Cost Principles for Educational Institutions

SUMMARY: The Office of Management and Budget revises Circular A-21,

``Cost Principles for Educational Institutions,'' by: (1) establishing

review and documentation requirements to assure the reasonableness of

large research 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, and (4) 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.

In addition, OMB is issuing an interim final revision to allow

trustees' travel expenses.

DATES: The revision and the interim final revision are effective on

June 1, 1998. Comments on the interim final revision must be received

by July 1, 1998.

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, NW, 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 CONTACT: Non-Federal organizations should

contact the organization's cognizant Federal agency. Federal agencies

should contact Gilbert Tran, Financial Standards and Reporting Branch,

Office of Federal Financial Management, Office of Management and

Budget, (202) 395-3993.

SUPPLEMENTARY INFORMATION:

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

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

(60 FR 7104 and 60 FR 7105): one for immediate consideration and the

other for future consideration. The first set of proposed revisions was

finalized on May 8, 1996 (61 FR 20880) with the following revisions.

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.

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.

Required the use of fixed facilities and administrative

(F&A) cost rates for the life of sponsored agreements.

Established cost negotiation cognizant agency

responsibilities.

Replaced the term ``indirect costs'' with ``facilities and

administrative costs''.

Clarified the policy for a change from use allowance to

depreciation.

Added criteria to interest allowability.

Disallowed tuition benefits for employee family members.

C. Current Revisions

On September 10, 1997, OMB proposed the second set of revisions (62

FR 47722) to complete OMB's intention expressed in February 1995. The

proposal included the following:

1. Establish guidance for Federal cost negotiators to assure the

reasonableness of facility costs.

2. Implement a new alternative approach to replace using special

cost studies for the recovery of utility costs and defer the

elimination of special cost studies for the recovery of library costs.

3. Provide additional guidance on the calculation of depreciation

and use allowances on buildings and equipment.

4. Change 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.

5. Develop a standard format for F&A proposal submissions.

Circular A-21 is revised to:

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 establishes a review and

documentation process for large research facilities. Large facilities

are defined as buildings costing more than $10 million. The new

provisions apply to large research facilities that are included in F&A

rate proposals negotiated after January 1, 2000, with design and

construction beginning after July 1, 1998. The revision, which is

detailed in a new Section F.2.c, ``Large research facilities,'' is

based on a university proposal and implements the following

requirements:

A requirement for institutions to maintain an adequate

internal review and approval process for facility costs to ensure that

the construction costs for large research facilities are reasonable.

The requirement is applicable when an institution has a new large

research facility (costing more than $10 million), of which more than

40 percent is expected to be allocated to Federal research. An annual

review of the institution's internal review process would be performed

under the audit for Federal programs, as required by OMB Circular A-

133, ``Audits of State, Local Governments, and Non-Profit

Organizations.'' Future revisions to the OMB Single Audit Compliance

Supplement, which provides steps and procedures for auditors in

conducting A-133 audits, will address the auditor's responsibility for

assessing institutional compliance with the research facility cost

review process.

An additional documentation requirement for a building

costing more than $25 million, of which more than 50 percent is

expected to be allocated to Federal research. For any such building,

the institution must perform and document an analysis of construction

costs, which includes a comparison of those costs with the National

Science Foundation data on research construction costs (based on its

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

Universities''), and any other relevant construction cost data.

[[Page 29787]]

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. For the fiscal year beginning on or after

July 1, 1998, institutions that have included special cost studies in

their most recently submitted F&A proposal (listed in Exhibit B) may,

instead, add 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.

As explained below, 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

the 50 institutions that previously submitted special utility studies

for utility costs related to research activities. OMB will periodically

reassess the UCA.

OMB will also develop criteria and publish them in a Federal

Register notice 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 percentage point.

Further, OMB revises the Circular to allow special studies for

library costs. 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 defers 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.

3. Provide additional guidelines on depreciation and use

allowances.

To provide more consistency in the treatment of use allowances and

depreciation among educational institutions and Federal cognizant

agencies, the Circular is revised as follows:

(a) Limit use allowance recovery to the acquisition costs of

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

(see subsection J.12.c).

(b) Require institutions that report depreciation on their

financial statements to use the same depreciation method and useful

lives for the F&A proposals (see subsection J.12.b).

(c) Establish guidelines for the calculation of depreciation on

buildings when depreciation is calculated on individual building

components (see subsection J.12.b). This revision establishes general

categories of building components.

(d) Require institutions that record depreciation in their

financial statements to record gains and losses on the disposition of

depreciable assets (see section J.33).

4. 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 Section H.3,

provides more comparability of F&A rates between small and large

universities.

5. Allow trustees' travel expenses. This change is issued as an

interim final revision and is made to provide consistency with recent

revisions to Circular A-122, ``Cost Principles for Non-Profit

Organizations.'' OMB requests comments on this change.

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

Circular published in 1979 (44 FR 12368; February 26, 1979), as amended

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

1986), in 1986 (51 FR 43487; December 2, 1986), in 1991 (56 FR 50224;

October 1, 1991), in 1993 (58 FR 39996), in 1996 (61 FR 20880; May 8,

1996), and in this notice. The 1996 amendment included a recompilation

of the Circular up to that date (61 FR 20893). A recompilation of the

entire Circular with all its amendments, including this amendment, is

available in electronic form on the OMB Home Page at http://

www.whitehouse.gov/WH/EOP/omb.

D. Comments and Responses

OMB received about 130 comments from universities, Federal

agencies, professional organizations, and accounting and law firms. The

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

comments resulted in modifications to OMB's original proposal.

Facility Costs

Comment: The commenters strongly opposed the proposal to establish

benchmark rates for facility costs, citing the following reasons: (1)

benchmarks are unnecessary given that there is no evidence of abuse and

universities already have rigid internal review and approval processes

to assure reasonable construction costs; (2) benchmarks would

compromise scientific excellence by discouraging universities'

investment in modern facilities; (3) negotiators are not qualified to

review justifications of facilities costs; and (4) the proposed NSF

data are not suitable for establishing benchmark rates.

Some universities proposed a less rigid approach that relies on

university cost management procedures to control the research facility

costs.

Response: The objective of the proposed review process based on

benchmark rates was to improve accountability by requiring and

reviewing construction cost justifications of buildings costing more

than 125 percent above the calculated average regional median. However,

OMB recognizes that there may exist review and approval systems at

universities to assure that construction costs are reasonable.

Therefore, in accordance with the universities' suggestion, the

Circular is revised to implement an approach that relies more on a

university's internal review process for facility costs rather than

established benchmarks. The approach requires a review of universities'

internal cost management procedures, combined with additional

documentation for large research facilities that are substantially

allocated to Federal programs.

Comment: The review of any internal control system for costs

charged against Federal programs should be included as part of the

annual audit of Federal programs required by Circular A-133.

Response: OMB agrees. The review of the university's internal

control and approval process for construction costs, which are

indirectly charged to Federal programs through depreciation/use

allowance costs, is included as part of the annual university A-133

audit. The review procedures will be included in the A-133 Compliance

Supplement.

Comment: The National Science Foundation (NSF) survey data for

research construction costs are inadequate for establishing benchmark

rates. The data does not identify costs by project and produces an

average rate based on the total of all construction projects,

regardless of size. Some commenters added that benchmark rates should

be based only on construction cost data for large projects at research-

intensive schools, since these buildings tend to cost more.

Response: OMB has requested NSF to conduct a follow-up survey that

would identify costs by project, and accumulate data for projects

costing more than $10 million. For the revised review process in

section F.2.c, universities shall include these NSF construction cost

data for comparison purposes in their analysis of large research

facilities costs.

Comment: One of the criteria that triggers a review for

construction costs is that a building is substantially allocated to

Federal programs. Does this criteria apply only when the building is

initially put in service or during the life of the building?

[[Page 29788]]

Response: The criteria for Federal participation (use) percentage

are based on university's estimation of the building use for its entire

life. Therefore, when a university estimates during the planning phase

that the space of a particular research building will be substantially

allocated to Federal programs during its life (thus, the Federal

government will fund a substantial part of the building costs), then

the university must comply with requirements of section F.2.c. The

Federal cognizant agencies will monitor the actual Federal

participation percentage in the building usage versus the universities'

estimation, so that OMB may evaluate whether further revisions to the

review requirements would be appropriate.

Comment: The review process for facility costs should exclude

reconstruction and renovation projects because of the diverse nature of

these projects, and therefore their costs. In addition, the total costs

of these projects are usually not material.

Response: OMB agrees. Reconstruction and renovation projects are

not subject to the requirements of section F.2.c.

Comment: The criteria for construction projects subject to

benchmark review should be increased to $25 million in construction

costs and 50 percent of space allocated to Federal programs (instead of

the proposed $10 million and 40 percent Federal participation).

Response: The revised requirements consist of two sets of criteria.

The first one (buildings costing more than $10 million and 40 percent

Federal participation) triggers the requirement for an internal review

and approval system for facility construction costs at the institution.

As suggested by some, the second set of criteria (buildings costing

more than $25 million and 50 percent Federal participation) triggers

the documentation requirement for that particular building.

Comment: The NSF construction data, which are required to be used

as comparison data in section F.2.c, should be made available publicly

and published as a separate schedule, as an attachment to A-21, or as

part of the NSF biennial report.

Response: OMB agrees. NSF data will be available publicly because

this data must be used by institutions in the comparative analysis for

buildings costing more than $25 million. NSF will publish this data as

part of their biennial report on research facilities.

Comment: Do the provisions in section F.2.c apply to buildings on

which the design and construction begins prior to July 1, 1998 (and the

buildings are not completed until fiscal year 2000)?

Response: OMB generally does not apply new provisions

retroactively. Therefore, the new provisions in section F.2.c apply

only to construction projects, on which the design and planning begins

after July 1, 1998, and whose costs are included in the F&A rate

proposals negotiated after January 1, 2000. The design and planning of

a particular building start when the architectural design of the

building is first presented to the institution's board of trustees for

consideration.

Utility cost adjustment

Comment: Some commenters suggested an increase in the utility cost

adjustment (UCA) from 1.3 percent to 1.7 percent based on the weighted

average of negotiated UCA at 11 major research universities.

Response: The UCA remains at 1.3 percent at this time. The 1.3

percent UCA is the weighted average for 50 universities that have

performed special utility cost studies, as OMB identified at proposal

time. Since the proposal was published, an additional 16 universities

have been identified to be eligible for the UCA because of their

previous submission of the special cost studies. The revised weighted

average UCA for the 66 schools dropped subsequently to 1.2 percent.

Instead of reducing the UCA to 1.2 percent, OMB will finalize the UCA

at 1.3 percent.

Comment: The UCA should be allowable to all schools regardless of

whether they have previously performed a special utility cost study,

since it is evident that research space require more utility costs than

other types of space.

Response: OMB allows the universities to conduct special cost

studies to support the utility consumption for research activities

under section E.2.d of the Circular. As a result, 66 universities

performed the special studies that support the allocation of utility

costs to their research activities. OMB does not believe it is

appropriate to grant the UCA at this time to universities that have not

demonstrated the heavier utility consumption for their research

activities. In addition, utility consumption varies greatly depending

on the types of research space. For certain types of research space

(e.g., computer laboratory, agricultural research barn, dry laboratory,

and math laboratory), the standard allocation method (based on square

foot) generally provides the best allocation of utility costs to

benefiting activities. However, OMB will develop criteria by fiscal

year 2002 for these universities to become certified for the UCA.

Comment: The UCA number needs to be connected with future actual

utility costs because utility costs can increase astronomically in the

future.

Response: OMB will periodically reassess the UCA number. OMB plans

to reevaluate the UCA in fiscal year 2002 with the assistance from

Federal agencies and the universities.

Comment: How is the UCA applied? On a building by building basis or

on the total F&A rate?

Response: The UCA is added to the university's overall F&A rate

that is computed using the standard allocation method. For example, a

university computes its total F&A rate of 50 percent (using the square

feet basis to allocate its utility costs); the F&A adjusted rate with

the UCA would be 51.3 percent.

Depreciation and use allowance

Comment: Can a state university, that is not required to record

depreciation for financial statements under generally accepted

accounting principles (GAAP), use depreciation for its F&A proposal?

Response: A state university, which is not currently required under

GAAP to record depreciation on its assets, can either use depreciation

or use allowance for its F&A proposal. When the depreciation method is

selected, the university must comply with the existing provisions in

section J.12.b of the Circular to calculate depreciation costs.

Comment: The revision requires that the same depreciation method be

used for financial statements and for a F&A proposal. Can a Federal

negotiator question the useful life of an asset when that useful life

is used for financial statements?

Response: The Federal negotiator can always question the

reasonableness of a particular asset's useful life as part of the F&A

proposal review. However, with this revision, the Federal negotiator

should address his/her concerns to the institution's external auditors,

who are responsible for certifying the adequacy of the institution's

financial statements (including the asset depreciation methods). For

public universities that do not currently record depreciation on their

financial statements, but use depreciation methods on their F&A

proposals, the Federal negotiator can address his/her concerns to the

institution's management and make any necessary adjustments on the F&A

proposal.

[[Page 29789]]

Comment: The revision suggests the grouping of building components

for depreciation purposes into three general groups: building shell,

building services systems, and fixed equipment. Can a university have

more than three general groups with the authorization from the Federal

cognizant agency?

Response: OMB believes that the three general groups are sufficient

for grouping building components for depreciation. If, in an

exceptional case, a university believes it should have more than the

three general groups for building components, the university may so

proceed if it receives authorization from the Federal cognizant agency

to do so. Such an exception should rarely be authorized, if ever. The

use of the three general groups standardizes the ``componentization''

process, eases the review of depreciation, and allows better data

collection on depreciation costs.

Comment: Can each component within a major building group have a

separate useful life?

Response: Each component within a general building group can have a

separate useful life that takes into consideration such factors as:

type of construction, nature of equipment, technological developments

in the particular area, and the renewal and replacement policies for

the assets. When a general component group has more than one useful

life for its components, a composite useful life for the entire group

must be calculated.

Comment: The commenters, particularly the public universities,

opposed a requirement to limit (i.e., cap) the use allowance recovery

on assets to the acquisition costs. They argued that (1) the

requirement is contrary to current policy regarding use allowance; (2)

the over-recovery of use allowance on those assets that have surpassed

their useful life is balanced by the under-recovery of assets that are

disposed of earlier than their useful life; and (3) the new limitation

will lead universities to convert to depreciation, which is costly,

will add accounting burden, and will increase the F&A rate.

Response: OMB disagrees. To allow use allowance for assets in

excess of the assets' acquisition costs can result in over-recovery of

costs by the universities, particularly when the universities can

select either the depreciation or use allowance methods for a

particular class of assets. In many instances, universities use both

the depreciation and use allowance methods for different classes of

assets: often using use allowance for long-lasting assets such as

buildings and laboratory benches, while using depreciation for shorter-

life assets such as computers. In these instances, the under-recovery

and over-recovery of asset costs do not balance each other out, but

rather the result is an over-recovery of costs against Federal

programs.

Under special circumstances, when a university uses the use

allowance method for all its assets, current section J.12.c.(3) allows

the university to claim use allowance recovery in excess of acquisition

costs for certain assets, with approval from Federal cognizant

agencies.

This issue may soon become moot when the public universities are

required, by the Governmental Accounting Standards Board (GASB), to

record depreciation for financial statements (at this time, this

requirement is projected to be effective for fiscal year 2001).

Comment: The conversion to depreciation for old buildings is

extremely difficult, if not impossible, because of the lack of records

for older capital improvement projects. The commenters suggest that

capital improvement projects be excluded from the limitations of use

allowance recovery.

Response: For older capital improvement projects, for which records

are unavailable, the university and the Federal cognizant agency may

negotiate a reasonable use allowance amount as long as the buildings

are still in use for the benefit of Federal programs.

Comment: The provision on gains and losses on the sale, retirement,

or other disposition of depreciable property should not apply to public

universities, which are not required to depreciate under GAAP, and

therefore, do not maintain depreciation records.

Response: OMB agrees. Section J.33.a (d) provides an exemption for

institutions that claim use allowance in lieu of depreciation for the

recovery of their asset costs.

Distribution Basis for ``Short-Form'' Universities

Comment: The use of the modified total direct costs (MTDC) basis

should be an option rather than a requirement for the simplified

allocation method since the determination of a MTDC basis can be much

more complicated than the salaries and wages basis. In some cases,

universities have to make major accounting system changes to

accommodate this requirement.

Response: OMB agrees. OMB encourages universities to use the MTDC

as the distribution basis for the simplified allocation method, as it

would improve the consistency of F&A rate reporting among small and

large universities. However, because of the possible difficulties for

some universities to calculate the MTDC amount, the revision allows the

universities to use either the MTDC or salaries and wages as

distribution basis.

Definition of ``Major Projects'

Comment: In July 1994, OMB issued a memorandum to the Federal

agencies to clarify its policy on administrative costs for ``major

project'', referred in subsection F.6.b, ``Departmental administration

expenses.'' OMB should add this clarification to the Circular to

provide consistent definition and treatment of the administrative costs

related to ``major project.''

Response: OMB agrees. The OMB memorandum to the Federal agencies

(dated July 13, 1994) provided guidance on defining the circumstances

under which administrative and clerical salaries may be charged

directly to Federal sponsored agreements. The definition of ``major

project'', as provided in OMB's memorandum, is added to section F.6.b.

A sample of examples is listed as new exhibit C.

E. Other Items

Develop a standard format for the submission of F&A proposals

OMB proposed in September 1997 to develop a standard format for the

submission of F&A proposals, that would assist universities in

completing their F&A rate proposals more efficiently and help the

Federal cognizant agency review each proposal on a more consistent

basis. OMB, with assistance from Federal agencies and universities, is

in the process of developing this standard format. When completed, OMB

will request comments under the Paperwork Reduction Act through a

separate Federal Register notice. The standard format will be included

as an Appendix to the Circular and be available electronically.

Interim Final Revision--Trustees' Travel Expenses

OMB is making an interim final revision to allow trustees' travel

expenses at educational institutions under the administrative cost

component of the F&A rate. The revision is made to provide consistency

with recent revisions to Circular A-122, ``Cost Principles for Non-

Profit Organizations,'' which retained the allowability of trustees'

travel expenses.

OMB recently issued final revisions to Circular A-122 to provide

consistency across all cost circulars. Based on the comments received

from non-profit

[[Page 29790]]

grantees regarding the proposed disallowance of trustees' travel

expenses, OMB determined that trustees' travel expenses are reasonable

and necessary business expenses for the operations of non-profit

organizations and should remain allowable. In considering this issue

for A-122, OMB also decided that trustees' travel expenses are

reasonable and necessary for universities. In October 1991, trustee

travel was made unallowable in Circular A-21, along with a number of

other cost categories (e.g., alcohol and advertising costs). This

interim final rule reflects the view that trustee travel, unlike the

other unallowable costs, is a reasonable cost of business, and should

be allowed. Accordingly, OMB is revising Circular A-21 to allow

trustees' travel expenses (see revised section 50). OMB requests

comments on this change.

Franklin D. Raines,

Director.

Circular A-21 is revised as follows:

1. Replace subsection E.2.d.(5) with the following:

(5) Notwithstanding subsection (3), effective July 1, 1998, a cost

analysis or base other than that in Section F shall not be used to

distribute utility or student services costs. Instead, subsections

F.4.c and F.4.d may be used in the recovery of utility costs.

2. Add new subsection F.2.c:

c. Large research facilities. The following provisions apply to

large research facilities, that are included in F&A rate proposals

negotiated after January 1, 2000, and on which the design and

construction begin after July 1, 1998. Large facilities, for this

provision, are defined as buildings with construction costs of more

than $10 million. The determination of the Federal participation (use)

percentage in a building is based on institution's estimates of

building use over its life, and is made during the planning phase for

the building.

(1) When an institution has a large research facilities, of which

40 percent or more of total assignable space is expected for Federal

use, the institution must maintain an adequate review and approval

process to ensure that construction costs are reasonable. The review

process shall address and document relevant factors affecting

construction costs, such as:

--Life cycle costs

--Unique research needs

--Special building needs

--Building site preparation

--Environmental consideration

--Federal construction code requirements

--Competitive procurement practices

The approval process shall include review and approval of the

projects by the institution's Board of Trustees (which can also be

called Board of Directors, Governors or Regents) or other independent

entities.

(2) For research facilities costing more than $25 million, of which

50 percent or more of total assignable space is expected for Federal

use, the institution must document the review steps performed to assure

that construction costs are reasonable. The review should include an

analysis of construction costs and a comparison of these costs with

relevant construction data, including the National Science Foundation

data for research facilities based on its biennial survey, ``Science

and Engineering Facilities at Colleges and Universities.'' The

documentation must be made available for review by Federal negotiators,

when requested.

3. Add new subsections F.4.c and F.4.d:

c. For F&A rates negotiated on or after July 1, 1998, an

institution that previously employed a utility special cost study in

its most recently negotiated F&A rate proposal in accordance with

Section E.2.d, may add a utility cost adjustment (UCA) of 1.3

percentage points to its negotiated overall F&A rate for organized

research. Exhibit B displays the list of eligible institutions. The

allocation of utility costs to the benefitting functions shall

otherwise be made in the same manner as described in subsection F.4.b.

Beginning on July 1, 2002, Federal agencies shall reassess periodically

the eligibility of institutions to receive the UCA.

d. Beginning on July 1, 2002, Federal agencies may receive

applications for utilization of the UCA from institutions not subject

to the provisions of subsection F.4.c.

4. Replace subsection F.6.b with the following:

b. The following guidelines apply to the determination of

departmental administrative costs as direct or F&A costs.

(1) In developing the departmental administration cost pool,

special care should be exercised to ensure that costs incurred for the

same purpose in like circumstances are treated consistently as either

direct or F&A costs. For example, salaries of technical staff,

laboratory supplies (e.g., chemicals), telephone toll charges, animals,

animal care costs, computer costs, travel costs, and specialized shop

costs shall be treated as direct cost wherever identifiable to a

particular cost objective. Direct charging of these costs may be

accomplished through specific identification of individual costs to

benefiting cost objectives, or through recharge centers or specialized

service facilities, as appropriate under the circumstances.

(2) The salaries of administrative and clerical staff should

normally be treated as F&A costs. Direct charging of these costs may be

appropriate where a major project or activity explicitly budgets for

administrative or clerical services and individuals involved can be

specifically identified with the project or activity. ``Major project''

is defined as a project that requires an extensive amount of

administrative or clerical support, which is significantly greater than

the routine level of such services provided by academic departments.

Some examples of major projects are described in Exhibit C.

(3) Items such as office supplies, postage, local telephone costs,

and memberships shall normally be treated as F&A costs.

5. Replace subsection H.1.a with the following:

a. Where the total direct cost of work covered by Circular A-21 at

an institution does not exceed $10 million in a fiscal year, the use of

the simplified procedure described in subsections 2 or 3, may be used

in determining allowable F&A costs. Under this simplified procedure,

the institution's most recent annual financial report and immediately

available supporting information shall be utilized as basis for

determining the F&A cost rate applicable to all sponsored agreements.

The institution may use either the salaries and wages (see subsection

2) or modified total direct costs (see subsection 3) as distribution

basis.

6. Change the title for subsection H.2. to ``Simplified Procedure--

Salaries and Wages Base.''

7. Add a new subsection H.3.

3. Simplified procedure--Modified total direct cost base.

a. Establish the total costs incurred by the institution for the

base period.

b. Establish a F&A cost pool consisting of the expenditures

(exclusive of capital items and other costs specifically identified as

unallowable) which customarily are classified under the following

titles or their equivalents:

(1) General administration and general expenses (exclusive of costs

of student administration and services, student activities, student

aid, and scholarships).

(2) Operation and maintenance of physical plant; and depreciation

and use allowances; after appropriate adjustment for costs applicable

to other institutional activities.

[[Page 29791]]

(3) Library.

(4) Department administration expenses, which will be computed as

20 percent of the salaries and expenses of deans and heads of

departments.

In those cases where expenditures classified under subsection (1)

have previously been allocated to other institutional activities, they

may be included in the F&A cost pool. The modified total direct costs

amount included in the F&A cost pool must be separately identified.

c. Establish a modified total direct cost distribution base, as

defined in Section G.2, that consists of all institution's direct

functions.

d. Establish the F&A cost rate, determined by dividing the amount

in the F&A cost pool, subsection b, by the amount of the distribution

base, subsection c.

e. Apply the F&A cost rate to the modified total direct costs for

individual agreements to determine the amount of F&A costs allocable to

such agreements.

8. Replace subsection J.12.b.(2) with the following:

(2) The depreciation method used to charge 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 in the early portions than in the later

portions of its useful life, 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.

The depreciation methods used to calculate the depreciation amounts for

F&A rate purposes shall be the same methods used by the institution for

its financial statements. This requirement does not apply to

institutions (e.g., public institutions) which are not required to

record depreciation by applicable generally accepted accounting

principles (GAAP).

9. Replace subsection J.12.b.(4) with the following:

(4) The entire building, including the shell and all components,

may be treated as a single asset and depreciated over a single useful

life. A building may also be divided into multiple components. Each

component item may then be depreciated over its estimated useful life.

The building components shall be grouped into three general components

of a building: building shell (including construction and design

costs), building services systems (e.g., elevators, HVAC, plumbing

system and heating and air-conditioning system) and fixed equipment

(e.g., sterilizers, casework, fumehoods, cold rooms and glassware/

washers). In exceptional cases, a Federal cognizant agency may

authorize an institution to use more than these three groupings. When

an institution elects to depreciate its buildings by its components,

the same depreciation methods must be used for F&A purposes and

financial statements purposes, as described in subsection (2).

10. Replace subsection J.12.c.(1) with the following:

(1) The use allowance for buildings and improvements (including

improvements such as paved parking areas, fences, and sidewalks) shall

be computed at an annual rate not exceeding two percent of acquisition

cost. The use allowance for equipment shall be computed at an annual

rate not exceeding six and two-thirds percent of acquisition cost. Use

allowance recovery is limited to the acquisition cost of the assets.

For donated assets, use allowance is limited to the fair market value

of the assets at the time of donation.

11. Replace section J.33 with the following:

33. Profits and losses on disposition of plant equipment or other

capital assets.

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

disposition of depreciable property shall be included in the year in

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

which the property was included. The amount of the gain or loss to be

included as a credit or charge to the appropriate asset 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 account

and is reflected in the depreciation allowable under Section J.12.

(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 Section J.21.d.

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

use allowances in lieu of depreciation.

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

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

excluded in computing Federal award costs.

c. When assets acquired with Federal funds, in part or wholly, are

disposed of, the distribution of the proceeds shall be made in

accordance with Circular A-110, ``Uniform Administrative Requirements

for Grants and Agreements with Institutions of Higher Education,

Hospitals, and Other Non-Profit Organizations.''

12. Replace Section 50 with the following:

50. Trustees. Travel and subsistence costs of trustees (or

directors) are allowable. The costs are subject to restrictions

regarding lodging, subsistence and air travel costs provided in Section

48.

13. Add Exhibit B--Listing of institutions receiving the utility

cost adjustment and Exhibit C--Examples of ``major project'' where

direct charging of administrative or clerical staff salaries may be

appropriate, as follows:

Exhibit B

Listing of institutions that are eligible for the utility cost

adjustment.

1. Baylor University

2. Boston College

3. Boston University

4. California Institute of Technology

5. Carnegie-Mellon University

6. Case Western University

7. Columbia University

8. Cornell University (Endowed)

9. Cornell University (Statutory)

10. Cornell University (Medical)

11. Dayton University

12. Emory University

13. George Washington University (Medical)

14. Georgetown University

15. Harvard Medical School

16. Harvard University (Main Campus)

17. Harvard University (School of Public Health)

18. Johns Hopkins University

19. Massachusetts Institute of Technology

20. Medical University of South Carolina

21. Mount Sinai School of Medicine

22. New York University (except New York University Medical Center)

23. New York University Medical Center

24. North Carolina State University

25. Northeastern University

26. Northwestern University

27. Oregon Health Sciences University

28. Oregon State University

29. Rice University

30. Rockefeller University

31. Stanford University

32. Tufts University

33. Tulane University

34. Vanderbilt University

35. Virginia Commonwealth University

36. Virginia Polytechnic Institute and State University

37. University of Arizona

38. University of CA, Berkeley

39. University of CA, Irvine

40. University of CA, Los Angeles

41. University of CA, San Diego

42. University of CA, San Francisco

43. University of Chicago

44. University of Cincinnati

[[Page 29792]]

45. University of Colorado, Health Sciences Center

46. University of Connecticut, Health Sciences Center

47. University of Health Science and The Chicago Medical School

48. University of Illinois, Urbana

49. University of Massachusetts, Medical Center

50. University of Medicine & Dentistry of New Jersey

51. University of Michigan

52. University of Pennsylvania

53. University of Pittsburgh

54. University of Rochester

55. University of Southern California

56. University of Tennessee, Knoxville

57. University of Texas, Galveston

58. University of Texas, Austin

60. University of Texas Southwestern Medical Center

61. University of Virginia

62. University of Vermont & State Agriculture College

63. University of Washington

64. Washington University

65. Yale University

66. Yeshiva University

Exhibit C

Examples of ``major project'' where direct charging of

administrative or clerical staff salaries may be appropriate.

Large, complex programs such as General Clinical

Research Centers, Primate Centers, Program Projects, environmental

research centers, engineering research centers, and other grants and

contracts that entail assembling and managing teams of investigators

from a number of institutions.

Projects which involve extensive data accumulation,

analysis and entry, surveying, tabulation, cataloging, searching

literature, and reporting (such as epidemiological studies, clinical

trials, and retrospective clinical records studies).

Projects that require making travel and meeting

arrangements for large numbers of participants, such as conferences

and seminars.

Projects whose principal focus is the preparation and

production of manuals and large reports, books and monographs

(excluding routine progress and technical reports).

Projects that are geographically inaccessible to normal

departmental administrative services, such as research vessels,

radio astronomy projects, and other research field sites that are

remote from campus.

Individual projects requiring project-specific database

management; individualized graphics or manuscript preparation; human

or animal protocols; and multiple project-related investigator

coordination and communications.

These examples are not exhaustive nor are they intended to imply

that direct charging of administrative or clerical salaries would

always be appropriate for the situations illustrated in the

examples. For instance, the examples would be appropriate when the

costs of such activities are incurred in unlike circumstances, i.e.,

the actual activities charged direct are not the same as the actual

activities normally included in the institution's facilities and

administrative (F&A) cost pools or, if the same, the indirect

activity costs are immaterial in amount. It would be inappropriate

to charge the cost of such activities directly to specific sponsored

agreements if, in similar circumstances, the costs of performing the

same type of activity for other sponsored agreements were included

as allocable costs in the institution's F&A cost pools. Application

of negotiated predetermined F&A cost rates may also be inappropriate

if such activity costs charged directly were not provided for in the

allocation base that was used to determine the predetermined F&A

cost rates.

[FR Doc. 98-14078 Filed 5-29-98; 8:45 am]

BILLING CODE 3110-01-P