[Federal Register Volume 60, Number 194 (Friday, October 6, 1995)]
[Notices]
[Pages 52522-52528]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-24900]



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OFFICE OF MANAGEMENT AND BUDGET


Cost Principles for Non-Profit Organizations; Proposed Revisions

AGENCY: Office of Management and Budget.

ACTION: Proposed revisions to OMB Circular A-122, ``Cost Principles for 
Non-Profit Organizations''.

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SUMMARY: This notice proposes changes to OMB Circular A-122, ``Cost 
Principles for Non-Profit Organizations,'' to revise the definition of 
equipment, to make certain additional costs unallowable, to modify the 
multiple allocation base method for computing indirect cost rate(s), 
and to place a ceiling on the administrative portion of indirect costs 
for organizations with Federal funding over $10 million. The proposed 
changes provide consistency across OMB's cost principles Circulars A-
122; A-87, ``Cost Principles for State and Local Governments;'' and A-
21, ``Cost Principles for Educational Institutions.''

DATES: Comments on these proposals are due December 5, 1995.

ADDRESSES: Comments should be mailed to Financial Standards and 
Reporting Branch, Office of Federal Financial Management, Office of 
Management and Budget, 725 17th Street, N.W., Room 6025, Washington, DC 
20503. Comments up to three pages in length may be submitted via 
facsimile to 202-395-3952. Electronic mail comments may be submitted 
via Internet to [email protected]. Please include the full body of 
electronic mail comments in the text and not as an attachment. Please 
include the name, title, organization, postal address, and E-mail 
address in the text of the message.

FOR FURTHER INFORMATION CONTACT: Non-Federal organizations should 
contact the organization's cognizant Federal agency. Federal agencies 
should contact Gilbert Tran, Financial Standards and Reporting Branch, 
Office of Federal Financial Management, Office of Management and 
Budget, (202) 395-3993.

SUPPLEMENTARY INFORMATION: In this issue of the Federal Register, the 
Office of Management and Budget (OMB) issued a final revision to OMB 
Circular A-122, ``Cost Principles for Non-Profit Organizations,'' 
regarding interest allowability. The revision was made in a continuing 
effort to provide consistency across OMB's cost principles Circulars A-
122; A-87, ``Cost Principles for State and Local Governments;'' and A-
21, ``Cost Principles for Educational Institutions,'' to ensure more 
comparable treatment of various types of institutions when seeking 
support from the Federal Government, and to promote cost effective 
funding decisions on the part of the Federal Government and non-profit 
organizations. Circular A-122 consists of the Circular as originally 
issued in 1980 (45 FR 46022; July 8, 1980), with amendments in 1984 (49 
FR 18260; April 27, 1984), in 1987 (52 FR 19788; May 27, 1987) and in 
this issue. See also 60 FR 36316 (July 14, 1995) regarding equipment 
capitalization threshold waivers.
    To further the goals stated previously, OMB proposes herein to 
revise the definition for equipment, to make certain additional types 
of costs unallowable, to modify the multiple allocation base method for 
computing indirect cost rate(s), and to place an upper-limit on 
payments for administrative expenses. The following describes each of 
the four proposals.
    First, in the equipment definition in Attachment B, section 15, OMB 
is proposing to raise the threshold amount to $5000 in conformance with 
the threshold established in Circular A-110, ``Uniform Administrative 
Requirements for Grants and Agreements with Institutions of Higher 
Education, Hospitals, and Other Non-Profit Organizations'' (58 FR 
62992; November 29, 1993). This revision will decrease burdens 
associated with accounting for property.

[[Page 52523]]

    Second, OMB is proposing additional unallowable items. Some 
proposed unallowable costs, items (1) to (10), are already unallowable 
under Circulars A-87 and/or A-21 (See Circular A-87 (60 FR 26484; May 
17, 1995) and Circular A-21 (56 FR 50224; October 1, 1991)) and/or the 
Federal Acquisition Regulation (at 48 CFR Part 31). These unallowable 
costs include:
    (1) Advertising and public relations costs.
    (2) Alcoholic beverages.
    (3) Organization-furnished automobiles for personal use.
    (4) Defense and prosecution of criminal and civil proceedings, 
claims, appeals and patent infringements.
    (5) Goods and services for personal uses.
    (6) Housing and living expenses of an organization's officers.
    (7) Insurance against defects.
    (8) Memberships in any civic, community or social organization or 
country club.
    (9) Selling or marketing of goods or services.
    (10) Trustees' travel.
    OMB is proposing to make changes to items (11) to (17) for 
consistency with amendments made by the Federal Acquisition 
Streamlining Act of 1994 (FASA), Public Law 103-355. Section 2151 of 
FASA, by amending section 306 of the Federal Property and 
Administrative Services Act of 1949 (41 U.S.C. 256), specified certain 
items of costs as not allowable under Federal covered contracts. While 
most of the unallowable cost items listed in FASA are precisely 
identical or substantively the same as are currently in Circular A-122, 
some of the cost items differ. They are:
    (11) Payments of fines and penalties resulting from violations of, 
or failure to comply with, foreign laws and regulations.
    (12) Costs of membership in any social, dining, or country club or 
organization.
    (13) Costs incurred in certain severance pay package (commonly 
known as a ``golden parachute'' payment).
    (14) Costs of severance pay to foreign nationals in excess of 
customary or prevailing practices.
    (15) Costs of severance pay to foreign nationals in the case of 
termination due to closing of, or the curtailment of activities at, a 
United States facility in that country.
    (16) Costs of advertising designed to promote the organization or 
its products.
    (17) Costs of commercial insurance that protects against the costs 
for correction of defects in materials or workmanship.
    OMB is proposing to add items (1) through (17) to the costs in 
Attachment B that are unallowable under Circular A-122.
    Third, OMB is proposing a revision to Attachment A under which an 
organization receiving more than $10 million of Federal funding will be 
required to compute its indirect cost rate based on a modified total 
direct cost basis using the ``multiple allocation method,'' and its 
rate should be determined separately for the two major categories: 
``Facilities'' and ``Administration.'' This proposed change would 
provide a standard and uniform method to calculate indirect cost 
rate(s) for organizations receiving more than $10 million of Federal 
funding. This method is consistent with that required for colleges and 
universities with direct costs funding covered by Circular A-21 of more 
than $10 million. Where the Federal funding covered in this Circular of 
an organization does not exceed $10 million in a fiscal year, the 
organization will be able to use one of the three allocation methods 
described in Section D of Attachment A, Allocation of Indirect Costs 
and Determination of Indirect Costs Rates.
    Fourth and finally, OMB is proposing an upper limit of 26 percent 
on the ``Administration'' component of the rate in Attachment A for an 
organization receiving more than $10 million of Federal funding. The 
administrative cap is consistent with the one implemented for colleges 
and universities on October 1, 1991, under Circular A-21 (56 FR 50224). 
Organizations with an administrative component rate at or less than 26 
percent will continue to recover at the current negotiated rate.
    The effective date for the first, second and fourth proposals will 
be at the start of the next accounting period beginning on or after the 
first issuance of the revised Circular for which the organization has 
not yet established a predetermined indirect cost rate. The effective 
date for the second proposal is as follows. For costs charged directly, 
the effective date for the proposed unallowable costs will be 30 days 
after the final issuance of the revised Circular. For costs charged 
indirectly, the effective date will be at the start of the next 
accounting period beginning on or after the final issuance of the 
revised Circular for which the organization has not established a 
predetermined indirect cost rate.

G. Edward DeSeve,
Controller.

Proposed Revisions

    Revise Attachments A and B of Circular A-122, as follows.

A. Attachment A

    1. Add Subsection 3 to Section C, Indirect Costs.
    3. For organizations receiving more than $10 million of Federal 
funding covered under this Circular, the indirect costs shall be 
classified within two broad categories: ``Facilities'' and 
``Administration.'' ``Facilities'' is defined as depreciation and use 
allowances, interest on debt associated with certain buildings, 
equipment and capital improvements, and operations and maintenance 
expenses. ``Administration'' is defined as general administration and 
general expenses such as the director's office, accounting, personnel, 
project administration (when it is not directly charged to projects), 
and all other types of expenditures not listed specifically under one 
of the subcategories of Facilities (including cross allocations from 
other pools).
    2. Add Subsections f and g to Section D.1., Allocation of Indirect 
Costs and Determination of Indirect Cost Rates, General:
    f. Where the Federal funding covered by this Circular of an 
organization does not exceed $10 million in a fiscal year, the 
organization can use one of the three allocation methods herein 
described as: simple, multiple or direct allocation method. The 
distribution base may be total direct costs (excluding capital 
expenditures and other distorting items, such as major subgrants or 
subgrants above $25,000 of each subgrant or subcontract, regardless of 
the period covered by the subgrant or subcontract), direct salaries and 
wages, or modified total direct costs (MTDC). MTDC consists of all 
salaries and wages, fringe benefits, materials and supplies, services, 
travel, and subgrants and subcontracts up to the first $25,000 of each 
subgrant or subcontract. Equipment, capital expenditures, charges for 
patient care, rental costs and the portion in excess of $25,000 shall 
be excluded from MTDC. Other items may only be excluded when the 
Federal cost cognizant agency determines that an exclusion is necessary 
to avoid a serious inequity in the distribution of indirect costs.
    g. Where the Federal funding covered by this Circular of an 
organization exceeds $10 million in a fiscal year, the 

[[Page 52524]]
organization shall use the multiple allocation method. The distribution 
base shall be MTDC as described in subsection f.
    3. Replace Section D.2.c. with the following:
    c. The distribution basis shall comply with the conditions 
described in Section D.1.
    4. Replace Section D.3 with the following:
3. Multiple Allocation Base Method
    a. General. Where an organization receives more than $10 million of 
Federal funding in a fiscal year covered under this Circular or where 
an organization's indirect costs benefit its major functions in varying 
degrees, such costs shall be accumulated into separate cost groupings, 
as described in subsection b. Each grouping shall then be allocated 
individually to benefitting functions by means of a base which best 
measures the relative benefits. The default bases by cost pool are 
described in subsection c.
    b. Identification of indirect costs. Cost groupings shall be 
established so as to permit the allocation of each grouping on the 
basis of benefits provided to the major functions. Each grouping shall 
constitute a pool of expenses that are of like character in terms of 
functions they benefit and in terms of the allocation base which best 
measures the relative benefits provided to each function. The groupings 
are classified within the two broad categories: ``Facilities'' and 
``Administration,'' as described in Section C.3. The indirect cost 
pools are defined as follows:
    (1) Depreciation and use allowances. The expenses under this 
heading are the portion of the costs of the organization's buildings, 
capital improvements to land and buildings, and equipment which are 
computed in accordance with Section 11 (``Depreciation and use 
allowance'').
    (2) Interest. Interest on debt associated with certain buildings, 
equipment and capital improvements are computed in accordance with 
Section 23 (``Interest, fund raising, and investment management 
costs'').
    (3) Operation and maintenance expenses. The expenses under this 
heading are those that have been incurred for the administration, 
operation, maintenance, preservation, and protection of the 
organization's physical plant. They include expenses normally incurred 
for such items as: janitorial and utility services; repairs and 
ordinary or normal alterations of buildings, furniture and equipment; 
care of grounds; maintenance and operation of buildings and other plant 
facilities; security; earthquake and disaster preparedness; 
environmental safety; hazardous waste disposal; property, liability and 
other insurance relating to property; space and capital leasing; 
facility planning and management; and, central receiving. The operation 
and maintenance expenses category shall also include its allocable 
share of fringe benefit costs, depreciation and use allowance, and 
interest costs.
    (4) General administration and general expenses. The expenses under 
this heading are those that have been incurred for the overall general 
executive and administrative offices of the organization and other 
expenses of a general nature which do not relate solely to any major 
function of the organization. This category shall also include its 
allocable share of fringe benefit costs, operation and maintenance 
expense, depreciation and use allowances, and interest costs. Examples 
of this category include central offices, such as the director's 
office, the office of finance, business services, budget and planning, 
personnel, safety and risk management, general counsel, and management 
information systems.
    In developing this cost pool, special care should be exercised to 
ensure that costs incurred for the same purpose in like circumstances 
are treated consistently as either direct or indirect costs. For 
example, salaries of technical staff, project supplies, project 
publication, telephone toll charges, computer costs, travel costs, and 
specialized services costs shall be treated as direct costs wherever 
identifiable to a particular program. The salaries and wages of 
administrative and pooled clerical staff should normally be treated as 
indirect costs. Direct charging of these costs may be appropriate where 
a major project or activity explicitly budgets for administrative or 
clerical services and other individuals involved can be identified with 
the program or activity. Items such as office supplies, postage, local 
telephone costs, periodicals and memberships should normally be treated 
as indirect costs.
    c. Allocation bases. Actual conditions shall be taken into account 
in selecting the base to be used in allocating the expenses in each 
grouping to benefitting functions. The essential consideration in 
selecting a method or a base is that it be the one best suited for 
assigning the pool of costs to cost objectives in accordance with 
benefits derived; a traceable cause and effect relationship; or logic 
and reason, where neither the cause nor the effect of the relationship 
is determinable. When an allocation can be made by assignment of a cost 
grouping directly to the function benefited, the allocation shall be 
made in that manner. When the expenses in a cost grouping are more 
general in nature, the allocation shall be made through the use of a 
selected base which produces results that are equitable to both the 
Federal Government and the organization. The distribution shall be made 
in accordance with the bases described herein unless it can be 
demonstrated that the use of a different base would result in a more 
equitable allocation of the costs, or that a more readily available 
base would not increase the costs charged to sponsored agreements. The 
results of special cost studies (such as an engineering utility study) 
shall not be used to determine and allocate the indirect costs to 
sponsored agreements.
    (1) Depreciation and use allowance. Depreciation and use allowance 
expenses shall be allocated in the following manner:
    (a) Depreciation and use allowances on buildings used exclusively 
in the conduct of a single function, and on capital improvements and 
equipment used in such buildings, shall be assigned to that function.
    (b) Depreciation and use allowances on buildings used for more than 
one function, and on capital improvements and equipment used in such 
buildings, shall be allocated to the individual functions performed in 
each building on the basis of usable square feet of space, excluding 
common areas, such as hallways, stairwells, and restrooms.
    (c) Depreciation and use allowances on buildings, capital 
improvements and equipment related space (e.g., individual rooms, and 
laboratories) used jointly by more than one function (as determined by 
the users of the space) shall be treated as follows. The cost of each 
jointly used unit of space shall be allocated to the benefitting 
functions on the basis of:
    (i) the employee full-time equivalents (FTEs) or salaries and wages 
of those individual functions benefitting from the use of that space; 
or
    (ii) organization-wide employee FTEs or salaries and wages 
applicable to the benefitting functions of the organization.
    (d) Depreciation or use allowances on certain capital improvements 
to land, such as paved parking areas, fences, sidewalks, and the like, 
not included in the cost of buildings, shall be allocated to user 
categories of employees on a FTE basis and distributed to major 
functions in proportion to the salaries and wages of all employees 
applicable to the functions.
    (2) Interest. Interest costs shall be allocated in the same manner 
as the 

[[Page 52525]]
depreciation or use allowance on the buildings, equipment and capital 
equipments to which the interest relates.
    (3) Operations and maintenance expenses. Operations and maintenance 
expenses shall be allocated in the same manner as the depreciation and 
use allowance.
    (4) General administration and general expenses. General 
administration and general expenses shall be allocated to benefitting 
functions based on MTDC, as described in Section D.1.f. The expenses 
included in this category could be grouped first according to major 
functions of the organization to which they render services or provide 
benefits. The aggregate expenses of each group shall then be allocated 
to benefitting functions based on MTDC.
    d. Order of distribution.
    (1) Indirect cost categories consisting of depreciation and use 
allowance, interest, operation and maintenance, and general 
administration and general expenses shall be allocated in that order to 
the remaining indirect cost categories as well as to the major 
functions of the organization. Other cost categories could be allocated 
in the order determined to be most appropriate by the organization. 
When cross allocation of costs is made as provided in subsection (2), 
this order of allocation does not apply.
    (2) Normally, an indirect cost category will be considered closed 
once it has been allocated to other cost objectives, and costs shall 
not be subsequently allocated to it. However, a cross allocation of 
costs between two or more indirect costs categories could be used if 
such allocation will result in a more equitable allocation of costs. If 
a cross allocation is used, an appropriate modification to the 
composition of the indirect cost categories is required.
    e. Application of indirect cost rate or rates. Except where a 
special indirect cost rate(s) is required in accordance with Section 
D.5, the separate groupings of indirect costs allocated to each major 
function shall be aggregated and treated as a common pool for that 
function. The costs in the common pool shall then be distributed to 
individual awards included in that function by use of a single indirect 
cost rate.
    f. Distribution basis. Indirect costs shall be distributed to 
applicable sponsored agreements and other benefitting activities within 
each major function on the basis of MTDC, as described in Section 
D.1.f. An indirect cost rate shall be determined for each separate 
indirect cost pool developed. The rate in each case shall be stated as 
the percentage which the amount of the particular indirect cost pool is 
of the distribution base identified with that pool. Each indirect cost 
rate negotiation or determination shall include development of the rate 
for each indirect cost pool as well as the overall indirect cost rate. 
The indirect cost pools shall be classified within two broad 
categories: ``Facilities'' and ``Administration,'' as described in 
Section C.3.
    g. Limitation on reimbursement of administrative costs.
    (1) The administrative costs charged to sponsored agreements 
awarded or amended (including continuation and renewal awards) with 
effective dates beginning on or after the start of the organization's 
first fiscal year which begins on or after October 1, 1995, shall be 
limited to 26 percent of MTDC (as defined in Section D.1.f) for the 
administration costs (including their allocable share of depreciation 
and/or use allowance, interest costs, operation and maintenance, and 
fringe benefits) and all other types of expenditures not listed 
specifically under one of the subcategories of facilities in Section 
C.3.
    (2) For organizations that already established predetermined rates 
beyond October 1, 1995, the limitation shall be at the start of the 
next fiscal year beginning on or after October 1, 1995, for which the 
organization has not yet established an indirect cost rate.
    (3) Organizations shall not change their accounting or cost 
allocations methods which were in effect on September 30, 1995, if the 
effect is to change the charging of a particular cost from indirect to 
direct to avoid the limitation on administrative costs. Cognizant 
Federal agencies are authorized to permit changes where an 
organization's charging practices are at variance with acceptable 
practices followed by a substantial majority of other similar 
organizations.

B. Attachment B

    Revise the following cost items in Attachment B to Circular A-122 
(``Selected Items of Cost'').
    1. Revise the Table of Contents for Attachment B to read:

1. Advertising and public relations costs
2. Alcoholic beverages
3. Bad debts
4. Bid and proposal costs (reserved)
5. Bonding costs
6. Communication costs
7. Compensation for personal services
8. Contingency provisions
9. Contributions
10. Defense and prosecution of criminal and civil proceedings, 
claims, appeals and patent infringement
11. Depreciation and use allowances
12. Donations
13. Employee morale, health and welfare costs and credits
14. Entertainment costs
15. Equipment and other capital expenditures
16. Fines and penalties
17. Fringe benefits
18. Goods or services for personal use
19. Housing and personal living expenses
20. Idle facilities and idle capacity
21. Independent research and development (reserved)
22. Insurance and indemnification
23. Interest, fund raising, and investment management costs
24. Labor relations costs
25. Lobbying costs
26. Losses on other awards
27. Maintenance and repair costs
28. Materials and supplies
29. Meetings and conferences
30. Memberships, subscriptions, and professional activity costs
31. Organization costs
32. Overtime, extra-pay shift, and multi-shift premiums
33. Page charges in professional journals
34. Participant support costs
35. Patent costs
36. Pension plans
37. Plant security costs
38. Pre-award costs
39. Professional service costs
40. Profits and losses on disposition of depreciable property or 
other capital assets
41. Public information service costs
42. Publication and printing costs
43. Rearrangement and alteration costs
44. Reconversion costs
45. Recruiting costs
46. Relocation costs
47. Rental costs
48. Royalties and other costs for use of patents and copyrights
49. Selling and marketing
50. Severance pay
51. Specialized service facilities
52. Taxes
53. Termination costs
54. Training and education costs
55. Transportation costs
56. Travel costs
57. Trustees

    2. Revise and retitle Section 1 to read:
    1. Advertising and public relations costs.
    a. The term advertising costs means the costs of advertising media 
and corollary administrative costs. Advertising media include 
magazines, newspapers, radio and television programs, direct mail, 
exhibits, and the like.
    b. The term public relations includes community relations and means 
those activities dedicated to maintaining the image of the organization 
or maintaining or promoting understanding and favorable relations with 
the community or public at large or any segment of the public. 

[[Page 52526]]

    c. The only allowable advertising costs are those which are solely 
for:
    (1) The recruitment of personnel required for the performance by 
the organization of obligations arising under a sponsored agreement, 
when considered in conjunction with all other recruitment costs, as set 
forth in Section 45 (``Recruiting costs'');
    (2) The procurement of goods and services for the performance of a 
sponsored agreement;
    (3) The disposal of scrap or surplus materials acquired in the 
performance of a sponsored agreement except when organizations are 
reimbursed for disposal costs at a predetermined amount in accordance 
with OMB Circular A-110, paragraph ______. 34, ``Equipment''; or
    (4) Other specific purposes necessary to meet the requirements of 
the sponsored agreement.
    d. The only allowable public relations costs are:
    (1) Costs specifically required by sponsored agreements;
    (2) Costs of communicating with the public and press pertaining to 
specific activities or accomplishments which result from performance of 
sponsored agreements; or
    (3) Costs of conducting general liaison with news media and 
government public relations officers, to the extent that such 
activities are limited to communication and liaison necessary to keep 
the public informed on matters of public concern, such as notices of 
contract/grant awards, financial matters, etc.
    e. Costs identified in subsections c. and d. if incurred for more 
than one sponsored agreement or for both sponsored work and other work 
of the organization, are allowable to the extent that the principles in 
Sections B (``Direct Costs'') and C (``Indirect Costs'') are observed.
    f. Unallowable advertising and public relations costs include the 
following:
    (1) All advertising and public relations costs other than as 
specified in subsections c., d., and e.;
    (2) Costs of meeting or other events related to fund raising or 
other organizational activities including:
    (i) Costs of displays, demonstrations, and exhibits;
    (ii) Costs of meeting rooms, hospitality suites, and other special 
facilities used in conjunction with shows and other special events; and
    (iii) Salaries and wages of employees or cost of services engaged 
in setting up and displaying exhibits, making demonstrations, and 
providing briefings;
    (3) Costs of promotional items and memorabilia, including models, 
gifts, and souvenirs;
    (4) Costs of advertising and public relations designed solely to 
promote the organization.
    3. Renumber current sections 2 through 8 as sections 3 through 9, 
respectively.
    4. Add the following new section 2:
    2. Alcoholic beverages. Costs of alcoholic beverages are 
unallowable.
    5. In section 7 (``Compensation for personal services''), as 
renumbered above in item 3, rename the current subsection g, Pension 
costs, as subsection h. Add a new subsection g:
    g. Organization-furnished automobiles. That portion of the cost of 
organization-furnished automobiles that relates to personal use by 
employees (including transportation to and from work) is unallowable 
regardless of whether the cost is reported as taxable income to the 
employees.
    6. Renumber current sections 9 through 15 as sections 11 through 
17, respectively.
    7. Add new section 10:
    10. Defense and prosecution of criminal and civil proceedings, 
claims, appeals and patent infringement.
    a. Definitions.
    (1) Conviction, as used herein, means a judgment or a conviction of 
a criminal offense by any court of competent jurisdiction, whether 
entered upon as a verdict or a plea, including a conviction due to a 
plea of nolo contendere.
    (2) Costs include, but are not limited to: administrative and 
clerical expenses; the cost of legal services, whether performed by in-
house or private counsel; and the costs of the services of accountants, 
consultants, or others retained by the organization to assist it; costs 
of employees, officers and trustees, and any similar costs incurred 
before, during, and after commencement of a judicial or administrative 
proceeding that bears a direct relationship to the proceedings.
    (3) Fraud, as used herein, means (i) acts of fraud corruption or 
attempts to defraud the Federal Government or to corrupt its agents, 
(ii) acts that constitute a cause for debarment or suspension (as 
specified in agency regulations), and (iii) acts which violate the 
False Claims Act, 31 U.S.C., sections 3729-3731, or the Anti-Kickback 
Act, 41 U.S.C., sections 51 and 54.
    (4) Penalty does not include restitution, reimbursement, or 
compensatory damages.
    (5) Proceeding includes an investigation.
    b. (1) Except as otherwise described herein, costs incurred in 
connection with any criminal, civil or administrative proceeding 
(including filing of a false certification) commenced by the Federal 
Government, or a State, local or foreign government, are not allowable 
if the proceeding: (1) relates to a violation of, or failure to comply 
with, a Federal, State, local or foreign statute or regulation by the 
organization (including its agents and employees), and (2) results in 
any of the following dispositions:
    (a) In a criminal proceeding, a conviction.
    (b) In a civil or administrative proceeding involving an allegation 
of fraud or similar misconduct, a determination of organizational 
liability.
    (c) In the case of any civil or administrative proceeding, the 
imposition of a monetary penalty.
    (d) A final decision by an appropriate Federal official to debar or 
suspend the organization, to rescind or void an award, or to terminate 
an award for default by reason of a violation or failure to comply with 
a law or regulation.
    (e) A disposition by consent or compromise, if the action could 
have resulted in any of the dispositions described in (a), (b), (c) or 
(d).
    (2) If more than one proceeding involves the same alleged 
misconduct, the costs of all such proceedings shall be unallowable if 
any one of them results in one of the dispositions shown in subsection 
b.(1).
    c. If a proceeding referred to in subsection b. is commenced by the 
Federal Government and is resolved by consent or compromise pursuant to 
an agreement entered into by the organization and the Federal 
Government, then the costs incurred by the organization in connection 
with such proceedings that are otherwise not allowable under subsection 
b. may be allowed to the extent specifically provided in such 
agreement.
    d. If a proceeding referred to in subsection b. is commenced by a 
State, local or foreign government, the authorized Federal official may 
allow the costs incurred by the organization for such proceedings, if 
such authorized official determines that the costs were incurred as a 
result of (1) a specific term or condition of a federally-sponsored 
agreement, or (2) specific written direction of an authorized official 
of the sponsoring agency.
    e. Costs incurred in connection with proceedings described in 
subsection b., but which are not made unallowable by that subsection, 
may be allowed by the Federal Government, but only to the extent that: 

[[Page 52527]]

    (1) The costs are reasonable in relation to the activities required 
to deal with the proceeding and the underlying cause of action;
    (2) Payment of the costs incurred, as allowable and allocable 
costs, is not prohibited by any other provision(s) of the sponsored 
agreement;
    (3) The costs are not otherwise recovered from the Federal 
Government or a third party, either directly as a result of the 
proceeding or otherwise; and,
    (4) The percentage of costs allowed does not exceed the percentage 
determined by an authorized Federal official to be appropriate, 
considering the complexity of procurement litigation, generally 
accepted principles governing the award of legal fees in civil actions 
involving the United States as a party, and such other factors as may 
be appropriate. Such percentage shall not exceed 80 percent. However, 
if an agreement reached under subsection c. has explicitly considered 
this 80 percent limitation and permitted a higher percentage, then the 
full amount of costs resulting from that agreement shall be allowable.
    f. Costs incurred by the organization in connection with the 
defense of suits brought by its employees or ex-employees under section 
2 of the Major Fraud Act of 1988 (Pub. L. 100-700), including the cost 
of all relief necessary to make such employee whole, where the 
organization was found liable or settled, are unallowable.
    g. Costs of legal, accounting, and consultant services, and related 
costs, incurred in connection with defense against Federal Government 
claims or appeals, or the prosecution of claims or appeals against the 
Federal Government, are unallowable.
    h. Costs of legal, accounting, and consultant services, and related 
costs, incurred in connection with patent infringement litigation, are 
unallowable unless otherwise provided for in the sponsored agreements.
    i. Costs which may be unallowable under this section, including 
directly associated costs, shall be segregated and accounted for by the 
organization separately. During the pendency of any proceeding covered 
by subsections b. and f. of this section, the Federal Government shall 
generally withhold payment of such costs. However, if in the best 
interests of the Federal Government, the Federal Government may provide 
for conditional payment upon provision of adequate security, or other 
adequate assurance, and agreements by the organization to repay all 
unallowable costs, plus interest, if the costs are subsequently 
determined to be unallowable.
    8. In section 15 (``Equipment and other capital expenditures''), as 
renumbered in item 6 above, replace subsection 15.a.(1):
    (1) ``Equipment'' means an article of nonexpendable, tangible 
personal property having a useful life of more than one year and an 
acquisition cost which equals or exceeds the lesser of (a) the 
capitalization level established by the organization for the financial 
statement purposes, or (b) $5000.
    9. Renumber current sections 16 through 44 as sections 20 through 
48, respectively.
    10. Add new section 18:
    18. Goods or services for personal use. Costs of goods or services 
for personal use of the organization's employees are unallowable 
regardless of whether the cost is reported as taxable income to the 
employees.
    11. Add new section 19:
    19. Housing and personal living expenses.
    a. Costs of housing (e.g., depreciation, maintenance, utilities, 
furnishings, rent, etc.), housing allowances and personal living 
expenses for/of the organization's officers are unallowable regardless 
of whether the cost is reported as taxable income to the employees.
    b. The term ``officers'' includes current and past officers.
    12. Add to renumbered section 22 (``Insurance and 
indemnification'') subsections (f) and (g) to section 22.a.(2):
    (f) Insurance against defects. Costs of insurance with respect to 
any costs incurred to correct defects in the organization's materials 
or workmanship are unallowable.
    (g) Medical liability (malpractice) insurance is an allowable cost 
of research programs only to the extent that the research involves 
human subjects. Medical liability insurance costs shall be treated as a 
direct cost and shall be assigned to individual projects based on the 
manner in which the insurer allocates the risk to the population 
covered by the insurance.
    13. Revise section 30, as renumbered in item 9, to read:
    30. Memberships, subscriptions and professional activity costs.
    a. Costs of the organization's membership in business, technical, 
and professional organizations are allowable.
    b. Costs of the organization's subscriptions to business, 
professional, and technical periodicals are allowable.
    c. Costs of meetings and conferences, when the primary purpose is 
the dissemination of technical information, are allowable. This 
includes costs of meals, transportation, rental of facilities, and 
other items incidental to such meetings or conferences.
    d. Costs of membership in any civic or community organization are 
unallowable.
    e. Costs of membership in any country club or social or dining club 
or organization are unallowable.
    14. Revise section 45, as renumbered in item 9, to read:
    45. Recruiting costs.
    a. Subject to subsections b., c., and d., and provided that the 
size of the staff recruited and maintained is in keeping with workload 
requirements, costs of ``help wanted'' advertising, operating costs of 
an employment office necessary to secure and maintain an adequate 
staff, costs of operating an aptitude and educational testing program, 
travel costs of employees while engaged in recruiting personnel, travel 
costs of applicants for interviews for prospective employment, and 
relocation costs incurred incident to recruitment of new employees, are 
allowable to the extent that such costs are incurred pursuant to a well 
managed recruitment program. Where the organization uses employment 
agencies, costs that are not in excess of standard commercial rates for 
such services are allowable.
    b. In publications, costs of help wanted advertising that includes 
color, includes advertising material for other than recruitment 
purposes, or is excessive in size (taking into consideration 
recruitment purposes for which intended and normal organizational 
practices in this respect), are unallowable.
    c. Costs of help wanted advertising, special emoluments, fringe 
benefits, and salary allowances incurred to attract professional 
personnel from other organizations that do not meet the test of 
reasonableness or do not conform with the established practices of the 
organization, are unallowable.
    d. Where relocation costs incurred incident to recruitment of a new 
employee have been allowed either as an allocable direct or indirect 
cost, and the newly hired employee resigns for reasons within his 
control within twelve months after being hired, the organization will 
be required to refund or credit such relocation costs to the Federal 
Government.
    15. Current sections 45 through 51 are renumbered as sections 50 
through 56, respectively.
    16. Add new section 49:
    49. Selling and marketing. Costs of selling and marketing any 
products or services of the organization (unless 

[[Page 52528]]
allowed under section 1) are unallowable.
    17. In section 50 (``Severance pay''), as renumbered in item 15, 
subsection a. is amended and new subsections c. and d. are added, as 
follows:
    a. Severance pay, also commonly referred to as dismissal wages, is 
a payment in addition to regular salaries and wages, by organizations 
to workers whose employment is being terminated. Costs of severance pay 
are allowable only to the extent that in each case, they are required 
by: (i) law; (ii) employer-employee agreement in effect at time of 
establishment of the contract or grant, or at commencement of 
employment; (iii) preexisting established policy that constitutes, in 
effect, an implied agreement on the organization's part; or (iv) 
circumstances of the particular employment.
    Costs incurred in certain severance pay packages (commonly known as 
``a golden parachute'' payment) which are in an amount in excess of the 
normal severance pay paid by the organization to an employee upon 
termination of employment and are paid to the employee contingent upon 
a change in management control over, or ownership of, the 
organization's assets are unallowable.
    c. Severance payments to foreign nationals employed by the 
organization outside the United States, to the extent that the amount 
exceeds the customary or prevailing practices for the organization in 
the United States are unallowable.
    d. Severance payments to foreign nationals employed by the 
organization outside the United States due to the termination of the 
foreign national as a result of the closing of, or curtailment of 
activities by, the organization in that country, are unallowable.
    18. Add new section 57:
    57. Trustees. Travel and subsistence costs of trustees, regardless 
of the purpose of the trip, are unallowable.
[FR Doc. 95-24900 Filed 10-5-95; 8:45 am]
BILLING CODE 3110-01-P