Cost Principles for Non-Profit Organizations

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

A-122 by amending the definition for equipment; requiring the breakout

of indirect costs into two categories (facilities and administration)

for certain non-profit organizations; modifying the multiple allocation

basis; and, clarifying the treatment of certain cost items.

DATES: The revision is effective on June 1, 1998.

FOR FURTHER INFORMATION CONTACT: Federal agencies should contact

Gilbert Tran, Office of Federal Financial Management, Office of

Management and Budget, (202) 395-3993. Non-Federal organizations should

contact the organization's Federal cognizant agency.

SUPPLEMENTARY INFORMATION:

A. Background

On October 6, 1995, the Office of Management and Budget (OMB)

issued a final revision to OMB Circular A-122, ``Cost Principles for

Non-Profit Organizations,'' in the Federal Register (60 FR 52516)

regarding interest allowability. The revision was made in a continuing

effort to increase consistency across OMB's cost principles circulars

A-122, A-21, ``Cost Principles for Educational Institutions,'' and A-

87, ``Cost Principles for State, Local and Indian Tribal Governments.''

To further the goals of consistency, OMB proposed on the same date (60

FR 52522) to revise the definition of equipment, to clarify the

treatment of certain types of costs, to modify the multiple allocation

base method for computing indirect cost rate(s), and to place an upper-

limit on payments of administrative expenses for certain non-profit

organizations.

With this final revision, Circular A-122 consists of the Circular

as issued in 1980 (45 FR 46022; July 8, 1980), as amended in 1984 (49

FR 18260; April 27, 1984), in 1987 (52 FR 19788; May 27, 1987), in 1995

(60 FR 52516; October 6, 1995), in 1997 (62 FR 45934; August 29, 1997),

and in this notice. A recompilation of the entire Circular A-122, with

all its amendments, accompanies the notice and is available in

electronic form on the OMB Home Page at http://www.whitehouse.gov/WH/

EOP/omb.

B. Current Revisions

Circular A-122 is revised in this notice to:

1. Amend the definition of equipment by increasing the

capitalization threshold to the lesser amount used for financial

statement purposes or $5,000 (see paragraph 15).

2. Require major non-profit organizations (those receiving more

than $10 million in direct Federal funding) to report indirect cost

rates by two major component categories: facilities and administration

(see paragraph D, Attachment A).

3. Modify the multiple allocation base method (MAB) to be

consistent with OMB Circular A-21 (see paragraph D.3). However, major

non-profit organizations are not required to use the multiple

allocation base method. MAB remains one of the three available

methodologies for computing indirect costs.

4. Clarify the treatment of the following cost items to provide

consistency across OMB's cost principles circulars (A-21 and A-87) and

the Federal Acquisition Regulations, where applicable:

Alcoholic beverages.

Advertising and public relations costs.

Organization-furnished automobiles.

Defense and prosecution of criminal and civil proceedings,

claims, appeals and patent infringements.

Housing and living expenses.

Insurance.

Memberships.

Selling or marketing of goods and services.

Severance pay for foreign nationals.

OMB is not implementing the proposed restrictions on trustees'

travel expenses at non-profit organizations. In line with this

decision, and to further consistency between cost circulars, OMB will

be amending Circular A-21 to allow trustees' travel expenses.

OMB defers considering an upper-limit on payment of administrative

expenses until better data on indirect costs at non-profit

organizations are collected.

C. Comments and Responses

OMB received about 185 comments from non-profit organizations,

Federal agencies, professional organizations and accounting firms. A

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

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

The comments and OMB's responses are summarized by section as

follow.

Equipment Definition

Comment: Clarification is needed on the treatment of depreciation

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

new $5,000.

Response: In order to clarify the accounting for the undepreciated

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

capitalization levels, paragraph 15 has been added to explain that the

undepreciated amount may be recovered by continuing to claim otherwise

allowable use allowances or depreciation on the equipment, or by

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

negotiated with the Federal cognizant agency.

Comment: Clarification is needed on whether equipment under the

$5,000 threshold, as established by the non-profit organizations'

policy, requires Federal approval prior to acquisition.

Response: Equipment under the $5,000 threshold, as established by

the non-profit organization's policy, can be directly charged to

sponsored agreements (subparagraph 15.b) without prior Federal

approval.

Comment: Current subparagraph 13.b requires prior approval for

special purpose equipment, as direct costs, with a unit cost of $1,000

or more. This requirement is not consistent with the higher threshold

of $5,000 allowed in the proposed revision. This requirement should be

revised to be consistent with the proposed revision.

Response: OMB agrees. The Circular is revised to require prior

Federal approval only for special purpose equipment with a unit cost of

$5,000 or more.

Unallowable Cost Items

These ten revised cost items are already unallowable under OMB

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

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

Governments,'' and/or the Federal Acquisition Regulations. OMB

addressed the issue of trustees' travel in response to the comments

received. For the other items, consistency across Federal cost

regulations was a more significant issue than most of the commenters'

concerns. Comments related to specific cost items are presented below,

followed by OMB's responses.

Advertising and Public Relations Costs

Comment: Current paragraph 37, Public information service costs,

should be combined with the ``Advertising'' paragraph to be consistent

with other OMB cost principles in Circulars A-21 and A-87.

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Response: The commenter is correct. The treatment of public

information service costs is now addressed in revised paragraph 1,

Advertising and public relations costs. Current paragraph 37 is

deleted.

Comment: Clarify the types of activities that are allowable as

public relations costs. Public relations costs to carry out certain

functions, such as legitimate program outreach, that are required under

sponsored programs and contracts should be allowable.

Response: The Circular is revised to clarify that certain public

relations costs for the purpose of communicating specific activities

related to the sponsored programs to the public or the press are

allowable costs. When they are necessary for program outreach effort as

required by sponsored programs, public relations costs are allowable.

Costs of advertising and public relations incurred solely to promote

the organization are unallowable.

Comment: Clarify whether advertising media costs such as radio and

television are allowable.

Response: As long as the public relations costs are specifically

required by the sponsored programs or are related to the promotion of

sponsored programs, any reasonable advertising media, including

magazines, newspapers, radio, television, direct mail, exhibits, and

the like, can be used and its costs are allowable. See paragraph 1.a.

Comment: Community relation costs should be allowable as part of

program outreach effort for Federal sponsored programs.

Response: Community relations are defined in subparagraph 1.b as

``those activities dedicated to maintain the image of the organization

or promoting understanding and favorable relations with the community

or public at large or any segment of the public.'' Costs related to

community relations are allowable when the costs are required or

necessary to the performance of the sponsored programs.

Organization-Furnished Automobiles for Personal Use

Comment: For security and economic reasons, non-profit

organizations often furnish automobiles and housing for its personnel

working on Federal projects (e.g., overseas projects sponsored by the

U.S. Agency for International Development or the U.S. State

Department). These costs should be allowable as direct costs.

Response: The Circular is revised to allow these costs when they

are necessary to perform the Federal projects, particularly the

overseas sponsored projects with prior approval by the Federal awarding

agency. These costs are allowable only as direct costs to the Federal

projects, and not as fringe benefit or indirect costs.

Comment: The Circular should specify which types of automobiles are

allowable or unallowable (e.g., cars, vans, trucks and buses).

Response: The types of automobiles are irrelevant for the purpose

of determining the allowability of automobile costs. Rather, the

determinant factors should be whether the automobile costs are

reasonable and necessary for the performance of the Federal projects

and authorized by the Federal awarding agency.

Defense and Prosecution of Criminal and Civil Proceedings, Claims,

Appeals and Patent Infringements

Comment: Current paragraph 35.d, Professional service costs, should

be combined with new paragraph 10.

Response: OMB agrees. Current paragraph 35.d is deleted.

Professional service costs related to defense of antitrust suits,

prosecution of claims against the Federal Government and patent

infringement litigation are discussed in new paragraph 10. Professional

service costs incurred for organization and reorganization are

discussed in paragraph 31, Organization costs.

Comment: Clarification is needed as to when legal costs related to

claims, appeals or proceeding become unallowable. Commenters noted that

Federal agencies are inconsistent in the determination of the

allowability of legal costs as one agency would allow legal costs up to

the point where the case goes out of the Federal agency appeal process

and to the courts, whereas other agencies would only allow legal costs

through the first phase of appeals within the Federal agency.

Response: The policy makes unallowable legal and related costs for

either defending against claims made by the Federal Government or

prosecuting claims against the Government. As such, once a final

management decision letter is issued by the agency (for example, a

disallowance letter), all legal and related costs are unallowable from

that point forward. Unallowable costs would include claims and defenses

pursued through agencies' formal appeal procedures such as

administrative law judges and agency appeal boards. Note that legal and

related costs may be allowable if the non-profit organization's

position is sustained by the administrative appeal process or an

agreement is reached between the organization and the Federal

Government (see subparagraghs 10.b, 10.c, 10.d and 10.e). This revision

is consistent with the language contained in OMB Circular A-21, ``Cost

Principles for Educational Institutions.''

Comment: Some commenters objected to the proposed 80 percent

limitation on reimbursement when the institution is found innocent.

Response: The proposed revision was retained because it provides

consistency with procurement contracts. This limitation is based on the

statutory language of Public Law 100-700, Major Fraud Act of 1988,

November 19, 1988 (41 U.S.C., 256 (k)(5)), which only allows recovery

of 80 percent of the legal costs.

Comment: Legal expenses to defend against lawsuits brought by a

foreign government for violation of that country's law should be

allowable.

Response: The Circular is revised in subparagraph 10.d to authorize

Federal agencies to allow legal expenses to defend against lawsuits

brought by a foreign government for violation of its law when such

costs were necessary or were direct results of the performance of

Federal sponsored programs. The same authorizations apply for legal

costs for defense against lawsuits brought by state or local

governments.

Comment: Legal fees to defend against lawsuits filed by former

employees for termination or by subrecipients should be allowable.

Response: Legal fees incurred in defense of lawsuits not brought by

a Federal, State, local or foreign government, except when the suits

are brought by former employees under Section 2 of the Major Fraud Act

of 1988 (Pub. L. 100-700), are allowable.

Housing and Living Expenses

Comment: For security and economic reasons, non-profit

organizations often furnish automobiles and housing for its personnel

working on overseas Federal projects (e.g., overseas projects sponsored

by the U.S. Agency for International Development). These costs should

be allowable as direct costs.

Response: As previously noted (in the discussion of automobiles),

the Circular is revised to allow these costs when they are necessary to

perform the Federal projects and when they are approved by the Federal

awarding agency. These costs are allowable only as direct costs to the

Federal projects, and not as fringe benefit or indirect costs.

Insurance

Comment: General and casualty liability insurance costs for

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organization's directors and administrators should be allowable.

Response: General and casualty liability insurance costs for

organization's directors and administrators are allowable, subject to

limitations, as described in subparagraph 22.a.(2). New subparagraph

22.a.(2).f, Insurance against defects, prohibits the reimbursement of

costs against Federally sponsored awards for product (or services)

liability insurance costs.

Comment: Medical liability insurance costs for participants in

Federal training programs should be allowable.

Response: Medical liability insurance costs associated with

participants in Federal training programs are allowable to Federal

programs as direct costs.

Comment: Malpractice insurance costs for physicians should be

direct charged to Federal programs while malpractice insurance costs

for nurses or laboratory assistants, which are immaterial in most

cases, should be charged as indirect costs.

Response: Subparagraph B.2 of Attachment A provides that when a

direct cost is of minor amounts, it may be treated as an indirect cost

for reasons of practicality and efficiency, provided that the

accounting treatment for such cost is consistently applied to all final

cost objectives. Therefore, when malpractice insurance costs for nurses

or lab technicians are immaterial in relation to its effect on the

overall indirect cost rates of the organization, they may be treated as

indirect costs.

Memberships

Comment: Membership costs in civic and community organizations

should be allowable.

Response: Membership costs are allowable for business and

professional organizations. The Circular is further revised to allow

membership costs in civic and community organizations when associations

with these organizations are essential to the performance of the

Federal programs (as an outreach function). These membership costs must

be approved by the Federal cognizant agency.

Comment: Costs of membership in organizations that lobby should be

unallowable.

Response: Paragraph 25 of the Circular disallows lobbying costs.

Membership dues to lobbying organizations are therefore unallowable.

The unallowable portion of membership dues is determined by the

percentage of lobbying activities versus other allowable activities of

the lobbying organization.

Selling or Marketing of Goods and Services

Comment: Clarification is needed for what types of activities are

considered to be the selling or marketing of goods and services.

Response: Selling or marketing of goods and services generally

include an organization's efforts to market the organization's products

or services such as through advertising, organizational image

enhancement, market planning and direct selling. Direct selling efforts

are those acts or actions used to induce particular customers to

purchase particular products or services of the organization. The

allowability provisions for advertising costs are described in

paragraph 1.

Comment: The guidelines for selling or marketing of goods and

services should be consistent with those in FAR 31.205.38(c)(1).

Response: FAR 31.205.38(c)(1) allows direct selling costs at

commercial contractors if they are reasonable in amount. By contrast to

the commercial contract context, direct selling costs are generally not

considered to be necessary costs for the performance of Federal

sponsored programs by non-profit organizations. In those cases where

they are essential for certain Federal sponsored programs, these costs

can be charged as direct costs to the Federal sponsored programs if

they are approved by the Federal awarding agency.

Comment: Given that the Bayh-Dole Act encouraged technology

transfer, selling or marketing costs of goods or services should be

allowable costs. At the minimum, these costs should be allowable as

direct costs to the Federal projects.

Response: The Circular is revised to allow selling or marketing

costs as direct costs to some Federal sponsored programs when approved

by the Federal awarding agency.

Severance Pay

Comment: Early retirement benefits should be allowable costs.

Response: Early retirement benefit costs are allowable costs,

subject to limitations, and are discussed in subparagraph 6.f, Fringe

Benefits, along with other forms of fringe benefits. Paragraph 49,

Severance Pay, deals only with severance policy, i.e., dismissal, and

the reimbursement of its costs.

Comment: Guidelines for costs of severance pay to foreign nationals

in excess of customary or prevailing practices should be consistent

with section 2151 of the Federal Acquisition Streamlining Act of 1994

(FASA).

Response: OMB agrees. The Circular is revised to be consistent with

FASA guidelines for severance pay to foreign nationals in excess of

customary or prevailing practices. As a result, the Federal awarding

agency may allow these costs when they are necessary for the

performance of the Federal sponsored programs.

Trustees' Travel

Comment: Several commenters opposed the proposal to disallow

trustees' travel costs citing the difficulty of retaining or obtaining

members to serve voluntarily on the Board of Trustees (or Directors) of

a non-profit organization, if Board members have to pay for their own

travel expenses to attend Board meetings. The commenters added that

since serving on a non-profit organization's Board is often not as

prestigious and desirable as serving on a University's Board (where

trustees' travel costs are unallowable under Circular A-21), non-

reimbursement of the travel costs would inhibit the recruitment of

Board members.

Response: OMB concurs that disallowing the reimbursement of

trustees' travel costs could inhibit the recruitment of qualified Board

members (particularly at smaller non-profit organizations), thereby

hampering the operations of a non-profit organization. OMB also

recognizes that trustees' travel costs are reasonable and necessary

business costs. As a result, trustees' travel costs remain allowable.

Comment: Trustees' travel costs should be allowable if they are

reasonable. Some suggested tests for reasonableness of trustees' travel

costs are: limit number of allowed trips per year, restriction of trips

to organization's principal place of business or reasonable

surroundings, distinction between scheduled Board meetings and

emergency Board meetings, and disallowance of first-class airfare

travels.

Response: All costs charged to Federal projects must satisfy a

reasonableness test. Although some of the suggested reasonableness

tests appear to be good, OMB does not believe it is necessary at this

time to impose specific restrictions on trustees' travel expenses. The

reasonableness of a particular travel expense remains at the judgement

of Federal negotiators.

Comment: At Head Start organizations, some Trustee members are

first sent for training in the operations of a Head Start program.

These travel costs related to training should be allowable.

Response: Travel costs related to training and education are

allowable,

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subject to limitations, and are addressed in paragraph 53 of the

Circular, Training and education costs.

Comment: At Head Start organizations, there often are several

advisory boards in addition to the Board of Trustees (or Directors).

These advisory boards are involved in day-to-day operations of the

organizations and often incur travel costs. Are these costs subject to

the same restrictions as trustees' travel?

Response: Travel costs for members of advisory groups are

allowable, subject to the limitations in paragraph 55, Travel costs.

Multiple Allocation Basis (MAB)

Comment: The multiple allocation method for calculating indirect

costs rates is much more complicated and burdensome than the simplified

method and it will cost non-profit organizations much more to prepare

the indirect cost proposal. Several commenters recommended the

flexibility of using one of the three different allocation methods as

they are currently described in the Circular. The multiple allocation

basis (MAB) should remain an optional allocation methodology rather

than a required methodology for certain organizations.

Response: The use of MAB for major non-profit organizations

promotes consistency in the calculation and the reporting of indirect

costs. It would facilitate the accumulation of indirect cost data by

cost components (i.e., facilities and administration) and provide

comparable rates between major research non-profit organizations and

universities. However, OMB recognizes that a conversion to MAB may

require some substantial changes in the organization's accounting

system and that MAB is not practical for single-function organizations.

Therefore, the Circular continues to allow non-profit organizations to

use any of the current three allocation methodologies.

Comment: Several commenters suggested raising the threshold for the

requirement to $25 million in direct Federal funding. Several

commenters also suggested an exemption from this requirement for

single-function organizations regardless of Federal funding levels.

Response: The Circular is revised to allow the use of the current

three allocation methodologies for all non-profit organizations. For

organizations that receive more than $10 million in direct Federal

funding, a breakout of indirect costs into two components, facilities

and administration, is required regardless of the selected allocation

methodology.

Comment: The allocation methodology for general administration

under MAB on the basis of modified total direct costs conflicts with

the required methodology under Cost Accounting Standard (CAS) 410

applicable to contracts using the salaries and wages basis. One

commenter suggested that a fully CAS-covered non-profit organization be

exempted from the MAB requirement.

Response: MAB is not a requirement for non-profit organizations and

remains one of the three available methodologies in the Circular for

computing indirect costs. In addition, CAS-covered non-profit

organizations should continue to follow CAS with respect to the

measurement, assignment and allocation of costs.

Comment: The revision should clarify that the modified total direct

cost base should only include the first $25,000 of a subcontract

regardless of the period during which the project is started

(consistent with OMB Circular A-21).

Response: The modified total direct cost base, described in

subparagraph D.3.f of the Circular, includes the first $25,000 of each

subgrant or subcontract regardless of the period covered by the

subgrant or subcontract. Subgrant or subcontract costs above $25,000

shall be excluded from the modified total direct cost base. For

example, for a $300,000 subgrant that lasts three years, only the first

$25,000 incurred on the award should be included in the modified total

direct cost base.

Administrative Cap of 26 Percent

Comment: Most commenters strongly opposed the 26 percent

administrative cap stating that such limitation on cost reimbursement

is arbitrary, capricious, and unnecessary. Some argued that a cap would

be financially disastrous to non-profit organizations because they

receive most of their funding from Federal sources (unlike

universities). A detailed analysis is urged to determine the average

administrative costs applicable to non-profit organizations, if an

administrative cap is to be implemented at non-profit organizations.

Response: Based on the comments against the implementation of an

administrative cap at non-profit organizations, OMB defers the

consideration of establishing any administrative cap until better data

on indirect costs at non-profit organizations can be collected. If OMB

believes that an administrative cap should be implemented, it would be

proposed in a subsequent notice.

Other

Comment: Attachment C of the Circular should be updated since a few

listed organizations no longer exist.

Response: OMB agrees. Attachment C is updated to delete those

organizations that no longer exist or are no longer exempted from OMB

Circular A-122.

Franklin D. Raines,

Director.

Attachments A, B and C of Circular A-122 are revised as follows:

A. Attachment A

1. Add subparagraph 3 to paragraph C (``Indirect Costs'').

3. Indirect costs shall be classified within two broad categories:

``Facilities'' and ``Administration.'' ``Facilities'' is defined as

depreciation and use allowances on buildings, equipment and capital

improvement, interest on debt associated with certain buildings,

equipment and capital improvements, and operations and maintenance

expenses. ``Administration'' is defined as general administration and

general expenses such as the director's office, accounting, personnel,

library expenses and all other types of expenditures not listed

specifically under one of the subcategories of ``Facilities''

(including cross allocations from other pools, where applicable). See

indirect cost rate reporting requirements in subparagraphs D.2.e and

D.3.g.

2. Add subparagraph 2.e to paragraph D.

e. For an organization that receives more than $10 million in

Federal funding of direct costs in a fiscal year, a breakout of the

indirect cost component into two broad categories, Facilities and

Administration as defined in subparagraph C.3, is required. The rate in

each case shall be stated as the percentage which the amount of the

particular indirect cost category (i.e., Facilities or Administration)

is of the distribution base identified with that category.

3. Replace subparagraph D.3 with the following:

3. Multiple allocation base method.

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

major functions in varying degrees, indirect costs shall be accumulated

into separate cost groupings, as described in subparagraph b. Each

grouping shall then be allocated individually to benefitting functions

by means of a base which best measures the relative benefits. The

default allocation bases by cost pool are described in subparagraph c.

b. Identification of indirect costs. Cost groupings shall be

established so as to permit the allocation of each grouping

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on the basis of benefits provided to the major functions. Each grouping

shall constitute a pool of expenses that are of like character in terms

of functions they benefit and in terms of the allocation base which

best measures the relative benefits provided to each function. The

groupings are classified within the two broad categories:

``Facilities'' and ``Administration,'' as described in subparagraph

C.3. The indirect cost pools are defined as follows:

(1) Depreciation and use allowances. The expenses under this

heading are the portion of the costs of the organization's buildings,

capital improvements to land and buildings, and equipment which are

computed in accordance with paragraph 11 of Attachment B

(``Depreciation and use allowances'').

(2) Interest. Interest on debt associated with certain buildings,

equipment and capital improvements are computed in accordance with

paragraph 23 of Attachment B (``Interest, fund raising, and investment

management costs'').

(3) Operation and maintenance expenses. The expenses under this

heading are those that have been incurred for the administration,

operation, maintenance, preservation, and protection of the

organization's physical plant. They include expenses normally incurred

for such items as: janitorial and utility services; repairs and

ordinary or normal alterations of buildings, furniture and equipment;

care of grounds; maintenance and operation of buildings and other plant

facilities; security; earthquake and disaster preparedness;

environmental safety; hazardous waste disposal; property, liability and

other insurance relating to property; space and capital leasing;

facility planning and management; and, central receiving. The operation

and maintenance expenses category shall also include its allocable

share of fringe benefit costs, depreciation and use allowances, and

interest costs.

(4) General administration and general expenses. The expenses under

this heading are those that have been incurred for the overall general

executive and administrative offices of the organization and other

expenses of a general nature which do not relate solely to any major

function of the organization. This category shall also include its

allocable share of fringe benefit costs, operation and maintenance

expense, depreciation and use allowances, and interest costs. Examples

of this category include central offices, such as the director's

office, the office of finance, business services, budget and planning,

personnel, safety and risk management, general counsel, management

information systems, and library costs.

In developing this 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 indirect costs. For

example, salaries of technical staff, project supplies, project

publication, telephone toll charges, computer costs, travel costs, and

specialized services costs shall be treated as direct costs wherever

identifiable to a particular program. The salaries and wages of

administrative and pooled clerical staff should normally be treated as

indirect costs. Direct charging of these costs may be appropriate where

a major project or activity explicitly requires and budgets for

administrative or clerical services and other individuals involved can

be identified with the program or activity. Items such as office

supplies, postage, local telephone costs, periodicals and memberships

should normally be treated as indirect costs.

c. Allocation bases. Actual conditions shall be taken into account

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

grouping to benefitting functions. The essential consideration in

selecting a method or a base is that it is the one best suited for

assigning the pool of costs to cost objectives in accordance with

benefits derived; a traceable cause and effect relationship; or logic

and reason, where neither the cause nor the effect of the relationship

is determinable. 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 cost grouping are more

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

selected base which produces results that are equitable to both the

Federal Government and the organization. The distribution shall be made

in accordance with the bases described herein unless it can be

demonstrated that the use of a different base would result in a more

equitable allocation of the costs, or that a more readily available

base would not increase the costs charged to sponsored awards. The

results of special cost studies (such as an engineering utility study)

shall not be used to determine and allocate the indirect costs to

sponsored awards.

(1) Depreciation and use allowances. Depreciation and use

allowances expenses shall be allocated in the following manner:

(a) Depreciation or use allowances on buildings used exclusively in

the conduct of a single function, and on capital improvements and

equipment used in such buildings, shall be assigned to that function.

(b) Depreciation or use allowances on buildings used for more than

one function, and on capital improvements and equipment used in such

buildings, shall be allocated to the individual functions performed in

each building on the basis of usable square feet of space, excluding

common areas, such as hallways, stairwells, and restrooms.

(c) Depreciation or use allowances on buildings, capital

improvements and equipment related space (e.g., individual rooms, and

laboratories) used jointly by more than one function (as determined by

the users of the space) shall be treated as follows. The cost of each

jointly used unit of space shall be allocated to the benefitting

functions on the basis of:

(i) the employees and other users on a full-time equivalent (FTE)

basis or salaries and wages of those individual functions benefitting

from the use of that space; or

(ii) organization-wide employee FTEs or salaries and wages

applicable to the benefitting functions of the organization.

(d) Depreciation or use allowances on certain capital improvements

to land, such as paved parking areas, fences, sidewalks, and the like,

not included in the cost of buildings, shall be allocated to user

categories on a FTE basis and distributed to major functions in

proportion to the salaries and wages of all employees applicable to the

functions.

(2) Interest. Interest costs shall be allocated in the same manner

as the depreciation or use allowances on the buildings, equipment and

capital equipments to which the interest relates.

(3) Operation and maintenance expenses. Operation and maintenance

expenses shall be allocated in the same manner as the depreciation and

use allowances.

(4) General administration and general expenses. General

administration and general expenses shall be allocated to benefitting

functions based on modified total direct costs (MTDC), as described in

subparagraph D.3.f. The expenses included in this category could be

grouped first according to major functions of the organization to which

they render services or provide benefits. The aggregate expenses of

each group shall then be allocated to benefitting functions based on

MTDC.

d. Order of distribution.

(1) Indirect cost categories consisting of depreciation and use

allowances,

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interest, operation and maintenance, and general administration and

general expenses shall be allocated in that order to the remaining

indirect cost categories as well as to the major functions of the

organization. Other cost categories could be allocated in the order

determined to be most appropriate by the organization. When cross

allocation of costs is made as provided in subparagraph (2), this order

of allocation does not apply.

(2) Normally, an indirect cost category will be considered closed

once it has been allocated to other cost objectives, and costs shall

not be subsequently allocated to it. However, a cross allocation of

costs between two or more indirect costs categories could be used if

such allocation will result in a more equitable allocation of costs. If

a cross allocation is used, an appropriate modification to the

composition of the indirect cost categories is required.

e. Application of indirect cost rate or rates. Except where a

special indirect cost rate(s) is required in accordance with

subparagraph D.5, the separate groupings 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.

f. Distribution basis. Indirect costs shall be distributed to

applicable sponsored awards and other benefitting activities within

each major function on the basis of MTDC. MTDC consists of all salaries

and wages, fringe benefits, materials and supplies, services, travel,

and subgrants and subcontracts up to the first $25,000 of each subgrant

or subcontract (regardless of the period covered by the subgrant or

subcontract). Equipment, capital expenditures, charges for patient

care, rental costs and the portion in excess of $25,000 shall be

excluded from MTDC. Participant support costs shall generally be

excluded from MTDC. Other items may only be excluded when the Federal

cost cognizant agency determines that an exclusion is necessary to

avoid a serious inequity in the distribution of indirect costs.

g. Individual Rate Components. An indirect cost rate shall be

determined for each separate indirect cost pool developed. The rate in

each case shall be stated as the percentage which the amount of the

particular indirect cost pool is of the distribution base identified

with that pool. Each indirect cost rate negotiation or determination

agreement shall include development of the rate for each indirect cost

pool as well as the overall indirect cost rate. The indirect cost pools

shall be classified within two broad categories: ``Facilities'' and

``Administration,'' as described in subparagraph C.3.

B. Attachment B

Revise the following cost items in Attachment B to Circular A-122

(``Selected Items of Cost'').

1. Revise the Table of Contents for Attachment B to read:

1. Advertising and public relations costs

2. Alcoholic beverages

3. Bad debts

4. Bid and proposal costs (reserved)

5. Bonding costs

6. Communication costs

7. Compensation for personal services

8. Contingency provisions

9. Contributions

10. Defense and prosecution of criminal and civil proceedings, claims,

appeals and patent infringement

11. Depreciation and use allowances

12. Donations

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

14. Entertainment costs

15. Equipment and other capital expenditures

16. Fines and penalties

17. Fringe benefits

18. Goods or services for personal use

19. Housing and personal living expenses

20. Idle facilities and idle capacity

21. Independent research and development (reserved)

22. Insurance and indemnification

23. Interest, fund raising, and investment management costs

24. Labor relations costs

25. Lobbying costs

26. Losses on other awards

27. Maintenance and repair costs

28. Materials and supplies

29. Meetings and conferences

30. Memberships, subscriptions, and professional activity costs

31. Organization costs

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

33. Page charges in professional journals

34. Participant support costs

35. Patent costs

36. Pension plans

37. Plant security costs

38. Pre-award costs

39. Professional service costs

40. Profits and losses on disposition of depreciable property or other

capital assets

41. Publication and printing costs

42. Rearrangement and alteration costs

43. Reconversion costs

44. Recruiting costs

45. Relocation costs

46. Rental costs

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

48. Selling and marketing

49. Severance pay

50. Specialized service facilities

51. Taxes

52. Termination costs

53. Training and education costs

54. Transportation costs

55. Travel costs

56. Trustees

2. Revise and retitle paragraph 1 to read:

1. Advertising and public relations costs.

a. The term advertising costs means the costs of advertising media

and corollary administrative costs. Advertising media include

magazines, newspapers, radio and television programs, direct mail,

exhibits, and the like.

b. The term public relations includes community relations and means

those activities dedicated to maintaining the image of the organization

or maintaining or promoting understanding and favorable relations with

the community or public at large or any segment of the public.

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

for:

(1) The recruitment of personnel required for the performance by

the organization of obligations arising under a sponsored award, when

considered in conjunction with all other recruitment costs, as set

forth in paragraph 44 (``Recruiting costs'');

(2) The procurement of goods and services for the performance of a

sponsored award;

(3) The disposal of scrap or surplus materials acquired in the

performance of a sponsored award except when organizations are

reimbursed for disposal costs at a predetermined amount in accordance

with OMB Circular A-110, Sec. ______.34, ``Equipment''; or

(4) Other specific purposes necessary to meet the requirements of

the sponsored award.

d. The only allowable public relations costs are:

(1) Costs specifically required by sponsored awards;

(2) Costs of communicating with the public and press pertaining to

specific activities or accomplishments which result from performance of

sponsored awards (these costs are considered necessary as part of the

outreach effort for the sponsored awards); or

(3) Costs of conducting general liaison with news media and

government public relations officers, to the extent that such

activities are limited to communication and liaison necessary to keep

the public informed on matters of

[[Page 29800]]

public concern, such as notices of contract/grant awards, financial

matters, etc.

e. Costs identified in subparagraphs c and d if incurred for more

than one sponsored award or for both sponsored work and other work of

the organization, are allowable to the extent that the principles in

paragraphs B (``Direct Costs'') and C (``Indirect Costs'') of

Attachment A are observed.

f. Unallowable advertising and public relations costs include the

following:

(1) All advertising and public relations costs other than as

specified in subparagraphs c, d, and e;

(2) Costs of meetings or other events related to fund raising or

other organizational activities including:

(i) Costs of displays, demonstrations, and exhibits;

(ii) Costs of meeting rooms, hospitality suites, and other special

facilities used in conjunction with shows and other special events; and

(iii) Salaries and wages of employees or cost of services engaged

in setting up and displaying exhibits, making demonstrations, and

providing briefings;

(3) Costs of promotional items and memorabilia, including models,

gifts, and souvenirs;

(4) Costs of advertising and public relations designed solely to

promote the organization.

3. Renumber current paragraphs 2 through 8 as paragraphs 3 through

9, respectively.

4. Add the following new paragraph 2:

2. Alcoholic beverages. Costs of alcoholic beverages are

unallowable.

5. In paragraph 7 (``Compensation for personal services''), as

renumbered above in item 3, rename the current subparagraph g

(``Pension costs''), as subparagraph h. Add a new subparagraph g:

g. Organization-furnished automobiles. That portion of the cost of

organization-furnished automobiles that relates to personal use by

employees (including transportation to and from work) is unallowable as

fringe benefit or indirect costs regardless of whether the cost is

reported as taxable income to the employees. These costs are allowable

as direct costs to sponsored award when necessary for the performance

of the sponsored award and approved by awarding agencies.

6. Renumber current paragraphs 9 through 15 as paragraphs 11

through 17, respectively.

7. Add new paragraph 10:

10. Defense and prosecution of criminal and civil proceedings,

claims, appeals and patent infringement.

a. Definitions.

(1) Conviction, as used herein, means a judgment or a conviction of

a criminal offense by any court of competent jurisdiction, whether

entered upon as a verdict or a plea, including a conviction due to a

plea of nolo contendere.

(2) Costs include, but are not limited to, administrative and

clerical expenses; the cost of legal services, whether performed by in-

house or private counsel; and the costs of the services of accountants,

consultants, or others retained by the organization to assist it; costs

of employees, officers and trustees, and any similar costs incurred

before, during, and after commencement of a judicial or administrative

proceeding that bears a direct relationship to the proceedings.

(3) Fraud, as used herein, means (i) acts of fraud corruption or

attempts to defraud the Federal Government or to corrupt its agents,

(ii) acts that constitute a cause for debarment or suspension (as

specified in agency regulations), and (iii) acts which violate the

False Claims Act, 31 U.S.C., sections 3729-3731, or the Anti-Kickback

Act, 41 U.S.C., sections 51 and 54.

(4) Penalty does not include restitution, reimbursement, or

compensatory damages.

(5) Proceeding includes an investigation.

b. (1) Except as otherwise described herein, costs incurred in

connection with any criminal, civil or administrative proceeding

(including filing of a false certification) commenced by the Federal

Government, or a State, local or foreign government, are not allowable

if the proceeding: (1) relates to a violation of, or failure to comply

with, a Federal, State, local or foreign statute or regulation by the

organization (including its agents and employees), and (2) results in

any of the following dispositions:

(a) In a criminal proceeding, a conviction.

(b) In a civil or administrative proceeding involving an allegation

of fraud or similar misconduct, a determination of organizational

liability.

(c) In the case of any civil or administrative proceeding, the

imposition of a monetary penalty.

(d) A final decision by an appropriate Federal official to debar or

suspend the organization, to rescind or void an award, or to terminate

an award for default by reason of a violation or failure to comply with

a law or regulation.

(e) A disposition by consent or compromise, if the action could

have resulted in any of the dispositions described in (a), (b), (c) or

(d).

(2) If more than one proceeding involves the same alleged

misconduct, the costs of all such proceedings shall be unallowable if

any one of them results in one of the dispositions shown in

subparagraph b.(1).

c. If a proceeding referred to in subparagraph b is commenced by

the Federal Government and is resolved by consent or compromise

pursuant to an agreement entered into by the organization and the

Federal Government, then the costs incurred by the organization in

connection with such proceedings that are otherwise not allowable under

subparagraph b may be allowed to the extent specifically provided in

such agreement.

d. If a proceeding referred to in subparagraph b is commenced by a

State, local or foreign government, the authorized Federal official may

allow the costs incurred by the organization for such proceedings, if

such authorized official determines that the costs were incurred as a

result of (1) a specific term or condition of a federally-sponsored

award, or (2) specific written direction of an authorized official of

the sponsoring agency.

e. Costs incurred in connection with proceedings described in

subparagraph b, but which are not made unallowable by that

subparagraph, may be allowed by the Federal Government, but only to the

extent that:

(1) The costs are reasonable in relation to the activities required

to deal with the proceeding and the underlying cause of action;

(2) Payment of the costs incurred, as allowable and allocable

costs, is not prohibited by any other provision(s) of the sponsored

award;

(3) The costs are not otherwise recovered from the Federal

Government or a third party, either directly as a result of the

proceeding or otherwise; and,

(4) The percentage of costs allowed does not exceed the percentage

determined by an authorized Federal official to be appropriate,

considering the complexity of the litigation, generally accepted

principles governing the award of legal fees in civil actions involving

the United States as a party, and such other factors as may be

appropriate. Such percentage shall not exceed 80 percent. However, if

an agreement reached under subparagraph c has explicitly considered

this 80 percent limitation and permitted a higher percentage, then the

full amount of costs resulting from that agreement shall be allowable.

f. Costs incurred by the organization in connection with the

defense of suits brought by its employees or ex-

[[Page 29801]]

employees under section 2 of the Major Fraud Act of 1988 (Pub. L. 100-

700), including the cost of all relief necessary to make such employee

whole, where the organization was found liable or settled, are

unallowable.

g. Costs of legal, accounting, and consultant services, and related

costs, incurred in connection with defense against Federal Government

claims or appeals, antitrust suits, or the prosecution of claims or

appeals against the Federal Government, are unallowable.

h. Costs of legal, accounting, and consultant services, and related

costs, incurred in connection with patent infringement litigation, are

unallowable unless otherwise provided for in the sponsored awards.

i. Costs which may be unallowable under this paragraph, including

directly associated costs, shall be segregated and accounted for by the

organization separately. During the pendency of any proceeding covered

by subparagraphs b and f, the Federal Government shall generally

withhold payment of such costs. However, if in the best interests of

the Federal Government, the Federal Government may provide for

conditional payment upon provision of adequate security, or other

adequate assurance, and agreements by the organization to repay all

unallowable costs, plus interest, if the costs are subsequently

determined to be unallowable.

8. In paragraph 15 (``Equipment and other capital expenditures''),

as renumbered in item 6 above, replace subparagraphs 15.a.(1) and

15.b.(2) to read:

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

personal property having a useful life of more than one year and an

acquisition cost which equals or exceeds the lesser of (a) the

capitalization level established by the organization for the financial

statement purposes, or (b) $5000. The unamortized portion of any

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

may be recovered by continuing to claim the otherwise allowable use

allowances or depreciation on the equipment, or by amortizing the

amount to be written off over a period of years as negotiated with the

Federal cognizant agency.

15.b.(2) Capital expenditures for special purpose equipment are

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

$5000 or more have the prior approval of awarding agency.

9. Renumber current paragraphs 16 through 36 as paragraphs 20

through 40, respectively.

10. Add new paragraph 18:

18. Goods or services for personal use. Costs of goods or services

for personal use of the organization's employees are unallowable

regardless of whether the cost is reported as taxable income to the

employees.

11. Add new paragraph 19:

19. Housing and personal living expenses.

a. Costs of housing (e.g., depreciation, maintenance, utilities,

furnishings, rent, etc.), housing allowances and personal living

expenses for/of the organization's officers are unallowable as fringe

benefit or indirect costs regardless of whether the cost is reported as

taxable income to the employees. These costs are allowable as direct

costs to sponsored awards when necessary for the performance of the

sponsored award and approved by awarding agencies.

b. The term ``officers'' includes current and past officers and

employees.

12. Add to paragraph 22.a.(2) (``Insurance and indemnification''),

as renumbered in item 9, subparagraphs (f) and (g):

(f) Insurance against defects. Costs of insurance with respect to

any costs incurred to correct defects in the organization's materials

or workmanship are unallowable.

(g) Medical liability (malpractice) insurance. Medical liability

insurance is an allowable cost of Federal research programs only to the

extent that the Federal research programs involve human subjects or

training of participants in research techniques. Medical liability

insurance costs shall be treated as a direct cost and shall be assigned

to individual projects based on the manner in which the insurer

allocates the risk to the population covered by the insurance.

13. Revise paragraph 30, as renumbered in item 9, to read:

30. Memberships, subscriptions and professional activity costs.

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

and professional organizations are allowable.

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

professional, and technical periodicals are allowable.

c. Costs of meetings and conferences, when the primary purpose is

the dissemination of technical information, are allowable. This

includes costs of meals, transportation, rental of facilities, and

other items incidental to such meetings or conferences.

d. Costs of membership in any civic or community organization are

allowable with prior approval by Federal cognizant agency.

e. Costs of membership in any country club or social or dining club

or organization are unallowable.

14. Delete subparagraph 39.d, as renumbered in item 9.

15. Delete current paragraph 37 (``Public service costs'').

16. Renumber current paragraphs 38 through 44 as paragraphs 41

through 47, respectively.

17. Revise paragraph 44, as renumbered in item 16, to read:

44. Recruiting costs.

a. Subject to subparagraphs b, c, and d, and provided that the size

of the staff recruited and maintained is in keeping with workload

requirements, costs of ``help wanted'' advertising, operating costs of

an employment office necessary to secure and maintain an adequate

staff, costs of operating an aptitude and educational testing program,

travel costs 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, are

allowable to the extent that such costs are incurred pursuant to a

well-managed recruitment program. Where the organization uses

employment agencies, costs that are not in excess of standard

commercial rates for such services are allowable.

b. In publications, costs of help wanted advertising that includes

color, includes advertising material for other than recruitment

purposes, or is excessive in size (taking into consideration

recruitment purposes for which intended and normal organizational

practices in this respect), are unallowable.

c. Costs of help wanted advertising, special emoluments, fringe

benefits, and salary allowances incurred to attract professional

personnel from other organizations that do not meet the test of

reasonableness or do not conform with the established practices of the

organization, are unallowable.

d. Where relocation costs incurred incident to recruitment of a new

employee have been allowed either as an allocable direct or indirect

cost, and the newly hired employee resigns for reasons within his

control within twelve months after being hired, the organization will

be required to refund or credit such relocation costs to the Federal

Government.

18. Renumber current paragraphs 45 through 51 as paragraphs 49

through 55, respectively.

19. Add new paragraph 48:

48. Selling and marketing. Costs of selling and marketing any

products or services of the organization (unless allowed under

paragraph 1 as allowable

[[Page 29802]]

public relations costs) are unallowable. These costs, however, are

allowable as direct costs, with prior approval by awarding agencies,

when they are necessary for the performance of Federal programs.

20. Add new subparagraphs c, d and e to paragraph 49 (``Severance

pay''), as renumbered in item 18, as follow:

c. Costs incurred in certain severance pay packages (commonly known

as ``a golden parachute'' payment) which are in an amount in excess of

the normal severance pay paid by the organization to an employee upon

termination of employment and are paid to the employee contingent upon

a change in management control over, or ownership of, the

organization's assets are unallowable.

d. Severance payments to foreign nationals employed by the

organization outside the United States, to the extent that the amount

exceeds the customary or prevailing practices for the organization in

the United States are unallowable, unless they are necessary for the

performance of Federal programs and approved by awarding agencies.

e. Severance payments to foreign nationals employed by the

organization outside the United States due to the termination of the

foreign national as a result of the closing of, or curtailment of

activities by, the organization in that country, are unallowable,

unless they are necessary for the performance of Federal programs and

approved by awarding agencies.

21. Add new paragraph 56:

56. 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

paragraph 55.

C. Attachment C

1. Delete the following organizations from Attachment C. These

organizations either no longer exist or are no longer exempted from

complying with Circular A-122.

Associated Universities, Incorporated, Washington, D.C.

Associated Universities for Research and Astronomy,

Tucson, Arizona.

Center for Energy and Environmental Research (CEER),

(University of Puerto Rico), Commonwealth of Puerto Rico.

Comparative Animal Research Laboratory (CARL), (University

of Tennessee), Oak Ridge, Tennessee.

Institute of Gas Technology, Chicago, Illinois.

Montana Energy Research and Development Institute, Inc.,

(MERDI), Butte, Montana.

Project Management Corporation, Oak Ridge, Tennessee.

Sandia Corporation, Albuquerque, New Mexico.

Universities Corporation for Atmospheric Research,

Boulder, Colorado.

2. Change Argonne Universities Association, Chicago, Illinois to

Argonne National Laboratory, Chicago, Illinois.

3. Change the location of the Institute for Defense Analysis in

Virginia from Arlington to Alexandria.

4. Replace Midwest Research Institute, Headquartered in Kansas

City, Missouri to National Renewable Energy Laboratory, Golden,

Colorado.

D. A Recompilation of the Entire Circular A-122, With All Its

Amendments, Follows:

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, Local, and Indian Tribal

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

[[Page 29803]]

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

Attachment A--Circular No. A-122

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

7. Conditional exemptions

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. Negotiation and approval of rates

Attachment A--Circular No. A-122

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.

[[Page 29804]]

____.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.

7. Conditional exemptions.

a. 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.

b. 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.

c. 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 be used for general expenses required to carry out other

responsibilities of a State or its subrecipients.

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 23 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:

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.

3. Indirect costs shall be classified within two broad categories:

``Facilities'' and ``Administration.'' ``Facilities'' is defined as

depreciation and use allowances on buildings, equipment and capital

improvement, interest on debt associated with certain buildings,

equipment and capital improvements, and operations and maintenance

expenses. ``Administration'' is defined as general administration and

general expenses such as the director's office, accounting, personnel,

library expenses

[[Page 29805]]

and all other types of expenditures not listed specifically under one

of the subcategories of ``Facilities'' (including cross allocations

from other pools, where applicable). See indirect cost rate reporting

requirements in subparagraphs D.2.e and D.3.g.

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 34

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).

e. For an organization that receives more than $10 million in

Federal funding of direct costs in a fiscal year, a breakout of the

indirect cost component into two broad categories, Facilities and

Administration as defined in subparagraph C.3, is required. The rate in

each case shall be stated as the percentage which the amount of the

particular indirect cost category (i.e., Facilities or Administration)

is of the distribution base identified with that category.

3. Multiple allocation base method.

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

major functions in varying degrees, indirect costs shall be accumulated

into separate cost groupings, as described in subparagraph b. Each

grouping shall then be allocated individually to benefitting functions

by means of a base which best measures the relative benefits. The

default allocation bases by cost pool are described in subparagraph c.

b. Identification of indirect costs. Cost 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 shall

constitute a pool of expenses that are of like character in terms of

functions they benefit and in terms of the allocation base which best

measures the relative benefits provided to each function. The groupings

are classified within the two broad categories: ``Facilities'' and

``Administration,'' as described in subparagraph C.3. The indirect cost

pools are defined as follows:

(1) Depreciation and use allowances. The expenses under this

heading are the portion of the costs of the organization's buildings,

capital improvements to land and buildings, and equipment which are

computed in accordance with paragraph 11 of Attachment B

(``Depreciation and use allowances'').

(2) Interest. Interest on debt associated with certain buildings,

equipment and capital improvements are computed in accordance with

paragraph 23 of Attachment B (``Interest, fundraising, and investment

management costs'').

(3) Operation and maintenance expenses. The expenses under this

heading are those that have been incurred for the administration,

operation, maintenance, preservation, and protection of the

organization's physical plant. They include expenses normally incurred

for such items as: janitorial and utility services; repairs and

ordinary or normal alterations of buildings, furniture and equipment;

care of grounds; maintenance and operation of buildings and other plant

facilities; security; earthquake and disaster preparedness;

environmental safety; hazardous waste disposal; property, liability and

other insurance relating to property; space and capital leasing;

facility planning and management; and, central receiving. The operation

and maintenance expenses category shall also include its allocable

share of fringe benefit costs, depreciation and use allowances, and

interest costs.

(4) General administration and general expenses. The expenses under

this heading are those that have been incurred for the overall general

executive and administrative offices of the organization and other

expenses of a general nature which do not relate solely to any major

function of the organization. This category shall also include its

allocable share of fringe benefit costs, operation and maintenance

expense, depreciation and use allowances, and interest costs. Examples

of this category include central offices, such as the director's

office, the office of finance, business services, budget and planning,

personnel, safety and risk management, general counsel, management

information systems, and library costs.

In developing this cost pool, special care should be exercised to

ensure that

[[Page 29806]]

costs incurred for the same purpose in like circumstances are treated

consistently as either direct or indirect costs. For example, salaries

of technical staff, project supplies, project publication, telephone

toll charges, computer costs, travel costs, and specialized services

costs shall be treated as direct costs wherever identifiable to a

particular program. The salaries and wages of administrative and pooled

clerical staff should normally be treated as indirect costs. Direct

charging of these costs may be appropriate where a major project or

activity explicitly requires and budgets for administrative or clerical

services and other individuals involved can be identified with the

program or activity. Items such as office supplies, postage, local

telephone costs, periodicals and memberships should normally be treated

as indirect costs.

c. Allocation bases. Actual conditions shall be taken into account

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

grouping to benefitting functions. The essential consideration in

selecting a method or a base is that it is the one best suited for

assigning the pool of costs to cost objectives in accordance with

benefits derived; a traceable cause and effect relationship; or logic

and reason, where neither the cause nor the effect of the relationship

is determinable. 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 cost grouping are more

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

selected base which produces results that are equitable to both the

Federal Government and the organization. The distribution shall be made

in accordance with the bases described herein unless it can be

demonstrated that the use of a different base would result in a more

equitable allocation of the costs, or that a more readily available

base would not increase the costs charged to sponsored awards. The

results of special cost studies (such as an engineering utility study)

shall not be used to determine and allocate the indirect costs to

sponsored awards.

(1) Depreciation and use allowances. Depreciation and use

allowances expenses shall be allocated in the following manner:

(a) Depreciation or use allowances on buildings used exclusively in

the conduct of a single function, and on capital improvements and

equipment used in such buildings, shall be assigned to that function.

(b) Depreciation or use allowances on buildings used for more than

one function, and on capital improvements and equipment used in such

buildings, shall be allocated to the individual functions performed in

each building on the basis of usable square feet of space, excluding

common areas, such as hallways, stairwells, and restrooms.

(c) Depreciation or use allowances on buildings, capital

improvements and equipment related space (e.g., individual rooms, and

laboratories) used jointly by more than one function (as determined by

the users of the space) shall be treated as follows. The cost of each

jointly used unit of space shall be allocated to the benefitting

functions on the basis of:

(i) the employees and other users on a full-time equivalent (FTE)

basis or salaries and wages of those individual functions benefitting

from the use of that space; or

(ii) organization-wide employee FTEs or salaries and wages

applicable to the benefitting functions of the organization.

(d) Depreciation or use allowances on certain capital improvements

to land, such as paved parking areas, fences, sidewalks, and the like,

not included in the cost of buildings, shall be allocated to user

categories on a FTE basis and distributed to major functions in

proportion to the salaries and wages of all employees applicable to the

functions.

(2) Interest. Interest costs shall be allocated in the same manner

as the depreciation or use allowances on the buildings, equipment and

capital equipments to which the interest relates.

(3) Operation and maintenance expenses. Operation and maintenance

expenses shall be allocated in the same manner as the depreciation and

use allowances.

(4) General administration and general expenses. General

administration and general expenses shall be allocated to benefitting

functions based on modified total direct costs (MTDC), as described in

subparagraph D.3.f. The expenses included in this category could be

grouped first according to major functions of the organization to which

they render services or provide benefits. The aggregate expenses of

each group shall then be allocated to benefitting functions based on

MTDC.

d. Order of distribution.

(1) Indirect cost categories consisting of depreciation and use

allowances, interest, operation and maintenance, and general

administration and general expenses shall be allocated in that order to

the remaining indirect cost categories as well as to the major

functions of the organization. Other cost categories could be allocated

in the order determined to be most appropriate by the organization.

When cross allocation of costs is made as provided in subparagraph (2),

this order of allocation does not apply.

(2) Normally, an indirect cost category will be considered closed

once it has been allocated to other cost objectives, and costs shall

not be subsequently allocated to it. However, a cross allocation of

costs between two or more indirect costs categories could be used if

such allocation will result in a more equitable allocation of costs. If

a cross allocation is used, an appropriate modification to the

composition of the indirect cost categories is required.

e. Application of indirect cost rate or rates. Except where a

special indirect cost rate(s) is required in accordance with

subparagraph D.5, the separate groupings 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.

f. Distribution basis. Indirect costs shall be distributed to

applicable sponsored awards and other benefitting activities within

each major function on the basis of MTDC. MTDC consists of all salaries

and wages, fringe benefits, materials and supplies, services, travel,

and subgrants and subcontracts up to the first $25,000 of each subgrant

or subcontract (regardless of the period covered by the subgrant or

subcontract). Equipment, capital expenditures, charges for patient

care, rental costs and the portion in excess of $25,000 shall be

excluded from MTDC. Participant support costs shall generally be

excluded from MTDC. Other items may only be excluded when the Federal

cost cognizant agency determines that an exclusion is necessary to

avoid a serious inequity in the distribution of indirect costs.

g. Individual Rate Components. An indirect cost rate shall be

determined for each separate indirect cost pool developed. The rate in

each case shall be stated as the percentage which the amount of the

particular indirect cost pool is of the distribution base identified

with that pool. Each indirect cost rate negotiation or determination

agreement shall include development of the rate for each indirect cost

pool as well as the overall indirect cost rate. The indirect cost pools

shall be classified within two broad categories:

[[Page 29807]]

``Facilities'' and ``Administration,'' as described in subparagraph

C.3.

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.

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

[[Page 29808]]

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.

Attachment B--Circular No. A-122

Selected Items of Cost

Table of Contents

1. Advertising and public relations costs

2. Alcoholic beverages

3. Bad debts

4. Bid and proposal costs (reserved)

5. Bonding costs

6. Communication costs

7. Compensation for personal services

8. Contingency provisions

9. Contributions

10. Defense and prosecution of criminal and civil proceedings, claims,

appeals and patent infringement

11. Depreciation and use allowances

12. Donations

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

14. Entertainment costs

15. Equipment and other capital expenditures

16. Fines and penalties

17. Fringe benefits

18. Goods or services for personal use

19. Housing and personal living expenses

20. Idle facilities and idle capacity

21. Independent research and development (reserved)

22. Insurance and indemnification

23. Interest, fund raising, and investment management costs

24. Labor relations costs

25. Lobbying

26. Losses on other awards

27. Maintenance and repair costs

28. Materials and supplies

29. Meetings and conferences

30. Memberships, subscriptions, and professional activity costs

31. Organization costs

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

33. Page charges in professional journals

34. Participant support costs

35. Patent costs

36. Pension plans

37. Plant security costs

38. Pre-award costs

39. Professional service costs

40. Profits and losses on disposition of depreciable property or other

capital assets

41. Publication and printing costs

42. Rearrangement and alteration costs

43. Reconversion costs

44. Recruiting costs

45. Relocation costs

46. Rental costs

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

48. Selling and marketing

49. Severance pay

50. Specialized service facilities

51. Taxes

52. Termination costs

53. Training and education costs

54. Transportation costs

55. Travel costs

56. Trustees

Attachment B--Circular No. A-122

Selected Items of Cost

Paragraphs 1 through 56 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 and public relations costs.

a. The term advertising costs means the costs of advertising media

and corollary administrative costs. Advertising media include

magazines, newspapers, radio and television programs, direct mail,

exhibits, and the like.

b. The term public relations includes community relations and means

those activities dedicated to maintaining the image of the organization

or maintaining or promoting understanding and favorable relations with

the community or public at large or any segment of the public.

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

for:

(1) The recruitment of personnel required for the performance by

the organization of obligations arising under a sponsored award, when

considered in conjunction with all other recruitment costs, as set

forth in paragraph 44 (``Recruiting costs'');

(2) The procurement of goods and services for the performance of a

sponsored award;

(3) The disposal of scrap or surplus materials acquired in the

performance of a sponsored award except when organizations are

reimbursed for disposal costs at a predetermined amount in accordance

with OMB Circular A-110, Sec. __.34, ``Equipment''; or

(4) Other specific purposes necessary to meet the requirements of

the sponsored award.

d. The only allowable public relations costs are:

(1) Costs specifically required by sponsored awards;

(2) Costs of communicating with the public and press pertaining to

specific activities or accomplishments which result from performance of

sponsored awards (these costs are considered necessary as part of the

outreach effort for the sponsored awards); or

(3) Costs of conducting general liaison with news media and

government public relations officers, to the extent that such

activities are limited to communication and liaison necessary to keep

the public informed on matters of public concern, such as notices of

contract/grant awards, financial matters, etc.

e. Costs identified in subparagraphs c and d if incurred for more

than one sponsored award or for both sponsored work and other work of

the organization, are allowable to the extent that the principles in

paragraphs B (``Direct Costs'') and C (``Indirect Costs'') of

Attachment A are observed.

f. Unallowable advertising and public relations costs include the

following:

(1) All advertising and public relations costs other than as

specified in subparagraphs c, d, and e;

(2) Costs of meetings or other events related to fund raising or

other organizational activities including:

(i) Costs of displays, demonstrations, and exhibits;

(ii) Costs of meeting rooms, hospitality suites, and other special

facilities used in conjunction with shows and other special events; and

(iii) Salaries and wages of employees or cost of services engaged

in setting up and displaying exhibits, making demonstrations, and

providing briefings;

(3) Costs of promotional items and memorabilia, including models,

gifts, and souvenirs;

(4) Costs of advertising and public relations designed solely to

promote the organization.

2. Alcoholic beverages. Costs of alcoholic beverages are

unallowable.

3. 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.

4. Bid and proposal costs. (reserved)

5. 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

[[Page 29809]]

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.

6. Communication costs. Costs incurred for telephone services,

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

and the like are allowable.

7. 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 h). 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.

(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 h), 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. Organization-furnished automobiles. That portion of the cost of

organization-furnished automobiles that relates to personal use by

employees (including transportation to and from work) is unallowable as

fringe benefit or indirect costs regardless of whether the cost is

reported as taxable income to the employees. These costs are allowable

as direct costs to sponsored award when necessary for the performance

of the sponsored award and approved by awarding agencies.

h. 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.

[[Page 29810]]

(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.

i. 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.

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

paragraph 32.

k. Severance pay. See paragraph 49.

l. Training and education costs. See paragraph 53.

m. 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 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.

8. 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 7.f(3) and

22.a(2)(d)); pension funds (see subparagraph 7.h); and reserves for

normal severance pay (see subparagraph 49.b(1)).

9. Contributions. Contributions and donations by the organization

to others are unallowable.

10. Defense and prosecution of criminal and civil proceedings,

claims, appeals and patent infringement.

a. Definitions.

(1) Conviction, as used herein, means a judgment or a conviction of

a criminal offense by any court of competent jurisdiction, whether

entered upon as a verdict or a plea, including a conviction due to a

plea of nolo contendere.

(2) Costs include, but are not limited to, administrative and

clerical expenses; the cost of legal services, whether performed by in-

house or private counsel; and the costs of the services of accountants,

consultants, or others retained by the organization to assist it; costs

of employees, officers and trustees, and any similar costs incurred

before, during, and after commencement of a judicial or administrative

proceeding that bears a direct relationship to the proceedings.

(3) Fraud, as used herein, means (i) acts of fraud, corruption or

attempts to defraud the Federal Government or to corrupt its agents,

(ii) acts that constitute a cause for debarment or suspension (as

specified in agency regulations), and (iii) acts which violate the

False Claims Act, 31 U.S.C., sections 3729-3731, or the Anti-Kickback

Act, 41 U.S.C., sections 51 and 54.

(4) Penalty does not include restitution, reimbursement, or

compensatory damages.

(5) Proceeding includes an investigation.

b. (1) Except as otherwise described herein, costs incurred in

connection with any criminal, civil or administrative proceeding

(including filing of a false certification) commenced by the Federal

Government, or a State, local or foreign government, are not allowable

if the proceeding: (1) relates to a violation of, or failure to comply

with, a Federal, State, local or foreign statute or regulation by the

organization (including its agents and employees), and (2) results in

any of the following dispositions:

(a) In a criminal proceeding, a conviction.

(b) In a civil or administrative proceeding involving an allegation

of fraud or similar misconduct, a determination of organizational

liability.

(c) In the case of any civil or administrative proceeding, the

imposition of a monetary penalty.

(d) A final decision by an appropriate Federal official to debar or

suspend the organization, to rescind or void an award, or to terminate

an award for default by reason of a violation or failure to comply with

a law or regulation.

(e) A disposition by consent or compromise, if the action could

have resulted in any of the dispositions described in (a), (b), (c) or

(d).

(2) If more than one proceeding involves the same alleged

misconduct, the costs of all such proceedings shall be unallowable if

any one of them results in one of the dispositions shown in

subparagraph b.(1).

c. If a proceeding referred to in subparagraph b is commenced by

the Federal Government and is resolved by consent or compromise

pursuant to an

[[Page 29811]]

agreement entered into by the organization and the Federal Government,

then the costs incurred by the organization in connection with such

proceedings that are otherwise not allowable under subparagraph b may

be allowed to the extent specifically provided in such agreement.

d. If a proceeding referred to in subparagraph b is commenced by a

State, local or foreign government, the authorized Federal official may

allow the costs incurred by the organization for such proceedings, if

such authorized official determines that the costs were incurred as a

result of (1) a specific term or condition of a federally-sponsored

award, or (2) specific written direction of an authorized official of

the sponsoring agency.

e. Costs incurred in connection with proceedings described in

subparagraph b, but which are not made unallowable by that

subparagraph, may be allowed by the Federal Government, but only to the

extent that:

(1) The costs are reasonable in relation to the activities required

to deal with the proceeding and the underlying cause of action;

(2) Payment of the costs incurred, as allowable and allocable

costs, is not prohibited by any other provision(s) of the sponsored

award;

(3) The costs are not otherwise recovered from the Federal

Government or a third party, either directly as a result of the

proceeding or otherwise; and,

(4) The percentage of costs allowed does not exceed the percentage

determined by an authorized Federal official to be appropriate,

considering the complexity of the litigation, generally accepted

principles governing the award of legal fees in civil actions involving

the United States as a party, and such other factors as may be

appropriate. Such percentage shall not exceed 80 percent. However, if

an agreement reached under subparagraph c has explicitly considered

this 80 percent limitation and permitted a higher percentage, then the

full amount of costs resulting from that agreement shall be allowable.

f. Costs incurred by the organization in connection with the

defense of suits brought by its employees or ex-employees under section

2 of the Major Fraud Act of 1988 (Pub. L. 100-700), including the cost

of all relief necessary to make such employee whole, where the

organization was found liable or settled, are unallowable.

g. Costs of legal, accounting, and consultant services, and related

costs, incurred in connection with defense against Federal Government

claims or appeals, antitrust suits, or the prosecution of claims or

appeals against the Federal Government, are unallowable.

h. Costs of legal, accounting, and consultant services, and related

costs, incurred in connection with patent infringement litigation, are

unallowable unless otherwise provided for in the sponsored awards.

i. Costs which may be unallowable under this paragraph, including

directly associated costs, shall be segregated and accounted for by the

organization separately. During the pendency of any proceeding covered

by subparagraphs b and f, the Federal Government shall generally

withhold payment of such costs. However, if in the best interests of

the Federal Government, the Federal Government may provide for

conditional payment upon provision of adequate security, or other

adequate assurance, and agreements by the organization to repay all

unallowable costs, plus interest, if the costs are subsequently

determined to be unallowable.

11. 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

[[Page 29812]]

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.

12. 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;

(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.

13. 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.

14. 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 13 and 30).

15. 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 one year and an

acquisition cost which equals or exceeds the lesser of (a) the

capitalization level established by the organization for the financial

statement purposes, or (b) $5,000. The unamortized portion of any

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

may be recovered by continuing to claim the otherwise allowable use

allowances or depreciation on the equipment, or by amortizing the

amount to be written off over a period of years as negotiated with the

Federal cognizant agency.

(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

$5,000 or more have the prior approval of awarding agency.

[[Page 29813]]

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 11 for allowability of use

allowances or depreciation on buildings, capital improvements, and

equipment. Also, see paragraph 46 for allowability of rental costs for

land, buildings, and equipment.

16. 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.

17. Fringe benefits. See subparagraph 7.f.

18. Goods or services for personal use. Costs of goods or services

for personal use of the organization's employees are unallowable

regardless of whether the cost is reported as taxable income to the

employees.

19. Housing and personal living expenses.

a. Costs of housing (e.g., depreciation, maintenance, utilities,

furnishings, rent, etc.), housing allowances and personal living

expenses for/of the organization's officers are unallowable as fringe

benefit or indirect costs regardless of whether the cost is reported as

taxable income to the employees. These costs are allowable as direct

costs to sponsored award when necessary for the performance of the

sponsored award and approved by awarding agencies.

b. The term ``officers'' includes current and past officers and

employees.

20. 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 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.

21. Independent research and development. [Reserved]

22. 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 7.f and 7.h(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 7.f(4)). The cost of such insurance when

the organization is identified as the beneficiary is unallowable.

(f) Insurance against defects. Costs of insurance with respect to

any costs incurred to correct defects in the organization's materials

or workmanship are unallowable.

(g) Medical liability (malpractice) insurance. Medical liability

insurance is an allowable cost of Federal research programs only to the

extent that the Federal research programs involve human subjects or

training of participants in research techniques. Medical liability

insurance costs shall be treated as a direct cost and shall be assigned

to individual projects based on the manner in which the insurer

allocates the risk to the population covered by the insurance.

(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

[[Page 29814]]

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.

23. 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 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.

[[Page 29815]]

(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 23:

(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.

24. 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.

25. 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

(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 25 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

allowabliliy 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 25. 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.

[[Page 29816]]

26. 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.

27. 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

15).

28. 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 organizat

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