[Federal Register Volume 69, Number 90 (Monday, May 10, 2004)]
[Notices]
[Pages 25970-25995]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-10350]



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Part III





Office of Management and Budget





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Cost Principles for Educational Institutions; State, Local, and Indian 
Tribal Governments; and Non-Profit Organizations; Notice

  Federal Register / Vol. 69, No. 90 / Monday, May 10, 2004 / Notices  

[[Page 25970]]


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OFFICE OF MANAGEMENT AND BUDGET


Cost Principles for Educational Institutions; State, Local, and 
Indian Tribal Governments; and Non-Profit Organizations

AGENCY: Office of Management and Budget.

ACTION: Revisions to OMB Circulars A-21, A-87 and A-122.

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SUMMARY: The Office of Management and Budget (OMB) amends the cost 
principles in OMB Circulars A-21, A-87 and A-122. These changes are 
intended to further the objectives of Public Law 106-107, the Federal 
Financial Assistance Management Improvement Act, (``the Act''). One of 
the actions taken by the agencies under the Act was to simplify the 
cost principles, making the descriptions of similar cost items 
consistent across the Circulars where possible, and reducing the 
possibility of misinterpretation.

DATES: These final cost principles are effective June 9, 2004.

ADDRESSES: OMB intends to keep these cost principles current with 
changes in laws, modifications to accounting standards and advances in 
technology. If you have comments on ways to improve these principles, 
please submit your comments to Gilbert Tran, Office of Federal 
Financial Management, Office of Management and Budget, 725 17th Street, 
NW., Room 6025, Washington 20503. Due to potential delays in OMB's 
receipt and processing of mail sent thru the U.S. Postal Service, we 
encourage you to submit comments electronically to [email protected] with your name, title, organization and postal address 
in the text of the message. You may also submit comments via facsimile 
by sending your comment to (202) 395-4915.

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

SUPPLEMENTARY INFORMATION:

Background

    The background for this effort was fully described in the preamble 
to the proposed changes to the circulars, published in the Federal 
Register on August 12, 2002 at 67 FR 52558. Briefly, the Federal 
Financial Assistance Management Improvement Act of 1999 (Pub. L. 106-
107, ``the Act'') directs the Office of Management and Budget (OMB) and 
executive branch agencies to simplify and consolidate requirements and 
procedures for the receipt and administration of financial assistance. 
Federal financial assistance includes grants, cooperative agreements, 
loans, loan guarantees, scholarships, and other forms of assistance. 
The grant and cooperative agreement portion of Federal financial 
assistance, hereafter referred as ``grants,'' involves more than 600 
programs, with awards of more than $400 billion a year, administered by 
26 Federal agencies.
    Grant recipients deal with increasingly complex problems that 
require the delivery and coordination of many kinds of services. The 
support for these services increasingly comes from more than one 
Federal agency. Grant recipients' need to respond to the numerous 
Federal grant administration requirements of these agencies and 
programs only adds to that complexity.
    OMB, working with the Department of Health and Human Services as 
lead agency and the Chief Financial Officers' Council, established an 
interagency group charged with reviewing the cost principles in Office 
of Management and Budget Circulars A-21 (A-21), Cost Principles for 
Educational Institutions, A-87 (A-87), Cost Principles for State, Local 
and Indian Tribal Governments, and A-122 (A-122), Cost Principles for 
Non-Profit Organizations. The goal of this group is to ensure that the 
cost principles in OMB Circulars A-21, A-87, and A-122 are current, 
consistent, and appropriate for covered recipients. The objectives of 
the group are to make the descriptions of similar cost items 
consistent, across the Circulars, where possible, and reduce the 
possibility of misinterpretation by clarifying existing policies rather 
than by adding restrictions or modifying current requirements.

Presentation of the Circulars

    When we proposed the changes to the three circulars, we posted them 
on the OMB Web site (http://www.omb.gov) as a chart so that readers 
could easily compare the changes to the selected items of cost among 
the three circulars. We will again post a chart that displays the final 
revisions to the cost items across the three circulars so readers could 
easily compare the final outcomes to the circulars. In this Federal 
Register notice, we set out the specific changes to the selected items 
of cost of the three circulars separately. In addition, we will post on 
the OMB Web site the revised versions of the three circulars so that 
each community can see the final revisions incorporated into each cost 
principle circular.

Items for Future Consideration

    In addition to comments on the proposed items, we received various 
comments for improvement to the circulars that were not included in our 
original proposal. We appreciated these comments. However, these 
recommendations are beyond the scope of the current project. We will 
consider them at a later phase of the cost consistency streamlining 
project.

Responses to Comments

    We received 184 comments on the proposal: 147 from universities, 13 
from State and local governments, 8 from Federal agencies, 4 from not-
for-profit organizations and 12 other individuals and entities.
    We have reviewed and given consideration to each comment in light 
of the overall objectives and goals of the project. Many comments 
resulted in changes in the proposed language while other comments 
resulted in the withdrawal of certain proposals. We believe that the 
final revisions accomplished our stated objectives to simplify the cost 
principles, making the description of similar items consistent and 
reducing the possibility of misunderstanding.
    In summary, we made revisions to our proposed language for 24 cost 
items and withdrew proposed language for 6 cost items. Forty-five of 
the proposed changes are made final as proposed. The following chart 
summarizes the final actions to the proposed items. The detailed 
discussion of the comments and how those comments were resolved are 
presented on the OMB Web site along with the revised circulars and the 
final comparison chart. See http://www.omb.gov.

    Dated: April 29, 2004.
Joshua B. Bolten,
Director.

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                                                             Adopted as         Adopted as          Proposal
    Cost items in 3 circulars            Proposal             proposed           amended           withdrawn
----------------------------------------------------------------------------------------------------------------
1. Advertising and public          Consistent language   .................  X                  .................
 relations.                         across all 3
                                    circulars.
2. Alcoholic beverages...........  No proposed change..  .................  .................  X
3. Bad debts.....................  Consistent language   .................  X                  .................
                                    across all 3
                                    circulars.

[[Page 25971]]

 
4. Communication costs...........  Consistent language   .................  X                  .................
                                    across all 3
                                    circulars.
5. Compensation for personal       Various relocation    X                  .................  .................
 services.                          of cost items into
                                    this section.
6. Contingency provisions........  Consistent language   .................  X                  .................
                                    across all 3
                                    circulars.
7. Donations and contributions...  Consistent language   .................  X                  .................
                                    across all 3
                                    circulars.
8. Defense and prosecution of      No proposed change..  X                  .................  .................
 criminal and civil proceedings,
 claims, appeals and patent
 infringement.
9. Depreciation and use            Consistent language   .................  X                  .................
 allowances.                        across all 3
                                    circulars.
10. Employee morale, health, and   Consistent language   X                  .................  .................
 welfare costs.                     across all 3
                                    circulars.
11. Entertainment costs..........  Consistent language   X                  .................  .................
                                    across all 3
                                    circulars.
12. Equipment and other capital    Consistent language   .................  X                  .................
 expenditures.                      across all 3
                                    circulars.
13. Fines and penalties..........  Consistent language   X                  .................  .................
                                    across all 3
                                    circulars.
14. (Interest), Fund raising and   Consistent language   .................  .................  X
 investment management costs.       across all 3
                                    circulars.
15. Insurance and indemnification  No proposed change..  X                  .................  .................
16. Interest.....................  Consistent language   .................  X                  .................
                                    across all 3
                                    circulars.
17. Gain and losses on             No proposed change..  X                  .................  .................
 depreciable assets.
18. Profits and losses on          Rename to ``Gain and  X                  .................  .................
 disposition of plant, equipment    losses on
 or other capital assets.           depreciable
                                    assets'' in all 3
                                    circulars.
19. Lobbying.....................  No proposed change..  X                  .................  .................
20. Losses on other sponsored      No proposed change..  X                  .................  .................
 agreements or contracts.
21. Maintenance and repair costs.  Consistent language   .................   X                 .................
                                    across all 3
                                    circulars.
22. Material costs...............  Consistent language   .................  X                  .................
                                    across all 3
                                    circulars.
23. Memberships, subscriptions     Consistent language   X                  .................  .................
 and professional activity costs.   across all 3
                                    circulars.
24. Pre-agreement costs..........  Consistent language   .................  .................  X
                                    across all 3
                                    circulars.
25. Professional service costs...  Consistent language   X                  .................  .................
                                    across all 3
                                    circulars.
26. Rearrangement and alteration   Revised language to   X                  .................  .................
 costs.                             A-21.
27. Reconversion costs...........  Consistent language   X                  .................  .................
                                    across all 3
                                    circulars.
28. Rental costs of buildings and  Consistent language   .................  X                  .................
 equipment.                         across all 3
                                    circulars.
29. Taxes........................  No proposed change..  X                  .................  .................
30. Travel costs.................  Consistent language   .................  X                  .................
                                    across all 3
                                    circulars.
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                                                             Adopted as         Adopted as          Proposal
 Cost items in only two circulars        Proposal             proposed           amended           withdrawn
----------------------------------------------------------------------------------------------------------------
1. Bonding costs.................  Consistent language   X                  .................  .................
                                    across all 3
                                    circulars.
2. Goods or services for personal  Consistent language   .................  X                  .................
 use.                               across all 3
                                    circulars.
3. Housing and personal living     No proposed change..  X                  .................  .................
 expenses.
4. Idle facilities and idle        Consistent language   .................  X                  .................
 capacity.                          across all 3
                                    circulars.
5. Labor relations costs.........  No proposed change..  X                  .................  .................
6. Patent costs..................  Consistent language   .................  X                  .................
                                    across all 3
                                    circulars.
7. Plant security costs..........  Consistent language   .................  X                  .................
                                    across all 3
                                    circulars.
8. Proposal costs................  No proposed change..  X                  .................  .................
9. Publication and printing costs  Consistent language   .................  X                  .................
                                    across all 3
                                    circulars.
10. Recruiting costs.............  Consistent language   .................  .................  X
                                    across all 3
                                    circulars.
11. Royalties and other costs for  Consistent language   X                  .................  .................
 use of patents.                    across all 3
                                    circulars.
12. Selling and marketing........  Consistent language   X                  .................  .................
                                    across all 3
                                    circulars.
13. Severance pay................  Relocate to the       X                  .................  .................
                                    ``Compensation for
                                    personal services''
                                    part of A-21 and A-
                                    122.
14. Specialized service            Consistent language   .................  X                  .................
 facilities.                        to A-21 and A-122.
15. Termination costs applicable   Consistent language   .................  X                  .................
 to sponsored agreements.           across all 3
                                    circulars.
16. Training.....................  Consistent language   .................  X                  .................
                                    across all 3
                                    circulars.
17. Transportation costs.........  No proposed change..  X                  .................  .................
18. Trustees.....................  No proposed change..  X                  .................  .................
----------------------------------------------------------------------------------------------------------------


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                                                             Adopted as         Adopted as          Proposal
 Cost items in only one circular         Proposal             proposed           amended           withdrawn
----------------------------------------------------------------------------------------------------------------
1. Accounting....................  Deleted.............  X                  .................  .................
2. Advisory Councils.............  Consistent language   X                  .................  .................
                                    across all 3
                                    circulars.
3. Alumni/ae activities..........  No proposed change..  X                  .................  .................
4. Audit costs and related         Consistent language   .................  X                  .................
 services.                          across all 3
                                    circulars.
5. Automatic electronic data       Deleted.............  X                  .................  .................
 processing.
6. Bid and Proposal costs........  Deleted.............  X                  .................  .................
7. Budgeting.....................  Deleted.............  X                  .................  .................
8. Civil defense costs...........  Deleted.............  .................  X                  .................

[[Page 25972]]

 
9. Commencement and convocation    No proposed change..  X                  .................  .................
 costs.
10. Deans of faculty and graduate  No proposed change..  X                  .................  .................
 schools.
11. Disbursing service...........  Deleted.............  X                  .................  .................
12. Executive lobbying costs.....  Consistent language   X                  .................  .................
                                    across all 3
                                    circulars under
                                    ``lobbying''.
13. Fringe benefits..............  Deleted.............  X                  .................  .................
14. General government expenses..  Revised language for  X                  .................  .................
                                    A-87.
15. Independent research and       Deleted.............  X                  .................  .................
 development.
16. Meeting and Conferences......  Consistent language   .................  X                  .................
                                    across all 3
                                    circulars.
17. Motor pools..................  Deleted.............  X                  .................  .................
18. Organization costs...........  No proposed change..  X                  .................  .................
19. Overtime, extra-pay shift,     Consistent language   .................  .................  X
 and multi shift premiums.          across all 3
                                    circulars.
20. Page charges in professional   Consistent language   .................  X                  .................
 journals.                          across all 3
                                    circulars.
21. Participant support costs....  Consistent language   .................  .................  X
                                    across all 3
                                    circulars.
22. Pension plans................  Deleted.............  X                  .................  .................
23. Relocation costs.............  Consistent language   .................  .................  X
                                    across all 3
                                    circulars.
24. Sabbatical leave costs.......  Relocate under        X                  .................  .................
                                    ``Compensation for
                                    personal services''
                                    of A-21.
25. Scholarships and student aid   Proposed revision     X                  .................  .................
 costs.                             for A-21.
26. Student activity costs.......  No proposed change..  X                  .................  .................
27. Under recovery of costs under  Deleted.............  X                  .................  .................
 Federal agreements.
----------------------------------------------------------------------------------------------------------------

Final Revisions

    We amend Circulars A-21, A-87 and A-122 under the following three 
headings:
A. Amendments to Circular A-21.
B. Amendments to Circular A-87.
C. Amendments to Circular A-122.

A. Amendments to Circular A-21

    1. Revise the table of contents for section J. to read as follows:

J. General provisions for selected items of cost
    1. Advertising and public relations costs
    2. Advisory councils
    3. Alcoholic beverages
    4. Alumni/ae activities
    5. Audit costs and related services
    6. Bad debts
    7. Bonding costs
    8. Commencement and convocation costs
    9. Communication costs
    10. Compensation for personal services
    11. Contingency provisions
    12. Deans of faculty and graduate schools
    13. Defense and prosecution of criminal and civil proceedings, 
claims, appeals and patent infringement
    14. Depreciation and use allowances
    15. Donations and contributions
    16. Employee morale, health, and welfare costs
    17. Entertainment costs
    18. Equipment and other capital expenditures
    19. Fines and penalties
    20. Fundraising
    21. Gains and losses on depreciable assets
    22. Goods or services for personal use
    23. Housing and personal living expenses
    24. Idle facilities and idle capital
    25. Insurance and indemnification
    26. Interest
    27. Labor relations costs
    28. Lobbying
    29. Losses on other sponsored agreements or contracts
    30. Maintenance and repair costs
    31. Material and supplies costs
    32. Meetings and conferences
    33. Memberships, subscriptions and professional activity costs
    34. Patent costs
    35. Plant and Homeland security costs
    36. Pre-agreement costs
    37. Professional service costs
    38. Proposal costs
    39. Publication and printing costs
    40. Rearrangement and alteration costs
    41. Reconversion costs
    42. Recruiting costs
    43. Rental costs of buildings and equipment
    44. Royalties and other costs for use of patents
    45. Scholarships and student aid costs
    46. Selling and marketing
    47. Specialized service facilities
    48. Student activity costs
    49. Taxes
    50. Termination costs applicable to sponsored agreements
    51. Training costs
    52. Transportation costs
    53. Travel costs
    54. Trustees

    2. Redesignate the sections in paragraph J. as follows:
    a. Section J.2. is redesignated as section J.3.
    b. Section J.3. is redesignated as section J.4.
    c. Section J.6. is redesignated as section J.8.
    d. Section J.8. is redesignated as section J.10.
    e. Section J.40. is redesignated as section J.10.h.
    f. Section J.10. is redesignated as section J.12.
    g. Section J.11. is redesignated as section J.13.
    h. Section J.19. is redesignated as section J.22.
    i. Section J.20. is redesignated as section J.23.
    j. Section J.21. is redesignated as section J.25.
    k. Section J.13. is redesignated as section J.27.
    l. Section J.24. is redesignated as section J.28.
    m. Section J.25. is redesignated as section J.29.
    n. Section J.31. is redesignated as section J.36.
    o. Section J.34. is redesignated as section J.38.
    p. Section J.37. is redesignated as section J.42.
    q. Section J.45. is redesignated as section J.48.
    r. Section J.46. is redesignated as section J.49.
    s. Section J.47. is redesignated as section J.52.
    t. Section J.50. is redesignated as section J.54.

    3. Section J.1. is revised to read as follows:
    1. Advertising and public relations costs.
    a. The term advertising costs means the costs of advertising media 
and corollary administrative costs. Advertising media include 
magazines, newspapers, radio and television, direct mail, exhibits, 
electronic or computer transmittals, and the like.
    b. The term public relations includes community relations and means 
those activities dedicated to maintaining the image of the institution 
or maintaining

[[Page 25973]]

or promoting understanding and favorable relations with the community 
or public at large or any segment of the public.
    c. The only allowable advertising costs are those that are solely 
for:
    (1) The recruitment of personnel required for the performance by 
the institution of obligations arising under a sponsored agreement (See 
also subsection b. of section J.42, Recruiting.);
    (2) The procurement of goods and services for the performance of a 
sponsored agreement;
    (3) The disposal of scrap or surplus materials acquired in the 
performance of a sponsored agreement except when institutions are 
reimbursed for disposal costs at a predetermined amount; or
    (4) Other specific purposes necessary to meet the requirements of 
the sponsored agreement.
    d. The only allowable public relations costs are:
    (1) Costs specifically required by the sponsored agreement;
    (2) Costs of communicating with the public and press pertaining to 
specific activities or accomplishments which result from performance of 
sponsored agreements (these costs are considered necessary as part of 
the outreach effort for the sponsored agreement); or
    (3) Costs of conducting general liaison with news media and 
government public relations officers, to the extent that such 
activities are limited to communication and liaison necessary keep the 
public informed on matters of public concern, such as notices of 
Federal contract/grant awards, financial matters, etc.
    e. Costs identified in subsections c and d if incurred for more 
than one sponsored agreement or for both sponsored work and other work 
of the institution, are allowable to the extent that the principles in 
sections D. (``Direct Costs'') and E. (``F & A Costs'') are observed.
    f. Unallowable advertising and public relations costs include the 
following:
    (1) All advertising and public relations costs other than as 
specified in subsections 1.c, 1.d, and 1.e;
    (2) Costs of meetings, conventions, convocations, or other events 
related to other activities of the institution, including:
    (a) Costs of displays, demonstrations, and exhibits;
    (b) Costs of meeting rooms, hospitality suites, and other special 
facilities used in conjunction with shows and other special events; and
    (c) Salaries and wages of employees engaged in setting up and 
displaying exhibits, making demonstrations, and providing briefings;
    (3) Costs of promotional items and memorabilia, including models, 
gifts, and souvenirs;
    (4) Costs of advertising and public relations designed solely to 
promote the institution.
    4. Section J.2. is revised to read as follows:
    2. Advisory councils.
    Costs incurred by advisory councils or committees are allowable as 
a direct cost where authorized by the Federal awarding agency or as an 
indirect cost where allocable to sponsored agreements.
    5. Section J.5. is revised to read as follows:
    5. Audit costs and related services.
    a. The costs of audits required by, and performed in accordance 
with, the Single Audit Act, as implemented by Circular A-133, ``Audits 
of States, Local Governments, and Non-Profit Organizations'' are 
allowable. Also see 31 U.S.C. 7505(b) and section --.230 (``Audit 
Costs'') of Circular A-133.
    b. Other audit costs are allowable if included in an indirect cost 
rate proposal, or if specifically approved by the awarding agency as a 
direct cost to an award.
    c. The cost of agreed-upon procedures engagements to monitor 
subrecipients who are exempted from A-133 under section --.200(d) are 
allowable, subject to the conditions listed in A-133, section 
--.230(b)(2).
    6. Section J.6. is revised to read as follows:
    6. Bad Debts.
    Bad debts, including losses (whether actual or estimated) arising 
from uncollectable accounts and other claims, related collection costs, 
and related legal costs, are unallowable.
    7. Section J.7. is revised to read as follows:
    7. 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 institution. They arise also in instances where 
the institution 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 institution 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.
    8. Section J.9. is revised to read as follows:
    9. Communication costs.
    Costs incurred for telephone services, local and long distance 
telephone calls, telegrams, postage, messenger, electronic or computer 
transmittal services and the like are allowable.
    9. Amend redesignated section J.10. by redesignating former section 
J.10.f.(4) as section J.10.f.(5), adding a new section J.10.f.(4), and 
adding a new section J.10.h. to read as follows:
    10. Compensation for personal services.
* * * * *
    f. Fringe benefits.
* * * * *
    (4) Rules for sabbatical leave are as follows:
    (a) Costs of leave of absence by employees for performance of 
graduate work or sabbatical study, travel, or research are allowable 
provided the institution has a uniform policy on sabbatical leave for 
persons engaged in instruction and persons engaged in research. Such 
costs will be allocated on an equitable basis among all related 
activities of the institution.
    (b) Where sabbatical leave is included in fringe benefits for which 
a cost is determined for assessment as a direct charge, the aggregate 
amount of such assessments applicable to all work of the institution 
during the base period must be reasonable in relation to the 
institution's actual experience under its sabbatical leave policy.
* * * * *
    h. Severance pay.
    (1) Severance pay is compensation in addition to regular salary and 
wages which are paid by an institution to employees whose services are 
being terminated. Costs of severance pay are allowable only to the 
extent that such payments are required by law, by employer-employee 
agreement, by established policy that constitutes in effect an implied 
agreement on the institution's part, or by circumstances of the 
particular employment.
    (2) Severance payments that are due to normal recurring turnover 
and which otherwise meet the conditions of subsection a may be allowed 
provided the actual costs of such severance payments are regarded as 
expenses applicable to the current fiscal year and are equitably 
distributed among the institution's activities during that period.
    (3) Severance payments that are due to abnormal or mass 
terminations are of such conjectural nature that allowability must be 
determined on a case-by-case basis. However, the Federal Government 
recognizes its obligation to participate, to the extent of its fair 
share, in any specific payment.

[[Page 25974]]

    (4) Costs incurred in excess of the institution's normal severance 
pay policy applicable to all persons employed by the institution upon 
termination of employment are unallowable.
    20. Section J.11. is revised to read as follows:
    11. 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, except as noted in the cost principles in 
this circular regarding self insurance, pensions, severance and post-
retirement health costs.
    11. Sections J.14. through 18. are revised to read as follows:
    14. Depreciation and use allowances.
    a. Institutions may be compensated for the use of their buildings, 
capital improvements, and equipment, provided that they are used, 
needed in the institutions' activities, and properly allocable to 
sponsored agreements. Such compensation shall be made by computing 
either depreciation or use allowance. Use allowances are the means of 
providing such compensation when depreciation or other equivalent costs 
are not computed. The allocation for depreciation or use allowance 
shall be made in accordance with Section F.2. Depreciation and use 
allowances are computed applying the following rules:
    b. The computation of depreciation or use allowances shall be based 
on the acquisition cost of the assets involved. The acquisition cost of 
an asset donated to the institution by a third party shall be its fair 
market value at the time of the donation.
    c. For this purpose, the acquisition cost 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 is presently located; and
    (3) any portion of the cost of buildings and equipment contributed 
by or for the institution where law or agreement prohibits recovery.
    d. In the use of the depreciation method, the following shall be 
observed:
    (1) 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, technological 
developments in the particular area, and the renewal and replacement 
policies followed for the individual items or classes of assets 
involved.
    (2) The depreciation method used to charge 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 in the early portions than in the later 
portions of its useful life, 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. The depreciation methods 
used to calculate the depreciation amounts for F&A rate purposes shall 
be the same methods used by the institution for its financial 
statements. This requirement does not apply to those institutions 
(e.g., public institutions of higher education) which are not required 
to record depreciation by applicable generally accepted accounting 
principles (GAAP).
    (3) Where the depreciation method is introduced to replace the use 
allowance method, depreciation shall be computed as if the asset had 
been depreciated over its entire life (i.e., from the date the asset 
was acquired and ready for use to the date of disposal or withdrawal 
from service). The aggregate amount of use allowances and depreciation 
attributable to an asset (including imputed depreciation applicable to 
periods prior to the conversion to the use allowance method as well as 
depreciation after the conversion) may be less than, and in no case, 
greater than the total acquisition cost of the asset.
    (4) The entire building, including the shell and all components, 
may be treated as a single asset and depreciated over a single useful 
life. A building may also be divided into multiple components. Each 
component item may then be depreciated over its estimated useful life. 
The building components shall be grouped into three general components 
of a building: building shell (including construction and design 
costs), building services systems (e.g., elevators, HVAC, plumbing 
system and heating and air-conditioning system) and fixed equipment 
(e.g., sterilizers, casework, fume hoods, cold rooms and glassware/
washers). In exceptional cases, a Federal cognizant agency may 
authorize an institution to use more than these three groupings. When 
an institutiton elects to depreciate its buildings by its components, 
the same depreciation methods must be used for F&A purposes and 
financial statement purposes, as described in subsection d.(2).
    (5) Where the depreciation method is used for a particular class of 
assets, no depreciation may be allowed on any such assets that have 
outlived their depreciable lives. (See also subsection e.(3))
    e. Under the use allowance method, the following shall be observed:
    (1) The use allowance for buildings and improvements (including 
improvements such as paved parking areas, fences, and sidewalks) shall 
be computed at an annual rate not exceeding two percent of acquisition 
cost.
    The use allowance for equipment shall be computed at an annual rate 
not exceeding six and two-thirds percent of acquisition cost. Use 
allowance recovery is limited to the acquisition cost of the assets. 
For donated assets, use allowance recovery is limited to the fair 
market value of the assets at the time of donation.
    (2) In contrast to the depreciation method, the entire building 
must be treated as a single asset without separating its ``shell'' from 
other building components under the use allowance method. The entire 
building must be treated as a single asset, and the two-percent use 
allowance limitation must be applied to all parts of the building.
    The two-percent limitation, however, need not be applied to 
equipment or other assets that are merely attached or fastened to the 
building but not permanently fixed and are used as furnishings, 
decorations or for specialized purposes (e.g., dentist chairs and 
dental treatment units, counters, laboratory benches bolted to the 
floor, dishwashers, modular furniture, and carpeting). Such equipment 
and assets will be considered as not being permanently fixed to the 
building if they can be removed without the need for costly or 
extensive alterations or repairs to the building to make the space 
usable for other purposes. Equipment and assets that meet these 
criteria will be subject to the 6\2/3\ percent equipment use allowance.
    (3) A reasonable use allowance may be negotiated for any assets 
that are considered to be fully depreciated, after taking into 
consideration the amount of depreciation previously charged to the 
Federal Government, the estimated useful life remaining at the time of 
negotiation, the effect of any increased maintenance charges, decreased 
efficiency due to age, and any other factors pertinent to the 
utilization of the asset for the purpose contemplated.
    (4) Notwithstanding subsection e.(3), once an institution converts 
from one cost recovery methodology to another, acquisition costs not 
recovered may not

[[Page 25975]]

be used in the calculation of the use allowance in subsection e.(3).
    f. Except as otherwise provided in subsections b. through e., a 
combination of the depreciation and use allowance methods may not be 
used, in like circumstances, for a single class of assets (e.g., 
buildings, office equipment, and computer equipment).
    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 to ensure that the assets exist and are 
usable, used, and needed. Statistical sampling techniques may be used 
in taking these inventories. In addition, when the depreciation method 
is used, adequate depreciation records showing the amount of 
depreciation taken each period must also be maintained.
    h. This section applies to the largest college and university 
recipients of Federal research and development funds as displayed in 
Exhibit A, List of Colleges and Universities Subject to Section J.14.f 
of Circular A-21.
    (1) Institutions shall expend currently, or reserve for expenditure 
within the next five years, the portion of F&A cost payments made for 
depreciation or use allowances under sponsored research agreements, 
consistent with Section F.2, to acquire or improve research facilities. 
This provision applies only to Federal agreements, which reimburse F&A 
costs at a full negotiated rate. These funds may only be used for (a) 
liquidation of the principal of debts incurred to acquire assets that 
are used directly for organized research activities, or (b) payments to 
acquire, repair, renovate, or improve buildings or equipment directly 
used for organized research. For buildings or equipment not exclusively 
used for organized research activity, only appropriately proportionate 
amounts will be considered to have been expended for research 
facilities.
    (2) An assurance that an amount equal to the Federal reimbursements 
has been appropriately expended or reserved to acquire or improve 
research facilities shall be submitted as part of each F&A cost 
proposal submitted to the cognizant Federal agency which is based on 
costs incurred on or after October 1, 1991. This assurance will cover 
the cumulative amounts of funds received and expended during the period 
beginning after the period covered by the previous assurance and ending 
with the fiscal year on which the proposal is based. The assurance 
shall also cover any amounts reserved from a prior period in which the 
funds received exceeded the amounts expended.
    15. Donations and contributions.
    a. Contributions or donations rendered.
    Contributions or donations, including cash, property, and services, 
made by the institution, regardless of the recipient, are unallowable.
    b. Donated services received.
    Donated or volunteer services may be furnished to an institution 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 F&A cost. However, the value of donated services 
may be used to meet cost sharing or matching requirements in accordance 
with Circular A-110.
    c. Donated property.
    The value of donated property is not reimbursable either as a 
direct or F&A cost, except that depreciation or use allowances on 
donated assets are permitted in accordance with Section J.14. The value 
of donated property may be used to meet cost sharing or matching 
requirements, in accordance with Circular A-110.
    16. Employee morale, health, and welfare costs.
    a. The costs of employee information publications, health or first-
aid clinics and/or infirmaries, recreational activities, employee 
counseling services, and any other expenses incurred in accordance with 
the institution's established practice or custom for the improvement of 
working conditions, employer-employee relations, employee morale, and 
employee performance are allowable.
    b. Such costs will be equitably apportioned to all activities of 
the institution. 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.
    c. Losses resulting from operating food services are allowable only 
if the institution's objective is to operate such services on a break-
even basis. Losses sustained because of operating objectives other than 
the above are allowable only (a) where the institution can demonstrate 
unusual circumstances, and (b) with the approval of the cognizant 
Federal agency.
    17. Entertainment costs.
    Costs of entertainment, including amusement, diversion, and social 
activities and any costs directly associated with such costs (such as 
tickets to shows or sports events, meals, lodging, rentals, 
transportation, and gratuities) are unallowable.
    18. Equipment and other capital expenditures.
    a. For purposes of this subsection, the following definitions 
apply:
    (1) ``Capital Expenditures'' means expenditures for the acquisition 
cost of capital assets (equipment, buildings, and land), or 
expenditures to make improvements to capital assets that materially 
increase their value or useful life. Acquisition cost means the cost of 
the asset including the cost to put it in place. Acquisition cost for 
equipment, for example, means the net invoice price of the 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 may be 
included in, or excluded from the acquisition cost in accordance with 
the institution's regular accounting practices.
    (2) ``Equipment'' means an article of nonexpendable, tangible 
personal property having a useful life of more than one year and an 
acquisition cost which equals or exceeds the lesser of the 
capitalization level established by the institution for financial 
statement purposes, or $5000.
    (3) ``Special purpose equipment'' means equipment which is used 
only for research, medical, scientific, or other technical activities. 
Examples of special purpose equipment include microscopes, x-ray 
machines, surgical instruments, and spectrometers.
    (4) ``General purpose equipment'' means equipment, which is not 
limited to research, medical, scientific or other technical activities. 
Examples include office equipment and furnishings, modular offices, 
telephone networks, information technology equipment and systems, air 
conditioning equipment, reproduction and printing equipment, and motor 
vehicles.
    b. The following rules of allowability shall apply to equipment and 
other capital expenditures:
    (1) Capital expenditures for general purpose equipment, buildings, 
and land are unallowable as direct charges, except where approved in 
advance by the awarding agency.
    (2) Capital expenditures for special purpose equipment are 
allowable as direct costs, provided that items with a unit cost of 
$5000 or more have the prior approval of the awarding agency.
    (3) 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.
    (4) When approved as a direct charge pursuant to subsections 
J.18.b.(1)

[[Page 25976]]

through (3), capital expenditures will be charged in the period in 
which the expenditure is incurred, or as otherwise determined 
appropriate by and negotiated with the awarding agency.
    (5) Equipment and other capital expenditures are unallowable as 
indirect costs. However, see section J.14, Depreciation and use 
allowance, for rules on the allowability of use allowances or 
depreciation on buildings, capital improvements, and equipment. Also, 
see section J.43, Rental costs of buildings and equipment, for rules on 
the allowability of rental costs for land, buildings, and equipment.
    (6) The unamortized portion of any equipment written off as a 
result of a change in capitalization levels may be recovered by 
continuing to claim the otherwise allowable use allowances or 
depreciation on the equipment, or by amortizing the amount to be 
written off over a period of years negotiated with the cognizant 
agency.
    12. Sections J.20. and 21. are revised to read as follows:
    20. Fund raising and investment costs.
    a. Costs of organized fund raising, including financial campaigns, 
endowment drives, solicitation of gifts and bequests, and similar 
expenses incurred solely to raise capital or obtain contributions, are 
unallowable.
    b. Costs of investment counsel and staff and similar expenses 
incurred solely to enhance income from investments are unallowable.
    c. Costs related to the physical custody and control of monies and 
securities are allowable.
    21. Gain and losses on depreciable assets.
    a. (1) Gains and losses on the sale, retirement, or other 
disposition of depreciable property shall be included in the year in 
which they occur as credits or charges to the asset cost grouping(s) in 
which the property was included. The amount of the gain or loss to be 
included as a credit or charge to the appropriate asset 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 account 
and is reflected in the depreciation allowable under section J.14.
    (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 Section J.24.
    (d) Compensation for the use of the property was provided through 
use allowances in lieu of depreciation.
    b. Gains or losses of any nature arising from the sale or exchange 
of property other than the property covered in subsection a shall be 
excluded in computing sponsored agreement costs.
    c. When assets acquired with Federal funds, in part or wholly, are 
disposed of, the distribution of the proceeds shall be made in 
accordance with Circular A-110, ``Uniform Administrative Requirements 
for Grants and Agreements with Institutions of Higher Education, 
Hospitals, and Other Non-Profit Organizations.''

    13. Section J.24. is revised to read as follows:

    24. Idle facilities and idle capacity.
    a. As used in this section 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 
institution.
    (2) ``Idle facilities'' means completely unused facilities that are 
excess to the institution's current needs.
    (3) ``Idle capacity'' means the unused capacity of partially used 
facilities. It is the difference between:
    (a) 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
    (b) The extent to which the facility was actually used to meet 
demands during the accounting period. A multi-shift basis should be 
used if it can be shown that this amount of usage would normally be 
expected for the type of facility involved.
    (4) ``Cost of idle facilities or idle capacity'' means costs such 
as maintenance, repair, housing, rent, and other related costs, e.g., 
insurance, interest, property taxes 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 subsection, 
costs of idle facilities are allowable for a reasonable period of time, 
ordinarily not to exceed one year, depending on the initiative taken to 
use, lease, or dispose of such facilities.
    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 that 
the capacity is reasonably anticipated to be necessary or was 
originally reasonable and is not subject to reduction or elimination by 
use on other sponsored agreements, subletting, renting, or sale, in 
accordance with sound business, economic, or security practices. 
Widespread idle capacity throughout an entire facility or among a group 
of assets having substantially the same function may be considered idle 
facilities.
    14. Section J.26. is revised to read as follows:
    26. Interest.
    a. Costs incurred for interest on borrowed capital, temporary use 
of endowment funds, or the use of the institution's own funds, however 
represented, are unallowable. However, interest on debt incurred after 
July 1, 1982 to acquire buildings, major reconstruction and remodeling, 
or the acquisition or fabrication of capital equipment costing $10,000 
or more, is allowable.
    b. Interest on debt incurred after May 8, 1996 to acquire or 
replace capital assets (including construction, renovations, 
alterations, equipment, land, and capital assets acquired through 
capital leases) acquired after that date and used in support of 
sponsored agreements is allowable, subject to the following conditions:
    (1) For facilities costing over $500,000, the institution shall 
prepare, prior to acquisition or replacement of the facility, a lease-
purchase analysis in accordance with the provisions of Sec.--.30 
through--.37 of OMB Circular A-110, which shows that a financed 
purchase, including a capital lease is less costly to the institution 
than other operating lease alternatives, on a net present value basis. 
Discount rates used shall be equal to the institution's anticipated 
interest rates and shall be no higher than the fair market rate 
available to the institution 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 
institution. The cost comparisons

[[Page 25977]]

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 defined period. 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 defined period. 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 institution directly or as 
part of the lease arrangement.
    (2) The actual interest cost claimed is predicated upon interest 
rates that are no higher than the fair market rate available to the 
institution from an unrelated (arm's length) third party.
    (3) 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.
    (4) Reimbursements are limited to the least costly alternative 
based on the total cost analysis required under subsection (1). 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 required to be performed, Federal reimbursement 
shall be based upon the least expensive alternative.
    (5) For debt arrangements over $1 million, unless the institution 
makes an initial equity contribution to the asset purchase of 25 
percent or more, the institution 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, institutions 
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 
cost. For cash flow calculations, the annual inflow figures shall be 
divided by the number of months in the year (i.e., 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 cost. 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.
    (6) 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 
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.
    (7) The allowable costs to acquire facilities and equipment are 
limited to a fair market value available to the institution from an 
unrelated (arm's length) third party.
    c. Institutions are also subject to the following conditions:
    (1) Interest on debt incurred to finance or refinance assets re-
acquired after the applicable effective dates stipulated above is 
unallowable.
    (2) Interest attributable to fully depreciated assets is 
unallowable.
    d. The following definitions are to be used for purposes of this 
section:
    (1) ``Re-acquired'' assets means assets held by the institution 
prior to the applicable effective dates stipulated above that have 
again come to be held by the institution, whether through repurchase or 
refinancing. It does not include assets acquired to replace older 
assets.
    (2) ``Initial equity contribution'' means the amount or value of 
contributions made by institutions for the acquisition of the asset 
prior to occupancy of facilities.
    (3) ``Asset costs'' means the capitalizable costs of an asset, 
including construction costs, acquisition costs, and other such costs 
capitalized in accordance with Generally Accepted Accounting Principles 
(GAAP).
    15. Add a new subsection h. to the redesignated section J.28., to 
read as follows.
    28. Lobbying.
* * * * *
    h. Executive lobbying costs.
    Costs incurred in attempting to improperly influence either 
directly or indirectly, an employee or officer of the Executive Branch 
of the Federal Government to give consideration or to act regarding a 
sponsored agreement or a regulatory matter are unallowable. Improper 
influence means any influence that induces or tends to induce a Federal 
employee or officer to give consideration or to act regarding a 
federally-sponsored agreement or regulatory matter on any basis other 
than the merits of the matter.
    16. Sections J.30. through 35. are revised to read as follows:
    30. 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 section 18.a.(1)).
    31. Material and supplies costs.
    a. Costs incurred for materials, supplies, and fabricated parts 
necessary to carry out a sponsored agreement are allowable.
    b. Purchased materials and supplies shall be charged at their 
actual prices, net of applicable credits. Withdrawals from general 
stores or stockrooms should be charged at their actual net cost under 
any recognized method of pricing inventory withdrawals, consistently 
applied. Incoming transportation charges are a proper part of materials 
and supplies costs.
    c. Only materials and supplies actually used for the performance of 
a sponsored agreement may be charged as direct costs.
    d. Where federally-donated or furnished materials are used in 
performing the sponsored agreement, such materials will be used without 
charge.
    32. Meetings and conferences.
    Costs of meetings and conferences, the primary purpose of which is 
the dissemination of technical information, are allowable. This 
includes costs of meals, transportation, rental of facilities, 
speakers' fees, and other items

[[Page 25978]]

incidental to such meetings or conferences. But see section J.17, 
Entertainment costs.
    33. Memberships, subscriptions and professional activity costs.
    a. Costs of the institution's membership in business, technical, 
and professional organizations are allowable.
    b. Costs of the institution's subscriptions to business, 
professional, and technical periodicals are allowable.
    c. Costs of membership in any civic or community organization are 
unallowable.
    d. Costs of membership in any country club or social or dining club 
or organization are unallowable.
    34. Patent costs.
    a. The following costs relating to patent and copyright matters are 
allowable:
    (1) Cost of preparing disclosures, reports, and other documents 
required by the sponsored agreement and of searching the art to the 
extent necessary to make such disclosures;
    (2) Cost of 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
    (3) General counseling services relating to patent and copyright 
matters, such as advice on patent and copyright laws, regulations, 
clauses, and employee agreements (but see sections J.37., Professional 
services costs, and J.44., Royalties and other costs for use of 
patents).
    b. The following costs related to patent and copyright matter are 
unallowable:
    (i) Cost of preparing disclosures, reports, and other documents and 
of searching the art to the extent necessary to make disclosures not 
required by the award
    (ii) Costs in connection with filing and prosecuting any foreign 
patent application, or any United States patent application, where the 
sponsored agreement does not require conveying title or a royalty-free 
license to the Federal Government, (but see section J.44, Royalties and 
other costs for use of patents).
    35. Plant and homeland security costs.
    Necessary and reasonable expenses incurred for routine and homeland 
security to protect facilities, personnel, and work products are 
allowable. Such costs include, but are not limited to, wages and 
uniforms of personnel engaged in security activities; equipment; 
barriers; contractual security services; consultants; etc. Capital 
expenditures for homeland and plant security purposes are subject to 
section J.18, Equipment and other capital expenditures, of this 
Circular.
    17. Revise section J.37. to read as follows:
    37. 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 institution, are 
allowable, subject to subsections b and c when reasonable in relation 
to the services rendered and when not contingent upon recovery of the 
costs from the Federal Government. In addition, legal and related 
services are limited under section J.13.
    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 
institution's capability in the particular area.
    (3) The past pattern of such costs, particularly in the years prior 
to sponsored agreements.
    (4) The impact of sponsored agreements on the institution's 
business (i.e., what new problems have arisen).
    (5) Whether the proportion of Federal work to the institution's 
total business is such as to influence the institution 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-sponsored 
agreements.
    (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 subsection b, retainer fees to be 
allowable must be supported by evidence of bona fide services available 
or rendered.
    18. Sections J.39., J.40. and J.41. are revised to read as follows:
    39. 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. Publication costs also include page 
charges in professional publications.
    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 institution.
    c. Page charges for professional journal publications are allowable 
as a necessary part of research costs where:
    (1) The research papers report work supported by the Federal 
Government: and
    (2) The charges are levied impartially on all research papers 
published by the journal, whether or not by federally-sponsored 
authors.
    40. 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 sponsoring agency.
    41. Reconversion costs.
    Costs incurred in the restoration or rehabilitation of the 
institution's facilities to approximately the same condition existing 
immediately prior to commencement of a sponsored agreement, fair wear 
and tear excepted, are allowable.
    19. Revise sections J.43. through J.47. to read as follows:
    43. Rental costs of buildings and equipment.
    a. Subject to the limitations described in subsections b. through 
d. of this section, 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. Rental arrangements should be reviewed 
periodically to determine if circumstances have changed and other 
options are available.
    b. Rental costs under ``sale and lease back'' arrangements are 
allowable only up to the amount that would be allowed had the 
institution continued to own the property. This amount would include 
expenses such as depreciation or use allowance, maintenance, taxes, and 
insurance.
    c. Rental costs under ``less-than-arms-length'' leases are 
allowable only up to the amount (as explained in subsection b) that 
would be allowed had title to the property vested in the institution. 
For this purpose, a less-than-arms-length

[[Page 25979]]

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--
    (1) divisions of an institution;
    (2) institutions under common control through common officers, 
directors, or members; and
    (3) an institution and a director, trustee, officer, or key 
employee of the institution or his immediate family, either directly or 
through corporations, trusts, or similar arrangements in which they 
hold a controlling interest. For example, an institution may establish 
a separate corporation for the sole purpose of owning property and 
leasing it back to the institution.
    d. Rental costs under leases which are required to be treated as 
capital leases under GAAP are allowable only up to the amount (as 
explained in subsection b) that would be allowed had the institution 
purchased the property on the date the lease agreement was executed. 
The provisions of Financial Accounting Standards Board Statement 13, 
Accounting for Leases, shall be used to determine whether a lease is a 
capital lease. Interest costs related to capital leases are allowable 
to the extent they meet the criteria in section J.25. Unallowable costs 
include amounts paid for profit, management fees, and taxes that would 
not have been incurred had the institution purchased the facility.
    44. Royalties and other costs for use of patents.
    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 been arrived at as a result of less-than-
arm's-length bargaining, e.g.:
    (1) Royalties paid to persons, including corporations, affiliated 
with the institution.
    (2) Royalties paid to unaffiliated parties, including corporations, 
under an agreement entered into in contemplation that a sponsored 
agreement would be made.
    (3) Royalties paid under an agreement entered into after an award 
is made to an institution.
    c. In any case involving a patent or copyright formerly owned by 
the institution, the amount of royalty allowed should not exceed the 
cost which would have been allowed had the institution retained title 
thereto.
    45. Scholarships and student aid costs.
    a. Costs of scholarships, fellowships, and other programs of 
student aid are allowable only when the purpose of the sponsored 
agreement is to provide training to selected participants and the 
charge is approved by the sponsoring agency. However, tuition remission 
and other forms of compensation paid as, or in lieu of, wages to 
students performing necessary work are allowable provided that--
    (1) The individual is conducting activities necessary to the 
sponsored agreement;
    (2) Tuition remission and other support are provided in accordance 
with established educational institutional policy and consistently 
provided in a like manner to students in return for similar activities 
conducted in nonsponsored as well as sponsored activities; and
    (3) During the academic period, the student is enrolled in an 
advanced degree program at a grantee or affiliated institution and the 
activities of the student in relation to the Federally-sponsored 
research project are related to the degree program;
    (4) the tuition or other payments are reasonable compensation for 
the work performed and are conditioned explicitly upon the performance 
of necessary work; and
    (5) it is the institution's practice to similarly compensate 
students in nonsponsored as well as sponsored activities.
    b. Charges for tuition remission and other forms of compensation 
paid to students as, or in lieu of, salaries and wages shall be subject 
to the reporting requirements stipulated in Section J.10, and shall be 
treated as direct or F&A cost in accordance with the actual work being 
performed. Tuition remission may be charged on an average rate basis.
    46. Selling and marketing.
    Costs of selling and marketing any products or services of the 
institution are unallowable (unless allowed under section J.1 as 
allowable public relations costs or under section J.38 as allowable 
proposal costs).
    47. Specialized service facilities.
    a. The costs of services provided by highly complex or specialized 
facilities operated by the institution, such as computers, wind 
tunnels, and reactors are allowable, provided the charges for the 
services meet the conditions of either subsection 47.b. or 47.c. and, 
in addition, take into account any items of income or Federal financing 
that qualify as applicable credits under section C.5 of this Circular.
    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
    (1) does not discriminate against federally-supported activities of 
the institution, including usage by the institution for internal 
purposes, and
    (2) 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 F&A costs. Rates shall be 
adjusted at least biennially, and shall take into consideration over/
under applied costs of the previous period(s).
    c. Where the costs incurred for a service are not material, they 
may be allocated as F&A costs.
    d. Under some extraordinary circumstances, where it is in the best 
interest of the Federal Government and the institution to establish 
alternative costing arrangements, such arrangements may be worked out 
with the cognizant Federal agency.
    20. Section J.50. is revised to read as follows:
    50. Termination costs applicable to sponsored agreements.
    Termination of awards generally gives rise to the incurrence of 
costs, or the need for special treatment of costs, which would not have 
arisen had the sponsored agreement 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. The cost of items reasonably usable on the institution's other 
work shall not be allowable unless the institution 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 institution, the awarding agency should consider the institution's 
plans and orders for current and scheduled activity.
    Contemporaneous purchases of common items by the institution shall 
be regarded as evidence that such items are reasonably usable on the 
institution's other work. Any acceptance of common items as allocable 
to the terminated portion of the sponsored agreement shall be limited 
to the extent that the quantities of such items on

[[Page 25980]]

hand, in transit, and on order are in excess of the reasonable 
quantitative requirements of other work.
    b. If in a particular case, despite all reasonable efforts by the 
institution, 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 institution to discontinue such costs shall be 
unallowable.
    c. Loss of useful value of special tooling, machinery, and 
equipment is generally allowable if:
    (1) Such special tooling, special machinery, or equipment is not 
reasonably capable of use in the other work of the institution,
    (2) The interest of the Federal Government is protected by transfer 
of title or by other means deemed appropriate by the awarding agency, 
and
    (3) The loss of useful value for any one terminated sponsored 
agreement is limited to that portion of the acquisition cost which 
bears the same ratio to the total acquisition cost as the terminated 
portion of the sponsored agreement bears to the entire terminated 
sponsored agreement and other sponsored agreements for which the 
special tooling, machinery, or equipment was acquired.
    d. Rental costs under unexpired leases are generally allowable 
where clearly shown to have been reasonably necessary for the 
performance of the terminated sponsored agreement, less the residual 
value of such leases, if:
    (1) the amount of such rental claimed does not exceed the 
reasonable use value of the property leased for the period of the 
sponsored agreement and such further period as may be reasonable; and
    (2) the institution 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 
sponsored agreement, and of reasonable restoration required by the 
provisions of the lease.
    e. Settlement expenses including the following are generally 
allowable:
    (1) Accounting, legal, clerical, and similar costs reasonably 
necessary for:
    (a) The preparation and presentation to the awarding agency of 
settlement claims and supporting data with respect to the terminated 
portion of the sponsored agreement, unless the termination is for 
default (see Subpart --.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 sponsored agreement, except when grantees 
or contractors are reimbursed for disposals at a predetermined amount 
in accordance with sections --.32 through --.37 of Circular A-110.
    (3) F&A costs related to salaries and wages incurred as settlement 
expenses in subsections b.(1) and (2) of this section 50. Normally, 
such F&A costs shall be limited to fringe benefits, occupancy cost, and 
immediate supervision.
    f. Claims under subawards, including the allocable portion of 
claims which are common to the sponsored agreement and to other work of 
the institution, are generally allowable.
    An appropriate share of the institution's F&A costs 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 section E, F&A costs. The F&A 
costs so allocated shall exclude the same and similar costs claimed 
directly or indirectly as settlement expenses.
    21. Add a new section J.51. to read as follows:
    51. Training costs.
    The cost of training provided for employee development is 
allowable.

    22. Add a new section J.53. to read as follows:
    53. Travel costs.
    a. General.
    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 institution. Such costs may be 
charged on an actual cost 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 is applied to an entire trip and not to selected days of 
the trip, and results in charges consistent with those normally allowed 
in like circumstances in the institution's non-federally-sponsored 
activities.
    b. Lodging and subsistence.
    Costs incurred by employees and officers for travel, including 
costs of lodging, other subsistence, and incidental expenses, shall be 
considered reasonable and allowable only to the extent such costs do 
not exceed charges normally allowed by the institution in its regular 
operations as the result of the institution's written travel policy. In 
the absence of an acceptable, written institution policy regarding 
travel costs, the rates and amounts established under subchapter I of 
Chapter 57, Title 5, United States Code (``Travel and Subsistence 
Expenses; Mileage Allowances''), or by the Administrator of General 
Services, or by the President (or his or her designee) pursuant to any 
provisions of such subchapter shall apply to travel under sponsored 
agreements (48 CFR 31.205-46(a)).
    c. Commercial air travel.
    (1) Airfare costs in excess of the customary standard commercial 
airfare (coach or equivalent), Federal Government contract airfare 
(where authorized and available), or the lowest commercial discount 
airfare are unallowable except when such accommodations would:
    (a) require circuitous routing;
    (b) require travel during unreasonable hours;
    (c) excessively prolong travel;
    (d) result in additional costs that would offset the transportation 
savings; or
    (e) offer accommodations not reasonably adequate for the traveler's 
medical needs. The institution must justify and document these 
conditions on a case-by-case basis in order for the use of first-class 
airfare to be allowable in such cases.
    (2) Unless a pattern of avoidance is detected, the Federal 
Government will generally not question an institution's determinations 
that customary standard airfare or other discount airfare is 
unavailable for specific trips if the institution can demonstrate 
either of the following:
    (a) That such airfare was not available in the specific case; or
    (b) That it is the institution's overall practice to make routine 
use of such airfare.
    d. Air travel by other than commercial carrier.
    Costs of travel by institution-owned, -leased, or -chartered 
aircraft include the cost of lease, charter, operation (including 
personnel costs), maintenance, depreciation, insurance, and other 
related costs. The portion of such costs that exceeds the cost of 
allowable commercial air travel, as provided for in subsection J.53.c., 
is unallowable.

B. Amendments to Circular A-87

    1. Revise Attachment A, section C.3.c., of OMB Circular A-87, to 
read as follows:

[[Page 25981]]

    C. Basic Guidelines
* * * * *
    3. Allocable costs
* * * * *
    c. Any cost allocable to a particular Federal award or cost 
objective under the principles provided for in this Circular may not be 
charged to other Federal awards to overcome fund deficiencies, to avoid 
restrictions imposed by law or terms of the Federal awards, or for 
other reasons.
    2. Revise the table of contents to Attachment B as follows:
Attachment B.--Selected Items of Cost

Table of Contents

1. Advertising and public relations costs
2. Advisory councils
3. Alcoholic beverages
4. Audit costs and related services
5. Bad debts
6. Bonding costs
7. Communication costs
8. Compensation for personal services
9. Contingency provisions
10. Defense and prosecution of criminal and civil proceedings, and 
claims
11. Depreciation and use allowances
12. Donations and contributions
13. Employee morale, health, and welfare costs
14. Entertainment costs
15. Equipment and other capital expenditures
16. Fines and penalties
17. Fund raising and investment management costs
18. Gains and losses on disposition of depreciable property and 
other capital assets and substantial relocation of Federal programs
19. General government expenses
20. Goods or services for personal use
21. Idle facilities and idle capacity
22. Insurance and indemnification
23. Interest
24. Lobbying
25. Maintenance, operations, and repairs
26. Materials and supplies costs
27. Meetings and conferences
28. Memberships, subscriptions, and professional activity costs
29. Patent costs
30. Plant and homeland security costs
31. Pre-award costs
32. Professional service costs
33. Proposal costs
34. Publication and printing costs
35. Rearrangement and alteration costs
36. Reconversion costs
37. Rental costs of building and equipment
38. Royalties and other costs for the use of patents
39. Selling and marketing
40. Taxes
41. Termination costs applicable to Federal awards
42. Training costs
43. Travel costs

    3. Redesignate the sections in Attachment B as follows:
    a. Section 3. is redesignated as section 2.
    b. Section 4. is redesignated as section 3.
    c. Section 11. is redesignated as section 8.
    d. Section 14. is redesignated as section 10.
    e. Section 20. is redesignated as section 16.
    f. Section 21. is redesignated as section 17.
    g. Section 22. is redesignated as section 18.
    h. Section 25. is redesignated as section 22.
    i. Section 27. is redesignated as section 24.
    j. Section 28. is redesignated as section 25.
    k. Section 32. is redesignated as section 31.
    l. Section 34. is redesignated as section 33.
    m. Section 36. is redesignated as section 35.
    n. Section 39. is redesignated as section 40.
    o. Section 40. is redesignated as section 42.
    4. Attachment B, section 1. is revised to read as follows:
    1. Advertising and public relations costs.
    a. The term advertising costs means the costs of advertising media 
and corollary administrative costs.
    Advertising media include magazines, newspapers, radio and 
television, direct mail, exhibits, electronic or computer transmittals, 
and the like.
    b. The term public relations includes community relations and means 
those activities dedicated to maintaining the image of the governmental 
unit or maintaining or promoting understanding and favorable relations 
with the community or public at large or any segment of the public.
    c. The only allowable advertising costs are those which are solely 
for:
    (1) The recruitment of personnel required for the performance by 
the governmental unit of obligations arising under a Federal award;
    (2) The procurement of goods and services for the performance of a 
Federal award;
    (3) The disposal of scrap or surplus materials acquired in the 
performance of a Federal award except when institutions are reimbursed 
for disposal costs at a predetermined amount; or
    (4) Other specific purposes necessary to meet the requirements of 
the Federal award.
    d. The only allowable public relations costs are:
    (1) Costs specifically required by the Federal award;
    (2) Costs of communicating with the public and press pertaining to 
specific activities or accomplishments which result from performance of 
Federal awards (these costs are considered necessary as part of the 
outreach effort for the Federal award); or
    (3) Costs of conducting general liaison with news media and 
government public relations officers, to the extent that such 
activities are limited to communication and liaison necessary keep the 
public informed on matters of public concern, such as notices of 
Federal contract/grant awards, financial matters, etc.
    e. Costs identified in sections 1.c and 1.d, if incurred for more 
than one Federal award or for both sponsored work and other work of the 
governmental unit, are allowable to the extent that the principles in 
Attachment A, sections E. (``Direct Costs'') and F. (``Indirect 
Costs'') are observed.
    f. Unallowable advertising and public relations costs include the 
following:
    (1) All advertising and public relations costs other than as 
specified in subsections c, d, and e;
    (2) Costs of meetings, conventions, convocations, or other events 
related to other activities of the governmental unit, including:
    (a) Costs of displays, demonstrations, and exhibits;
    (b) Costs of meeting rooms, hospitality suites, and other special 
facilities used in conjunction with shows and other special events; and
    (c) Salaries and wages of employees engaged in setting up and 
displaying exhibits, making demonstrations, and providing briefings;
    (3) Costs of promotional items and memorabilia, including models, 
gifts, and souvenirs;
    (4) Costs of advertising and public relations designed solely to 
promote the governmental unit.
    5. Attachment B, sections 4, 5, 6 and 7 are revised to read as 
follows:
    4. Audit costs and related services.
    a. The costs of audits required by, and performed in accordance 
with, the Single Audit Act, as implemented by Circular A-133, ``Audits 
of States, Local Governments, and Non-Profit Organizations'' are 
allowable. Also see 31 U.S.C. 7505(b) and section 230 (``Audit Costs'') 
of Circular A-133.
    b. Other audit costs are allowable if included in a cost allocation 
plan or indirect cost proposal, or if specifically approved by the 
awarding agency as a direct cost to an award.
    c. The cost of agreed-upon procedures engagements to monitor 
subrecipients who are exempted from A-133 under section 200(d) are 
allowable, subject to the conditions listed in A-133, section 
230(b)(2).

[[Page 25982]]

    5. Bad debts. Bad debts, including losses (whether actual or 
estimated) arising from uncollectable accounts and other claims, 
related collection costs, and related legal costs, are unallowable. 
Costs incurred for telephone services, local and long distance 
telephone calls, telegrams, postage, messenger, electronic or computer 
transmittal services and the like are allowable.
    6. 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 governmental unit. They arise also in instances 
where the governmental unit 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 governmental unit 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.
    7. Communication costs. Costs incurred for telephone services, 
local and long distance telephone calls, telegrams, postage, messenger, 
electronic or computer transmittal services and the like are allowable.
    6. Attachment B, section 9. is revised to read as follows:
    9. 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 Attachment B, section 22.c.), 
pension plan reserves (see Attachment B, section 8.e.), and post-
retirement health and other benefit reserves (see Attachment B, section 
8.f.) computed using acceptable actuarial cost methods.
    7. Attachment B, sections 11. through 15. are revised to read as 
follows:
    11. Depreciation and use allowances.
    a. Depreciation and use allowances are means of allocating the cost 
of fixed assets to periods benefiting from asset use. Compensation for 
the use of fixed assets on hand may be made through depreciation or use 
allowances. 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.) except as provided for in 
subsection g. Except for enterprise funds and internal service funds 
that are included as part of a State/local cost allocation plan, 
classes of assets shall be determined on the same basis used for the 
government-wide financial statements.
    b. The computation of depreciation or use allowances shall be based 
on the acquisition cost of the assets involved. Where actual cost 
records have not been maintained, a reasonable estimate of the original 
acquisition cost may be used. The value of an asset donated to the 
governmental unit by an unrelated third party shall be its fair market 
value at the time of donation. Governmental or quasi-governmental 
organizations located within the same State shall not be considered 
unrelated third parties for this purpose.
    c. The computation of depreciation or use allowances 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 governmental unit, or a related donor organization, in 
satisfaction of a matching requirement.
    d. Where the 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, historical usage patterns, 
technological developments, and the renewal and replacement policies of 
the governmental unit followed for the individual items or classes of 
assets involved. In the absence of clear evidence indicating that the 
expected consumption of the asset will be significantly greater in the 
early portions than in the later portions of its useful life, the 
straight line method of depreciation shall be used.
    Depreciation methods once used shall not be changed unless approved 
by the Federal cognizant or awarding agency. When the depreciation 
method is introduced for application to an asset previously subject to 
a use allowance, the annual depreciation charge thereon may not exceed 
the amount that would have resulted had the depreciation method been in 
effect from the date of acquisition of the asset. The combination of 
use allowances and depreciation applicable to the asset shall not 
exceed the total acquisition cost of the asset or fair market value at 
time of donation.
    e. When the depreciation method is used for buildings, a building's 
shell may be segregated from the major component of the building (e.g., 
plumbing system, heating, and air conditioning system, etc.) and each 
major component 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. Where the use allowance method is followed, the use allowance 
for buildings and improvements (including land improvements, such as 
paved parking areas, fences, and sidewalks) will be computed at an 
annual rate not exceeding two percent of acquisition costs. The use 
allowance for equipment will be computed at an annual rate not 
exceeding 6\2/3\ 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 condition, 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, 
modular furniture, carpeting, etc.). Such equipment will be considered 
as not being permanently fixed to the building if it can be removed 
without the destruction of, or need for costly or extensive alterations 
or repairs, to the building or the equipment. Equipment that meets 
these criteria will be subject to the 6\2/3\ percent equipment use 
allowance limitation.
    g. A reasonable use allowance may be negotiated for any assets that 
are considered to be fully depreciated, after taking into consideration 
the amount of depreciation previously charged to the government, the 
estimated useful life remaining at the time of negotiation, the effect 
of any increased maintenance charges, decreased efficiency due to age, 
and any other factors pertinent to the utilization of the asset for the 
purpose contemplated.
    h. Charges for use allowances or depreciation must be supported by 
adequate property records. Physical inventories must be taken at least 
once every two years (a statistical sampling approach is acceptable) to 
ensure that assets exist, and are in use. Governmental units will 
manage equipment in accordance with State laws and procedures. When the 
depreciation method is followed, depreciation records indicating the

[[Page 25983]]

amount of depreciation taken each period must also be maintained.
    12. Donations and contributions.
    a. Contributions or donations rendered. Contributions or donations, 
including cash, property, and services, made by the governmental unit, 
regardless of the recipient, are unallowable.
    b. Donated services received:
    (1) Donated or volunteer services may be furnished to a 
governmental unit 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. However, the 
value of donated services may be used to meet cost sharing or matching 
requirements in accordance with the Federal Grant Common Rule.
    (2) The value of donated services utilized in the performance of a 
direct cost activity shall, when material in amount, be considered in 
the determination of the governmental unit's indirect costs or rate(s) 
and, accordingly, shall be allocated a proportionate share of 
applicable indirect costs.
    (3) To the extent feasible, donated services will be supported by 
the same methods used by the governmental unit to support the 
allocability of regular personnel services.
    13. Employee morale, health, and welfare costs.
    a. The costs of employee information publications, health or first-
aid clinics and/or infirmaries, recreational activities, employee 
counseling services, and any other expenses incurred in accordance with 
the governmental unit's established practice or custom for the 
improvement of working conditions, employer-employee relations, 
employee morale, and employee performance are allowable.
    b. Such costs will be equitably apportioned to all activities of 
the governmental unit. Income generated from any of these activities 
will be offset against expenses.
    14. Entertainment costs. Costs of entertainment, including 
amusement, diversion, and social activities and any costs directly 
associated with such costs (such as tickets to shows or sports events, 
meals, lodging, rentals, transportation, and gratuities) are 
unallowable.
    15. Equipment and other capital expenditures.
    a. For purposes of this section 15, the following definitions 
apply:
    (1) ``Capital Expenditures'' means expenditures for the acquisition 
cost of capital assets (equipment, buildings, land), or expenditures to 
make improvements to capital assets that materially increase their 
value or useful life. Acquisition cost means the cost of the asset 
including the cost to put it in place. Acquisition cost for equipment, 
for example, means the net invoice price of the 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 may be included in, or excluded 
from the acquisition cost in accordance with the governmental unit's 
regular accounting practices.
    (2) ``Equipment'' means an article of nonexpendable, tangible 
personal property having a useful life of more than one year and an 
acquisition cost which equals or exceeds the lesser of the 
capitalization level established by the governmental unit for financial 
statement purposes, or $5000.
    (3) ``Special purpose equipment'' means equipment which is used 
only for research, medical, scientific, or other technical activities. 
Examples of special purpose equipment include microscopes, x-ray 
machines, surgical instruments, and spectrometers.
    (4) ``General purpose equipment'' means equipment, which is not 
limited to research, medical, scientific or other technical activities. 
Examples include office equipment and furnishings, modular offices, 
telephone networks, information technology equipment and systems, air 
conditioning equipment, reproduction and printing equipment, and motor 
vehicles.
    b. The following rules of allowability shall apply to equipment and 
other capital expenditures:
    (1) Capital expenditures for general purpose equipment, buildings, 
and land are unallowable as direct charges, except where approved in 
advance by the awarding agency.
    (2) Capital expenditures for special purpose equipment are 
allowable as direct costs, provided that items with a unit cost of 
$5000 or more have the prior approval of the awarding agency.
    (3) 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.
    (4) When approved as a direct charge pursuant to Attachment B, 
section 15.b.(1), (2), and (3), capital expenditures will be charged in 
the period in which the expenditure is incurred, or as otherwise 
determined appropriate and negotiated with the awarding agency. In 
addition, Federal awarding agencies are authorized at their option to 
waive or delegate the prior approval requirement.
    (5) Equipment and other capital expenditures are unallowable as 
indirect costs. However, see section 11, Depreciation and use 
allowance, for rules on the allowability of use allowances or 
depreciation on buildings, capital improvements, and equipment. Also, 
see section 37, Rental costs, concerning the allowability of rental 
costs for land, buildings, and equipment.
    (6) The unamortized portion of any equipment written off as a 
result of a change in capitalization levels may be recovered by 
continuing to claim the otherwise allowable use allowances or 
depreciation on the equipment, or by amortizing the amount to be 
written off over a period of years negotiated with the cognizant 
agency.
    (7) When replacing equipment purchased in whole or in part with 
Federal funds, the governmental unit may use the equipment to be 
replaced as a trade-in or sell the property and use the proceeds to 
offset the cost of the replacement property.
    8. Attachment B, sections 19. through 21. are revised to read 
follows:
    19. General government expenses.
    a. The general costs of government are unallowable (except as 
provided in Attachment B, section 43, Travel costs). These include:
    (1) Salaries and expenses of the Office of the Governor of a State 
or the chief executive of a political subdivision or the chief 
executive of federally-recognized Indian tribal government;
    (2) Salaries and other expenses of a State legislature, tribal 
council, or similar local governmental body, such as a county 
supervisor, city council, school board, etc., whether incurred for 
purposes of legislation or executive direction;
    (3) Costs of the judiciary branch of a government;
    (4) Costs of prosecutorial activities unless treated as a direct 
cost to a specific program if authorized by program statute or 
regulation (however, this does not preclude the allowability of other 
legal activities of the Attorney General); and
    (5) Costs of other general types of government services normally 
provided to the general public, such as fire and police, unless 
provided for as a direct cost under a program statute or regulation.
    b. For federally-recognized Indian tribal governments and Councils 
of Governments (COGs), the portion of salaries and expenses directly 
attributable to managing and operating

[[Page 25984]]

Federal programs by the chief executive and his staff is allowable.
    20. Goods or services for personal use. Costs of goods or services 
for personal use of the governmental unit's employees are unallowable 
regardless of whether the cost is reported as taxable income to the 
employees.
    21. Idle facilities and idle capacity.
    a. As used in this section 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 
governmental unit.
    (2) ``Idle facilities'' means completely unused facilities that are 
excess to the governmental unit's current needs.
    (3) ``Idle capacity'' means the unused capacity of partially used 
facilities. It is the difference between: (a) 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 (b) the 
extent to which the facility was actually used to meet demands during 
the accounting period. A multi-shift basis should be used if it can be 
shown that this amount of usage would normally be expected for the type 
of facility involved.
    (4) ``Cost of idle facilities or idle capacity'' means costs such 
as maintenance, repair, housing, rent, and other related costs, e.g., 
insurance, interest, property taxes 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 subsection, 
costs of idle facilities are allowable for a reasonable period of time, 
ordinarily not to exceed one year, depending on the initiative taken to 
use, lease, or dispose of such facilities.
    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 that 
the capacity is reasonably anticipated to be necessary or was 
originally reasonable and is not subject to reduction or elimination by 
use on other Federal awards, subletting, renting, or sale, in 
accordance with sound business, economic, or security practices. 
Widespread idle capacity throughout an entire facility or among a group 
of assets having substantially the same function may be considered idle 
facilities.
    9. Attachment B, section 23. is revised to read as follows:
    23. Interest.
    a. Costs incurred for interest on borrowed capital or the use of a 
governmental unit's own funds, however represented, are unallowable 
except as specifically provided in this section 23.b. or authorized by 
Federal legislation.
    b. Financing costs (including interest) paid or incurred which are 
associated with the otherwise allowable costs of building acquisition, 
construction, or fabrication, reconstruction or remodeling completed on 
or after October 1, 1980 is allowable subject to the conditions in 
sections (1) through (4) of this section 23.b. Financing costs 
(including interest) paid or incurred on or after September 1, 1995 for 
land or associated with otherwise allowable costs of equipment is 
allowable, subject to the conditions in (1) through (4).
    (1) The financing is provided (from other than tax or user fee 
sources) by a bona fide third party external to the governmental unit;
    (2) The assets are used in support of Federal awards;
    (3) Earnings on debt service reserve funds or interest earned on 
borrowed funds pending payment of the construction or acquisition costs 
are used to offset the current period's cost or the capitalized 
interest, as appropriate. Earnings subject to being reported to the 
Federal Internal Revenue Service under arbitrage requirements are 
excludable.
    (4) For debt arrangements over $1 million, unless the governmental 
unit makes an initial equity contribution to the asset purchase of 25 
percent or more, the governmental unit shall reduce claims for interest 
cost by an amount equal to imputed interest earnings on excess cash 
flow, which is to be calculated as follows. Annually, governmental 
units 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 cost. For cash flow calculations, the annual inflow figures 
shall be divided by the number of months in the year (i.e., 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 cost. 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.
    (5) Interest attributable to fully depreciated assets is 
unallowable.
    10. Redesignated Attachment B, section 24. is amended by 
designating the current text as section a. and adding a new section 
24.b. to read as follows:
    24. Lobbying.
* * * * *
    b. Executive lobbying costs. Costs incurred in attempting to 
improperly influence either directly or indirectly, an employee or 
officer of the Executive Branch of the Federal Government to give 
consideration or to act regarding a sponsored agreement or a regulatory 
matter are unallowable. Improper influence means any influence that 
induces or tends to induce a Federal employee or officer to give 
consideration or to act regarding a federally-sponsored agreement or 
regulatory matter on any basis other than the merits of the matter.
    11. Attachment B, sections 26. through 30. are revised to read as 
follows:
    26. Materials and supplies costs.
    a. Costs incurred for materials, supplies, and fabricated parts 
necessary to carry out a Federal award are allowable.
    b. Purchased materials and supplies shall be charged at their 
actual prices, net of applicable credits. Withdrawals from general 
stores or stockrooms should be charged at their actual net cost under 
any recognized method of pricing inventory withdrawals, consistently 
applied. Incoming transportation charges are a proper part of materials 
and supplies costs.
    c. Only materials and supplies actually used for the performance of 
a Federal award may be charged as direct costs.
    d. Where federally-donated or furnished materials are used in 
performing the Federal award, such materials will be used without 
charge.
    27. Meetings and conferences.
    Costs of meetings and conferences, the primary purpose of which is 
the dissemination of technical information,

[[Page 25985]]

are allowable. This includes costs of meals, transportation, rental of 
facilities, speakers' fees, and other items incidental to such meetings 
or conferences. But see Attachment B, section 14, Entertainment.
    28. Memberships, subscriptions, and professional activity costs.
    a. Costs of the governmental unit's memberships in business, 
technical, and professional organizations are allowable.
    b. Costs of the governmental unit's subscriptions to business, 
professional, and technical periodicals are allowable.
    c. Costs of membership in civic and community, social organizations 
are allowable as a direct cost with the approval of the Federal 
awarding agency.
    d. Costs of membership in organizations substantially engaged in 
lobbying are unallowable.
    29. Patent costs.
    a. The following costs relating to patent and copyright matters are 
allowable:
    (1) Cost of preparing disclosures, reports, and other documents 
required by the Federal award and of searching the art to the extent 
necessary to make such disclosures;
    (2) Cost of 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
    (3) General counseling services relating to patent and copyright 
matters, such as advice on patent and copyright laws, regulations, 
clauses, and employee agreements (but see Attachment B, sections 32, 
Professional service costs, and 38, Royalties and other costs for use 
of patents and copyrights).
    b. The following costs related to patent and copyright matter are 
unallowable:
    (1) Cost of preparing disclosures, reports, and other documents and 
of searching the art to the extent necessary to make disclosures not 
required by the award,
    (2) Costs in connection with filing and prosecuting any foreign 
patent application, or
    (3) Any United States patent application, where the Federal award 
does not require conveying title or a royalty-free license to the 
Federal Government (but see Attachment B, section 38., Royalties and 
other costs for use of patents and copyrights).
    30. Plant and homeland security costs.
    Necessary and reasonable expenses incurred for routine and homeland 
security to protect facilities, personnel, and work products are 
allowable. Such costs include, but are not limited to, wages and 
uniforms of personnel engaged in security activities; equipment; 
barriers; contractual security services; consultants; etc. Capital 
expenditures for homeland and plant security purposes are subject to 
section 15., Equipment and other capital expenditures, of this 
circular.
    12. Attachment B, section 32. is revised to read as follows:
    32. 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 governmental unit, 
are allowable, subject to sections 32.b. and c. when reasonable in 
relation to the services rendered and when not contingent upon recovery 
of the costs from the Federal Government.
    In addition, legal and related services are limited under 
Attachment B, section 10.
    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 
governmental unit'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 governmental unit's 
business (i.e., what new problems have arisen).
    (5) Whether the proportion of Federal work to the governmental 
unit's total business is such as to influence the governmental unit 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 section 32.b, retainer fees to be 
allowable must be supported by available or rendered evidence of bona 
fide services available or rendered.
    13. Attachment B, section 34. is revised to read as follows:
    34. 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. Publication costs also include page 
charges in professional publications.
    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 governmental unit.
    c. Page charges for professional journal publications are allowable 
as a necessary part of research costs where:
    (1) The research papers report work supported by the Federal 
Government; and
    (2) The charges are levied impartially on all research papers 
published by the journal, whether or not by federally-sponsored 
authors.

    14. Attachment B, sections 36. through 39. are revised to read as 
follows:
    36. Reconversion costs. Costs incurred in the restoration or 
rehabilitation of the governmental unit's facilities to approximately 
the same condition existing immediately prior to commencement of 
Federal awards, less costs related to normal wear and tear, are 
allowable.
    37. Rental costs of buildings and equipment.
    a. Subject to the limitations described in sections b. through d. 
of this section 37, 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. Rental arrangements should be reviewed 
periodically to determine if circumstances have changed and other 
options are available.
    b. Rental costs under ``sale and lease back'' arrangements are 
allowable only up to the amount that would be allowed had the 
governmental unit continued to own the property. This amount would 
include expenses such as depreciation or use allowance, maintenance, 
taxes, and insurance.
    c. Rental costs under ``less-than-arms-length'' leases are 
allowable only up to the amount (as explained in Attachment B, section 
37.b.) that would be allowed had title to the property vested in the

[[Page 25986]]

governmental unit. 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 a governmental 
unit; (ii) governmental units under common control through common 
officers, directors, or members; and (iii) a governmental unit and a 
director, trustee, officer, or key employee of the governmental unit or 
his immediate family, either directly or through corporations, trusts, 
or similar arrangements in which they hold a controlling interest. For 
example, a governmental unit may establish a separate corporation for 
the sole purpose of owning property and leasing it back to the 
governmental unit.
    d. Rental costs under leases which are required to be treated as 
capital leases under GAAP are allowable only up to the amount (as 
explained in subsection b) that would be allowed had the governmental 
unit purchased the property on the date the lease agreement was 
executed. The provisions of Financial Accounting Standards Board 
Statement 13, Accounting for Leases, shall be used to determine whether 
a lease is a capital lease. Interest costs related to capital leases 
are allowable to the extent they meet the criteria in Attachment B, 
section 23. Unallowable costs include amounts paid for profit, 
management fees, and taxes that would not have been incurred had the 
governmental unit purchased the facility.
    38. Royalties and other costs for the use of patents.
    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 been arrived at as a result of less-than-
arm's-length bargaining, e.g.:
    (1) Royalties paid to persons, including corporations, affiliated 
with the governmental unit.
    (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 a governmental unit.
    c. In any case involving a patent or copyright formerly owned by 
the governmental unit, the amount of royalty allowed should not exceed 
the cost which would have been allowed had the governmental unit 
retained title thereto.
    39. Selling and marketing. Costs of selling and marketing any 
products or services of the governmental unit are unallowable (unless 
allowed under Attachment B, section 1. as allowable public relations 
costs or under Attachment B, section 33. as allowable proposal costs.
    22. Attachment B, section 41. is revised to read as follows:
    41. Termination costs applicable to Federal awards.
    Termination of awards generally gives rise to the incurrence of 
costs, or the need for special treatment of costs, which would not have 
arisen had the Federal 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. The cost of items reasonably usable on the governmental unit's 
other work shall not be allowable unless the governmental unit 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 governmental unit, the awarding agency should consider the 
governmental unit's plans and orders for current and scheduled 
activity.
    Contemporaneous purchases of common items by the governmental unit 
shall be regarded as evidence that such items are reasonably usable on 
the governmental unit's other work. Any acceptance of common items as 
allocable to the terminated portion of the Federal 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. If in a particular case, despite all reasonable efforts by the 
governmental unit, 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 governmental unit to discontinue such costs 
shall be unallowable.
    c. Loss of useful value of special tooling, machinery, and 
equipment is generally allowable if:
    (1) Such special tooling, special machinery, or equipment is not 
reasonably capable of use in the other work of the governmental unit,
    (2) The interest of the Federal Government is protected by transfer 
of title or by other means deemed appropriate by the awarding agency, 
and
    (3) The loss of useful value for any one terminated Federal award 
is limited to that portion of the acquisition cost which bears the same 
ratio to the total acquisition cost as the terminated portion of the 
Federal award bears to the entire terminated Federal award and other 
Federal awards for which the special tooling, machinery, or equipment 
was acquired.
    d. Rental costs under unexpired leases are generally allowable 
where clearly shown to have been reasonably necessary for the 
performance of the terminated Federal award less the residual value of 
such leases, if:
    (1) the amount of such rental claimed does not exceed the 
reasonable use value of the property leased for the period of the 
Federal award and such further period as may be reasonable, and
    (2) the governmental unit 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 Federal award, and of reasonable restoration required by the 
provisions of the lease.
    e. Settlement expenses including the following are generally 
allowable:
    (1) Accounting, legal, clerical, and similar costs reasonably 
necessary for:
    (a) The preparation and presentation to the awarding agency of 
settlement claims and supporting data with respect to the terminated 
portion of the Federal award, unless the termination is for default 
(see section--.44 of the Grants Management Common Rule implementing OMB 
Circular A-102); 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 Federal award, except when grantees or 
contractors are reimbursed for disposals at a predetermined amount in 
accordance with sections--.31 and --.32 of the

[[Page 25987]]

Grants Management Common Rule implementing OMB Circular A-102.
    f. Claims under subawards, including the allocable portion of 
claims which are common to the Federal award, and to other work of the 
governmental unit are generally allowable.
    An appropriate share of the governmental unit'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.
    15. Attachment B, section 43. is revised to read as follows:
    43. Travel costs.
    a. General. 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 governmental unit. Such 
costs may be charged on an actual cost 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 is applied to an entire trip and not to 
selected days of the trip, and results in charges consistent with those 
normally allowed in like circumstances in the governmental unit's non-
federally-sponsored activities. Notwithstanding the provisions of 
Attachment B, section 19, General government expenses, travel costs of 
officials covered by that section are allowable with the prior approval 
of an awarding agency when they are specifically related to Federal 
awards.
    b. Lodging and subsistence. Costs incurred by employees and 
officers for travel, including costs of lodging, other subsistence, and 
incidental expenses, shall be considered reasonable and allowable only 
to the extent such costs do not exceed charges normally allowed by the 
governmental unit in its regular operations as the result of the 
governmental unit's written travel policy. In the absence of an 
acceptable, written governmental unit policy regarding travel costs, 
the rates and amounts established under subchapter I of Chapter 57, 
Title 5, United States Code (``Travel and Subsistence Expenses; Mileage 
Allowances''), or by the Administrator of General Services, or by the 
President (or his or her designee) pursuant to any provisions of such 
subchapter shall apply to travel under Federal awards (48 CFR 31.205-
46(a)).
    c. Commercial air travel.
    (1) Airfare costs in excess of the customary standard commercial 
airfare (coach or equivalent), Federal Government contract airfare 
(where authorized and available), or the lowest commercial discount 
airfare are unallowable except when such accommodations would:
    (a) require circuitous routing;
    (b) require travel during unreasonable hours;
    (c) excessively prolong travel;
    (d) result in additional costs that would offset the transportation 
savings; or
    (e) offer accommodations not reasonably adequate for the traveler's 
medical needs. The governmental unit must justify and document these 
conditions on a case-by-case basis in order for the use of first-class 
airfare to be allowable in such cases.
    (2) Unless a pattern of avoidance is detected, the Federal 
Government will generally not question a governmental unit's 
determinations that customary standard airfare or other discount 
airfare is unavailable for specific trips if the governmental unit can 
demonstrate either of the following: (a) that such airfare was not 
available in the specific case; or (b) that it is the governmental 
unit's overall practice to make routine use of such airfare.
    d. Air travel by other than commercial carrier. Costs of travel by 
governmental unit-owned, -leased, or -chartered aircraft include the 
cost of lease, charter, operation (including personnel costs), 
maintenance, depreciation, insurance, and other related costs. The 
portion of such costs that exceeds the cost of allowable commercial air 
travel, as provided for in section 43.c., is unallowable.
    e. Foreign travel. 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 receive such approval. 
For purposes of this provision, ``foreign travel'' includes any travel 
outside Canada, Mexico, the United States, and any United States 
territories and possessions. However, the term ``foreign travel'' for a 
governmental unit located in a foreign country means travel outside 
that country.

C. Amendments to A-122

    1. Revise the table of contents to Attachment B as follows:
Attachment B.--Selected Items of Cost

Table of Contents

1. Advertising and public relations costs
2. Advisory councils
3. Alcoholic beverages
4. Audit costs and related services
5. Bad debts
6. Bonding costs
7. Communication costs
8. Compensation for personal services
9. Contingency provisions
10. Defense and prosecution of criminal and civil proceedings, 
claims, appeals and patent infringement
11. Depreciation and use allowances
12. Donations and contributions
13. Employee morale, health, and welfare costs
14. Entertainment costs
15. Equipment and other capital expenditures
16. Fines and penalties
17. Fund raising and investment management costs
18. Gains and losses on depreciable assets
19. Goods or services for personal use
20. Housing and personal living expenses
21. Idle facilities and idle capacity
22. Insurance and indemnification
23. Interest
24. Labor relations costs
25. Lobbying
26. Losses on other awards or contracts
27. Maintenance and repair costs
28. Materials and supplies costs
29. Meetings and conferences
30. Memberships, subscriptions, and professional activity costs
31. Organization costs
32. Page charges in professional journals
33. Participant support costs
34. Patent costs
35. Plant and homeland security costs
36. Pre-agreement costs
37. Professional services costs
38. Publication and printing costs
39. Rearrangement and alteration costs
40. Reconversion costs
41. Recruiting costs
42. Relocation costs
43. Rental costs of buildings and equipment
44. Royalties and other costs for use of patents and copyrights
45. Selling and marketing
46. Specialized service facilities
47. Taxes
48. Termination costs applicable to Federal awards
49. Training costs
50. Transportation costs
51. Travel costs
52. Trustees

    2. Redesignate the following paragraphs in Appendix B:
    a. Paragraph 2. is redesignated as paragraph 3.
    b. Paragraph 7. is redesignated as paragraph 8.
    c. Paragraph 18. is redesignated as paragraph 19.
    d. Paragraph 19. is redesignated as paragraph 20.
    e. Paragraph 33. is redesignated as paragraph 32.
    f. Paragraph 34. is redesignated as paragraph 33.
    g. Paragraph 38. is redesignated as paragraph 36.
    h. Paragraph 42. is redesignated as paragraph 39.
    i. Paragraph 44. is redesignated as paragraph 41.

[[Page 25988]]

    j. Paragraph 45. is redesignated as paragraph 42.
    k. Paragraph 51. is redesignated as paragraph 47.
    l. Paragraph 53. is redesignated as paragraph 49.
    m. Paragraph 54. is redesignated as paragraph 50.
    n. Paragraph 56. is redesignated as paragraph 52.

    3. Attachment B, paragraphs 1. and 2. are revised to read as 
follows:
    1. Advertising and public relations costs.
    a. The term advertising costs means the costs of advertising media 
and corollary administrative costs. Advertising media include 
magazines, newspapers, radio and television, direct mail, exhibits, 
electronic or computer transmittals, and the like.
    b. The term public relations includes community relations and means 
those activities dedicated to maintaining the image of the organization 
or maintaining or promoting understanding and favorable relations with 
the community or public at large or any segment of the public.
    c. The only allowable advertising costs are those which are solely 
for:
    (1) The recruitment of personnel required for the performance by 
the organization of obligations arising under a Federal award (See also 
Attachment B, paragraphs 42., Recruiting, and paragraph 43., Relocation 
costs.);
    (2) The procurement of goods and services for the performance of a 
Federal award;
    (3) The disposal of scrap or surplus materials acquired in the 
performance of a Federal award except when governmental units are 
reimbursed for disposal costs at a predetermined amount; or
    (4) Other specific purposes necessary to meet the requirements of 
the Federal award.
    d. The only allowable public relations costs are:
    (1) Costs specifically required by the Federal award;
    (2) Costs of communicating with the public and press pertaining to 
specific activities or accomplishments which result from performance of 
Federal awards (these costs are considered necessary as part of the 
outreach effort for the Federal award); or
    (3) Costs of conducting general liaison with news media and 
government public relations officers, to the extent that such 
activities are limited to communication and liaison necessary keep the 
public informed on matters of public concern, such as notices of 
Federal contract/grant awards, financial matters, etc.
    e. Costs identified in subparagraphs c and d if incurred for more 
than one Federal award or for both sponsored work and other work of the 
organization, are allowable to the extent that the principles in 
Attachment A, paragraphs B. (``Direct Costs'') and C. (``Indirect 
Costs'') are observed.
    f. Unallowable advertising and public relations costs include the 
following:
    (1) All advertising and public relations costs other than as 
specified in paragraphs 1.c., d., and e.;
    (2) Costs of meetings, conventions, convocations, or other events 
related to other activities of the organization, including:
    (a) Costs of displays, demonstrations, and exhibits;
    (b) Costs of meeting rooms, hospitality suites, and other special 
facilities used in conjunction with shows and other special events; and
    (c) Salaries and wages of employees engaged in setting up and 
displaying exhibits, making demonstrations, and providing briefings;
    (3) Costs of promotional items and memorabilia, including models, 
gifts, and souvenirs;
    (4) Costs of advertising and public relations designed solely to 
promote the organization.
    2. Advisory councils.
    Costs incurred by advisory councils or committees are allowable as 
a direct cost where authorized by the Federal awarding agency or as an 
indirect cost where allocable to Federal awards.
    4. Attachment B, paragraphs 4. through 7. are revised to read as 
follows:
    4. Audit costs and related services.
    a. The costs of audits required by, and performed in accordance 
with, the Single Audit Act, as implemented by Circular A-133, ``Audits 
of States, Local Governments, and Non-Profit Organizations'' are 
allowable. Also see 31 U.S.C. 7505(b) and section 230 (``Audit Costs'') 
of Circular A-133.
    b. Other audit costs are allowable if included in an indirect cost 
rate proposal, or if specifically approved by the awarding agency as a 
direct cost to an award.
    c. The cost of agreed-upon procedures engagements to monitor 
subrecipients who are exempted from A-133 under section 200(d) are 
allowable, subject to the conditions listed in A-133, section 
230(b)(2).
    5. Bad debts. Bad debts, including losses (whether actual or 
estimated) arising from uncollectable accounts and other claims, 
related collection costs, and related legal costs, are unallowable.
    6. 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.
    7. Communication costs. Costs incurred for telephone services, 
local and long distance telephone calls, telegrams, postage, messenger, 
electronic or computer transmittal services and the like are allowable.
    5. In Attachment B, redesignated paragraph 8. is amended by 
redesignating paragraphs 8.f. through 8.i. as paragraphs 8.g. through 
8.j. adding a new paragraph 8.f. and adding a new paragraph 8.k. to 
read as follows.
    8. Compensation for personal services.
* * * * *
    f. Overtime, extra-pay shift, and multi-shift premiums. Premiums 
for overtime, extra-pay shifts, and multi-shift work are allowable only 
with the prior approval of the awarding agency except:
    (1) 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.
    (2) When employees are performing indirect functions, such as 
administration, maintenance, or accounting.
    (3) In the performance of tests, laboratory procedures, or other 
similar operations which are continuous in nature and cannot reasonably 
be interrupted or otherwise completed.
    (4) When lower overall cost to the Federal Government will result.
* * * * *
    k. Severance pay.
    (1) 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
    (a) Law,
    (b) Employer-employee agreement,

[[Page 25989]]

    (c) Established policy that constitutes, in effect, an implied 
agreement on the organization's part, or
    (d) Circumstances of the particular employment.
    (2) Costs of severance payments are divided into two categories as 
follows:
    (a) 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.
    (b) 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.
    (c) Costs incurred in certain severance pay packages (commonly 
known as ``a golden parachute'' payment) which are in an amount in 
excess of the normal severance pay paid by the organization to an 
employee upon termination of employment and are paid to the employee 
contingent upon a change in management control over, or ownership of, 
the organization's assets are unallowable.
    (d) Severance payments to foreign nationals employed by the 
organization outside the United States, to the extent that the amount 
exceeds the customary or prevailing practices for the organization in 
the United States are unallowable, unless they are necessary for the 
performance of Federal programs and approved by awarding agencies.
    (e) Severance payments to foreign nationals employed by the 
organization outside the United States due to the termination of the 
foreign national as a result of the closing of, or curtailment of 
activities by, the organization in that country, are unallowable, 
unless they are necessary for the performance of Federal programs and 
approved by awarding agencies.
    6. Attachment B, paragraph 9. is revised to read as follows:
    9. 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 paragraphs Attachment B, 8.g.(3) and 22.a.(2)(d); pension funds 
(see paragraph 8.i.): and reserves for normal severance pay (see 
paragraph 8.k.).
    7. Attachment B, paragraphs 11. through 15. are revised to read as 
follows:
    11. Depreciation and use allowances.
    a. Compensation for the use of buildings, other capital 
improvements, and equipment on hand may be made through use allowance 
or depreciation. However, except as provided in Attachment B, paragraph 
11.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 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.
    e. 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 d, 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. 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 6\2/3\ 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, 
modular furniture, 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

[[Page 25990]]

be subject to the 6\2/3\ percent equipment use allowance limitation.
    h. Charges for use allowances or depreciation must be supported by 
adequate property records and physical inventories must be taken at 
least once every two years (a statistical sampling basis is acceptable) 
to ensure that assets exist and are usable and needed. When the 
depreciation method is followed, adequate depreciation records 
indicating the amount of depreciation taken each period must also be 
maintained.
    12. Donations and contributions.
    a. Contributions or donations rendered. Contributions or donations, 
including cash, property, and services, made by the organization, 
regardless of the recipient, are unallowable.
    b. Donated services received:
    (1) Donated or volunteer services may be furnished to a 
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. However, the value of 
donated services may be used to meet cost sharing or matching 
requirements in accordance with OMB Circular A-110.
    (2) The value of donated services utilized in the performance of a 
direct cost activity shall, when material in amount, be considered in 
the determination of the organization's indirect costs or rate(s) and, 
accordingly, shall be allocated a proportionate share of applicable 
indirect costs when the following exist:
    (a) The aggregate value of the services is material;
    (b) The services are supported by a significant amount of the 
indirect costs incurred by the organization; and
    (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.
    c. Donated goods or space.
    (1) Donated goods; i.e., expendable personal property/supplies, and 
donated use of space may be furnished to a 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 Circular 
A-110. Where donations are treated as indirect costs, indirect cost 
rates will separate the value of the donations so that reimbursement 
will not be made.
    13. Employee morale, health, and welfare costs.
    a. The costs of employee information publications, health or first-
aid clinics and/or infirmaries, recreational activities, employee 
counseling services, and any 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.
    b. Such costs will be equitably apportioned to all activities of 
the organization. Income generated from any of these activities will be 
credited to the cost thereof unless such income has been irrevocably 
set over to employee welfare organizations.
    14. Entertainment costs.
    Costs of entertainment, including amusement, diversion, and social 
activities and any costs directly associated with such costs (such as 
tickets to shows or sports events, meals, lodging, rentals, 
transportation, and gratuities) are unallowable.
    15. Equipment and other capital expenditures.
    a. For purposes of this subparagraph, the following definitions 
apply:
    (1) ``Capital Expenditures'' means expenditures for the acquisition 
cost of capital assets (equipment, buildings, land), or expenditures to 
make improvements to capital assets that materially increase their 
value or useful life. Acquisition cost means the cost of the asset 
including the cost to put it in place. Acquisition cost for equipment, 
for example, means the net invoice price of the 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 may be included in, or excluded 
from the acquisition cost in accordance with the organization's regular 
accounting practices.
    (2) ``Equipment'' means an article of nonexpendable, tangible 
personal property having a useful life of more than one year and an 
acquisition cost which equals or exceeds the lesser of the 
capitalization level established by the organization for financial 
statement purposes, or $5000.
    (3) ``Special purpose equipment'' means equipment which is used 
only for research, medical, scientific, or other technical activities. 
Examples of special purpose equipment include microscopes, x-ray 
machines, surgical instruments, and spectrometers.
    (4) ``General purpose equipment'' means equipment, which is not 
limited to research, medical, scientific or other technical activities. 
Examples include office equipment and furnishings, modular offices, 
telephone networks, information technology equipment and systems, air 
conditioning equipment, reproduction and printing equipment, and motor 
vehicles.
    b. The following rules of allowability shall apply to equipment and 
other capital expenditures:
    (1) Capital expenditures for general purpose equipment, buildings, 
and land are unallowable as direct charges, except where approved in 
advance by the awarding agency.
    (2) Capital expenditures for special purpose equipment are 
allowable as direct costs, provided that items with a unit cost of 
$5000 or more have the prior approval of the awarding agency.
    (3) 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.
    (4) When approved as a direct charge pursuant to this paragraph 
15.b.(1), (2), and (3), capital expenditures will be charged in the 
period in which the expenditure is incurred, or as otherwise determined 
appropriate by and negotiated with the awarding agency.
    (5) Equipment and other capital expenditures are unallowable as 
indirect costs. However, see Attachment B, paragraph 11., Depreciation 
and use allowance, for rules on the allowability of use allowances or 
depreciation on buildings, capital improvements, and equipment. Also, 
see Attachment B, paragraph 44., Rental costs of buildings and 
equipment, for rules on the allowability of rental costs for land, 
buildings, and equipment.
    (6) The unamortized portion of any equipment written off as a 
result of a change in capitalization levels may be recovered by 
continuing to claim the

[[Page 25991]]

otherwise allowable use allowances or depreciation on the equipment, or 
by amortizing the amount to be written off over a period of years 
negotiated with the cognizant agency.

    8. Attachment B, paragraphs 17. and 18., are revised to read as 
follows:
    17. Fund raising and investment management costs.
    a. 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.
    b. Costs of investment counsel and staff and similar expenses 
incurred solely to enhance income from investments are unallowable.
    c. Fundraising and investment activities shall be allocated an 
appropriate share of indirect costs under the conditions described in 
subparagraph B.3 of Attachment A.
    18. Gains and losses on depreciable 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 account 
and is reflected in the depreciation allowable under Attachment B, 
paragraph 11.
    (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 Attachment B, paragraph 22.
    (d) Compensation for the use of the property was provided through 
use allowances in lieu of depreciation in accordance with paragraph 11.
    (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.
    9. Attachment B, paragraph 21. is revised to read as follows:
    21. 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: (a) 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 (b) the 
extent to which the facility was actually used to meet demands during 
the accounting period. A multi-shift basis should be used if it can be 
shown that this amount of usage would normally be expected for the type 
of facility involved.
    (4) ``Cost of idle facilities or idle capacity'' means costs such 
as maintenance, repair, housing, rent, and other related costs, e.g., 
insurance, interest, property taxes 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 on the initiative taken to 
use, lease, or dispose of such facilities.
    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 that 
the capacity is reasonably anticipated to be necessary or was 
originally reasonable and is not subject to reduction or elimination by 
use on other Federal awards, subletting, renting, or sale, in 
accordance with sound business, economic, or security practices. 
Widespread idle capacity throughout an entire facility or among a group 
of assets having substantially the same function may be considered idle 
facilities.
    10. Attachment B, paragraph 23. is revised to read as follows:
    23. Interest. a. Costs incurred for interest on borrowed capital, 
temporary use of endowment funds, or the use of the organization's own 
funds, however represented, are unallowable. However, interest on debt 
incurred after September 29, 1995 to acquire or replace capital assets 
(including renovations, alterations, equipment, land, and capital 
assets acquired through capital leases), acquired after September 29, 
1995 and used in support of Federal awards is allowable, provided that:
    (1) 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 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) A statement of purpose and justification for facility 
acquisition or replacement;
    (b) A statement as to why current facilities are not adequate;
    (c) A statement of planned future use of the facility;
    (d) A description of the financing agreement to be arranged for the 
facility;
    (e) A summary of the building contract with estimated cost 
information and statement of source and use of funds;
    (f) A schedule of planned occupancy dates.
    (2) 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 Sections --.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

[[Page 25992]]

length'') third-party. The lease/purchase analysis shall include a 
comparison of the net present value of the projected total cost 
comparisons of both alternatives over the period the asset is expected 
to be used by the non-profit organization. The cost comparisons 
associated with purchasing the facility shall include the estimated 
purchase price, anticipated operating and maintenance costs (including 
property taxes, if applicable) not included in the debt financing, less 
any estimated asset salvage value at the end of the period defined 
above. The cost comparison for a capital lease shall include the 
estimated total lease payments, any estimated bargain purchase option, 
operating and maintenance costs, and taxes not included in the capital 
leasing arrangement, less any estimated credits due under the lease at 
the end of the period defined above. Projected operating lease costs 
shall be based on the anticipated cost of leasing comparable facilities 
at fair market rates under rental agreements that would be renewed or 
reestablished over the period defined above, and any expected 
maintenance costs and allowable property taxes to be borne by the non-
profit organization directly or as part of the lease arrangement.
    (3) 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.
    (4) 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.
    (5) 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.
    (6) Organizations are also subject to the following conditions:
    (a) Interest on debt incurred to finance or refinance assets 
acquired before or reacquired after September 29, 1995, is not 
allowable.
    (b) Interest attributable to fully depreciated assets is 
unallowable.
    (c) 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.
    (d) 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.
    (e) 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.
    b. 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.
    c. The following definitions are to be used for purposes of this 
paragraph:
    (1) Re-acquired assets means assets held by the non-profit 
organization prior to September 29, 1995 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.
    (2) Initial equity contribution means the amount or value of 
contributions made by organizations for the acquisition of the asset or 
prior to occupancy of facilities.
    (3) Asset costs means the capitalizable costs of an asset, 
including construction costs, acquisition costs, and other such costs 
capitalized in accordance with GAAP.

    11. Attachment B, paragraph 25. is amended by adding a new sub-
paragraph d. at the end to read as follows:
    25. Lobbying.
* * * * *
    d. Executive lobbying costs. Costs incurred in attempting to 
improperly influence either directly or indirectly, an employee or 
officer of the Executive Branch of the Federal Government to give 
consideration or to act regarding a sponsored agreement or a regulatory 
matter are unallowable. Improper influence means any influence that 
induces or tends to induce a Federal employee or officer to give 
consideration or to act regarding a federally-sponsored agreement or 
regulatory matter on any basis other than the merits of the matter.
    12. Attachment B, paragraph 26. is amended by revising the title to 
read as follows:
    26. Losses on other awards or contracts.
* * * * *
    13. Attachment B, paragraphs 27. through 30. are revised to read as 
follows:
    27. Maintenance and repair costs.
    Costs incurred for necessary maintenance, repair, or upkeep of 
buildings and equipment (including Federal property unless otherwise 
provided for) which neither add to the permanent value of the property 
nor appreciably prolong its intended life, but keep it in an efficient 
operating condition, are allowable. Costs incurred for improvements 
which add to the permanent value of the buildings and equipment or 
appreciably prolong their intended life shall be treated as capital 
expenditures (see Attachment B paragraph 15.).
    28. Materials and supplies costs.

[[Page 25993]]

    a. Costs incurred for materials, supplies, and fabricated parts 
necessary to carry out a Federal award are allowable.
    b. Purchased materials and supplies shall be charged at their 
actual prices, net of applicable credits. Withdrawals from general 
stores or stockrooms should be charged at their actual net cost under 
any recognized method of pricing inventory withdrawals, consistently 
applied. Incoming transportation charges are a proper part of materials 
and supplies costs.
    c. Only materials and supplies actually used for the performance of 
a Federal award may be charged as direct costs.
    d. Where federally-donated or furnished materials are used in 
performing the Federal award, such materials will be used without 
charge.
    29. Meetings and conferences.
    Costs of meetings and conferences, the primary purpose of which is 
the dissemination of technical information, are allowable. This 
includes costs of meals, transportation, rental of facilities, 
speakers' fees, and other items incidental to such meetings or 
conferences. But see Attachment B, paragraphs 14., Entertainment, and 
34., Participant support costs.
    30. Memberships, subscriptions, and professional activities.
    a. Costs of the organization's membership in business, technical, 
and professional organizations are allowable.
    b. Costs of the organization's subscriptions to business, 
professional, and technical periodicals are allowable.
    c. Costs of membership in any civic or community organization are 
allowable with prior approval by Federal cognizant agency.
    d. Costs of membership in any country club or social or dining club 
or organization are unallowable.
    14. Attachment B, paragraphs 34. and 35. are revised to read as 
follows:
    34. Patent costs.
    a. The following costs relating to patent and copyright matters are 
allowable:
    (1) Cost of preparing disclosures, reports, and other documents 
required by the Federal award and of searching the art to the extent 
necessary to make such disclosures;
    (2) Cost of 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
    (3) General counseling services relating to patent and copyright 
matters, such as advice on patent and copyright laws, regulations, 
clauses, and employee agreements (but see Attachment B, paragraphs 37., 
Professional service costs, and 44., Royalties and other costs for use 
of patents and copyrights).
    b. The following costs related to patent and copyright matter are 
unallowable:
    (1) Cost of preparing disclosures, reports, and other documents and 
of searching the art to the extent necessary to make disclosures not 
required by the award.
    (2) Costs in connection with filing and prosecuting any foreign 
patent application, or any United States patent application, where the 
Federal award does not require conveying title or a royalty-free 
license to the Federal Government (but see Attachment B, paragraph 44., 
Royalties and other costs for use of patents and copyrights).
    35. Plant and homeland security costs.
    Necessary and reasonable expenses incurred for routine and homeland 
security to protect facilities, personnel, and work products are 
allowable. Such costs include, but are not limited to, wages and 
uniforms of personnel engaged in security activities; equipment; 
barriers; contractual security services; consultants; etc. Capital 
expenditures for homeland and plant security purposes are subject to 
Attachment B, paragraph 15., Equipment and other capital expenditures, 
of this circular.
    15. In Attachment B, redesignated paragraph 36. is amended by 
revising the title to read as follows:
    36. Pre-agreement costs.
* * * * *
    16. Attachment B, paragraphs 37. and 38. are revised to read as 
follows:
    37. 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. and c. of this paragraph 37. 
when reasonable in relation to the services rendered and when not 
contingent upon recovery of the costs from the Federal Government.
    In addition, legal and related services are limited under 
Attachment B, paragraph 10.
    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 this Attachment B, paragraph 
37.b., retainer fees to be allowable must be supported by evidence of 
bona fide services available or rendered.
    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. Publication costs also include page 
charges in professional publications.
    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. Page charges for professional journal publications are allowable 
as a necessary part of research costs where:
    (1) The research papers report work supported by the Federal 
Government; and
    (2) The charges are levied impartially on all research papers 
published by the journal, whether or not by federally-sponsored 
authors.

    17. Attachment B, paragraph 40 is revised to read as follows:
    40. Reconversion costs. Costs incurred in the restoration or 
rehabilitation of the organization's facilities to approximately the 
same condition

[[Page 25994]]

existing immediately prior to commencement of Federal awards, less 
costs related to normal wear and tear, are allowable.

    18. Attachment B, paragraphs 43. through 46., are revised to read 
as follows:
    43. Rental costs of buildings and equipment.
    a. Subject to the limitations described in subparagraphs b. through 
d. of this paragraph 43., 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. Rental arrangements should be reviewed 
periodically to determine if circumstances have changed and other 
options are available.
    b. Rental costs under ``sale and lease back'' arrangements are 
allowable only up to the amount that would be allowed had the 
organization continued to own the property. This amount would include 
expenses such as depreciation or use allowance, maintenance, taxes, and 
insurance.
    c. Rental costs under ``less-than-arm's-length'' leases are 
allowable only up to the amount (as explained in subparagraph b. of 
this paragraph 43.) that would be allowed had title to the property 
vested in the organization. For this purpose, a less-than-arm's-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:
    (1) Divisions of an organization;
    (2) Organizations under common control through common officers, 
directors, or members; and
    (3) 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.
    For example, an organization may establish a separate corporation 
for the sole purpose of owning property and leasing it back to the 
organization.
    d. Rental costs under leases which are required to be treated as 
capital leases under GAAP are allowable only up to the amount (as 
explained in subparagraph b. of this paragaph 43.) that would be 
allowed had the organization purchased the property on the date the 
lease agreement was executed. The provisions of Financial Accounting 
Standards Board Statement 13, Accounting for Leases, shall be used to 
determine whether a lease is a capital lease. Interest costs related to 
capital leases are allowable to the extent they meet the criteria in 
Attachment B, paragraph 23. Unallowable costs include amounts paid for 
profit, management fees, and taxes that would 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. Selling and marketing. Costs of selling and marketing any 
products or services of the organization are unallowable (unless 
allowed under Attachment B, paragraph 1, as allowable public relations 
cost. However, these costs are allowable as direct costs, with prior 
approval by awarding agencies, when they are necessary for the 
performance of Federal programs.
    46. Specialized service facilities.
    a. The costs of services provided by highly complex or specialized 
facilities operated by the organization, such as computers, wind 
tunnels, and reactors are allowable, provided the charges for the 
services meet the conditions of either 46.b. or c. and, in addition, 
take into account any items of income or Federal financing that qualify 
as applicable credits under Attachment A, paragraph 5, of this 
circular.
    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:
    (1) Does not discriminate against federally-supported activities of 
the organization, including usage by the organization for internal 
purposes; and
    (2) 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. Rates shall 
be adjusted at least biennially, and shall take into consideration 
over/under applied costs of the previous period(s).
    c. Where the costs incurred for a service are not material, they 
may be allocated as indirect costs.
    d. Under some extraordinary circumstances, where it is in the best 
interest of the Federal Government and the organization to establish 
alternative costing arrangements, such arrangements may be worked out 
with the cognizant Federal agency.

    19. Attachment B, paragraph 48, is revised to read as follows:
    48. Termination costs applicable to Federal awards.
    Termination of awards generally gives rise to the incurrence of 
costs, or the need for special treatment of costs, which would not have 
arisen had the Federal 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. 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 Federal 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. If in a particular case, despite all reasonable efforts by the 
organization, certain costs cannot be discontinued

[[Page 25995]]

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 of special tooling, machinery, and is 
generally allowable if:
    (1) Such special tooling, special 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, 
and
    (3) The loss of useful value for any one terminated Federal award 
is limited to that portion of the acquisition cost which bears the same 
ratio to the total acquisition cost as the terminated portion of the 
Federal award bears to the entire terminated Federal award and other 
Federal awards for which the special tooling, special machinery, or 
equipment was acquired.
    d. Rental costs under unexpired leases are generally allowable 
where clearly shown to have been reasonably necessary for the 
performance of the terminated Federal award less the residual value of 
such leases, if:
    (1) the amount of such rental claimed does not exceed the 
reasonable use value of the property leased for the period of the 
Federal award and such further period as may be reasonable, and
    (2) 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 
Federal award, and of reasonable restoration required by the provisions 
of the lease.
    e. Settlement expenses including the following are generally 
allowable:
    (1) Accounting, legal, clerical, and similar costs reasonably 
necessary for:
    (a) The preparation and presentation to the awarding agency of 
settlement claims and supporting data with respect to the terminated 
portion of the Federal award, unless the termination is for default 
(see section --.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 Federal award, except when grantees or 
contractors are reimbursed for disposals at a predetermined amount in 
accordance with sections --.32 through --.37 of Circular A-110.
    (3) Indirect costs related to salaries and wages incurred as 
settlement expenses in subparagraphs e.(1) and (2) of this paragraph 
48. Normally, such indirect costs shall be limited to fringe benefits, 
occupancy cost, and immediate supervision.
    f. Claims under sub awards, including the allocable portion of 
claims which are common to the Federal 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.

    20. In Attachment B, redesignated paragraph 49. is amended by 
revising the title to read as follows:
    49. Training costs.
* * * * *

    21. Attachment B, paragraph 51. is revised to read as follows:
    51. Travel costs.
    a. General. 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. Such costs 
may be charged on an actual cost 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 is applied to an entire trip and not to 
selected days of the trip, and results in charges consistent with those 
normally allowed in like circumstances in the organization's non-
federally-sponsored activities.
    b. Lodging and subsistence. Costs incurred by employees and 
officers for travel, including costs of lodging, other subsistence, and 
incidental expenses, shall be considered reasonable and allowable only 
to the extent such costs do not exceed charges normally allowed by the 
organization in its regular operations as the result of the 
organization's written travel policy. In the absence of an acceptable, 
written organization policy regarding travel costs, the rates and 
amounts established under subchapter I of Chapter 57, Title 5, United 
States Code (``Travel and Subsistence Expenses; Mileage Allowances''), 
or by the Administrator of General Services, or by the President (or 
his or her designee) pursuant to any provisions of such subchapter 
shall apply to travel under Federal awards (48 CFR 31.205-46(a)).
    c. Commercial air travel.
    (1) Airfare costs in excess of the customary standard commercial 
airfare (coach or equivalent), Federal Government contract airfare 
(where authorized and available), or the lowest commercial discount 
airfare are unallowable except when such accommodations would:
    (a) Require circuitous routing;
    (b) Require travel during unreasonable hours;
    (c) Excessively prolong travel;
    (d) Result in additional costs that would offset the transportation 
savings; or
    (e) Offer accommodations not reasonably adequate for the traveler's 
medical needs. The organization must justify and document these 
conditions on a case-by-case basis in order for the use of first-class 
airfare to be allowable in such cases.
    (2) Unless a pattern of avoidance is detected, the Federal 
Government will generally not question an organization's determinations 
that customary standard airfare or other discount airfare is 
unavailable for specific trips if the organization can demonstrate 
either of the following: (a) that such airfare was not available in the 
specific case; or (b) that it is the organization's overall practice to 
make routine use of such airfare.
    d. Air travel by other than commercial carrier. Costs of travel by 
organization-owned, -leased, or -chartered aircraft include the cost of 
lease, charter, operation (including personnel costs), maintenance, 
depreciation, insurance, and other related costs. The portion of such 
costs that exceeds the cost of allowable commercial air travel, as 
provided for in paragraph c. of this paragraph 51., is unallowable.
    e. Foreign travel. 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 receive such approval. 
For purposes of this provision, ``foreign travel'' includes any travel 
outside Canada, Mexico, the United States, and any United States 
territories and possessions. However, the term ``foreign travel'' for 
an organization located in a foreign country means travel outside that 
country.

[FR Doc. 04-10350 Filed 5-7-04; 8:45 am]
BILLING CODE 3110-01-P