Cost Principles for Educational Institutions

SUMMARY: The Office of Management and Budget (OMB) revises OMB Circular

A-21, ``Cost Principles for Educational Institutions,'' by

incorporating four Cost Accounting Standards applicable to educational

institutions, issued by the Cost Accounting Standards Board (CASB) on

November 8, 1994 (59 FR 55746), and extending these standards to all

sponsored agreements. The revision also: requires certain large

institutions to disclose their cost accounting practices by the

submission of a Disclosure Statement prescribed by the CASB; amends the

definition of equipment; eliminates in 1998 the use of special cost

studies to allocate utility, library and student services costs; and,

requires the use of fixed facilities and administrative cost rates for

the life of sponsored agreements. Further, the revision establishes

cost negotiation cognizant agency responsibilities, replaces the term

``indirect costs'' with ``facilities and administrative costs'' (to

describe more accurately the various cost components of sponsored

agreements), clarifies the policy for a change from use allowance to

depreciation, adds criteria to interest allowability, and disallows

tuition benefits for employee family members. Finally, the revision

rescinds OMB Circular A-88, ``Indirect Cost Rates, Audits, and Audit

Follow-up at Educational Institutions,'' in its entirety. The

recompilation of Circular A-21 in its entirety appears after the

revision.

EFFECTIVE DATES: The effective date of this revision of Circular A-21

is May 8, l996, unless otherwise noted within this revision. Circular

A-88 is rescinded effective July 1, l996.

FOR FURTHER INFORMATION: Educational institutions should contact the

educational institution's cognizant Federal agency. Federal agencies

should contact Gilbert Tran, Office of Financial Federal Financial

Management, Office of Management and Budget, (202) 395-3993.

SUPPLEMENTARY INFORMATION:

A. Purpose of Circular A-21

Office of Management and Budget (OMB) Circular A-21, ``Cost

Principles for Educational Institutions,'' establishes principles for

determining costs applicable to Federal grants, contracts, and other

sponsored agreements with educational institutions.

B. Recent Prior Revisions

Circular A-21 was last amended in 1991 and 1993 (56 FR 50224 of 10/

1/91 and 58 FR 39996 of 7/15/93, respectively). The 1991 revisions made

certain specified costs unallowable for Federal reimbursement and

placed a limit on the amount of reimbursable administrative costs. That

revision also required a certification to accompany each rate proposal.

The 1991 revisions also added Exhibit A containing a list of colleges

and universities subject to Section J.12.F, Depreciation and Use

Allowance. The 1993 revisions further clarified and standardized the

Circular's principles for determining allowable costs.

C. Current Revisions

On February 6, 1995, OMB proposed revisions in 60 FR 7104 and 60 FR

7106. In 60 FR 7104, OMB proposed the extension of the four cost

accounting standards (CAS) applicable to educational institutions to

all sponsored agreements and an amendment to the definition of

equipment. In 60 FR 7106, OMB proposed eight additional revisions,

including the rescission of OMB Circular A-88, ``Indirect Cost Rate,

Audits, and Audit Follow-up at Educational Institutions,'' and

mentioned six other revisions for future consideration.

Circular A-21 is revised to:

1. Incorporate the four CAS (48 CFR 9905) and the Disclosure

Statement (the Cost Accounting Standards Board's (CASB) form DS-2) and

associated administrative requirements promulgated by the CASB for

educational institutions. This action will extend the four CAS to all

sponsored agreements (see Sections C.10, 11, 12 and 13 and Appendix A)

and extend the applicability of the DS-2 (48 CFR 9903.202) to major

educational institutions (see Sections C.14, K.2.b and Appendix B).

Guidance for the implementation and administration of the CAS

requirements and the submission of required DS-2s is also provided.

2. Replace the term ``indirect'' costs with ``facilities and

administrative'' (F&A) costs. F&A costs are synonymous with

``indirect'' costs, as previously used in this Circular and as

currently used in Appendices A and B.

3. Eliminate the use of special cost studies to allocate utility,

library and student services costs effective July 1, 1998, at which

time an alternative methodology making payments on utility costs will

be in place (see Section E.2.d(5)).

4. Require Federal funding agencies to use F&A rates in effect at

the time of an initial award throughout the life of the sponsored

agreement (see Section G.7).

5. Rescind Circular A-88 and establish cost negotiation cognizance

for educational institutions and cognizant agency responsibilities in

Circular A-21 (see Section G.11).

6. Eliminate the allowability of dependent tuition benefits (see

Section J.8.f(2)).

7. Clarify the policy governing the transition from use allowance

to depreciation (see Section J.12.b.(3)).

8. Amend the definition of equipment by increasing the

capitalization threshold to the lesser of the amount used for financial

statement purposes or $5000 (see Section J.16).

9. Establish criteria for reimbursement of interest costs (see

Section J.22.f).

Circular A-21, as amended by this revision, consists of the

Circular published at 44 FR 12368 (2/26/79), as amended by Transmittal

Memoranda Numbers 1 through 5, at 47 FR 33658 (7/23/82), 51 FR 20908

(6/9/86), 51 FR 43487 (12/2/86), 56 FR 50224 (10/01/91), 58 FR 39996

(7/15/93), respectively, and the amendments herein. A recompilation of

the entire Circular A-21 with all its amendments to date appears at the

end of this notice and is available in electronic form on the OMB Home

Page at http://www.whitehouse.gov/WH/EOP/OMB, or in hard copy by

calling OMB's Publication Office at (202) 395-7332.

D. Paperwork Reduction Act

This revision includes an information collection requirement for

educational institutions receiving more than $25 million in federally-

sponsored agreements to file the CASB's DS-2. This revision's

information collection requirement covers more educational institutions

than those subject to CASB's regulatory requirement for filing the DS-

2, pursuant to Public Law 100-679, which was previously approved and

assigned OMB control number 0348-0055 (which expires August 31, 1997).

On February 6, 1995 (60 FR 7104), OMB requested comments on this

proposed information collection requirement in accordance with the

Paperwork Reduction Act (44 U.S.C. Chapter 35 et seq.). The proposed

information requirement will not be effective until another notice is

published in the Federal Register. The subsequent notice will provide

the effective date and the OMB control number.

[[Page 20881]]

E. Comments and Responses

OMB received about 200 comments from colleges and universities,

Federal agencies, professional organizations, and accounting firms. The

comments and OMB's responses are included in this notice. Several of

the comments resulted in modifications to OMB's original proposal.

The comments received and OMB's responses are summarized below.

Cost Accounting Standards (CAS) (Sections C.10-13 and Appendix A)

Comment: Many commenters stated that OMB Circular A-21 currently

provides adequate rules and guidelines regarding cost reimbursements

for Federal grants and contracts. Therefore, they argued that the

proposed incorporation of the CAS would duplicate Circular A-21's

requirements.

Response: OMB concurs that many of the requirements covered under

the CAS currently exist in OMB Circular A-21. However, the four CAS are

being incorporated since they provide more explicit provisions and

guidance regarding the consistent application of cost accounting

practices at educational institutions. To minimize potential conflict

between OMB policies and the Cost Accounting Standards Board (CASB)

regulations at 48 CFR 9903, the CASB has committed to perform an

analysis to identify administrative requirements--especially those

relating to contract clauses, definitions of a cost accounting

practice, and the cost impact process--that may not be readily

adaptable to colleges and universities. The CASB will separately

evaluate the need to establish any unique or alternative provisions

that should be applied to colleges and universities based on the

changes in Circular A-21. Recognizing that the two sets of documents

should be compatible, the CASB will, within the limitations imposed by

the statutory requirements of the CASB's organic statute, examine the

administrative requirements issue in order to determine what

improvements can be made to the administrative requirements of the

CASB's rules as they effect colleges, universities and Federal

cognizant agencies.

Comment: The CAS language refers to contracts. Language in the

Circular needs to be amended to cover sponsored agreements.

Response: The CAS language in Sections C.10, 11, 12 and 13 and

Appendix A of the Circular has been changed to cover all forms of

sponsored agreements.

Comment: The proposal stated that the CAS provisions will not go

into effect on January 9, 1995; however, no other effective date was

provided. When will the CAS language become effective?

Response: For CAS-covered contracts, the CASB's effective date for

the application of CAS was January 9, 1995. For other sponsored

agreements, the application of CAS is effective for the educational

institution's fiscal year starting on or after the publication date of

this revision.

Comment: The CAS were intended for commercial enterprises and are

not appropriate for colleges and universities. Also, commercial

enterprises are not limited by a 26 percent administrative cap;

therefore, they can recover additional administrative costs to comply

with CAS.

Response: Commercial contractors are subject to 19 CAS. Only four

of those CAS are being applied to universities. The four CAS are for:

(1) consistency in estimating, accumulating and reporting costs; (2)

consistency in allocating costs incurred for the same purpose; (3)

accounting for unallowable costs; and, (4) cost accounting period.

Since these CAS merely strengthen the cost principles currently in

Circular A-21, the implementation of CAS should not significantly

increase burden or result in any additional costs to universities.

Comment: The revision limits an educational institution's

flexibility to take necessary or advantageous action in a changing

environment.

Response: The application of the four CAS should not limit an

educational institution's flexibility in a changing business

environment. The standards only require that costs be treated

consistently and, if an educational institution makes an accounting

change that materially impacts sponsored agreement reimbursement, then

the change and its impact need to be reported. These requirements

currently exist in Circular A-21. A change that converts a cost from

direct to F&A (during a period where an educational institution has a

predetermined F&A rate) normally is not considered a significant

change, because it does not have a material impact on sponsored

agreement reimbursement.

Comment: Limit CAS coverage to sponsored agreements in excess of

$500,000, which is consistent with CAS coverage of contracts. Some

universities have several thousand agreements. Most of them are smaller

than the $500,000 threshold. The smaller agreements should not be

covered by these requirements. To cover smaller agreements would hold

educational institutions to a higher standard than the industry's

standard. At issue is whether or not a cost impact proposal or some

other form of submission for an equitable adjustment should be made on

all agreements.

Response: The four CAS promote consistency in cost accounting

practices used by an educational institution to estimate, accumulate

and report costs charged against federally-sponsored agreements. These

underlining principles currently exist in Circular A-21 which covers

all sponsored agreements. The four CAS set forth more explicit

fundamental requirements, techniques and illustrations on how to comply

with these principles. Therefore, it is appropriate to extend these CAS

to all sponsored agreements.

Furthermore, a cost impact proposal is not required to be prepared

for each agreement when an educational institution changes accounting

practices. Instead, CAS regulations (48 CFR 9903.306 (e) and (f)) allow

the use of ``any other suitable technique'' for cost impact adjustment.

Thus, a cost impact adjustment could be done through the F&A cost

negotiation process and rate agreement if deemed appropriate by the

cognizant agency.

Comment: Educational institutions do not have sufficient funds to

build accounting systems effective enough to comply with CAS.

Commenters suggested an increase of the administrative cap of 26

percent of modified total direct costs (MTDC) to cover the increased

paperwork burden. Failing this, the commenters requested an increase of

the alternative administrative threshold rate from 24 percent, as

allowed in Section G.8, to 26 percent.

Response: Compliance with CAS should not require educational

institutions to acquire additional accounting systems. Since the CAS

only clarify existing provisions for sponsored agreements, existing

accounting systems that comply with Sec. ______.21, Standards for

financial management systems, in OMB Circular A-110, ``Uniform

Administrative Requirements for Grants and Agreements with Institutions

of Higher Education, Hospitals and Non-Profit Organizations,'' should

require no change.

Comment: The Circular should stipulate that Federal agencies retain

the latitude to permit certain administrative expenditures to be

charged directly to a project when they believe that these costs are

essential for the conduct of the project.

Response: Section C.11 states that ``all costs incurred for the

same purpose, in like circumstances, are either direct costs only or

F&A costs only with respect to final costs objectives.''

[[Page 20882]]

However, there are circumstances where it is appropriate to direct

charge costs, such as administrative and clerical salaries, when these

costs are normally charged indirectly. For example, direct charging of

these costs may be appropriate where a major project or activity

requires a significant level of administrative or clerical services and

individuals involved can be specifically identified with the project or

activity. In this example, the administrative or clerical service costs

are not incurred for the same purpose and under like circumstances as

are administrative and clerical service costs associated with general

university functions, such accounting operations or general

administrative activities, which do not result from specifically

identifiable requirements.

Comment: CAS definitions (for direct cost, ``indirect'' cost,

consistency and accounting change) are more limiting than in Circular

A-21. How will such inconsistencies between the two documents be

handled?

Response: Inconsistency in definitions and cost policy

interpretations do not exist between the two documents. To further

assure consistency between the two documents, all inquiries related to

the CAS applicable to educational institutions will be addressed by

OMB's Office of Federal Financial Management, in coordination with the

CASB.

Comment: The precision required by CAS would not be consistent with

future proposed systems of benchmarking, thresholds, caps, and other

limiting factors. OMB is sending out mixed messages.

Response: The purposes of the four CAS and future proposed

revisions to Circular A-21 are different. The four CAS incorporated in

the Circular serve to promote consistent treatment of estimated costs

proposed to the Federal Government and actual costs charged as

reimbursable cost against federally- sponsored agreements. The purposes

of the future proposed revisions are to assure the consistent treatment

of costs proposed and charged to federally-sponsored agreements.

Comment: Some small colleges have training grants with 8 percent

overhead limits. Could CAS requirements and disclosures be waived for

those educational institutions with low overhead rates (perhaps 10

percent)?

Response: Small colleges with less than $25 million in Federal

funding covered under this Circular will be subject to the CAS but are

exempt from the Disclosure Statement filing requirements.

Disclosure Statement (DS-2) (Section C.14 and Appendix B)

Comment: Many commenters express concerns that the preparation of

the Disclosure Statement (DS-2) can take as much as 2500 hours. A

suggestion was made to require a submission only for the year when the

educational institution is required to submit a F&A cost rate proposal.

Response: OMB disagrees that the DS-2 can take as much as 2500

hours to complete unless a university does not currently have adequate

written cost accounting policies. The DS-2 is a 20-page document that

provides a summary of an educational institution's cost accounting

system for Federal grants and contracts. The cost accounting practices

used for Federal grants and contracts should already be properly

documented as required by Subpart C, Sec. ______.21, Standards for

financial management systems, in OMB Circular A-110. Therefore, the

effort to summarize the existing practices in the DS-2 should not be

overly burdensome to complete.

In addition, educational institutions do not have to file the DS-2

on an annual basis. Educational institutions are only required to file

an initial DS-2 in accordance with the time frame described in Section

C.14 and thereafter, educational institutions only need to submit

amendments of sections affected by changes in cost accounting practices

deemed significant by the cognizant agency. Section C.14.d discourages

the resubmission of a complete, updated DS-2 except for extensive

changes.

Furthermore, the DS-2 submission is required only for educational

institutions receiving more than $25 million in federally-sponsored

agreements during their most recently completed fiscal year.

Comment: The paperwork burden imposed has not proven necessary and

the costs of providing the information outweigh the benefits to be

derived.

Response: OMB believes that the DS-2 requires no more information

than would normally be provided to the cognizant agency for review of

an educational institution's F&A cost rate proposal and for negotiation

of the associated rate agreement. OMB does not intend for the paperwork

to be an arduous process, rather a reasonable representation of the

accounting practices and policies that are used by the educational

institution in recovering costs under Federal sponsored programs.

Comment: The DS-2 will result in additional work and expense, but,

because of the 26 percent cap, educational institutions will not be

allowed to recover those amounts.

Response: OMB believes that the information required by the DS-2 is

of the type that historically should have been submitted during F&A

cost rate negotiations and made available for audits of grants and

contracts in accordance OMB Circular A-133, ``Audits of Institutions of

Higher Education and Other Non-Profit Institutions.'' Therefore, the

only additional time requirements should be to put the same information

in the format required by the DS-2 and to submit information on

accounting changes, as needed. Subsequently, the information will not

have to be resubmitted every time a rate proposal is submitted. Only

changes in cost accounting practices need to be addressed as the

changes are made. This should result in administrative cost savings in

the long term.

Comment: The revision should clarify what constitutes an accounting

change, and provide a materiality threshold so that insignificant

changes do not have to be reported.

Response: OMB does not intend for educational institutions to

report insignificant accounting changes. Sections C.14.d and g

emphasize that a change is to be reported and approved by the cognizant

agency only when ``the change is expected to have a material impact on

the educational institution's negotiated F&A rates * * *'' (emphasis

added). The determination of whether an accounting change is

significant and, therefore, requires an amendment to the DS-2 and

possibly a cost impact proposal is to be made by the cognizant agency.

However, educational institutions are prohibited under the allocability

clauses of the Circular from double-counting any costs to the Federal

Government which could result from a change in accounting.

Comment: There were many comments about confusion over the

submission dates for the initial DS-2 between the proposed dates stated

in the proposed revision to Circular A-21 and the dates published by

the CASB on November 8, 1994.

Response: In order to clarify the submission dates for the initial

DS-2, and to prevent confusion, the DS-2 submission dates in this

Circular for CAS-covered educational institutions are the same as those

published by the CASB on November 8, 1994. The DS-2 submission date for

educational institution not covered by the CASB requirements is six

months after the end of the fiscal year which starts after the

publication date of this revision. In addition, the cognizant agency

has the

[[Page 20883]]

authority to provide a filing date extension on a case-by-case basis,

unless the DS-2 submission date is defined by receipt of a CAS-covered

contract by the educational institution.

Comment: Small colleges and universities are disproportionately

affected by the DS-2 submission requirements since a small university

which received a CAS-covered contract and $25 million in sponsored

awards could have the same submission due date as the top 20

universities which receive substantially more Federal awards

(approximately $150 million or more).

Response: To provide consistency and avoid confusion among all

colleges and universities regarding the submission due dates for the

DS-2, OMB has revised the due dates to correspond with the due dates

published by the CASB. A cognizant agency has the authority to grant a

filing date extension.

Comment: A definition is needed for ``a component unit'' or the

previously-defined terms ``segment'' and ``a business unit'' should be

used.

Response: ``A component unit'' in Section C.14 is replaced with ``a

business unit.'' A business unit at colleges and universities means any

unit of an educational institution which is not divided into segments.

Segment means one of two or more divisions, campus locations, or other

subdivisions of an educational institution that operate as independent

organizational entities under the auspices of the parent educational

institution and report directly to an intermediary group office or the

governing central system office of the parent educational institution.

Comment: For those educational institutions that are required to

file a DS-2, there should be a transition time period (e.g., within one

year after submittal) in which the cognizant agency is required to

identify any procedures or descriptions that it believes would lead to

disallowance of costs in the future and the educational institution

should be given an opportunity to correct these procedures or

descriptions without a penalty. When the document is found acceptable

to the cognizant agency, then it should receive a written

acknowledgment that, in the agency's opinion, the document describes

acceptable practices. An educational institution would then only be

subject to disallowances if it is found to be violating its described

practices in such a way that unallowable costs were being incurred.

Response: OMB disagrees. The DS-2 should disclose the cost

accounting practices used to estimate, accumulate and report the costs

of sponsored agreements over the award periods of performance. If the

cognizant agency identifies established or disclosed cost accounting

practices that would lead to disallowance of costs, it would require

the educational institution to correct the practice and may also

compute a cost adjustment, if material, in accordance with Section

C.14.e.

Comment: Any subsequent cost adjustments for procedures that are

inconsistent with those disclosed in the DS-2 and result in unallowable

costs should be limited to the time period beginning after acceptance

of the DS-2 by the cognizant agency.

Response: While the purpose of the DS-2 is to disclose an

educational institution's current cost accounting practices and is

intended more for future purposes than for a review of past practices,

it may be necessary to make adjustments for some unallowable costs that

may have been reimbursed in the past. These adjustments will be made at

the discretion of the cognizant agency. Adjustments for the effects of

deviations from the practices disclosed in the DS-2 can occur only

after the filing. However, the effect of deviations by an educational

institution from established practices, whether or not a DS-2

submission is required, will continue to be subject to adjustments in

accordance with Section C.8.

Comment: In resolving questions about costs incurred, any claimed

disallowances should be based on requirements of Circular A-21 with

regards to allowability of costs and not some procedural issue related

to following a procedure described in the DS-2.

Response: OMB agrees that Circular A-21 should provide the basis of

allowability of costs. However, in some instances, the DS-2 will help

to clarify how such costs are allocated and may effect the

reimbursement of costs claimed as allocable and, therefore,

reimbursable costs.

Comment: The DS-2 will be difficult to manage when the reporting

entity manages grants from various locations. OMB should clarify

disclosure requirements for multi-campus and multi-location educational

institutions.

Response: OMB expects that educational institutions' accounting

policies would be the same, particularly if the locations are all

covered by the same cost pools. If this is not the case, OMB believes

that preparation of the DS-2 will help educational institutions to

develop consistent accounting policies. However, if for some justified

reasons various locations maintain different cost accounting practices,

a separate DS-2 should be submitted for each business unit as stated in

Section C.14.a.

Terminology (``Indirect'' Costs)

Comment: Most commenters agreed with the proposed change of

terminology from ``indirect'' costs to ``facilities and

administrative'' costs. However, some commenters noted that this change

will create confusion and conflicts with other OMB cost principles

circulars and OMB grants management circulars that still use the term

``indirect'' costs.

Response: OMB agrees that inconsistent terminology may cause short

term problems. However, this change is needed to more accurately

describe the several cost pools for sponsored agreements at educational

institutions. The replacement of the term ``indirect'' costs will be

limited to Circular A-21 and not extended to other OMB grants

management circulars because of the several cost pools that exist only

in Circular A-21. The term ``indirect'' costs still appears in Appendix

A--CASB's Cost Accounting Standards and Appendix B--Disclosure

Statement (DS-2) since these appendices are directly from the CASB's

regulations.

Special Cost Studies (Section E.2.d.)

Comment: The provision to limit special cost studies to allocate

utility, library and student costs should be delayed until reasonable

benchmarks can be established for the payment of these costs.

Response: Benchmark studies to develop alternative payment methods

for facility construction, utilities and library costs are currently

underway. In the meantime, due to the ambiguous nature of special cost

studies that were the source of disagreement between cognizant agencies

and institutions, OMB plans to make utility, library and student

services cost recoveries based on special cost studies unallowable

costs. This restriction's effective date is delayed until July 1, 1998

at which time OMB will have in place an alternative method to pay

utility costs. Utility, library and student services cost allocations

based on special cost studies will be disallowed for administrative and

facilities payment rates negotiated on or after July 1, 1998. The

special cost studies cannot be used to establish rates beyond fiscal

year ending in 1998, unless a rate agreement in effect at the time of

this publication extends beyond 1998, in which case the use of special

cost studies will terminate at the end of the rate agreement period.

OMB is currently reviewing proposals for

[[Page 20884]]

alternative methodologies for making payments on costs related to

utilities. OMB will publish the proposals for public comments prior to

July 1, 1997.

Comment: Instead of eliminating the special cost studies, OMB

should develop standards, methodology and criteria for conducting

special cost studies that would be acceptable for the Federal

Government.

Response: Special cost studies were cited as an example of an area

of potential abuse and source of disagreement and distrust between

cognizant agencies and institutions. Rather than try to devise a set of

complex parameters that would preclude any opportunity for abuse, OMB

decided to disallow any cost allocations based upon those studies and,

instead, to provide an alternative payment mechanism.

Fixed Rates (Section G.7)

Comment: Clarification of ``life of agreement'' is needed since a

project can extend over a long period of time exceeding ten or fifteen

years at times. Does it mean each continuing period of an award or each

competing renewal of an award? Fixed rates should only apply

prospectively to new awards. ``Life'' should mean each competitive

renewal period. A commenter suggested that a fixed rate apply for a

period of three years.

Response: OMB has clarified ``life of agreement'' to mean each new

competitive segment. A competitive segment is a period of years

approved for a project at the time of the award, usually three to five

years. Fixed rates will apply only to awards made after the publication

date of this revision.

Comment: A clarification is needed for the impact of a fixed rate

throughout the life of the award on the various types of rates, i.e.,

provisional, predetermined and fixed rates.

Response: The revision requires that the Federal funding agencies

use rates in effect at time of award throughout the life of the award,

using the negotiated rates (predetermined, fixed or provisional) at the

time of the award. For example, if an educational institution has a

provisional rate of 40 percent at the time of the award, the 40 percent

rate will be used for funding and reimbursement throughout the life of

that award. If an educational institution has predetermined rates of 40

percent (first year), 42 percent (second year) and 45 percent (third

year), then a five-year project would have rates of 40 percent (first

year), 42 percent (second year) and 45 percent (third, fourth and fifth

years).

When an educational institution does not have a negotiated rate

with the Federal Government at the time of the award (because the

educational institution is a new grantee or the parties cannot reach

agreement on a rate), the provisional rate used at the time of the

award will be adjusted after a rate is negotiated and approved by the

cognizant agency.

Comment: To implement a fixed rate throughout the life of an award

penalizes a university with growth in facility costs. This would

discourage colleges and universities from investing in facility costs.

Response: When entering into an agreement with educational

institutions to perform a specific project, it is only fair for the

Federal Government to commit funding and reimbursement based on the

conditions as they are understood to exist at that time. Most research

project activities remain in the same laboratory during the entire life

of the project and, therefore, the facility costs should remain at the

same level. A fixed rate throughout the life of an award would only

adversely affect an educational institution when, after the award date,

the educational institution moved the project into a more modern and

expensive facility. Therefore, for future awards, an educational

institution with growth in facility costs should seek to establish

future cost rates (fixed or predetermined) that reflect the growing

cost pattern.

Comment: It is not clear what rate is to be used when the

educational institution's rate is decreasing during the life of the

award.

Response: In the case of anticipated declining cost rates, the

educational institution should provide the basis for the anticipated

decline. Total funding for the award would reflect the anticipated

decline. If a declining cost rate is not anticipated at the time of

award, the educational institution may recover the costs at the rates

in effect at the time of the award.

Comment: Fixed rates should not be applied to primate centers that

are funded by the National Institutes of Health P-51 awards, since

these centers are involved in a very long-term agreement with the

Federal Government for specific research activities.

Response: The fixed rates concept does not apply to the seven

primate animal care facilities that are involved in special animal

research funded under the National Institutes of Health P-51--Primate

Research Center Grant. These centers are primarily federally-funded and

are involved in a very long-term agreement with the Federal Government.

The federally-funded F&A costs that make up the rates are used to

charge the educational institution's users of the facility and are

treated as program income and returned to the Federal awards.

Comment: Fixed rates should only be used for funding a total

project, regardless of Federal reimbursement of a university's F&A

costs. This policy is consistent with the funding and reimbursement

policies for grants by the National Science Foundation (NSF).

Response: Current NSF policies award a fixed amount (direct and F&A

costs) for the conduct of an entire project. This policy allows the

educational institution to recover more F&A costs than originally

budgeted as long as the total reimbursement for the project does not

exceed the funding for the total award. The revision in Section G.7

provides that a fixed rate shall be used for both funding and

reimbursement of F&A costs during an award's life (or a competitive

segment's life). This policy assures that the Federal Government is

receiving the level of services (i.e., research) agreed to by the

educational institution and the Federal agency when the award was made.

If the fixed rate concept is used only for funding of the award and not

reimbursement of F&A costs, during periods of increasing rates, while

the total funding for the award remains the same, then a shift of

funding available for direct costs to F&A costs would occur. Therefore,

the funding available for direct cost activities would decrease and so

would the level of services (or research).

Cost Negotiation Cognizance (Section G.11)

Comment: The Circular should address the effects that a change in

cost negotiation cognizance would have on an educational institution's

administrative functions.

Response: A change in cost negotiation cognizance should have no

impact on an educational institution's administrative functions. The

consolidation of cognizant agencies for cost negotiation will enhance

the consistency in the application and interpretations of the

Circular's cost principles and in the review of cost rate proposals.

Comment: Several commenters suggest that the period for cognizant

agency assignment should be ten years rather than five since

universities frequently negotiate multiple year rates for two or three

years.

Response: The assignment period for a cognizant agency will remain

at five years, as proposed. A five-year period assignment should

normally extend over more than two normal negotiation

[[Page 20885]]

cycles. Furthermore, since the funding pattern from particular Federal

agencies at a particular university usually does not change over a

short time period, the cognizance should remain reasonably stable.

Comment: One commenter suggests that financial statements rather

National Science Foundation (NSF) data should be used in the

determination of a cognizant agency.

Response: The preferable source for cognizant agency determination

would be the Schedule of Federal Awards, as required by OMB Circular A-

133, that accompanies an educational institution's financial

statements. However, information on the Schedules of Federal Awards has

not yet been automated in a Federal data base. Therefore, the best

source data are the most recent three years of data published by NSF in

its annual report (``Selected Data on Federal Support to Universities

and Colleges''), in the table at page 5, entitled ``Federal obligations

for science and engineering research and development to universities

and colleges, ranked by total amount received, by agency; fiscal

year.'' OMB is revising Circular A-133 which will establish a data base

that can be used for this purpose.

Comment: Which would be the cognizant agency for educational

institutions that do not receive either HHS or the Department of

Defense, Office of Naval Research (DOD) funding? One commenter

suggested that an agency which has a predominant interest and an on-

site presence should be the cognizant agency. The concern is that the

major funding agency may not have the authority to address cost issues

that impact its funded projects.

Response: The Circular has been revised to provide that an

educational institution will have an assigned cognizant agency even

when HHS or DOD provides little or no funding at that educational

institution. Cognizance is assigned to either HHS or DOD depending on

which of the two agencies (HHS or DOD) provides more funds to the

educational institution. In cases where neither HHS nor DOD provides

any funding, the cognizant agency assignment shall default to HHS.

Other arrangements for cognizance of a particular educational

institution may also be made based on mutual agreement by both HHS and

DOD.

Section G.11 also states that the cognizant agency is responsible

for coordinating the formal negotiation and arranging a pre-negotiation

conference if there is interest from another agency. This process

assures that an interested major funding agency is not precluded from

participating in the negotiation process.

Comment: The agency with Federal audit cognizance (established by

Circular A-133) and cost negotiation cognizance (established by

Circular A-21) should be the same for each educational institution.

Response: With the rescission of OMB A-88, which assigned a single

Federal cognizant agency for rate negotiation, audit and audit follow-

up, an educational institution may have two different agencies

responsible for audit and cost cognizance. OMB believes that the audit

function and cost negotiation functions are different functions. This

division of responsibility works effectively for State and local

governments under Circulars A-87, ``Cost Principles for State, Local

and Indian Tribal Governments'' (60 FR 26484; May 17, 1995), and A-128,

``Audits of State and Local Governments'' (50 FR 19114; May 10, 1985).

Comment: Which agency would be the cognizant cost negotiation

agency for the Federally-Funded Research and Development Centers

(FFRDCs) associated with educational institutions? Is the FFRDC

included in the total dollar amount received by the educational

institution for the determination of a cognizant agency?

Response: Federal responsibilities associated with FFRDCs are not

affected by the revision to Circular A-21. FFRDCs associated with

educational institutions are independent organizations that function

outside the operational activities of the educational institutions.

They are required to comply with the CAS and rules and regulations

issued by the CASB set forth in 48 CFR Chapter 99. The determination of

their cognizant agency will continue to be based on the primary funding

source. Federal funding to FFRDCs shall be excluded from the

determination of cost cognizance for an educational institution.

Comment: Several commenters suggested that Federal agencies do not

have the authority to use a F&A rate for a class of sponsored

agreements or a single agreement other than the negotiated rates. To

allow this would defeat the purpose of standardized rate agreements.

Response: Under normal circumstances, the negotiated rates

established between the educational institution and the cognizant

agency should be used by all agencies. The Circular has been revised to

state that only under special circumstances prescribed by law or

regulation can an agency use a rate other than the negotiated rate.

Comment: The proposed revision stated that cognizant assignments as

of December 31, 1995, will continue in effect through an educational

institution's fiscal years ending during 1997. Is this based on the

receipt of the educational institution's cost proposal or is it based

on the year for which the proposal is prepared?

Response: The transfer of cognizance assignment is based on the

receipt date of the cost proposal. The cognizant agency for an

educational institution as of December 31, 1995, is responsible for the

review and negotiation of rates for all cost proposals submitted to

that agency through fiscal years ending during 1997. The cognizant

agency is also responsible for any disputes or appeals that result from

proposals submitted through fiscal years ending during 1997.

Dependent Tuition Benefits (Section J.8)

Comment: Most commenters stated that dependent tuition benefits are

legitimate fringe benefit costs, as are health benefits, and are

commonly used by a university to attract the best faculty and staff.

This benefit should not be eliminated. A comparison of this benefit to

the private sector should not be made since the salary for faculty and

staff are typically much lower and university employees do not receive

some benefits offered by the private sector, such as stock options.

Eliminating the dependent tuition benefit will cause universities to

raise wages for their employees, thus ultimately resulting in higher

costs for Federal research.

Response: OMB disagrees for the following reasons:

(1) Some universities charge federally-sponsored agreements for

dependent tuition assistance even when there is no actual cost incurred

by the university. For example, in the four universities covered by a

recent General Accounting Office (GAO) study (``University Research--

U.S. Reimbursement of Tuition Costs for University Employee Family

Members,'' GAO/NSIAD-95-19), when a dependent attended the university

where an employee worked, the four universities charged tuition in full

or in part to federally-sponsored agreements. GAO's report provided an

example in which an institution ``would have charged $18,000 to the

fringe benefit pool for a child of a tenured faculty member attending

the university during 1993.'' Generally, provision of substantial

fringe benefits that do not in fact impose a measurable cost on an

entity are not a ``cost'' that is properly chargeable to the

government.

[[Page 20886]]

(2) Since 1977, the Federal Acquisition Regulation (FAR)(48 CFR

Subpart 31.205-44, ``Training and education costs''), which applies to

Federal contracts with commercial firms, has treated dependent tuition

benefit as an unallowable cost. This change was made because the

procurement regulation review committee, which studied changes to the

FAR in the mid 1970's, believed that there was no benefit to the

government from subsidizing tuition costs of employee family members.

(3) Dependent tuition benefits are unique to educational

institutions, i.e., they are not available as a normal business

practice for the private sector (subject to the FAR), State and local

governments (subject to OMB Circular A-87), and non-profit

organizations (subject to OMB Circular A-122, ``Cost Principles for

Non-Profit Organizations''). Allowing dependent tuition benefits to

educational institutions would provide allowable costs for only one

group of grantees and contractors.

(4) No evidence has been offered to support the comment that

compensation for educational institution faculty and staff currently is

much lower than compensation in the private sector for the same

discipline. If higher salary levels are required to attract faculty and

staff, then such salaries will be chargeable to Federal awards to the

extent allowable under this Circular and the terms of the awards.

Based on the above reasons, the Circular is revised to disallow

dependent tuition benefits for educational institutions' fiscal years

starting on or after September 30, 1998.

Comment: A phase-in period with an effective date of 1998 should be

allowed for the total elimination of this benefit.

Response: Given existing contractual commitments to faculty and

staff, the effective date for making the dependent tuition an

unallowable cost is the educational institution's fiscal years

beginning on or after September 30, 1998.

Use Allowance/Depreciation (Section J.12)

Comment: The educational institution should be allowed to

depreciate the remaining (full) value of the assets at the time of

conversion, using the depreciation rate until the assets are disposed.

Response: For claiming its costs on a single class of assets, an

educational institution always has the choice of selecting either the

use allowance or depreciation methodology. These two methodologies are

based on different cost reimbursement principles (i.e., use allowance

allows cost recovery beyond useful lives as long as the asset is in

use, while depreciation allows a quicker cost recovery based on a

depreciable life only). The selection of recovery method is up to the

educational institution.

Circular A-21 does not require the educational institution to

convert from the use allowance method to the depreciation method. The

revision in Section J.12.b.(3) simply clarifies that, in the case where

an educational institution, by its own choice, elects to convert from

use allowance to the depreciation method, the conversion should be made

as if the depreciation method had been used over the entire life of the

asset.

Additionally, the ``allocability principle'' in Section C.4 of

Circular A-21 states that ``a cost is allocable to a particular cost

objective if the goods or services involved are chargeable or

assignable to such cost objective in accordance with relative benefits

received or other equitable relationship'' (emphasis added). 44 FR

12368 (February 26, 1979). The allocability principle would be violated

if unclaimed costs could be charged to the future periods that do not

benefit from the use of the asset.

Comment: Circular A-21 should allow the use allowance method for

old buildings and the depreciation method for new buildings rather than

restrict the use of one method of reimbursement for one type of assets.

The provision should apply to new assets only and not all assets. The

commenter recommends changing the language to ``a combination of the

depreciation and use allowances may not be used for new assets.''

Response: Section J.12.d has provided that a combination of the

depreciation and use allowance may not be used, in like circumstances,

for a single class of assets. To allow the use of both methods for a

single class of assets would violate the consistent treatment principle

of the Circular, complicate the depreciation/use allowance calculation

process, and create inequities in the recovery of asset costs against

Federal programs. This provision prevents an educational institution

from both using depreciation to recover the cost of assets with useful

lives that are shorter than the average lives reflected in the use

allowance rates (50 years for buildings and 15 years for equipment) AND

using allowance for the recovery of assets with longer useful lives.

The mix of the two methods for a single class of assets is clearly

inequitable to the Federal Government since the use allowance method is

a simplified recovery method that is based on an averaging concept

which implicitly recognizes that certain assets within each broad

category have lives that differ from the average. OMB does not see the

need to change this policy since it is the educational institution's

choice to select the appropriate method of recovery for facility costs.

Comment: The provision should allow full recovery of assets that

are converted from use allowance to depreciation. This could be done by

allowing use allowance beyond the asset's depreciable ``life''--as long

as the assets are in use--until the full cost is recovered.

Authorization from the cognizant agency shall be obtained.

Response: OMB disagrees. If the depreciation method is used,

Section J.12.b.(5) provides that depreciation is not allowed on any

assets that have outlived their depreciable lives. However, Section

J.12.c.(3) allows a ``reasonable use allowance'' for any assets that

are considered to be fully depreciated after considering the amount of

depreciation previously charged to the Federal Government, the

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

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

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

purposed contemplated. The allowable amounts are determined by the

cognizant agency. This provision allows a use allowance for fully

depreciated assets only under the most extraordinary circumstances and

is not applicable when converting from use allowance to depreciation.

This provision is intended to permit reimbursement under unusual

circumstances where an asset is treated as having outlived its useful

life but nevertheless has future cost consequences that are not

recoverable through capitalized repair and replacement costs or as

current period expenses.

An example of a ``reasonable use allowance'' is for the use of an

electronic microscope by the educational institution after its useful

life. At the start of its service life, a reasonable estimate of the

useful life of an electronic microscope is five years. However, after

five years, when the asset is fully depreciated and its costs fully

recovered, if it is still functional and is used to support Federal

projects, then consideration may be given by the cognizant agency for a

reasonable use allowance. This approach results in cost savings both

for the educational institution and the Federal Government since the

educational institution could have replaced the old electronic

microscope with a new, more expensive

[[Page 20887]]

one and then appropriately charge a use allowance to the Federal

projects.

Equipment Definition (Section J.16)

Comment: The effective date of the equipment definition change

should be prior to the expiration of an educational institution's F&A

cost rate agreements.

Response: In order to simplify the transition, the effective date

of the equipment definition change will be at the beginning of the next

F&A cost rate agreement. An educational institution with predetermined

or fixed rates that wishes to raise its equipment threshold earlier

should contact its cognizant agency for approval. While educational

institutions are free to change their capitalization policy at any

time, there should be limitations as to when sponsoring agencies may

recognize the change. To do otherwise could result in direct costs and

F&A costs being reimbursed under conditions different from those upon

which the F&A cost rate was predicated. Federal sponsoring agencies are

to award, and grantees are to claim, costs in accordance with the

policies in effect at the time the cost rate agreement was issued. At

the cognizant agency's discretion, revised cost rates may be

established based on an analysis of the impact on cost rates of the

conversion.

Comment: Clarification is needed on the treatment of depreciation

of those assets which had costs between the old $500 threshold and the

new $5000.

Response: In order to clarify the accounting for the unamortized

portion of any equipment costs as a result of a change in

capitalization levels, language has been added to Section J.16.a.(1) to

explain that the unamortized portion may be recovered by continuing to

claim the otherwise allowable use allowance or depreciation on the

equipment, or by amortizing the amount to be written off over a period

of years negotiated with the cognizant agency.

Interest Criteria (Section J.22)

General

Comment: Clarifications are needed for the calculations used in the

lease-purchase analysis and the cash-flow analysis.

Response: The commenter is correct. The Circular has been revised

to provide the following clarifications for the interest requirements.

A threshold of $500,000 has been set for the requirement of a lease-

purchase analysis for a facility acquisition, a cash-flow analysis is

required for debt arrangements over $1 million (when the initial equity

contribution by the educational institution is less than 25 percent),

and notification is required in case of a substantial relocation from a

building funded in part or whole through Federal reimbursements. The

same clarifications adopted in the final revision of the interest

provision of Circular A-122 (60 FR 52516), have been included in this

revision to Circular A-21 in Section J.22.f. This will maintain

conformity across the cost principles circulars.

Comment: The requirements under the interest criteria create an

additional administrative burden for colleges and universities in a

period when the administrative costs are already capped.

Response: OMB recognizes that there might be a nominal increase in

an administrative burden in a few cases. However, OMB believes that

these requirements are needed to protect the Federal Government against

abusive financing arrangements (such as ``balloon financing method''

where the entire principal amount is made at the end of the finance

term).

Comment: The requirements should only apply prospectively to future

asset acquisitions.

Response: OMB revises the provision in Section J.22.f to state that

the criteria for interest allowability in this revision apply only to

facilities and equipment acquired after the effective date of this

revision.

Comment: What are the reimbursement limitations when the least

expensive alternative is not chosen?

Response: As the revision in Section J.22.f states, when a lease-

purchase analysis is required to be performed, reimbursement will be

limited to the least expensive alternative available, whether or not it

is the chosen alternative.

Comment: Where a facility is acquired and the components are

depreciated over varying lives, can interest on debt associated with

fully depreciated assets be claimed?

Response: No. Under the allocability provisions of Section C.4.a,

interest costs on fully depreciated, retired, scrapped, or nonexistent

assets are unallowable.

Comment: Where a new facility is acquired or constructed with

excess capacity intended to meet future needs, can interest costs be

claimed for that portion of the facility that is currently excess and

not in use?

Response: No. Under the allocability provisions of Section C.4.a,

interest costs on excess or idle capacity are not allocable to Federal

programs and are, therefore, unallowable. This provision also applies

to any related costs, such as depreciation.

Lease-Purchase Analysis

Comment: A higher threshold should be established for the

requirement of the lease-purchase analysis. Thresholds of $50 million

and $25 million were recommended.

Response: Many commenters indicated that lease-purchase analyses

are generally performed by the educational institutions as a common

business practice. Such analyses normally are performed for assets

under the suggested $25 million threshold, whether or not Federal funds

are involved. The expense of the analysis is justified when one

considers the considerably greater amounts that are at stake in a real

estate lease or purchase. Also, by identifying the most economical

acquisition alternative, such analyses can pay for themselves. Section

C.3 of Circular A-21 requires that, to be allowable, costs must be

reasonable. A lease-purchase analysis provides such supporting

documentation. A threshold of $25 million or $50 million is simply too

high to protect the interests of the Federal Government

However, OMB recognizes that a lease-purchase analysis may not be

cost effective for smaller facility acquisitions. Therefore, a

threshold of $500,000 has been established in the final revision for

the lease-purchase analysis requirement for facilities. Additionally,

the analysis is not required to be submitted but is only to be

maintained on file for cognizant agency review upon request. There is

no requirement for a lease-purchase analysis for equipment.

Cash-Flow Analysis

Comment: The educational institution should have the option of

rolling forward the ``excess'' cash recovery to future years rather

than being disallowed in the year incurred since interest costs are

often based on a declining principal balance and are not spread evenly

over the life of the mortgage.

Response: The provision on ``excess'' cash flow addresses the

interest costs to the Federal Government in instances where cash flow

from depreciation exceeds debt principal payments (e.g., a ``balloon''

payment arrangement). In such case, where the entire principal amount

is paid at the end of the finance period, the cash flow received by the

educational institution for reimbursement of depreciation and interest

expenses on a facility would exceed the payments made by the

educational institution for interest and principal, thus resulting in

an excessive cash flow. The interest on the excess

[[Page 20888]]

cash flow should be deducted from interest costs in the year earned and

not spread out over the life of the mortgage since the Federal

Government pays its proportionate share of future period interest.

The provision requiring an adjustment to allowable interest for

positive cash flow does not result in a ``disallowance'' of

depreciation exceeding principal payments. When inflows exceed

outflows, earnings are to be imputed on the excess cash flow and offset

against interest costs for the 12-month period. The educational

institution, however, retains the excess cash flow which will be needed

during periods of negative cash flow.

A sample cash-flow analysis is presented hereafter.

Comment: The provision requires that earnings on positive cash

flows be offset against interest costs. If principal payments include

the cost of land, the positive cash flow and imputed earnings will be

understated.

Response: OMB agrees. While interest on debt to acquire land is

allowable, the cost of land is not. Accordingly, when computing cash

flows, each debt principal payment shall be reduced by an amount equal

to the portion of the principal payment attributed to the acquisition

of land. This requirement is included in Section J.22.f.

BILLING CODE 3110-01-P

[[Page 20889]]

[GRAPHIC] [TIFF OMITTED] TN08MY96.024

BILLING CODE 3110-01-C

[[Page 20890]]

Interagency Policy Group

Comment: The establishment of a Federal interagency group for the

development of grant and contract policy should be addressed in

Circular A-110 rather than Circular A-21. This group should include

representatives from colleges and universities.

Response: The commenter is correct that the interagency policy

group should be formed under broader auspices than just Circular A-21.

In response, the proposal has been deleted from the final revision of

this Circular. This proposal is not being pursued at this time.

Alice M. Rivlin,

Director.

EXECUTIVE OFFICE OF THE PRESIDENT

Office of Management and Budget

Circular No. A-21, Revised, Transmittal Memorandum No. 6.

To the Heads of Executive Departments and Establishments

Subject: Cost Principles for Educational Institutions.

April 26, 1996.

This transmittal memorandum revises OMB Circular No. A-21,

``Cost Principles for Educational Institutions.'' The attached

revision further clarifies and standardizes the Circular's

principles for determining costs applicable to grants, contracts,

and other agreements with educational institutions, and rescinds OMB

Circular A-88, ``Indirect Cost Rates, Audits, and Audit Follow-up at

Educational Institutions.'' This revision is effective on the date

of its publication in the Federal Register, unless otherwise noted

within this revision.

Also attached is a recompilation of Circular A-21 that consists

of the original Circular published at 44 FR 12368 (February 26,

1979), as amended by Transmittal Memoranda Numbers 1 through 5, at

47 FR 33658 (July 23, 1982), 51 FR 20908 (June 9, 1986), 51 FR 43487

(December 2, 1986), 56 FR 50224 (October 1, 1991), 58 FR 39996 (July

15, 1993), respectively, and the amendments herein.

Alice M. Rivlin,

Director.

Attachments.

I. Circular A-88 is rescinded, effective July 1, 1996.

II. Circular A-21 is revised as follows:

Revise Sections A, C, G, J and K as follows.

1. In Section A, add subsection 4 to read as follows: 4.

Inquiries. All inquiries from Federal agencies concerning the cost

principles contained in this Circular, including the administration

and implementation of the Cost Accounting Standards (CAS) (described

in Sections C.10 through C.13) and disclosure statement (DS-2)

requirements, shall be addressed by the Office of Management and

Budget (OMB), Office of Federal Financial Management, in

coordination with the Cost Accounting Standard Board (CASB) with

respect to inquiries concerning CAS. Educational institutions'

inquiries should be addressed to the cognizant agency.

2. In Section C, change subsection 8 as follows. 8. Collection

of unallowable costs, excess costs due to noncompliance with cost

policies, increased costs due to failure to follow a disclosed

accounting practice and increased costs resulting from a change in

cost accounting practice. The following costs shall be refunded

(including interest) in accordance with applicable Federal agency

regulations:

a. Costs specifically identified as unallowable in Section J,

either directly or indirectly, and charged to the Federal

Government.

b. Excess costs due to failure by the educational institution to

comply with the cost policies in this Circular.

c. Increased costs due to a noncompliant cost accounting

practice used to estimate, accumulate, or report costs.

d. Increased costs resulting from a change in accounting

practice.

3. In Section C, add subsection 10 to read as follows: 10.

Consistency in estimating, accumulating and reporting costs.

a. An educational institution's practices used in estimating

costs in pricing a proposal shall be consistent with the educational

institution's cost accounting practices used in accumulating and

reporting costs.

b. An educational institution's cost accounting practices used

in accumulating and reporting actual costs for a sponsored agreement

shall be consistent with the educational institution's practices

used in estimating costs in pricing the related proposal or

application.

c. The grouping of homogeneous costs in estimates prepared for

proposal purposes shall not per se be deemed an inconsistent

application of cost accounting practices under subsection a when

such costs are accumulated and reported in greater detail on an

actual cost basis during performance of the sponsored agreement.

d. Appendix A also reflects this requirement, along with the

purpose, definitions, and techniques for application, all of which

are authoritative.

4. In Section C, add subsection 11 to read as follows: 11.

Consistency in allocating costs incurred for the same purpose.

a. All costs incurred for the same purpose, in like

circumstances, are either direct costs only or F&A costs only with

respect to final cost objectives. No final cost objective shall have

allocated to it as a cost any cost, if other costs incurred for the

same purpose, in like circumstances, have been included as a direct

cost of that or any other final cost objective. Further, no final

cost objective shall have allocated to it as a direct cost any cost,

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

have been included in any F&A cost pool to be allocated to that or

any other final cost objective.

b. Appendix A reflects this requirement along with its purpose,

definitions, techniques for application, illustrations and

interpretations, all of which are authoritative.

5. In Section C, add subsection 12 to read as follows: 12.

Accounting for unallowable costs.

a. Costs expressly unallowable or mutually agreed to be

unallowable, including costs mutually agreed to be unallowable

directly associated costs, shall be identified and excluded from any

billing, claim, application, or proposal applicable to a sponsored

agreement.

b. Costs which specifically become designated as unallowable as

a result of a written decision furnished by a Federal official

pursuant to sponsored agreement disputes procedures shall be

identified if included in or used in the computation of any billing,

claim, or proposal applicable to a sponsored agreement. This

identification requirement applies also to any costs incurred for

the same purpose under like circumstances as the costs specifically

identified as unallowable under either this subsection or subsection

a.

c. Costs which, in a Federal official's written decision

furnished pursuant to sponsored agreement disputes procedures, are

designated as unallowable directly associated costs of unallowable

costs covered by either subsection a or b shall be accorded the

identification required by subsection b.

d. The costs of any work project not contractually authorized by

a sponsored agreement, whether or not related to performance of a

proposed or existing sponsored agreement, shall be accounted for, to

the extent appropriate, in a manner which permits ready separation

from the costs of authorized work projects.

e. All unallowable costs covered by subsections a through d

shall be subject to the same cost accounting principles governing

cost allocability as allowable costs. In circumstances where these

unallowable costs normally would be part of a regular F&A cost

allocation base or bases, they shall remain in such base or bases.

Where a directly associated cost is part of a category of costs

normally included in a F&A cost pool that shall be allocated over a

base containing the unallowable cost with which it is associated,

such a directly associated cost shall be retained in the F&A cost

pool and be allocated through the regular allocation process.

f. Where the total of the allocable and otherwise allowable

costs exceeds a limitation-of-cost or ceiling-price provision in a

sponsored agreement, full direct and F&A cost allocation shall be

made to the sponsored agreement cost objective, in accordance with

established cost accounting practices and standards which regularly

govern a given entity's allocations to sponsored agreement cost

objectives. In any determination of a cost overrun, the amount

thereof shall be identified in terms of the excess of allowable

costs over the ceiling amount, rather than through specific

identification of particular cost items or cost elements.

g. Appendix A reflects this requirement, along with its purpose,

definitions, techniques for application, and illustrations of this

standard, all of which are authoritative.

6. In Section C, add subsection 13 to read as follows: 13. Cost

accounting period.

a. Educational institutions shall use their fiscal year as their

cost accounting period, except that:

(1) Costs of a F&A function which exists for only a part of a

cost accounting period may

[[Page 20891]]

be allocated to cost objectives of that same part of the period on

the basis of data for that part of the cost accounting period if the

cost is: (i) material in amount, (ii) accumulated in a separate F&A

cost pool or expense pool, and (iii) allocated on the basis of an

appropriate direct measure of the activity or output of the function

during that part of the period.

(2) An annual period other than the fiscal year may, upon mutual

agreement with the Federal Government, be used as the cost

accounting period if the use of such period is an established

practice of the educational institution and is consistently used for

managing and controlling revenues and disbursements, and appropriate

accruals, deferrals or other adjustments are made with respect to

such annual periods.

(3) A transitional cost accounting period other than a year

shall be used whenever a change of fiscal year occurs.

b. An educational institution shall follow consistent practices

in the selection of the cost accounting period or periods in which

any types of expense and any types of adjustment to expense

(including prior-period adjustments) are accumulated and allocated.

c. The same cost accounting period shall be used for

accumulating costs in a F&A cost pool as for establishing its

allocation base, except that the Federal Government and educational

institution may agree to use a different period for establishing an

allocation base, provided:

(1) The practice is necessary to obtain significant

administrative convenience,

(2) The practice is consistently followed by the educational

institution,

(3) The annual period used is representative of the activity of

the cost accounting period for which the F&A costs to be allocated

are accumulated, and

(4) The practice can reasonably be estimated to provide a

distribution to cost objectives of the cost accounting period not

materially different from that which otherwise would be obtained.

d. Appendix A reflects this requirement, along with its purpose,

definitions, techniques for application and illustrations, all of

which are authoritative.

7. In Section C, add subsection 14 to read as follows: 14.

Disclosure Statement.

a. Educational institutions that received aggregate sponsored

agreements totaling $25 million or more subject to this Circular

during their most recently completed fiscal year shall disclose

their cost accounting practices by filing a Disclosure Statement

(DS-2), which is reproduced in Appendix B. With the approval of the

cognizant agency, an educational institution may meet the DS-2

submission by submitting the DS-2 for each business unit that

received $25 million or more in sponsored agreements.

b. The DS-2 shall be submitted to the cognizant agency with a

copy to the educational institution's audit cognizant office.

c. Educational institutions receiving $25 million or more in

sponsored agreements that are not required to file a DS-2 pursuant

to 48 CFR 9903.202-1 shall file a DS-2 covering the first fiscal

year beginning after the publication date of this revision, within

six months after the end of that fiscal year. Extensions beyond the

above due date may be granted by the cognizant agency on a case-by-

case basis.

d. Educational institutions are responsible for maintaining an

accurate DS-2 and complying with disclosed cost accounting

practices. Educational institutions must file amendments to the DS-2

when disclosed practices are changed to comply with a new or

modified standard, or when practices are changed for other reasons.

Amendments of a DS-2 may be submitted at any time. If the change is

expected to have a material impact on the educational institution's

negotiated F&A cost rates, the revision shall be approved by the

cognizant agency before it is implemented. Resubmission of a

complete, updated DS-2 is discouraged except when there are

extensive changes to disclosed practices.

e. Cost and funding adjustments. Cost adjustments shall be made

by the cognizant agency if an educational institution fails to

comply with the cost policies in this Circular or fails to

consistently follow its established or disclosed cost accounting

practices when estimating, accumulating or reporting the costs of

sponsored agreements, if aggregate cost impact on sponsored

agreements is material. The cost adjustment shall normally be made

on an aggregate basis for all affected sponsored agreements through

an adjustment of the educational institution's future F&A costs

rates or other means considered appropriate by the cognizant agency.

Under the terms of CAS-covered contracts, adjustments in the amount

of funding provided may also be required when the estimated proposal

costs were not determined in accordance with established cost

accounting practices.

f. Overpayments. Excess amounts paid in the aggregate by the

Federal Government under sponsored agreements due to a noncompliant

cost accounting practice used to estimate, accumulate, or report

costs shall be credited or refunded, as deemed appropriate by the

cognizant agency. Interest applicable to the excess amounts paid in

the aggregate during the period of noncompliance shall also be

determined and collected in accordance with applicable Federal

agency regulations.

g. Compliant cost accounting practice changes. Changes from one

compliant cost accounting practice to another compliant practice

that are approved by the cognizant agency may require cost

adjustments if the change has a material effect on sponsored

agreements and the changes are deemed appropriate by the cognizant

agency.

h. Responsibilities. The cognizant agency shall:

(1) Determine cost adjustments for all sponsored agreements in

the aggregate on behalf of the Federal Government. Actions of the

cognizant agency official in making cost adjustment determinations

shall be coordinated with all affected Federal agencies to the

extent necessary.

(2) Prescribe guidelines and establish internal procedures to

promptly determine on behalf of the Federal Government that a DS-2

adequately discloses the educational institution's cost accounting

practices and that the disclosed practices are compliant with

applicable CAS and the requirements of this Circular.

(3) Distribute to all affected agencies any DS-2 determination

of adequacy and/or noncompliance.

8. In Section E, add subsection 2.d(5) to read as follows:

2.d(5) Notwithstanding subsection (3), effective July 1, 1998, a

cost analysis study or base other than that in Section F shall not

be used to distribute utility, library or student services costs. By

that date, OMB shall have in place an alternative methodology for

making payments on costs related to utilities.

9. In Section G, add a new subsection 7 to read as follows, and

renumber all subsequent subsections from 7, 8 and 9 to 8, 9 and 10,

respectively: 7. Fixed rates for the life of the sponsored

agreement.

a. Federal agencies shall use the negotiated rates for F&A costs

in effect at the time of the initial award throughout the life of

the sponsored agreement. ``Life'' for the purpose of this subsection

means each competitive segment of a project. A competitive segment

is a period of years approved by the Federal funding agency at the

time of the award. If negotiated rate agreements do not extend

through the life of the sponsored agreement at the time of the

initial award, then the negotiated rate for the last year of the

sponsored agreement shall be extended through the end of the life of

the sponsored agreement. Award levels for sponsored agreements may

not be adjusted in future years as a result of changes in negotiated

rates.

b. When an educational institution does not have a negotiated

rate with the Federal Government at the time of the award (because

the educational institution is a new grantee or the parties cannot

reach agreement on a rate), the provisional rate used at the time of

the award shall be adjusted once a rate is negotiated and approved

by the cognizant agency.

10. In Section G, add subsection 11 to read as follows: 11.

Negotiation and approval of F&A rate.

a. Cognizant agency assignments. ``A cognizant agency'' means

the Federal agency responsible for negotiating and approving F&A

rates for an educational institution on behalf of all Federal

agencies.

(1) Cost negotiation cognizance is assigned to the Department of

Health and Human Services (HHS) or the Department of Defense's

Office of Naval Research (DOD), normally depending on which of the

two agencies (HHS or DOD) provides more funds to the educational

institution for the most recent three years. Information on funding

shall be derived from relevant data gathered by the National Science

Foundation. In cases where neither HHS nor DOD provides Federal

funding to an educational institution, the cognizant agency

assignment shall default to HHS. Notwithstanding the method for

cognizance determination described above, other arrangements for

cognizance of a particular educational institution may also be based

in part on the types of research performed at the educational

institution and

[[Page 20892]]

shall be decided based on mutual agreement between HHS and DOD.

(2) Cognizant assignments as of December 31, 1995, shall

continue in effect through educational institutions' fiscal years

ending during 1997, or the period covered by negotiated agreements

in effect on December 31, 1995, whichever is later, except for those

educational institutions with cognizant agencies other than HHS or

DOD. Cognizance for these educational institutions shall transfer to

HHS or DOD at the end of the period covered by the current

negotiated rate agreement. After cognizance is established, it shall

continue for a five-year period.

b. Acceptance of rates. The negotiated rates shall be accepted

by all Federal agencies. Only under special circumstances, when

required by law or regulation, may an agency use a rate different

from the negotiated rate for a class of sponsored agreements or a

single sponsored agreement.

c. Correcting deficiencies. The cognizant agency shall negotiate

changes needed to correct systems deficiencies relating to

accountability for sponsored agreements. Cognizant agencies shall

address the concerns of other affected agencies, as appropriate.

d. Resolving questioned costs. The cognizant agency shall

conduct any necessary negotiations with an educational institution

regarding amounts questioned by audit that are due the Federal

Government related to costs covered by a negotiated agreement.

e. Reimbursement. Reimbursement to cognizant agencies for work

performed under Circular A-21 may be made by reimbursement billing

under the Economy Act, 31 U.S.C. 1535.

f. Procedure for establishing facilities and administrative

rates. The cognizant agency shall arrange with the educational

institution to provide copies of rate proposals to all interested

agencies. Agencies wanting such copies should notify the cognizant

agency. Rates shall be established by one of the following methods:

(1) Formal negotiation. The cognizant agency is responsible for

negotiating and approving rates for an educational institution on

behalf of all Federal agencies. Non- cognizant Federal agencies,

which award sponsored agreements to an educational institution,

shall notify the cognizant agency of specific concerns (i.e., a need

to establish special cost rates) which could affect the negotiation

process. The cognizant agency shall address the concerns of all

interested agencies, as appropriate. A pre-negotiation conference

may be scheduled among all interested agencies, if necessary. The

cognizant agency shall then arrange a negotiation conference with

the educational institution.

(2) Other than formal negotiation. The cognizant agency and

educational institution may reach an agreement on rates without a

formal negotiation conference; for example, through correspondence

or use of the simplified method described in this Circular.

g. Formalizing determinations and agreements. The cognizant

agency shall formalize all determinations or agreements reached with

an educational institution and provide copies to other agencies

having an interest.

h. Disputes and disagreements. Where the cognizant agency is

unable to reach agreement with an educational institution with

regard to rates or audit resolution, the appeal system of the

cognizant agency shall be followed for resolution of the

disagreement.

11. In Section J, replace subsection 8.f.(2) to read as follows:

8.f.(2) Fringe benefits in the form of employer contributions or

expenses for social security, employee insurance, workmen's

compensation insurance, tuition or remission of tuition for

individual employees are allowable, provided such benefits are

granted in accordance with established educational institutional

policies, and are distributed to all institutional activities on an

equitable basis. Tuition benefits for family members other than the

employee are unallowable for fiscal years beginning after September

30, 1998. See Section J.41.b, Scholarships and student aid costs,

for treatment of tuition remission provided to students.

12. In Section J, add subsection 12.b.(3) to read as follows:

12.b.(3) Where the depreciation method is introduced to replace

the use allowance method, depreciation shall be computed as if the

asset had been depreciated over its entire life (i.e., from the date

the asset was acquired and ready for use to the date of disposal or

withdrawal from service). The aggregate amount of use allowances and

depreciation attributable to an asset (including imputed

depreciation applicable to periods prior to the conversion to the

use allowance method as well as depreciation after the conversion)

may be less than, and in no case, greater than the total acquisition

cost of the asset.

13. In Section J, add subsection 12 c.(4) to read as follows:

12.c.(4) Notwithstanding subsection(3), once an educational

institution converts from one cost recovery methodology to another,

acquisition costs not recovered may not be used in the calculation

of the use allowance in subsection(3).

14. In Section J, amend subsections 16.a.(1) and 16.b.(2) to

read as follows:

16.a.(1) ``Equipment'' means an article of nonexpendable,

tangible personal property having a useful life of more than one

year and an acquisition cost which equals or exceeds the lesser of

the capitalization level established by the organization for

financial statement purposes, or $5000. The unamortized portion of

any equipment written off as a result of a change in capitalization

levels may be recovered by continuing to claim the otherwise

allowable use allowances or depreciation on the equipment, or by

amortizing the amount to be written off over a period of years

negotiated with the cognizant agency.

16.b.(2) Expenditures for special purpose equipment are

allowable as direct charges with the approval of the sponsoring

agency.

15. In Section J, add subsection 22.f to read as follows:

22.f. Interest on debt incurred after the effective date of this

revision to acquire, replace or renovate capital assets (including

renovations, alterations, equipment, land, and capital assets

acquired through capital leases), acquired after the effective date

of this revision and used in support of sponsored agreements is

subject to the following conditions:

(1) For facilities costing over $500,000, the educational

institution shall prepare, prior to the acquisition or replacement

of the facility, a lease-purchase analysis in accordance with

Sec. ______.44 of OMB Circular A-110, which shows that a financed

purchase, including a capital lease is less costly to the

educational institution than other operating lease alternatives, on

a net present value basis. Discount rates used shall be equal to the

educational institution's anticipated interest rates and shall be no

higher than the fair market rate available to the educational

institution from an unrelated (``arm's length'') third-party. The

lease-purchase analysis shall include a comparison of the net

present value of the projected total cost comparisons of both

alternatives over the period the asset is expected to be used by the

educational institution. The cost comparisons associated with

purchasing the facility shall include the estimated purchase price,

anticipated operating and maintenance costs (including property

taxes, if applicable) not included in the debt financing, less any

estimated asset salvage value at the end of the defined period. The

cost comparison for a capital lease shall include the estimated

total lease payments, any estimated bargain purchase option,

operating and maintenance costs, and taxes not included in the

capital leasing arrangement, less any estimated credits due under

the lease at the end of the defined period. Projected operating

lease costs shall be based on the anticipated cost of leasing

comparable facilities at fair market rates under rental agreements

that would be renewed or reestablished over the period defined

above, and any expected maintenance costs and allowable property

taxes to be borne by the educational institution directly or as part

of the lease arrangement.

(2) The actual interest cost claimed is predicated upon interest

rates that are no higher than the fair market rate available to the

educational institution from an unrelated (arm's length) third

party.

(3) Investment earnings, including interest income on bond or

loan principal, pending payment of the construction or acquisition

costs, are used to offset allowable interest cost. Arbitrage

earnings reportable to the Internal Revenue Service are not required

to be offset against allowable interest costs.

(4) Reimbursements are limited to the least costly alternative

based on the total cost analysis required under subsection (1). For

example, if an operating lease is determined to be less costly than

purchasing through debt financing, then reimbursement is limited to

the amount determined if leasing had been used. In all cases where a

lease-purchase analysis is required to be performed, Federal

reimbursement shall be based upon the least expensive alternative.

(5) Educational institutions are also subject to the following

conditions:

(a) For debt arrangements over $1 million, unless the

educational institution makes an initial equity contribution to the

asset purchase of 25 percent or more, educational

[[Page 20893]]

institutions shall reduce claims for interest cost by an amount

equal to imputed interest earnings on excess cash flow, which is to

be calculated as follows. Annually, educational institutions shall

prepare a cumulative (from the inception of the project) report of

monthly cash flows that includes inflows and outflows, regardless of

the funding source. Inflows consist of depreciation expense,

amortization of capitalized construction interest, and annual

interest cost. For cash flow calculations, the annual inflow figures

shall be divided by the number of months in the year (i.e., usually

12) that the building is in service for monthly amounts. Outflows

consist of initial equity contributions, debt principal payments

(less the pro rata share attributable to the unallowable costs of

land) and interest payments. Where cumulative inflows exceed

cumulative outflows, interest shall be calculated on the excess

inflows for that period and be treated as a reduction to allowable

interest cost. The rate of interest to be used to compute earnings

on excess cash flows shall be the three-month Treasury bill closing

rate as of the last business day of that month.

(b) Substantial relocation of federally-sponsored activities

from a facility financed by indebtedness, the cost of which was

funded in whole or part through Federal reimbursements, to another

facility prior to the expiration of a period of 20 years requires

notice to the cognizant agency. The extent of the relocation, the

amount of the Federal participation in the financing, and the

depreciation and interest charged to date may require negotiation

and/or downward adjustments of replacement space charged to Federal

programs in the future.

(c) The allowable costs to acquire facilities and equipment are

limited to a fair market value available to the educational

institution from an unrelated (arm's length) third party.

(6) The following definitions are to be used for purposes of

this section:

(a) ``Initial equity contribution'' means the amount or value of

contributions made by non-Federal entities for the acquisition of

the asset prior to occupancy of facilities.

(b) ``Asset costs'' means the capitalizable costs of an asset,

including construction costs, acquisition costs, and other such

costs capitalized in accordance with Generally Accepted Accounting

Principles (GAAP).

16. In Section K, add an instruction and subsection 2.b(5) under

the ``Certificate of F&A Costs'' to read as follows:

For educational institutions that are required to file a DS-2 in

accordance with Section C.14, the following statement shall be added

to the ``Certificate of F&A Costs'':

(5) The rate proposal is prepared using the same cost accounting

practices that are disclosed in the DS-2, including its amendments

and revisions, filed with and approved by the cognizant agency.

17. Throughout the entire Circular, except for in Appendices A

and B, replace the term ``indirect costs'' with ``facilities and

administrative costs'' and make the following additional amendments:

a. In Section B, add the definition of facilities and

administrative (F&A) costs to read as follows:

4. Facilities and administrative (F&A) costs, for the purpose of

this Circular, means costs that are incurred for common or joint

objectives and, therefore, cannot be identified readily and

specifically with a particular sponsored project, an instructional

activity, or any other institutional activity. F&A costs are

synonymous with ``indirect'' costs, as previously used in this

Circular and as currently used in Appendices A and B. The F&A cost

categories are described in Section F.1.

b. In Section E, replace subsection 1 to read as follows:

1. General. F&A costs are those that are incurred for common or

joint objectives and therefore cannot be identified readily and

specifically with a particular sponsored project, an institutional

activity, or any other institutional activity. See Section F.1 for a

discussion of the components of F&A costs.

c. In Section E, replace subsection 2.e.(1) to read as follows:

2.e.(1) F&A costs are the broad categories of costs discussed in

Section F.1.

d. In Section F, replace the first sentence of subsection 1 to

read as follows:

1. Definition of Facilities and Administration. F&A costs are

broad categories of costs.

18. Add Appendices A and B for the CASB's Cost Accounting

Standards (CAS) and the CASB's Disclosure Statement (DS-2).

19. In OMB's recompilation of Circular A-21 and its six

Transmittal Memoranda, throughout the Circular, consistent

conventions were introduced, including some numbering changes,

punctuation changes, correction of typographical errors, etc. In

addition, in Section J, former subsections 29, ``Public information

services costs,'' and 39, ``Special services costs,'' were removed

since their contents were merged into subsections 1 and 3 in

Transmittal Memorandum No. 4.

EXECUTIVE OFFICE OF THE PRESIDENT

Office of Management and Budget

Circular No. A-21, Revised

To the Heads of Executive Departments and Establishments

Subject: Cost principles for educational institutions.

1. Purpose. This Circular establishes principles for determining

costs applicable to grants, contracts, and other agreements with

educational institutions . The principles deal with the subject of

cost determination, and make no attempt to identify the

circumstances or dictate the extent of agency and institutional

participation in the financing of a particular project. The

principles are designed to provide that the Federal Government bear

its fair share of total costs, determined in accordance with

generally accepted accounting principles, except where restricted or

prohibited by law. Agencies are not expected to place additional

restrictions on individual items of cost. Provision for profit or

other increment above cost is outside the scope of this Circular.

2. Supersession. The Circular supersedes Federal Management

Circular 73-8, dated December 19, 1973. FMC 73-8 is revised and

reissued under its original designation of OMB Circular No. A-21.

3. Applicability.

a. All Federal agencies that sponsor research and development,

training, and other work at educational institutions shall apply the

provisions of this Circular in determining the costs incurred for

such work. The principles shall also be used as a guide in the

pricing of fixed price or lump sum agreements.

b. In addition, Federally Funded Research and Development

Centers associated with educational institutions shall be required

to comply with the Cost Accounting Standards, rules and regulations

issued by the Cost Accounting Standards Board, and set forth in 48

CFR part 99; provided that they are subject thereto under defense

related contracts.

4. Responsibilities. The successful application of cost

accounting principles requires development of mutual understanding

between representatives of educational institutions and of the

Federal Government as to their scope, implementation, and

interpretation.

5. Attachment. The principles and related policy guides are set

forth in the Attachment, ``Principles for determining costs

applicable to grants, contracts, and other agreements with

educational institutions.''

6. Effective date. The provisions of this Circular shall be

effective October 1, 1979, except for subsequent amendments

incorporated herein for which the effective dates were specified in

six Transmittal Memoranda (47 FR 33658, 51 FR 20908, 51 FR 43487, 56

FR 50224, and 58 FR 39996 and [insert today's FR cite for this

Part]). The provisions shall be implemented by institutions as of

the start of their first fiscal year beginning after that date.

Earlier implementation, or a delay in implementation of individual

provisions, is permitted by mutual agreement between an institution

and the cognizant Federal agency.

7. Inquiries. Further information concerning this Circular may

be obtained by contacting the Office of Federal Financial

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

telephone (202) 395-3993.

Attachment.

Principles for Determining Costs Applicable to Grants, Contracts, and

Other Agreements With Educational Institutions

Table of Contents

A. Purpose and scope

1. Objectives

2. Policy guides

3. Application

4. Inquiries

B. Definition of terms

1. Major functions of an institution

2. Sponsored agreement

3. Allocation

4. Facilities and administrative (F&A) costs

C. Basic considerations

1. Composition of total costs

2. Factors affecting allowability of costs

3. Reasonable costs

4. Allocable costs

5. Applicable credits

6. Costs incurred by State and local governments

7. Limitations on allowance of costs

8. Collection of unallowable costs

[[Page 20894]]

9. Adjustment of previously negotiated F&A cost rates containing

unallowable costs

10. Consistency in estimating, accumulating and reporting costs

11. Consistency in allocating costs incurred for the same

purpose

12. Accounting for unallowable costs

13. Cost accounting period

14. Disclosure statement

D. Direct costs

1. General

2. Application to sponsored agreements

E. F&A costs

1. General

2. Criteria for distribution

F. Identification and assignment of F&A costs

1. Definition of Facilities and Administration

2. Depreciation and use allowances

3. Interest

4. Operation and maintenance expenses

5. General administration and general expenses

6. Departmental administration expenses

7. Sponsored projects administration

8. Library expenses

9. Student administration and services

10. Offset for F&A expenses otherwise provided for by the

Federal Government

G. Determination and application of F&A cost rate or rates

1. F&A cost pools

2. The distribution basis

3. Negotiated lump sum for F&A costs

4. Predetermined rates for F&A costs

5. Negotiated fixed rates and carry-forward provisions

6. Provisional and final rates for F&A costs

7. Fixed rates for the life of the sponsored agreement

8. Limitation on reimbursement of administrative costs

9. Alternative method for administrative costs

10. Individual rate components

11. Negotiation and approval of F&A rate

H. Simplified method for small institutions

1. General

2. Simplified procedure

I. Reserved

J. General provisions for selected items of cost

1. Advertising and public relations costs

2. Alcoholic beverages

3. Alumni/ae activities

4. Bad debts

5. Civil defense costs

6. Commencement and convocation costs

7. Communication costs

8. Compensation for personal services

9. Contingency provisions

10. Deans of faculty and graduate schools

11. Defense and prosecution of criminal and civil proceedings,

claims, appeals and patent infringement

12. Depreciation and use allowances

13. Donations and contributions

14. Employee morale, health, and welfare costs and credits

15. Entertainment costs

16. Equipment and other capital expenditures

17. Executive lobbying costs

18. Fines and penalties

19. Goods or services for personal use

20. Housing and personal living expenses

21. Insurance and indemnification

22. Interest, fund raising, and investment management costs

23. Labor relations costs

24. Lobbying

25. Losses on other sponsored agreements or contracts

26. Maintenance and repair costs

27. Material costs

28. Memberships, subscriptions and professional activity costs

29. Patent costs

30. Plant security costs

31. Preagreement costs

32. Professional services costs

33. Profits and losses on disposition of plant equipment or

other capital assets

34. Proposal costs

35. Rearrangement and alteration costs

36. Reconversion costs

37. Recruiting costs

38. Rental cost of buildings and equipment

39. Royalties and other costs for use of patents

40. Sabbatical leave costs

41. Scholarships and student aid costs

42. Selling and marketing

43. Severance pay

44. Specialized service facilities

45. Student activity costs

46. Taxes

47. Transportation costs

48. Travel costs

49. Termination costs applicable to sponsored agreements

50. Trustees

K. Certification of charges

Exhibit A--List of Colleges and Universities Subject to Section

J.12.f of Circular A-21

Appendix A--CASB's Cost Accounting Standards (CAS)

Appendix B--CASB's Disclosure Statement (DS-2)

Principles for Determining Costs Applicable to Grants, Contracts, and

Other Agreements With Educational Institutions

A. Purpose and Scope

1. Objectives. This Attachment provides principles for

determining the costs applicable to research and development,

training, and other sponsored work performed by colleges and

universities under grants, contracts, and other agreements with the

Federal Government. These agreements are referred to as sponsored

agreements.

2. Policy guides. The successful application of these cost

accounting principles requires development of mutual understanding

between representatives of universities and of the Federal

Government as to their scope, implementation, and interpretation. It

is recognized that--

a. The arrangements for Federal agency and institutional

participation in the financing of a research, training, or other

project are properly subject to negotiation between the agency and

the institution concerned, in accordance with such governmentwide

criteria or legal requirements as may be applicable.

b. Each institution, possessing its own unique combination of

staff, facilities, and experience, should be encouraged to conduct

research and educational activities in a manner consonant with its

own academic philosophies and institutional objectives.

c. The dual role of students engaged in research and the

resulting benefits to sponsored agreements are fundamental to the

research effort and shall be recognized in the application of these

principles.

d. Each institution, in the fulfillment of its obligations,

should employ sound management practices.

e. The application of these cost accounting principles should

require no significant changes in the generally accepted accounting

practices of colleges and universities. However, the accounting

practices of individual colleges and universities must support the

accumulation of costs as required by the principles, and must

provide for adequate documentation to support costs charged to

sponsored agreements.

f. Cognizant Federal agencies involved in negotiating facilities

and administrative (F&A) cost rates and auditing should assure that

institutions are generally applying these cost accounting principles

on a consistent basis. Where wide variations exist in the treatment

of a given cost item among institutions, the reasonableness and

equitableness of such treatments should be fully considered during

the rate negotiations and audit.

3. Application. These principles shall be used in determining

the allowable costs of work performed by colleges and universities

under sponsored agreements. The principles shall also be used in

determining the costs of work performed by such institutions under

subgrants, cost-reimbursement subcontracts, and other awards made to

them under sponsored agreements. They also shall be used as a guide

in the pricing of fixed-price contracts and subcontracts where costs

are used in determining the appropriate price. The principles do not

apply to:

a. Arrangements under which Federal financing is in the form of

loans, scholarships, fellowships, traineeships, or other fixed

amounts based on such items as education allowance or published

tuition rates and fees of an institution.

b. Capitation awards.

c. Other awards under which the institution is not required to

account to the Federal Government for actual costs incurred.

4. Inquiries. All inquiries from Federal agencies concerning the

cost principles contained in this Circular, including the

administration and implementation of the Cost Accounting Standards

(CAS) (described in Sections C.10 through C.13) and disclosure

statement (DS-2) requirements, shall be addressed by the Office of

Management and Budget (OMB), Office of Federal Financial Management,

in coordination with the Cost Accounting Standard Board (CASB) with

respect to inquiries concerning CAS. Educational institutions'

inquiries should be addressed to the cognizant agency.

B. Definition of Terms

1. Major functions of an institution refers to instruction,

organized research, other sponsored activities and other

institutional activities as defined below:

a. Instruction means the teaching and training activities of an

institution. Except for

[[Page 20895]]

research training as provided in subsection b, this term includes

all teaching and training activities, whether they are offered for

credits toward a degree or certificate or on a non-credit basis, and

whether they are offered through regular academic departments or

separate divisions, such as a summer school division or an extension

division. Also considered part of this major function are

departmental research, and, where agreed to, university research.

(1) Sponsored instruction and training means specific

instructional or training activity established by grant, contract,

or cooperative agreement. For purposes of the cost principles, this

activity may be considered a major function even though an

institution's accounting treatment may include it in the instruction

function.

(2) Departmental research means research, development and

scholarly activities that are not organized research and,

consequently, are not separately budgeted and accounted for.

Departmental research, for purposes of this document, is not

considered as a major function, but as a part of the instruction

function of the institution.

b. Organized research means all research and development

activities of an institution that are separately budgeted and

accounted for. It includes:

(1) Sponsored research means all research and development

activities that are sponsored by Federal and non-Federal agencies

and organizations . This term includes activities involving the

training of individuals in research techniques (commonly called

research training) where such activities utilize the same facilities

as other research and development activities and where such

activities are not included in the instruction function.

(2) University research means all research and development

activities that are separately budgeted and accounted for by the

institution under an internal application of institutional funds.

University research, for purposes of this document, shall be

combined with sponsored research under the function of organized

research.

c. Other sponsored activities means programs and projects

financed by Federal and non-Federal agencies and organizations which

involve the performance of work other than instruction and organized

research. Examples of such programs and projects are health service

projects, and community service programs. However, when any of these

activities are undertaken by the institution without outside

support, they may be classified as other institutional activities.

d. Other institutional activities means all activities of an

institution except:

(1) instruction, departmental research, organized research, and

other sponsored activities, as defined above;

(2) F&A cost activities identified in Section F; and

(3) specialized service facilities described in Section J.44.

Other institutional activities include operation of residence halls,

dining halls, hospitals and clinics, student unions, intercollegiate

athletics, bookstores, faculty housing, student apartments, guest

houses, chapels, theaters, public museums, and other similar

auxiliary enterprises. This definition also includes any other

categories of activities, costs of which are ``unallowable'' to

sponsored agreements, unless otherwise indicated in the agreements.

2. Sponsored agreement, for purposes of this Circular, means any

grant, contract, or other agreement between the institution and the

Federal Government.

3. Allocation means the process of assigning a cost, or a group

of costs, to one or more cost objective, in reasonable and realistic

proportion to the benefit provided or other equitable relationship.

A cost objective may be a major function of the institution, a

particular service or project, a sponsored agreement, or a F&A cost

activity, as described in Section F. The process may entail

assigning a cost(s) directly to a final cost objective or through

one or more intermediate cost objectives.

4.Facilities and administrative (F&A) costs, for the purpose of

this Circular, means costs that are incurred for common or joint

objectives and, therefore, cannot be identified readily and

specifically with a particular sponsored project, an instructional

activity, or any other institutional activity. F&A costs are

synonymous with ``indirect'' costs, as previously used in this

Circular and as currently used in Appendices A and B. The F&A cost

categories are described in Section F.1.

C. Basic Considerations

1. Composition of total costs. The cost of a sponsored agreement

is comprised of the allowable direct costs incident to its

performance, plus the allocable portion of the allowable F&A costs

of the institution, less applicable credits as described in

subsection 5.

2. Factors affecting allowability of costs. The tests of

allowability of costs under these principles are: (a) They must be

reasonable; (b) they must be allocable to sponsored agreements under

the principles and methods provided herein; (c) they must be given

consistent treatment through application of those generally accepted

accounting principles appropriate to the circumstances; and (d) they

must conform to any limitations or exclusions set forth in these

principles or in the sponsored agreement as to types or amounts of

cost items.

3. Reasonable costs. A cost may be considered reasonable if the

nature of the goods or services acquired or applied, and the amount

involved therefor, reflect the action that a prudent person would

have taken under the circumstances prevailing at the time the

decision to incur the cost was made. Major considerations involved

in the determination of the reasonableness of a cost are: (a)

whether or not the cost is of a type generally recognized as

necessary for the operation of the institution or the performance of

the sponsored agreement; (b) the restraints or requirements imposed

by such factors as arm's-length bargaining, Federal and State laws

and regulations, and sponsored agreement terms and conditions; (c)

whether or not the individuals concerned acted with due prudence in

the circumstances, considering their responsibilities to the

institution, its employees, its students, the Federal Government,

and the public at large; and, (d) the extent to which the actions

taken with respect to the incurrence of the cost are consistent with

established institutional policies and practices applicable to the

work of the institution generally, including sponsored agreements.

4. Allocable costs. a. A cost is allocable to a particular cost

objective (i.e., a specific function, project, sponsored agreement,

department, or the like) if the goods or services involved are

chargeable or assignable to such cost objective in accordance with

relative benefits received or other equitable relationship. Subject

to the foregoing, a cost is allocable to a sponsored agreement if

(1) it is incurred solely to advance the work under the sponsored

agreement; (2) it benefits both the sponsored agreement and other

work of the institution, in proportions that can be approximated

through use of reasonable methods, or (3) it is necessary to the

overall operation of the institution and, in light of the principles

provided in this Circular, is deemed to be assignable in part to

sponsored projects. Where the purchase of equipment or other capital

items is specifically authorized under a sponsored agreement, the

amounts thus authorized for such purchases are assignable to the

sponsored agreement regardless of the use that may subsequently be

made of the equipment or other capital items involved.

b. Any costs allocable to a particular sponsored agreement under

the standards provided in this Circular may not be shifted to other

sponsored agreements in order to meet deficiencies caused by

overruns or other fund considerations, to avoid restrictions imposed

by law or by terms of the sponsored agreement, or for other reasons

of convenience.

c. Any costs allocable to activities sponsored by industry,

foreign governments or other sponsors may not be shifted to

federally-sponsored agreements.

d. Allocation and documentation standard.

(1) Cost principles. The recipient institution is responsible

for ensuring that costs charged to a sponsored agreement are

allowable, allocable, and reasonable under these cost principles.

(2) Internal controls. The institution's financial management

system shall ensure that no one person has complete control over all

aspects of a financial transaction.

(3) Direct cost allocation principles. If a cost benefits two or

more projects or activities in proportions that can be determined

without undue effort or cost, the cost should be allocated to the

projects based on the proportional benefit. If a cost benefits two

or more projects or activities in proportions that cannot be

determined because of the interrelationship of the work involved,

then, notwithstanding subsection b, the costs may be allocated or

transferred to benefited projects on any reasonable basis,

consistent with subsections d. (1) and (2).

(4) Documentation. Federal requirements for documentation are

specified in this Circular, Circular A-110, ``Uniform Administrative

Requirements for Grants and Agreements with Institutions of Higher

Education, Hospitals, and Other Non-Profit

[[Page 20896]]

Organizations,'' and specific agency policies on cost transfers. If

the institution authorizes the principal investigator or other

individual to have primary responsibility, given the requirements of

subsection d.(2), for the management of sponsored agreement funds,

then the institution's documentation requirements for the actions of

those individuals (e.g., signature or initials of the principal

investigator or designee or use of a password) will normally be

considered sufficient.

5. Applicable credits. a. The term ``applicable credits'' refers

to those receipts or negative expenditures that operate to offset or

reduce direct or F&A cost items. Typical examples of such

transactions are: purchase discounts, rebates, or allowances;

recoveries or indemnities on losses; and adjustments of overpayments

or erroneous charges. This term also includes ``educational

discounts'' on products or services provided specifically to

educational institutions, such as discounts on computer equipment,

except where the arrangement is clearly and explicitly identified as

a gift by the vendor.

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

Government to finance institutional activities or service operations

should be treated as applicable credits. Specifically, the concept

of netting such credit items against related expenditures should be

applied by the institution in determining the rates or amounts to be

charged to sponsored agreements for services rendered whenever the

facilities or other resources used in providing such services have

been financed directly, in whole or in part, by Federal funds. (See

Sections F.10, J.12.a, and J.44 for areas of potential application

in the matter of direct Federal financing.)

6. Costs incurred by State and local governments. Costs incurred

or paid by State or local governments on behalf of their colleges

and universities for fringe benefit programs, such as pension costs

and FICA and any other costs specifically incurred on behalf of, and

in direct benefit to, the institutions, are allowable costs of such

institutions whether or not these costs are recorded in the

accounting records of the institutions, subject to the following:

a. The costs meet the requirements of subsections 1 through 5.

b. The costs are properly supported by cost allocation plans in

accordance with applicable Federal cost accounting principles.

c. The costs are not otherwise borne directly or indirectly by

the Federal Government.

7. Limitations on allowance of costs. Sponsored agreements may

be subject to statutory requirements that limit the allowance of

costs. When the maximum amount allowable under a limitation is less

than the total amount determined in accordance with the principles

in this Circular, the amount not recoverable under a sponsored

agreement may not be charged to other sponsored agreements.

8. Collection of unallowable costs, excess costs due to

noncompliance with cost policies, increased costs due to failure to

follow a disclosed accounting practice and increased costs resulting

from a change in cost accounting practice. The following costs shall

be refunded (including interest) in accordance with applicable

Federal agency regulations:

a. Costs specifically identified as unallowable in Section J,

either directly or indirectly, and charged to the Federal

Government.

b. Excess costs due to failure by the educational institution to

comply with the cost policies in this Circular.

c. Increased costs due to a noncompliant cost accounting

practice used to estimate, accumulate, or report costs.

d. Increased costs resulting from a change in accounting

practice.

9. Adjustment of previously negotiated F&A cost rates containing

unallowable costs. Negotiated F&A cost rates based on a proposal

later found to have included costs that (a) are unallowable as

specified by (i) law or regulation, (ii) Section J of this Circular,

(iii) terms and conditions of sponsored agreements, or (b) are

unallowable because they are clearly not allocable to sponsored

agreements, shall be adjusted, or a refund shall be made, in

accordance with the requirements of this section. These adjustments

or refunds are designed to correct the proposals used to establish

the rates and do not constitute a reopening of the rate negotiation.

The adjustments or refunds will be made regardless of the type of

rate negotiated (predetermined, final, fixed, or provisional).

a. For rates covering a future fiscal year of the institution,

the unallowable costs will be removed from the F&A cost pools and

the rates appropriately adjusted.

b. For rates covering a past period, the Federal share of the

unallowable costs will be computed for each year involved and a cash

refund (including interest chargeable in accordance with applicable

regulations) will be made to the Federal Government. If cash refunds

are made for past periods covered by provisional or fixed rates,

appropriate adjustments will be made when the rates are finalized to

avoid duplicate recovery of the unallowable costs by the Federal

Government.

c. For rates covering the current period, either a rate

adjustment or a refund, as described in subsections a and b, shall

be required by the cognizant agency. The choice of method shall be

at the discretion of the cognizant agency, based on its judgment as

to which method would be most practical.

d. The amount or proportion of unallowable costs included in

each year's rate will be assumed to be the same as the amount or

proportion of unallowable costs included in the base year proposal

used to establish the rate.

10. Consistency in estimating, accumulating and reporting costs.

a. An educational institution's practices used in estimating

costs in pricing a proposal shall be consistent with the educational

institution's cost accounting practices used in accumulating and

reporting costs.

b. An educational institution's cost accounting practices used

in accumulating and reporting actual costs for a sponsored agreement

shall be consistent with the educational institution's practices

used in estimating costs in pricing the related proposal or

application.

c. The grouping of homogeneous costs in estimates prepared for

proposal purposes shall not per se be deemed an inconsistent

application of cost accounting practices under subsection a when

such costs are accumulated and reported in greater detail on an

actual cost basis during performance of the sponsored agreement.

d. Appendix A also reflects this requirement, along with the

purpose, definitions, and techniques for application, all of which

are authoritative.

11. Consistency in allocating costs incurred for the same

purpose.

a. All costs incurred for the same purpose, in like

circumstances, are either direct costs only or F&A costs only with

respect to final cost objectives. No final cost objective shall have

allocated to it as a cost any cost, if other costs incurred for the

same purpose, in like circumstances, have been included as a direct

cost of that or any other final cost objective. Further, no final

cost objective shall have allocated to it as a direct cost any cost,

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

have been included in any F&A cost pool to be allocated to that or

any other final cost objective.

b. Appendix A reflects this requirement along with its purpose,

definitions, techniques for application, illustrations and

interpretations, all of which are authoritative.

12. Accounting for unallowable costs.

a. Costs expressly unallowable or mutually agreed to be

unallowable, including costs mutually agreed to be unallowable

directly associated costs, shall be identified and excluded from any

billing, claim, application, or proposal applicable to a sponsored

agreement.

b. Costs which specifically become designated as unallowable as

a result of a written decision furnished by a Federal official

pursuant to sponsored agreement disputes procedures shall be

identified if included in or used in the computation of any billing,

claim, or proposal applicable to a sponsored agreement. This

identification requirement applies also to any costs incurred for

the same purpose under like circumstances as the costs specifically

identified as unallowable under either this subsection or subsection

a.

c. Costs which, in a Federal official's written decision

furnished pursuant to sponsored agreement disputes procedures, are

designated as unallowable directly associated costs of unallowable

costs covered by either subsection a or b shall be accorded the

identification required by subsection b.

d. The costs of any work project not contractually authorized by

a sponsored agreement, whether or not related to performance of a

proposed or existing sponsored agreement, shall be accounted for, to

the extent appropriate, in a manner which permits ready separation

from the costs of authorized work projects.

e. All unallowable costs covered by subsections a through d

shall be subject to the same cost accounting principles governing

cost allocability as allowable costs. In circumstances where these

unallowable

[[Page 20897]]

costs normally would be part of a regular F&A cost allocation base

or bases, they shall remain in such base or bases. Where a directly

associated cost is part of a category of costs normally included in

a F&A cost pool that shall be allocated over a base containing the

unallowable cost with which it is associated, such a directly

associated cost shall be retained in the F&A cost pool and be

allocated through the regular allocation process.

f. Where the total of the allocable and otherwise allowable

costs exceeds a limitation-of-cost or ceiling-price provision in a

sponsored agreement, full direct and F&A cost allocation shall be

made to the sponsored agreement cost objective, in accordance with

established cost accounting practices and standards which regularly

govern a given entity's allocations to sponsored agreement cost

objectives. In any determination of a cost overrun, the amount

thereof shall be identified in terms of the excess of allowable

costs over the ceiling amount, rather than through specific

identification of particular cost items or cost elements.

g. Appendix A reflects this requirement, along with its purpose,

definitions, techniques for application, and illustrations of this

standard, all of which are authoritative.

13. Cost accounting period.

a. Educational institutions shall use their fiscal year as their

cost accounting period, except that:

(1) Costs of a F&A function which exists for only a part of a

cost accounting period may be allocated to cost objectives of that

same part of the period on the basis of data for that part of the

cost accounting period if the cost is: (i) material in amount, (ii)

accumulated in a separate F&A cost pool or expense pool, and (iii)

allocated on the basis of an appropriate direct measure of the

activity or output of the function during that part of the period.

(2) An annual period other than the fiscal year may, upon mutual

agreement with the Federal Government, be used as the cost

accounting period if the use of such period is an established

practice of the educational institution and is consistently used for

managing and controlling revenues and disbursements, and appropriate

accruals, deferrals or other adjustments are made with respect to

such annual periods.

(3) A transitional cost accounting period other than a year

shall be used whenever a change of fiscal year occurs.

b. An educational institution shall follow consistent practices

in the selection of the cost accounting period or periods in which

any types of expense and any types of adjustment to expense

(including prior-period adjustments) are accumulated and allocated.

c. The same cost accounting period shall be used for

accumulating costs in a F&A cost pool as for establishing its

allocation base, except that the Federal Government and educational

institution may agree to use a different period for establishing an

allocation base, provided:

(1) The practice is necessary to obtain significant

administrative convenience,

(2) The practice is consistently followed by the educational

institution,

(3) The annual period used is representative of the activity of

the cost accounting period for which the F&A costs to be allocated

are accumulated, and

(4) The practice can reasonably be estimated to provide a

distribution to cost objectives of the cost accounting period not

materially different from that which otherwise would be obtained.

d. Appendix A reflects this requirement, along with its purpose,

definitions, techniques for application and illustrations, all of

which are authoritative.

14. Disclosure Statement. a. Educational institutions that

received aggregate sponsored agreements totaling $25 million or more

subject to this Circular during their most recently completed fiscal

year shall disclose their cost accounting practices by filing a

Disclosure Statement (DS-2), which is reproduced in Appendix B. With

the approval of the cognizant agency, an educational institution may

meet the DS-2 submission by submitting the DS-2 for each business

unit that received $25 million or more in sponsored agreements.

b. The DS-2 shall be submitted to the cognizant agency with a

copy to the educational institution's audit cognizant office.

c. Educational institutions receiving $25 million or more in

sponsored agreements that are not required to file a DS-2 pursuant

to 48 CFR 9903.202-1 shall file a DS-2 covering the first fiscal

year beginning after the publication date of this revision, within

six months after the end of that fiscal year. Extensions beyond the

above due date may be granted by the cognizant agency on a case-by-

case basis.

d. Educational institutions are responsible for maintaining an

accurate DS-2 and complying with disclosed cost accounting

practices. Educational institutions must file amendments to the DS-2

when disclosed practices are changed to comply with a new or

modified standard, or when practices are changed for other reasons.

Amendments of a DS-2 may be submitted at any time. If the change is

expected to have a material impact on the educational institution's

negotiated F&A cost rates, the revision shall be approved by the

cognizant agency before it is implemented. Resubmission of a

complete, updated DS-2 is discouraged except when there are

extensive changes to disclosed practices.

e. Cost and funding adjustments. Cost adjustments shall be made

by the cognizant agency if an educational institution fails to

comply with the cost policies in this Circular or fails to

consistently follow its established or disclosed cost accounting

practices when estimating, accumulating or reporting the costs of

sponsored agreements, if aggregate cost impact on sponsored

agreements is material. The cost adjustment shall normally be made

on an aggregate basis for all affected sponsored agreements through

an adjustment of the educational institution's future F&A costs

rates or other means considered appropriate by the cognizant agency.

Under the terms of CAS-covered contracts, adjustments in the amount

of funding provided may also be required when the estimated proposal

costs were not determined in accordance with established cost

accounting practices.

f. Overpayments. Excess amounts paid in the aggregate by the

Federal Government under sponsored agreements due to a noncompliant

cost accounting practice used to estimate, accumulate, or report

costs shall be credited or refunded, as deemed appropriate by the

cognizant agency. Interest applicable to the excess amounts paid in

the aggregate during the period of noncompliance shall also be

determined and collected in accordance with applicable Federal

agency regulations.

g. Compliant cost accounting practice changes. Changes from one

compliant cost accounting practice to another compliant practice

that are approved by the cognizant agency may require cost

adjustments if the change has a material effect on sponsored

agreements and the changes are deemed appropriate by the cognizant

agency.

h. Responsibilities. The cognizant agency shall:

(1) Determine cost adjustments for all sponsored agreements in

the aggregate on behalf of the Federal Government. Actions of the

cognizant agency official in making cost adjustment determinations

shall be coordinated with all affected Federal agencies to the

extent necessary.

(2) Prescribe guidelines and establish internal procedures to

promptly determine on behalf of the Federal Government that a DS-2

adequately discloses the educational institution's cost accounting

practices and that the disclosed practices are compliant with

applicable CAS and the requirements of this Circular.

(3) Distribute to all affected agencies any DS-2 determination

of adequacy and/or noncompliance.

D. Direct Costs

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

specifically with a particular sponsored project, an instructional

activity, or any other institutional activity, or that can be

directly assigned to such activities relatively easily with a high

degree of accuracy. Costs incurred for the same purpose in like

circumstances must be treated consistently as either direct or F&A

costs. Where an institution treats a particular type of cost as a

direct cost of sponsored agreements, all costs incurred for the same

purpose in like circumstances shall be treated as direct costs of

all activities of the institution.

2. Application to sponsored agreements. Identification with the

sponsored work rather than the nature of the goods and services

involved is the determining factor in distinguishing direct from F&A

costs of sponsored agreements. Typical costs charged directly to a

sponsored agreement are the compensation of employees for

performance of work under the sponsored agreement, including related

fringe benefit costs to the extent they are consistently treated, in

like circumstances, by the institution as direct rather than F&A

costs; the costs of materials consumed or expended in the

performance of the work; and other items of expense

[[Page 20898]]

incurred for the sponsored agreement, including extraordinary

utility consumption. The cost of materials supplied from stock or

services rendered by specialized facilities or other institutional

service operations may be included as direct costs of sponsored

agreements, provided such items are consistently treated, in like

circumstances, by the institution as direct rather than F&A costs,

and are charged under a recognized method of computing actual costs,

and conform to generally accepted cost accounting practices

consistently followed by the institution.

E. F&A Costs

1. General. F&A costs are those that are incurred for common or

joint objectives and therefore cannot be identified readily and

specifically with a particular sponsored project, an instructional

activity, or any other institutional activity. See Section F.1 for a

discussion of the components of F&A costs.

2. Criteria for distribution. a. Base period. A base period for

distribution of F&A costs is the period during which the costs are

incurred. The base period normally should coincide with the fiscal

year established by the institution, but in any event the base

period should be so selected as to avoid inequities in the

distribution of costs.

b. Need for cost groupings. The overall objective of the F&A

cost allocation process is to distribute the F&A costs described in

Section F to the major functions of the institution in proportions

reasonably consistent with the nature and extent of their use of the

institution's resources. In order to achieve this objective, it may

be necessary to provide for selective distribution by establishing

separate groupings of cost within one or more of the F&A cost

categories referred to in subsection 1. In general, the cost

groupings established within a category should constitute, in each

case, a pool of those items of expense that are considered to be of

like nature in terms of their relative contribution to (or degree of

remoteness from) the particular cost objectives to which

distribution is appropriate. Cost groupings should be established

considering the general guides provided in subsection c. Each such

pool or cost grouping should then be distributed individually to the

related cost objectives, using the distribution base or method most

appropriate in the light of the guides set forth in subsection d.

c. General considerations on cost groupings. The extent to which

separate cost groupings and selective distribution would be

appropriate at an institution is a matter of judgment to be

determined on a case-by-case basis. Typical situations which may

warrant the establishment of two or more separate cost groupings

(based on account classification or analysis) within a F&A cost

category include but are not limited to the following:

(1) Where certain items or categories of expense relate solely

to one of the major functions of the institution or to less than all

functions, such expenses should be set aside as a separate cost

grouping for direct assignment or selective allocation in accordance

with the guides provided in subsections b and d.

(2) Where any types of expense ordinarily treated as general

administration or departmental administration are charged to

sponsored agreements as direct costs, expenses applicable to other

activities of the institution when incurred for the same purposes in

like circumstances must, through separate cost groupings, be

excluded from the F&A costs allocable to those sponsored agreements

and included in the direct cost of other activities for cost

allocation purposes.

(3) Where it is determined that certain expenses are for the

support of a service unit or facility whose output is susceptible of

measurement on a workload or other quantitative basis, such expenses

should be set aside as a separate cost grouping for distribution on

such basis to organized research, instructional, and other

activities at the institution or within the department.

(4) Where activities provide their own purchasing, personnel

administration, building maintenance or similar service, the

distribution of general administration and general expenses, or

operation and maintenance expenses to such activities should be

accomplished through cost groupings which include only that portion

of central F&A costs (such as for overall management) which are

properly allocable to such activities.

(5) Where the institution elects to treat fringe benefits as F&A

charges, such costs should be set aside as a separate cost grouping

for selective distribution to related cost objectives.

(6) The number of separate cost groupings within a category

should be held within practical limits, after taking into

consideration the materiality of the amounts involved and the degree

of precision attainable through less selective methods of

distribution.

d. Selection of distribution method.

(1) Actual conditions must be taken into account in selecting

the method or base to be used in distributing individual cost

groupings. The essential consideration in selecting a base is that

it be the one best suited for assigning the pool of costs to cost

objectives in accordance with benefits derived; a traceable cause

and effect relationship; or logic and reason, where neither benefit

nor cause and effect relationship is determinable.

(2) Where a cost grouping can be identified directly with the

cost objective benefited, it should be assigned to that cost

objective.

(3) Where the expenses in a cost grouping are more general in

nature, the distribution may be based on a cost analysis study which

results in an equitable distribution of the costs. Such cost

analysis studies may take into consideration weighting factors,

population, or space occupied if appropriate. Cost analysis studies,

however, must (a) be appropriately documented in sufficient detail

for subsequent review by the cognizant Federal agency, (b)

distribute the costs to the related cost objectives in accordance

with the relative benefits derived, (c) be statistically sound, (d)

be performed specifically at the institution at which the results

are to be used, and (e) be reviewed periodically, but not less

frequently than every two years, updated if necessary, and used

consistently. Any assumptions made in the study must be stated and

explained. The use of cost analysis studies and periodic changes in

the method of cost distribution must be fully justified.

(4) If a cost analysis study is not performed, or if the study

does not result in an equitable distribution of the costs, the

distribution shall be made in accordance with the appropriate base

cited in Section F, unless one of the following conditions is met:

(a) it can be demonstrated that the use of a different base would

result in a more equitable allocation of the costs, or that a more

readily available base would not increase the costs charged to

sponsored agreements, or (b) the institution qualifies for, and

elects to use, the simplified method for computing F&A cost rates

described in Section H.

(5) Notwithstanding subsection (3), effective July 1, 1998, a

cost analysis study or base other than that in Section F shall not

be used to distribute utility, library or student services costs. By

that date, OMB shall have in place an alternative methodology for

making payments on costs related to utilities.

e. Order of distribution. (1) F&A costs are the broad categories

of costs discussed in Section F.1.

(2) Depreciation and use allowances, operation and maintenance

expenses, and general administrative and general expenses should be

allocated in that order to the remaining F&A cost categories as well

as to the major functions and specialized service facilities of the

institution. Other cost categories may be allocated in the order

determined to be most appropriate by the institutions. When cross

allocation of costs is made as provided in subsection (3), this

order of allocation does not apply.

(3) Normally a F&A cost category will be considered closed once

it has been allocated to other cost objectives, and costs may not be

subsequently allocated to it. However, a cross allocation of costs

between two or more F&A cost categories may be used if such

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

cross allocation is used, an appropriate modification to the

composition of the F&A cost categories described in Section F is

required.

F. Identification and Assignment of F&A Costs

1. Definition of Facilities and Administration. F&A costs are

broad categories of costs. ``Facilities'' is defined as depreciation

and use allowances, interest on debt associated with certain

buildings, equipment and capital improvements, operation and

maintenance expenses, and library expenses. ``Administration'' is

defined as general administration and general expenses, departmental

administration, sponsored projects administration, student

administration and services, and all other types of expenditures not

listed specifically under one of the subcategories of Facilities

(including cross allocations from other pools).

2. Depreciation and use allowances. a. The expenses under this

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

capital improvements to land and buildings,

[[Page 20899]]

and equipment which are computed in accordance with Section J.12.

b. In the absence of the alternatives provided for in Section

E.2.d, the expenses included in this category shall be allocated in

the following manner:

(1) Depreciation or use allowances on buildings used exclusively

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

equipment used in such buildings, shall be assigned to that

function.

(2) Depreciation or use allowances on buildings used for more

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

such buildings, shall be allocated to the individual functions

performed in each building on the basis of usable square feet of

space, excluding common areas such as hallways, stairwells, and rest

rooms.

(3) Depreciation or use allowances on buildings, capital

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

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

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

each jointly used unit of space shall be allocated to benefiting

functions on the basis of:

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

wages of those individual functions benefiting from the use of that

space; or

(b) institution-wide employee FTEs or salaries and wages

applicable to the benefiting major functions (see Section B.1) of

the institution.

(4) Depreciation or use allowances on certain capital

improvements to land, such as paved parking areas, fences,

sidewalks, and the like, not included in the cost of buildings,

shall be allocated to user categories of students and employees on a

full-time equivalent basis. The amount allocated to the student

category shall be assigned to the instruction function of the

institution. The amount allocated to the employee category shall be

further allocated to the major functions of the institution in

proportion to the salaries and wages of all employees applicable to

those functions.

3. Interest. Interest on debt associated with certain buildings,

equipment and capital improvements, as defined in Sections J.22.e

and f, shall be classified as an expenditure under the category

Facilities. These costs shall be allocated in the same manner as the

depreciation or use allowances on the buildings, equipment and

capital improvements to which the interest relates.

4. Operation and maintenance expenses. a. The expenses under

this heading are those that have been incurred for the

administration, supervision, operation, maintenance, preservation,

and protection of the institution's physical plant. They include

expenses normally incurred for such items as janitorial and utility

services; repairs and ordinary or normal alterations of buildings,

furniture and equipment; care of grounds; maintenance and operation

of buildings and other plant facilities; security; earthquake and

disaster preparedness; environmental safety; hazardous waste

disposal; property, liability and all other insurance relating to

property; space and capital leasing; facility planning and

management; and, central receiving. The operation and maintenance

expense category should also include its allocable share of fringe

benefit costs, depreciation and use allowances, and interest costs.

b. In the absence of the alternatives provided for in Section

E.2.d, the expenses included in this category shall be allocated in

the same manner as described in subsection 2.b for depreciation and

use allowances.

5. General administration and general expenses. a. The expenses

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

executive and administrative offices of educational institutions and

other expense of a general character which do not relate solely to

any major function of the institution; i.e., solely to (1)

instruction, (2) organized research, (3) other sponsored activities,

or (4) other institutional activities. The general administration

and general expense category should also include its allocable share

of fringe benefit costs, operation and maintenance expense,

depreciation and use allowances, and interest costs. Examples of

general administration and general expenses include: those expenses

incurred by administrative offices that serve the entire university

system of which the institution is a part; central offices of the

institution such as the President's or Chancellor's office, the

offices for institution-wide financial management, business

services, budget and planning, personnel management, and safety and

risk management; the office of the General Counsel; and, the

operations of the central administrative management information

systems. General administration and general expenses shall not

include expenses incurred within non- university-wide deans'

offices, academic departments, organized research units, or similar

organizational units. (See subsection 6, Departmental administration

expenses.)

b. In the absence of the alternatives provided for in Section

E.2.d, the expenses included in this category shall be grouped first

according to common major functions of the institution to which they

render services or provide benefits. The aggregate expenses of each

group shall then be allocated to serviced or benefited functions on

the modified total cost basis. Modified total costs consist of the

same elements as those in Section G.2. When an activity included in

this F&A cost category provides a service or product to another

institution or organization, an appropriate adjustment must be made

to either the expenses or the basis of allocation or both, to assure

a proper allocation of costs.

6. Departmental administration expenses. a. The expenses under

this heading are those that have been incurred for administrative

and supporting services that benefit common or joint departmental

activities or objectives in academic deans' offices, academic

departments and divisions, and organized research units. Organized

research units include such units as institutes, study centers, and

research centers. Departmental administration expenses are subject

to the following limitations.

(1) Academic deans' offices. Salaries and operating expenses are

limited to those attributable to administrative functions.

(2) Academic departments:

(a) Salaries and fringe benefits attributable to the

administrative work (including bid and proposal preparation) of

faculty (including department heads), and other professional

personnel conducting research and/or instruction, shall be allowed

at a rate of 3.6 percent of modified total direct costs. This

category does not include professional business or professional

administrative officers. This allowance shall be added to the

computation of the F&A cost rate for major functions in Section G;

the expenses covered by the allowance shall be excluded from the

departmental administration cost pool. No documentation is required

to support this allowance.

(b) Other administrative and supporting expenses incurred within

academic departments are allowable provided they are treated

consistently in like circumstances. This would include expenses such

as the salaries of secretarial and clerical staffs, the salaries of

administrative officers and assistants, travel, office supplies,

stockrooms, and the like.

(3) Other fringe benefit costs applicable to the salaries and

wages included in subsections (1) and (2) are allowable, as well as

an appropriate share of general administration and general expenses,

operation and maintenance expenses, and depreciation and/or use

allowances.

(4) Federal agencies may authorize reimbursement of additional

costs for department heads and faculty only in exceptional cases

where an institution can demonstrate undue hardship or detriment to

project performance.

b. In developing the departmental administration cost pool,

special care should be exercised to ensure that costs incurred for

the same purpose in like circumstances are treated consistently as

either direct or F&A costs. For example, salaries of technical

staff, laboratory supplies (e.g., chemicals), telephone toll

charges, animals, animal care costs, computer costs, travel costs,

and specialized shop costs shall be treated as direct cost wherever

identifiable to a particular cost objective. Direct charging of

these costs may be accomplished through specific identification of

individual costs to benefiting cost objectives, or through recharge

centers or specialized service facilities, as appropriate under the

circumstances. The salaries of administrative and clerical staff

should normally be treated as F&A costs. Direct charging of these

costs may be appropriate where a major project or activity

explicitly budgets for administrative or clerical services and

individuals involved can be specifically identified with the project

or activity. Items such as office supplies, postage, local telephone

costs, and memberships shall normally be treated as F&A costs.

c. In the absence of the alternatives provided for in Section

E.2.d, the expenses included in this category shall be allocated as

follows:

(1) The administrative expenses of the dean's office of each

college and school shall

[[Page 20900]]

be allocated to the academic departments within that college or

school on the modified total cost basis.

(2) The administrative expenses of each academic department, and

the department's share of the expenses allocated in subsection (1)

shall be allocated to the appropriate functions of the department on

the modified total cost basis.

7. Sponsored projects administration. a. The expenses under this

heading are limited to those incurred by a separate organization(s)

established primarily to administer sponsored projects, including

such functions as grant and contract administration (Federal and

non-Federal), special security, purchasing, personnel,

administration, and editing and publishing of research and other

reports. They include the salaries and expenses of the head of such

organization, assistants, and immediate staff, together with the

salaries and expenses of personnel engaged in supporting activities

maintained by the organization, such as stock rooms, stenographic

pools and the like. This category also includes an allocable share

of fringe benefit costs, general administration and general

expenses, operation and maintenance expenses, depreciation/use

allowances. Appropriate adjustments will be made for services

provided to other functions or organizations.

b. In the absence of the alternatives provided for in Section

E.2.d, the expenses included in this category shall be allocated to

the major functions of the institution under which the sponsored

projects are conducted on the basis of the modified total cost of

sponsored projects.

c. An appropriate adjustment shall be made to eliminate any

duplicate charges to sponsored agreements when this category

includes similar or identical activities as those included in the

general administration and general expense category or other F&A

cost items, such as accounting, procurement, or personnel

administration.

8. Library expenses. a. The expenses under this heading are

those that have been incurred for the operation of the library,

including the cost of books and library materials purchased for the

library, less any items of library income that qualify as applicable

credits under Section C.5. The library expense category should also

include the fringe benefits applicable to the salaries and wages

included therein, an appropriate share of general administration and

general expense, operation and maintenance expense, and depreciation

and use allowances. Costs incurred in the purchases of rare books

(museum-type books) with no value to sponsored agreements should not

be allocated to them.

b. In the absence of the alternatives provided for in Section

E.2.d, the expenses included in this category shall be allocated

first on the basis of primary categories of users, including

students, professional employees, and other users.

(1) The student category shall consist of full-time equivalent

students enrolled at the institution, regardless of whether they

earn credits toward a degree or certificate.

(2) The professional employee category shall consist of all

faculty members and other professional employees of the institution,

on a full-time equivalent basis.

(3) The other users category shall consist of all other users of

library facilities.

c. Amount allocated in subsection b shall be assigned further as

follows:

(1) The amount in the student category shall be assigned to the

instruction function of the institution.

(2) The amount in the professional employee category shall be

assigned to the major functions of the institution in proportion to

the salaries and wages of all faculty members and other professional

employees applicable to those functions.

(3) The amount in the other users category shall be assigned to

the other institutional activities function of the institution.

9. Student administration and services. a. The expenses under

this heading are those that have been incurred for the

administration of student affairs and for services to students,

including expenses of such activities as deans of students,

admissions, registrar, counseling and placement services, student

advisers, student health and infirmary services, catalogs, and

commencements and convocations. The salaries of members of the

academic staff whose responsibilities to the institution require

administrative work that benefits sponsored projects may also be

included to the extent that the portion charged to student

administration is determined in accordance with Section J.8. This

expense category also includes the fringe benefit costs applicable

to the salaries and wages included therein, an appropriate share of

general administration and general expenses, operation and

maintenance, and use allowances and/or depreciation.

b. In the absence of the alternatives provided for in Section

E.2.d, the expenses in this category shall be allocated to the

instruction function, and subsequently to sponsored agreements in

that function.

10. Offset for F&A expenses otherwise provided for by the

Federal Government. a. The items to be accumulated under this

heading are the reimbursements and other payments from the Federal

Government which are made to the institution to support solely,

specifically, and directly, in whole or in part, any of the

administrative or service activities described in subsections 2

through 9.

b. The items in this group shall be treated as a credit to the

affected individual F&A cost category before that category is

allocated to benefiting functions.

G. Determination and Application of F&A Cost Rate or Rates

1. F&A cost pools. a. (1) Subject to subsection b, the separate

categories of F&A costs allocated to each major function of the

institution as prescribed in Section F shall be aggregated and

treated as a common pool for that function. The amount in each pool

shall be divided by the distribution base described in subsection 2

to arrive at a single F&A cost rate for each function.

(2) The rate for each function is used to distribute F&A costs

to individual sponsored agreements of that function. Since a common

pool is established for each major function of the institution, a

separate F&A cost rate would be established for each of the major

functions described in Section B.1 under which sponsored agreements

are carried out.

(3) Each institution's F&A cost rate process must be

appropriately designed to ensure that Federal sponsors do not in any

way subsidize the F&A costs of other sponsors, specifically

activities sponsored by industry and foreign governments.

Accordingly, each allocation method used to identify and allocate

the F&A cost pools, as described in Sections E.2 and F.2 through

F.9, must contain the full amount of the institution's modified

total costs or other appropriate units of measurement used to make

the computations. In addition, the final rate distribution base (as

defined in subsection 2) for each major function (organized

research, instruction, etc., as described in Section B.1) shall

contain all the programs or activities which utilize the F&A costs

allocated to that major function. At the time a F&A cost proposal is

submitted to a cognizant Federal agency, each institution must

describe the process it uses to ensure that Federal funds are not

used to subsidize industry and foreign government funded programs.

b. In some instances a single rate basis for use across the

board on all work within a major function at an institution may not

be appropriate. A single rate for research, for example, might not

take into account those different environmental factors and other

conditions which may affect substantially the F&A costs applicable

to a particular segment of research at the institution. A particular

segment of research may be that performed under a single sponsored

agreement or it may consist of research under a group of sponsored

agreements performed in a common environment. The environmental

factors are not limited to the physical location of the work. Other

important factors are the level of the administrative support

required, the nature of the facilities or other resources employed,

the scientific disciplines or technical skills involved, the

organizational arrangements used, or any combination thereof. Where

a particular segment of a sponsored agreement is performed within an

environment which appears to generate a significantly different

level of F&A costs, provisions should be made for a separate F&A

cost pool applicable to such work. The separate F&A cost pool should

be developed during the regular course of the rate determination

process and the separate F&A cost rate resulting therefrom should be

utilized; provided it is determined that (1) such F&A cost rate

differs significantly from that which would have been obtained under

subsection a, and (2) the volume of work to which such rate would

apply is material in relation to other sponsored agreements at the

institution.

2. The distribution basis. F&A costs shall be distributed to

applicable sponsored agreements and other benefiting activities

within each major function (see Section B.1) on the basis of

modified total direct costs, consisting of all salaries and wages,

fringe benefits, materials and supplies, services, travel, and

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

or subcontract (regardless of the period covered

[[Page 20901]]

by the subgrant or subcontract). Equipment, capital expenditures,

charges for patient care and tuition remissi

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