# Cost Principles for Educational Institutions

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URL: https://www.frixlaw.com/law-library/documents/fr%3A96-11111

## Record

- **Collection:** Federal Register
- **Document type:** Notice
- **Published:** May 8, 1996
- **Citation:** 61 FR 20880

## Text

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A-88 is rescinded effective July 1, l996.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 app

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A96-11111. Public record. Not legal advice.