[Federal Register Volume 60, Number 24 (Monday, February 6, 1995)]
[Notices]
[Pages 7105-7109]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-2871]



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OFFICE OF MANAGEMENT AND BUDGET


Cost Principles for Educational Institutions

AGENCY: Office of Management and Budget.

ACTION: Proposed revisions to OMB Circular A-21 and proposed rescission 
of OMB Circular A-88.

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SUMMARY: This Notice offers interested parties an opportunity to 
comment on proposed revisions to Office of Management and Budget (OMB) 
Circular A-21, ``Cost Principles for Educational Institutions'' and 
OMB's proposal to rescind OMB Circular A-88, ``Indirect Cost Rates, 
Audit, and Audit Followup at Educational Institutions.''
    This proposed revision, together with a separate proposed revision 
published in this issue of the Federal Register, fulfills the 
Administration's commitment in the fiscal year 1995 budget to ``conduct 
a comprehensive review with the goal of improving the incentives that 
govern overhead reimbursement for a wide range of federal research 
grantees and contractors.'' It also reflects the Administration's 
policies regarding Circular A-21 as described in the fiscal year 1996 
budget, transmitted to Congress on February 6, 1995. Of the 14 policies 
in this Notice, eight are proposed as revisions to Circular A-21 itself 
in this Notice, and the other six revisions, as described below, 
require [[Page 7106]] further development prior to proposed 
implementation.
    In brief, the proposed revisions:
    (1) clarify that, when an institution transitions from a use 
allowance methodology to a depreciation methodology, only the 
depreciation incurred from the time of the transition--calculated as if 
the asset had been depreciated over its entire life--may be allocated 
to federally-sponsored research;
    (2) limit the use of special studies by prohibiting them for 
determining and allocating utility, library and student services costs;
    (3) require all Federal funding agencies to use rates in effect at 
the time of initial award throughout the life of the sponsored 
agreement;
    (4) eliminate the allowability of dependent tuition benefits;
    (5) establish criteria for appropriate reimbursement of interest 
costs;
    (6) rescind Circular A-88 and establish cost negotiation cognizance 
for educational institutions and cognizant agency responsibilities 
through Circular A-21;
    (7) establish an interagency group of Federal officials responsible 
for coordinating policy development for sponsored agreements; and
    (8) modify the terminology used in Circular A-21 to describe more 
accurately the various cost components of sponsored agreements.
    In addition, this Notice announces OMB's decision to develop other 
revisions to Circular A-21. These include:
    (1) establishing a process for assessing reasonable costs for 
research facility construction and renovation that may be allocated to 
facility cost pools and charged against sponsored agreements;
    (2) developing a standard methodology for uniform treatment of 
specialized services, including computational centers and biohazards;
    (3) developing standard benchmarks for utility costs over the next 
year, to be followed potentially by similar efforts for library and 
student services costs thereafter;
    (4) developing and testing a model for charging space costs 
directly to research grants;
    (5) examining and potentially revising the useful life schedule for 
equipment; and
    (6) examining methods for explaining variations in facilities and 
administrative costs rates.

DATES: Comments should be received on or before April 7, 1995. Late-
filed comments will be considered to the extent practicable.

ADDRESSES: Interested parties are invited to comment on all of these 
proposed changes. Comments should be submitted to the Office of 
Management and Budget, Office of Federal Financial Management, Room 
6025, New Executive Office Building, Washington, DC 20503. Brief 
comments (3 pages or less) may be sent via facsimile (fax: 202-395-
3952).

FOR FURTHER INFORMATION CONTACT: Norwood Jackson, Office of Federal 
Financial Management, Office of Management and Budget, telephone (202) 
395-3993.

SUPPLEMENTARY INFORMATION: In the fiscal year 1995 President's budget, 
the Administration committed to a comprehensive review of the costs of 
federally-sponsored research, with the goal of making the reimbursement 
system more defensible, equitable and understandable by reducing 
unexplainable variations in facilities and administrative rates; 
improving incentives for efficiency; and fostering consistency in the 
Federal Government's approach to administering support for sponsored 
research. The revisions proposed in this Notice are the result of this 
review.
    In the spirit of other reinvention efforts, the review process 
guided by the Office of Management and Budget (OMB) and the Office of 
Science and Technology Policy (OSTP) was inclusive and open. OMB and 
OSTP solicited views, recommendations, and proposals from many parties, 
including Federal science funding agencies; the grantee community, 
including both university administrators and bench scientists; and 
Congressional staff and agencies.
    Based on their input, the Administration decided that the review 
should focus on facilities costs, since the two other groups of 
research costs (direct costs and administration costs) have reasonably 
efficient mechanisms built into their funding policies. Direct costs, 
which support researchers, laboratory equipment, and supplies 
associated with a specific project, are subject to peer review and 
scientists have an opportunity to exert direct control over these 
costs. Administrative costs, which support the salaries of university 
research managers, support staff and other shared costs related to 
research, were capped at 26 percent of modified total direct costs by a 
1991 revision to Circular A-21, ``Cost Principles for Educational 
Institutions.'' In contrast, facilities costs are not limited or peer 
reviewed. They account for almost all of the growth in research 
overhead rates over the last decade and explain much of the variation 
in rates among schools. Most of the specific changes proposed in this 
Notice address the facilities component of research costs.
    The two sections below describe the eight revisions OMB proposes to 
make to Circular A-21 at this time, as well as a separate set of 
revisions that require further work before they can be proposed for 
implementation. OMB intends to propose these additional revisions for 
comment within one year of publication of this Notice. Finally, OMB 
intends to publish a recompilation of the entire Circular A-21 in the 
Federal Register by March 31, 1995, reflecting all final revisions 
through that date, and also to make the recompilation available 
electronically on the Internet.

PROPOSED REVISIONS TO OMB CIRCULAR PA-21: The following explains the 
eight specific changes proposed to Circular A-21.
    (1) Clarify the policy governing the transition from use allowance 
to depreciation and examine useful life schedules for equipment. 
Circular A-21 would be amended to clarify that an institution may 
recoup only the remaining depreciation expense representing the 
remaining useful life of an asset when the institution shifts from the 
use allowance methodology to depreciation. Because current language in 
Circular A-21 addressing the transition issue is not sufficiently 
precise, cognizant agencies have interpreted it differently. This 
revision is expected to have little impact because the vast majority of 
institutions now allocate costs consistent with the clarified policy.
    This revision also clarifies that institutions must use either use 
allowance or depreciation, but not both, in allocating the costs of any 
class of assets to sponsored research. As in the past, Circular A-21 
does not require institutions to shift from use allowance to 
depreciation. Institutions may continue to do so at their discretion.
    (2) Limit use of special cost analysis studies. Circular A-21 would 
be amended so that the results of special studies for utility, library 
and student services costs could not be used to determine and allocate 
the costs of such services to sponsored research. The methodology for 
such studies is not specified in Circular A-21 and is a source of 
disagreement between cognizant agencies and institutions. The provision 
in Circular A-21 allowing special studies may have been appropriate at 
one time but now promotes disparity in rates and recovery. In 
conjunction with limiting [[Page 7107]] special studies, OMB proposes 
to develop and implement standard benchmarks for equitable allocation 
of utility, library and student services costs (see proposal #3 under 
``Other Issues for Public Comment'' below).
    (3) Require Federal funding agencies to use rates in effect at the 
time of initial award throughout the life of the sponsored agreement. 
Circular A-21 would be amended to require Federal science funding 
agencies to calculate outyear grant commitments using negotiated 
predetermined rates or other available negotiated rates at the time of 
the award. Funding agencies may not adjust future award levels for 
changes in negotiated rates taking effect after the initial award. This 
proposed change allows peer reviewers and funding agencies to know with 
certainty the total cost of an entire sponsored agreement throughout 
the decisionmaking process, and eliminates another point of 
inconsistency in Federal grant policies.
    (4) Eliminate the allowability of dependent tuition benefit. To 
make Circular A-21 consistent with the Federal Acquisition Regulation, 
this Notice proposes to prohibit the allocation of dependent tuition 
benefits to sponsored agreements.
    (5) Establish criteria for appropriate reimbursement of interest 
costs. The proposed revision would provide that interest on buildings 
and equipment would be allowable under certain circumstances which 
include a favorable lease/purchase analysis, a limit on the interest 
rate, and an offset of investment earnings against interest cost. The 
revision will serve to provide more consistency on interest 
allowability across OMB's three cost circulars: Circular A-122 for non-
profit institutions, Circular A-87 for State and local governments, and 
Circular A-21 for educational institutions.
    (6) Rescind Circular A-88 and establish cost negotiation cognizance 
for educational institutions and cognizant agency responsibilities 
through Circular A-21. This proposed revision rescinds Circular A-88. 
Cost negotiation cognizance would be assigned to the Department of 
Health and Human Services or the Office of Naval Research of the 
Department of Defense based on funding levels for sponsored agreements 
from these Departments. The Department providing the most funding would 
assume cognizance. Because of this change in approach, a listing of 
cognizant agency assignments is no longer necessary.
    (7) Establish an interagency group of Federal officials to 
coordinate policy development for sponsored agreements. This proposed 
change would establish an interagency working group co-chaired by OMB 
and the Office of Science and Technology Policy (OSTP), comprised of 
officials responsible for policy development for sponsored agreements. 
This group would be charged with recommending changes to Circular A-21 
and other OMB cost principles circulars based on recommendations of 
Federal agencies and non-Federal organizations. This group would 
recommend pilot projects designed to test ways to streamline the 
operations of sponsored agreements, reduce costs, or improve program 
delivery.
    (8) Modify terminology used to describe research cost components. 
Circular A-21 would be amended to change terminology from ``indirect 
costs'' to ``facilities costs and administrative costs.'' The terms 
used currently to describe costs are perceived as insufficiently 
descriptive.

Other Issues For Public Comment: In addition to the specific revisions 
described above, OMB is also considering the following issues for 
possible future implementation through Circular A-21. Public comment is 
solicited on these issues. Should OMB decide to revise Circular A-21 to 
address these issues, specific changes will be proposed for comment at 
that time.
    (1) Assessing reasonable costs for research facility construction 
and renovation that may be allocated to facility cost pools and charged 
against sponsored agreements or allocated directly. Circular A-21 
requires that costs allocated to sponsored research be reasonable, and 
sets as a standard for reasonableness the ``prudent person'' test, 
i.e., whether a ``prudent person'' would have incurred the costs under 
similar circumstances. The rise in facilities costs over the past ten 
years and the significant variation in facilities rates among 
institutions have caused some to question how well and how consistently 
the ``prudent person'' test has been applied to facilities costs.
    A committee of Federal officials from relevant agencies would be 
formed to develop benchmarks for the reasonable costs of construction 
of various types of space, adjusted for variable costs (e.g., energy, 
type of research) in each region of the U.S. The committee would seek 
input from the university community, private sector, and others. 
Benchmarks for renovation would be set at the same level as those for 
new construction. Benchmarks would be set at or slightly below a given 
standard to encourage efficiencies and would be indexed to inflation 
using a rate appropriate for construction. Benchmarks for each region 
of the country and by type of research facility would be published in 
the Federal Register for comment by January 2, 1996.
    Cognizant agencies and institutions would use these benchmarks to 
determine the facility costs that may be charged to sponsored 
agreements. If proposed facility costs fall below the relevant 
benchmark, the depreciation or use allowance and interest costs of the 
building could be allocated to sponsored agreements in accordance with 
Circular A-21. If the proposed costs exceed the benchmarks, only the 
amounts provided by the benchmarks could be allocated without prior 
approval by the panel described below.
    Review of costs above the benchmarks would be carried out by a 
panel of Federal officials. The review would consider special 
circumstances related to individual projects. If a university fails to 
obtain approval for reimbursement of the full allocated share of the 
facility costs, it could either accept the benchmark rate, or submit a 
revised justification.
    The goals of the new process are to make as objective as possible 
the assessment and allocation of costs to sponsored research, to assure 
equitable results, and to encourage efficient construction and 
renovation of research facilities. Benchmarks will reflect only what 
the government will pay for space, and in no way will limit what 
universities may spend on infrastructure. The review process will be 
proposed in a future revision to Circular A-21.
    (2) Develop a standard methodology for uniform treatment of 
specialized services. Circular A-21 requires that costs associated with 
the use of specialized service facilities (e.g., animal care, 
computational centers, and biohazards) be charged as direct costs. This 
requirement was intended to avoid assessing facility charges to 
investigators who do not use specialized services. To comply with this 
provision, some institutions have developed usage rates that reflect 
the full costs of the facility; as a result, charges for services such 
as animal per diem have increased as the total costs of operating the 
facility have been added to the daily costs of caring for each animal. 
Colleges and universities have not allocated the costs of specialized 
services uniformly to cost pools.
    OMB intends to identify the operating expenses of special 
facilities that should be allocated to the direct costs and those to be 
included in a facility-specific rate or the general facilities cost 
pool. The costs associated with each category [[Page 7108]] should be 
uniform across institutions. The new methodology should promote greater 
uniformity of cost allocation among institutions while stabilizing the 
impact on project costs. This methodology will be proposed in a future 
revision to Circular A-21.
    (3) Develop standard benchmarks for utility costs. In conjunction 
with the proposed revision in this Notice to eliminate special studies 
for utility costs, OMB plans to develop a benchmark ratio, based on 
determinants of the ratio of utility usage to research space, to 
standardize the allocation of such costs to sponsored research. These 
benchmarks will be proposed in a future revision to Circular A-21. 
After benchmarks for utility costs have been developed and implemented, 
OMB will also consider employing similar processes and models to 
develop benchmarks for libraries and student services.
    (4) Develop and test a model for charging space costs directly to 
research grants. Over the last several years, policymakers, scientists 
and negotiators have discussed the idea of identifying project-specific 
space costs and charging those costs directly to grants. Direct 
charging would strengthen the incentive for colleges and universities 
to allocate space efficiently. Charging space directly to sponsored 
agreements would also help clarify the true costs of research and 
subject these costs to peer review and program oversight on a project-
by-project basis.
    The idea of charging space directly has not been adopted because 
some perceive it as too complicated from a technical perspective. The 
Federal Demonstration Project (FDP), which was established to test ways 
to improve flexibility and reduce the administrative costs associated 
with grantmaking, is well-suited to test the idea of direct charging 
space to grants. Further, the National Performance Review recommended 
using the FDP as a model program to reduce overhead on research grants. 
OMB has requested the FDP to develop a model for and to test direct 
charging of space.
    (5) Examine and potentially revise the useful life schedule for 
equipment. OMB intends to review the current useful life schedules for 
equipment to ensure cost recovery policies keep pace with the changing 
nature of scientific equipment. Useful life schedules will be updated 
in future proposed revisions of Circular A-21, as appropriate.
    (6) Examine methods for explaining variations in facilities and 
administrative costs rates. OMB will review ways of collecting data to 
explain rate variation, to include establishing a uniform chart of 
accounts. OMB solicits comments on methods that will provide 
appropriate data in a cost-effective manner.
John B. Arthur,
Associate Director for Administration.
    The following are proposed revisions to sections A, E, G, and J of 
Circular A-21:
    (1) Amend Section A by: (a) deleting paragraph 2.f, (b) changing 
the number of the current paragraph 3 to 4, and (c) adding a new 
paragraph 3 as follows:
    3. Cognizant agency assignments and responsibilities.
    a. Cognizant agency assignments. Cost negotiation cognizance is 
assigned to the Department of Health and Human Services (DHHS) or the 
Department of Defense, Office of Naval Research (ONR), based on which 
of these two Departments provides more Federal funding through 
sponsored agreements to an educational institution (including its 
component parts) for the most recent three years available using data 
published by the National Science Foundation in its annual report 
entitled ``Selected Data on Federal Support to Universities and 
Colleges.'' Cognizant assignments as of December 31, 1994, will 
continue in effect through educational institution years ending during 
1997, except for those institutions with cognizant agencies other than 
DHHS or ONR. Cognizance for these institutions will transfer to DHHS or 
ONR not later than the end of the period covered by the current 
negotiated indirect cost agreement. Once cognizance is established, it 
will continue for a five-year period.
    b. Acceptance of rates. The negotiated rates will be accepted by 
all Federal agencies. This does not preclude agencies from paying a 
lower rate pursuant to a class of sponsored agreements or a single 
sponsored agreement.
    c. Correcting deficiencies. The cognizant agency will negotiate 
changes needed to correct systems deficiencies relating to 
accountability for sponsored agreements. The cognizant agency will seek 
the views of other affected agencies before entering into negotiations 
and invite their participation.
    d. Resolving questioned costs. The cognizant agency will conduct 
any necessary negotiations with the institution regarding amounts 
questioned by audit that are due the government related to costs 
covered by a negotiated agreement. Prior to reaching final agreement 
with an institution, the cognizant agency will seek the views of other 
agencies concerned.
    e. Reimbursement. Reimbursement to cognizant agencies for work 
performed under this Circular may be made by reimbursement billing 
under the Economy Act, 31 U.S.C. 1535.
    f. Procedure for establishing facilities and administrative cost 
rates. The cognizant agency will arrange with the institution to 
provide copies of facilities and administrative cost proposals to all 
interested agencies. Agencies wanting such copies should notify the 
cognizant agency. Facilities and administrative cost rates will be 
established by one of the following methods:
    (1) Formal negotiation. The cognizant agency will advise all 
interested agencies of its intention to negotiate, and schedule a pre-
negotiation conference, if necessary. The cognizant agency will then 
arrange a negotiation conference with the institution. If an agency 
does not wish to be represented in these meetings, the cognizant agency 
will represent that agency.
    (2) Other than formal negotiation. This will include cases where 
the institution and cognizant agency determine that agreement can be 
reached without a formal negotiation conference; for example, through 
correspondence or use of the simplified method described in this 
Circular.
    g. Formalizing determinations and agreements. The cognizant agency 
will formalize all determinations or agreements reached with the 
institution and provide copies to other agencies having an interest.
    h. Disputes and disagreements. Where the cognizant agency is unable 
to reach agreement with an institution with regard to facilities and 
administrative cost rates or audit resolution, the appeals system of 
the cognizant agency will be followed for resolution of the 
disagreement.
    (2) Amend Section A., ``Purpose and scope'' by adding a new 
paragraph A.4. as follows:
    4. Interagency Working Group. A Federal interagency working group 
will be responsible for coordination of cost policy development for 
sponsored agreements. The group will meet at least semi-annually. The 
Office of Management and Budget (OMB) and the Office of Science and 
Technology Policy (OSTP) will serve as Co-Chairs. Federal agencies 
represented will be the Office of Science and Technology Policy of the 
Executive Office of the President, the Department of Health and Human 
Services, the Office of Naval Research of the Department of Defense, 
the National Science Foundation, the Department of Education, the 
Department of Energy, and such other agencies as OMB designates. The 
responsibilities of the [[Page 7109]] group will be to recommend 
changes to OMB Circular A-21 and other OMB circulars based upon 
recommendations of Federal agencies and non-Federal organizations. The 
group will also recommend pilot projects designed to test ways to 
streamline the operations of sponsored agreements, reduce costs, or 
improve program delivery.
    (3) Amend Section E, paragraph 2.d by adding a new subparagraph 
(5):
    (5) Notwithstanding subparagraph (3), a cost analysis study or base 
other than that in section F shall not be used to distribute utility, 
library and student services costs.
    (4) Amend Section G by inserting a new paragraph 7 and renumbering 
all subsequent paragraphs:
    7. Fixed rates for the life of the sponsored agreement. Federal 
funding agencies shall use the rates for facilities and administrative 
costs in effect at the time of the initial award throughout the life of 
the sponsored agreement. If negotiated rate agreements do not extend 
through the life of the sponsored agreement at the time of the initial 
award, then the negotiated rate for the last year of the sponsored 
agreement shall be extended through the end of the life of the 
sponsored agreement. Award levels for sponsored agreements may not be 
adjusted in future years as a result of changes in negotiated rates.
    (5) Replace Section J 12, paragraph b. (3), as follows:
    (3) Where the depreciation method is introduced for application to 
assets for which use allowance was previously charged, depreciation on 
each asset will be computed as if the asset had been depreciated over 
its entire life (i.e., from the date the asset as acquired and ready 
for use to the date the asset is expected to be disposed of or 
otherwise withdrawn from use). The aggregate amount of use allowances 
and depreciation applicable to the asset (including imputed 
depreciation applicable to the period prior to the charging of use 
allowances as well as depreciation after the conversion) may be less 
than but in no case may exceed the total acquisition cost of the asset.
    And add a new subparagraph J 12 c. (4):
    (4) Notwithstanding c.(3), once an institution converts from one 
cost recovery methodology to another, acquisition costs not recovered 
may not be used in the calculation of the use allowance in c.(3).
    (6) Amend Section J, paragraph 22.e. to read as follows:
    e. Interest on debt issued to acquire capital assets used in 
support of sponsored agreements is unallowable unless:
    (1) The educational institution performs a lease/purchase analysis 
in accordance with the provisions of OMB Circular A-110, ``Uniform 
Administrative Requirements for Grants and Agreements with Institutions 
of Higher Education, Hospitals and Other Non-Profit Organizations,'' 
and sections 5a, 8(c)(2), and 13 of OMB Circular A-94, ``Guidelines and 
Discount Rates for Benefit-Cost Analysis of Federal Programs,'' which 
shows that purchasing through debt financing is less costly to the 
Federal Government than leasing. Discount rates used should be equal to 
the grantee's borrowing rates. The financial analysis must include a 
comparison of the present value of the projected total cash flows of 
both alternatives over the period the asset is expected to be used by 
the educational institution in carrying out federally-sponsored 
activities. The cash flows associated with purchasing the asset must 
include the purchase price, anticipated operating and maintenance costs 
(including property taxes, if applicable) not included in the debt 
financing, less any estimated asset salvage value at the end of the 
defined period. Projected rental costs should be based on the 
anticipated cost of renting comparable facilities or equipment at fair 
market rates over the defined period, and any expected maintenance 
costs and property taxes to be borne by the educational institution 
directly or as part of the lease arrangement.
    (2) Financing is provided at an interest rate no higher than the 
fair market rate available to the educational institution from an 
unrelated third party.
    (3) Investment earnings, including interest, on bond or loan 
principal, pending payment of the construction or acquisition costs, 
are used to offset allowable interest cost. Arbitrage earnings 
reportable to the Internal Revenue Service are not required to be 
offset against allowable interest costs.
    (4) Educational institutions are also subject to the following 
conditions:
    (a) Interest on debt issued to finance or refinance assets acquired 
before July 1, 1982, is not allowable.
    (b) Federal cognizant agencies shall require educational 
institutions to compute interest on the excess of the Federal 
Government's depreciation and interest reimbursement payments over the 
educational institution's principal and interest payments, and that the 
educational institution treat the computed interest as a reduction in 
the interest expense to be reimbursed by the Federal Government. This 
provision is not applicable in instances where the educational 
institution makes an initial equity contribution of 25 percent or more 
to purchase the asset.
    (c) Substantial relocation of federally-sponsored activities from a 
facility financed by indebtedness, the cost of which was funded in 
whole or part through Federal reimbursements, to another facility prior 
to the expiration of a period of 20 years requires Federal cognizant 
agency approval. The extent of the relocation, the amount of the 
Federal participation in the financing, and the depreciation charged to 
date may require negotiation of space charges for Federal programs.
    (7) Amend Section J by adding a new paragraph 51:
    51. Tuition benefits for family members. For educational 
institution's fiscal years beginning after September 30, 1997, charges 
for tuition benefits for any person other than the employee are no 
longer allowable.
    (8) Amend the entire Circular by changing all references to 
``indirect costs'' to ``facilities and administrative costs.''
    Circular A-88 is proposed to be rescinded in its entirety.

[FR Doc. 95-2871 Filed 2-3-95; 8:45 am]
BILLING CODE 3110-01-P