) 395-3993.

SUPPLEMENTARY INFORMATION: In this issue of the Federal Register, the

Office of Management and Budget (OMB) issued a final revision to OMB

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

regarding interest allowability. The revision was made in a continuing

effort to provide consistency across OMB's cost principles Circulars A-

122; A-87, ``Cost Principles for State and Local Governments;'' and A-

21, ``Cost Principles for Educational Institutions,'' to ensure more

comparable treatment of various types of institutions when seeking

support from the Federal Government, and to promote cost effective

funding decisions on the part of the Federal Government and non-profit

organizations. Circular A-122 consists of the Circular as originally

issued in 1980 (45 FR 46022; July 8, 1980), with amendments in 1984 (49

FR 18260; April 27, 1984), in 1987 (52 FR 19788; May 27, 1987) and in

this issue. See also 60 FR 36316 (July 14, 1995) regarding equipment

capitalization threshold waivers.

To further the goals stated previously, OMB proposes herein to

revise the definition for equipment, to make certain additional types

of costs unallowable, to modify the multiple allocation base method for

computing indirect cost rate(s), and to place an upper-limit on

payments for administrative expenses. The following describes each of

the four proposals.

First, in the equipment definition in Attachment B, section 15, OMB

is proposing to raise the threshold amount to $5000 in conformance with

the threshold established in Circular A-110, ``Uniform Administrative

Requirements for Grants and Agreements with Institutions of Higher

Education, Hospitals, and Other Non-Profit Organizations'' (58 FR

62992; November 29, 1993). This revision will decrease burdens

associated with accounting for property.

[[Page 52523]]

Second, OMB is proposing additional unallowable items. Some

proposed unallowable costs, items (1) to (10), are already unallowable

under Circulars A-87 and/or A-21 (See Circular A-87 (60 FR 26484; May

17, 1995) and Circular A-21 (56 FR 50224; October 1, 1991)) and/or the

Federal Acquisition Regulation (at 48 CFR Part 31). These unallowable

costs include:

(1) Advertising and public relations costs.

(2) Alcoholic beverages.

(3) Organization-furnished automobiles for personal use.

(4) Defense and prosecution of criminal and civil proceedings,

claims, appeals and patent infringements.

(5) Goods and services for personal uses.

(6) Housing and living expenses of an organization's officers.

(7) Insurance against defects.

(8) Memberships in any civic, community or social organization or

country club.

(9) Selling or marketing of goods or services.

(10) Trustees' travel.

OMB is proposing to make changes to items (11) to (17) for

consistency with amendments made by the Federal Acquisition

Streamlining Act of 1994 (FASA), Public Law 103-355. Section 2151 of

FASA, by amending section 306 of the Federal Property and

Administrative Services Act of 1949 (41 U.S.C. 256), specified certain

items of costs as not allowable under Federal covered contracts. While

most of the unallowable cost items listed in FASA are precisely

identical or substantively the same as are currently in Circular A-122,

some of the cost items differ. They are:

(11) Payments of fines and penalties resulting from violations of,

or failure to comply with, foreign laws and regulations.

(12) Costs of membership in any social, dining, or country club or

organization.

(13) Costs incurred in certain severance pay package (commonly

known as a ``golden parachute'' payment).

(14) Costs of severance pay to foreign nationals in excess of

customary or prevailing practices.

(15) Costs of severance pay to foreign nationals in the case of

termination due to closing of, or the curtailment of activities at, a

United States facility in that country.

(16) Costs of advertising designed to promote the organization or

its products.

(17) Costs of commercial insurance that protects against the costs

for correction of defects in materials or workmanship.

OMB is proposing to add items (1) through (17) to the costs in

Attachment B that are unallowable under Circular A-122.

Third, OMB is proposing a revision to Attachment A under which an

organization receiving more than $10 million of Federal funding will be

required to compute its indirect cost rate based on a modified total

direct cost basis using the ``multiple allocation method,'' and its

rate should be determined separately for the two major categories:

``Facilities'' and ``Administration.'' This proposed change would

provide a standard and uniform method to calculate indirect cost

rate(s) for organizations receiving more than $10 million of Federal

funding. This method is consistent with that required for colleges and

universities with direct costs funding covered by Circular A-21 of more

than $10 million. Where the Federal funding covered in this Circular of

an organization does not exceed $10 million in a fiscal year, the

organization will be able to use one of the three allocation methods

described in Section D of Attachment A, Allocation of Indirect Costs

and Determination of Indirect Costs Rates.

Fourth and finally, OMB is proposing an upper limit of 26 percent

on the ``Administration'' component of the rate in Attachment A for an

organization receiving more than $10 million of Federal funding. The

administrative cap is consistent with the one implemented for colleges

and universities on October 1, 1991, under Circular A-21 (56 FR 50224).

Organizations with an administrative component rate at or less than 26

percent will continue to recover at the current negotiated rate.

The effective date for the first, second and fourth proposals will

be at the start of the next accounting period beginning on or after the

first issuance of the revised Circular for which the organization has

not yet established a predetermined indirect cost rate. The effective

date for the second proposal is as follows. For costs charged directly,

the effective date for the proposed unallowable costs will be 30 days

after the final issuance of the revised Circular. For costs charged

indirectly, the effective date will be at the start of the next

accounting period beginning on or after the final issuance of the

revised Circular for which the organization has not established a

predetermined indirect cost rate.

G. Edward DeSeve,

Controller.

Proposed Revisions

Revise Attachments A and B of Circular A-122, as follows.

A. Attachment A

1. Add Subsection 3 to Section C, Indirect Costs.

3. For organizations receiving more than $10 million of Federal

funding covered under this Circular, the indirect costs shall be

classified within two broad categories: ``Facilities'' and

``Administration.'' ``Facilities'' is defined as depreciation and use

allowances, interest on debt associated with certain buildings,

equipment and capital improvements, and operations and maintenance

expenses. ``Administration'' is defined as general administration and

general expenses such as the director's office, accounting, personnel,

project administration (when it is not directly charged to projects),

and all other types of expenditures not listed specifically under one

of the subcategories of Facilities (including cross allocations from

other pools).

2. Add Subsections f and g to Section D.1., Allocation of Indirect

Costs and Determination of Indirect Cost Rates, General:

f. Where the Federal funding covered by this Circular of an

organization does not exceed $10 million in a fiscal year, the

organization can use one of the three allocation methods herein

described as: simple, multiple or direct allocation method. The

distribution base may be total direct costs (excluding capital

expenditures and other distorting items, such as major subgrants or

subgrants above $25,000 of each subgrant or subcontract, regardless of

the period covered by the subgrant or subcontract), direct salaries and

wages, or modified total direct costs (MTDC). MTDC consists of all

salaries and wages, fringe benefits, materials and supplies, services,

travel, and subgrants and subcontracts up to the first $25,000 of each

subgrant or subcontract. Equipment, capital expenditures, charges for

patient care, rental costs and the portion in excess of $25,000 shall

be excluded from MTDC. Other items may only be excluded when the

Federal cost cognizant agency determines that an exclusion is necessary

to avoid a serious inequity in the distribution of indirect costs.

g. Where the Federal funding covered by this Circular of an

organization exceeds $10 million in a fiscal year, the

[[Page 52524]]

organization shall use the multiple allocation method. The distribution

base shall be MTDC as described in subsection f.

3. Replace Section D.2.c. with the following:

c. The distribution basis shall comply with the conditions

described in Section D.1.

4. Replace Section D.3 with the following:

3. Multiple Allocation Base Method

a. General. Where an organization receives more than $10 million of

Federal funding in a fiscal year covered under this Circular or where

an organization's indirect costs benefit its major functions in varying

degrees, such costs shall be accumulated into separate cost groupings,

as described in subsection b. Each grouping shall then be allocated

individually to benefitting functions by means of a base which best

measures the relative benefits. The default bases by cost pool are

described in subsection c.

b. Identification of indirect costs. Cost groupings shall be

established so as to permit the allocation of each grouping on the

basis of benefits provided to the major functions. Each grouping shall

constitute a pool of expenses that are of like character in terms of

functions they benefit and in terms of the allocation base which best

measures the relative benefits provided to each function. The groupings

are classified within the two broad categories: ``Facilities'' and

``Administration,'' as described in Section C.3. The indirect cost

pools are defined as follows:

(1) Depreciation and use allowances. The expenses under this

heading are the portion of the costs of the organization's buildings,

capital improvements to land and buildings, and equipment which are

computed in accordance with Section 11 (``Depreciation and use

allowance'').

(2) Interest. Interest on debt associated with certain buildings,

equipment and capital improvements are computed in accordance with

Section 23 (``Interest, fund raising, and investment management

costs'').

(3) Operation and maintenance expenses. The expenses under this

heading are those that have been incurred for the administration,

operation, maintenance, preservation, and protection of the

organization's physical plant. They include expenses normally incurred

for such items as: janitorial and utility services; repairs and

ordinary or normal alterations of buildings, furniture and equipment;

care of grounds; maintenance and operation of buildings and other plant

facilities; security; earthquake and disaster preparedness;

environmental safety; hazardous waste disposal; property, liability and

other insurance relating to property; space and capital leasing;

facility planning and management; and, central receiving. The operation

and maintenance expenses category shall also include its allocable

share of fringe benefit costs, depreciation and use allowance, and

interest costs.

(4) General administration and general expenses. The expenses under

this heading are those that have been incurred for the overall general

executive and administrative offices of the organization and other

expenses of a general nature which do not relate solely to any major

function of the organization. This category shall also include its

allocable share of fringe benefit costs, operation and maintenance

expense, depreciation and use allowances, and interest costs. Examples

of this category include central offices, such as the director's

office, the office of finance, business services, budget and planning,

personnel, safety and risk management, general counsel, and management

information systems.

In developing this cost pool, special care should be exercised to

ensure that costs incurred for the same purpose in like circumstances

are treated consistently as either direct or indirect costs. For

example, salaries of technical staff, project supplies, project

publication, telephone toll charges, computer costs, travel costs, and

specialized services costs shall be treated as direct costs wherever

identifiable to a particular program. The salaries and wages of

administrative and pooled clerical staff should normally be treated as

indirect costs. Direct charging of these costs may be appropriate where

a major project or activity explicitly budgets for administrative or

clerical services and other individuals involved can be identified with

the program or activity. Items such as office supplies, postage, local

telephone costs, periodicals and memberships should normally be treated

as indirect costs.

c. Allocation bases. Actual conditions shall be taken into account

in selecting the base to be used in allocating the expenses in each

grouping to benefitting functions. The essential consideration in

selecting a method or a base is that it be the one best suited for

assigning the pool of costs to cost objectives in accordance with

benefits derived; a traceable cause and effect relationship; or logic

and reason, where neither the cause nor the effect of the relationship

is determinable. When an allocation can be made by assignment of a cost

grouping directly to the function benefited, the allocation shall be

made in that manner. When the expenses in a cost grouping are more

general in nature, the allocation shall be made through the use of a

selected base which produces results that are equitable to both the

Federal Government and the organization. The distribution shall be made

in accordance with the bases described herein unless it can be

demonstrated that the use of a different base would result in a more

equitable allocation of the costs, or that a more readily available

base would not increase the costs charged to sponsored agreements. The

results of special cost studies (such as an engineering utility study)

shall not be used to determine and allocate the indirect costs to

sponsored agreements.

(1) Depreciation and use allowance. Depreciation and use allowance

expenses shall be allocated in the following manner:

(a) Depreciation and use allowances on buildings used exclusively

in the conduct of a single function, and on capital improvements and

equipment used in such buildings, shall be assigned to that function.

(b) Depreciation and use allowances on buildings used for more than

one function, and on capital improvements and equipment used in such

buildings, shall be allocated to the individual functions performed in

each building on the basis of usable square feet of space, excluding

common areas, such as hallways, stairwells, and restrooms.

(c) Depreciation and use allowances on buildings, capital

improvements and equipment related space (e.g., individual rooms, and

laboratories) used jointly by more than one function (as determined by

the users of the space) shall be treated as follows. The cost of each

jointly used unit of space shall be allocated to the benefitting

functions on the basis of:

(i) the employee full-time equivalents (FTEs) or salaries and wages

of those individual functions benefitting from the use of that space;

or

(ii) organization-wide employee FTEs or salaries and wages

applicable to the benefitting functions of the organization.

(d) Depreciation or use allowances on certain capital improvements

to land, such as paved parking areas, fences, sidewalks, and the like,

not included in the cost of buildings, shall be allocated to user

categories of employees on a FTE basis and distributed to major

functions in proportion to the salaries and wages of all employees

applicable to the functions.

(2) Interest. Interest costs shall be allocated in the same manner

as the

[[Page 52525]]

depreciation or use allowance on the buildings, equipment and capital

equipments to which the interest relates.

(3) Operations and maintenance expenses. Operations and maintenance

expenses shall be allocated in the same manner as the depreciation and

use allowance.

(4) General administration and general expenses. General

administration and general expenses shall be allocated to benefitting

functions based on MTDC, as described in Section D.1.f. The expenses

included in this category could be grouped first according to major

functions of the organization to which they render services or provide

benefits. The aggregate expenses of each group shall then be allocated

to benefitting functions based on MTDC.

d. Order of distribution.

(1) Indirect cost categories consisting of depreciation and use

allowance, interest, operation and maintenance, and general

administration and general expenses shall be allocated in that order to

the remaining indirect cost categories as well as to the major

functions of the organization. Other cost categories could be allocated

in the order determined to be most appropriate by the organization.

When cross allocation of costs is made as provided in subsection (2),

this order of allocation does not apply.

(2) Normally, an indirect cost category will be considered closed

once it has been allocated to other cost objectives, and costs shall

not be subsequently allocated to it. However, a cross allocation of

costs between two or more indirect costs categories could be used if

such allocation will result in a more equitable allocation of costs. If

a cross allocation is used, an appropriate modification to the

composition of the indirect cost categories is required.

e. Application of indirect cost rate or rates. Except where a

special indirect cost rate(s) is required in accordance with Section

D.5, the separate groupings of indirect costs allocated to each major

function shall be aggregated and treated as a common pool for that

function. The costs in the common pool shall then be distributed to

individual awards included in that function by use of a single indirect

cost rate.

f. Distribution basis. Indirect costs shall be distributed to

applicable sponsored agreements and other benefitting activities within

each major function on the basis of MTDC, as described in Section

D.1.f. An indirect cost rate shall be determined for each separate

indirect cost pool developed. The rate in each case shall be stated as

the percentage which the amount of the particular indirect cost pool is

of the distribution base identified with that pool. Each indirect cost

rate negotiation or determination shall include development of the rate

for each indirect cost pool as well as the overall indirect cost rate.

The indirect cost pools shall be classified within two broad

categories: ``Facilities'' and ``Administration,'' as described in

Section C.3.

g. Limitation on reimbursement of administrative costs.

(1) The administrative costs charged to sponsored agreements

awarded or amended (including continuation and renewal awards) with

effective dates beginning on or after the start of the organization's

first fiscal year which begins on or after October 1, 1995, shall be

limited to 26 percent of MTDC (as defined in Section D.1.f) for the

administration costs (including their allocable share of depreciation

and/or use allowance, interest costs, operation and maintenance, and

fringe benefits) and all other types of expenditures not listed

specifically under one of the subcategories of facilities in Section

C.3.

(2) For organizations that already established predetermined rates

beyond October 1, 1995, the limitation shall be at the start of the

next fiscal year beginning on or after October 1, 1995, for which the

organization has not yet established an indirect cost rate.

(3) Organizations shall not change their accounting or cost

allocations methods which were in effect on September 30, 1995, if the

effect is to change the charging of a particular cost from indirect to

direct to avoid the limitation on administrative costs. Cognizant

Federal agencies are authorized to permit changes where an

organization's charging practices are at variance with acceptable

practices followed by a substantial majority of other similar

organizations.

B. Attachment B

Revise the following cost items in Attachment B to Circular A-122

(``Selected Items of Cost'').

1. Revise the Table of Contents for Attachment B to read:

1. Advertising and public relations costs

2. Alcoholic beverages

3. Bad debts

4. Bid and proposal costs (reserved)

5. Bonding costs

6. Communication costs

7. Compensation for personal services

8. Contingency provisions

9. Contributions

10. Defense and prosecution of criminal and civil proceedings,

claims, appeals and patent infringement

11. Depreciation and use allowances

12. Donations

13. Employee morale, health and welfare costs and credits

14. Entertainment costs

15. Equipment and other capital expenditures

16. Fines and penalties

17. Fringe benefits

18. Goods or services for personal use

19. Housing and personal living expenses

20. Idle facilities and idle capacity

21. Independent research and development (reserved)

22. Insurance and indemnification

23. Interest, fund raising, and investment management costs

24. Labor relations costs

25. Lobbying costs

26. Losses on other awards

27. Maintenance and repair costs

28. Materials and supplies

29. Meetings and conferences

30. Memberships, subscriptions, and professional activity costs

31. Organization costs

32. Overtime, extra-pay shift, and multi-shift premiums

33. Page charges in professional journals

34. Participant support costs

35. Patent costs

36. Pension plans

37. Plant security costs

38. Pre-award costs

39. Professional service costs

40. Profits and losses on disposition of depreciable property or

other capital assets

41. Public information service costs

42. Publication and printing costs

43. Rearrangement and alteration costs

44. Reconversion costs

45. Recruiting costs

46. Relocation costs

47. Rental costs

48. Royalties and other costs for use of patents and copyrights

49. Selling and marketing

50. Severance pay

51. Specialized service facilities

52. Taxes

53. Termination costs

54. Training and education costs

55. Transportation costs

56. Travel costs

57. Trustees

2. Revise and retitle Section 1 to read:

1. Advertising and public relations costs.

a. The term advertising costs means the costs of advertising media

and corollary administrative costs. Advertising media include

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

exhibits, and the like.

b. The term public relations includes community relations and means

those activities dedicated to maintaining the image of the organization

or maintaining or promoting understanding and favorable relations with

the community or public at large or any segment of the public.

[[Page 52526]]

c. The only allowable advertising costs are those which are solely

for:

(1) The recruitment of personnel required for the performance by

the organization of obligations arising under a sponsored agreement,

when considered in conjunction with all other recruitment costs, as set

forth in Section 45 (``Recruiting costs'');

(2) The procurement of goods and services for the performance of a

sponsored agreement;

(3) The disposal of scrap or surplus materials acquired in the

performance of a sponsored agreement except when organizations are

reimbursed for disposal costs at a predetermined amount in accordance

with OMB Circular A-110, paragraph ______. 34, ``Equipment''; or

(4) Other specific purposes necessary to meet the requirements of

the sponsored agreement.

d. The only allowable public relations costs are:

(1) Costs specifically required by sponsored agreements;

(2) Costs of communicating with the public and press pertaining to

specific activities or accomplishments which result from performance of

sponsored agreements; or

(3) Costs of conducting general liaison with news media and

government public relations officers, to the extent that such

activities are limited to communication and liaison necessary to keep

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

contract/grant awards, financial matters, etc.

e. Costs identified in subsections c. and d. if incurred for more

than one sponsored agreement or for both sponsored work and other work

of the organization, are allowable to the extent that the principles in

Sections B (``Direct Costs'') and C (``Indirect Costs'') are observed.

f. Unallowable advertising and public relations costs include the

following:

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

specified in subsections c., d., and e.;

(2) Costs of meeting or other events related to fund raising or

other organizational activities including:

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

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

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

(iii) Salaries and wages of employees or cost of services engaged

in setting up and displaying exhibits, making demonstrations, and

providing briefings;

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

gifts, and souvenirs;

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

promote the organization.

3. Renumber current sections 2 through 8 as sections 3 through 9,

respectively.

4. Add the following new section 2:

2. Alcoholic beverages. Costs of alcoholic beverages are

unallowable.

5. In section 7 (``Compensation for personal services''), as

renumbered above in item 3, rename the current subsection g, Pension

costs, as subsection h. Add a new subsection g:

g. Organization-furnished automobiles. That portion of the cost of

organization-furnished automobiles that relates to personal use by

employees (including transportation to and from work) is unallowable

regardless of whether the cost is reported as taxable income to the

employees.

6. Renumber current sections 9 through 15 as sections 11 through

17, respectively.

7. Add new section 10:

10. Defense and prosecution of criminal and civil proceedings,

claims, appeals and patent infringement.

a. Definitions.

(1) Conviction, as used herein, means a judgment or a conviction of

a criminal offense by any court of competent jurisdiction, whether

entered upon as a verdict or a plea, including a conviction due to a

plea of nolo contendere.

(2) Costs include, but are not limited to: administrative and

clerical expenses; the cost of legal services, whether performed by in-

house or private counsel; and the costs of the services of accountants,

consultants, or others retained by the organization to assist it; costs

of employees, officers and trustees, and any similar costs incurred

before, during, and after commencement of a judicial or administrative

proceeding that bears a direct relationship to the proceedings.

(3) Fraud, as used herein, means (i) acts of fraud corruption or

attempts to defraud the Federal Government or to corrupt its agents,

(ii) acts that constitute a cause for debarment or suspension (as

specified in agency regulations), and (iii) acts which violate the

False Claims Act, 31 U.S.C., sections 3729-3731, or the Anti-Kickback

Act, 41 U.S.C., sections 51 and 54.

(4) Penalty does not include restitution, reimbursement, or

compensatory damages.

(5) Proceeding includes an investigation.

b. (1) Except as otherwise described herein, costs incurred in

connection with any criminal, civil or administrative proceeding

(including filing of a false certification) commenced by the Federal

Government, or a State, local or foreign government, are not allowable

if the proceeding: (1) relates to a violation of, or failure to comply

with, a Federal, State, local or foreign statute or regulation by the

organization (including its agents and employees), and (2) results in

any of the following dispositions:

(a) In a criminal proceeding, a conviction.

(b) In a civil or administrative proceeding involving an allegation

of fraud or similar misconduct, a determination of organizational

liability.

(c) In the case of any civil or administrative proceeding, the

imposition of a monetary penalty.

(d) A final decision by an appropriate Federal official to debar or

suspend the organization, to rescind or void an award, or to terminate

an award for default by reason of a violation or failure to comply with

a law or regulation.

(e) A disposition by consent or compromise, if the action could

have resulted in any of the dispositions described in (a), (b), (c) or

(d).

(2) If more than one proceeding involves the same alleged

misconduct, the costs of all such proceedings shall be unallowable if

any one of them results in one of the dispositions shown in subsection

b.(1).

c. If a proceeding referred to in subsection b. is commenced by the

Federal Government and is resolved by consent or compromise pursuant to

an agreement entered into by the organization and the Federal

Government, then the costs incurred by the organization in connection

with such proceedings that are otherwise not allowable under subsection

b. may be allowed to the extent specifically provided in such

agreement.

d. If a proceeding referred to in subsection b. is commenced by a

State, local or foreign government, the authorized Federal official may

allow the costs incurred by the organization for such proceedings, if

such authorized official determines that the costs were incurred as a

result of (1) a specific term or condition of a federally-sponsored

agreement, or (2) specific written direction of an authorized official

of the sponsoring agency.

e. Costs incurred in connection with proceedings described in

subsection b., but which are not made unallowable by that subsection,

may be allowed by the Federal Government, but only to the extent that:

[[Page 52527]]

(1) The costs are reasonable in relation to the activities required

to deal with the proceeding and the underlying cause of action;

(2) Payment of the costs incurred, as allowable and allocable

costs, is not prohibited by any other provision(s) of the sponsored

agreement;

(3) The costs are not otherwise recovered from the Federal

Government or a third party, either directly as a result of the

proceeding or otherwise; and,

(4) The percentage of costs allowed does not exceed the percentage

determined by an authorized Federal official to be appropriate,

considering the complexity of procurement litigation, generally

accepted principles governing the award of legal fees in civil actions

involving the United States as a party, and such other factors as may

be appropriate. Such percentage shall not exceed 80 percent. However,

if an agreement reached under subsection c. has explicitly considered

this 80 percent limitation and permitted a higher percentage, then the

full amount of costs resulting from that agreement shall be allowable.

f. Costs incurred by the organization in connection with the

defense of suits brought by its employees or ex-employees under section

2 of the Major Fraud Act of 1988 (Pub. L. 100-700), including the cost

of all relief necessary to make such employee whole, where the

organization was found liable or settled, are unallowable.

g. Costs of legal, accounting, and consultant services, and related

costs, incurred in connection with defense against Federal Government

claims or appeals, or the prosecution of claims or appeals against the

Federal Government, are unallowable.

h. Costs of legal, accounting, and consultant services, and related

costs, incurred in connection with patent infringement litigation, are

unallowable unless otherwise provided for in the sponsored agreements.

i. Costs which may be unallowable under this section, including

directly associated costs, shall be segregated and accounted for by the

organization separately. During the pendency of any proceeding covered

by subsections b. and f. of this section, the Federal Government shall

generally withhold payment of such costs. However, if in the best

interests of the Federal Government, the Federal Government may provide

for conditional payment upon provision of adequate security, or other

adequate assurance, and agreements by the organization to repay all

unallowable costs, plus interest, if the costs are subsequently

determined to be unallowable.

8. In section 15 (``Equipment and other capital expenditures''), as

renumbered in item 6 above, replace subsection 15.a.(1):

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

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

acquisition cost which equals or exceeds the lesser of (a) the

capitalization level established by the organization for the financial

statement purposes, or (b) $5000.

9. Renumber current sections 16 through 44 as sections 20 through

48, respectively.

10. Add new section 18:

18. Goods or services for personal use. Costs of goods or services

for personal use of the organization's employees are unallowable

regardless of whether the cost is reported as taxable income to the

employees.

11. Add new section 19:

19. Housing and personal living expenses.

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

furnishings, rent, etc.), housing allowances and personal living

expenses for/of the organization's officers are unallowable regardless

of whether the cost is reported as taxable income to the employees.

b. The term ``officers'' includes current and past officers.

12. Add to renumbered section 22 (``Insurance and

indemnification'') subsections (f) and (g) to section 22.a.(2):

(f) Insurance against defects. Costs of insurance with respect to

any costs incurred to correct defects in the organization's materials

or workmanship are unallowable.

(g) Medical liability (malpractice) insurance is an allowable cost

of research programs only to the extent that the research involves

human subjects. Medical liability insurance costs shall be treated as a

direct cost and shall be assigned to individual projects based on the

manner in which the insurer allocates the risk to the population

covered by the insurance.

13. Revise section 30, as renumbered in item 9, to read:

30. Memberships, subscriptions and professional activity costs.

a. Costs of the organization's membership in business, technical,

and professional organizations are allowable.

b. Costs of the organization's subscriptions to business,

professional, and technical periodicals are allowable.

c. Costs of meetings and conferences, when the primary purpose is

the dissemination of technical information, are allowable. This

includes costs of meals, transportation, rental of facilities, and

other items incidental to such meetings or conferences.

d. Costs of membership in any civic or community organization are

unallowable.

e. Costs of membership in any country club or social or dining club

or organization are unallowable.

14. Revise section 45, as renumbered in item 9, to read:

45. Recruiting costs.

a. Subject to subsections b., c., and d., and provided that the

size of the staff recruited and maintained is in keeping with workload

requirements, costs of ``help wanted'' advertising, operating costs of

an employment office necessary to secure and maintain an adequate

staff, costs of operating an aptitude and educational testing program,

travel costs of employees while engaged in recruiting personnel, travel

costs of applicants for interviews for prospective employment, and

relocation costs incurred incident to recruitment of new employees, are

allowable to the extent that such costs are incurred pursuant to a well

managed recruitment program. Where the organization uses employment

agencies, costs that are not in excess of standard commercial rates for

such services are allowable.

b. In publications, costs of help wanted advertising that includes

color, includes advertising material for other than recruitment

purposes, or is excessive in size (taking into consideration

recruitment purposes for which intended and normal organizational

practices in this respect), are unallowable.

c. Costs of help wanted advertising, special emoluments, fringe

benefits, and salary allowances incurred to attract professional

personnel from other organizations that do not meet the test of

reasonableness or do not conform with the established practices of the

organization, are unallowable.

d. Where relocation costs incurred incident to recruitment of a new

employee have been allowed either as an allocable direct or indirect

cost, and the newly hired employee resigns for reasons within his

control within twelve months after being hired, the organization will

be required to refund or credit such relocation costs to the Federal

Government.

15. Current sections 45 through 51 are renumbered as sections 50

through 56, respectively.

16. Add new section 49:

49. Selling and marketing. Costs of selling and marketing any

products or services of the organization (unless

[[Page 52528]]

allowed under section 1) are unallowable.

17. In section 50 (``Severance pay''), as renumbered in item 15,

subsection a. is amended and new subsections c. and d. are added, as

follows:

a. Severance pay, also commonly referred to as dismissal wages, is

a payment in addition to regular salaries and wages, by organizations

to workers whose employment is being terminated. Costs of severance pay

are allowable only to the extent that in each case, they are required

by: (i) law; (ii) employer-employee agreement in effect at time of

establishment of the contract or grant, or at commencement of

employment; (iii) preexisting established policy that constitutes, in

effect, an implied agreement on the organization's part; or (iv)

circumstances of the particular employment.

Costs incurred in certain severance pay packages (commonly known as

``a golden parachute'' payment) which are in an amount in excess of the

normal severance pay paid by the organization to an employee upon

termination of employment and are paid to the employee contingent upon

a change in management control over, or ownership of, the

organization's assets are unallowable.

c. Severance payments to foreign nationals employed by the

organization outside the United States, to the extent that the amount

exceeds the customary or prevailing practices for the organization in

the United States are unallowable.

d. Severance payments to foreign nationals employed by the

organization outside the United States due to the termination of the

foreign national as a result of the closing of, or curtailment of

activities by, the organization in that country, are unallowable.

18. Add new section 57:

57. Trustees. Travel and subsistence costs of trustees, regardless

of the purpose of the trip, are unallowable.

[FR Doc. 95-24900 Filed 10-5-95; 8:45 am]

BILLING CODE 3110-01-P