Governmentwide Grants Management Requirements

OFFICE OF MANAGEMENT AND BUDGET

Governmentwide Grants Management Requirements

AGENCY: Office of Management and Budget.

ACTION: Proposed Revision of OMB Circulars A-21, A-87, A-102, A-110 and

A-122.

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SUMMARY: The Office of Management and Budget (OMB) proposes to revise

OMB Circulars A-21, ``Cost Principles for Educational Institutions,''

A-87, ``Cost Principles for State and Local Governments,'' A-102,

``Grants and Cooperative Agreements with State and Local Governments,''

A-110, ``Uniform Administrative Requirements for Grants and Agreements

with Institutions of Higher Education, Hospitals, and Other Non-Profit

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

Organizations,'' to provide a conditional exemption from OMB's grants

management requirements and a conditional class deviation from the

agencies' Grants Management Common Rule for certain Federal grant

programs with statutorily-authorized consolidated planning and

consolidated administrative funding, that are identified by a Federal

agency and approved by the head of the Executive department or

establishment. A recompiled Circular A-122 is also provided.

DATES: All comments on this proposal should be in writing and must be

received by July 14, 1997. Late comments will be considered to the

extent practicable.

ADDRESSES: Comments should be mailed to Grants Management Exemption

Docket, Office of Federal Financial Management, Office of Management

and Budget, Room 6025 New Executive Office Building, Washington, DC

20503. Electronic mail (E-mail) comments may be submitted via the

Internet to [email protected]. Please include the full body of E-

mail comments in the text of the message and not as an attachment.

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

mail address in the text of the message.

FOR FURTHER INFORMATION CONTACT: Barbara F. Kahlow, Office of Federal

Financial Management, Office of Management and Budget, (202) 395-3053.

The text of this proposed revision and of the current OMB Circulars A-

21, A-87, A-102, and A-110 are available electronically on the OMB Home

Page at http://www.whitehouse.gov/WH/EOP/omb. The text of a fully

recompiled Circular A-122 is appended to this proposal and will also be

available electronically on the OMB Home Page. The current version of

OMB Circulars A-21, A-87, A-102, and A-110 are available in paper

format by contacting the OMB Publications Office at (202) 395-7332.

SUPPLEMENTARY INFORMATION: The Administration believes in greater

[[Page 26578]]

flexibility for State-administered grant programs in return for greater

accountability. Therefore, the Office of Management and Budget (OMB)

proposes to revise OMB Circulars A-21, ``Cost Principles for

Educational Institutions,'' A-87, ``Cost Principles for State and Local

Governments,'' A-102, ``Grants and Cooperative Agreements with State

and Local Governments,'' A-110, ``Uniform Administrative Requirements

for Grants and Agreements with Institutions of Higher Education,

Hospitals, and Other Non-Profit Organizations,'' and A-122, ``Cost

Principles for Non-Profit Organizations,'' to provide a conditional

exemption from OMB's grants management requirements and a conditional

class deviation from the agencies' Grants Management Common Rule (GMCR)

for certain Federal grant programs with statutorily-authorized

consolidated planning and consolidated administrative funding, that are

identified by a Federal agency and approved by the head of the

Executive department or establishment.

This exemption could be granted to related Federal non-entitlement

grant programs which are administered by State and local governments

and which have the following characteristics: the related programs (1)

serve a common program purpose, (2) have specific statutorily-

authorized consolidated planning and consolidated administrative

funding, and (3) are administered by State agencies which are funded

mostly by non-Federal sources. In order to promote efficiency in the

State and local program administration of such related programs,

Federal agencies could exempt these covered State-administered, non-

entitlement grant programs from Federal grants management requirements

in OMB Circulars A-21, A-87, A-110, and A-122, and the GMCR. The

exemptions would be from all but the allocability-of-costs provisions

of Circulars A-21 (Section C, subpart 4), A-87 (Attachment A,

subsection C.3), and A-122 (Attachment A, subsection A.4), and from all

of the administrative requirements provisions of Circular A-110 and the

GMCR.

A Federal agency would have the discretion to exempt a Federal

grant program from the Federal grants management requirements. A

Federal agency shall consult with OMB during its consideration of

whether to grant such an exemption.

If a Federal agency exempts a Federal grant program from these

requirements, a State would only qualify if it adopts its own written

fiscal and administrative requirements for expending and accounting for

all funds, which are consistent with the provisions of OMB Circular A-

87, and extends such requirements to all subrecipients. These fiscal

and administrative requirements must be sufficiently specific to ensure

that: funds are used in compliance with all applicable Federal

statutory and regulatory provisions, costs are reasonable and necessary

for operating these programs, and funds are not to be used for general

expenses required to carry out other responsibilities of a State or its

subrecipients. If a State does not adopt such fiscal and administrative

requirements, then it would continue to be subject to the Federal

grants management requirements.

To provide such a conditional exemption, Section A.3 of Circular A-

21, Attachment A Section A.3 of Circular A-87, Section 2 of Circular A-

102, Subpart C of Circular A-110, and Attachment A Section A of

Circular A-122 are proposed for amendment.

Franklin D. Raines,

Director.

OMB proposes to add the following language: (1) As a new paragraph

d under A.3 Purpose and Scope, Application of Circular A-21; (2) as a

new paragraph e under Attachment A, A.3 Purpose and Scope, Application

of Circular A-87; (3) as a new paragraph j under Section 2, Post-award

Policies of Circular A-102; (4) as a new Section __.45 under Subpart C,

Post-award Requirements of Circular A-110; and, (5) as a new paragraph

7 under Attachment A, A. Basic Considerations of Circular A-122:

Conditional exemptions. OMB authorizes conditional exemption from

OMB administrative requirements and cost principles circulars for

certain Federal programs with statutorily-authorized consolidated

planning and consolidated administrative funding, that are identified

by a Federal agency and approved by the head of the Executive

department or establishment. A Federal agency shall consult with OMB

during its consideration of whether to grant such an exemption.

To promote efficiency in State and local program administration,

when Federal non-entitlement programs with common purposes have

specific statutorily-authorized consolidated planning and consolidated

administrative funding and where most of the State agency's resources

come from non-Federal sources, Federal agencies may exempt these

covered State-administered, non-entitlement grant programs from certain

OMB grants management requirements. The exemptions would be from all

but the allocability of costs provisions of OMB Circulars A-87

(Attachment A, subsection C.3), ``Cost Principles for State, Local, and

Indian Tribal Governments,'' A-21 (Section C, subpart 4), ``Cost

Principles for Educational Institutions,'' and A-122 (Attachment A,

subsection A.4), ``Cost Principles for Non-Profit Organizations,'' and

from all of the administrative requirements provisions of OMB Circular

A-110, ``Uniform Administrative Requirements for Grants and Agreements

with Institutions of Higher Education, Hospitals, and Other Non-Profit

Organizations,'' and the agencies' grants management common rule.

When a Federal agency provides this flexibility, as a prerequisite

to a State's exercising this option, a State must adopt its own written

fiscal and administrative requirements for expending and accounting for

all funds, which are consistent with the provisions of OMB Circular A-

87, and extend such policies to all subrecipients. These fiscal and

administrative requirements must be sufficiently specific to ensure

that: funds are used in compliance with all applicable Federal

statutory and regulatory provisions, costs are reasonable and necessary

for operating these programs, and funds are not to be used for general

expenses required to carry out other responsibilities of a State or its

subrecipients.

Appendix

OMB originally issued Circular A-122 on June 27, 1980 (45 FR

46022). OMB amended the Circular on April 25, 1984 (49 FR 18260), on

May 19, 1987 (52 FR 19788), and on September 29, 1995 (60 FR 52516).

This Appendix presents the fully recompiled Circular A-122. It reflects

all of the amendments and all of OMB's current editorial conventions,

and incorporates various non-substantive technical corrections. In

addition, the recompilation includes the following two clarifying

changes in Attachment B which reflect what has been OMB's

interpretation: (a) Under Idle facilities and idle capacity,

Subparagraph 16.b.(1) now reads ``They are necessary to meet

fluctuations in workload'' instead of ``They are unnecessary to meet

fluctuations in workload;'' and, (b) under Taxes, Subparagraph 47.a now

reads ``* * * based on an exemption afforded the Federal Government''

instead of ``* * * based on an exemption afforded the Government.''

The text of the recompiled Circular follows:

Circular No. A-122

Revised

[[Page 26579]]

Transmittal Memorandum No. 4

To the Heads of Executive Departments and Establishments

SUBJECT: Cost Principles for Non-Profit Organizations

This transmittal memorandum is a recompilation of Circular A-

122, ``Cost Principles for Non-Profit Organizations,'' that consists

of the original Circular published at 45 FR 46022 (June 27, 1980),

as amended by Transmittal Memoranda Numbers 1 through 3, at 49 FR

18260 (April 25, 1984), 52 FR 19788 (May 19, 1987), and 60 FR 52516

(September 29, 1995), respectively. This recompilation reflects all

of the amendments and all of the Office of Management and Budget's

current editorial conventions, and incorporates various non-

substantive technical corrections and two clarifying changes.

Franklin D. Raines

Director

Attachment

Circular No. A-122

Revised

To the Heads of Executive Departments and Establishments

Subject: Cost principles for non-profit organizations

1. Purpose. This Circular establishes principles for determining

costs of grants, contracts and other agreements with non-profit

organizations. It does not apply to colleges and universities which are

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

Principles for Educational Institutions''; State, local, and federally-

recognized Indian tribal governments which are covered by OMB Circular

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

hospitals. The principles are designed to provide that the Federal

Government bear its fair share of costs except where restricted or

prohibited by law. The principles do not attempt to prescribe the

extent of cost sharing or matching on grants, contracts, or other

agreements. However, such cost sharing or matching shall not be

accomplished through arbitrary limitations on individual cost elements

by Federal agencies. Provision for profit or other increment above cost

is outside the scope of this Circular.

2. Supersession. This Circular supersedes cost principles issued by

individual agencies for non-profit organizations.

3. Applicability.

a. These principles shall be used by all Federal agencies in

determining the costs of work performed by non-profit organizations

under grants, cooperative agreements, cost reimbursement contracts, and

other contracts in which costs are used in pricing, administration, or

settlement. All of these instruments are hereafter referred to as

awards. The principles do not apply to awards under which an

organization is not required to account to the Federal Government for

actual costs incurred.

b. All cost reimbursement subawards (subgrants, subcontracts, etc.)

are subject to those Federal cost principles applicable to the

particular organization concerned. Thus, if a subaward is to a non-

profit organization, this Circular shall apply; if a subaward is to a

commercial organization, the cost principles applicable to commercial

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

Circular A-21 shall apply; if a subaward is to a State, local, or

federally-recognized Indian tribal government, Circular A-87 shall

apply.

4. Definitions.

a. Non-profit organization means any corporation, trust,

association, cooperative, or other organization which:

(1) is operated primarily for scientific, educational, service,

charitable, or similar purposes in the public interest;

(2) is not organized primarily for profit; and

(3) uses its net proceeds to maintain, improve, and/or expand its

operations. For this purpose, the term ``non-profit organization''

excludes (i) colleges and universities; (ii) hospitals; (iii) State,

local, and federally-recognized Indian tribal governments; and (iv)

those non-profit organizations which are excluded from coverage of this

Circular in accordance with paragraph 5.

b. Prior approval means securing the awarding agency's permission

in advance to incur cost for those items that are designated as

requiring prior approval by the Circular. Generally this permission

will be in writing. Where an item of cost requiring prior approval is

specified in the budget of an award, approval of the budget constitutes

approval of that cost.

5. Exclusion of some non-profit organizations. Some non-profit

organizations, because of their size and nature of operations, can be

considered to be similar to commercial concerns for purpose of

applicability of cost principles. Such non-profit organizations shall

operate under Federal cost principles applicable to commercial

concerns. A listing of these organizations is contained in Attachment

C. Other organizations may be added from time to time.

6. Responsibilities. Agencies responsible for administering

programs that involve awards to non-profit organizations shall

implement the provisions of this Circular. Upon request, implementing

instruction shall be furnished to OMB. Agencies shall designate a

liaison official to serve as the agency representative on matters

relating to the implementation of this Circular. The name and title of

such representative shall be furnished to OMB within 30 days of the

date of this Circular.

7. Attachments. The principles and related policy guides are set

forth in the following Attachments:

Attachment A--General Principles

Attachment B--Selected Items of Cost

Attachment C--Non-Profit Organizations Not Subject To This Circular

8. Requests for exceptions. OMB may grant exceptions to the

requirements of this Circular when permissible under existing law.

However, in the interest of achieving maximum uniformity, exceptions

will be permitted only in highly unusual circumstances.

9. Effective Date. The provisions of this Circular are effective

immediately. Implementation shall be phased in by incorporating the

provisions into new awards made after the start of the organization's

next fiscal year. For existing awards, the new principles may be

applied if an organization and the cognizant Federal agency agree.

Earlier implementation, or a delay in implementation of individual

provisions, is also permitted by mutual agreement between an

organization and the cognizant Federal agency.

10. Inquiries. Further information concerning this Circular may be

obtained by contacting the Office of Federal Financial Management, OMB,

Washington, DC 20503, telephone (202) 395-3993.

Attachments

Circular No. A-122

Attachment A--General Principles

Table of Contents

A. Basic Considerations

1. Composition of total costs

2. Factors affecting allowability of costs

3. Reasonable costs

4. Allocable costs

5. Applicable credits

6. Advance understandings

B. Direct Costs

C. Indirect Costs

D. Allocation of Indirect Costs and Determination of Indirect Cost

Rates

1. General

2. Simplified allocation method

3. Multiple allocation base method

4. Direct allocation method

5. Special indirect cost rates

E. Negotiation and Approval of Indirect Cost Rates

1. Definitions

2. Negotiations and approval of rates

[[Page 26580]]

Circular No. A-122

Attachment A--General Principles

A. Basic Considerations

1. Composition of total costs. The total cost of an award is the

sum of the allowable direct and allocable indirect costs less any

applicable credits.

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

an award, costs must meet the following general criteria:

a. Be reasonable for the performance of the award and be allocable

thereto under these principles.

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

principles or in the award as to types or amount of cost items.

c. Be consistent with policies and procedures that apply uniformly

to both federally-financed and other activities of the organization.

d. Be accorded consistent treatment.

e. Be determined in accordance with generally accepted accounting

principles (GAAP).

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

matching requirements of any other federally-financed program in either

the current or a prior period.

g. Be adequately documented.

3. Reasonable costs. A cost is reasonable if, in its nature or

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

person under the circumstances prevailing at the time the decision was

made to incur the costs. The question of the reasonableness of specific

costs must be scrutinized with particular care in connection with

organizations or separate divisions thereof which receive the

preponderance of their support from awards made by Federal agencies. In

determining the reasonableness of a given cost, consideration shall be

given to:

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

and necessary for the operation of the organization or the performance

of the award.

b. The restraints or requirements imposed by such factors as

generally accepted sound business practices, arms length bargaining,

Federal and State laws and regulations, and terms and conditions of the

award.

c. Whether the individuals concerned acted with prudence in the

circumstances, considering their responsibilities to the organization,

its members, employees, and clients, the public at large, and the

Federal Government.

d. Significant deviations from the established practices of the

organization which may unjustifiably increase the award costs.

4. Allocable costs.

a. A cost is allocable to a particular cost objective, such as a

grant, contract, project, service, or other activity, in accordance

with the relative benefits received. A cost is allocable to a Federal

award if it is treated consistently with other costs incurred for the

same purpose in like circumstances and if it:

(1) Is incurred specifically for the award.

(2) Benefits both the award and other work and can be distributed

in reasonable proportion to the benefits received, or

(3) Is necessary to the overall operation of the organization,

although a direct relationship to any particular cost objective cannot

be shown.

b. Any cost allocable to a particular award or other cost objective

under these principles may not be shifted to other Federal awards to

overcome funding deficiencies, or to avoid restrictions imposed by law

or by the terms of the award.

5. Applicable credits.

a. The term applicable credits refers to those receipts, or

reduction of expenditures which operate to offset or reduce expense

items that are allocable to awards as direct or indirect costs. Typical

examples of such transactions are: purchase discounts, rebates or

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

adjustments of overpayments or erroneous charges. To the extent that

such credits accruing or received by the organization relate to

allowable cost, they shall be credited to the Federal Government either

as a cost reduction or cash refund, as appropriate.

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

Government to finance organizational 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 organization in determining the rates or amounts to be

charged to Federal awards 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.

c. For rules covering program income (i.e., gross income earned

from federally-supported activities) see Sec. __.24 of Office of

Management and Budget (OMB) Circular A-110, ``Uniform Administrative

Requirements for Grants and Agreements with Institutions of Higher

Education, Hospitals, and Other Non-Profit Organizations.''

6. Advance understandings. Under any given award, the

reasonableness and allocability of certain items of costs may be

difficult to determine. This is particularly true in connection with

organizations that receive a preponderance of their support from

Federal agencies. In order to avoid subsequent disallowance or dispute

based on unreasonableness or nonallocability, it is often desirable to

seek a written agreement with the cognizant or awarding agency in

advance of the incurrence of special or unusual costs. The absence of

an advance agreement on any element of cost will not, in itself, affect

the reasonableness or allocability of that element.

B. Direct Costs

1. Direct costs are those that can be identified specifically with

a particular final cost objective, i.e., a particular award, project,

service, or other direct activity of an organization. However, a cost

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

incurred for the same purpose, in like circumstance, has been allocated

to an award as an indirect cost. Costs identified specifically with

awards are direct costs of the awards and are to be assigned directly

thereto. Costs identified specifically with other final cost objectives

of the organization are direct costs of those cost objectives and are

not to be assigned to other awards directly or indirectly.

2. Any direct cost of a minor amount may be treated as an indirect

cost for reasons of practicality where the accounting treatment for

such cost is consistently applied to all final cost objectives.

3. The cost of certain activities are not allowable as charges to

Federal awards (see, for example, fundraising costs in paragraph 19 of

Attachment B). However, even though these costs are unallowable for

purposes of computing charges to Federal awards, they nonetheless must

be treated as direct costs for purposes of determining indirect cost

rates and be allocated their share of the organization's indirect costs

if they represent activities which (1) include the salaries of

personnel, (2) occupy space, and (3) benefit from the organization's

indirect costs.

4. The costs of activities performed primarily as a service to

members, clients, or the general public when significant and necessary

to the organization's mission must be treated as direct costs whether

or not allowable and be allocated an equitable share of indirect costs.

Some examples of these types of activities include:

[[Page 26581]]

a. Maintenance of membership rolls, subscriptions, publications,

and related functions.

b. Providing services and information to members, legislative or

administrative bodies, or the public.

c. Promotion, lobbying, and other forms of public relations.

d. Meetings and conferences except those held to conduct the

general administration of the organization.

e. Maintenance, protection, and investment of special funds not

used in operation of the organization.

f. Administration of group benefits on behalf of members or

clients, including life and hospital insurance, annuity or retirement

plans, financial aid, etc.

C. Indirect Costs

1. Indirect costs are those that have been incurred for common or

joint objectives and cannot be readily identified with a particular

final cost objective. Direct cost of minor amounts may be treated as

indirect costs under the conditions described in subparagraph B.2.

After direct costs have been determined and assigned directly to awards

or other work as appropriate, indirect costs are those remaining to be

allocated to benefiting cost objectives. A cost may not be allocated to

an award as an indirect cost if any other cost incurred for the same

purpose, in like circumstances, has been assigned to an award as a

direct cost.

2. Because of the diverse characteristics and accounting practices

of non-profit organizations, it is not possible to specify the types of

cost which may be classified as indirect cost in all situations.

However, typical examples of indirect cost for many non-profit

organizations may include depreciation or use allowances on buildings

and equipment, the costs of operating and maintaining facilities, and

general administration and general expenses, such as the salaries and

expenses of executive officers, personnel administration, and

accounting.

D. Allocation of Indirect Costs and Determination of Indirect Cost

Rates

1. General.

a. Where a non-profit organization has only one major function, or

where all its major functions benefit from its indirect costs to

approximately the same degree, the allocation of indirect costs and the

computation of an indirect cost rate may be accomplished through

simplified allocation procedures, as described in subparagraph 2.

b. Where an organization has several major functions which benefit

from its indirect costs in varying degrees, allocation of indirect

costs may require the accumulation of such costs into separate cost

groupings which then are allocated individually to benefiting functions

by means of a base which best measures the relative degree of benefit.

The indirect costs allocated to each function are then distributed to

individual awards and other activities included in that function by

means of an indirect cost rate(s).

c. The determination of what constitutes an organization's major

functions will depend on its purpose in being; the types of services it

renders to the public, its clients, and its members; and the amount of

effort it devotes to such activities as fundraising, public information

and membership activities.

d. Specific methods for allocating indirect costs and computing

indirect cost rates along with the conditions under which each method

should be used are described in subparagraphs 2 through 5.

e. The base period for the allocation of indirect costs is the

period in which such costs are incurred and accumulated for allocation

to work performed in that period. The base period normally should

coincide with the organization's fiscal year but, in any event, shall

be so selected as to avoid inequities in the allocation of the costs.

2. Simplified allocation method.

a. Where an organization's major functions benefit from its

indirect costs to approximately the same degree, the allocation of

indirect costs may be accomplished by (i) separating the organization's

total costs for the base period as either direct or indirect, and (ii)

dividing the total allowable indirect costs (net of applicable credits)

by an equitable distribution base. The result of this process is an

indirect cost rate which is used to distribute indirect costs to

individual awards. The rate should be expressed as the percentage which

the total amount of allowable indirect costs bears to the base

selected. This method should also be used where an organization has

only one major function encompassing a number of individual projects or

activities, and may be used where the level of Federal awards to an

organization is relatively small.

b. Both the direct costs and the indirect costs shall exclude

capital expenditures and unallowable costs. However, unallowable costs

which represent activities must be included in the direct costs under

the conditions described in subparagraph B.3.

c. The distribution base may be total direct costs (excluding

capital expenditures and other distorting items, such as major

subcontracts or subgrants), direct salaries and wages, or other base

which results in an equitable distribution. The distribution base shall

generally exclude participant support costs as defined in paragraph 30

of Attachment B.

d. Except where a special rate(s) is required in accordance with

subparagraph 5, the indirect cost rate developed under the above

principles is applicable to all awards at the organization. If a

special rate(s) is required, appropriate modifications shall be made in

order to develop the special rate(s).

3. Multiple allocation base method.

a. Where an organization's indirect costs benefit its major

functions in varying degrees, such costs shall be accumulated into

separate cost groupings. Each grouping shall then be allocated

individually to benefiting functions by means of a base which best

measures the relative benefits.

b. The groupings shall be established so as to permit the

allocation of each grouping on the basis of benefits provided to the

major functions. Each grouping should constitute a pool of expenses

that are of like character in terms of the functions they benefit and

in terms of the allocation base which best measures the relative

benefits provided to each function. The number of separate groupings

should be held within practical limits, taking into consideration the

materiality of the amounts involved and the degree of precision

desired.

c. Actual conditions must be taken into account in selecting the

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

benefiting functions. When an allocation can be made by assignment of a

cost grouping directly to the function benefited, the allocation shall

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

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

selected base which produces results that are equitable to both the

Federal Government and the organization. In general, any cost element

or cost related factor associated with the organization's work is

potentially adaptable for use as an allocation base, provided (i) it

can readily be expressed in terms of dollars or other quantitative

measures (total direct costs, direct salaries and wages, staff hours

applied, square feet used, hours of usage, number of documents

processed, population served, and the like) and (ii) it is common to

the benefiting functions during the base period.

d. Except where a special indirect cost rate(s) is required in

accordance with subparagraph 5, the separate groupings

[[Page 26582]]

of indirect costs allocated to each major function shall be aggregated

and treated as a common pool for that function. The costs in the common

pool shall then be distributed to individual awards included in that

function by use of a single indirect cost rate.

e. The distribution base used in computing the indirect cost rate

for each function may be total direct costs (excluding capital

expenditures and other distorting items such as major subcontracts and

subgrants), direct salaries and wages, or other base which results in

an equitable distribution. The distribution base shall generally

exclude participant support costs as defined in paragraph 30,

Attachment B. An indirect cost rate should be developed for each

separate indirect cost pool developed. The rate in each case should be

stated as the percentage which the amount of the particular indirect

cost pool is of the distribution base identified with that pool.

4. Direct allocation method.

a. Some non-profit organizations treat all costs as direct costs

except general administration and general expenses. These organizations

generally separate their costs into three basic categories: (i) General

administration and general expenses, (ii) fundraising, and (iii) other

direct functions (including projects performed under Federal awards).

Joint costs, such as depreciation, rental costs, operation and

maintenance of facilities, telephone expenses, and the like are

prorated individually as direct costs to each category and to each

award or other activity using a base most appropriate to the particular

cost being prorated.

b. This method is acceptable, provided each joint cost is prorated

using a base which accurately measures the benefits provided to each

award or other activity. The bases must be established in accordance

with reasonable criteria, and be supported by current data. This method

is compatible with the Standards of Accounting and Financial Reporting

for Voluntary Health and Welfare Organizations issued jointly by the

National Health Council, Inc., the National Assembly of Voluntary

Health and Social Welfare Organizations, and the United Way of America.

c. Under this method, indirect costs consist exclusively of general

administration and general expenses. In all other respects, the

organization's indirect cost rates shall be computed in the same manner

as that described in subparagraph 2.

5. Special indirect cost rates. In some instances, a single

indirect cost rate for all activities of an organization or for each

major function of the organization may not be appropriate, since it

would not take into account those different factors which may

substantially affect the indirect costs applicable to a particular

segment of work. For this purpose, a particular segment of work may be

that performed under a single award or it may consist of work under a

group of awards performed in a common environment. These factors may

include the physical location of the work, the level of administrative

support required, the nature of the facilities or other resources

employed, the scientific disciplines or technical skills involved, the

organizational arrangements used, or any combination thereof. When a

particular segment of work is performed in an environment which appears

to generate a significantly different level of indirect costs,

provisions should be made for a separate indirect cost pool applicable

to such work. The separate indirect cost pool should be developed

during the course of the regular allocation process, and the separate

indirect cost rate resulting therefrom should be used, provided it is

determined that (i) the rate differs significantly from that which

would have been obtained under subparagraphs 2, 3, and 4, and (ii) the

volume of work to which the rate would apply is material.

E. Negotiation and Approval of Indirect Cost Rates

1. Definitions. As used in this section, the following terms have

the meanings set forth below:

a. Cognizant agency means the Federal agency responsible for

negotiating and approving indirect cost rates for a non-profit

organization on behalf of all Federal agencies.

b. Predetermined rate means an indirect cost rate, applicable to a

specified current or future period, usually the organization's fiscal

year. The rate is based on an estimate of the costs to be incurred

during the period. A predetermined rate is not subject to adjustment.

c. Fixed rate means an indirect cost rate which has the same

characteristics as a predetermined rate, except that the difference

between the estimated costs and the actual costs of the period covered

by the rate is carried forward as an adjustment to the rate computation

of a subsequent period.

d. Final rate means an indirect cost rate applicable to a specified

past period which is based on the actual costs of the period. A final

rate is not subject to adjustment.

e. Provisional rate or billing rate means a temporary indirect cost

rate applicable to a specified period which is used for funding,

interim reimbursement, and reporting indirect costs on awards pending

the establishment of a final rate for the period.

f. Indirect cost proposal means the documentation prepared by an

organization to substantiate its claim for the reimbursement of

indirect costs. This proposal provides the basis for the review and

negotiation leading to the establishment of an organization's indirect

cost rate.

g. Cost objective means a function, organizational subdivision,

contract, grant, or other work unit for which cost data are desired and

for which provision is made to accumulate and measure the cost of

processes, projects, jobs and capitalized projects.

2. Negotiation and approval of rates.

a. Unless different arrangements are agreed to by the agencies

concerned, the Federal agency with the largest dollar value of awards

with an organization will be designated as the cognizant agency for the

negotiation and approval of the indirect cost rates and, where

necessary, other rates such as fringe benefit and computer charge-out

rates. Once an agency is assigned cognizance for a particular non-

profit organization, the assignment will not be changed unless there is

a major long-term shift in the dollar volume of the Federal awards to

the organization. All concerned Federal agencies shall be given the

opportunity to participate in the negotiation process but, after a rate

has been agreed upon, it will be accepted by all Federal agencies. When

a Federal agency has reason to believe that special operating factors

affecting its awards necessitate special indirect cost rates in

accordance with subparagraph D.5, it will, prior to the time the rates

are negotiated, notify the cognizant agency.

b. A non-profit organization which has not previously established

an indirect cost rate with a Federal agency shall submit its initial

indirect cost proposal immediately after the organization is advised

that an award will be made and, in no event, later than three months

after the effective date of the award.

c. Organizations that have previously established indirect cost

rates must submit a new indirect cost proposal to the cognizant agency

within six months after the close of each fiscal year.

d. A predetermined rate may be negotiated for use on awards where

there is reasonable assurance, based on past experience and reliable

projection of the organization's costs, that the rate is not likely to

exceed a rate based on the organization's actual costs.

[[Page 26583]]

e. Fixed rates may be negotiated where predetermined rates are not

considered appropriate. A fixed rate, however, shall not be negotiated

if (i) all or a substantial portion of the organization's awards are

expected to expire before the carry-forward adjustment can be made;

(ii) the mix of Federal and non-Federal work at the organization is too

erratic to permit an equitable carry-forward adjustment; or (iii) the

organization's operations fluctuate significantly from year to year.

f. Provisional and final rates shall be negotiated where neither

predetermined nor fixed rates are appropriate.

g. The results of each negotiation shall be formalized in a written

agreement between the cognizant agency and the non-profit organization.

The cognizant agency shall distribute copies of the agreement to all

concerned Federal agencies.

h. If a dispute arises in a negotiation of an indirect cost rate

between the cognizant agency and the non-profit organization, the

dispute shall be resolved in accordance with the appeals procedures of

the cognizant agency.

i. To the extent that problems are encountered among the Federal

agencies in connection with the negotiation and approval process, OMB

will lend assistance as required to resolve such problems in a timely

manner.

Circular No. A-122

Attachment B--Selected Items of Cost

Table of Contents

1. Advertising costs

2. Bad debts

3. Bid and proposal costs (reserved)

4. Bonding costs

5. Communication costs

6. Compensation for personal services

7. Contingency provisions

8. Contributions

9. Depreciation and use allowances

10. Donations

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

12. Entertainment costs

13. Equipment and other capital expenditures

14. Fines and penalties

15. Fringe benefits

16. Idle facilities and idle capacity

17. Independent research and development (reserved)

18. Insurance and indemnification

19. Interest, fundraising, and investment management costs

20. Labor relations costs

21. Lobbying

22. Losses on other awards

23. Maintenance and repair costs

24. Materials and supplies

25. Meetings and conferences

26. Membership, subscription, and professional activity costs

27. Organization costs

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

29. Page charges in professional journals

30. Participant support costs

31. Patent costs

32. Pension plans

33. Plant security costs

34. Pre-award costs

35. Professional service costs

36. Profits and losses on disposition of depreciable property or

other capital assets

37. Public information service costs

38. Publication and printing costs

39. Rearrangement and alteration costs

40. Reconversion costs

41. Recruiting costs

42. Relocation costs

43. Rental costs

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

45. Severance pay

46. Specialized service facilities

47. Taxes

48. Termination costs

49. Training and education costs

50. Transportation costs

51. Travel costs

Circular No. A-122

Attachment B--Selected Items of Cost

Paragraphs 1 through 51 provide principles to be applied in

establishing the allowability of certain items of cost. These

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

Failure to mention a particular item of cost is not intended to imply

that it is unallowable; rather, determination as to allowability in

each case should be based on the treatment or principles provided for

similar or related items of cost.

1. Advertising costs.

a. Advertising costs mean the costs of media services and

associated costs. Media advertising includes magazines, newspapers,

radio and television programs, direct mail, exhibits, and the like.

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

for (i) the recruitment of personnel when considered in conjunction

with all other recruitment costs, as set forth in paragraph 41; (ii)

the procurement of goods and services; (iii) the disposal of surplus

materials acquired in the performance of the award except when

organizations are reimbursed for disposals at a predetermined amount in

accordance with Office of Management and Budget (OMB) Circular A-110,

``Uniform Administrative Requirements for Grants and Agreements with

Institutions of Higher Education, Hospitals, and Other Non-Profit

Organizations;'' or (iv) specific requirements of the award.

2. Bad debts. Bad debts, including losses (whether actual or

estimated) arising from uncollectible accounts and other claims,

related collection costs, and related legal costs, are unallowable.

3. Bid and proposal costs. (reserved)

4. Bonding costs.

a. Bonding costs arise when the Federal Government requires

assurance against financial loss to itself or others by reason of the

act or default of the organization. They arise also in instances where

the organization requires similar assurance. Included are such bonds as

bid, performance, payment, advance payment, infringement, and fidelity

bonds.

b. Costs of bonding required pursuant to the terms of the award are

allowable.

c. Costs of bonding required by the organization in the general

conduct of its operations are allowable to the extent that such bonding

is in accordance with sound business practice and the rates and

premiums are reasonable under the circumstances.

5. Communication costs. Costs incurred for telephone services,

local and long distance telephone calls, telegrams, radiograms, postage

and the like are allowable.

6. Compensation for personal services.

a. Definition. Compensation for personal services includes all

compensation paid currently or accrued by the organization for services

of employees rendered during the period of the award (except as

otherwise provided in subparagraph g). It includes, but is not limited

to, salaries, wages, director's and executive committee member's fees,

incentive awards, fringe benefits, pension plan costs, allowances for

off-site pay, incentive pay, location allowances, hardship pay, and

cost of living differentials.

b. Allowability. Except as otherwise specifically provided in this

paragraph, the costs of such compensation are allowable to the extent

that:

(1) Total compensation to individual employees is reasonable for

the services rendered and conforms to the established policy of the

organization consistently applied to both Federal and non-Federal

activities; and

(2) Charges to awards whether treated as direct or indirect costs

are determined and supported as required in this paragraph.

c. Reasonableness.

(1) When the organization is predominantly engaged in activities

other than those sponsored by the Federal Government, compensation for

employees on federally-sponsored work will be considered reasonable to

the extent that it is consistent with that paid for similar work in the

organization's other activities.

[[Page 26584]]

(2) When the organization is predominantly engaged in federally-

sponsored activities and in cases where the kind of employees required

for the Federal activities are not found in the organization's other

activities, compensation for employees on federally-sponsored work will

be considered reasonable to the extent that it is comparable to that

paid for similar work in the labor markets in which the organization

competes for the kind of employees involved.

d. Special considerations in determining allowability. Certain

conditions require special consideration and possible limitations in

determining costs under Federal awards where amounts or types of

compensation appear unreasonable. Among such conditions are the

following:

(1) Compensation to members of non-profit organizations, trustees,

directors, associates, officers, or the immediate families thereof.

Determination should be made that such compensation is reasonable for

the actual personal services rendered rather than a distribution of

earnings in excess of costs.

(2) Any change in an organization's compensation policy resulting

in a substantial increase in the organization's level of compensation,

particularly when it was concurrent with an increase in the ratio of

Federal awards to other activities of the organization or any change in

the treatment of allowability of specific types of compensation due to

changes in Federal policy.

e. Unallowable costs. Costs which are unallowable under other

paragraphs of this Attachment shall not be allowable under this

paragraph solely on the basis that they constitute personal

compensation.

f. Fringe benefits.

(1) Fringe benefits in the form of regular compensation paid to

employees during periods of authorized absences from the job, such as

vacation leave, sick leave, military leave, and the like, are

allowable, provided such costs are absorbed by all organization

activities in proportion to the relative amount of time or effort

actually devoted to each.

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

expenses for social security, employee insurance, workmen's

compensation insurance, pension plan costs (see subparagraph g), and

the like, are allowable, provided such benefits are granted in

accordance with established written organization policies. Such

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

distributed to particular awards and other activities in a manner

consistent with the pattern of benefits accruing to the individuals or

group of employees whose salaries and wages are chargeable to such

awards and other activities.

(3) (a) Provisions for a reserve under a self-insurance program for

unemployment compensation or workers' compensation are allowable to the

extent that the provisions represent reasonable estimates of the

liabilities for such compensation, and the types of coverage, extent of

coverage, and rates and premiums would have been allowable had

insurance been purchased to cover the risks. However, provisions for

self-insured liabilities which do not become payable for more than one

year after the provision is made shall not exceed the present value of

the liability.

(b) Where an organization follows a consistent policy of expensing

actual payments to, or on behalf of, employees or former employees for

unemployment compensation or workers' compensation, such payments are

allowable in the year of payment with the prior approval of the

awarding agency, provided they are allocated to all activities of the

organization.

(4) Costs of insurance on the lives of trustees, officers, or other

employees holding positions of similar responsibility are allowable

only to the extent that the insurance represents additional

compensation. The costs of such insurance when the organization is

named as beneficiary are unallowable.

g. Pension plan costs.

(1) Costs of the organization's pension plan which are incurred in

accordance with the established policies of the organization are

allowable, provided:

(a) Such policies meet the test of reasonableness;

(b) The methods of cost allocation are not discriminatory;

(c) The cost assigned to each fiscal year is determined in

accordance with generally accepted accounting principles (GAAP), as

prescribed in Accounting Principles Board Opinion No. 8 issued by the

American Institute of Certified Public Accountants; and

(d) The costs assigned to a given fiscal year are funded for all

plan participants within six months after the end of that year.

However, increases to normal and past service pension costs caused by a

delay in funding the actuarial liability beyond 30 days after each

quarter of the year to which such costs are assignable are unallowable.

(2) Pension plan termination insurance premiums paid pursuant to

the Employee Retirement Income Security Act (ERISA) of 1974 (Pub. L.

93-406) are allowable. Late payment charges on such premiums are

unallowable.

(3) Excise taxes on accumulated funding deficiencies and other

penalties imposed under ERISA are unallowable.

h. Incentive compensation. Incentive compensation to employees

based on cost reduction, or efficient performance, suggestion awards,

safety awards, etc., are allowable to the extent that the overall

compensation is determined to be reasonable and such costs are paid or

accrued pursuant to an agreement entered into in good faith between the

organization and the employees before the services were rendered, or

pursuant to an established plan followed by the organization so

consistently as to imply, in effect, an agreement to make such payment.

i. Overtime, extra pay shift, and multi-shift premiums. See

paragraph 28.

j. Severance pay. See paragraph 45.

k. Training and education costs. See paragraph 49.

l. Support of salaries and wages.

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

direct costs or indirect costs, will be based on documented payrolls

approved by a responsible official(s) of the organization. The

distribution of salaries and wages to awards must be supported by

personnel activity reports, as prescribed in subparagraph (2), except

when a substitute system has been approved in writing by the cognizant

agency. (See subparagraph E.2 of Attachment A.)

(2) Reports reflecting the distribution of activity of each

employee must be maintained for all staff members (professionals and

nonprofessionals) whose compensation is charged, in whole or in part,

directly to awards. In addition, in order to support the allocation of

indirect costs, such reports must also be maintained for other

employees whose work involves two or more functions or activities if a

distribution of their compensation between such functions or activities

is needed in the determination of the organization's indirect cost

rate(s) (e.g., an employee engaged part-time in indirect cost

activities and part-time in a direct function). Reports maintained by

non-profit organizations to satisfy these requirements must meet the

following standards:

(a) The reports must reflect an after-the-fact determination of the

actual activity of each employee. Budget estimates (i.e., estimates

determined before the services are performed) do not qualify as support

for charges to awards.

(b) Each report must account for the total activity for which

employees are

[[Page 26585]]

compensated and which is required in fulfillment of their obligations

to the organization.

(c) The reports must be signed by the individual employee, or by a

responsible supervisory official having first hand knowledge of the

activities performed by the employee, that the distribution of activity

represents a reasonable estimate of the actual work performed by the

employee during the periods covered by the reports.

(d) The reports must be prepared at least monthly and must coincide

with one or more pay periods.

(3) Charges for the salaries and wages of nonprofessional

employees, in addition to the supporting documentation described in

subparagraphs (1) and (2), must also be supported by records indicating

the total number of hours worked each day maintained in conformance

with Department of Labor regulations implementing the Fair Labor

Standards Act (FLSA) (29 CFR Part 516). For this purpose, the term

``nonprofessional employee'' shall have the same meaning as ``nonexempt

employee,'' under FLSA.

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

matching requirements on awards must be supported in the same manner as

salaries and wages claimed for reimbursement from awarding agencies.

7. Contingency provisions. Contributions to a contingency reserve

or any similar provision made for events the occurrence of which cannot

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

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

excludes self-insurance reserves (see subparagraphs 6.f (3) and

18.a(2)(d); pension funds (see subparagraph 6.g); and reserves for

normal severance pay (see subparagraph 45.b(1)).

8. Contributions. Contributions and donations by the organization

to others are unallowable.

9. Depreciation and use allowances.

a. Compensation for the use of buildings, other capital

improvements, and equipment on hand may be made through use allowances

or depreciation. However, except as provided in subparagraph f, a

combination of the two methods may not be used in connection with a

single class of fixed assets (e.g., buildings, office equipment,

computer equipment, etc.).

b. The computation of use allowances or depreciation shall be based

on the acquisition cost of the assets involved. The acquisition cost of

an asset donated to the organization by a third party shall be its fair

market value at the time of the donation.

c. The computation of use allowances or depreciation will exclude:

(1) The cost of land;

(2) Any portion of the cost of buildings and equipment borne by or

donated by the Federal Government irrespective of where title was

originally vested or where it presently resides; and

(3) Any portion of the cost of buildings and equipment contributed

by or for the organization in satisfaction of a statutory matching

requirement.

d. Where the use allowance method is followed, the use allowance

for buildings and improvement (including land improvements, such as

paved parking areas, fences, and sidewalks) will be computed at an

annual rate not exceeding two percent of acquisition cost. The use

allowance for equipment will be computed at an annual rate not

exceeding six and two-thirds percent of acquisition cost. When the use

allowance method is used for buildings, the entire building must be

treated as a single asset; the building's components (e.g., plumbing

system, heating and air conditioning, etc.) cannot be segregated from

the building's shell. The two percent limitation, however, need not be

applied to equipment which is merely attached or fastened to the

building but not permanently fixed to it and which is used as

furnishings or decorations or for specialized purposes (e.g., dentist

chairs and dental treatment units, counters, laboratory benches bolted

to the floor, dishwashers, carpeting, etc.). Such equipment will be

considered as not being permanently fixed to the building if it can be

removed without the need for costly or extensive alterations or repairs

to the building or the equipment. Equipment that meets these criteria

will be subject to the six and two-thirds percent equipment use

allowance limitation.

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

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

assets must take into consideration such factors as type of

construction, nature of the equipment used, technological developments

in the particular program area, and the renewal and replacement

policies followed for the individual items or classes of assets

involved. The method of depreciation used to assign the cost of an

asset (or group of assets) to accounting periods shall reflect the

pattern of consumption of the asset during its useful life. In the

absence of clear evidence indicating that the expected consumption of

the asset will be significantly greater or lesser in the early portions

of its useful life than in the later portions, the straight-line method

shall be presumed to be the appropriate method. Depreciation methods

once used shall not be changed unless approved in advance by the

cognizant Federal agency. When the depreciation method is introduced

for application to assets previously subject to a use allowance, the

combination of use allowances and depreciation applicable to such

assets must not exceed the total acquisition cost of the assets. When

the depreciation method is used for buildings, a building's shell may

be segregated from each building component (e.g., plumbing system,

heating, and air conditioning system, etc.) and each item depreciated

over its estimated useful life; or the entire building (i.e., the shell

and all components) may be treated as a single asset and depreciated

over a single useful life.

f. When the depreciation method is used for a particular class of

assets, no depreciation may be allowed on any such assets that, under

subparagraph e, would be viewed as fully depreciated. However, a

reasonable use allowance may be negotiated for such assets if warranted

after taking into consideration the amount of depreciation previously

charged to the Federal Government, the estimated useful life remaining

at time of negotiation, the effect of any increased maintenance charges

or decreased efficiency due to age, and any other factors pertinent to

the utilization of the asset for the purpose contemplated.

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

adequate property records and physical inventories must be taken at

least once every two years (a statistical sampling basis is acceptable)

to ensure that assets exist and are usable and needed. When the

depreciation method is followed, adequate depreciation records

indicating the amount of depreciation taken each period must also be

maintained.

10. Donations.

a. Services received.

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

organization by professional and technical personnel, consultants, and

other skilled and unskilled labor. The value of these services is not

reimbursable either as a direct or indirect cost.

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

direct cost activity shall be considered in the determination of the

organization's indirect cost rate(s) and, accordingly, shall be

allocated a proportionate share of applicable indirect costs when the

following circumstances exist:

(a) The aggregate value of the services is material;

[[Page 26586]]

(b) The services are supported by a significant amount of the

indirect costs incurred by the organization;

(c) The direct cost activity is not pursued primarily for the

benefit of the Federal Government,

(3) In those instances where there is no basis for determining the

fair market value of the services rendered, the recipient and the

cognizant agency shall negotiate an appropriate allocation of indirect

cost to the services.

(4) Where donated services directly benefit a project supported by

an award, the indirect costs allocated to the services will be

considered as a part of the total costs of the project. Such indirect

costs may be reimbursed under the award or used to meet cost sharing or

matching requirements.

(5) The value of the donated services may be used to meet cost

sharing or matching requirements under conditions described in Sec.

__.23 of Circular A-110. Where donated services are treated as indirect

costs, indirect cost rates will separate the value of the donations so

that reimbursement will not be made.

(6) Fair market value of donated services shall be computed as

follows:

(a) Rates for volunteer services. Rates for volunteers shall be

consistent with those regular rates paid for similar work in other

activities of the organization. In cases where the kinds of skills

involved are not found in other activities of the organization, the

rates used shall be consistent with those paid for similar work in the

labor market in which the organization competes for such skills.

(b) Services donated by other organizations. When an employer

donates the services of an employee, these services shall be valued at

the employee's regular rate of pay (exclusive of fringe benefits and

indirect costs), provided the services are in the same skill for which

the employee is normally paid. If the services are not in the same

skill for which the employee is normally paid, fair market value shall

be computed in accordance with subparagraph (a).

b. Goods and space.

(1) Donated goods; i.e., expendable personal property/supplies, and

donated use of space may be furnished to an organization. The value of

the goods and space is not reimbursable either as a direct or indirect

cost.

(2) The value of the donations may be used to meet cost sharing or

matching share requirements under the conditions described in Sec.

__.23 of Circular A-110. The value of the donations shall be determined

in accordance with Sec. __.23 of Circular A-110. Where donations are

treated as indirect costs, indirect cost rates will separate the value

of the donations so that reimbursement will not be made.

11. Employee morale, health, and welfare costs and credits. The

costs of house publications, health or first-aid clinics, and/or

infirmaries, recreational activities, employees' counseling services,

and other expenses incurred in accordance with the organization's

established practice or custom for the improvement of working

conditions, employer-employee relations, employee morale, and employee

performance are allowable. Such costs will be equitably apportioned to

all activities of the organization. Income generated from any of these

activities will be credited to the cost thereof unless such income has

been irrevocably set over to employee welfare organizations.

12. Entertainment costs. Costs of amusement, diversion, social

activities, ceremonials, and costs relating thereto, such as meals,

lodging, rentals, transportation, and gratuities are unallowable (but

see paragraphs 11 and 26).

13. Equipment and other capital expenditures.

a. As used in this paragraph, the following terms have the meanings

set forth below:

(1) Equipment means an article of nonexpendable tangible personal

property having a useful life of more than two years and an acquisition

cost of $500 or more per unit. An organization may use its own

definition, provided that it at least includes all nonexpendable

tangible personal property as defined herein.

(2) Acquisition cost means the net invoice unit price of an item of

equipment, including the cost of any modifications, attachments,

accessories, or auxiliary apparatus necessary to make it usable for the

purpose for which it is acquired. Ancillary charges, such as taxes,

duty, protective in-transit insurance, freight, and installation shall

be included in or excluded from acquisition cost in accordance with the

organization's regular written accounting practices.

(3) Special purpose equipment means equipment which is usable only

for research, medical, scientific, or technical activities. Examples of

special purpose equipment include microscopes, x-ray machines, surgical

instruments, and spectrometers.

(4) General purpose equipment means equipment which is usable for

other than research, medical, scientific, or technical activities,

whether or not special modifications are needed to make them suitable

for a particular purpose. Examples of general purpose equipment include

office equipment and furnishings, air conditioning equipment,

reproduction and printing equipment, motor vehicles, and automatic data

processing equipment.

b. (1) Capital expenditures for general purpose equipment are

unallowable as a direct cost except with the prior approval of the

awarding agency.

(2) Capital expenditures for special purpose equipment are

allowable as direct costs, provided that items with a unit cost of

$1000 or more have the prior approval of the awarding agency.

c. Capital expenditures for land or buildings are unallowable as a

direct cost except with the prior approval of the awarding agency.

d. Capital expenditures for improvements to land, buildings, or

equipment which materially increase their value or useful life are

unallowable as a direct cost except with the prior approval of the

awarding agency.

e. Equipment and other capital expenditures are unallowable as

indirect costs. However, see paragraph 9 for allowability of use

allowances or depreciation on buildings, capital improvements, and

equipment. Also, see paragraph 43 for allowability of rental costs for

land, buildings, and equipment.

14. Fines and penalties. Costs of fines and penalties resulting

from violations of, or failure of the organization to comply with

Federal, State, and local laws and regulations are unallowable except

when incurred as a result of compliance with specific provisions of an

award or instructions in writing from the awarding agency.

15. Fringe benefits. See subparagraph 6.f.

16. Idle facilities and idle capacity.

a. As used in this paragraph, the following terms have the meanings

set forth below:

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

equipment individually or collectively, or any other tangible capital

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

organization.

(2) Idle facilities means completely unused facilities that are

excess to the organization's current needs.

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

facilities. It is the difference between that which a facility could

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

operating interruptions resulting from time lost for repairs, setups,

unsatisfactory materials, and other normal delays, and the extent to

which the facility was actually used to meet demands during the

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

[[Page 26587]]

be shown that this amount of usage could normally be expected for the

type of facility involved.

(4) Costs of idle facilities or idle capacity means costs such as

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

property taxes, insurance, and depreciation or use allowances.

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

extent that:

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

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

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

program requirements, efforts to achieve more economical operations,

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

reasonably foreseen. Under the exception stated in this subparagraph,

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

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

to use, lease, or dispose of such facilities (but see subparagraphs

48.b and d).

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

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

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

capacity is reasonably anticipated to be necessary or was originally

reasonable and is not subject to reduction or elimination by

subletting, renting, or sale, in accordance with sound business,

economics, or security practices. Widespread idle capacity throughout

an entire facility or among a group of assets having substantially the

same function may be idle facilities.

17. Independent research and development. [Reserved]

18. Insurance and indemnification.

a. Insurance includes insurance which the organization is required

to carry, or which is approved, under the terms of the award and any

other insurance which the organization maintains in connection with the

general conduct of its operations. This paragraph does not apply to

insurance which represents fringe benefits for employees (see

subparagraphs 6.f and 6.g(2)).

(1) Costs of insurance required or approved, and maintained,

pursuant to the award are allowable.

(2) Costs of other insurance maintained by the organization in

connection with the general conduct of its operations are allowable

subject to the following limitations:

(a) Types and extent of coverage shall be in accordance with sound

business practice and the rates and premiums shall be reasonable under

the circumstances.

(b) Costs allowed for business interruption or other similar

insurance shall be limited to exclude coverage of management fees.

(c) Costs of insurance or of any provisions for a reserve covering

the risk of loss or damage to Federal property are allowable only to

the extent that the organization is liable for such loss or damage.

(d) Provisions for a reserve under a self-insurance program are

allowable to the extent that types of coverage, extent of coverage,

rates, and premiums would have been allowed had insurance been

purchased to cover the risks. However, provision for known or

reasonably estimated self-insured liabilities, which do not become

payable for more than one year after the provision is made, shall not

exceed the present value of the liability.

(e) Costs of insurance on the lives of trustees, officers, or other

employees holding positions of similar responsibilities are allowable

only to the extent that the insurance represents additional

compensation (see subparagraph 6.f(4)). The cost of such insurance when

the organization is identified as the beneficiary is unallowable.

(3) Actual losses which could have been covered by permissible

insurance (through the purchase of insurance or a self-insurance

program) are unallowable unless expressly provided for in the award,

except:

(a) Costs incurred because of losses not covered under nominal

deductible insurance coverage provided in keeping with sound business

practice are allowable.

(b) Minor losses not covered by insurance, such as spoilage,

breakage, and disappearance of supplies, which occur in the ordinary

course of operations, are allowable.

b. Indemnification includes securing the organization against

liabilities to third persons and any other loss or damage, not

compensated by insurance or otherwise. The Federal Government is

obligated to indemnify the organization only to the extent expressly

provided in the award.

19. Interest, fundraising, and investment management costs.

a. Interest.

(1) Costs incurred for interest on borrowed capital or temporary

use of endowment funds, however represented, are unallowable. However,

interest on debt incurred after the effective date of this revision to

acquire or replace 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 allowable, provided that:

(a) For facilities acquisitions (excluding renovations and

alterations) costing over $10 million where the Federal Government's

reimbursement is expected to equal or exceed 40 percent of an asset's

cost, the non-profit organization prepares, prior to the acquisition or

replacement of the capital asset(s), a justification that demonstrates

the need for the facility in the conduct of federally-sponsored

activities. Upon request, the needs justification must be provided to

the Federal agency with cost cognizance authority as a prerequisite to

the continued allowability of interest on debt and depreciation related

to the facility. The needs justification for the acquisition of a

facility should include, at a minimum, the following:

A statement of purpose and justification for facility

acquisition or replacement.

A statement as to why current facilities are not adequate.

A statement of planned future use of the facility.

A description of the financing agreement to be arranged

for the facility.

A summary of the building contract with estimated cost

information and statement of source and use of funds.

A schedule of planned occupancy dates.

(b) For facilities costing over $500,000, the non-profit

organization prepares, prior to the acquisition or replacement of the

facility, a lease/purchase analysis in accordance with the provisions

of Sec. __.30 through __.37 of Circular A-110, which shows that a

financed purchase or capital lease is less costly to the organization

than other leasing alternatives, on a net present value basis. Discount

rates used should be equal to the non-profit organization's anticipated

interest rates and should be no higher than the fair market rate

available to the non-profit organization 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 non-profit organization. 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 period

[[Page 26588]]

defined above. 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 period defined above. 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 non-profit organization directly or as part of the lease

arrangement.

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

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

non-profit organization from an unrelated (``arm's length'') third

party.

(d) 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.

(e) Reimbursements are limited to the least costly alternative

based on the total cost analysis required under subparagraph (b). 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 performed, Federal reimbursement shall be based

upon the least expensive alternative.

(f) Non-profit organizations are also subject to the following

conditions:

(i) Interest on debt incurred to finance or refinance assets

acquired before or reacquired after the effective date of this Circular

is not allowable.

(ii) For debt arrangements over $1 million, unless the non-profit

organization makes an initial equity contribution to the asset purchase

of 25 percent or more, non-profit organizations shall reduce claims for

interest expense by an amount equal to imputed interest earnings on

excess cash flow, which is to be calculated as follows. Annually, non-

profit organizations 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 expense. For cash flow calculations, the

annual inflow figures shall be divided by the number of months in the

year (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

expense. 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.

(iii) 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

Federal 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.

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

limited to a fair market value available to the non-profit organization

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

(2) For non-profit organizations subject to ``full coverage'' under

the Cost Accounting Standards (CAS) as defined at 48 CFR 9903.201, the

interest allowability provisions of subparagraph a do not apply.

Instead, these organizations' sponsored agreements are subject to CAS

414 (48 CFR 9903.414), cost of money as an element of the cost of

facilities capital, and CAS 417 (48 CFR 9903.417), cost of money as an

element of the cost of capital assets under construction.

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

paragraph 19:

(a) Re-acquired assets means assets held by the non-profit

organization prior to the effective date of this revision that have

again come to be held by the organization, whether through repurchase

or refinancing. It does not include assets acquired to replace older

assets.

(b) Initial equity contribution means the amount or value of

contributions made by non-Federal entities for the acquisition of the

asset or prior to occupancy of facilities.

(c) Asset costs means the capitalizable costs of an asset,

including construction costs, acquisition costs, and other such costs

capitalized in accordance with GAAP.

b. Costs of organized fundraising, including financial campaigns,

endowment drives, solicitation of gifts and bequests, and similar

expenses incurred solely to raise capital or obtain contributions are

unallowable.

c. Costs of investment counsel and staff and similar expenses

incurred solely to enhance income from investments are unallowable.

d. Fundraising and investment activities shall be allocated an

appropriate share of indirect costs under the conditions described in

subparagraph B.3 of Attachment A.

20. Labor relations costs. Costs incurred in maintaining

satisfactory relations between the organization and its employees,

including costs of labor management committees, employee publications,

and other related activities are allowable.

21. Lobbying.

a. Notwithstanding other provisions of this Circular, costs

associated with the following activities are unallowable:

(1) Attempts to influence the outcomes of any Federal, State, or

local election, referendum, initiative, or similar procedure, through

in kind or cash contributions, endorsements, publicity, or similar

activity;

(2) Establishing, administering, contributing to, or paying the

expenses of a political party, campaign, political action committee, or

other organization established for the purpose of influencing the

outcomes of elections;

(3) Any attempt to influence: (i) The introduction of Federal or

State legislation; or (ii) the enactment or modification of any pending

Federal or State legislation through communication with any member or

employee of the Congress or State legislature (including efforts to

influence State or local officials to engage in similar lobbying

activity), or with any Government official or employee in connection

with a decision to sign or veto enrolled legislation;

(4) Any attempt to influence: (i) The introduction of Federal or

State legislation; or (ii) the enactment or modification of any pending

Federal or State legislation by preparing, distributing or using

publicity or propaganda, or by urging members of the general public or

any segment thereof to contribute to or participate in any mass

demonstration, march, rally, fundraising drive, lobbying campaign or

letter writing or telephone campaign; or

[[Page 26589]]

(5) Legislative liaison activities, including attendance at

legislative sessions or committee hearings, gathering information

regarding legislation, and analyzing the effect of legislation, when

such activities are carried on in support of or in knowing preparation

for an effort to engage in unallowable lobbying.

b. The following activities are excepted from the coverage of

subparagraph a:

(1) Providing a technical and factual presentation of information

on a topic directly related to the performance of a grant, contract or

other agreement through hearing testimony, statements or letters to the

Congress or a State legislature, or subdivision, member, or cognizant

staff member thereof, in response to a documented request (including a

Congressional Record notice requesting testimony or statements for the

record at a regularly scheduled hearing) made by the recipient member,

legislative body or subdivision, or a cognizant staff member thereof;

provided such information is readily obtainable and can be readily put

in deliverable form; and further provided that costs under this section

for travel, lodging or meals are unallowable unless incurred to offer

testimony at a regularly scheduled Congressional hearing pursuant to a

written request for such presentation made by the Chairman or Ranking

Minority Member of the Committee or Subcommittee conducting such

hearing.

(2) Any lobbying made unallowable by subparagraph a(3) to influence

State legislation in order to directly reduce the cost, or to avoid

material impairment of the organization's authority to perform the

grant, contract, or other agreement.

(3) Any activity specifically authorized by statute to be

undertaken with funds from the grant, contract, or other agreement.

c. (1) When an organization seeks reimbursement for indirect costs,

total lobbying costs shall be separately identified in the indirect

cost rate proposal, and thereafter treated as other unallowable

activity costs in accordance with the procedures of subparagraph B.3 of

Attachment A.

(2) Organizations shall submit, as part of the annual indirect cost

rate proposal, a certification that the requirements and standards of

this paragraph have been complied with.

(3) Organizations shall maintain adequate records to demonstrate

that the determination of costs as being allowable or unallowable

pursuant to paragraph 21 complies with the requirements of this

Circular.

(4) Time logs, calendars, or similar records shall not be required

to be created for purposes of complying with this paragraph during any

particular calendar month when: (1) The employee engages in lobbying

(as defined in subparagraphs (a) and (b)) 25 percent or less of the

employee's compensated hours of employment during that calendar month,

and (2) within the preceding five-year period, the organization has not

materially misstated allowable or unallowable costs of any nature,

including legislative lobbying costs. When conditions (1) and (2) are

met, organizations are not required to establish records to support the

allowability of claimed costs in addition to records already required

or maintained. Also, when conditions (1) and (2) are met, the absence

of time logs, calendars, or similar records will not serve as a basis

for disallowing costs by contesting estimates of lobbying time spent by

employees during a calendar month.

(5) Agencies shall establish procedures for resolving in advance,

in consultation with OMB, any significant questions or disagreements

concerning the interpretation or application of paragraph 21. Any such

advance resolution shall be binding in any subsequent settlements,

audits or investigations with respect to that grant or contract for

purposes of interpretation of this Circular; provided, however, that

this shall not be construed to prevent a contractor or grantee from

contesting the lawfulness of such a determination.

22. Losses on other awards. Any excess of costs over income on any

award is unallowable as a cost of any other award. This includes, but

is not limited to, the organization's contributed portion by reason of

cost sharing agreements or any under-recoveries through negotiation of

lump sums for, or ceilings on, indirect costs.

23. Maintenance and repair costs. Costs incurred for necessary

maintenance, repair, or upkeep of buildings and equipment (including

Federal property unless otherwise provided for) which neither add to

the permanent value of the property nor appreciably prolong its

intended life, but keep it in an efficient operating condition, are

allowable. Costs incurred for improvements which add to the permanent

value of the buildings and equipment or appreciably prolong their

intended life shall be treated as capital expenditures (see paragraph

13).

24. Materials and supplies. The costs of materials and supplies

necessary to carry out an award are allowable. Such costs should be

charged at their actual prices after deducting all cash discounts,

trade discounts, rebates, and allowances received by the organization.

Withdrawals from general stores or stockrooms should be charged at cost

under any recognized method of pricing consistently applied. Incoming

transportation charges may be a proper part of material cost. Materials

and supplies charged as a direct cost should include only the materials

and supplies actually used for the performance of the contract or

grant, and due credit should be given for any excess materials or

supplies retained, or returned to vendors.

25. Meetings and conferences.

a. Costs associated with the conduct of meetings and conferences

include the cost of renting facilities, meals, speakers' fees, and the

like. But see paragraph 12, Entertainment costs, and paragraph 30,

Participant support costs.

b. To the extent that these costs are identifiable with a

particular cost objective, they should be charged to that objective

(see paragraph B of Attachment A). These costs are allowable, provided

that they meet the general tests of allowability, shown in paragraph A

of Attachment A to this Circular.

c. Costs of meetings and conferences held to conduct the general

administration of the organization are allowable.

26. Memberships, subscriptions, and professional activity costs.

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

technical and professional organizations are allowable.

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

professional, and technical periodicals are allowable.

c. Costs of attendance at meetings and conferences sponsored by

others when the primary purpose is the dissemination of technical

information are allowable. This includes costs of meals,

transportation, and other items incidental to such attendance.

27. Organization costs. Expenditures, such as incorporation fees,

brokers' fees, fees to promoters, organizers or management consultants,

attorneys, accountants, or investment counselors, whether or not

employees of the organization, in connection with establishment or

reorganization of an organization, are unallowable except with prior

approval of the awarding agency.

28. Overtime, extra-pay shift, and multi-shift premiums. Premiums

for overtime, extra-pay shifts, and multi-shift work are allowable only

with the

[[Page 26590]]

prior approval of the awarding agency except:

a. When necessary to cope with emergencies, such as those resulting

from accidents, natural disasters, breakdowns of equipment, or

occasional operational bottlenecks of a sporadic nature.

b. When employees are performing indirect functions, such as

administration, maintenance, or accounting.

c. In the performance of tests, laboratory procedures, or other

similar operations which are continuous in nature and cannot reasonably

be interrupted or otherwise completed.

d. When lower overall cost to the Federal Government will result.

29. Page charges in professional journals. Page charges for

professional journal publications are allowable as a necessary part of

research costs, where:

a. The research papers report work supported by the Federal

Government; and

b. The charges are levied impartially on all research papers

published by the journal, whether or not by federally-sponsored

authors.

30. Participant support costs. Participant support costs are direct

costs for items such as stipends or subsistence allowances, travel

allowances, and registration fees paid to or on behalf of participants

or trainees (but not employees) in connection with meetings,

conferences, symposia, or training projects. These costs are allowable

with the prior approval of the awarding agency.

31. Patent costs.

a. Costs of (i) preparing disclosures, reports, and other documents

required by the award and of searching the art to the extent necessary

to make such disclosures, (ii) preparing documents and any other patent

costs in connection with the filing and prosecution of a United States

patent application where title or royalty-free license is required by

the Federal Government to be conveyed to the Federal Government, and

(iii) general counseling services relating to patent and copyright

matters, such as advice on patent and copyright laws, regulations,

clauses, and employee agreements are allowable (but see paragraph 35).

b. Cost of preparing disclosures, reports, and other documents and

of searching the art to the extent necessary to make disclosures, if

not required by the award, are unallowable. Costs in connection with

(i) filing and prosecuting any foreign patent application, or (ii) any

United States patent application, where the award does not require

conveying title or a royalty-free license to the Federal Government,

are unallowable (also see paragraph 44).

32. Pension plans. See subparagraph 6.g.

33. Plant security costs. Necessary expenses incurred to comply

with Federal security requirements or for facilities protection,

including wages, uniforms, and equipment of personnel are allowable.

34. Pre-award costs. Pre-award costs are those incurred prior to

the effective date of the award directly pursuant to the negotiation

and in anticipation of the award where such costs are necessary to

comply with the proposed delivery schedule or period of performance.

Such costs are allowable only to the extent that they would have been

allowable if incurred after the date of the award and only with the

written approval of the awarding agency.

35. Professional service costs.

a. Costs of professional and consultant services rendered by

persons who are members of a particular profession or possess a special

skill, and who are not officers or employees of the organization, are

allowable, subject to subparagraphs b, c, and d when reasonable in

relation to the services rendered and when not contingent upon recovery

of the costs from the Federal Government.

b. In determining the allowability of costs in a particular case,

no single factor or any special combination of factors is necessarily

determinative. However, the following factors are relevant:

(1) The nature and scope of the service rendered in relation to the

service required.

(2) The necessity of contracting for the service, considering the

organization's capability in the particular area.

(3) The past pattern of such costs, particularly in the years prior

to Federal awards.

(4) The impact of Federal awards on the organization's business

(i.e., what new problems have arisen).

(5) Whether the proportion of Federal work to the organization's

total business is such as to influence the organization in favor of

incurring the cost, particularly where the services rendered are not of

a continuing nature and have little relationship to work under Federal

grants and contracts.

(6) Whether the service can be performed more economically by

direct employment rather than contracting.

(7) The qualifications of the individual or concern rendering the

service and the customary fees charged, especially on non-Federal

awards.

(8) Adequacy of the contractual agreement for the service (e.g.,

description of the service, estimate of time required, rate of

compensation, and termination provisions).

c. In addition to the factors in subparagraph b, retainer fees to

be allowable must be supported by evidence of bona fide services

available or rendered.

d. Cost of legal, accounting, and consulting services, and related

costs incurred in connection with defense of antitrust suits, and the

prosecution of claims against the Federal Government, are unallowable.

Costs of legal, accounting and consulting services, and related costs,

incurred in connection with patent infringement litigation,

organization and reorganization, are unallowable unless otherwise

provided for in the award (but see subparagraph 48.e).

36. Profits and losses on disposition of depreciable property or

other capital assets.

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

of depreciable property shall be included in the year in which they

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

depreciation applicable to such property was included. The amount of

the gain or loss to be included as a credit or charge to the

appropriate cost grouping(s) shall be the difference between the amount

realized on the property and the undepreciated basis of the property.

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

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

following conditions:

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

account and is reflected in the depreciation allowable under paragraph

9.

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

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

determining the depreciation cost basis of the new item.

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

insurance, except as otherwise provided in subparagraph 18.a(3).

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

use allowances in lieu of depreciation in accordance with paragraph 9.

(e) Gains and losses arising from mass or extraordinary sales,

retirements, or other dispositions shall be considered on a case-by-

case basis.

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

of property other than the property covered in subparagraph a shall be

excluded in computing award costs.

[[Page 26591]]

37. Public information service costs.

a. Public information service costs include the costs associated

with pamphlets, news releases, and other forms of information services.

Such costs are normally incurred to:

(1) Inform or instruct individuals, groups, or the general public.

(2) Interest individuals or groups in participating in a service

program of the organization.

(3) Disseminate the results of sponsored and nonsponsored

activities.

b. Public information service costs are allowable as direct costs

with the prior approval of the awarding agency. Such costs are

unallowable as indirect costs.

38. Publication and printing costs.

a. Publication costs include the costs of printing (including the

processes of composition, plate-making, press work, binding, and the

end products produced by such processes), distribution, promotion,

mailing, and general handling.

b. If these costs are not identifiable with a particular cost

objective, they should be allocated as indirect costs to all benefiting

activities of the organization.

c. Publication and printing costs are unallowable as direct costs

except with the prior approval of the awarding agency.

d. The cost of page charges in journals is addressed in paragraph

29.

39. Rearrangement and alteration costs. Costs incurred for ordinary

or normal rearrangement and alteration of facilities are allowable.

Special arrangement and alteration costs incurred specifically for the

project are allowable with the prior approval of the awarding agency.

40. Reconversion costs. Costs incurred in the restoration or

rehabilitation of the organization's facilities to approximately the

same condition existing immediately prior to commencement of Federal

awards, fair wear and tear excepted, are allowable.

41. Recruiting costs. The following recruiting costs are allowable:

cost of ``help wanted'' advertising, operating costs of an employment

office, costs of operating an educational testing program, travel

expenses including food and lodging of employees while engaged in

recruiting personnel, travel costs of applicants for interviews for

prospective employment, and relocation costs incurred incident to

recruitment of new employees (see subparagraph 42.c). Where the

organization uses employment agencies, costs not in excess of standard

commercial rates for such services are allowable.

42. Relocation costs.

a. Relocation costs are costs incident to the permanent change of

duty assignment (for an indefinite period or for a stated period of not

less than 12 months) of an existing employee or upon recruitment of a

new employee. Relocation costs are allowable, subject to the limitation

described in subparagraphs b, c, and d, provided that:

(1) The move is for the benefit of the employer.

(2) Reimbursement to the employee is in accordance with an

established written policy consistently followed by the employer.

(3) The reimbursement does not exceed the employee's actual (or

reasonably estimated) expenses.

b. Allowable relocation costs for current employees are limited to

the following:

(1) The costs of transportation of the employee, members of his

immediate family and his household, and personal effects to the new

location.

(2) The costs of finding a new home, such as advance trips by

employees and spouses to locate living quarters and temporary lodging

during the transition period, up to maximum period of 30 days,

including advance trip time.

(3) Closing costs, such as brokerage, legal, and appraisal fees,

incident to the disposition of the employee's former home. These costs,

together with those described in (4), are limited to 8 per cent of the

sales price of the employee's former home.

(4) The continuing costs of ownership of the vacant former home

after the settlement or lease date of the employee's new permanent

home, such as maintenance of buildings and grounds (exclusive of fixing

up expenses), utilities, taxes, and property insurance.

(5) Other necessary and reasonable expenses normally incident to

relocation, such as the costs of canceling an unexpired lease,

disconnecting and reinstalling household appliances, and purchasing

insurance against loss of or damages to personal property. The cost of

canceling an unexpired lease is limited to three times the monthly

rental.

c. Allowable relocation costs for new employees are limited to

those described in (1) and (2) of subparagraph b. When relocation costs

incurred incident to the recruitment of new employees have been allowed

either as a direct or indirect cost and the employee resigns for

reasons within his control within 12 months after hire, the

organization shall refund or credit the Federal Government for its

share of the cost. However, the costs of travel to an overseas location

shall be considered travel costs in accordance with paragraph 51 and

not relocation costs for the purpose of this paragraph if dependents

are not permitted at the location for any reason and the costs do not

include costs of transporting household goods.

d. The following costs related to relocation are unallowable:

(1) Fees and other costs associated with acquiring a new home.

(2) A loss on the sale of a former home.

(3) Continuing mortgage principal and interest payments on a home

being sold.

(4) Income taxes paid by an employee related to reimbursed

relocation costs.

43. Rental costs.

a. Subject to the limitations described in subparagraphs b through

d, rental costs are allowable to the extent that the rates are

reasonable in light of such factors as: rental costs of comparable

property, if any; market conditions in the area; alternatives

available; and the type, life expectancy, condition, and value of the

property leased.

b. Rental costs under sale and leaseback arrangements are allowable

only up to the amount that would be allowed had the organization

continued to own the property.

c. Rental costs under less-than-arms-length leases are allowable

only up to the amount that would be allowed had title to the property

vested in the organization. For this purpose, a less-than-arms-length

lease is one under which one party to the lease agreement is able to

control or substantially influence the actions of the other. Such

leases include, but are not limited to those between (i) divisions of

an organization; (ii) organizations under common control through common

officers, directors, or members; and (iii) an organization and a

director, trustee, officer, or key employee of the organization or his

immediate family either directly or through corporations, trusts, or

similar arrangements in which they hold a controlling interest.

d. Rental costs under leases which are required to be treated as

capital leases under GAAP, are allowable only up to the amount that

would be allowed had the organization purchased the property on the

date the lease agreement was executed, i.e., to the amount that

minimally would pay for depreciation or use allowances, maintenance,

taxes, and insurance. Interest costs related to capitalized leases are

allowable to the extent they meet criteria in subparagraph 19.a.

Unallowable costs include amounts paid for profit, management fees, and

taxes that would

[[Page 26592]]

not have been incurred had the organization purchased the facility.

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

a. Royalties on a patent or copyright or amortization of the cost

of acquiring by purchase a copyright, patent, or rights thereto,

necessary for the proper performance of the award are allowable unless:

(1) The Federal Government has a license or the right to free use

of the patent or copyright.

(2) The patent or copyright has been adjudicated to be invalid, or

has been administratively determined to be invalid.

(3) The patent or copyright is considered to be unenforceable.

(4) The patent or copyright is expired.

b. Special care should be exercised in determining reasonableness

where the royalties may have arrived at as a result of less-than-arm's-

length bargaining, e.g.:

(1) Royalties paid to persons, including corporations, affiliated

with the organization.

(2) Royalties paid to unaffiliated parties, including corporations,

under an agreement entered into in contemplation that a Federal award

would be made.

(3) Royalties paid under an agreement entered into after an award

is made to an organization.

c. In any case involving a patent or copyright formerly owned by

the organization, the amount of royalty allowed should not exceed the

cost which would have been allowed had the organization retained title

thereto.

45. Severance pay.

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

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

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

are allowable only to the extent that in each case, it is required by

(i) law, (ii) employer-employee agreement, (iii) established policy

that constitutes, in effect, an implied agreement on the organization's

part, or (iv) circumstances of the particular employment.

b. Costs of severance payments are divided into two categories as

follows:

(1) Actual normal turnover severance payments shall be allocated to

all activities; or, where the organization provides for a reserve for

normal severances, such method will be acceptable if the charge to

current operations is reasonable in light of payments actually made for

normal severances over a representative past period, and if amounts

charged are allocated to all activities of the organization.

(2) Abnormal or mass severance pay is of such a conjectural nature

that measurement of costs by means of an accrual will not achieve

equity to both parties. Thus, accruals for this purpose are not

allowable. However, the Federal Government recognizes its obligation to

participate, to the extent of its fair share, in any specific payment.

Thus, allowability will be considered on a case-by-case basis in the

event or occurrence.

46. Specialized service facilities.

a. The costs of services provided by highly complex or specialized

facilities operated by the organization, such as electronic computers

and wind tunnels, are allowable, provided the charges for the services

meet the conditions of either subparagraph b or c and, in addition,

take into account any items of income or Federal financing that qualify

as applicable credits under subparagraph A.5 of Attachment A.

b. The costs of such services, when material, must be charged

directly to applicable awards based on actual usage of the services on

the basis of a schedule of rates or established methodology that (i)

does not discriminate against federally-supported activities of the

organization, including usage by the organization for internal

purposes, and (ii) is designed to recover only the aggregate costs of

the services. The costs of each service shall consist normally of both

its direct costs and its allocable share of all indirect costs. Advance

agreements pursuant to subparagraph A.6 of Attachment A are

particularly important in this situation.

c. Where the costs incurred for a service are not material, they

may be allocated as indirect costs.

47. Taxes.

a. In general, taxes which the organization is required to pay and

which are paid or accrued in accordance with GAAP, and payments made to

local governments in lieu of taxes which are commensurate with the

local government services received are allowable, except for (i) Taxes

from which exemptions are available to the organization directly or

which are available to the organization based on an exemption afforded

the Federal Government and in the latter case when the awarding agency

makes available the necessary exemption certificates, (ii) special

assessments on land which represent capital improvements, and (iii)

Federal income taxes.

b. Any refund of taxes, and any payment to the organization of

interest thereon, which were allowed as award costs, will be credited

either as a cost reduction or cash refund, as appropriate, to the

Federal Government.

48. Termination costs. Termination of awards generally give rise to

the incurrence of costs, or the need for special treatment of costs,

which would not have arisen had the award not been terminated. Cost

principles covering these items are set forth below. They are to be

used in conjunction with the other provisions of this Circular in

termination situations.

a. Common items. The cost of items reasonably usable on the

organization's other work shall not be allowable unless the

organization submits evidence that it would not retain such items at

cost without sustaining a loss. In deciding whether such items are

reasonably usable on other work of the organization, the awarding

agency should consider the organization's plans and orders for current

and scheduled activity. Contemporaneous purchases of common items by

the organization shall be regarded as evidence that such items are

reasonably usable on the organization's other work. Any acceptance of

common items as allocable to the terminated portion of the award shall

be limited to the extent that the quantities of such items on hand, in

transit, and on order are in excess of the reasonable quantitative

requirements of other work.

b. Costs continuing after termination. If in a particular case,

despite all reasonable efforts by the organization, certain costs

cannot be discontinued immediately after the effective date of

termination, such costs are generally allowable within the limitations

set forth in this Circular, except that any such costs continuing after

termination due to the negligent or willful failure of the organization

to discontinue such costs shall be unallowable.

c. Loss of useful value. Loss of useful value of special tooling,

machinery and equipment which was not charged to the award as a capital

expenditure is generally allowable if:

(1) Such special tooling, machinery, or equipment is not reasonably

capable of use in the other work of the organization.

(2) The interest of the Federal Government is protected by transfer

of title or by other means deemed appropriate by the awarding agency;

d. Rental costs. Rental costs under unexpired leases are generally

allowable where clearly shown to have been reasonably necessary for the

performance of the terminated award less the residual value of such

leases, if (i) the amount of such rental claimed does not exceed the

reasonable use value of the property leased for the

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period of the award and such further period as may be reasonable, and

(ii) the organization makes all reasonable efforts to terminate,

assign, settle, or otherwise reduce the cost of such lease. There also

may be included the cost of alterations of such leased property,

provided such alterations were necessary for the performance of the

award, and of reasonable restoration required by the provisions of the

lease.

e. Settlement expenses. Settlement expenses including the following

are generally allowable:

(1) Accounting, legal, clerical, and similar costs reasonably

necessary for:

(a) The preparation and presentation to awarding agency of

settlement claims and supporting data with respect to the terminated

portion of the award, unless the termination is for default (see Sec.

__.61 of Circular A-110); and

(b) The termination and settlement of subawards.

(2) Reasonable costs for the storage, transportation, protection,

and disposition of property provided by the Federal Government or

acquired or produced for the award, except when grantees or contractors

are reimbursed for disposals at a predetermined amount in accordance

with Sec. __.30 through __.37 of Circular A-110.

(3) Indirect costs related to salaries and wages incurred as

settlement expenses in subparagraphs (1) and (2). Normally, such

indirect costs shall be limited to fringe benefits, occupancy cost, and

immediate supervision.

f. Claims under subawards. Claims under subawards, including the

allocable portion of claims which are common to the award, and to other

work of the organization are generally allowable. An appropriate share

of the organization's indirect expense may be allocated to the amount

of settlements with subcontractors and/or subgrantees, provided that

the amount allocated is otherwise consistent with the basic guidelines

contained in Attachment A. The indirect expense so allocated shall

exclude the same and similar costs claimed directly or indirectly as

settlement expenses.

49. Training and education costs.

a. Costs of preparation and maintenance of a program of instruction

including but not limited to on-the-job, classroom, and apprenticeship

training, designed to increase the vocational effectiveness of

employees, including training materials, textbooks, salaries or wages

of trainees (excluding overtime compensation which might arise

therefrom), and (i) salaries of the director of training and staff when

the training program is conducted by the organization; or (ii) tuition

and fees when the training is in an institution not operated by the

organization, are allowable.

b. Costs of part-time education, at an undergraduate or post-

graduate college level, including that provided at the organization's

own facilities, are allowable only when the course or degree pursued is

relative to the field in which the employee is now working or may

reasonably be expected to work, and are limited to:

(1) Training materials.

(2) Textbooks.

(3) Fees charges by the educational institution.

(4) Tuition charged by the educational institution or, in lieu of

tuition, instructors' salaries and the related share of indirect costs

of the educational institution to the extent that the sum thereof is

not in excess of the tuition which would have been paid to the

participating educational institution.

(5) Salaries and related costs of instructors who are employees of

the organization.

(6) Straight-time compensation of each employee for time spent

attending classes during working hours not in excess of 156 hours per

year and only to the extent that circumstances do not permit the

operation of classes or attendance at classes after regular working

hours; otherwise, such compensation is unallowable.

c. Costs of tuition, fees, training materials, and textbooks (but

not subsistence, salary, or any other emoluments) in connection with

full-time education, including that provided at the organization's own

facilities, at a post-graduate (but not undergraduate) college level,

are allowable only when the course or degree pursued is related to the

field in which the employee is now working or may reasonably be

expected to work, and only where the costs receive the prior approval

of the awarding agency. Such costs are limited to the costs

attributable to a total period not to exceed one school year for each

employee so trained. In unusual cases the period may be extended.

d. Costs of attendance of up to 16 weeks per employee per year at

specialized programs specifically designed to enhance the effectiveness

of executives or managers or to prepare employees for such positions

are allowable. Such costs include enrollment fees, training materials,

textbooks and related charges, employees' salaries, subsistence, and

travel. Costs allowable under this paragraph do not include those for

courses that are part of a degree-oriented curriculum, which are

allowable only to the extent set forth in subparagraphs b and c.

e. Maintenance expense, and normal depreciation or fair rental, on

facilities owned or leased by the organization for training purposes

are allowable to the extent set forth in paragraphs 9, 23, and 43.

f. Contributions or donations to educational or training

institutions, including the donation of facilities or other properties,

and scholarships or fellowships, are unallowable.

g. Training and education costs in excess of those otherwise

allowable under subparagraphs b and c may be allowed with prior

approval of the awarding agency. To be considered for approval, the

organization must demonstrate that such costs are consistently incurred

pursuant to an established training and education program, and that the

course or degree pursued is relative to the field in which the employee

is now working or may reasonably be expected to work.

50. Transportation costs. Transportation costs include freight,

express, cartage, and postage charges relating either to goods

purchased, in process, or delivered. These costs are allowable. When

such costs can readily be identified with the items involved, they may

be directly charged as transportation costs or added to the cost of

such items (see paragraph 24). Where identification with the materials

received cannot readily be made, transportation costs may be charged to

the appropriate indirect cost accounts if the organization follows a

consistent, equitable procedure in this respect.

51. Travel costs.

a. Travel costs are the expenses for transportation, lodging,

subsistence, and related items incurred by employees who are in travel

status on official business of the organization. Travel costs are

allowable subject to subparagraphs b through e, when they are directly

attributable to specific work under an award or are incurred in the

normal course of administration of the organization.

b. Such costs may be charged on an actual basis, on a per diem or

mileage basis in lieu of actual costs incurred, or on a combination of

the two, provided the method used results in charges consistent with

those normally allowed by the organization in its regular operations.

c. The difference in cost between first-class air accommodations

and less than first-class air accommodations is unallowable except when

less than first-class air accommodations are not reasonably available

to meet necessary mission requirements, such as where

[[Page 26594]]

less than first-class accommodations would (i) require circuitous

routing, (ii) require travel during unreasonable hours, (iii) greatly

increase the duration of the flight, (iv) result in additional costs

which would offset the transportation savings, or (v) offer

accommodations which are not reasonably adequate for the medical needs

of the traveler.

d. Necessary and reasonable costs of family movements and personnel

movements of a special or mass nature are allowable, pursuant to

paragraphs 41 and 42, subject to allocation on the basis of work or

time period benefited when appropriate. Advance agreements are

particularly important.

e. Direct charges for foreign travel costs are allowable only when

the travel has received prior approval of the awarding agency. Each

separate foreign trip must be approved. For purposes of this provision,

foreign travel is defined as any travel outside of Canada and the

United States and its territories and possessions. However, for an

organization located in foreign countries, the term ``foreign travel''

means travel outside that country.

Circular No. A-122

Attachment C--Non-Profit Organizations Not Subject to This Circular

Aerospace Corporation, El Segundo, California

Argonne Universities Association, Chicago, Illinois

Associated Universities, Incorporated, Washington, D.C.

Associated Universities for Research and Astronomy, Tucson, Arizona

Atomic Casualty Commission, Washington, D.C.

Battelle Memorial Institute, Headquartered in Columbus, Ohio

Brookhaven National Laboratory, Upton, New York

Center for Energy and Environmental Research (CEER), (University of

Puerto Rico), Commonwealth of Puerto Rico

Charles Stark Draper Laboratory, Incorporated, Cambridge, Massachusetts

Comparative Animal Research Laboratory (CARL), (University of

Tennessee), Oak Ridge, Tennessee

Environmental Institute of Michigan, Ann Arbor, Michigan

Hanford Environmental Health Foundation, Richland, Washington

IIT Research Institute, Chicago, Illinois

Institute for Defense Analysis, Arlington, Virginia

Institute of Gas Technology, Chicago, Illinois

Midwest Research Institute, Headquartered in Kansas City, Missouri

Mitre Corporation, Bedford, Massachusetts

Montana Energy Research and Development Institute, Inc. (MERDI), Butte,

Montana

National Radiological Astronomy Observatory, Green Bank, West Virginia

Oak Ridge Associated Universities, Oak Ridge, Tennessee

Project Management Corporation, Oak Ridge, Tennessee

Rand Corporation, Santa Monica, California

Research Triangle Institute, Research Triangle Park, North Carolina

Riverside Research Institute, New York, New York

Sandia Corporation, Albuquerque, New Mexico

Southern Research Institute, Birmingham, Alabama

Southwest Research Institute, San Antonio, Texas

SRI International, Menlo Park, California

Syracuse Research Corporation, Syracuse, New York

Universities Research Association, Incorporated (National Acceleration

Lab), Argonne, Illinois

Universities Corporation for Atmospheric Research, Boulder, Colorado

Non-profit insurance companies, such as Blue Cross and Blue Shield

Organizations

Other non-profit organizations as negotiated with awarding agencies

[FR Doc. 97-12683 Filed 5-13-97; 8:45 am]

BILLING CODE 3110-01-P