[Federal Register Volume 59, Number 215 (Tuesday, November 8, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-27439]


[[Page Unknown]]

[Federal Register: November 8, 1994]


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Part II





Office of Management and Budget





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Office of Federal Procurement Policy



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48 CFR Parts 9903, 9905




Cost Accounting Standards Board; Application of Cost Accounting 
Standards Board Regulations to Educational Institutions; Final Rule
OFFICE OF MANAGEMENT AND BUDGET

Office of Federal Procurement Policy

48 CFR Parts 9903, 9905

 
Cost Accounting Standards Board; Application of Cost Accounting 
Standards Board Regulations to Educational Institutions

AGENCY: Cost Accounting Standards Board, Office of Federal Procurement 
Policy, OMB.

ACTION: Final rule.

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SUMMARY: The Cost Accounting Standards Board (CASB) hereby amends the 
regulatory provisions contained in Chapter 99 of Title 48. The 
amendments being promulgated today as a final rule apply to educational 
institutions receiving a negotiated Federal contract or subcontract 
award, in excess of $500,000 (excluding contracts awarded for the 
operation of Federally Funded Research and Development Centers (FFRDCs) 
which are already subject to CASB regulations), and require that such 
educational institutions comply with certain specified CASB rules, 
regulations and Cost Accounting Standards (CAS).

EFFECTIVE DATE: This rule is effective on January 9, 1995.

FOR FURTHER INFORMATION CONTACT: Rudolph J. Schuhbauer, Project 
Director, Cost Accounting Standards Board (telephone: 202-395-3254).

SUPPLEMENTARY INFORMATION:

A. Regulatory Process

    The CASB's rules, regulations and Standards are codified at 48 CFR 
Chapter 99. Section 26(g)(1) of the Office of Federal Procurement 
Policy Act, 41 U.S.C. 422(g), requires that the Board, prior to the 
establishment of any new or revised CAS, complete a prescribed 
rulemaking process. The process generally consists of the following 
four steps:

    1. Consult with interested persons concerning the advantages, 
disadvantages and improvements anticipated in the pricing and 
administration of Government contracts as a result of the adoption 
of a proposed Standard.
    2. Promulgate an Advance Notice of Proposed Rulemaking (ANPRM).
    3. Promulgate a Notice of Proposed Rulemaking (NPRM).
    4. Promulgate a final rule.
    This promulgation completes the four step process.

B. Background

    Prior Promulgations: Based on information that some institutions of 
higher education were improperly allocating indirect costs to Federal 
research programs and charging unallowable costs to Federal awards 
(e.g., contracts, grants and cooperative agreements), the CASB 
published three Federal Register (FR) proposals requesting public 
comments from interested parties concerning the proposed application of 
the Board's rules, regulations and Standards to educational 
institutions. A Staff Discussion Paper was published on October 8, 1991 
(56 FR 50737). After consideration of the public comments received in 
response to the Staff Discussion Paper, the CASB published an Advance 
Notice of Proposed Rulemaking (ANPRM) on June 2, 1992 (57 FR 23189). On 
December 21, 1992, after consideration of the public comments received 
in response to the ANPRM, the CASB published a Notice of Proposed 
Rulemaking (NPRM) (57 FR 60503) concerning proposed amendments to 
Chapter 99 of Title 48 that, when issued as a final rule, would require 
educational institutions to comply with certain specified CASB rules, 
regulations and Standards.
    Public Comments: Seventy sets of public comments were received in 
response to the NPRM from educational institutions, Government 
agencies, public accounting firms, a professional accounting 
association, other associations, and an individual.
    Many commenters opposed the CASB's proposal to independently 
promulgate CAS coverage for application to colleges and universities. 
The commenters' concerns centered primarily on the premise that the 
Board's proposal would result in a ``second'' set of accounting rules 
that may conflict with the accounting principles specified in Office of 
Management and Budget (OMB) Circular A-21, Cost Principles For 
Educational Institutions. Establishment of a ``single'' set of 
accounting requirements in Circular A-21 was recommended. In the 
promulgations referenced above, the Board stated that its proposed 
requirements are intended to be compatible with the basic requirements 
of Circular A-21. No conflicting provisions were specifically 
identified by the commenters. The Board, in its promulgations, 
repeatedly stated that it expected OMB to extend the CAS coverage 
established for contracts to grants and other forms of financial 
assistance by formal revision of Circular A-21.
    On July 26, 1993, OMB, in the preamble comments to a Federal 
Register proposal making certain final revisions to Circular A-21 (58 
FR 39997), stated that ``Consistent with the Board's stated 
expectations, OMB plans to extend the CASB's regulations and Standards 
applicable to educational institutions to all awards (contracts and 
grants) made to institutions that are major recipients of Federal 
research funds.''
    Consistent with the CASB's stated expectations and independent 
statutory rulemaking authority, the CASB is promulgating this final 
rule in today's Federal Register. The Board has purposefully delayed 
the effective date of this final rule by 60 days so that OMB, by 
separate action, can amend Circular A-21 to incorporate the Board's 
requirements. Once promulgated, the Circular A-21 amendments 
incorporating CAS should mitigate the basis for the commenters' 
concerns regarding ``two'' sets of rules.
    A number of commenters expressed opposition to the Board's proposal 
from administration and cost of implementation viewpoints, but such 
commenters generally did not take issue with the technical aspects of 
the proposed coverage. Some commenters endorsed the Board's proposal. 
Several commenters provided constructive editorial and technical 
comments which, in their opinion, would improve and clarify the Board's 
proposed regulatory coverage.
    The commenters' overall concerns and suggestions are addressed in 
greater detail under Section E., Public Comments. The Board and the 
CASB staff express their appreciation for the constructive suggestions 
and criticisms provided by the commenters, particularly those offered 
to clarify and improve the proposed language in Parts 9903 and 9905, 
and the content of the proposed Disclosure Statement. Many of the 
commenters' suggested improvements have been incorporated into the 
final rule being promulgated today.
    Benefits: After consideration of the public comments received, it 
is the Board's opinion that the application of the CAS provisions being 
promulgated today will improve the cost accounting practices followed 
by educational institutions when estimating, accumulating and reporting 
costs under Federal awards, and that the incremental costs of 
compliance with the Board's specific requirements will be minimal. 
Costs associated with the initial preparation and maintenance of a 
Disclosure Statement should be offset by reductions in the recurring 
administrative costs currently associated with the preparation of cost 
accounting data being submitted routinely to the cognizant Federal 
agencies for informational support, evaluation and negotiation of the 
institutions' indirect cost rate proposals. Use of the Disclosure 
Statement being promulgated today should also reduce the potential for 
disagreements between the contracting parties regarding an 
institution's cost accounting practices.
    The Board believes this final rule will promote uniformity and 
consistency in the educational institutions' cost accounting practices. 
The potential benefits accruing to the Government's audit, negotiation 
and general contract administration processes will be substantial and 
will greatly outweigh any added costs.
    Proposed Amendments: A brief description of the proposed amendments 
follows:
    Part 9903, Contract Coverage: In Subpart 9903.2, CAS Program 
Requirements, existing subparagraph 9903.201-1(b)(10), exempting 
certain contracts awarded to educational institutions from CAS, is 
deleted. Subsections 9903.201-1 and 9903.201-2 are amended to identify 
which Standards shall continue to be applied to contractors other than 
educational institutions, and a new paragraph (9903.201-2(c)) is added 
to establish the particular Standards and associated contractual 
provisions to be applied to educational institutions. Subsection 
9903.201-3 is amended to conform the prescribed solicitation notice for 
use by educational institutions. Subsection 9903.201-4 is amended to 
establish a unique contract clause for inclusion in CAS-covered 
contracts awarded to educational institutions. Subsection 9903.201-6 is 
amended to reference the new contract clause's provision permitting 
equitable adjustments when a change in cost accounting practice is 
found to be desirable and not detrimental. Section 9903.201-7 is added 
to specify cognizant Federal agency responsibilities for administering 
CAS-covered contracts. Section 9903.202 is amended to establish 
Disclosure Statement filing requirements for educational institutions 
(including temporary transition period filing requirements), prescribe 
the disclosure form to be submitted by educational institutions, and 
add new provisions requiring the cognizant Federal agency to establish 
policies and procedures for promptly determining the adequacy of 
submitted Disclosure Statements. In Subpart 9903.3, CAS Rules and 
Regulations, Section 9903.301 is amended to incorporate cross-
references to definitions for certain new and existing terms.
    Part 9905, Cost Accounting Standards For Educational Institutions: 
A new Part 9905 is added to incorporate four new Standards applicable 
to educational institutions, i.e., one requiring consistency in 
estimating, accumulating and reporting costs (Section 9903.501), one 
requiring consistency in allocating costs (Section 9903.502), one 
requiring contractor identification of specific unallowable costs 
(Section 9903.505), and one requiring consistency in the selection and 
use of a cost accounting period (Section 9903.506).
    Summary Description of Amended CAS Coverage: As amended, Part 9903 
and Part 9905 apply to educational institutions. A prescribed CAS 
contract clause must be incorporated in any negotiated Federal contract 
or subcontract awarded, in excess of $500,000, to an educational 
institution. An institution receiving a CAS-covered award will be 
contractually required to (1) consistently follow its established cost 
accounting practices when estimating (proposed costs), accumulating, 
and reporting costs under that and any subsequent CAS-covered award(s), 
(2) consistently allocate costs incurred for the same purpose, (3) 
identify unallowable costs and exclude from its billings, claims and 
proposals costs that are expressly unallowable or mutually agreed to be 
unallowable, and (4) consistently use the same cost accounting period 
for purposes of estimating, accumulating and reporting costs. 
Institutions receiving CAS-covered contracts will also be required to 
formally disclose, in a prescribed Disclosure Statement, and 
consistently follow their disclosed cost accounting practices, when a 
business unit of an institution:

    (a) receives a CAS-covered contract or subcontract of $25 
million, or more,
    (b) received more than $25 million of CAS-covered contracts and 
subcontracts in its preceding cost accounting period, of which at 
least one award exceeded $1 million, or
    (c) receives a CAS-covered contract or subcontract in excess of 
$500,000 and is one of the major recipients of Federal funds that is 
listed in Exhibit A of OMB Circular A-21.

    Transition period Disclosure Statement filing requirements and 
temporary agency waiver authority are provided so agencies can phase-in 
the basic disclosure requirements in an orderly manner.
    The CAS contract clause further provides for equitable price and 
cost adjustments in the event an institution is required to or elects 
to change its established or disclosed cost accounting practices 
(including cost accounting practice changes mandated by future 
amendments, if any, to Circular A-21), fails to consistently follow its 
established or disclosed cost accounting practices, or fails to comply 
with applicable Standards.

C. Paperwork Reduction Act

    The information collection aspects of this rule have been approved 
by the Office of Management and Budget, and assigned Control Number 
0348-0055.

D. Executive Order 12866 and the Regulatory Flexibility Act

    This rule affects educational institutions receiving negotiated 
Federal contracts or subcontracts in excess of $500,000. The economic 
impact on educational institutions resulting from this rule is expected 
to be minor. Therefore, the Board has determined that this is not a 
``major rule'' under Executive Order 12866, and that a regulatory 
impact analysis is not required. Furthermore, this regulation will not 
have a significant effect on a substantial number of small entities 
because small businesses are exempt from the application of the Cost 
Accounting Standards. Therefore, this final rule does not require a 
regulatory flexibility analysis under the Regulatory Flexibility Act of 
1980.

E. Public Comments

    This final rule is based upon the NPRM published in the Federal 
Register on December 21, 1992, 57 FR 60503, wherein public comments 
were invited. Seventy commenters responded. Their comments were 
considered. The Board's actions taken in response thereto are 
summarized in the paragraphs that follow:

OMB Circular A-21

    Comment: Many educational institutions opposed the CASB proposal to 
independently promulgate regulations for application to colleges and 
universities. Instead, they recommended that the Board ``adopt'' the 
provisions contained in the OMB Circular A-21 which they stated is also 
being revised to resolve the same type of problems cited as the reason 
for applying the proposed CAS provisions to educational institutions. 
Such commenters stated:

The proposed Standards duplicate A-21 requirements.
Extra Standards are unnecessary, A-21 is adequate with planned 
changes, etc.
CAS will increase the potential for conflicts between the two 
regulations.
The Government has failed to demonstrate the need for two sets of 
regulations.
The Board should work with OMB to develop a mutually acceptable 
single A-21 rule.

    Response: In the NPRM, the Board specifically responded to 
virtually identical concerns which were expressed by commenters in 
response to the ANPRM.
    The Board strongly disagrees with the commenters' perceptions that 
the Board's proposal is duplicative of the accounting principles 
specified in Circular A-21 and therefore is unnecessary.
    Circular A-21 does not require educational institutions to formally 
disclose the cost accounting practices they use to estimate, accumulate 
and report the costs of performing Federal awards. Information 
currently obtained by Federal officials concerning an institution's 
cost accounting practices is generally limited to data (1) indirectly 
reflected in an institution's individual cost proposals or 
reimbursement claims, (2) sampled, reviewed and reported on by 
auditors, and/or (3) provided in conjunction with the submission of the 
institution's indirect cost rate proposals to the extent specifically 
required by the Federal negotiator. Consequently, when such cost 
accounting information is obtained by Federal officials, it is acquired 
sporadically, in varying degrees of uniformity and thoroughness.
    Circular A-21 does not contain the specific criteria and guidance 
provided in the four Standards under consideration. Proposed Standards 
9905.501 and 9905.502 establish fundamental consistency requirements, 
define terms, detail techniques and provide illustrations for achieving 
compliance with the Standards' fundamental requirements. These two 
Standards constitute a significant expansion and clarification of the 
general consistency concepts specified in Circular A-21. Standard 
9905.505 prescribes alternate methods that may be applied in meeting 
the fundamental requirement to identify and exclude costs that are not 
allowable under the terms of Federal awards. Standard 9905.506 
requiring that a consistent cost accounting period be used, 
additionally specifies how an institution can comply with that 
requirement, including the use of specified transition periods in cases 
where a change in cost accounting periods is necessary or alternate 
methods where use of a twelve month period is not appropriate. Again, 
the specificity and detailed guidance contained in the four Standards 
is not contained in Circular A-21.
    Accordingly, it is the Board's view that:

    The commenters general objections appear to deal more with the 
form of regulatory coverage rather than the substance of the 
coverage.
    Promulgation of the Board's proposal will provide for disclosure 
of an institution's cost accounting practices in a structured manner 
that is more efficient and effective than the current unspecified 
process.
    Disclosure and application of the proposed Standards will 
facilitate and improve the administration of Federal payments to 
recipients of Federal funds and provide greater assurances that the 
educational institutions follow their cost accounting practices in a 
consistent manner.
    The Board's statutory authority for promulgating cost accounting 
rules, regulations and Standards resides with the Board. Delegation 
of such authority to other Federal officials is not authorized under 
the statute.
    The Board's proposed provisions augment, but do not duplicate, 
the requirements of Circular A-21. Thus, adoption of Circular A-21 
requirements in lieu of the Board's proposal would be inappropriate.

    Comment: Several commenters stated that CAS should be implemented 
after expected OMB Circular A-21 ``accounting'' changes go into effect. 
This would avoid the necessity for filing Disclosure Statement (DS) 
revisions and cost impact statements.
    Response: The referenced accounting principle changes were 
incorporated in Circular A-21 on July 15, 1993. The Circular's amended 
provisions are to be ``* * * implemented with the establishment of 
indirect cost rates for all fiscal years beginning on or after January 
1, 1994.'' It is the Board's understanding that these amendments need 
not be implemented during any fiscal years where predetermined indirect 
cost rates have already been established. Thus, the date the Circular's 
provisions ``go into effect'' will vary from institution to 
institution. The CASB's provisions are designed to be compatible with 
existing and future amended A-21 accounting principles. Whenever an OMB 
Circular A-21 mandated accounting principle change requiring an 
institution to change its cost accounting practice(s) is actually 
implemented, only the page(s) in the DS pertaining to the changed 
practice(s) need be amended and filed prior to actual implementation of 
the change. In such cases, the institution, pursuant to provision 
(a)(4)(iv) of the contract clause at 9903.201-4(e), must also resolve 
with their cognizant Federal agency officials whether an equitable 
adjustment is or is not required under existing CAS-covered contracts. 
Guidance for effecting equitable price adjustments is contained in 
9903.305, Materiality, and 9903.306, Interpretations.
    Accordingly, it is not feasible, desirable or necessary for the 
Board to establish a concurrent effective date as suggested for 
implementation of this final rule.

Administrative Costs to Implement CAS

    Comment: Many of the commenters stated that the CASB rules impose 
an administrative cost burden.
    Response: The commenters various concerns that application of the 
Board's proposed CAS coverage will impose an administrative cost burden 
generally evolved into two basic questions:

    1. What presently constitutes an adequate cost accounting system 
under the terms and conditions of existing Federal awards?
    2. What are the additional costs imposed by CAS?

    Educational institutions are required to maintain adequate records 
for the accumulation and identification of allowable costs under the 
existing regulatory requirements incorporated in their existing Federal 
awards. It is not altogether clear if the cited administrative cost 
concerns are solely attributable to the Board's proposal or a possible 
indication of a lack of compliance with the existing contractual 
requirements concerning the maintenance of adequate estimating and cost 
accounting systems. Educational institutions must presently administer 
their Federal awards and resolve any cost accounting issues raised by 
Federal officials in accordance with existing administrative processes. 
The administrative costs that were or are currently being incurred by 
some of the major universities to resolve the recent Federal challenges 
to proposed and claimed costs were not mentioned.
    When several universities were recently subjected to increased 
Federal audit scrutiny, millions of dollars of claimed costs were 
questioned and recovered by Federal agencies. The basis for such 
Federal challenges were attributed to (1) differing interpretations 
regarding the propriety of the institutions' cost allocation processes 
and (2) the institutions' failure to identify and exclude unallowable 
costs from their proposals and cost-reimbursement claims. The CASB's 
proposal requires formal disclosure of the major institutions' cost 
accounting practices; and, provides Standards for attaining consistency 
and for identification and exclusion of unallowable costs. The 
additional costs imposed by CAS are the incremental costs required to 
complete and maintain Disclosure Statements. The CAS consistency and 
unallowable cost provisions are Standards for meeting existing 
contractual requirements. Thus, the Board views the administrative 
costs associated with the latter as part of the normal costs of 
compliance with the basic contractual requirements that are imposed 
under existing regulations. Further, the Board believes the proposal 
will reduce the potential for after-the-fact disagreements over the 
educational institutions' cost allocation processes, establish a more 
structured process for resolving cost accounting issues and will, in 
the long run, benefit both the Government and the educational 
institutions.
    The expressed concerns did not result in modification of the 
Board's proposed regulatory requirements. However, the content of the 
proposed CASB Form DS-2 was significantly reduced to minimize 
Disclosure Statement preparation costs, as discussed in Paragraph F.

Civilian Agencies are Not Staffed to Administer CAS

    Comments: Several commenters stated that they would be adversely 
impacted because agencies are not staffed to administer Disclosure 
Statements (DSs) and routine changes in their accounting systems. The 
Department of Health and Human Services confirmed that it too was 
concerned about its abilities to immediately implement the proposed CAS 
requirements for all CAS-covered entities.
    Response: In consideration of the expressed concerns, the Board 
concluded that delayed implementation of the DS submission requirements 
would benefit the contracting parties. Under the NPRM, educational 
institutions meeting specified criteria were required to submit a DS 
prior to receipt of a CAS-covered contract. It is not the Board's 
intent to preclude the award of a contract where an institution has not 
yet become familiar with the Board's new disclosure requirements or 
been provided a reasonable opportunity to disclose its cost accounting 
practices. Further, the Board views an orderly phased-in implementation 
period as preferable to the proposed requirement which could clearly 
strain cognizant Federal agency resources if concurrent receipt of a 
significant number of DSs occurred. Accordingly, the Board has delayed 
implementation of the basic requirement and established transition 
period requirements for the filing of new DSs, applicable exclusively 
to educational institutions, at 9903.202-1(f).
    Under the cited transition period provisions, educational 
institutions are authorized to file completed DSs after receipt of a 
CAS-covered contract that is placed on or before December 31, 1995. Six 
month filing periods ending six, twelve, and eighteen months after 
receipt of such contracts were established to phase-in the basic 
disclosure requirement in order to minimize the impact on educational 
institutions and Federal agencies. The twenty largest recipients of 
Federal funds were expected to submit completed DSs first and are, 
therefore, subject to the six month after award filing requirement. The 
next largest group of Federal funds recipients are subject to the 
twelve month requirement, etc.
    Implementation of the basic requirement that a completed DS be 
provided or be on file with the cognizant Federal agency prior to award 
applies to CAS-covered contracts placed on or after January 1, 1996. 
However, where the cognizant Federal agency and the educational 
institution have established a DS due date falling between January 1, 
1996 and June 30, 1997 pursuant to 9903.202-1(f)(3) and (4), individual 
awarding agencies are provided authorization to waive the preaward 
filing requirement for contracts placed during that period when 
necessary to avoid any potential due date conflicts.
    For those educational institutions required to disclose their cost 
accounting practices, the transition provisions are intended to permit 
the larger recipients of Federal funds to complete and file DSs on or 
before June 30, 1996 and the smaller recipients to complete and file 
DSs no later than June 30, 1997. Earlier compliance with the basic 
disclosure requirement is encouraged.
    The Board has also established additional provisions at 9903.201-7 
and 9903.202-6 requiring Federal agencies to establish appropriate 
policies and procedures to administer CAS and to determine the adequacy 
of submitted DSs in a timely manner.

Predetermined Indirect Cost Rates (PDICRs)

    Background: Predetermined fixed rates or negotiated fixed rates are 
used by some agencies to reimburse educational institutions for 
indirect costs associated with their cost-reimbursement type contracts 
and grants. Generally, such PDICRs are negotiated in advance, and are 
applied to direct base costs incurred and billed in subsequent periods. 
PDICRs are final rates, i.e., the indirect costs so determined and paid 
under Federal awards are not subsequently adjusted to reflect the 
actual allowable indirect costs incurred during the subsequent periods 
of performance. At some locations where a civilian agency is the 
cognizant Federal agency, an institution's PDICR proposal may be based 
on actual costs extrapolated from the institution's fund accounting 
records that were maintained for a completed fiscal year, i.e., a prior 
base year (e.g., year 1). The base year's costs may be adjusted to 
reflect estimated base and pool costs for future fiscal years (e.g., 
PDICRs negotiated in year 2 may cover years 3, 4, etc.). Under the 
current Federal Acquisition Regulation (FAR), FAR 42.705-3(b) only 
permits the use of ``predetermined final indirect cost rates'' for 
contract awards when specified conditions are met. Predetermined rates 
covering more than a one year period are prohibited under FAR 42.705-
3(b)(6).
    Comment: The Department of Health and Human Services asked the 
Board to ``* * * explicitly state that the standards do not preclude 
the use of * * *'' PDICRs.
    Response: The use of PDICRs is subject to agency procurement 
regulations. Where permitted by statute and implementing agency 
regulations, negotiated PDICRs can continue to be used provided that, 
in the completed base year and in subsequent cost accounting periods, 
(1) all costs incurred for the same purpose, in like circumstances, are 
consistently treated as either direct costs only or as indirect costs 
only and (2) the allocation base costs (e.g., Modified Total Direct 
Costs) and allowable indirect cost pool amounts are grouped, 
accumulated and allocated in a consistent manner. The base costs and 
pool costs used to calculate predetermined or negotiated fixed rates 
should be estimated by using the same cost accounting practices that 
were used to measure, assign, and allocate actual base costs and 
indirect pool costs for a completed fiscal year. If different cost 
accounting practices are used to estimate and accumulate base or pool 
costs of a future period, the change in cost accounting practice must 
be disclosed under the terms of CAS-covered contracts. The cost 
accounting practices used to determine estimated (predetermined) and 
actual indirect costs are subject to the Board's CAS and Disclosure 
Statement requirements.
    The use of predetermined or negotiated fixed rates, for 
administrative convenience or for other reasons, should not be viewed 
as a CAS noncompliance issue, provided the institution maintains cost 
accounting records which clearly demonstrate that direct and indirect 
costs are determined in a consistent manner, when the institution 
estimates, accumulates and reports costs applicable to Federal awards 
(See 9905.501).
    Comment: One university representative requested the Board to ``* * 
* comment on the significance of * * *'' PDICRs and compliance with 
CAS. The commenter believes that CAS compliance is achieved if the 
PDICR is ``* * * multiplied by the applicable direct cost base. Any 
further inquiry into actual indirect costs would be inconsistent with 
the premise of predetermined rates * * *''.
    Response: The Board does not agree with the commenter's 
perceptions. Under existing Federal contractual audit and record 
keeping requirements, an institution must maintain a complete set of 
accounting records, supported by source documents, that adequately 
reflect all costs incurred and claimed under their Federal awards. Such 
records must also be made available for audit pursuant to applicable 
Federal audit requirements. Under the CAS being promulgated today, an 
educational institution is required to maintain cost accounting records 
which reflect the consistent application of the institution's 
established cost accounting practices, including those used to classify 
a cost either as a direct or indirect cost, when estimating, 
accumulating and reporting costs during each cost accounting period. 
Memorandum or work sheet records are acceptable.
    Based on this comment, the Board is concerned that some 
institutions may not be maintaining annual cost accounting records that 
adequately identify how their total direct and indirect costs are 
treated during each cost accounting period. Without such annual 
records, the institution's internal controls and the ``audit trail'' 
(from source documents to final cost accumulation points) would be 
obscured. Consequently, the institution's ability to demonstrate the 
consist application of its established cost accounting practices when 
estimating, accumulating and reporting direct and indirect costs may be 
irreparably impaired.
    Educational institutions are advised that failure to maintain 
adequate cost accounting records for each cost accounting period may be 
viewed as a violation of their existing contractual record keeping 
requirements and/or result in a determination that the institution has 
failed to comply with an applicable CAS or to consistently follow its 
established cost accounting practices.

Negotiated Fixed Rates and Carry-Forward Provisions (NFR-CFPs)

    Background: OMB Circular A-21 provides that where NFR-CFPs are 
used, the over- or under-recovery in a particular year may be included 
as an adjustment to the indirect cost recognized as allowable and 
allocable in a subsequent year.
    Comment: An accounting association expressed concerns that use of 
NFR-CFPs may result in significantly inaccurate measurements of cost 
for a particular cost accounting period.
    Response: To some, this overall adjustment process may raise valid 
cost assignment and allocation issues. However, the carry forward 
provision is viewed by the Board as essentially an administrative 
expedient. It is the Board's understanding that the carry-forward 
provision is generally used where the number of Federal awards is 
significant but the volume of Federal activity is relatively stable and 
predictable. Rather than adjust the individual amounts billed for a 
large number of awards, necessary adjustments are effected in an 
overall manner by offsetting different amounts otherwise considered 
allowable. Such offsets made in a subsequent period for adjustments 
attributable to a prior period represent, in essence, the 
implementation of an administrative policy on how to best effect 
adjustments for any over- or under-payments after the actual allowable 
costs are determined for a prior period.
    Where agency procurement regulations permit the use of NFR-CFPs, 
the resulting cost adjustment process should not be viewed as a CAS 
noncompliance issue per se. Necessary adjustments may be applied under 
CAS-covered contracts if the cost accounting practices used to 
initially determine forecasted or actual indirect costs and rates 
(exclusive of any carry forward adjustments) for each year comply with 
the Board's rules, regulations, and Standards. In such cases, however, 
a distinctive two step procedure must be followed. First, the 
forecasted or actual indirect expense pool(s) used to initially 
determine the forecasted rates and the actual prior year rates must be 
determined exclusive of any carry forward adjustments. The cost 
accounting practices used to do so must meet applicable CAS 
requirements. Then, after the rates are so determined, the institution 
and cognizant Federal negotiator may, if permitted by agency 
regulations, effect appropriate adjustments to a forecasted year rate 
to compensate for any over- or under-estimated indirect cost payments 
made in a prior year.

Part 9903 CAS Applicability Provisions

    Comment: A commenter asked if a negotiated contract would be 
considered CAS-covered, where a contract initially awarded for $325,000 
to cover a three year performance period were increased to $625,000 and 
the performance period were extended to five years.
    Response: The CAS applicability threshold is determined at the time 
the basic contract is awarded based on the total negotiated price for 
the entire scope of work contemplated, including all options. If only a 
three year contract was contemplated, the described contract action 
totaling $325,000 would not incorporate a CAS contract clause. However, 
if the Government had initially contemplated a five year contract 
performance period but available funds were obligated to only cover the 
first three years, CAS applicability would be determined based upon the 
negotiated contract price for the full five year period. That is, where 
a negotiated contract is incrementally funded, the individual amounts 
of funding provided in the basic award and subsequent funding 
modifications are not to be used individually in determining CAS 
applicability. Rather, the entire estimated contract cost, plus fee, if 
any (for the entire period of performance), is used to determine CAS 
applicability.
    Comment: A commenter asked if an existing negotiated contract in 
excess of $500,000 that is not currently CAS-covered would become CAS-
covered after promulgation of this final rule if a contract 
modification increases the contract price by $100,000.
    Response: No. The existing non-CAS-covered contract would not 
become CAS-covered even if the modification was in excess of $500,000.
    Comment: A commenter asked if a $200,000 subcontract awarded under 
a CAS-covered prime contract would be CAS-covered?
    Response: No. Only negotiated subcontracts in excess of $500,000 
will be required to be CAS-covered.
    Comment: Several commenters expressed opposition to the proposed 
CAS applicability provision that requires full coverage when an 
institution receives a single CAS-covered award in excess of $500,000 
and the institution is listed in Exhibit A of OMB Circular A-21.
    Response: Exhibit A of the Circular lists the 99 educational 
institutions that receive the preponderant amount of Federal research 
funds under their contracts and grants. The listed institutions receive 
Federal funds ranging from more than $25 million annually to amounts in 
excess of $250 million annually. Unlike commercial organizations, 
however, many of these educational institutions do not receive large 
individual dollar value contracts that could be used as an effective 
applicability threshold, e.g., to trigger a Disclosure Statement 
requirement. Rather, they receive a large number of small dollar value 
contract and grant awards. The Board believes it would be beneficial to 
the contracting parties if the larger recipients of Federal research 
funds formally disclosed their cost accounting practices. Accordingly, 
use of only a $25 million contract threshold to initiate the disclosure 
requirement being promulgated today was not considered sufficient to 
meet the Board's objective.
    Comment: There is an inconsistency in the proposed threshold 
coverage: Coverage is set at ``$500,000 or more'' and at ``in excess of 
$500,000.''
    Response: The NPRM proposed language has been revised to 
consistently cite ``in excess of $500,000.''
    Comment: If educational institutions are to be covered by CAS, 
whereas only their FFRDCs were covered previously, all future CAS-
covered contracts awarded to educational institutions should be subject 
to the same coverage. The proposal to retain modified and full coverage 
for such FFRDCs should be eliminated.
    Response: FFRDCs are generally treated as an independent segment of 
an educational institution and have been subject to full or modified 
CAS coverage prescribed by the CASB and incorporated in Part 9903 and 
Part 9904 by the Board. That prescribed coverage for FFRDCs is not 
modified or revised by this final rule.

Part 9905 Cost Accounting Standards

Standard 9905.501

    Comment: If an institution installs a new accounting system with a 
new chart of accounts during the performance of a contract and it 
cannot report actual costs consistent with the way the costs were 
estimated, does this constitute a violation of the Fundamental 
Requirement at 9905.501-40(b)?
    Response: Yes. Changes made in an institution's general accounting 
systems used for financial management and reporting purposes that 
result in a change in the institution's cost accounting practices or 
noncompliance with a Standard are subject to paragraphs (a)(4) and 
(a)(5), respectively, of the contract clause at 9903.201-4(e).
    Comment: A commenter suggested that the Board clarify that the 
providing of estimated cost data in greater detail than the 
institution's accounting system can handle should not constitute a 
violation of Standard 9905.501.
    Response: The Board's proposal was predicated on Standard 9904.401. 
However, the Interpretation at 9904.401-61 that addressed to what 
degree the costs for estimated scrap and shrinkage costs in a 
manufacturing production oriented environment should be accounted for 
in a contractor's cost accounting records was not included in 9905.501. 
Scrap and shrinkage costs were not considered a material cost item 
under research contracts performed by educational institution. The 
Board believes that the record keeping concepts expressed in the 
referenced Interpretation apply equally to this commenter's concern and 
that such guidance would facilitate implementation of 9905.501. 
Accordingly, the portions of the referenced Interpretation concerning 
the amount of detail required in accumulating and reporting costs have 
been incorporated at 9905.501-50(c).

Standard 9905.502

    Comment: One commenter expressed difficulty in understanding the 
concepts of Standard 9905.502 where the university engages in cost 
sharing, where projects have multiple sponsors particularly in light of 
the university's desire to accommodate the different requirements 
imposed by Federal and private supporters and the different fund 
accounting methods it uses to account for restricted and unrestricted 
funds.
    Response: The statements provided by this commenter infer that, in 
a university ``fund'' accounting system, direct and indirect costs for 
a particular project cannot always be allocated to final cost 
objectives on a consistent basis. Thus, the proposed Standard requires 
revision. If that was the commenters intent, the Board does not agree.
    One of the Board's primary objectives is to prescribe rules and 
regulations that will result in the consistent and equitable allocation 
of direct and indirect costs to CAS-covered contracts. The purpose of 
Standard 9905.502 is to require consistency in the institution's cost 
accounting practices followed for determining the direct and indirect 
costs to be allocated to all final cost objectives. The Standard 
requires that the institution's cost accounting practices consistently 
treat costs incurred for the same purpose, in like circumstances, as 
either a direct cost or an indirect cost, without regard to the source 
or type of funds (restricted or unrestricted) involved. While multi-
sponsored projects and cost-sharing arrangements are not specifically 
addressed, this Standard requires that direct and indirect costs be 
allocated to all final cost objectives established for each project on 
a consistent basis in the institution's cost accounting system. A 
project's costs may be accumulated under one final cost objective and 
be identified with individual sponsors on a pro rata basis, and/or 
project costs may be accumulated and recorded in sub-accounts or 
individual cost accumulation points (final cost objectives) associated 
with each sponsor. This Standard does not prescribe criteria for 
determining what constitutes a project or the number of final cost 
objectives required to accumulate costs for a project.
    Comment: Where a large major research contract involves the 
management of major subcontracts, complex procurements and equipment 
fabrications, award and administration costs of such activities may be 
directly attributable to the research project and are charged directly. 
Conversely, procurements under smaller projects that are relatively 
simple to administer, may be administered by the department's general 
business manager, who is included in Departmental Administration 
indirect cost pool. The Board should recognize that this is not a 
violation of the Standard.
    Response: Where an institution can demonstrate different 
circumstances, Standard 9905.502 permits the use of different 
allocation methods. However, the described circumstances appear 
identical to the illustration of costs that are incurred for the same 
purpose, at 9905.502-60(a)(1), where the institution elects to charge 
travel costs, normally treated as an indirect cost, directly to a 
contract. That illustration provides that similar travel costs incurred 
under other contracts may no longer remain in the indirect expense 
pool. The described subcontract administration costs appear to be 
incurred for the same purpose, regardless of the subcontracts' size, 
nature or complexity. Double counting may occur if the costs of 
administering other subcontracts under the smaller projects are not 
removed from the Departmental Administration indirect cost pool and 
charged directly. Determinations on whether different circumstances are 
or are not involved must be made on a case-by-case basis.
    Comment: In 9905.502-30(a)(4), it should be made clear that the 
term ``final cost objective'' is not intended to mean each individual 
contract.
    Response: The term ``final cost objective'' as defined in the 
Standards, applies to individual cost objectives, e.g., individually 
sponsored projects (contracts, grants, etc.), co-sponsored projects, 
in-house projects, and similar cost objectives. Normally, costs 
accumulated in a final cost objective are not allocated to other cost 
objectives.
    Comment: A Federal agency recommended that, in 9905.502-60(a)(2), 
the proposed term ``planning costs'' be replaced with a more 
representative term such as ``purchasing activity'' which is a more 
significant cost item at universities.
    Response: The illustration was appropriately revised.
    Comment: A commenter suggested that certain prescribed OMB policies 
and procedures be illustrated as an acceptable practice in the 
Standard.
    Response: The suggestion would result in the duplication and 
unnecessary proliferation of existing regulations. The commenter did 
not indicate if there was a potential conflict between CAS and OMB 
Circular A-21, accordingly the proposed Standard was not modified.

Standard 9905.505

    Comment: A commenter from a major university stated that paragraph 
9905.505-40(f) describes how to handle a cost overrun on a contract. 
However, it does not consider the way in which cost overruns must be 
handled in a fund accounting system. This paragraph should either be 
deleted or modified to recognize the requirement of a fund accounting 
contractor.
    Response: The Board's Standards pertain to the complete set of cost 
accounting practices used by an institution to estimate, accumulate and 
report costs under negotiated Federal awards. Conceptually, the same 
cost accounting practices are applied to all activities of a segment 
performing CAS-covered contracts in order to ensure all costs are 
allocated on a consistent basis to all final cost objectives. The 
particular provision in question requires that an institution be able 
to identify the total costs incurred with respect to a particular 
contract or similar cost objective, regardless of available funding 
considerations. In cases of a contract cost overrun, the Standard does 
not prescribe how the cost overrun is to be treated in the educational 
institution's ``fund'' accounting system.
    The commenter's statements remain a concern to the Board, as this 
issue was discussed in the preamble comments to the NPRM. The 
explanatory statements currently provided infer that cost overruns 
cannot be accumulated and reported in a university environment. Because 
all costs must be funded in order to be recorded in a fund accounting 
system, the commenter advised that the direct costs of an overrun 
contract must be transferred to other projects or to other indirect 
cost centers (e.g., from Research to Instruction). Within the set of 
cost accounting practices used for determining the costs of Federal 
awards, such transfers could result in the allocation of different 
indirect cost amounts to the same base costs and alter the amount of 
indirect costs allocated to other final cost objectives. If so, the 
described practices would not be in compliance with the consistency 
requirements being promulgated today. The commenting university is 
encouraged to review, and possibly modify, its cost accounting 
practices being followed under Federal awards to ensure that they will 
be in compliance with the Board's consistency requirements.
    Comment: One commenter asked: After identifying an indirect cost 
that has been questioned by the auditor and sustained by the 
contracting officer, must the university also deduct it from subsequent 
proposals pending appeal?
    Response: No. The type of costs under appeal must be identified in, 
but need not be excluded from, proposals and reimbursement claims. If, 
after the appeal is adjudicated, the Contracting Officer's final 
decision is not overturned and the costs remain unallowable, the 
Standard's identification and exclusion provisions would apply.
    Comment: A commenter suggested that, in 9905.505-60(d), the phrase 
``interim bidding and billing rates'' be replaced by a more commonly 
used term.
    Response: The phrase was replaced by the generic term ``indirect 
cost rates.''

Standard 9905.506

    Comment: Under paragraph 9905.506-50(a)(2), a commenter suggested 
adding the words ``or cost group'' after the words ``indirect cost 
pool.'' By way of explanation, the commenter advised the only way one 
could handle a situation of an indirect cost function which exists for 
only part of a year is to set up a separate cost group within one of 
the A-21 specified indirect cost pools.
    Response: This suggestion was partially adopted. The term ``expense 
pool'' was added instead of the suggested term.
    The commenter's suggestion and rationale could be erroneously 
interpreted by some to mean that a separate pool and allocation base 
applicable to the partial period need not be established. This Standard 
requires the use of a full cost accounting period, e.g., normally the 
institution's fiscal year. An exception provision permits the use of a 
shorter period for the allocation of indirect costs that only exist 
during a portion of the cost accounting period. In such cases, 
9905.506-50(a) requires the establishment of a separate allocation 
base, during the partial period, that is representative of the short 
term function. That provision also requires that the indirect costs 
associated with the unique short term function be accumulated in a 
separate indirect cost pool. The resultant allocation to final cost 
objectives of the short term period would generally be independent of 
the normal A-21 allocation process that is predicated on allocation 
bases and indirect cost pools applicable to all work performed during a 
full cost accounting period. The Board believes incorporation of the 
term ``expense pool'' will clarify that unique indirect costs that only 
exist during a portion of the cost accounting period may be accumulated 
in a separate pool and allocated to final cost objectives of that 
shorter period.
    Comment: A commenter stated that, in the illustration at 9905.506-
60(a), the proposed phrase ``estimated amount of the Organized Research 
expense pool'' was unclear and suggested use of the phrase ``estimated 
amount of indirect costs allocated to Organized Research.''
    Response: The suggested change was adopted.

Disclosure Statement (DS)

    Comment: One commenter recommended that the Board clarify that the 
different and special handling of direct vs. indirect costs of an FFRDC 
contract from all other CAS-covered contracts does not constitute a 
violation of Standard 9905.502.
    Response: When the cost accounting practices of the FFRDC activity 
and other institutional activities differ, the FFRDC should be treated 
as a separate ``segment'' and file its own DS. Where costs of the 
institution are allocated to both FFRDC and non-FFRDC activities, the 
segments' DSs should appropriately detail how institution-wide costs 
are allocated to the segments. Each segment must then disclose its 
particular cost accounting practices.
    Likewise, if two departments at a campus location follow different 
cost accounting practices, the institution must decide if the two 
departments should be treated as separate segments and file separate 
DSs for each or if the cost accounting practices of the two departments 
should be conformed.
    Comment: A Federal agency and other commenters advised that the 
level of detailed cost accounting records maintained by educational 
institutions to accumulate costs may vary depending upon the indirect 
cost category or functional activity involved.
    Response: In determining the costs of performing Federal awards, an 
institution's cost accounting records must be able to first identify 
and accumulate the total costs of each indirect cost category to be 
allocated to all major functions and activities of the institution. The 
accounting records maintained for this purpose must be sufficiently 
detailed to enable the contracting parties to reasonably establish base 
costs and indirect pool costs, applicable to all functions and 
activities, in a consistent manner. However, decisions on the level of 
detailed accounting records to be maintained should be influenced by 
the materiality of the costs being allocated to Federal awards. 
Reasonable approximations of costs may be used when the costs are 
immaterial or the resultant allocations to intermediate and final cost 
objectives will not differ materially from the amounts that would be 
obtained if more precise and detailed records were maintained. The 
level of accounting detail considered necessary in the circumstances 
must, therefore, be determined on a case-by-case basis and remains a 
matter subject to review and approval by the cognizant Federal agency.
    In light of the commenter's statements, Item 3.1.0. of the 
Disclosure Statement was expanded to require disclosure of how the 
costs of the individual indirect cost categories are identified and 
accumulated. Where the costs associated with a particular indirect cost 
category are not formally accumulated and recorded in the institution's 
formal accounting system, the cost accounting practices followed to 
identify such costs for allocation to the major functions and 
activities of the institution must be fully described on a continuation 
sheet.

F. Additional Revisions--Disclosure Statement (DS) Form CASB DS-2

    By memorandum dated February 1, 1994, the Deputy Administrator, 
Office of Information and Regulatory Affairs (OIRA), advised the Board 
that some representatives from OMB and the Department of Health and 
Human Services (HHS) had recently informed OIRA that the Board's 
proposed DS Form CASB DS-2 could be improved.
    The Board advised OIRA that in order to meet its primary objective, 
the promulgation of a useful DS Form, it would consider any additional 
OMB suggestions or Federal agency elaborations regarding their 
previously submitted responses to the Board's NPRM. Representatives 
from OMB's Office of Federal Financial Management, HHS and the 
Department of Defense proceeded to develop a list of suggested changes 
which, in their view, would further clarify the proposed disclosure 
requirements or curtail the amount of disclosure needed for certain 
cost elements that were not considered to be significant or 
problematic. The list was informally coordinated with the CASB's staff. 
A revised CASB Form DS-2 was then prepared by the CASB staff and 
submitted to the Board. Most of the suggested changes were adopted by 
the Board and are reflected in the CASB Form DS-2 being promulgated 
today.
    Essentially, a number of DS items contained in the NPRM were 
deleted and/or restated to facilitate disclosure. Consequently, the 
Board believes the DS being promulgated today is more useful and cost 
effective than that proposed in the NPRM. To that end, the Board 
expresses its appreciation for the assistance provided by OMB and 
agency representatives.
    On July 21, 1994, OMB promulgated a Notice in the Federal Register 
(59 FR 37276) for paperwork clearance purposes and copies of the 
revised Form CASB DS-2 were made available to interested parties. Based 
on the public comments received, the promulgated Form CASB DS-2 was 
further revised as follows:

    Item 2.4.0 was revised to clarify that the term ``direct 
personal service costs'' may include applicable fringe benefits 
costs consistent with OMB Circular A-21 provisions.
    Item 3.1.0 was revised to include the word ``other'' to clarify 
that costs from one indirect cost category may be allocated to 
``other'' indirect cost categories.
    In Part VI, the instructions were expanded to provide the 
reporting unit with the option of completing the form for any costs 
incurred by another organizational entity where it has access to the 
necessary data or of requesting that entity to complete the 
pertinent items.

    The Federal Acquisition Streamlining Act of 1994, in Section 2191 
titled ``Travel Expenses of Government Contractors'' repealed Section 
24 of the Office of Federal Procurement Policy Act (41 U.S.C. 420). 
Since proposed item 2.7.1. was predicated on the repealed statutory 
provisions, it was deleted.
    In the General Instructions to the Disclosure Statement, 
Instruction Number 8, was modified to permit incorporation of written 
cost accounting polices and procedures by specific reference or 
alternatively by incorporation as appendices. As promulgated today, 
Instruction 8 is intended to facilitate full disclosure and minimize 
Disclosure Statement preparation costs whenever an established cost 
accounting practice is adequately described in an institution's formal 
accounting system.

List of Subjects in 48 CFR Parts 9903, 9905

    Cost accounting standards, Government procurement.
Richard C. Loeb,
Executive Secretary, Cost Accounting Standards Board.

    For the reasons set forth in this preamble, chapter 99 of title 48 
of the Code of Federal Regulations is amended as set forth below:
    1. The authority citation for Part 9903 continues to read as 
follows:

    Authority: Public Law 100-679, 102 Stat. 4056, 41 U.S.C. 422.

PART 9903--CONTRACT COVERAGE

Subpart 9903.1--General

    2. Section 9903.102 is amended by revising the last sentence of 
this paragraph to read as follows:


9903.102  OMB Approval Under the Paperwork Reduction Act.

    * * * OMB has assigned Control Numbers 0348-0051 and 0348-0055 to 
the paperwork, recordkeeping and forms associated with this regulation.

Subpart 9903.2--CAS Program Requirements

    3. Section 9903.201-1 is amended by revising paragraph (a) and 
removing and reserving paragraph (b)(10) to read as follows:


9903.201-1  CAS applicability.

    (a) This subsection describes the rules for determining whether a 
proposed contract or subcontract is exempt from CAS. (See 9904 or 9905, 
as applicable.) Negotiated contracts not exempt in accordance with 
9903.201-1(b) shall be subject to CAS. A CAS-covered contract may be 
subject to full, modified or other types of CAS coverage. The rules for 
determining the applicable type of CAS coverage are in 9903.201-2.
    (b) * * *
    (7)-(10) [Reserved]
* * * * *
    4. Section 9903.201-2 is amended by revising the first sentence in 
paragraph (a) and adding a new paragraph (c) to read as follows:


9903.201-2  Types of CAS coverage.

    (a) Full coverage. Full coverage requires that the business unit 
comply with all of the CAS specified in Part 9904 that are in effect on 
the date of the contract award and with any CAS that become applicable 
because of later award of a CAS-covered contract. * * *
* * * * *
    (c) Coverage for educational institutions--(1) Regulatory 
requirements. Parts 9903 and 9905 apply to educational institutions 
except as otherwise provided in this paragraph (c) and at 9903.202-
1(f).
    (2) Definitions. (i) The following term is prominent in Parts 9903 
and 9905. Other terms defined elsewhere in this Chapter 99 shall have 
the meanings ascribed to them in those definitions unless paragraph 
(c)(2)(ii) of this subsection below requires otherwise.
    Educational institution means a public or nonprofit institution of 
higher education, e.g., an accredited college or university, as defined 
in section 1201(a) of Public Law 89-329, November 8, 1965, Higher 
Education Act of 1965; (20 U.S.C. 1141(a)).
    (ii) The following modifications of terms defined elsewhere in this 
Chapter 99 are applicable to educational institutions:
    Business unit means any segment of an educational institution, or 
an entire educational institution which is not divided into segments.
    Segment means one of two or more divisions, campus locations, or 
other subdivisions of an educational institution that operate as 
independent organizational entities under the auspices of the parent 
educational institution and report directly to an intermediary group 
office or the governing central system office of the parent educational 
institution. Two schools of instruction operating under one division, 
campus location or other subdivision would not be separate segments 
unless they follow different cost accounting practices, for example, 
the School of Engineering should not be treated as a separate segment 
from the School of Humanities if they both are part of the same 
division's cost accounting system and are subject to the same cost 
accounting practices. The term includes Government-owned contractor-
operated (GOCO) facilities, Federally Funded Research and Developments 
Centers (FFRDCs), and joint ventures and subsidiaries (domestic and 
foreign) in which the institution has a majority ownership. The term 
also includes those joint ventures and subsidiaries (domestic and 
foreign) in which the institution has less than a majority of 
ownership, but over which it exercises control.
    (3) Applicable Standards. Coverage for educational institutions 
requires that the business unit comply with all of the CAS specified in 
Part 9905 that are in effect on the date of the contract award and with 
any CAS that become applicable because of later award of a CAS-covered 
contract. This coverage applies to business units that receive 
negotiated contracts in excess of $500,000, except for CAS-covered 
contracts awarded to FFRDCs operated by an educational institution.
    (4) FFRDCs. Negotiated contracts awarded to an FFRDC operated by an 
educational institution are subject to the full or modified CAS 
coverage prescribed in paragraphs (a) and (b) of this subsection. CAS-
covered FFRDC contracts shall be excluded from the institution's 
universe of contracts when determining CAS applicability and disclosure 
requirements for contracts other than those to be performed by the 
FFRDC.
    (5) Contract Clauses. The contract clause at 9903.201-4(e) shall be 
incorporated in each negotiated contract and subcontract awarded to an 
educational institution when the negotiated contract or subcontract 
price exceeds $500,000. For CAS-covered contracts awarded to a FFRDC 
operated by an educational institution, however, the full or modified 
CAS contract clause specified at 9903.201-4 (a) or (c), as applicable, 
shall be incorporated.
    (6) Continuity in Fully CAS-Covered Contracts. Where existing 
contracts awarded to an educational institution incorporate full CAS 
coverage, the contracting officer may continue to apply full CAS 
coverage, as prescribed at 9903.201-2(a), in future awards made to that 
educational institution.
* * * * *
    5. Section 9903.201-3 is amended by redesignating the introductory 
heading as the heading of paragraph (a); redesignating the existing 
introductory text and paragraphs (a) through (d) as paragraph (a)(1) 
introductory text and paragraphs (a)(1) (i) through (iv) respectively; 
adding a new paragraph (a)(2); revising the heading of the solicitation 
notice; adding a new paragraph at the end of the introductory ``Note;'' 
amending Part I of the basic provision by revising paragraph (a), the 
first and second sentences in paragraph (b) and paragraphs (c)(1) and 
(c)(2); and adding a new Alternate I at the end of the basic provision 
to read as follows:


9903.201-3  Solicitation provisions.

    (a) Cost Accounting Standards Notices and Certifications.
    (1) * * *
    (2) If an award to an educational institution is contemplated 
prior to July 1, 1997, the contracting officer shall use the basic 
provision set forth below with its Alternate I, unless the contract 
is to be performed by an FFRDC (see 9903.201(c)(5)), or the 
provision at 9903.201(c)(6) applies.

Cost Accounting Standards Notices and Certification (Oct 1994)

    Note: * * *
    If the offeror is an educational institution, Part II does not 
apply unless the contemplated contract will be subject to full or 
modified CAS-coverage pursuant to 9903.201-2(c)(5) or 9903.201-
2(c)(6).

I. Disclosure Statement--Cost Accounting Practices and 
Certification

    (a) Any contract in excess of $500,000 resulting from this 
solicitation, except contracts in which the price negotiated is 
based on (1) established catalog or market prices of commercial 
items sold in substantial quantities to the general public, or (2) 
prices set by law or regulation, will be subject to the requirements 
of the Cost Accounting Standards Board (48 CFR, Chapter 99), except 
for those contracts which are exempt as specified in 9903.201-1.
    (b) Any offeror submitting a proposal which, if accepted, will 
result in a contract subject to the requirements of 48 CFR, Chapter 
99 must, as a condition of contracting, submit a Disclosure 
Statement as required by 9903.202. When required, the Disclosure 
Statement must be submitted as a part of the offeror's proposal 
under this solicitation unless the offeror has already submitted a 
Disclosure Statement disclosing the practices used in connection 
with the pricing of this proposal. * * *
    (c) Check the appropriate box below:
    {time}  (1) Certificate of Concurrent Submission of Disclosure 
Statement.
    The offeror hereby certifies that, as a part of the offer, 
copies of the Disclosure Statement have been submitted as follows: 
(i) Original and one copy to the cognizant Administrative 
Contracting Officer (ACO) or cognizant Federal agency official 
authorized to act in that capacity, as applicable, and (ii) one copy 
to the cognizant Federal auditor.
    (Disclosure must be on Form No. CASB DS-1 or CASB DS-2, as 
applicable. Forms may be obtained from the cognizant ACO or 
cognizant Federal agency official acting in that capacity and/or 
from the looseleaf version of the Federal Acquisition Regulation.)
Date of Disclosure Statement:------------------------------------------
Name and Address of Cognizant ACO or Federal Official where filed:-----
    The offeror further certifies that the practices used in 
estimating costs in pricing this proposal are consistent with the 
cost accounting practices disclosed in the Disclosure Statement.
    {time}  (2) Certificate of Previously Submitted Disclosure 
Statement. The offeror hereby certifies that the required Disclosure 
Statement was filed as follows:
Date of Disclosure Statement:------------------------------------------
Name and Address of Cognizant ACO or Federal Official where filed:-----
    The offeror further certifies that the practices used in 
estimating costs in pricing this proposal are consistent with the 
cost accounting practices disclosed in the applicable Disclosure 
Statement.
* * * * *
(End of basic provision)

    Alternate I (OCT 1994) Insert the following subparagraph (5) at 
the end of Part I of the basic clause:

    {time}  (5) Certificate of Disclosure Statement Due Date by 
Educational Institution. If the offeror is an educational 
institution that, under the transition provisions of 9903.202-1(f), 
is or will be required to submit a Disclosure Statement after 
receipt of this award, the offeror hereby certifies that (check one 
and complete):
    {time}  (a) A Disclosure Statement filing Due Date of 
____________ has been established with the cognizant Federal agency.
    {time}  (b) The Disclosure Statement will be submitted within 
the six month period ending ____________ months after receipt of 
this award.

Name and Address of Cognizant ACO or Federal Official where Disclosure 
Statement is to be filed:----------------------------------------------

----------------------------------------------------------------------

(End of Alternate I)

    6. Section 9903.201-4 is amended by revising the text of paragraphs 
(a)(1) and (a)(2) preceding the clause and by adding a new paragraph 
(e) including a new clause to read as follows:


9903.201-4  Contract clauses.

    (a) Cost Accounting Standards. (1) The contracting officer shall 
insert the clause set forth below, Cost Accounting Standards, in 
negotiated contracts, unless the contract is exempted (see 9903.201-1), 
the contract is subject to modified coverage (see 9903.201-2), or the 
clause prescribed in paragraphs (d) or (e) of this section is used.
    (2) The clause below requires the contractor to comply with all CAS 
specified in Part 9904, to disclose actual cost accounting practices 
(applicable to CAS-covered contracts only), and to follow disclosed and 
established cost accounting practices consistently.
* * * * *
    (e) Cost Accounting Standards--Educational Institutions. (1) The 
contracting officer shall insert the clause set forth below, Cost 
Accounting Standards--Educational Institution, in negotiated contracts 
awarded to educational institutions, unless the contract is exempted 
(see 9903.201-1), the contract is to be performed by an FFRDC (see 
9903.201-2(c)(5)), or the provision at 9903.201-2(c)(6) applies.
    (2) The clause below requires the educational institution to comply 
with all CAS specified in Part 9905, to disclose actual cost accounting 
practices as required by 9903.202-1(f), and to follow disclosed and 
established cost accounting practices consistently.

Cost Accounting Standards--Educational Institution (Oct 1994)

    (a) Unless the contract is exempt under 9903.201-1 and 9903.201-
2, the provisions of 9903 are incorporated herein by reference and 
the Contractor in connection with this contract, shall--
    (1) (CAS-covered Contracts Only) If a business unit of an 
educational institution required to submit a Disclosure Statement, 
disclose in writing the Contractor's cost accounting practices as 
required by 9903.202-1 through 9903.202-5 including methods of 
distinguishing direct costs from indirect costs and the basis used 
for accumulating and allocating indirect costs. The practices 
disclosed for this contract shall be the same as the practices 
currently disclosed and applied on all other contracts and 
subcontracts being performed by the Contractor and which contain a 
Cost Accounting Standards (CAS) clause. If the Contractor has 
notified the Contracting Officer that the Disclosure Statement 
contains trade secrets, and commercial or financial information 
which is privileged and confidential, the Disclosure Statement shall 
be protected and shall not be released outside of the Government.
    (2) Follow consistently the Contractor's cost accounting 
practices in accumulating and reporting contract performance cost 
data concerning this contract. If any change in cost accounting 
practices is made for the purposes of any contract or subcontract 
subject to CAS requirements, the change must be applied 
prospectively to this contract and the Disclosure Statement, if 
required, must be amended accordingly. If an accounting principle 
change mandated under Office of Management and Budget (OMB) Circular 
A-21, Cost Principles for Educational Institutions, requires that a 
change in the Contractor's cost accounting practices be made after 
the date of this contract award, the change must be applied 
prospectively to this contract and the Disclosure Statement, if 
required, must be amended accordingly. If the contract price or cost 
allowance of this contract is affected by such changes, adjustment 
shall be made in accordance with subparagraph (a)(4) or (a)(5) of 
this clause, as appropriate.
    (3) Comply with all CAS, including any modifications and 
interpretations indicated thereto contained in 48 CFR 9905, in 
effect on the date of award of this contract or, if the Contractor 
has submitted cost or pricing data, on the date of final agreement 
on price as shown on the Contractor's signed certificate of current 
cost or pricing data. The Contractor shall also comply with any CAS 
(or modifications to CAS) which hereafter become applicable to a 
contract or subcontract of the Contractor. Such compliance shall be 
required prospectively from the date of applicability to such 
contract or subcontract.
    (4)(i) Agree to an equitable adjustment as provided in the 
Changes clause of this contract if the contract cost is affected by 
a change which, pursuant to subparagraph (a)(3) of this clause, the 
Contractor is required to make to the Contractor's established cost 
accounting practices.
    (ii) Negotiate with the Contracting Officer to determine the 
terms and conditions under which a change may be made to a cost 
accounting practice, other than a change made under other provisions 
of subparagraph (a)(4) of this clause; provided that no agreement 
may be made under this provision that will increase costs paid by 
the United States.
    (iii) When the parties agree to a change to a cost accounting 
practice, other than a change under subdivision (a)(4)(i) or 
(a)(4)(iv) of this clause, negotiate an equitable adjustment as 
provided in the Changes clause of this contract.
    (iv) Agree to an equitable adjustment as provided in the Changes 
clause of this contract, if the contract cost is materially affected 
by an OMB Circular A-21 accounting principle amendment which, on 
becoming effective after the date of contract award, requires the 
Contractor to make a change to the Contractor's established cost 
accounting practices.
    (5) Agree to an adjustment of the contract price or cost 
allowance, as appropriate, if the Contractor or a subcontractor 
fails to comply with an applicable Cost Accounting Standard, or to 
follow any cost accounting practice consistently and such failure 
results in any increased costs paid by the United States. Such 
adjustment shall provide for recovery of the increased costs to the 
United States, together with interest thereon computed at the annual 
rate established under section 6621 of the Internal Revenue Code of 
1986 (26 U.S.C. 6621) for such period, from the time the payment by 
the United States was made to the time the adjustment is effected. 
In no case shall the Government recover costs greater than the 
increased cost to the Government, in the aggregate, on the relevant 
contracts subject to the price adjustment, unless the Contractor 
made a change in its cost accounting practices of which it was aware 
or should have been aware at the time of price negotiations and 
which it failed to disclose to the Government.
    (b) If the parties fail to agree whether the Contractor or a 
subcontractor has complied with an applicable CAS or a CAS rule or 
regulation in 9903 and as to any cost adjustment demanded by the 
United States, such failure to agree will constitute a dispute under 
the Contract Disputes Act (41 U.S.C. 601).
    (c) The Contractor shall permit any authorized representatives 
of the Government to examine and make copies of any documents, 
papers, or records relating to compliance with the requirements of 
this clause.
    (d) The Contractor shall include in all negotiated subcontracts 
which the Contractor enters into, the substance of this clause, 
except paragraph (b), and shall require such inclusion in all other 
subcontracts, of any tier, including the obligation to comply with 
all applicable CAS in effect on the subcontractor's award date or if 
the subcontractor has submitted cost or pricing data, on the date of 
final agreement on price as shown on the subcontractor's signed 
Certificate of Current Cost or Pricing Data, except that--
    (1) If the subcontract is awarded to a business unit which 
pursuant to 9903.201-2 is subject to other types of CAS coverage, 
the substance of the applicable clause set forth in 9903.201-4 shall 
be inserted; and
    (2) This requirement shall apply only to negotiated subcontracts 
in excess of $500,000 where the price negotiated is not based on--
    (i) Established catalog or market prices of commercial items 
sold in substantial quantities to the general public; or
    (ii) Prices set by law or regulation, and except that the 
requirement shall not apply to negotiated subcontracts otherwise 
exempt from the requirement to include a CAS clause as specified in 
9903.201-1.

(End of clause)

    7. Section 9903.201-6 is amended by revising paragraph (a) to read 
as follows:


9903.201-6  Findings.

    (a) Prior to making any equitable adjustment under the provisions 
of paragraph (a)(4)(iii) of the contract clause set forth in 9903.201-
4(a) or 9903.201-4(e), the Contracting Officer shall make a finding 
that the change is desirable and is not detrimental to the interests of 
the Government.
* * * * *
    8. A new section 9903.201-7 is added to read as follows:


9903.201-7  Cognizant Federal Agency Responsibilities.

    (a) The requirements of Part 9903 shall, to the maximum extent 
practicable, be administered by the cognizant Federal agency 
responsible for a particular contractor organization or location, 
usually the Federal agency responsible for negotiating indirect cost 
rates on behalf of the Government. The cognizant Federal agency should 
take the lead role in administering the requirements of Part 9903 and 
coordinating CAS administrative actions with all affected Federal 
agencies. When multiple CAS-covered contracts or more than one Federal 
agency are involved, agencies should discourage Contracting Officers 
from individually administering CAS on a contract-by-contract basis. 
Coordinated administrative actions will provide greater assurances that 
individual contractors follow their cost accounting practices 
consistently under all their CAS-covered contracts and that changes in 
cost accounting practices or CAS noncompliance issues are resolved, 
equitably, in a uniform overall manner.
    (b) Federal agencies shall prescribe regulations and establish 
internal policies and procedures governing how agencies will administer 
the requirements of CAS-covered contracts, with particular emphasis on 
inter-agency coordination activities. Procedures to be followed when an 
agency is and is not the cognizant Federal agency should be clearly 
delineated. Internal agency policies and procedures shall provide for 
the designation of the agency office(s) or officials responsible for 
administering CAS under the agency's CAS-covered contracts at each 
contractor business unit and the delegation of necessary contracting 
authority to agency individuals authorized to administer the terms and 
conditions of CAS-covered contracts, e.g., Administrative Contracting 
Officers (ACOs) or other agency officials authorized to perform in that 
capacity. Agencies are urged to coordinate on the development of such 
regulations.
    9. Section 9903.202-1 is amended by adding a new paragraph (f) to 
read as follows:


9903.202-1  General Requirements.

* * * * *
    (f) Educational institutions--disclosure requirements. (1) 
Educational institutions receiving contracts subject to the CAS 
specified in Part 9905 are subject to the requirements of 9903.202, 
except that completed Disclosure Statements are required in the 
following circumstances.
    (2) Basic requirement. For CAS-covered contracts placed on or after 
January 1, 1996, completed Disclosure Statements are required as 
follows:
    (i) Any business unit of an educational institution that is 
selected to receive a CAS-covered contract or subcontract in excess of 
$500,000 and is part of a college or university location listed in 
Exhibit A of Office of Management and Budget (OMB) Circular A-21 shall 
submit a Disclosure Statement before award. A Disclosure Statement is 
not required, however, if the listed entity can demonstrate that the 
net amount of Federal contract and financial assistance awards received 
during its immediately preceding cost accounting period was less than 
$25 million.
    (ii) Any business unit that is selected to receive a CAS-covered 
contract or subcontract of $25 million or more shall submit a 
Disclosure Statement before award.
    (iii) Any educational institution which, together with its 
segments, received net awards of negotiated prime contracts and 
subcontracts subject to CAS totaling $25 million or more in its most 
recent cost accounting period, of which, at least one award exceeded $1 
million, must submit a Disclosure Statement before award of its first 
CAS-covered contract in the immediately following cost accounting 
period. However, if the first CAS-covered contract is received within 
90 days of the start of the cost accounting period, the institution is 
not required to file until the end of 90 days.
    (3) Transition period requirement. For CAS-covered contracts placed 
on or before December 31, 1995, completed Disclosure Statements are 
required as follows:

    (i) For business units that are selected to receive a CAS-
covered contract or subcontract in excess of $500,000 and are part 
of the first 20 college or university locations (i.e., numbers 1 
through 20) listed in Exhibit A of OMB Circular A-21, Disclosure 
Statements shall be submitted within six months after the date of 
contract award.
    (ii) For business units that are selected to receive a CAS-
covered contract or subcontract in excess of $500,000 and are part 
of a college or university location that is listed as one of the 
institutions numbered 21 through 50, in Exhibit A of OMB Circular A-
21, Disclosure Statements shall be submitted during the six month 
period ending twelve months after the date of contract award.
    (iii) For business units that are selected to receive a CAS-
covered contract or subcontract in excess of $500,000 and are part 
of a college or university location that is listed as one of the 
institutions numbered 51 through 99, in Exhibit A of OMB Circular A-
21, Disclosure Statements shall be submitted during the six month 
period ending eighteen months after the date of contract award.
    (iv) For any other business unit that is selected to receive a 
CAS-covered contract or subcontract of $25 million or more, a 
Disclosure Statement shall be submitted within six months after the 
date of contract award.

    (4) Transition period due dates. The educational institution and 
cognizant Federal agency should establish a specific due date within 
the periods prescribed in 9903.202-1(f)(3) when a Disclosure Statement 
is required under a CAS-covered contract placed on or before December 
31, 1995.
    (5) Transition period waiver authority. For a CAS-covered contract 
to be awarded during the period January 1, 1996 through June 30, 1997, 
the awarding agency may waive the preaward Disclosure Statement 
submission requirement specified in 9903.202-1(f)(2) when a due date 
for the submission of a Disclosure Statement has previously been 
established by the cognizant Federal agency and the educational 
institution under the provisions of 9903.202-1(f) (3) and (4). CAUTION: 
This waiver authority is not available unless the cognizant Federal 
agency and the educational institution have established a disclosure 
statement due date pursuant to a written agreement executed prior to 
January 1, 1996, and award is made prior to the established disclosure 
statement due date.
    10. Section 9903.202-5 is revised to read as follows:


9903.202-5  Filing Disclosure Statements.

    (a) Disclosure must be on Form Number CASB DS-1 or CASB DS-2, as 
applicable. Forms may be obtained from the cognizant Federal agency 
(cognizant ACO or cognizant Federal agency official authorized to act 
in that capacity) or from the looseleaf version of the Federal 
Acquisition Regulation. When requested in advance by a contractor, the 
cognizant Federal agency may authorize contractor disclosure based on 
computer generated reproductions of the applicable Disclosure Statement 
Form.
    (b) Offerors are required to file Disclosure Statements as follows:
    (1) Original and one copy with the cognizant ACO or cognizant 
Federal agency official acting in that capacity, as applicable; and
    (2) One copy with the cognizant Federal auditor.
    (c) Amendments and revisions shall be submitted to the ACO or 
agency official acting in that capacity, as applicable, and the Federal 
auditor of the currently cognizant Federal agency.
    11. Section 9903.202-6 is added to read as follows:


9903.202-6  Adequacy of Disclosure Statement.

    Federal agencies shall prescribe regulations and establish internal 
procedures by which each will promptly determine on behalf of the 
Government, when serving as the cognizant Federal agency for a 
particular contractor location, that a Disclosure Statement has 
adequately disclosed the practices required to be disclosed by the Cost 
Accounting Standards Board's rules, regulations and Standards. The 
determination of adequacy shall be distributed to all affected 
agencies. Agencies are urged to coordinate on the development of such 
regulations.
    12. Section 9903.202-10 is added to read as follows:


9903.202-10  Illustration of Disclosure Statement Form, CASB DS-2.

    The data which are required to be disclosed by educational 
institutions are set forth in detail in the Disclosure Statement Form, 
CASB DS-2, which is illustrated below:

BILLING CODE 3110-01-P

TR08NO94.000


TR08NO94.001


TR08NO94.002


TR08NO94.003


TR08NO94.004


TR08NO94.005


TR08NO94.006


TR08NO94.007


TR08NO94.008


TR08NO94.009


TR08NO94.010


TR08NO94.011

BILLING CODE 3110-01-C

Subpart 9903.3--CAS Rules and Regulations

    13. Section 9903.301 is amended by redesignating the existing 
introductory text and definitions as paragraph (a) and by adding a new 
paragraph (b) to read as follows:


9903.301  Definitions.

* * * * *
    (b) The definitions set forth below are applicable exclusively to 
educational institutions and apply to this chapter 99.
    Business unit. See 9903.201-2(c)(2)(ii).
    Educational institution. See 9903.201-2(c)(2)(i).
    Intermediate cost objective. See 9905.502-30(a)(7).
    Segment. See 9903.201-2(c)(2)(ii).
    14. A new Part 9905 is added to read as follows:

PART 9905--COST ACCOUNTING STANDARDS FOR EDUCATIONAL INSTITUTIONS

9905.501  Cost accounting standard--consistency in estimating, 
accumulating and reporting costs by educational institutions.
9905.501-10  [Reserved]
9905.501-20  Purpose.
9905.501-30  Definitions.
9905.501-40  Fundamental requirement.
9905.501-50  Techniques for application.
9905.501-60  Illustration. [Reserved]
9905.501-61  Interpretation. [Reserved]
9905.501-62  Exemption.
9905.501-63  Effective Date.
9905.502  Cost accounting standard--consistency in allocating costs 
incurred for the same purpose by educational institutions.
9905.502-10  [Reserved]
9905.502-20  Purpose.
9905.502-30  Definitions.
9905.502-40  Fundamental requirement.
9905.502-50  Techniques for application.
9905.502-60  Illustrations.
9905.502-61  Interpretation.
9905.502-62  Exemption.
9905.502-63  Effective date.
9905.505  Accounting for unallowable costs--Educational 
institutions.
9905.505-10  [Reserved]
9905.505-20  Purpose.
9905.505-30  Definitions.
9905.505-40  Fundamental requirement.
9905.505-50  Techniques for application.
9905.505-60  Illustrations.
9905.505-61  Interpretation. [Reserved]
9905.505-62  Exemption.
9905.505-63  Effective date.
9905.506  Cost accounting period--Educational institutions.
9905.506-10  [Reserved]
9905.506-20  Purpose.
9905.506-30  Definitions.
9905.506-40  Fundamental requirement.
9905.506-50  Techniques for application.
9905.506-60  Illustrations.
9905.506-61  Interpretation. [Reserved]
9905.506-62  Exemption.
9905.506-63  Effective date.

    Authority: Public Law 100-679, 102 Stat. 4056, 41 U.S.C. 422.


9905.501  Cost accounting standard--consistency in estimating, 
accumulating and reporting costs by educational institutions.


9905.501-10  [Reserved]


9905.501-20  Purpose.

    The purpose of this Cost Accounting Standard is to ensure that each 
educational institution's practices used in estimating costs for a 
proposal are consistent with cost accounting practices used by the 
institution in accumulating and reporting costs. Consistency in the 
application of cost accounting practices is necessary to enhance the 
likelihood that comparable transactions are treated alike. With respect 
to individual contracts, the consistent application of cost accounting 
practices will facilitate the preparation of reliable cost estimates 
used in pricing a proposal and their comparison with the costs of 
performance of the resulting contract. Such comparisons provide one 
important basis for financial control over costs during contract 
performance and aid in establishing accountability for costs in the 
manner agreed to by both parties at the time of contracting. The 
comparisons also provide an improved basis for evaluating estimating 
capabilities.


9905.501-30  Definitions.

    (a) The following are definitions of terms which are prominent in 
this Standard. Other terms defined elsewhere in this Chapter 99 shall 
have the meanings ascribed to them in those definitions unless 
paragraph (b) of this subsection requires otherwise.
    (1) Accumulating costs means the collecting of cost data in an 
organized manner, such as through a system of accounts.
    (2) Actual cost means an amount determined on the basis of cost 
incurred (as distinguished from forecasted cost), including standard 
cost properly adjusted for applicable variance.
    (3) Estimating costs means the process of forecasting a future 
result in terms of cost, based upon information available at the time.
    (4) Indirect cost pool means a grouping of incurred costs 
identified with two or more objectives but not identified specifically 
with any final cost objective.
    (5) Pricing means the process of establishing the amount or amounts 
to be paid in return for goods or services.
    (6) Proposal means any offer or other submission used as a basis 
for pricing a contract, contract modification or termination settlement 
or for securing payments thereunder.
    (7) Reporting costs means the providing of cost information to 
others.
    (b) The following modifications of terms defined elsewhere in this 
Chapter 99 are applicable to this Standard: None.


9905.501-40  Fundamental requirement.

    (a) An educational institution's practices used in estimating costs 
in pricing a proposal shall be consistent with the institution's cost 
accounting practices used in accumulating and reporting costs.
    (b) An educational institution's cost accounting practices used in 
accumulating and reporting actual costs for a contract shall be 
consistent with the institution's practices used in estimating costs in 
pricing the related proposal.
    (c) The grouping of homogeneous costs in estimates prepared for 
proposal purposes shall not per se be deemed an inconsistent 
application of cost accounting practices under paragraphs (a) and (b) 
of this subsection when such costs are accumulated and reported in 
greater detail on an actual cost basis during contract performance.


9905.501-50  Techniques for application.

    (a) The standard allows grouping of homogeneous costs in order to 
cover those cases where it is not practicable to estimate contract 
costs by individual cost element. However, costs estimated for proposal 
purposes shall be presented in such a manner and in such detail that 
any significant cost can be compared with the actual cost accumulated 
and reported therefor. In any event, the cost accounting practices used 
in estimating costs in pricing a proposal and in accumulating and 
reporting costs on the resulting contract shall be consistent with 
respect to:
    (1) The classification of elements of cost as direct or indirect;
    (2) The indirect cost pools to which each element of cost is 
charged or proposed to be charged; and
    (3) The methods of allocating indirect costs to the contract.
    (b) Adherence to the requirement of 9905.501-40(a) of this standard 
shall be determined as of the date of award of the contract, unless the 
contractor has submitted cost or pricing data pursuant to 10 U.S.C. 
2306(a) or 41 U.S.C. 254(d) (Pub. L. 87-653), in which case adherence 
to the requirement of 9905.501-40(a) shall be determined as of the date 
of final agreement on price, as shown on the signed certificate of 
current cost or pricing data. Notwithstanding 9905.501-40(b), changes 
in established cost accounting practices during contract performance 
may be made in accordance with Part 9903 (48 CFR part 9903).
    (c) The standard does not prescribe the amount of detail required 
in accumulating and reporting costs. The basic requirement which must 
be met, however, is that for any significant amount of estimated cost, 
the contractor must be able to accumulate and report actual cost at a 
level which permits sufficient and meaningful comparison with its 
estimates. The amount of detail required may vary considerably 
depending on how the proposed costs were estimated, the data presented 
in justification or lack thereof, and the significance of each 
situation. Accordingly, it is neither appropriate nor practical to 
prescribe a single set of accounting practices which would be 
consistent in all situations with the practices of estimating costs. 
Therefore, the amount of accounting and statistical detail to be 
required and maintained in accounting for estimated costs has been and 
continues to be a matter to be decided by Government procurement 
authorities on the basis of the individual facts and circumstances.


9905.501-60  Illustration. [Reserved]


9905.501-61  Interpretation. [Reserved]


9905.501-62  Exemption.

    None for this Standard.


9905.501-63  Effective date.

    This Standard is effective as of January 9, 1995.


9905.502  Cost accounting standard--consistency in allocating costs 
incurred for the same purpose by educational institutions.


9905.502-10  [Reserved]


9905.502-20  Purpose.

    The purpose of this Standard is to require that each type of cost 
is allocated only once and on only one basis to any contract or other 
cost objective. The criteria for determining the allocation of costs to 
a contract or other cost objective should be the same for all similar 
objectives. Adherence to these cost accounting concepts is necessary to 
guard against the overcharging of some cost objectives and to prevent 
double counting. Double counting occurs most commonly when cost items 
are allocated directly to a cost objective without eliminating like 
cost items from indirect cost pools which are allocated to that cost 
objective.


9905.502-30  Definitions.

    (a) The following are definitions of terms which are prominent in 
this Standard. Other terms defined elsewhere in this Chapter 99 shall 
have the meanings ascribed to them in those definitions unless 
paragraph (b) of this subsection requires otherwise.
    (1) Allocate means to assign an item of cost, or a group of items 
of cost, to one or more cost objectives. This term includes both direct 
assignment of cost and the reassignment of a share from an indirect 
cost pool.
    (2) Cost objective means a function, organizational subdivision, 
contract, or other work unit for which cost data are desired and for 
which provision is made to accumulate and measure the cost of 
processes, products, jobs, capitalized projects, etc.
    (3) Direct cost means any cost which is identified specifically 
with a particular final cost objective. Direct costs are not limited to 
items which are incorporated in the end product as material or labor. 
Costs identified specifically with a contract are direct costs of that 
contract. All costs identified specifically with other final cost 
objectives of the educational institution are direct costs of those 
cost objectives.
    (4) Final cost objective means a cost objective which has allocated 
to it both direct and indirect costs, and in the educational 
institution's accumulation system, is one of the final accumulation 
points.
    (5) Indirect cost means any cost not directly identified with a 
single final cost objective, but identified with two or more final cost 
objectives or with at least one intermediate cost objective.
    (6) Indirect cost pool means a grouping of incurred costs 
identified with two or more cost objectives but not identified with any 
final cost objective.
    (7) Intermediate cost objective means a cost objective that is used 
to accumulate indirect costs or service center costs that are 
subsequently allocated to one or more indirect cost pools and/or final 
cost objectives.
    (b) The following modifications of terms defined elsewhere in this 
Chapter 99 are applicable to this Standard: None.


9905.502-40  Fundamental requirement.

    All costs incurred for the same purpose, in like circumstances, are 
either direct costs only or indirect costs only with respect to final 
cost objectives. No final cost objective shall have allocated to it as 
an indirect cost any cost, if other costs incurred for the same 
purpose, in like circumstances, have been included as a direct cost of 
that or any other final cost objective. Further, no final cost 
objective shall have allocated to it as a direct cost any cost, if 
other costs incurred for the same purpose, in like circumstances, have 
been included in any indirect cost pool to be allocated to that or any 
other final cost objective.


9905.502-50  Techniques for application.

    (a) The Fundamental Requirement is stated in terms of cost incurred 
and is equally applicable to estimates of costs to be incurred as used 
in contract proposals.
    (b) The Disclosure Statement to be submitted by the educational 
institution will require that the institution set forth its cost 
accounting practices with regard to the distinction between direct and 
indirect costs. In addition, for those types of cost which are 
sometimes accounted for as direct and sometimes accounted for as 
indirect, the educational institution will set forth in its Disclosure 
Statement the specific criteria and circumstances for making such 
distinctions. In essence, the Disclosure Statement submitted by the 
educational institution, by distinguishing between direct and indirect 
costs, and by describing the criteria and circumstances for allocating 
those items which are sometimes direct and sometimes indirect, will be 
determinative as to whether or not costs are incurred for the same 
purpose. Disclosure Statement as used herein refers to the statement 
required to be submitted by educational institutions as a condition of 
contracting as set forth in Subpart 9903.2.
    (c) In the event that an educational institution has not submitted 
a Disclosure Statement, the determination of whether specific costs are 
directly allocable to contracts shall be based upon the educational 
institution's cost accounting practices used at the time of contract 
proposal.
    (d) Whenever costs which serve the same purpose cannot equitably be 
indirectly allocated to one or more final cost objectives in accordance 
with the educational institution's disclosed accounting practices, the 
educational institution may either use a method for reassigning all 
such costs which would provide an equitable distribution to all final 
cost objectives, or directly assign all such costs to final cost 
objectives with which they are specifically identified. In the event 
the educational institution decides to make a change for either 
purpose, the Disclosure Statement shall be amended to reflect the 
revised accounting practices involved.
    (e) Any direct cost of minor dollar 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, provided that such treatment produces results which are 
substantially the same as the results which would have been obtained if 
such cost had been treated as a direct cost.


9905.502-60  Illustrations.

    (a) Illustrations of costs which are incurred for the same purpose:
    (1) An educational institution normally allocates all travel as an 
indirect cost and previously disclosed this accounting practice to the 
Government. For purposes of a new proposal, the educational institution 
intends to allocate the travel costs of personnel whose time is 
accounted for as direct labor directly to the contract. Since travel 
costs of personnel whose time is accounted for as direct labor working 
on other contracts are costs which are incurred for the same purpose, 
these costs may no longer be included within indirect cost pools for 
purposes of allocation to any covered Government contract. The 
educational institution's Disclosure Statement must be amended for the 
proposed changes in accounting practices.
    (2) An educational institution normally allocates purchasing 
activity costs indirectly and allocates this cost to instruction and 
research on the basis of modified total costs. A proposal for a new 
contract requires a disproportionate amount of subcontract 
administration to be performed by the purchasing activity. The 
educational institution prefers to continue to allocate purchasing 
activity costs indirectly. In order to equitably allocate the total 
purchasing activity costs, the educational institution may use a method 
for allocating all such costs which would provide an equitable 
distribution to all applicable indirect cost pools. For example, the 
institution may use the number of transactions processed rather than 
its former allocation base of modified total costs. The educational 
institution's Disclosure Statement must be amended for the proposed 
changes in accounting practices.
    (b) Illustrations of costs which are not incurred for the same 
purpose:
    (1) An educational institution normally allocates special test 
equipment costs directly to contracts. The costs of general purpose 
test equipment are normally included in the indirect cost pool which is 
allocated to contracts. Both of these accounting practices were 
previously disclosed to the Government. Since both types of costs 
involved were not incurred for the same purpose in accordance with the 
criteria set forth in the educational institution's Disclosure 
Statement, the allocation of general purpose test equipment costs from 
the indirect cost pool to the contract, in addition to the directly 
allocated special test equipment costs, is not considered a violation 
of the Standard.
    (2) An educational institution proposes to perform a contract which 
will require three firemen on 24-hour duty at a fixed-post to provide 
protection against damage to highly inflammable materials used on the 
contract. The educational institution presently has a firefighting 
force of 10 employees for general protection of its facilities. The 
educational institution's costs for these latter firemen are treated as 
indirect costs and allocated to all contracts; however, it wants to 
allocate the three fixed-post firemen directly to the particular 
contract requiring them and also allocate a portion of the cost of the 
general firefighting force to the same contract. The institution may do 
so but only on condition that its disclosed practices indicate that the 
costs of the separate classes of firemen serve different purposes and 
that it is the institution's practice to allocate the general 
firefighting force indirectly and to allocate fixed-post firemen 
directly.


9905.502-61  Interpretation.

    (a) 9905.502, Cost Accounting Standard--Consistency in Allocating 
Costs Incurred for the Same Purpose by Educational Institutions, 
provides, in 9905.502-40, that ``*** no final cost objective shall have 
allocated to it as a direct cost any cost, if other costs incurred for 
the same purpose, in like circumstances, have been included in any 
indirect cost pool to be allocated to that or any other final cost 
objective.''
    (b) This interpretation deals with the way 9905.502 applies to the 
treatment of costs incurred in preparing, submitting, and supporting 
proposals. In essence, it is addressed to whether or not, under the 
Standard, all such costs are incurred for the same purpose, in like 
circumstances.
    (c) Under 9905.502, costs incurred in preparing, submitting, and 
supporting proposals pursuant to a specific requirement of an existing 
contract are considered to have been incurred in different 
circumstances from the circumstances under which costs are incurred in 
preparing proposals which do not result from such a specific 
requirement. The circumstances are different because the costs of 
preparing proposals specifically required by the provisions of an 
existing contract relate only to that contract while other proposal 
costs relate to all work of the educational institution.
    (d) This interpretation does not preclude the allocation, as 
indirect costs, of costs incurred in preparing all proposals. The cost 
accounting practices used by the educational institution, however, must 
be followed consistently and the method used to reallocate such costs, 
of course, must provide an equitable distribution to all final cost 
objectives.


9905.502-62  Exemption.

    None for this Standard.


9905.502-63  Effective date.

    This Standard is effective as of January 9, 1995.


9905.505  Accounting for unallowable costs--Educational institutions.


9905.505-10  [Reserved]


9905.505-20  Purpose.

    (a)(1) The purpose of this Cost Accounting Standard is to 
facilitate the negotiation, audit, administration and settlement of 
contracts by establishing guidelines covering:
    (i) Identification of costs specifically described as unallowable, 
at the time such costs first become defined or authoritatively 
designated as unallowable, and
    (ii) The cost accounting treatment to be accorded such identified 
unallowable costs in order to promote the consistent application of 
sound cost accounting principles covering all incurred costs.
    (2) The Standard is predicated on the proposition that costs 
incurred in carrying on the activities of an educational institution--
regardless of the allowability of such costs under Government 
contracts--are allocable to the cost objectives with which they are 
identified on the basis of their beneficial or causal relationships.
    (b) This Standard does not govern the allowability of costs. This 
is a function of the appropriate procurement or reviewing authority.


9905.505-30  Definitions.

    (a) The following are definitions of terms which are prominent in 
this Standard. Other terms defined elsewhere in this Chapter 99 shall 
have the meanings ascribed to them in those definitions unless 
paragraph (b) of this subsection requires otherwise.
    (1) Directly associated cost means any cost which is generated 
solely as a result of the incurrence of another cost, and which would 
not have been incurred had the other cost not been incurred.
    (2) Expressly unallowable cost means a particular item or type of 
cost which, under the express provisions of an applicable law, 
regulation, or contract, is specifically named and stated to be 
unallowable.
    (3) Indirect cost means any cost not directly identified with a 
single final cost objective, but identified with two or more final cost 
objectives or with at least one intermediate cost objective.
    (4) Unallowable cost means any cost which, under the provisions of 
any pertinent law, regulation, or contract, cannot be included in 
prices, cost reimbursements, or settlements under a Government contract 
to which it is allocable.
    (b) The following modifications of terms defined elsewhere in this 
Chapter 99 are applicable to this Standard: None.


9905.505-40  Fundamental requirement.

    (a) Costs expressly unallowable or mutually agreed to be 
unallowable, including costs mutually agreed to be unallowable directly 
associated costs, shall be identified and excluded from any billing, 
claim, or proposal applicable to a Government contract.
    (b) Costs which specifically become designated as unallowable as a 
result of a written decision furnished by a contracting officer 
pursuant to contract disputes procedures shall be identified if 
included in or used in the computation of any billing, claim, or 
proposal applicable to a Government contract. This identification 
requirement applies also to any costs incurred for the same purpose 
under like circumstances as the costs specifically identified as 
unallowable under either this paragraph or paragraph (a) of this 
subsection.
    (c) Costs which, in a contracting officer's written decision 
furnished pursuant to contract disputes procedures, are designated as 
unallowable directly associated costs of unallowable costs covered by 
either paragraph (a) or (b) of this subsection shall be accorded the 
identification required by paragraph (b) of this subsection.
    (d) The costs of any work project not contractually authorized, 
whether or not related to performance of a proposed or existing 
contract, shall be accounted for, to the extent appropriate, in a 
manner which permits ready separation from the costs of authorized work 
projects.
    (e) All unallowable costs covered by paragraphs (a) through (d) of 
this subsection shall be subject to the same cost accounting principles 
governing cost allocability as allowable costs. In circumstances where 
these unallowable costs normally would be part of a regular indirect-
cost allocation base or bases, they shall remain in such base or bases. 
Where a directly associated cost is part of a category of costs 
normally included in an indirect-cost pool that will be allocated over 
a base containing the unallowable cost with which it is associated, 
such a directly associated cost shall be retained in the indirect-cost 
pool and be allocated through the regular allocation process.
    (f) Where the total of the allocable and otherwise allowable costs 
exceeds a limitation-of-cost or ceiling-price provision in a contract, 
full direct and indirect cost allocation shall be made to the contract 
cost objective, in accordance with established cost accounting 
practices and Standards which regularly govern a given entity's 
allocations to Government contract cost objectives. In any 
determination of unallowable cost overrun, the amount thereof shall be 
identified in terms of the excess of allowable costs over the ceiling 
amount, rather than through specific identification of particular cost 
items or cost elements.


9905.505-50  Techniques for application.

    (a) The detail and depth of records required as backup support for 
proposals, billings, or claims shall be that which is adequate to 
establish and maintain visibility of identified unallowable costs 
(including directly associated costs), their accounting status in terms 
of their allocability to contract cost objectives, and the cost 
accounting treatment which has been accorded such costs. Adherence to 
this cost accounting principle does not require that allocation of 
unallowable costs to final cost objectives be made in the detailed cost 
accounting records. It does require that unallowable costs be given 
appropriate consideration in any cost accounting determinations 
governing the content of allocation bases used for distributing 
indirect costs to cost objectives. Unallowable costs involved in the 
determination of rates used for standard costs, or for indirect-cost 
bidding or billing, need be identified only at the time rates are 
proposed, established, revised or adjusted.
    (b)(1) The visibility requirement of paragraph (a) of this 
subsection, may be satisfied by any form of cost identification which 
is adequate for purposes of contract cost determination and 
verification. The Standard does not require such cost identification 
for purposes which are not relevant to the determination of Government 
contract cost. Thus, to provide visibility for incurred costs, 
acceptable alternative practices would include:
    (i) The segregation of unallowable costs in separate accounts 
maintained for this purpose in the regular books of account,
    (ii) The development and maintenance of separate accounting records 
or workpapers, or
    (iii) The use of any less formal cost accounting techniques which 
establishes and maintains adequate cost identification to permit audit 
verification of the accounting recognition given unallowable costs.
    (2) Educational institutions may satisfy the visibility 
requirements for estimated costs either:
    (i) By designation and description (in backup data, workpapers, 
etc.) of the amounts and types of any unallowable costs which have 
specifically been identified and recognized in making the estimates, or
    (ii) By description of any other estimating technique employed to 
provide appropriate recognition of any unallowable costs pertinent to 
the estimates.
    (c) Specific identification of unallowable costs is not required in 
circumstances where, based upon considerations of materiality, the 
Government and the educational institution reach agreement on an 
alternate method that satisfies the purpose of the Standard.


9905.505-60  Illustrations.

    (a) An auditor recommends disallowance of certain direct labor and 
direct material costs, for which a billing has been submitted under a 
contract, on the basis that these particular costs were not required 
for performance and were not authorized by the contract. The 
contracting officer issues a written decision which supports the 
auditor's position that the questioned costs are unallowable. Following 
receipt of the contracting officer's decision, the educational 
institution must clearly identify the disallowed direct labor and 
direct material costs in the institution's accounting records and 
reports covering any subsequent submission which includes such costs. 
Also, if the educational institution's base for allocation of any 
indirect cost pool relevant to the subject contract consists of direct 
labor, direct material, total prime cost, total cost input, etc., the 
institution must include the disallowed direct labor and material costs 
in its allocation base for such pool. Had the contracting officer's 
decision been against the auditor, the educational institution would 
not, of course, have been required to account separately for the costs 
questioned by the auditor.
    (b) An educational institution incurs, and separately identifies, 
as a part of a service center or expense pool, certain costs which are 
expressly unallowable under the existing and currently effective 
regulations. If the costs of the service center or indirect expense 
pool are regularly a part of the educational institution's base for 
allocation of other indirect expenses, the educational institution must 
allocate the other indirect expenses to contracts and other final cost 
objectives by means of a base which includes the identified unallowable 
indirect costs.
    (c) An auditor recommends disallowance of certain indirect costs. 
The educational institution claims that the costs in question are 
allowable under the provisions of Office Of Management and Budget 
Circular A-21, Cost Principles For Educational Institutions; the 
auditor disagrees. The issue is referred to the contracting officer for 
resolution pursuant to the contract disputes clause. The contracting 
officer issues a written decision supporting the auditor's position 
that the total costs questioned are unallowable under the Circular. 
Following receipt of the contracting officer's decision, the 
educational institution must identify the disallowed costs and specific 
other costs incurred for the same purpose in like circumstances in any 
subsequent estimating, cost accumulation or reporting for Government 
contracts, in which such costs are included. If the contracting 
officer's decision had supported the educational institution's 
contention, the costs questioned by the auditor would have been 
allowable and the educational institution would not have been required 
to provide special identification.
    (d) An educational institution incurred certain unallowable costs 
that were charged indirectly as general administration and general 
expenses (GA&GE). In the educational institution's proposals for final 
indirect cost rates to be applied in determining allowable contract 
costs, the educational institution identified and excluded the 
expressly unallowable GA&GE costs form the applicable indirect cost 
pools. In addition, during the course of negotiation of indirect cost 
rates to be used for bidding and billing purposes, the educational 
institution agreed to classify as unallowable cost, various directly 
associated costs of the identifiable unallowable costs. On the basis of 
negotiations and agreements between the educational institution and the 
contracting officer's authorized representatives, indirect cost rates 
were established, based on the net balance of allowable GA&GE. 
Application of the rates negotiated to proposals, and to billings, for 
covered contracts constitutes compliance with the Standard.
    (e) An employee, whose salary, travel, and subsistence expenses are 
charged regularly to the general administration and general expenses 
(GA&GE), an indirect cost category, takes several business associates 
on what is clearly a business entertainment trip. The entertainment 
costs of such trips is expressly unallowable because it constitutes 
entertainment expense prohibited by OMB Circular A-21, and is 
separately identified by the educational institution. In these 
circumstances, the employee's travel and subsistence expenses would be 
directly associated costs for identification with the unallowable 
entertainment expense. However, unless this type of activity 
constituted a significant part of the employee's regular duties and 
responsibilities on which his salary was based, no part of the 
employee's salary would be required to be identified as a directly 
associated cost of the unallowable entertainment expense.


9905.505-61  Interpretation. [Reserved]


9905.505-62  Exemption.

    None for this Standard.


9905.505-63  Effective date.

    This Standard is effective as of January 9, 1995.


9905.506  Cost accounting period--Educational institutions.


9905.506-10  [Reserved]


9905.506-20  Purpose.

    The purpose of this Cost Accounting Standard is to provide criteria 
for the selection of the time periods to be used as cost accounting 
periods for contract cost estimating, accumulating, and reporting. This 
Standard will reduce the effects of variations in the flow of costs 
within each cost accounting period. It will also enhance objectivity, 
consistency, and verifiability, and promote uniformity and 
comparability in contract cost measurements.


9905.506-30  Definitions.

    (a) The following are definitions of terms which are prominent in 
this Standard. Other terms defined elsewhere in this Part 99 shall have 
the meanings ascribed to them in those definitions unless paragraph (b) 
of this subsection requires otherwise.
    (1) Allocate means to assign an item of cost, or a group of items 
of cost, to one or more cost objectives. This term includes both direct 
assignment of cost and the reassignment of a share from an indirect 
cost pool.
    (2) Cost objective means a function, organizational subdivision, 
contract, or other work unit for which cost data are desired and for 
which provision is made to accumulate and measure the cost of 
processes, products, jobs, capitalized projects, etc.
    (3) Fiscal year means the accounting period for which annual 
financial statements are regularly prepared, generally a period of 12 
months, 52 weeks, or 53 weeks.
    (4) Indirect cost pool means a grouping of incurred costs 
identified with two or more cost objectives but not identified 
specifically with any final cost objective.
    (b) The following modifications of terms defined elsewhere in this 
Chapter 99 are applicable to this Standard: None.


9905.506-40  Fundamental requirement.

    (a) Educational institutions shall use their fiscal year as their 
cost accounting period, except that:
    (1) Costs of an indirect function which exists for only a part of a 
cost accounting period may be allocated to cost objectives of that same 
part of the period as provided in 9905.506-50(a).
    (2) An annual period other than the fiscal year may, as provided in 
9905.506-50(d), be used as the cost accounting period if its use is an 
established practice of the institution.
    (3) A transitional cost accounting period other than a year shall 
be used whenever a change of fiscal year occurs.
    (b) An institution shall follow consistent practices in the 
selection of the cost accounting period or periods in which any types 
of expense and any types of adjustment to expense (including prior-
period adjustments) are accumulated and allocated.
    (c) The same cost accounting period shall be used for accumulating 
costs in an indirect cost pool as for establishing its allocation base, 
except that the contracting parties may agree to use a different period 
for establishing an allocation base as provided in 9905.506-50(e).


9905.506-50  Techniques for application.

    (a) The cost of an indirect function which exists for only a part 
of a cost accounting period may be allocated on the basis of data for 
that part of the cost accounting period if the cost is:
    (1) Material in amount,
    (2) Accumulated in a separate indirect cost pool or expense pool, 
and
    (3) Allocated on the basis of an appropriate direct measure of the 
activity or output of the function during that part of the period.
    (b) The practices required by 9905.506-40(b) of this Standard shall 
include appropriate practices for deferrals, accruals, and other 
adjustments to be used in identifying the cost accounting periods among 
which any types of expense and any types of adjustment to expense are 
distributed. If an expense, such as insurance or employee leave, is 
identified with a fixed, recurring, annual period which is different 
from the institution's cost accounting period, the Standard permits 
continued use of that different period. Such expenses shall be 
distributed to cost accounting periods in accordance with the 
institution's established practices for accruals, deferrals, and other 
adjustments.
    (c) Indirect cost allocation rates, based on estimates, which are 
used for the purpose of expediting the closing of contracts which are 
terminated or completed prior to the end of a cost accounting period 
need not be those finally determined or negotiated for that cost 
accounting period. They shall, however, be developed to represent a 
full cost accounting period, except as provided in paragraph (a) of 
this subsection.
    (d) An institution may, upon mutual agreement with the Government, 
use as its cost accounting period a fixed annual period other than its 
fiscal year, if the use of such a period is an established practice of 
the institution and is consistently used for managing and controlling 
revenues and disbursements, and appropriate accruals, deferrals or 
other adjustments are made with respect to such annual periods.
    (e) The contracting parties may agree to use an annual period which 
does not coincide precisely with the cost accounting period for 
developing the data used in establishing an allocation base: Provided,
    (1) The practice is necessary to obtain significant administrative 
convenience,
    (2) The practice is consistently followed by the institution,
    (3) The annual period used is representative of the activity of the 
cost accounting period for which the indirect costs to be allocated are 
accumulated, and
    (4) The practice can reasonably be estimated to provide a 
distribution to cost objectives of the cost accounting period not 
materially different from that which otherwise would be obtained.
    (f)(1) When a transitional cost accounting period is required under 
the provisions of 9905.506-40(a)(3), the institution may select any one 
of the following: (i) The period, less than a year in length, extending 
from the end of its previous cost accounting period to the beginning of 
its next regular cost accounting period,
    (ii) A period in excess of a year, but not longer than 15 months, 
obtained by combining the period described in paragraph (f)(1) of this 
subsection with the previous cost accounting period, or
    (iii) A period in excess of a year, but not longer than 15 months, 
obtained by combining the period described in subparagraph (f)(1) of 
this subsection with the next regular cost accounting period.
    (2) A change in the institution's cost accounting period is a 
change in accounting practices for which an adjustment in the contract 
price may be required in accordance with subdivision (a)(4)(ii) or 
(iii) of the contract clause set out at 9903.201-4(e).


9905.506-60  Illustrations.

    (a) An institution allocates indirect expenses for Organized 
Research on the basis of a modified total direct cost base. In a 
proposal for a covered contract, it estimates the allocable expenses 
based solely on the estimated amount of indirect costs allocated to 
Organized Research and the amount of the modified total direct cost 
base estimated to be incurred during the 8 months in which performance 
is scheduled to be commenced and completed. Such a proposal would be in 
violation of the requirements of this Standard that the calculation of 
the amounts of both the indirect cost pools and the allocation bases be 
based on the contractor's cost accounting period.
    (b) An institution whose cost accounting period is the calendar 
year, installs a computer service center to begin operations on May 1. 
The operating expense related to the new service center is expected to 
be material in amount, will be accumulated in an intermediate cost 
objective, and will be allocated to the benefiting cost objectives on 
the basis of measured usage. The total operating expenses of the 
computer service center for the 8-month part of the cost accounting 
period may be allocated to the benefiting cost objectives of that same 
8-month period.
    (c) An institution changes its fiscal year from a calendar year to 
the 12-month period ending May 31. For financial reporting purposes, it 
has a 5-month transitional ``fiscal year.'' The same 5-month period 
must be used as the transitional cost accounting period; it may not be 
combined as provided in 9905.506-50(f), because the transitional period 
would be longer than 15 months. The new fiscal year must be adopted 
thereafter as its regular cost accounting period. The change in its 
cost accounting period is a change in accounting practices; adjustments 
of the contract prices may thereafter be required in accordance with 
subdivision (a)(4) (ii) or (iii) of the contract clause at 9903.201-
4(e).
    (d) Financial reports are prepared on a calendar year basis on a 
university-wide basis. However, the contracting segment does all 
internal financial planning, budgeting, and internal reporting on the 
basis of a twelve month period ended June 30. The contracting parties 
agree to use the period ended June 30 and they agree to overhead rates 
on the June 30 basis. They also agree on a technique for prorating 
fiscal year assignment of the university's central system office 
expenses between such June 30 periods. This practice is permitted by 
the Standard.
    (e) Most financial accounts and contract cost records are 
maintained on the basis of a fiscal year which ends November 30 each 
year. However, employee vacation allowances are regularly managed on 
the basis of a ``vacation year'' which ends September 30 each year. 
Vacation expenses are estimated uniformly during each ``vacation 
year.'' Adjustments are made each October to adjust the accrued 
liability to actual, and the estimating rates are modified to the 
extent deemed appropriate. This use of a separate annual period for 
determining the amounts of vacation expense is permitted under 
9905.506-50(b).


9905.506-61  Interpretation. [Reserved]


9905.506-62  Exemption.

    None for this Standard.


9905.506-63  Effective date.

    This Standard is effective as of January 9, 1995. For institutions 
with no previous CAS-covered contracts, this Standard shall be applied 
as of the start of its next fiscal year beginning after receipt of a 
contract to which this Standard is applicable.

[FR Doc. 94-27439 Filed 11-7-94; 8:45 am]
BILLING CODE 3110-01-P