Cost Principles for Educational Institutions

Federal RegisterSep 10, 1997

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SUMMARY: This notice proposes to revise Office of Management and Budget

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

(1) Establishing guidance for Federal cost negotiators to assure the

reasonableness of facility costs, (2) implementing a new alternative

approach to replace using special cost studies for the recovery of

utility costs and deferring the elimination of special cost studies for

the recovery of library costs, (3) providing additional guidance on the

calculation of depreciation and use allowances on buildings and

equipment, (4) proposing the use of and soliciting input on a standard

format for facility and administrative rate proposal submissions, and

(5) changing the distribution basis for the facilities and

administrative cost application (from salaries and wages to modified

total direct costs) at universities that use the simplified (short-

form) method to calculate their facilities and administrative rate.

DATE: Comments on these proposals are due November 10, 1997.

ADDRESSES: Comments should be mailed to Gilbert Tran, Financial

Standards and Reporting Branch, Office of Federal Financial Management,

Office of Management and Budget, 725 17th Street, N.W., Room 6025,

Washington, DC 20503. Comments up to three pages in length may be

submitted via facsimile to 202-395-4915. Electronic mail comments may

be submitted via Internet to [email protected] Please include the

full body of electronic mail comments in the text and not as an

attachment. Please include the name, title, organization, postal

address, and E-mail address in the text of the message.

FOR FURTHER INFORMATION: Non-Federal organizations should contact the

organization's cognizant Federal agency. Federal agencies should

contact Gilbert Tran, Financial Standards and Reporting Branch, Office

of Federal Financial Management, Office of Management and Budget, (202)

395-3993.

SUPPLEMENTARY INFORMATION:

A. Purpose of Circular A-21

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

Principles for Educational Institutions,'' establishes principles for

determining costs applicable to Federal grants, contracts, and other

sponsored agreements with educational institutions.

B. Recent Prior Revisions

Circular A-21 was last amended on May 8, 1996 (61 FR 20880). The

1996 revision incorporated four Cost Accounting Standards applicable to

educational institutions, issued by the Cost Accounting Standards Board

(CASB) on November 8, 1994 (59 FR 55746), and extended these standards

to all sponsored agreements. The revision also: required certain large

institutions to disclose their cost accounting practices by the

submission of a Disclosure Statement prescribed by the CASB; amended

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

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

required the use of fixed facilities and administrative (F&A) cost

rates for the life of sponsored agreements. Furthermore, the 1996

revision: established cost negotiation cognizant agency

responsibilities; replaced the term ``indirect costs'' with

``facilities and administrative costs'' (to describe more accurately

the various cost components of sponsored agreements); clarified the

policy for a change from use allowance to depreciation; added criteria

to interest allowability; and, disallowed tuition benefits for employee

family members.

C. Revisions Proposed for Comment

On February 6, 1995, OMB published two sets of proposed revisions

(60 FR 7104 and 60 FR 7105). The first set was finalized in 1996, as

described in Section B. The second set required further development

prior to proposed implementation. The following proposed revisions

address the second set of proposals made in 1995.

1. Establish a Review Process To Ensure the Reasonableness of Facility

Costs.

To increase accountability in the research component of F&A costs

and ensure that the cost of new research facilities passes a ``prudent

person'' test of reasonableness, OMB proposes to establish a review

process for research facility construction project costs. The proposal,

which is detailed in a new Section F.2.b, would require Federal cost

negotiators to determine whether the gross square foot (GSF) cost of

new research facilities with an actual or estimated total cost of more

than $10 million (or renovation costs of more than $4 million) meet the

reasonableness test. The review process would apply to all new research

building construction and renovation projects that are included in F&A

rates negotiated after January 1, 2000. The review process would apply

only to research buildings in which 40 percent or more of total space

is devoted to federally-sponsored agreements.

Federal cost negotiators will rely on the most recent GSF data

collected by the National Science Foundation (NSF) in response to its

biennial survey, ``Science and Engineering Facilities at Colleges and

Universities.'' Biennially, NSF will calculate the median cost per GSF

figures for new research facilities and the median cost per GSF for

renovations to research facilities. NSF will publish these results in

its biennial survey report, which is publicly available. The review

will apply to projects in the 50 states and the District of Columbia,

and the benchmarks will be broken down into the ten Federal regions

established by OMB Circular A-105, ``Standard Federal Regions,'' in

April of 1974, minus the island territories (in addition, as explained

below, Alaska and Hawaii raise unique issues).

The cost items that go into research facility costs have been found

to be geographically sensitive and so the costs within contiguous and

regional states should be comparable. NSF analyzed previous years'

construction cost data by these longstanding Federal regions, and found

that geography explained a significant degree of variation in cost-per-

square-foot in university research facilities and that the Federal

regional grouping provided a reasonable approximation of comparable

construction costs. Further, the geographic regions established in

Circular A-105 are used by the Department of Health and Human Services,

which has negotiation cognizance over a majority of educational

institutions, in their administration of grants and contracts and is

familiar with the grantee community. Therefore, OMB proposes to use

these ten regions for initiating the review process for a particular

university facility costs. Given that other geographic groupings could

be contemplated, OMB invites suggestions of other geographic groupings

that might be demonstrated to be significant contributors to research

facility costs. See proposed new Appendix C to Circular A-21.

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In reviewing data pertaining to newly-constructed or renovated

space, Federal cost negotiators will determine whether the facility's

GSF cost exceeds 125 percent of the NSF median for the region in which

the facility is located. No justification is necessary if the GSF cost

is below the 125 percent benchmark. If the GSF cost exceeds the 125

percent benchmark, then institutions must submit detailed and

quantitative justifications in order for such costs to be considered in

rate negotiations. Acceptable justification should address one of the

following:

(a) Lower life-cycle costs--The institution must demonstrate that

it will incur higher up-front costs in constructing a facility in order

to lower operating costs, and that the initial investment will benefit

the institution and sponsored research agreements; or

(b) Unique research needs--The institution must demonstrate that

unusual design or materials are required for the type of research. For

example, biomedical research space costs are typically more expensive

than the costs of other types of research space.

Additionally, given the different nature of construction costs in

Alaska and Hawaii, a third acceptable justification for construction

costs to exceed the benchmarks is that the project lies in one of those

states.

If an institution's justification is accepted by the Federal cost

negotiators, the full GSF cost amount may be included in the

institution's calculation of its depreciation or use allowance. If an

institution's justification is not deemed acceptable, the Federal cost

negotiators will limit payment of facilities' depreciation or use

allowance to the 125 percent benchmark rate for the region in which the

facility is located. If an institution submits justification that

justifies costs above the benchmark but justifies an amount less than

actual or estimated costs, the Federal cost negotiators and

institutions may arrive at an amount above 125 percent of the regional

median but less than the actual or estimated costs that may be included

in an institution's calculation of depreciation and use allowance.

2. Implement an Alternative Approach for the Payment of Utility Costs

and Defer the Elimination of Special Cost Studies for the Recovery of

Library Costs

The 1996 revision to Circular A-21 indicated that special cost

studies will be eliminated starting with fiscal years beginning on or

after July 1, 1998. OMB committed to developing an alternative approach

to replace special cost studies for utility costs. The proposed

alternative approach, as outlined in proposed new subsections F.4.c and

d, provides a simple methodology to pay for increased utility costs

related to research activities. The approach consists of adding a

utility cost adjustment (UCA) of 1.3 percentage points to the

university's overall F&A organized research rate calculated using the

standard Circular A-21 allocation methods. The 1.3 percentage points

represent the weighted average incremental rate that the Federal

Government paid above the rate calculated using the standard allocation

methodology to institutions that submitted in the past special utility

studies for utility costs related to research activities. OMB will

periodically reassess the UCA.

The UCA will initially be available, starting with fiscal years

beginning on or after July 1, 1998, to the institutions that included

special cost studies in their most recently submitted F&A proposal. The

list of these institutions, based on review of Federal records, is

provided in Attachment A to this proposal. OMB will develop criteria by

which the institutions may be periodically recertified and by which

other institutions could qualify for the UCA by July 1, 2002 and may

change the UCA.

Further, due to the uncertain effects of recent and ongoing changes

to university libraries and their services brought about by the

increased use of the Internet and on-line research, OMB proposes to

defer the elimination of special cost studies to support the allocation

of library costs until OMB has an opportunity to evaluate the impact of

these changes on the costs of library services benefitting organized

research. See proposed revised subsection E.2.d.(5).

3. Provide Additional Guidelines on Depreciation and Use Allowances

In 1995, OMB stated its intention to examine and potentially revise

the current useful life schedules for equipment, the cost of which is

allocated to federally-sponsored agreements through a use allowance, to

ensure that F&A recovery payments keep pace with the changing nature of

scientific equipment. The use allowance methodology is based on an

averaging concept that defines a 15-year useful life as an average life

for all equipment at educational institutions. OMB's examination of

this issue determined that the current 15-year useful life used in the

computation of use allowance is, on balance, reasonable. That is,

although the 15-year useful life may not match the expected life of

some types of equipment (e.g., scientific and computer equipment), it

remains appropriate considering the longer useful life of other types

of equipment (e.g., furniture and fixtures). Therefore, OMB does not

intend to revise the useful life for equipment for the use allowance

method.

For those educational institutions that find that a shorter useful

life for their equipment is more appropriate, Circular A-21 allows the

use of depreciation for the recovery of equipment costs.

To provide more consistency in the treatment of use allowance and

depreciation among educational institutions and Federal cognizant

agencies, OMB proposes the following clarifications for the calculation

of depreciation and use allowance:

(a) Use allowance recovery shall be limited to the acquisition

costs of assets, or fair market value of donated assets at the time of

donation (see proposed revised subsection J.2.c).

(b) Institutions that report depreciation in their financial

statements must use the same depreciation methodology and useful lives

for the F&A proposal (see proposed revised subsection J.12.b).

buildings when depreciation is calculated on individual building

components (see proposed revised subsection J.12.b). This revision

establishes general categories of building components for the

assignment of useful life.

(d) Gains and losses shall be computed on the disposition of

depreciable assets (see proposed revised section J.33). This is how

gains and losses are computed under other OMB cost principles found in

Circulars A-87, ``Cost Principles for State, Local and Indian Tribal

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

Organizations,'' in the treatment of gains or losses resulting from

disposition of depreciable assets. Previously, Circular A-21 was silent

on this issue because depreciation calculations were not required for

educational institutions under generally accepted accounting principles

(GAAP).

4. Propose To Develop a Standard Format for the Ssubmission of F&A

Proposals

A standard format would assist institutions in completing their F&A

rate proposal more efficiently and help the Federal cognizant agency

review each proposal on a more consistent basis. It would also allow

the Federal Government to collect improved information about F&A costs

and to analyze F&A data that could be useful

[[Page 47724]]

in explaining variances in F&A rates among institutions. OMB intends to

develop the standard format with assistance from Federal agencies,

universities, and other interested parties, and then request comments

under the Paperwork Reduction Act through a notice in the Federal

Circular and be available electronically.

5. Change the distribution Basis for F&A Application (From Salaries and

Wages to Modified Total Direct Costs) for Institutions That Use the

Simplified Allocation Method

This change, detailed in proposed revised Section H.2, would

provide more comparability between F&A rates at small and large

universities.

D. Other Proposed Items for Consideration in the 1995 Notice

OMB does not propose at this time to make revisions on two other

items that were discussed in the 1995 Federal Register notice. They

were: (1) to develop methods for direct charging of space costs, and

(2) to develop new methods for charging specialized services

facilities. The following discussion summarizes the result of OMB's

analyses on these two items.

1. Develop Methods for Direct Charging of Space Costs

In February 1995, OMB stated its intention to develop and test a

model for charging facilities costs directly to sponsored agreements.

The objective of this study was to strengthen the incentive for

universities to allocate space costs more efficiently. OMB asked the

Federal Demonstration Project (FDP), which was created to test ways to

improve flexibility and reduce administrative costs associated with

grant-making, to perform the study. In October 1995, the FDP reported

to OMB that it had developed three models of direct charging space

costs to sponsored agreements. It also reported that, although direct

charging is likely to produce more efficient use of space, it could

also impose an excessive administrative burden on educational

institutions and Federal agencies.

In recognition of the FDP's concerns, OMB is not formally pursuing

this concept at the present time. However, OMB requests that Federal

research agencies attempt to identify candidate institutions willing to

pilot test direct charging. Federal agencies should work with pilot

institutions to identify the best ways to quantify the efficiencies and

administrative burdens direct charging creates and to see if an

acceptable balance can be developed.

2. Consider New Methods for Charging Specialized Service Facilities

In February 1995, OMB stated its intention to develop a standard

methodology for uniform treatment of specialized service facilities

(e.g., animal care, computer centers and biohazard centers). OMB

examined the issue and is not considering a change at this time in the

current provisions for charging specialized service facilities costs.

OMB intended to identify the operating expenses of specialized

service facilities that should be allocated to the direct costs and

those to be included in a facility-specific rate or the general

facilities cost pool. Based on OMB's analysis, costs associated with

the specialized service facilities can be generally identified to these

facilities. In accordance with current provisions of Circular A-21,

these costs shall be directly assigned to the special service

facilities and shall not be included in a facility-specific rate or the

general facilities cost pool, unless the costs are immaterial or not

readily identifiable. To allow the allocation of facilities and general

administrative costs associated with specific specialized service

facilities to a general facilities cost pool would violate the basic

allocability principles of OMB cost principles Circulars (A-21, A-87

and A-122) and inequitably distribute costs to projects that do not

benefit from the specialized service facilities.

E. Clarification on the Use of Fixed Rates for the Life of the