[Federal Register Volume 62, Number 93 (Wednesday, May 14, 1997)]
[Notices]
[Pages 26577-26594]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-12683]


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OFFICE OF MANAGEMENT AND BUDGET


Governmentwide Grants Management Requirements

AGENCY: Office of Management and Budget.

ACTION: Proposed Revision of OMB Circulars A-21, A-87, A-102, A-110 and 
A-122.

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SUMMARY: The Office of Management and Budget (OMB) proposes to revise 
OMB Circulars A-21, ``Cost Principles for Educational Institutions,'' 
A-87, ``Cost Principles for State and Local Governments,'' A-102, 
``Grants and Cooperative Agreements with State and Local Governments,'' 
A-110, ``Uniform Administrative Requirements for Grants and Agreements 
with Institutions of Higher Education, Hospitals, and Other Non-Profit 
Organizations,'' and A-122, ``Cost Principles for Non-Profit 
Organizations,'' to provide a conditional exemption from OMB's grants 
management requirements and a conditional class deviation from the 
agencies' Grants Management Common Rule for certain Federal grant 
programs with statutorily-authorized consolidated planning and 
consolidated administrative funding, that are identified by a Federal 
agency and approved by the head of the Executive department or 
establishment. A recompiled Circular A-122 is also provided.

DATES: All comments on this proposal should be in writing and must be 
received by July 14, 1997. Late comments will be considered to the 
extent practicable.

ADDRESSES: Comments should be mailed to Grants Management Exemption 
Docket, Office of Federal Financial Management, Office of Management 
and Budget, Room 6025 New Executive Office Building, Washington, DC 
20503. Electronic mail (E-mail) comments may be submitted via the 
Internet to [email protected]. Please include the full body of E-
mail comments in the text of the message 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: Barbara F. Kahlow, Office of Federal 
Financial Management, Office of Management and Budget, (202) 395-3053. 
The text of this proposed revision and of the current OMB Circulars A-
21, A-87, A-102, and A-110 are available electronically on the OMB Home 
Page at http://www.whitehouse.gov/WH/EOP/omb. The text of a fully 
recompiled Circular A-122 is appended to this proposal and will also be 
available electronically on the OMB Home Page. The current version of 
OMB Circulars A-21, A-87, A-102, and A-110 are available in paper 
format by contacting the OMB Publications Office at (202) 395-7332.

SUPPLEMENTARY INFORMATION: The Administration believes in greater

[[Page 26578]]

flexibility for State-administered grant programs in return for greater 
accountability. Therefore, the Office of Management and Budget (OMB) 
proposes to revise OMB Circulars A-21, ``Cost Principles for 
Educational Institutions,'' A-87, ``Cost Principles for State and Local 
Governments,'' A-102, ``Grants and Cooperative Agreements with State 
and Local Governments,'' A-110, ``Uniform Administrative Requirements 
for Grants and Agreements with Institutions of Higher Education, 
Hospitals, and Other Non-Profit Organizations,'' and A-122, ``Cost 
Principles for Non-Profit Organizations,'' to provide a conditional 
exemption from OMB's grants management requirements and a conditional 
class deviation from the agencies' Grants Management Common Rule (GMCR) 
for certain Federal grant programs with statutorily-authorized 
consolidated planning and consolidated administrative funding, that are 
identified by a Federal agency and approved by the head of the 
Executive department or establishment.
    This exemption could be granted to related Federal non-entitlement 
grant programs which are administered by State and local governments 
and which have the following characteristics: the related programs (1) 
serve a common program purpose, (2) have specific statutorily-
authorized consolidated planning and consolidated administrative 
funding, and (3) are administered by State agencies which are funded 
mostly by non-Federal sources. In order to promote efficiency in the 
State and local program administration of such related programs, 
Federal agencies could exempt these covered State-administered, non-
entitlement grant programs from Federal grants management requirements 
in OMB Circulars A-21, A-87, A-110, and A-122, and the GMCR. The 
exemptions would be from all but the allocability-of-costs provisions 
of Circulars A-21 (Section C, subpart 4), A-87 (Attachment A, 
subsection C.3), and A-122 (Attachment A, subsection A.4), and from all 
of the administrative requirements provisions of Circular A-110 and the 
GMCR.
    A Federal agency would have the discretion to exempt a Federal 
grant program from the Federal grants management requirements. A 
Federal agency shall consult with OMB during its consideration of 
whether to grant such an exemption.
    If a Federal agency exempts a Federal grant program from these 
requirements, a State would only qualify if it adopts its own written 
fiscal and administrative requirements for expending and accounting for 
all funds, which are consistent with the provisions of OMB Circular A-
87, and extends such requirements to all subrecipients. These fiscal 
and administrative requirements must be sufficiently specific to ensure 
that: funds are used in compliance with all applicable Federal 
statutory and regulatory provisions, costs are reasonable and necessary 
for operating these programs, and funds are not to be used for general 
expenses required to carry out other responsibilities of a State or its 
subrecipients. If a State does not adopt such fiscal and administrative 
requirements, then it would continue to be subject to the Federal 
grants management requirements.
    To provide such a conditional exemption, Section A.3 of Circular A-
21, Attachment A Section A.3 of Circular A-87, Section 2 of Circular A-
102, Subpart C of Circular A-110, and Attachment A Section A of 
Circular A-122 are proposed for amendment.
Franklin D. Raines,
Director.
    OMB proposes to add the following language: (1) As a new paragraph 
d under A.3 Purpose and Scope, Application of Circular A-21; (2) as a 
new paragraph e under Attachment A, A.3 Purpose and Scope, Application 
of Circular A-87; (3) as a new paragraph j under Section 2, Post-award 
Policies of Circular A-102; (4) as a new Section __.45 under Subpart C, 
Post-award Requirements of Circular A-110; and, (5) as a new paragraph 
7 under Attachment A, A. Basic Considerations of Circular A-122:
    Conditional exemptions. OMB authorizes conditional exemption from 
OMB administrative requirements and cost principles circulars for 
certain Federal programs with statutorily-authorized consolidated 
planning and consolidated administrative funding, that are identified 
by a Federal agency and approved by the head of the Executive 
department or establishment. A Federal agency shall consult with OMB 
during its consideration of whether to grant such an exemption.
    To promote efficiency in State and local program administration, 
when Federal non-entitlement programs with common purposes have 
specific statutorily-authorized consolidated planning and consolidated 
administrative funding and where most of the State agency's resources 
come from non-Federal sources, Federal agencies may exempt these 
covered State-administered, non-entitlement grant programs from certain 
OMB grants management requirements. The exemptions would be from all 
but the allocability of costs provisions of OMB Circulars A-87 
(Attachment A, subsection C.3), ``Cost Principles for State, Local, and 
Indian Tribal Governments,'' A-21 (Section C, subpart 4), ``Cost 
Principles for Educational Institutions,'' and A-122 (Attachment A, 
subsection A.4), ``Cost Principles for Non-Profit Organizations,'' and 
from all of the administrative requirements provisions of OMB Circular 
A-110, ``Uniform Administrative Requirements for Grants and Agreements 
with Institutions of Higher Education, Hospitals, and Other Non-Profit 
Organizations,'' and the agencies' grants management common rule.
    When a Federal agency provides this flexibility, as a prerequisite 
to a State's exercising this option, a State must adopt its own written 
fiscal and administrative requirements for expending and accounting for 
all funds, which are consistent with the provisions of OMB Circular A-
87, and extend such policies to all subrecipients. These fiscal and 
administrative requirements must be sufficiently specific to ensure 
that: funds are used in compliance with all applicable Federal 
statutory and regulatory provisions, costs are reasonable and necessary 
for operating these programs, and funds are not to be used for general 
expenses required to carry out other responsibilities of a State or its 
subrecipients.

Appendix

    OMB originally issued Circular A-122 on June 27, 1980 (45 FR 
46022). OMB amended the Circular on April 25, 1984 (49 FR 18260), on 
May 19, 1987 (52 FR 19788), and on September 29, 1995 (60 FR 52516). 
This Appendix presents the fully recompiled Circular A-122. It reflects 
all of the amendments and all of OMB's current editorial conventions, 
and incorporates various non-substantive technical corrections. In 
addition, the recompilation includes the following two clarifying 
changes in Attachment B which reflect what has been OMB's 
interpretation: (a) Under Idle facilities and idle capacity, 
Subparagraph 16.b.(1) now reads ``They are necessary to meet 
fluctuations in workload'' instead of ``They are unnecessary to meet 
fluctuations in workload;'' and, (b) under Taxes, Subparagraph 47.a now 
reads ``* * * based on an exemption afforded the Federal Government'' 
instead of ``* * * based on an exemption afforded the Government.''
    The text of the recompiled Circular follows:
Circular No. A-122
Revised

[[Page 26579]]

Transmittal Memorandum No. 4

To the Heads of Executive Departments and Establishments

SUBJECT: Cost Principles for Non-Profit Organizations

    This transmittal memorandum is a recompilation of Circular A-
122, ``Cost Principles for Non-Profit Organizations,'' that consists 
of the original Circular published at 45 FR 46022 (June 27, 1980), 
as amended by Transmittal Memoranda Numbers 1 through 3, at 49 FR 
18260 (April 25, 1984), 52 FR 19788 (May 19, 1987), and 60 FR 52516 
(September 29, 1995), respectively. This recompilation reflects all 
of the amendments and all of the Office of Management and Budget's 
current editorial conventions, and incorporates various non-
substantive technical corrections and two clarifying changes.
Franklin D. Raines
Director
Attachment

Circular No. A-122
Revised

To the Heads of Executive Departments and Establishments

Subject: Cost principles for non-profit organizations

    1. Purpose. This Circular establishes principles for determining 
costs of grants, contracts and other agreements with non-profit 
organizations. It does not apply to colleges and universities which are 
covered by Office of Management and Budget (OMB) Circular A-21, ``Cost 
Principles for Educational Institutions''; State, local, and federally-
recognized Indian tribal governments which are covered by OMB Circular 
A-87, ``Cost Principles for State and Local Governments''; or 
hospitals. The principles are designed to provide that the Federal 
Government bear its fair share of costs except where restricted or 
prohibited by law. The principles do not attempt to prescribe the 
extent of cost sharing or matching on grants, contracts, or other 
agreements. However, such cost sharing or matching shall not be 
accomplished through arbitrary limitations on individual cost elements 
by Federal agencies. Provision for profit or other increment above cost 
is outside the scope of this Circular.
    2. Supersession. This Circular supersedes cost principles issued by 
individual agencies for non-profit organizations.
    3. Applicability.
    a. These principles shall be used by all Federal agencies in 
determining the costs of work performed by non-profit organizations 
under grants, cooperative agreements, cost reimbursement contracts, and 
other contracts in which costs are used in pricing, administration, or 
settlement. All of these instruments are hereafter referred to as 
awards. The principles do not apply to awards under which an 
organization is not required to account to the Federal Government for 
actual costs incurred.
    b. All cost reimbursement subawards (subgrants, subcontracts, etc.) 
are subject to those Federal cost principles applicable to the 
particular organization concerned. Thus, if a subaward is to a non-
profit organization, this Circular shall apply; if a subaward is to a 
commercial organization, the cost principles applicable to commercial 
concerns shall apply; if a subaward is to a college or university, 
Circular A-21 shall apply; if a subaward is to a State, local, or 
federally-recognized Indian tribal government, Circular A-87 shall 
apply.
    4. Definitions.
    a. Non-profit organization means any corporation, trust, 
association, cooperative, or other organization which:
    (1) is operated primarily for scientific, educational, service, 
charitable, or similar purposes in the public interest;
    (2) is not organized primarily for profit; and
    (3) uses its net proceeds to maintain, improve, and/or expand its 
operations. For this purpose, the term ``non-profit organization'' 
excludes (i) colleges and universities; (ii) hospitals; (iii) State, 
local, and federally-recognized Indian tribal governments; and (iv) 
those non-profit organizations which are excluded from coverage of this 
Circular in accordance with paragraph 5.
    b. Prior approval means securing the awarding agency's permission 
in advance to incur cost for those items that are designated as 
requiring prior approval by the Circular. Generally this permission 
will be in writing. Where an item of cost requiring prior approval is 
specified in the budget of an award, approval of the budget constitutes 
approval of that cost.
    5. Exclusion of some non-profit organizations. Some non-profit 
organizations, because of their size and nature of operations, can be 
considered to be similar to commercial concerns for purpose of 
applicability of cost principles. Such non-profit organizations shall 
operate under Federal cost principles applicable to commercial 
concerns. A listing of these organizations is contained in Attachment 
C. Other organizations may be added from time to time.
    6. Responsibilities. Agencies responsible for administering 
programs that involve awards to non-profit organizations shall 
implement the provisions of this Circular. Upon request, implementing 
instruction shall be furnished to OMB. Agencies shall designate a 
liaison official to serve as the agency representative on matters 
relating to the implementation of this Circular. The name and title of 
such representative shall be furnished to OMB within 30 days of the 
date of this Circular.
    7. Attachments. The principles and related policy guides are set 
forth in the following Attachments:

Attachment A--General Principles
Attachment B--Selected Items of Cost
Attachment C--Non-Profit Organizations Not Subject To This Circular

    8. Requests for exceptions. OMB may grant exceptions to the 
requirements of this Circular when permissible under existing law. 
However, in the interest of achieving maximum uniformity, exceptions 
will be permitted only in highly unusual circumstances.
    9. Effective Date. The provisions of this Circular are effective 
immediately. Implementation shall be phased in by incorporating the 
provisions into new awards made after the start of the organization's 
next fiscal year. For existing awards, the new principles may be 
applied if an organization and the cognizant Federal agency agree. 
Earlier implementation, or a delay in implementation of individual 
provisions, is also permitted by mutual agreement between an 
organization and the cognizant Federal agency.
    10. Inquiries. Further information concerning this Circular may be 
obtained by contacting the Office of Federal Financial Management, OMB, 
Washington, DC 20503, telephone (202) 395-3993.

Attachments

Circular No. A-122

Attachment A--General Principles

Table of Contents

A. Basic Considerations
    1. Composition of total costs
    2. Factors affecting allowability of costs
    3. Reasonable costs
    4. Allocable costs
    5. Applicable credits
    6. Advance understandings
B. Direct Costs
C. Indirect Costs
D. Allocation of Indirect Costs and Determination of Indirect Cost 
Rates
    1. General
    2. Simplified allocation method
    3. Multiple allocation base method
    4. Direct allocation method
    5. Special indirect cost rates
E. Negotiation and Approval of Indirect Cost Rates
    1. Definitions
    2. Negotiations and approval of rates


[[Page 26580]]


Circular No. A-122

Attachment A--General Principles

A. Basic Considerations

    1. Composition of total costs. The total cost of an award is the 
sum of the allowable direct and allocable indirect costs less any 
applicable credits.
    2. Factors affecting allowability of costs. To be allowable under 
an award, costs must meet the following general criteria:
    a. Be reasonable for the performance of the award and be allocable 
thereto under these principles.
    b. Conform to any limitations or exclusions set forth in these 
principles or in the award as to types or amount of cost items.
    c. Be consistent with policies and procedures that apply uniformly 
to both federally-financed and other activities of the organization.
    d. Be accorded consistent treatment.
    e. Be determined in accordance with generally accepted accounting 
principles (GAAP).
    f. Not be included as a cost or used to meet cost sharing or 
matching requirements of any other federally-financed program in either 
the current or a prior period.
    g. Be adequately documented.
    3. Reasonable costs. A cost is reasonable if, in its nature or 
amount, it does not exceed that which would be incurred by a prudent 
person under the circumstances prevailing at the time the decision was 
made to incur the costs. The question of the reasonableness of specific 
costs must be scrutinized with particular care in connection with 
organizations or separate divisions thereof which receive the 
preponderance of their support from awards made by Federal agencies. In 
determining the reasonableness of a given cost, consideration shall be 
given to:
    a. Whether the cost is of a type generally recognized as ordinary 
and necessary for the operation of the organization or the performance 
of the award.
    b. The restraints or requirements imposed by such factors as 
generally accepted sound business practices, arms length bargaining, 
Federal and State laws and regulations, and terms and conditions of the 
award.
    c. Whether the individuals concerned acted with prudence in the 
circumstances, considering their responsibilities to the organization, 
its members, employees, and clients, the public at large, and the 
Federal Government.
    d. Significant deviations from the established practices of the 
organization which may unjustifiably increase the award costs.
    4. Allocable costs.
    a. A cost is allocable to a particular cost objective, such as a 
grant, contract, project, service, or other activity, in accordance 
with the relative benefits received. A cost is allocable to a Federal 
award if it is treated consistently with other costs incurred for the 
same purpose in like circumstances and if it:
    (1) Is incurred specifically for the award.
    (2) Benefits both the award and other work and can be distributed 
in reasonable proportion to the benefits received, or
    (3) Is necessary to the overall operation of the organization, 
although a direct relationship to any particular cost objective cannot 
be shown.
    b. Any cost allocable to a particular award or other cost objective 
under these principles may not be shifted to other Federal awards to 
overcome funding deficiencies, or to avoid restrictions imposed by law 
or by the terms of the award.
    5. Applicable credits.
    a. The term applicable credits refers to those receipts, or 
reduction of expenditures which operate to offset or reduce expense 
items that are allocable to awards as direct or indirect costs. Typical 
examples of such transactions are: purchase discounts, rebates or 
allowances, recoveries or indemnities on losses, insurance refunds, and 
adjustments of overpayments or erroneous charges. To the extent that 
such credits accruing or received by the organization relate to 
allowable cost, they shall be credited to the Federal Government either 
as a cost reduction or cash refund, as appropriate.
    b. In some instances, the amounts received from the Federal 
Government to finance organizational activities or service operations 
should be treated as applicable credits. Specifically, the concept of 
netting such credit items against related expenditures should be 
applied by the organization in determining the rates or amounts to be 
charged to Federal awards for services rendered whenever the facilities 
or other resources used in providing such services have been financed 
directly, in whole or in part, by Federal funds.
    c. For rules covering program income (i.e., gross income earned 
from federally-supported activities) see Sec. __.24 of Office of 
Management and Budget (OMB) Circular A-110, ``Uniform Administrative 
Requirements for Grants and Agreements with Institutions of Higher 
Education, Hospitals, and Other Non-Profit Organizations.''
    6. Advance understandings. Under any given award, the 
reasonableness and allocability of certain items of costs may be 
difficult to determine. This is particularly true in connection with 
organizations that receive a preponderance of their support from 
Federal agencies. In order to avoid subsequent disallowance or dispute 
based on unreasonableness or nonallocability, it is often desirable to 
seek a written agreement with the cognizant or awarding agency in 
advance of the incurrence of special or unusual costs. The absence of 
an advance agreement on any element of cost will not, in itself, affect 
the reasonableness or allocability of that element.

B. Direct Costs

    1. Direct costs are those that can be identified specifically with 
a particular final cost objective, i.e., a particular award, project, 
service, or other direct activity of an organization. However, a cost 
may not be assigned to an award as a direct cost if any other cost 
incurred for the same purpose, in like circumstance, has been allocated 
to an award as an indirect cost. Costs identified specifically with 
awards are direct costs of the awards and are to be assigned directly 
thereto. Costs identified specifically with other final cost objectives 
of the organization are direct costs of those cost objectives and are 
not to be assigned to other awards directly or indirectly.
    2. Any direct cost of a minor amount may be treated as an indirect 
cost for reasons of practicality where the accounting treatment for 
such cost is consistently applied to all final cost objectives.
    3. The cost of certain activities are not allowable as charges to 
Federal awards (see, for example, fundraising costs in paragraph 19 of 
Attachment B). However, even though these costs are unallowable for 
purposes of computing charges to Federal awards, they nonetheless must 
be treated as direct costs for purposes of determining indirect cost 
rates and be allocated their share of the organization's indirect costs 
if they represent activities which (1) include the salaries of 
personnel, (2) occupy space, and (3) benefit from the organization's 
indirect costs.
    4. The costs of activities performed primarily as a service to 
members, clients, or the general public when significant and necessary 
to the organization's mission must be treated as direct costs whether 
or not allowable and be allocated an equitable share of indirect costs. 
Some examples of these types of activities include:

[[Page 26581]]

    a. Maintenance of membership rolls, subscriptions, publications, 
and related functions.
    b. Providing services and information to members, legislative or 
administrative bodies, or the public.
    c. Promotion, lobbying, and other forms of public relations.
    d. Meetings and conferences except those held to conduct the 
general administration of the organization.
    e. Maintenance, protection, and investment of special funds not 
used in operation of the organization.
    f. Administration of group benefits on behalf of members or 
clients, including life and hospital insurance, annuity or retirement 
plans, financial aid, etc.

C. Indirect Costs

    1. Indirect costs are those that have been incurred for common or 
joint objectives and cannot be readily identified with a particular 
final cost objective. Direct cost of minor amounts may be treated as 
indirect costs under the conditions described in subparagraph B.2. 
After direct costs have been determined and assigned directly to awards 
or other work as appropriate, indirect costs are those remaining to be 
allocated to benefiting cost objectives. A cost may not be allocated to 
an award as an indirect cost if any other cost incurred for the same 
purpose, in like circumstances, has been assigned to an award as a 
direct cost.
    2. Because of the diverse characteristics and accounting practices 
of non-profit organizations, it is not possible to specify the types of 
cost which may be classified as indirect cost in all situations. 
However, typical examples of indirect cost for many non-profit 
organizations may include depreciation or use allowances on buildings 
and equipment, the costs of operating and maintaining facilities, and 
general administration and general expenses, such as the salaries and 
expenses of executive officers, personnel administration, and 
accounting.

D. Allocation of Indirect Costs and Determination of Indirect Cost 
Rates

    1. General.
    a. Where a non-profit organization has only one major function, or 
where all its major functions benefit from its indirect costs to 
approximately the same degree, the allocation of indirect costs and the 
computation of an indirect cost rate may be accomplished through 
simplified allocation procedures, as described in subparagraph 2.
    b. Where an organization has several major functions which benefit 
from its indirect costs in varying degrees, allocation of indirect 
costs may require the accumulation of such costs into separate cost 
groupings which then are allocated individually to benefiting functions 
by means of a base which best measures the relative degree of benefit. 
The indirect costs allocated to each function are then distributed to 
individual awards and other activities included in that function by 
means of an indirect cost rate(s).
    c. The determination of what constitutes an organization's major 
functions will depend on its purpose in being; the types of services it 
renders to the public, its clients, and its members; and the amount of 
effort it devotes to such activities as fundraising, public information 
and membership activities.
    d. Specific methods for allocating indirect costs and computing 
indirect cost rates along with the conditions under which each method 
should be used are described in subparagraphs 2 through 5.
    e. The base period for the allocation of indirect costs is the 
period in which such costs are incurred and accumulated for allocation 
to work performed in that period. The base period normally should 
coincide with the organization's fiscal year but, in any event, shall 
be so selected as to avoid inequities in the allocation of the costs.
    2. Simplified allocation method.
    a. Where an organization's major functions benefit from its 
indirect costs to approximately the same degree, the allocation of 
indirect costs may be accomplished by (i) separating the organization's 
total costs for the base period as either direct or indirect, and (ii) 
dividing the total allowable indirect costs (net of applicable credits) 
by an equitable distribution base. The result of this process is an 
indirect cost rate which is used to distribute indirect costs to 
individual awards. The rate should be expressed as the percentage which 
the total amount of allowable indirect costs bears to the base 
selected. This method should also be used where an organization has 
only one major function encompassing a number of individual projects or 
activities, and may be used where the level of Federal awards to an 
organization is relatively small.
    b. Both the direct costs and the indirect costs shall exclude 
capital expenditures and unallowable costs. However, unallowable costs 
which represent activities must be included in the direct costs under 
the conditions described in subparagraph B.3.
    c. The distribution base may be total direct costs (excluding 
capital expenditures and other distorting items, such as major 
subcontracts or subgrants), direct salaries and wages, or other base 
which results in an equitable distribution. The distribution base shall 
generally exclude participant support costs as defined in paragraph 30 
of Attachment B.
    d. Except where a special rate(s) is required in accordance with 
subparagraph 5, the indirect cost rate developed under the above 
principles is applicable to all awards at the organization. If a 
special rate(s) is required, appropriate modifications shall be made in 
order to develop the special rate(s).
    3. Multiple allocation base method.
    a. Where an organization's indirect costs benefit its major 
functions in varying degrees, such costs shall be accumulated into 
separate cost groupings. Each grouping shall then be allocated 
individually to benefiting functions by means of a base which best 
measures the relative benefits.
    b. The 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 should constitute a pool of expenses 
that are of like character in terms of the functions they benefit and 
in terms of the allocation base which best measures the relative 
benefits provided to each function. The number of separate groupings 
should be held within practical limits, taking into consideration the 
materiality of the amounts involved and the degree of precision 
desired.
    c. Actual conditions must be taken into account in selecting the 
base to be used in allocating the expenses in each grouping to 
benefiting functions. 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 grouping are more 
general in nature, the allocation should be made through the use of a 
selected base which produces results that are equitable to both the 
Federal Government and the organization. In general, any cost element 
or cost related factor associated with the organization's work is 
potentially adaptable for use as an allocation base, provided (i) it 
can readily be expressed in terms of dollars or other quantitative 
measures (total direct costs, direct salaries and wages, staff hours 
applied, square feet used, hours of usage, number of documents 
processed, population served, and the like) and (ii) it is common to 
the benefiting functions during the base period.
    d. Except where a special indirect cost rate(s) is required in 
accordance with subparagraph 5, the separate groupings

[[Page 26582]]

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.
    e. The distribution base used in computing the indirect cost rate 
for each function may be total direct costs (excluding capital 
expenditures and other distorting items such as major subcontracts and 
subgrants), direct salaries and wages, or other base which results in 
an equitable distribution. The distribution base shall generally 
exclude participant support costs as defined in paragraph 30, 
Attachment B. An indirect cost rate should be developed for each 
separate indirect cost pool developed. The rate in each case should be 
stated as the percentage which the amount of the particular indirect 
cost pool is of the distribution base identified with that pool.
    4. Direct allocation method.
    a. Some non-profit organizations treat all costs as direct costs 
except general administration and general expenses. These organizations 
generally separate their costs into three basic categories: (i) General 
administration and general expenses, (ii) fundraising, and (iii) other 
direct functions (including projects performed under Federal awards). 
Joint costs, such as depreciation, rental costs, operation and 
maintenance of facilities, telephone expenses, and the like are 
prorated individually as direct costs to each category and to each 
award or other activity using a base most appropriate to the particular 
cost being prorated.
    b. This method is acceptable, provided each joint cost is prorated 
using a base which accurately measures the benefits provided to each 
award or other activity. The bases must be established in accordance 
with reasonable criteria, and be supported by current data. This method 
is compatible with the Standards of Accounting and Financial Reporting 
for Voluntary Health and Welfare Organizations issued jointly by the 
National Health Council, Inc., the National Assembly of Voluntary 
Health and Social Welfare Organizations, and the United Way of America.
    c. Under this method, indirect costs consist exclusively of general 
administration and general expenses. In all other respects, the 
organization's indirect cost rates shall be computed in the same manner 
as that described in subparagraph 2.
    5. Special indirect cost rates. In some instances, a single 
indirect cost rate for all activities of an organization or for each 
major function of the organization may not be appropriate, since it 
would not take into account those different factors which may 
substantially affect the indirect costs applicable to a particular 
segment of work. For this purpose, a particular segment of work may be 
that performed under a single award or it may consist of work under a 
group of awards performed in a common environment. These factors may 
include the physical location of the work, the level of administrative 
support required, the nature of the facilities or other resources 
employed, the scientific disciplines or technical skills involved, the 
organizational arrangements used, or any combination thereof. When a 
particular segment of work is performed in an environment which appears 
to generate a significantly different level of indirect costs, 
provisions should be made for a separate indirect cost pool applicable 
to such work. The separate indirect cost pool should be developed 
during the course of the regular allocation process, and the separate 
indirect cost rate resulting therefrom should be used, provided it is 
determined that (i) the rate differs significantly from that which 
would have been obtained under subparagraphs 2, 3, and 4, and (ii) the 
volume of work to which the rate would apply is material.

E. Negotiation and Approval of Indirect Cost Rates

    1. Definitions. As used in this section, the following terms have 
the meanings set forth below:
    a. Cognizant agency means the Federal agency responsible for 
negotiating and approving indirect cost rates for a non-profit 
organization on behalf of all Federal agencies.
    b. Predetermined rate means an indirect cost rate, applicable to a 
specified current or future period, usually the organization's fiscal 
year. The rate is based on an estimate of the costs to be incurred 
during the period. A predetermined rate is not subject to adjustment.
    c. Fixed rate means an indirect cost rate which has the same 
characteristics as a predetermined rate, except that the difference 
between the estimated costs and the actual costs of the period covered 
by the rate is carried forward as an adjustment to the rate computation 
of a subsequent period.
    d. Final rate means an indirect cost rate applicable to a specified 
past period which is based on the actual costs of the period. A final 
rate is not subject to adjustment.
    e. Provisional rate or billing rate means a temporary indirect cost 
rate applicable to a specified period which is used for funding, 
interim reimbursement, and reporting indirect costs on awards pending 
the establishment of a final rate for the period.
    f. Indirect cost proposal means the documentation prepared by an 
organization to substantiate its claim for the reimbursement of 
indirect costs. This proposal provides the basis for the review and 
negotiation leading to the establishment of an organization's indirect 
cost rate.
    g. Cost objective means a function, organizational subdivision, 
contract, grant, or other work unit for which cost data are desired and 
for which provision is made to accumulate and measure the cost of 
processes, projects, jobs and capitalized projects.
    2. Negotiation and approval of rates.
    a. Unless different arrangements are agreed to by the agencies 
concerned, the Federal agency with the largest dollar value of awards 
with an organization will be designated as the cognizant agency for the 
negotiation and approval of the indirect cost rates and, where 
necessary, other rates such as fringe benefit and computer charge-out 
rates. Once an agency is assigned cognizance for a particular non-
profit organization, the assignment will not be changed unless there is 
a major long-term shift in the dollar volume of the Federal awards to 
the organization. All concerned Federal agencies shall be given the 
opportunity to participate in the negotiation process but, after a rate 
has been agreed upon, it will be accepted by all Federal agencies. When 
a Federal agency has reason to believe that special operating factors 
affecting its awards necessitate special indirect cost rates in 
accordance with subparagraph D.5, it will, prior to the time the rates 
are negotiated, notify the cognizant agency.
    b. A non-profit organization which has not previously established 
an indirect cost rate with a Federal agency shall submit its initial 
indirect cost proposal immediately after the organization is advised 
that an award will be made and, in no event, later than three months 
after the effective date of the award.
    c. Organizations that have previously established indirect cost 
rates must submit a new indirect cost proposal to the cognizant agency 
within six months after the close of each fiscal year.
    d. A predetermined rate may be negotiated for use on awards where 
there is reasonable assurance, based on past experience and reliable 
projection of the organization's costs, that the rate is not likely to 
exceed a rate based on the organization's actual costs.

[[Page 26583]]

    e. Fixed rates may be negotiated where predetermined rates are not 
considered appropriate. A fixed rate, however, shall not be negotiated 
if (i) all or a substantial portion of the organization's awards are 
expected to expire before the carry-forward adjustment can be made; 
(ii) the mix of Federal and non-Federal work at the organization is too 
erratic to permit an equitable carry-forward adjustment; or (iii) the 
organization's operations fluctuate significantly from year to year.
    f. Provisional and final rates shall be negotiated where neither 
predetermined nor fixed rates are appropriate.
    g. The results of each negotiation shall be formalized in a written 
agreement between the cognizant agency and the non-profit organization. 
The cognizant agency shall distribute copies of the agreement to all 
concerned Federal agencies.
    h. If a dispute arises in a negotiation of an indirect cost rate 
between the cognizant agency and the non-profit organization, the 
dispute shall be resolved in accordance with the appeals procedures of 
the cognizant agency.
    i. To the extent that problems are encountered among the Federal 
agencies in connection with the negotiation and approval process, OMB 
will lend assistance as required to resolve such problems in a timely 
manner.
Circular No. A-122

Attachment B--Selected Items of Cost

Table of Contents

1. Advertising costs
2. Bad debts
3. Bid and proposal costs (reserved)
4. Bonding costs
5. Communication costs
6. Compensation for personal services
7. Contingency provisions
8. Contributions
9. Depreciation and use allowances
10. Donations
11. Employee morale, health, and welfare costs and credits
12. Entertainment costs
13. Equipment and other capital expenditures
14. Fines and penalties
15. Fringe benefits
16. Idle facilities and idle capacity
17. Independent research and development (reserved)
18. Insurance and indemnification
19. Interest, fundraising, and investment management costs
20. Labor relations costs
21. Lobbying
22. Losses on other awards
23. Maintenance and repair costs
24. Materials and supplies
25. Meetings and conferences
26. Membership, subscription, and professional activity costs
27. Organization costs
28. Overtime, extra-pay shift, and multi-shift premiums
29. Page charges in professional journals
30. Participant support costs
31. Patent costs
32. Pension plans
33. Plant security costs
34. Pre-award costs
35. Professional service costs
36. Profits and losses on disposition of depreciable property or 
other capital assets
37. Public information service costs
38. Publication and printing costs
39. Rearrangement and alteration costs
40. Reconversion costs
41. Recruiting costs
42. Relocation costs
43. Rental costs
44. Royalties and other costs for use of patents and copyrights
45. Severance pay
46. Specialized service facilities
47. Taxes
48. Termination costs
49. Training and education costs
50. Transportation costs
51. Travel costs
Circular No. A-122

Attachment B--Selected Items of Cost

    Paragraphs 1 through 51 provide principles to be applied in 
establishing the allowability of certain items of cost. These 
principles apply whether a cost is treated as direct or indirect. 
Failure to mention a particular item of cost is not intended to imply 
that it is unallowable; rather, determination as to allowability in 
each case should be based on the treatment or principles provided for 
similar or related items of cost.
    1. Advertising costs. 
    a. Advertising costs mean the costs of media services and 
associated costs. Media advertising includes magazines, newspapers, 
radio and television programs, direct mail, exhibits, and the like.
    b. The only advertising costs allowable are those which are solely 
for (i) the recruitment of personnel when considered in conjunction 
with all other recruitment costs, as set forth in paragraph 41; (ii) 
the procurement of goods and services; (iii) the disposal of surplus 
materials acquired in the performance of the award except when 
organizations are reimbursed for disposals at a predetermined amount in 
accordance with Office of Management and Budget (OMB) Circular A-110, 
``Uniform Administrative Requirements for Grants and Agreements with 
Institutions of Higher Education, Hospitals, and Other Non-Profit 
Organizations;'' or (iv) specific requirements of the award.
    2. Bad debts. Bad debts, including losses (whether actual or 
estimated) arising from uncollectible accounts and other claims, 
related collection costs, and related legal costs, are unallowable.
    3. Bid and proposal costs. (reserved)
    4. Bonding costs.
    a. Bonding costs arise when the Federal Government requires 
assurance against financial loss to itself or others by reason of the 
act or default of the organization. They arise also in instances where 
the organization requires similar assurance. Included are such bonds as 
bid, performance, payment, advance payment, infringement, and fidelity 
bonds.
    b. Costs of bonding required pursuant to the terms of the award are 
allowable.
    c. Costs of bonding required by the organization in the general 
conduct of its operations are allowable to the extent that such bonding 
is in accordance with sound business practice and the rates and 
premiums are reasonable under the circumstances.
    5. Communication costs. Costs incurred for telephone services, 
local and long distance telephone calls, telegrams, radiograms, postage 
and the like are allowable.
    6. Compensation for personal services. 
    a. Definition. Compensation for personal services includes all 
compensation paid currently or accrued by the organization for services 
of employees rendered during the period of the award (except as 
otherwise provided in subparagraph g). It includes, but is not limited 
to, salaries, wages, director's and executive committee member's fees, 
incentive awards, fringe benefits, pension plan costs, allowances for 
off-site pay, incentive pay, location allowances, hardship pay, and 
cost of living differentials.
    b. Allowability. Except as otherwise specifically provided in this 
paragraph, the costs of such compensation are allowable to the extent 
that:
    (1) Total compensation to individual employees is reasonable for 
the services rendered and conforms to the established policy of the 
organization consistently applied to both Federal and non-Federal 
activities; and
    (2) Charges to awards whether treated as direct or indirect costs 
are determined and supported as required in this paragraph.
    c. Reasonableness.
    (1) When the organization is predominantly engaged in activities 
other than those sponsored by the Federal Government, compensation for 
employees on federally-sponsored work will be considered reasonable to 
the extent that it is consistent with that paid for similar work in the 
organization's other activities.

[[Page 26584]]

    (2) When the organization is predominantly engaged in federally-
sponsored activities and in cases where the kind of employees required 
for the Federal activities are not found in the organization's other 
activities, compensation for employees on federally-sponsored work will 
be considered reasonable to the extent that it is comparable to that 
paid for similar work in the labor markets in which the organization 
competes for the kind of employees involved.
    d. Special considerations in determining allowability. Certain 
conditions require special consideration and possible limitations in 
determining costs under Federal awards where amounts or types of 
compensation appear unreasonable. Among such conditions are the 
following:
    (1) Compensation to members of non-profit organizations, trustees, 
directors, associates, officers, or the immediate families thereof. 
Determination should be made that such compensation is reasonable for 
the actual personal services rendered rather than a distribution of 
earnings in excess of costs.
    (2) Any change in an organization's compensation policy resulting 
in a substantial increase in the organization's level of compensation, 
particularly when it was concurrent with an increase in the ratio of 
Federal awards to other activities of the organization or any change in 
the treatment of allowability of specific types of compensation due to 
changes in Federal policy.
    e. Unallowable costs. Costs which are unallowable under other 
paragraphs of this Attachment shall not be allowable under this 
paragraph solely on the basis that they constitute personal 
compensation.
    f. Fringe benefits.
    (1) Fringe benefits in the form of regular compensation paid to 
employees during periods of authorized absences from the job, such as 
vacation leave, sick leave, military leave, and the like, are 
allowable, provided such costs are absorbed by all organization 
activities in proportion to the relative amount of time or effort 
actually devoted to each.
    (2) Fringe benefits in the form of employer contributions or 
expenses for social security, employee insurance, workmen's 
compensation insurance, pension plan costs (see subparagraph g), and 
the like, are allowable, provided such benefits are granted in 
accordance with established written organization policies. Such 
benefits whether treated as indirect costs or as direct costs, shall be 
distributed to particular awards and other activities in a manner 
consistent with the pattern of benefits accruing to the individuals or 
group of employees whose salaries and wages are chargeable to such 
awards and other activities.
    (3) (a) Provisions for a reserve under a self-insurance program for 
unemployment compensation or workers' compensation are allowable to the 
extent that the provisions represent reasonable estimates of the 
liabilities for such compensation, and the types of coverage, extent of 
coverage, and rates and premiums would have been allowable had 
insurance been purchased to cover the risks. However, provisions for 
self-insured liabilities which do not become payable for more than one 
year after the provision is made shall not exceed the present value of 
the liability.
    (b) Where an organization follows a consistent policy of expensing 
actual payments to, or on behalf of, employees or former employees for 
unemployment compensation or workers' compensation, such payments are 
allowable in the year of payment with the prior approval of the 
awarding agency, provided they are allocated to all activities of the 
organization.
    (4) Costs of insurance on the lives of trustees, officers, or other 
employees holding positions of similar responsibility are allowable 
only to the extent that the insurance represents additional 
compensation. The costs of such insurance when the organization is 
named as beneficiary are unallowable.
    g. Pension plan costs.
    (1) Costs of the organization's pension plan which are incurred in 
accordance with the established policies of the organization are 
allowable, provided:
    (a) Such policies meet the test of reasonableness;
    (b) The methods of cost allocation are not discriminatory;
    (c) The cost assigned to each fiscal year is determined in 
accordance with generally accepted accounting principles (GAAP), as 
prescribed in Accounting Principles Board Opinion No. 8 issued by the 
American Institute of Certified Public Accountants; and
    (d) The costs assigned to a given fiscal year are funded for all 
plan participants within six months after the end of that year. 
However, increases to normal and past service pension costs caused by a 
delay in funding the actuarial liability beyond 30 days after each 
quarter of the year to which such costs are assignable are unallowable.
    (2) Pension plan termination insurance premiums paid pursuant to 
the Employee Retirement Income Security Act (ERISA) of 1974 (Pub. L. 
93-406) are allowable. Late payment charges on such premiums are 
unallowable.
    (3) Excise taxes on accumulated funding deficiencies and other 
penalties imposed under ERISA are unallowable.
    h. Incentive compensation. Incentive compensation to employees 
based on cost reduction, or efficient performance, suggestion awards, 
safety awards, etc., are allowable to the extent that the overall 
compensation is determined to be reasonable and such costs are paid or 
accrued pursuant to an agreement entered into in good faith between the 
organization and the employees before the services were rendered, or 
pursuant to an established plan followed by the organization so 
consistently as to imply, in effect, an agreement to make such payment.
    i. Overtime, extra pay shift, and multi-shift premiums. See 
paragraph 28.
    j. Severance pay. See paragraph 45.
    k. Training and education costs. See paragraph 49.
    l. Support of salaries and wages.
    (1) Charges to awards for salaries and wages, whether treated as 
direct costs or indirect costs, will be based on documented payrolls 
approved by a responsible official(s) of the organization. The 
distribution of salaries and wages to awards must be supported by 
personnel activity reports, as prescribed in subparagraph (2), except 
when a substitute system has been approved in writing by the cognizant 
agency. (See subparagraph E.2 of Attachment A.)
    (2) Reports reflecting the distribution of activity of each 
employee must be maintained for all staff members (professionals and 
nonprofessionals) whose compensation is charged, in whole or in part, 
directly to awards. In addition, in order to support the allocation of 
indirect costs, such reports must also be maintained for other 
employees whose work involves two or more functions or activities if a 
distribution of their compensation between such functions or activities 
is needed in the determination of the organization's indirect cost 
rate(s) (e.g., an employee engaged part-time in indirect cost 
activities and part-time in a direct function). Reports maintained by 
non-profit organizations to satisfy these requirements must meet the 
following standards:
    (a) The reports must reflect an after-the-fact determination of the 
actual activity of each employee. Budget estimates (i.e., estimates 
determined before the services are performed) do not qualify as support 
for charges to awards.
    (b) Each report must account for the total activity for which 
employees are

[[Page 26585]]

compensated and which is required in fulfillment of their obligations 
to the organization.
    (c) The reports must be signed by the individual employee, or by a 
responsible supervisory official having first hand knowledge of the 
activities performed by the employee, that the distribution of activity 
represents a reasonable estimate of the actual work performed by the 
employee during the periods covered by the reports.
    (d) The reports must be prepared at least monthly and must coincide 
with one or more pay periods.
    (3) Charges for the salaries and wages of nonprofessional 
employees, in addition to the supporting documentation described in 
subparagraphs (1) and (2), must also be supported by records indicating 
the total number of hours worked each day maintained in conformance 
with Department of Labor regulations implementing the Fair Labor 
Standards Act (FLSA) (29 CFR Part 516). For this purpose, the term 
``nonprofessional employee'' shall have the same meaning as ``nonexempt 
employee,'' under FLSA.
    (4) Salaries and wages of employees used in meeting cost sharing or 
matching requirements on awards must be supported in the same manner as 
salaries and wages claimed for reimbursement from awarding agencies.
    7. Contingency provisions. Contributions to a contingency reserve 
or any similar provision made for events the occurrence of which cannot 
be foretold with certainty as to time, intensity, or with an assurance 
of their happening, are unallowable. The term ``contingency reserve'' 
excludes self-insurance reserves (see subparagraphs 6.f (3) and 
18.a(2)(d); pension funds (see subparagraph 6.g); and reserves for 
normal severance pay (see subparagraph 45.b(1)).
    8. Contributions. Contributions and donations by the organization 
to others are unallowable.
    9. Depreciation and use allowances.
    a. Compensation for the use of buildings, other capital 
improvements, and equipment on hand may be made through use allowances 
or depreciation. However, except as provided in subparagraph f, a 
combination of the two methods may not be used in connection with a 
single class of fixed assets (e.g., buildings, office equipment, 
computer equipment, etc.).
    b. The computation of use allowances or depreciation shall be based 
on the acquisition cost of the assets involved. The acquisition cost of 
an asset donated to the organization by a third party shall be its fair 
market value at the time of the donation.
    c. The computation of use allowances or depreciation will exclude:
    (1) The cost of land;
    (2) Any portion of the cost of buildings and equipment borne by or 
donated by the Federal Government irrespective of where title was 
originally vested or where it presently resides; and
    (3) Any portion of the cost of buildings and equipment contributed 
by or for the organization in satisfaction of a statutory matching 
requirement.
    d. Where the use allowance method is followed, the use allowance 
for buildings and improvement (including land improvements, such as 
paved parking areas, fences, and sidewalks) will be computed at an 
annual rate not exceeding two percent of acquisition cost. The use 
allowance for equipment will be computed at an annual rate not 
exceeding six and two-thirds percent of acquisition cost. When the use 
allowance method is used for buildings, the entire building must be 
treated as a single asset; the building's components (e.g., plumbing 
system, heating and air conditioning, etc.) cannot be segregated from 
the building's shell. The two percent limitation, however, need not be 
applied to equipment which is merely attached or fastened to the 
building but not permanently fixed to it and which is used as 
furnishings or decorations or for specialized purposes (e.g., dentist 
chairs and dental treatment units, counters, laboratory benches bolted 
to the floor, dishwashers, carpeting, etc.). Such equipment will be 
considered as not being permanently fixed to the building if it can be 
removed without the need for costly or extensive alterations or repairs 
to the building or the equipment. Equipment that meets these criteria 
will be subject to the six and two-thirds percent equipment use 
allowance limitation.
    e. Where depreciation method is followed, the period of useful 
service (useful life) established in each case for usable capital 
assets must take into consideration such factors as type of 
construction, nature of the equipment used, technological developments 
in the particular program area, and the renewal and replacement 
policies followed for the individual items or classes of assets 
involved. The method of depreciation used to assign the cost of an 
asset (or group of assets) to accounting periods shall reflect the 
pattern of consumption of the asset during its useful life. In the 
absence of clear evidence indicating that the expected consumption of 
the asset will be significantly greater or lesser in the early portions 
of its useful life than in the later portions, the straight-line method 
shall be presumed to be the appropriate method. Depreciation methods 
once used shall not be changed unless approved in advance by the 
cognizant Federal agency. When the depreciation method is introduced 
for application to assets previously subject to a use allowance, the 
combination of use allowances and depreciation applicable to such 
assets must not exceed the total acquisition cost of the assets. When 
the depreciation method is used for buildings, a building's shell may 
be segregated from each building component (e.g., plumbing system, 
heating, and air conditioning system, etc.) and each item depreciated 
over its estimated useful life; or the entire building (i.e., the shell 
and all components) may be treated as a single asset and depreciated 
over a single useful life.
    f. When the depreciation method is used for a particular class of 
assets, no depreciation may be allowed on any such assets that, under 
subparagraph e, would be viewed as fully depreciated. However, a 
reasonable use allowance may be negotiated for such assets if warranted 
after taking into consideration the amount of depreciation previously 
charged to the Federal Government, the estimated useful life remaining 
at time of negotiation, the effect of any increased maintenance charges 
or decreased efficiency due to age, and any other factors pertinent to 
the utilization of the asset for the purpose contemplated.
    g. Charges for use allowances or depreciation must be supported by 
adequate property records and physical inventories must be taken at 
least once every two years (a statistical sampling basis is acceptable) 
to ensure that assets exist and are usable and needed. When the 
depreciation method is followed, adequate depreciation records 
indicating the amount of depreciation taken each period must also be 
maintained.
    10. Donations.
    a. Services received.
    (1) Donated or volunteer services may be furnished to an 
organization by professional and technical personnel, consultants, and 
other skilled and unskilled labor. The value of these services is not 
reimbursable either as a direct or indirect cost.
    (2) The value of donated services utilized in the performance of a 
direct cost activity shall be considered in the determination of the 
organization's indirect cost rate(s) and, accordingly, shall be 
allocated a proportionate share of applicable indirect costs when the 
following circumstances exist:
    (a) The aggregate value of the services is material;

[[Page 26586]]

    (b) The services are supported by a significant amount of the 
indirect costs incurred by the organization;
    (c) The direct cost activity is not pursued primarily for the 
benefit of the Federal Government,
    (3) In those instances where there is no basis for determining the 
fair market value of the services rendered, the recipient and the 
cognizant agency shall negotiate an appropriate allocation of indirect 
cost to the services.
    (4) Where donated services directly benefit a project supported by 
an award, the indirect costs allocated to the services will be 
considered as a part of the total costs of the project. Such indirect 
costs may be reimbursed under the award or used to meet cost sharing or 
matching requirements.
    (5) The value of the donated services may be used to meet cost 
sharing or matching requirements under conditions described in Sec. 
__.23 of Circular A-110. Where donated services are treated as indirect 
costs, indirect cost rates will separate the value of the donations so 
that reimbursement will not be made.
    (6) Fair market value of donated services shall be computed as 
follows:
    (a) Rates for volunteer services. Rates for volunteers shall be 
consistent with those regular rates paid for similar work in other 
activities of the organization. In cases where the kinds of skills 
involved are not found in other activities of the organization, the 
rates used shall be consistent with those paid for similar work in the 
labor market in which the organization competes for such skills.
    (b) Services donated by other organizations. When an employer 
donates the services of an employee, these services shall be valued at 
the employee's regular rate of pay (exclusive of fringe benefits and 
indirect costs), provided the services are in the same skill for which 
the employee is normally paid. If the services are not in the same 
skill for which the employee is normally paid, fair market value shall 
be computed in accordance with subparagraph (a).
    b. Goods and space.
    (1) Donated goods; i.e., expendable personal property/supplies, and 
donated use of space may be furnished to an organization. The value of 
the goods and space is not reimbursable either as a direct or indirect 
cost.
    (2) The value of the donations may be used to meet cost sharing or 
matching share requirements under the conditions described in Sec. 
__.23 of Circular A-110. The value of the donations shall be determined 
in accordance with Sec. __.23 of Circular A-110. Where donations are 
treated as indirect costs, indirect cost rates will separate the value 
of the donations so that reimbursement will not be made.
    11. Employee morale, health, and welfare costs and credits. The 
costs of house publications, health or first-aid clinics, and/or 
infirmaries, recreational activities, employees' counseling services, 
and other expenses incurred in accordance with the organization's 
established practice or custom for the improvement of working 
conditions, employer-employee relations, employee morale, and employee 
performance are allowable. Such costs will be equitably apportioned to 
all activities of the organization. Income generated from any of these 
activities will be credited to the cost thereof unless such income has 
been irrevocably set over to employee welfare organizations.
    12. Entertainment costs. Costs of amusement, diversion, social 
activities, ceremonials, and costs relating thereto, such as meals, 
lodging, rentals, transportation, and gratuities are unallowable (but 
see paragraphs 11 and 26).
    13. Equipment and other capital expenditures.
    a. As used in this paragraph, the following terms have the meanings 
set forth below:
    (1) Equipment means an article of nonexpendable tangible personal 
property having a useful life of more than two years and an acquisition 
cost of $500 or more per unit. An organization may use its own 
definition, provided that it at least includes all nonexpendable 
tangible personal property as defined herein.
    (2) Acquisition cost means the net invoice unit price of an item of 
equipment, including the cost of any modifications, attachments, 
accessories, or auxiliary apparatus necessary to make it usable for the 
purpose for which it is acquired. Ancillary charges, such as taxes, 
duty, protective in-transit insurance, freight, and installation shall 
be included in or excluded from acquisition cost in accordance with the 
organization's regular written accounting practices.
    (3) Special purpose equipment means equipment which is usable only 
for research, medical, scientific, or technical activities. Examples of 
special purpose equipment include microscopes, x-ray machines, surgical 
instruments, and spectrometers.
    (4) General purpose equipment means equipment which is usable for 
other than research, medical, scientific, or technical activities, 
whether or not special modifications are needed to make them suitable 
for a particular purpose. Examples of general purpose equipment include 
office equipment and furnishings, air conditioning equipment, 
reproduction and printing equipment, motor vehicles, and automatic data 
processing equipment.
    b. (1) Capital expenditures for general purpose equipment are 
unallowable as a direct cost except with the prior approval of the 
awarding agency.
    (2) Capital expenditures for special purpose equipment are 
allowable as direct costs, provided that items with a unit cost of 
$1000 or more have the prior approval of the awarding agency.
    c. Capital expenditures for land or buildings are unallowable as a 
direct cost except with the prior approval of the awarding agency.
    d. Capital expenditures for improvements to land, buildings, or 
equipment which materially increase their value or useful life are 
unallowable as a direct cost except with the prior approval of the 
awarding agency.
    e. Equipment and other capital expenditures are unallowable as 
indirect costs. However, see paragraph 9 for allowability of use 
allowances or depreciation on buildings, capital improvements, and 
equipment. Also, see paragraph 43 for allowability of rental costs for 
land, buildings, and equipment.
    14. Fines and penalties. Costs of fines and penalties resulting 
from violations of, or failure of the organization to comply with 
Federal, State, and local laws and regulations are unallowable except 
when incurred as a result of compliance with specific provisions of an 
award or instructions in writing from the awarding agency.
    15. Fringe benefits. See subparagraph 6.f.
    16. Idle facilities and idle capacity.
    a. As used in this paragraph, the following terms have the meanings 
set forth below:
    (1) Facilities means land and buildings or any portion thereof, 
equipment individually or collectively, or any other tangible capital 
asset, wherever located, and whether owned or leased by the 
organization.
    (2) Idle facilities means completely unused facilities that are 
excess to the organization's current needs.
    (3) Idle capacity means the unused capacity of partially used 
facilities. It is the difference between that which a facility could 
achieve under 100 percent operating time on a one-shift basis less 
operating interruptions resulting from time lost for repairs, setups, 
unsatisfactory materials, and other normal delays, and the extent to 
which the facility was actually used to meet demands during the 
accounting period. A multi-shift basis may be used if it can

[[Page 26587]]

be shown that this amount of usage could normally be expected for the 
type of facility involved.
    (4) Costs of idle facilities or idle capacity means costs such as 
maintenance, repair, housing, rent, and other related costs, e.g., 
property taxes, insurance, and depreciation or use allowances.
    b. The costs of idle facilities are unallowable except to the 
extent that:
    (1) They are necessary to meet fluctuations in workload; or
    (2) Although not necessary to meet fluctuations in workload, they 
were necessary when acquired and are now idle because of changes in 
program requirements, efforts to achieve more economical operations, 
reorganization, termination, or other causes which could not have been 
reasonably foreseen. Under the exception stated in this subparagraph, 
costs of idle facilities are allowable for a reasonable period of time, 
ordinarily not to exceed one year, depending upon the initiative taken 
to use, lease, or dispose of such facilities (but see subparagraphs 
48.b and d).
    c. The costs of idle capacity are normal costs of doing business 
and are a factor in the normal fluctuations of usage or indirect cost 
rates from period to period. Such costs are allowable, provided the 
capacity is reasonably anticipated to be necessary or was originally 
reasonable and is not subject to reduction or elimination by 
subletting, renting, or sale, in accordance with sound business, 
economics, or security practices. Widespread idle capacity throughout 
an entire facility or among a group of assets having substantially the 
same function may be idle facilities.
    17. Independent research and development. [Reserved]
    18. Insurance and indemnification.
    a. Insurance includes insurance which the organization is required 
to carry, or which is approved, under the terms of the award and any 
other insurance which the organization maintains in connection with the 
general conduct of its operations. This paragraph does not apply to 
insurance which represents fringe benefits for employees (see 
subparagraphs 6.f and 6.g(2)).
    (1) Costs of insurance required or approved, and maintained, 
pursuant to the award are allowable.
    (2) Costs of other insurance maintained by the organization in 
connection with the general conduct of its operations are allowable 
subject to the following limitations:
    (a) Types and extent of coverage shall be in accordance with sound 
business practice and the rates and premiums shall be reasonable under 
the circumstances.
    (b) Costs allowed for business interruption or other similar 
insurance shall be limited to exclude coverage of management fees.
    (c) Costs of insurance or of any provisions for a reserve covering 
the risk of loss or damage to Federal property are allowable only to 
the extent that the organization is liable for such loss or damage.
    (d) Provisions for a reserve under a self-insurance program are 
allowable to the extent that types of coverage, extent of coverage, 
rates, and premiums would have been allowed had insurance been 
purchased to cover the risks. However, provision for known or 
reasonably estimated self-insured liabilities, which do not become 
payable for more than one year after the provision is made, shall not 
exceed the present value of the liability.
    (e) Costs of insurance on the lives of trustees, officers, or other 
employees holding positions of similar responsibilities are allowable 
only to the extent that the insurance represents additional 
compensation (see subparagraph 6.f(4)). The cost of such insurance when 
the organization is identified as the beneficiary is unallowable.
    (3) Actual losses which could have been covered by permissible 
insurance (through the purchase of insurance or a self-insurance 
program) are unallowable unless expressly provided for in the award, 
except:
    (a) Costs incurred because of losses not covered under nominal 
deductible insurance coverage provided in keeping with sound business 
practice are allowable.
    (b) Minor losses not covered by insurance, such as spoilage, 
breakage, and disappearance of supplies, which occur in the ordinary 
course of operations, are allowable.
    b. Indemnification includes securing the organization against 
liabilities to third persons and any other loss or damage, not 
compensated by insurance or otherwise. The Federal Government is 
obligated to indemnify the organization only to the extent expressly 
provided in the award.
    19. Interest, fundraising, and investment management costs.
    a. Interest.
    (1) Costs incurred for interest on borrowed capital or temporary 
use of endowment funds, however represented, are unallowable. However, 
interest on debt incurred after the effective date of this revision to 
acquire or replace capital assets (including renovations, alterations, 
equipment, land, and capital assets acquired through capital leases), 
acquired after the effective date of this revision and used in support 
of sponsored agreements is allowable, provided that:
    (a) For facilities acquisitions (excluding renovations and 
alterations) costing over $10 million where the Federal Government's 
reimbursement is expected to equal or exceed 40 percent of an asset's 
cost, the non-profit organization prepares, prior to the acquisition or 
replacement of the capital asset(s), a justification that demonstrates 
the need for the facility in the conduct of federally-sponsored 
activities. Upon request, the needs justification must be provided to 
the Federal agency with cost cognizance authority as a prerequisite to 
the continued allowability of interest on debt and depreciation related 
to the facility. The needs justification for the acquisition of a 
facility should include, at a minimum, the following:
     A statement of purpose and justification for facility 
acquisition or replacement.
     A statement as to why current facilities are not adequate.
     A statement of planned future use of the facility.
     A description of the financing agreement to be arranged 
for the facility.
     A summary of the building contract with estimated cost 
information and statement of source and use of funds.
     A schedule of planned occupancy dates.
    (b) For facilities costing over $500,000, the non-profit 
organization prepares, prior to the acquisition or replacement of the 
facility, a lease/purchase analysis in accordance with the provisions 
of Sec. __.30 through __.37 of Circular A-110, which shows that a 
financed purchase or capital lease is less costly to the organization 
than other leasing alternatives, on a net present value basis. Discount 
rates used should be equal to the non-profit organization's anticipated 
interest rates and should be no higher than the fair market rate 
available to the non-profit organization from an unrelated (``arm's 
length'') third-party. The lease/purchase analysis shall include a 
comparison of the net present value of the projected total cost 
comparisons of both alternatives over the period the asset is expected 
to be used by the non-profit organization. The cost comparisons 
associated with purchasing the facility shall include the estimated 
purchase price, anticipated operating and maintenance costs (including 
property taxes, if applicable) not included in the debt financing, less 
any estimated asset salvage value at the end of the period

[[Page 26588]]

defined above. The cost comparison for a capital lease shall include 
the estimated total lease payments, any estimated bargain purchase 
option, operating and maintenance costs, and taxes not included in the 
capital leasing arrangement, less any estimated credits due under the 
lease at the end of the period defined above. Projected operating lease 
costs shall be based on the anticipated cost of leasing comparable 
facilities at fair market rates under rental agreements that would be 
renewed or reestablished over the period defined above, and any 
expected maintenance costs and allowable property taxes to be borne by 
the non-profit organization directly or as part of the lease 
arrangement.
    (c) The actual interest cost claimed is predicated upon interest 
rates that are no higher than the fair market rate available to the 
non-profit organization from an unrelated (``arm's length'') third 
party.
    (d) Investment earnings, including interest income, on bond or loan 
principal, pending payment of the construction or acquisition costs, 
are used to offset allowable interest cost. Arbitrage earnings 
reportable to the Internal Revenue Service are not required to be 
offset against allowable interest costs.
    (e) Reimbursements are limited to the least costly alternative 
based on the total cost analysis required under subparagraph (b). For 
example, if an operating lease is determined to be less costly than 
purchasing through debt financing, then reimbursement is limited to the 
amount determined if leasing had been used. In all cases where a lease/
purchase analysis is performed, Federal reimbursement shall be based 
upon the least expensive alternative.
    (f) Non-profit organizations are also subject to the following 
conditions:
    (i) Interest on debt incurred to finance or refinance assets 
acquired before or reacquired after the effective date of this Circular 
is not allowable.
    (ii) For debt arrangements over $1 million, unless the non-profit 
organization makes an initial equity contribution to the asset purchase 
of 25 percent or more, non-profit organizations shall reduce claims for 
interest expense by an amount equal to imputed interest earnings on 
excess cash flow, which is to be calculated as follows. Annually, non-
profit organizations shall prepare a cumulative (from the inception of 
the project) report of monthly cash flows that includes inflows and 
outflows, regardless of the funding source. Inflows consist of 
depreciation expense, amortization of capitalized construction 
interest, and annual interest expense. For cash flow calculations, the 
annual inflow figures shall be divided by the number of months in the 
year (usually 12) that the building is in service for monthly amounts. 
Outflows consist of initial equity contributions, debt principal 
payments (less the pro rata share attributable to the unallowable costs 
of land) and interest payments. Where cumulative inflows exceed 
cumulative outflows, interest shall be calculated on the excess inflows 
for that period and be treated as a reduction to allowable interest 
expense. The rate of interest to be used to compute earnings on excess 
cash flows shall be the three month Treasury Bill closing rate as of 
the last business day of that month.
    (iii) Substantial relocation of federally-sponsored activities from 
a facility financed by indebtedness, the cost of which was funded in 
whole or part through Federal reimbursements, to another facility prior 
to the expiration of a period of 20 years requires notice to the 
Federal cognizant agency. The extent of the relocation, the amount of 
the Federal participation in the financing, and the depreciation and 
interest charged to date may require negotiation and/or downward 
adjustments of replacement space charged to Federal programs in the 
future.
    (iv) The allowable costs to acquire facilities and equipment are 
limited to a fair market value available to the non-profit organization 
from an unrelated (``arm's length'') third party.
    (2) For non-profit organizations subject to ``full coverage'' under 
the Cost Accounting Standards (CAS) as defined at 48 CFR 9903.201, the 
interest allowability provisions of subparagraph a do not apply. 
Instead, these organizations' sponsored agreements are subject to CAS 
414 (48 CFR 9903.414), cost of money as an element of the cost of 
facilities capital, and CAS 417 (48 CFR 9903.417), cost of money as an 
element of the cost of capital assets under construction.
    (3) The following definitions are to be used for purposes of 
paragraph 19:
    (a) Re-acquired assets means assets held by the non-profit 
organization prior to the effective date of this revision that have 
again come to be held by the organization, whether through repurchase 
or refinancing. It does not include assets acquired to replace older 
assets.
    (b) Initial equity contribution means the amount or value of 
contributions made by non-Federal entities for the acquisition of the 
asset or prior to occupancy of facilities.
    (c) Asset costs means the capitalizable costs of an asset, 
including construction costs, acquisition costs, and other such costs 
capitalized in accordance with GAAP.
    b. Costs of organized fundraising, including financial campaigns, 
endowment drives, solicitation of gifts and bequests, and similar 
expenses incurred solely to raise capital or obtain contributions are 
unallowable.
    c. Costs of investment counsel and staff and similar expenses 
incurred solely to enhance income from investments are unallowable.
    d. Fundraising and investment activities shall be allocated an 
appropriate share of indirect costs under the conditions described in 
subparagraph B.3 of Attachment A.
    20. Labor relations costs. Costs incurred in maintaining 
satisfactory relations between the organization and its employees, 
including costs of labor management committees, employee publications, 
and other related activities are allowable.
    21. Lobbying. 
    a. Notwithstanding other provisions of this Circular, costs 
associated with the following activities are unallowable:
    (1) Attempts to influence the outcomes of any Federal, State, or 
local election, referendum, initiative, or similar procedure, through 
in kind or cash contributions, endorsements, publicity, or similar 
activity;
    (2) Establishing, administering, contributing to, or paying the 
expenses of a political party, campaign, political action committee, or 
other organization established for the purpose of influencing the 
outcomes of elections;
    (3) Any attempt to influence: (i) The introduction of Federal or 
State legislation; or (ii) the enactment or modification of any pending 
Federal or State legislation through communication with any member or 
employee of the Congress or State legislature (including efforts to 
influence State or local officials to engage in similar lobbying 
activity), or with any Government official or employee in connection 
with a decision to sign or veto enrolled legislation;
    (4) Any attempt to influence: (i) The introduction of Federal or 
State legislation; or (ii) the enactment or modification of any pending 
Federal or State legislation by preparing, distributing or using 
publicity or propaganda, or by urging members of the general public or 
any segment thereof to contribute to or participate in any mass 
demonstration, march, rally, fundraising drive, lobbying campaign or 
letter writing or telephone campaign; or

[[Page 26589]]

    (5) Legislative liaison activities, including attendance at 
legislative sessions or committee hearings, gathering information 
regarding legislation, and analyzing the effect of legislation, when 
such activities are carried on in support of or in knowing preparation 
for an effort to engage in unallowable lobbying.
    b. The following activities are excepted from the coverage of 
subparagraph a:
    (1) Providing a technical and factual presentation of information 
on a topic directly related to the performance of a grant, contract or 
other agreement through hearing testimony, statements or letters to the 
Congress or a State legislature, or subdivision, member, or cognizant 
staff member thereof, in response to a documented request (including a 
Congressional Record notice requesting testimony or statements for the 
record at a regularly scheduled hearing) made by the recipient member, 
legislative body or subdivision, or a cognizant staff member thereof; 
provided such information is readily obtainable and can be readily put 
in deliverable form; and further provided that costs under this section 
for travel, lodging or meals are unallowable unless incurred to offer 
testimony at a regularly scheduled Congressional hearing pursuant to a 
written request for such presentation made by the Chairman or Ranking 
Minority Member of the Committee or Subcommittee conducting such 
hearing.
    (2) Any lobbying made unallowable by subparagraph a(3) to influence 
State legislation in order to directly reduce the cost, or to avoid 
material impairment of the organization's authority to perform the 
grant, contract, or other agreement.
    (3) Any activity specifically authorized by statute to be 
undertaken with funds from the grant, contract, or other agreement.
    c. (1) When an organization seeks reimbursement for indirect costs, 
total lobbying costs shall be separately identified in the indirect 
cost rate proposal, and thereafter treated as other unallowable 
activity costs in accordance with the procedures of subparagraph B.3 of 
Attachment A.
    (2) Organizations shall submit, as part of the annual indirect cost 
rate proposal, a certification that the requirements and standards of 
this paragraph have been complied with.
    (3) Organizations shall maintain adequate records to demonstrate 
that the determination of costs as being allowable or unallowable 
pursuant to paragraph 21 complies with the requirements of this 
Circular.
    (4) Time logs, calendars, or similar records shall not be required 
to be created for purposes of complying with this paragraph during any 
particular calendar month when: (1) The employee engages in lobbying 
(as defined in subparagraphs (a) and (b)) 25 percent or less of the 
employee's compensated hours of employment during that calendar month, 
and (2) within the preceding five-year period, the organization has not 
materially misstated allowable or unallowable costs of any nature, 
including legislative lobbying costs. When conditions (1) and (2) are 
met, organizations are not required to establish records to support the 
allowability of claimed costs in addition to records already required 
or maintained. Also, when conditions (1) and (2) are met, the absence 
of time logs, calendars, or similar records will not serve as a basis 
for disallowing costs by contesting estimates of lobbying time spent by 
employees during a calendar month.
    (5) Agencies shall establish procedures for resolving in advance, 
in consultation with OMB, any significant questions or disagreements 
concerning the interpretation or application of paragraph 21. Any such 
advance resolution shall be binding in any subsequent settlements, 
audits or investigations with respect to that grant or contract for 
purposes of interpretation of this Circular; provided, however, that 
this shall not be construed to prevent a contractor or grantee from 
contesting the lawfulness of such a determination.
    22. Losses on other awards. Any excess of costs over income on any 
award is unallowable as a cost of any other award. This includes, but 
is not limited to, the organization's contributed portion by reason of 
cost sharing agreements or any under-recoveries through negotiation of 
lump sums for, or ceilings on, indirect costs.
    23. Maintenance and repair costs. Costs incurred for necessary 
maintenance, repair, or upkeep of buildings and equipment (including 
Federal property unless otherwise provided for) which neither add to 
the permanent value of the property nor appreciably prolong its 
intended life, but keep it in an efficient operating condition, are 
allowable. Costs incurred for improvements which add to the permanent 
value of the buildings and equipment or appreciably prolong their 
intended life shall be treated as capital expenditures (see paragraph 
13).
    24. Materials and supplies. The costs of materials and supplies 
necessary to carry out an award are allowable. Such costs should be 
charged at their actual prices after deducting all cash discounts, 
trade discounts, rebates, and allowances received by the organization. 
Withdrawals from general stores or stockrooms should be charged at cost 
under any recognized method of pricing consistently applied. Incoming 
transportation charges may be a proper part of material cost. Materials 
and supplies charged as a direct cost should include only the materials 
and supplies actually used for the performance of the contract or 
grant, and due credit should be given for any excess materials or 
supplies retained, or returned to vendors.
    25. Meetings and conferences. 
    a. Costs associated with the conduct of meetings and conferences 
include the cost of renting facilities, meals, speakers' fees, and the 
like. But see paragraph 12, Entertainment costs, and paragraph 30, 
Participant support costs.
    b. To the extent that these costs are identifiable with a 
particular cost objective, they should be charged to that objective 
(see paragraph B of Attachment A). These costs are allowable, provided 
that they meet the general tests of allowability, shown in paragraph A 
of Attachment A to this Circular.
    c. Costs of meetings and conferences held to conduct the general 
administration of the organization are allowable.
    26. Memberships, subscriptions, and professional activity costs.
    a. Costs of the organization's membership in civic, business, 
technical and professional organizations are allowable.
    b. Costs of the organization's subscriptions to civic, business, 
professional, and technical periodicals are allowable.
    c. Costs of attendance at meetings and conferences sponsored by 
others when the primary purpose is the dissemination of technical 
information are allowable. This includes costs of meals, 
transportation, and other items incidental to such attendance.
    27. Organization costs. Expenditures, such as incorporation fees, 
brokers' fees, fees to promoters, organizers or management consultants, 
attorneys, accountants, or investment counselors, whether or not 
employees of the organization, in connection with establishment or 
reorganization of an organization, are unallowable except with prior 
approval of the awarding agency.
    28. Overtime, extra-pay shift, and multi-shift premiums. Premiums 
for overtime, extra-pay shifts, and multi-shift work are allowable only 
with the

[[Page 26590]]

prior approval of the awarding agency except:
    a. When necessary to cope with emergencies, such as those resulting 
from accidents, natural disasters, breakdowns of equipment, or 
occasional operational bottlenecks of a sporadic nature.
    b. When employees are performing indirect functions, such as 
administration, maintenance, or accounting.
    c. In the performance of tests, laboratory procedures, or other 
similar operations which are continuous in nature and cannot reasonably 
be interrupted or otherwise completed.
    d. When lower overall cost to the Federal Government will result.
    29. Page charges in professional journals. Page charges for 
professional journal publications are allowable as a necessary part of 
research costs, where:
    a. The research papers report work supported by the Federal 
Government; and
    b. The charges are levied impartially on all research papers 
published by the journal, whether or not by federally-sponsored 
authors.
    30. Participant support costs. Participant support costs are direct 
costs for items such as stipends or subsistence allowances, travel 
allowances, and registration fees paid to or on behalf of participants 
or trainees (but not employees) in connection with meetings, 
conferences, symposia, or training projects. These costs are allowable 
with the prior approval of the awarding agency.
    31. Patent costs.
    a. Costs of (i) preparing disclosures, reports, and other documents 
required by the award and of searching the art to the extent necessary 
to make such disclosures, (ii) preparing documents and any other patent 
costs in connection with the filing and prosecution of a United States 
patent application where title or royalty-free license is required by 
the Federal Government to be conveyed to the Federal Government, and 
(iii) general counseling services relating to patent and copyright 
matters, such as advice on patent and copyright laws, regulations, 
clauses, and employee agreements are allowable (but see paragraph 35).
    b. Cost of preparing disclosures, reports, and other documents and 
of searching the art to the extent necessary to make disclosures, if 
not required by the award, are unallowable. Costs in connection with 
(i) filing and prosecuting any foreign patent application, or (ii) any 
United States patent application, where the award does not require 
conveying title or a royalty-free license to the Federal Government, 
are unallowable (also see paragraph 44).
    32. Pension plans. See subparagraph 6.g.
    33. Plant security costs. Necessary expenses incurred to comply 
with Federal security requirements or for facilities protection, 
including wages, uniforms, and equipment of personnel are allowable.
    34. Pre-award costs. Pre-award costs are those incurred prior to 
the effective date of the award directly pursuant to the negotiation 
and in anticipation of the award where such costs are necessary to 
comply with the proposed delivery schedule or period of performance. 
Such costs are allowable only to the extent that they would have been 
allowable if incurred after the date of the award and only with the 
written approval of the awarding agency.
    35. Professional service costs.
    a. Costs of professional and consultant services rendered by 
persons who are members of a particular profession or possess a special 
skill, and who are not officers or employees of the organization, are 
allowable, subject to subparagraphs b, c, and d when reasonable in 
relation to the services rendered and when not contingent upon recovery 
of the costs from the Federal Government.
    b. In determining the allowability of costs in a particular case, 
no single factor or any special combination of factors is necessarily 
determinative. However, the following factors are relevant:
    (1) The nature and scope of the service rendered in relation to the 
service required.
    (2) The necessity of contracting for the service, considering the 
organization's capability in the particular area.
    (3) The past pattern of such costs, particularly in the years prior 
to Federal awards.
    (4) The impact of Federal awards on the organization's business 
(i.e., what new problems have arisen).
    (5) Whether the proportion of Federal work to the organization's 
total business is such as to influence the organization in favor of 
incurring the cost, particularly where the services rendered are not of 
a continuing nature and have little relationship to work under Federal 
grants and contracts.
    (6) Whether the service can be performed more economically by 
direct employment rather than contracting.
    (7) The qualifications of the individual or concern rendering the 
service and the customary fees charged, especially on non-Federal 
awards.
    (8) Adequacy of the contractual agreement for the service (e.g., 
description of the service, estimate of time required, rate of 
compensation, and termination provisions).
    c. In addition to the factors in subparagraph b, retainer fees to 
be allowable must be supported by evidence of bona fide services 
available or rendered.
    d. Cost of legal, accounting, and consulting services, and related 
costs incurred in connection with defense of antitrust suits, and the 
prosecution of claims against the Federal Government, are unallowable. 
Costs of legal, accounting and consulting services, and related costs, 
incurred in connection with patent infringement litigation, 
organization and reorganization, are unallowable unless otherwise 
provided for in the award (but see subparagraph 48.e).
    36. Profits and losses on disposition of depreciable property or 
other capital assets.
    a. (1) Gains and losses on sale, retirement, or other disposition 
of depreciable property shall be included in the year in which they 
occur as credits or charges to cost grouping(s) in which the 
depreciation applicable to such property was included. The amount of 
the gain or loss to be included as a credit or charge to the 
appropriate cost grouping(s) shall be the difference between the amount 
realized on the property and the undepreciated basis of the property.
    (2) Gains and losses on the disposition of depreciable property 
shall not be recognized as a separate credit or charge under the 
following conditions:
    (a) The gain or loss is processed through a depreciation reserve 
account and is reflected in the depreciation allowable under paragraph 
9.
    (b) The property is given in exchange as part of the purchase price 
of a similar item and the gain or loss is taken into account in 
determining the depreciation cost basis of the new item.
    (c) A loss results from the failure to maintain permissible 
insurance, except as otherwise provided in subparagraph 18.a(3).
    (d) Compensation for the use of the property was provided through 
use allowances in lieu of depreciation in accordance with paragraph 9.
    (e) Gains and losses arising from mass or extraordinary sales, 
retirements, or other dispositions shall be considered on a case-by-
case basis.
    b. Gains or losses of any nature arising from the sale or exchange 
of property other than the property covered in subparagraph a shall be 
excluded in computing award costs.

[[Page 26591]]

    37. Public information service costs.
    a. Public information service costs include the costs associated 
with pamphlets, news releases, and other forms of information services. 
Such costs are normally incurred to:
    (1) Inform or instruct individuals, groups, or the general public.
    (2) Interest individuals or groups in participating in a service 
program of the organization.
    (3) Disseminate the results of sponsored and nonsponsored 
activities.
    b. Public information service costs are allowable as direct costs 
with the prior approval of the awarding agency. Such costs are 
unallowable as indirect costs.
    38. Publication and printing costs.
    a. Publication costs include the costs of printing (including the 
processes of composition, plate-making, press work, binding, and the 
end products produced by such processes), distribution, promotion, 
mailing, and general handling.
    b. If these costs are not identifiable with a particular cost 
objective, they should be allocated as indirect costs to all benefiting 
activities of the organization.
    c. Publication and printing costs are unallowable as direct costs 
except with the prior approval of the awarding agency.
    d. The cost of page charges in journals is addressed in paragraph 
29.
    39. Rearrangement and alteration costs. Costs incurred for ordinary 
or normal rearrangement and alteration of facilities are allowable. 
Special arrangement and alteration costs incurred specifically for the 
project are allowable with the prior approval of the awarding agency.
    40. Reconversion costs. Costs incurred in the restoration or 
rehabilitation of the organization's facilities to approximately the 
same condition existing immediately prior to commencement of Federal 
awards, fair wear and tear excepted, are allowable.
    41. Recruiting costs. The following recruiting costs are allowable: 
cost of ``help wanted'' advertising, operating costs of an employment 
office, costs of operating an educational testing program, travel 
expenses including food and lodging 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 (see subparagraph 42.c). Where the 
organization uses employment agencies, costs not in excess of standard 
commercial rates for such services are allowable.
    42. Relocation costs.
    a. Relocation costs are costs incident to the permanent change of 
duty assignment (for an indefinite period or for a stated period of not 
less than 12 months) of an existing employee or upon recruitment of a 
new employee. Relocation costs are allowable, subject to the limitation 
described in subparagraphs b, c, and d, provided that:
    (1) The move is for the benefit of the employer.
    (2) Reimbursement to the employee is in accordance with an 
established written policy consistently followed by the employer.
    (3) The reimbursement does not exceed the employee's actual (or 
reasonably estimated) expenses.
    b. Allowable relocation costs for current employees are limited to 
the following:
    (1) The costs of transportation of the employee, members of his 
immediate family and his household, and personal effects to the new 
location.
    (2) The costs of finding a new home, such as advance trips by 
employees and spouses to locate living quarters and temporary lodging 
during the transition period, up to maximum period of 30 days, 
including advance trip time.
    (3) Closing costs, such as brokerage, legal, and appraisal fees, 
incident to the disposition of the employee's former home. These costs, 
together with those described in (4), are limited to 8 per cent of the 
sales price of the employee's former home.
    (4) The continuing costs of ownership of the vacant former home 
after the settlement or lease date of the employee's new permanent 
home, such as maintenance of buildings and grounds (exclusive of fixing 
up expenses), utilities, taxes, and property insurance.
    (5) Other necessary and reasonable expenses normally incident to 
relocation, such as the costs of canceling an unexpired lease, 
disconnecting and reinstalling household appliances, and purchasing 
insurance against loss of or damages to personal property. The cost of 
canceling an unexpired lease is limited to three times the monthly 
rental.
    c. Allowable relocation costs for new employees are limited to 
those described in (1) and (2) of subparagraph b. When relocation costs 
incurred incident to the recruitment of new employees have been allowed 
either as a direct or indirect cost and the employee resigns for 
reasons within his control within 12 months after hire, the 
organization shall refund or credit the Federal Government for its 
share of the cost. However, the costs of travel to an overseas location 
shall be considered travel costs in accordance with paragraph 51 and 
not relocation costs for the purpose of this paragraph if dependents 
are not permitted at the location for any reason and the costs do not 
include costs of transporting household goods.
    d. The following costs related to relocation are unallowable:
    (1) Fees and other costs associated with acquiring a new home.
    (2) A loss on the sale of a former home.
    (3) Continuing mortgage principal and interest payments on a home 
being sold.
    (4) Income taxes paid by an employee related to reimbursed 
relocation costs.
    43. Rental costs.
    a. Subject to the limitations described in subparagraphs b through 
d, rental costs are allowable to the extent that the rates are 
reasonable in light of such factors as: rental costs of comparable 
property, if any; market conditions in the area; alternatives 
available; and the type, life expectancy, condition, and value of the 
property leased.
    b. Rental costs under sale and leaseback arrangements are allowable 
only up to the amount that would be allowed had the organization 
continued to own the property.
    c. Rental costs under less-than-arms-length leases are allowable 
only up to the amount that would be allowed had title to the property 
vested in the organization. For this purpose, a less-than-arms-length 
lease is one under which one party to the lease agreement is able to 
control or substantially influence the actions of the other. Such 
leases include, but are not limited to those between (i) divisions of 
an organization; (ii) organizations under common control through common 
officers, directors, or members; and (iii) an organization and a 
director, trustee, officer, or key employee of the organization or his 
immediate family either directly or through corporations, trusts, or 
similar arrangements in which they hold a controlling interest.
    d. Rental costs under leases which are required to be treated as 
capital leases under GAAP, are allowable only up to the amount that 
would be allowed had the organization purchased the property on the 
date the lease agreement was executed, i.e., to the amount that 
minimally would pay for depreciation or use allowances, maintenance, 
taxes, and insurance. Interest costs related to capitalized leases are 
allowable to the extent they meet criteria in subparagraph 19.a. 
Unallowable costs include amounts paid for profit, management fees, and 
taxes that would

[[Page 26592]]

not have been incurred had the organization purchased the facility.
    44. Royalties and other costs for use of patents and copyrights.
    a. Royalties on a patent or copyright or amortization of the cost 
of acquiring by purchase a copyright, patent, or rights thereto, 
necessary for the proper performance of the award are allowable unless:
    (1) The Federal Government has a license or the right to free use 
of the patent or copyright.
    (2) The patent or copyright has been adjudicated to be invalid, or 
has been administratively determined to be invalid.
    (3) The patent or copyright is considered to be unenforceable.
    (4) The patent or copyright is expired.
    b. Special care should be exercised in determining reasonableness 
where the royalties may have arrived at as a result of less-than-arm's-
length bargaining, e.g.:
    (1) Royalties paid to persons, including corporations, affiliated 
with the organization.
    (2) Royalties paid to unaffiliated parties, including corporations, 
under an agreement entered into in contemplation that a Federal award 
would be made.
    (3) Royalties paid under an agreement entered into after an award 
is made to an organization.
    c. In any case involving a patent or copyright formerly owned by 
the organization, the amount of royalty allowed should not exceed the 
cost which would have been allowed had the organization retained title 
thereto.
    45. Severance pay.
    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, it is required by 
(i) law, (ii) employer-employee agreement, (iii) established policy 
that constitutes, in effect, an implied agreement on the organization's 
part, or (iv) circumstances of the particular employment.
    b. Costs of severance payments are divided into two categories as 
follows:
    (1) Actual normal turnover severance payments shall be allocated to 
all activities; or, where the organization provides for a reserve for 
normal severances, such method will be acceptable if the charge to 
current operations is reasonable in light of payments actually made for 
normal severances over a representative past period, and if amounts 
charged are allocated to all activities of the organization.
    (2) Abnormal or mass severance pay is of such a conjectural nature 
that measurement of costs by means of an accrual will not achieve 
equity to both parties. Thus, accruals for this purpose are not 
allowable. However, the Federal Government recognizes its obligation to 
participate, to the extent of its fair share, in any specific payment. 
Thus, allowability will be considered on a case-by-case basis in the 
event or occurrence.
    46. Specialized service facilities.
    a. The costs of services provided by highly complex or specialized 
facilities operated by the organization, such as electronic computers 
and wind tunnels, are allowable, provided the charges for the services 
meet the conditions of either subparagraph b or c and, in addition, 
take into account any items of income or Federal financing that qualify 
as applicable credits under subparagraph A.5 of Attachment A.
    b. The costs of such services, when material, must be charged 
directly to applicable awards based on actual usage of the services on 
the basis of a schedule of rates or established methodology that (i) 
does not discriminate against federally-supported activities of the 
organization, including usage by the organization for internal 
purposes, and (ii) is designed to recover only the aggregate costs of 
the services. The costs of each service shall consist normally of both 
its direct costs and its allocable share of all indirect costs. Advance 
agreements pursuant to subparagraph A.6 of Attachment A are 
particularly important in this situation.
    c. Where the costs incurred for a service are not material, they 
may be allocated as indirect costs.
    47. Taxes.
    a. In general, taxes which the organization is required to pay and 
which are paid or accrued in accordance with GAAP, and payments made to 
local governments in lieu of taxes which are commensurate with the 
local government services received are allowable, except for (i) Taxes 
from which exemptions are available to the organization directly or 
which are available to the organization based on an exemption afforded 
the Federal Government and in the latter case when the awarding agency 
makes available the necessary exemption certificates, (ii) special 
assessments on land which represent capital improvements, and (iii) 
Federal income taxes.
    b. Any refund of taxes, and any payment to the organization of 
interest thereon, which were allowed as award costs, will be credited 
either as a cost reduction or cash refund, as appropriate, to the 
Federal Government.
    48. Termination costs. Termination of awards generally give rise to 
the incurrence of costs, or the need for special treatment of costs, 
which would not have arisen had the award not been terminated. Cost 
principles covering these items are set forth below. They are to be 
used in conjunction with the other provisions of this Circular in 
termination situations.
    a. Common items. The cost of items reasonably usable on the 
organization's other work shall not be allowable unless the 
organization submits evidence that it would not retain such items at 
cost without sustaining a loss. In deciding whether such items are 
reasonably usable on other work of the organization, the awarding 
agency should consider the organization's plans and orders for current 
and scheduled activity. Contemporaneous purchases of common items by 
the organization shall be regarded as evidence that such items are 
reasonably usable on the organization's other work. Any acceptance of 
common items as allocable to the terminated portion of the award shall 
be limited to the extent that the quantities of such items on hand, in 
transit, and on order are in excess of the reasonable quantitative 
requirements of other work.
    b. Costs continuing after termination. If in a particular case, 
despite all reasonable efforts by the organization, certain costs 
cannot be discontinued immediately after the effective date of 
termination, such costs are generally allowable within the limitations 
set forth in this Circular, except that any such costs continuing after 
termination due to the negligent or willful failure of the organization 
to discontinue such costs shall be unallowable.
    c. Loss of useful value. Loss of useful value of special tooling, 
machinery and equipment which was not charged to the award as a capital 
expenditure is generally allowable if:
    (1) Such special tooling, machinery, or equipment is not reasonably 
capable of use in the other work of the organization.
    (2) The interest of the Federal Government is protected by transfer 
of title or by other means deemed appropriate by the awarding agency;
    d. Rental costs. Rental costs under unexpired leases are generally 
allowable where clearly shown to have been reasonably necessary for the 
performance of the terminated award less the residual value of such 
leases, if (i) the amount of such rental claimed does not exceed the 
reasonable use value of the property leased for the

[[Page 26593]]

period of the award and such further period as may be reasonable, and 
(ii) the organization makes all reasonable efforts to terminate, 
assign, settle, or otherwise reduce the cost of such lease. There also 
may be included the cost of alterations of such leased property, 
provided such alterations were necessary for the performance of the 
award, and of reasonable restoration required by the provisions of the 
lease.
    e. Settlement expenses. Settlement expenses including the following 
are generally allowable:
    (1) Accounting, legal, clerical, and similar costs reasonably 
necessary for:
    (a) The preparation and presentation to awarding agency of 
settlement claims and supporting data with respect to the terminated 
portion of the award, unless the termination is for default (see Sec. 
__.61 of Circular A-110); and
    (b) The termination and settlement of subawards.
    (2) Reasonable costs for the storage, transportation, protection, 
and disposition of property provided by the Federal Government or 
acquired or produced for the award, except when grantees or contractors 
are reimbursed for disposals at a predetermined amount in accordance 
with Sec. __.30 through __.37 of Circular A-110.
    (3) Indirect costs related to salaries and wages incurred as 
settlement expenses in subparagraphs (1) and (2). Normally, such 
indirect costs shall be limited to fringe benefits, occupancy cost, and 
immediate supervision.
    f. Claims under subawards. Claims under subawards, including the 
allocable portion of claims which are common to the award, and to other 
work of the organization are generally allowable. An appropriate share 
of the organization's indirect expense may be allocated to the amount 
of settlements with subcontractors and/or subgrantees, provided that 
the amount allocated is otherwise consistent with the basic guidelines 
contained in Attachment A. The indirect expense so allocated shall 
exclude the same and similar costs claimed directly or indirectly as 
settlement expenses.
    49. Training and education costs.
    a. Costs of preparation and maintenance of a program of instruction 
including but not limited to on-the-job, classroom, and apprenticeship 
training, designed to increase the vocational effectiveness of 
employees, including training materials, textbooks, salaries or wages 
of trainees (excluding overtime compensation which might arise 
therefrom), and (i) salaries of the director of training and staff when 
the training program is conducted by the organization; or (ii) tuition 
and fees when the training is in an institution not operated by the 
organization, are allowable.
    b. Costs of part-time education, at an undergraduate or post-
graduate college level, including that provided at the organization's 
own facilities, are allowable only when the course or degree pursued is 
relative to the field in which the employee is now working or may 
reasonably be expected to work, and are limited to:
    (1) Training materials.
    (2) Textbooks.
    (3) Fees charges by the educational institution.
    (4) Tuition charged by the educational institution or, in lieu of 
tuition, instructors' salaries and the related share of indirect costs 
of the educational institution to the extent that the sum thereof is 
not in excess of the tuition which would have been paid to the 
participating educational institution.
    (5) Salaries and related costs of instructors who are employees of 
the organization.
    (6) Straight-time compensation of each employee for time spent 
attending classes during working hours not in excess of 156 hours per 
year and only to the extent that circumstances do not permit the 
operation of classes or attendance at classes after regular working 
hours; otherwise, such compensation is unallowable.
    c. Costs of tuition, fees, training materials, and textbooks (but 
not subsistence, salary, or any other emoluments) in connection with 
full-time education, including that provided at the organization's own 
facilities, at a post-graduate (but not undergraduate) college level, 
are allowable only when the course or degree pursued is related to the 
field in which the employee is now working or may reasonably be 
expected to work, and only where the costs receive the prior approval 
of the awarding agency. Such costs are limited to the costs 
attributable to a total period not to exceed one school year for each 
employee so trained. In unusual cases the period may be extended.
    d. Costs of attendance of up to 16 weeks per employee per year at 
specialized programs specifically designed to enhance the effectiveness 
of executives or managers or to prepare employees for such positions 
are allowable. Such costs include enrollment fees, training materials, 
textbooks and related charges, employees' salaries, subsistence, and 
travel. Costs allowable under this paragraph do not include those for 
courses that are part of a degree-oriented curriculum, which are 
allowable only to the extent set forth in subparagraphs b and c.
    e. Maintenance expense, and normal depreciation or fair rental, on 
facilities owned or leased by the organization for training purposes 
are allowable to the extent set forth in paragraphs 9, 23, and 43.
    f. Contributions or donations to educational or training 
institutions, including the donation of facilities or other properties, 
and scholarships or fellowships, are unallowable.
    g. Training and education costs in excess of those otherwise 
allowable under subparagraphs b and c may be allowed with prior 
approval of the awarding agency. To be considered for approval, the 
organization must demonstrate that such costs are consistently incurred 
pursuant to an established training and education program, and that the 
course or degree pursued is relative to the field in which the employee 
is now working or may reasonably be expected to work.
    50. Transportation costs. Transportation costs include freight, 
express, cartage, and postage charges relating either to goods 
purchased, in process, or delivered. These costs are allowable. When 
such costs can readily be identified with the items involved, they may 
be directly charged as transportation costs or added to the cost of 
such items (see paragraph 24). Where identification with the materials 
received cannot readily be made, transportation costs may be charged to 
the appropriate indirect cost accounts if the organization follows a 
consistent, equitable procedure in this respect.
    51. Travel costs.
    a. Travel costs are the expenses for transportation, lodging, 
subsistence, and related items incurred by employees who are in travel 
status on official business of the organization. Travel costs are 
allowable subject to subparagraphs b through e, when they are directly 
attributable to specific work under an award or are incurred in the 
normal course of administration of the organization.
    b. Such costs may be charged on an actual basis, on a per diem or 
mileage basis in lieu of actual costs incurred, or on a combination of 
the two, provided the method used results in charges consistent with 
those normally allowed by the organization in its regular operations.
    c. The difference in cost between first-class air accommodations 
and less than first-class air accommodations is unallowable except when 
less than first-class air accommodations are not reasonably available 
to meet necessary mission requirements, such as where

[[Page 26594]]

less than first-class accommodations would (i) require circuitous 
routing, (ii) require travel during unreasonable hours, (iii) greatly 
increase the duration of the flight, (iv) result in additional costs 
which would offset the transportation savings, or (v) offer 
accommodations which are not reasonably adequate for the medical needs 
of the traveler.
    d. Necessary and reasonable costs of family movements and personnel 
movements of a special or mass nature are allowable, pursuant to 
paragraphs 41 and 42, subject to allocation on the basis of work or 
time period benefited when appropriate. Advance agreements are 
particularly important.
    e. Direct charges for foreign travel costs are allowable only when 
the travel has received prior approval of the awarding agency. Each 
separate foreign trip must be approved. For purposes of this provision, 
foreign travel is defined as any travel outside of Canada and the 
United States and its territories and possessions. However, for an 
organization located in foreign countries, the term ``foreign travel'' 
means travel outside that country.
Circular No. A-122

Attachment C--Non-Profit Organizations Not Subject to This Circular

Aerospace Corporation, El Segundo, California
Argonne Universities Association, Chicago, Illinois
Associated Universities, Incorporated, Washington, D.C.
Associated Universities for Research and Astronomy, Tucson, Arizona
Atomic Casualty Commission, Washington, D.C.
Battelle Memorial Institute, Headquartered in Columbus, Ohio
Brookhaven National Laboratory, Upton, New York
Center for Energy and Environmental Research (CEER), (University of 
Puerto Rico), Commonwealth of Puerto Rico
Charles Stark Draper Laboratory, Incorporated, Cambridge, Massachusetts
Comparative Animal Research Laboratory (CARL), (University of 
Tennessee), Oak Ridge, Tennessee
Environmental Institute of Michigan, Ann Arbor, Michigan
Hanford Environmental Health Foundation, Richland, Washington
IIT Research Institute, Chicago, Illinois
Institute for Defense Analysis, Arlington, Virginia
Institute of Gas Technology, Chicago, Illinois
Midwest Research Institute, Headquartered in Kansas City, Missouri
Mitre Corporation, Bedford, Massachusetts
Montana Energy Research and Development Institute, Inc. (MERDI), Butte, 
Montana
National Radiological Astronomy Observatory, Green Bank, West Virginia
Oak Ridge Associated Universities, Oak Ridge, Tennessee
Project Management Corporation, Oak Ridge, Tennessee
Rand Corporation, Santa Monica, California
Research Triangle Institute, Research Triangle Park, North Carolina
Riverside Research Institute, New York, New York
Sandia Corporation, Albuquerque, New Mexico
Southern Research Institute, Birmingham, Alabama
Southwest Research Institute, San Antonio, Texas
SRI International, Menlo Park, California
Syracuse Research Corporation, Syracuse, New York
Universities Research Association, Incorporated (National Acceleration 
Lab), Argonne, Illinois
Universities Corporation for Atmospheric Research, Boulder, Colorado
Non-profit insurance companies, such as Blue Cross and Blue Shield 
Organizations
Other non-profit organizations as negotiated with awarding agencies

[FR Doc. 97-12683 Filed 5-13-97; 8:45 am]
BILLING CODE 3110-01-P