[Federal Register Volume 70, Number 168 (Wednesday, August 31, 2005)]
[Rules and Regulations]
[Pages 51880-51909]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-16648]


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OFFICE OF MANAGEMENT AND BUDGET

2 CFR Parts 215 and 220


Cost Principles for Educational Institutions (OMB Circular A-21)

AGENCY: Office of Management and Budget.

ACTION: Relocation of policy guidance to 2 CFR chapter II.

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SUMMARY: The Office of Management and Budget (OMB) is relocating OMB 
Circular A-21, ``Cost Principles for Educational Institutions,'' to 
Title 2 in the Code of Federal Regulations (2 CFR), subtitle A, chapter 
II, part 220. This relocation is part of our broader initiative to 
create 2 CFR as a single location where the public can find both OMB 
guidance for grants and agreements and the associated Federal agency 
implementing regulations. The broader initiative provides a good 
foundation for streamlining and simplifying the policy framework for 
grants and agreements, one objective of OMB and Federal agency efforts 
to implement the Federal Financial Assistance Management Improvement 
Act of 1999 (Pub. L. 106-107).
    Furthermore, this document makes changes to 2 CFR part 215, Uniform 
Administrative Requirements for Grants and Agreements With Institutions 
of Higher Education, Hospitals, and Other Non-Profit Organizations (OMB 
Circular A-110). The changes will add to part 215 new references to 2 
CFR parts 220, 225, and 230 for the cost principles in OMB Circulars A-
21, A-87, and A-122, respectively; will update part 215 to include a 
citation for the Social Security Administration's grant regulation; and 
will correct part 215 to add the amendatory language of A-110 published 
on October 8, 1999, and to correct a typographic error.

DATES: This document is effective August 31, 2005. This document 
republishes the existing OMB Circular A-21, which already is in effect.

FOR FURTHER INFORMATION CONTACT: Gil Tran, Office of Federal Financial 
Management, Office of Management and Budget, telephone (202) 395-3052 
(direct) or (202) 395-3993 (main office) and e-mail Hai_M._Tran@omb.eop.gov.

SUPPLEMENTARY INFORMATION: On May 10, 2004 [69 FR 25970], we revised 
the three OMB circulars containing Federal cost principles. The purpose 
of those revisions was to simplify the cost principles by making the 
descriptions of similar cost items consistent across the circulars 
where possible, thereby reducing the possibility of misinterpretation. 
Those revisions resulted from OMB and Federal agency efforts to 
implement Public Law 106-107, and were effective on June 9, 2004.
    In this document and the two documents immediately following this 
one, we relocate those three OMB circulars to the CFR, in Title 2 which 
was established on May 11, 2004 [69 FR 26276] as a central location for 
OMB and Federal agency policies on grants and agreements. When we 
established 2 CFR and relocated OMB Circular A-110 in that new title, 
we stated that we would relocate in the near future the other OMB 
circulars related to grants and agreements. Today's documents are a 
significant step toward that end.
    Our relocation of OMB Circular A-21 does not change the substance 
of the circular. Other than adjustments needed to conform to the 
formatting requirements of the CFR, this notice relocates in 2 CFR the 
version of OMB Circular A-21 as revised by the May 10, 2004 notice.
    Conforming changes to 2 CFR part 215. There is a need for 
conforming changes to 2 CFR part 215, which contains administrative 
requirements for grants and other financial assistance agreements with 
educational institutions and other nonprofit organizations. The 
amendments to Sec.  215.25(c)(6) and (e), Sec.  215.27, and Sec.  
215.29(b) add the new references to 2 CFR parts 220, 225, and 230 for 
the cost principles in OMB Circulars A-21, A-87, and A-122, 
respectively.
    Update and corrections to 2 CFR part 215. Additional changes to 2 
CFR part 215 are needed to update Sec.  215.5 and to correct Sec.  
215.36 and Sec.  215.72. The update to Sec.  215.5 adds the CFR 
citation for the Social Security Administration's (SSA) implementation 
of the grants management common rule, ``Uniform Administrative 
Requirements for Grants and Cooperative Agreements to State and Local 
Governments.'' The changes to Sec.  215.36 provide the corrections 
needed to include the amendments to OMB Circular A-110 that were 
published as final on October 8, 1999 [64 FR 54926] and were 
inadvertently omitted from our publication of part 215 last year [69 FR 
26281]. The change to Sec.  215.72 provides correction for a long-
standing typo.

List of Subjects

2 CFR Part 215

    Accounting, Colleges and universities, Cooperative agreements, 
Grant programs, Grants administration, Hospitals, Nonprofit 
organizations, Reporting and recordkeeping requirements.

2 CFR Part 220

    Accounting, Colleges and universities, Grant programs, Grant 
administrations, Reporting and recordkeeping requirements.

    Dated: August 8, 2005.
Joshua B. Bolten,
Director.

Authority and Issuance

0
For the reasons set forth above, the Office of Management and Budget 
amends 2 CFR, subtitle A, chapter II, as follows:

PART 215--[AMENDED]

0
1. The authority citation for part 215 continues to read as follows:

    Authority: 31 U.S.C. 503; 31 U.S.C. 1111; 41 U.S.C. 405; 
Reorganization Plan No. 2 of 1970; E.O. 11541, 35 FR 10737, 3 CFR, 
1966-1970, p. 939.


Sec.  215.5  [Amended]

0
2. Section 215.5 is amended by adding ``20 CFR part 437,'' following 
``15 CFR part 24,''.

0
3. Section 215.25 is amended by revising paragraphs (c)(6) and (e) to 
read as follows:


Sec.  215.25  Revision of budget and program plans.

* * * * *
    (c) * * *
    (6) The inclusion, unless waived by the Federal awarding agency, of 
costs that require prior approval in accordance with any of the 
following, as applicable:
    (i) 2 CFR part 220, ``Cost Principles for Educational Institutions 
(OMB Circular A-21);''
    (ii) 2 CFR part 230, ``Cost Principles for Non-Profit Organizations 
(OMB Circular A-122);''
    (iii) 45 CFR part 74, Appendix E, ``Principles for Determining 
Costs Applicable to Research and Development under Grants and Contracts 
with Hospitals;'' and
    (iv) 48 CFR part 31, ``Contract Cost Principles and Procedures.''
* * * * *
    (e) Except for requirements listed in paragraphs (c)(1) and (c)(4) 
of this

[[Page 51881]]

section, Federal awarding agencies are authorized, at their option, to 
waive cost-related and administrative prior written approvals required 
by 2 CFR parts 220 and 230 (OMB Circulars A-21 and A-122). Such waivers 
may include authorizing recipients to do any one or more of the 
following.
* * * * *

0
4. Section 215.27 is revised to read as follows:


Sec.  215.27  Allowable costs.

    For each kind of recipient, there is a set of Federal principles 
for determining allowable costs. Allowability of costs shall be 
determined in accordance with the cost principles applicable to the 
entity incurring the costs. Thus, allowability of costs incurred by 
State, local or federally-recognized Indian tribal governments is 
determined in accordance with the provisions of 2 CFR part 225, ``Cost 
Principles for State, Local, and Indian Tribal Governments (OMB 
Circular A-87.'' The allowability of costs incurred by non-profit 
organizations is determined in accordance with the provisions of 2 CFR 
part 230, ``Cost Principles for Non-Profit Organizations (OMB Circular 
A-122).'' The allowability of costs incurred by institutions of higher 
education is determined in accordance with the provisions of 2 CFR part 
220, ``Cost Principles for Educational Institutions (OMB Circular A-
21).'' The allowability of costs incurred by hospitals is determined in 
accordance with the provisions of Appendix E of 45 CFR part 74, 
``Principles for Determining Costs Applicable to Research and 
Development Under Grants and Contracts with Hospitals.'' The 
allowability of costs incurred by commercial organizations and those 
non-profit organizations listed in Attachment C to Circular A-122 is 
determined in accordance with the provisions of the Federal Acquisition 
Regulation (FAR) at 48 CFR part 31.

0
5. Section 215.29 is amended by:
0
a. Revising paragraph (b) to read as set forth below; and
0
b. Revising ``the provisions of OMB Circular A-87 and extend such 
policies'' in paragraph (c) to read ``the provisions of 2 CFR part 225, 
``Cost Principles for State, Local, and Indian Tribal Governments (OMB 
Circular A-87)'' and extend such policies''.


Sec.  215.29  Conditional exemptions.

* * * * *
    (b) To promote efficiency in State and local program 
administration, when Federal non-entitlement programs with common 
purposes have specific statutorily-authorized consolidated planning and 
consolidated administrative funding and where most of the State 
agency's resources come from non-Federal sources, Federal agencies may 
exempt these covered State-administered, non-entitlement grant programs 
from certain OMB grants management requirements. The exemptions would 
be from:
    (1) The requirements in 2 CFR part 225, ``Cost Principles for 
State, Local, and Indian Tribal Governments (OMB Circular A-87)'' other 
than the allocability of costs provisions that are contained in 
subsection C.3 of Appendix A to that part;
    (2) The requirements in 2 CFR part 220, ``Cost Principles for 
Educational Institutions (OMB Circular A-21)'' other than the 
allocability of costs provisions that are contained in paragraph C.4 in 
section C of the Appendix to that part;
    (3) The requirements in 2 CFR part 230, ``Cost Principles for Non-
Profit Organizations (OMB Circular A-122)'' other than the allocability 
of costs provisions that are in paragraph A.4 in section A of Appendix 
A to that part;
    (4) The administrative requirements provisions of part 215 (OMB 
Circular A-110, ``Uniform Administrative Requirements for Grants and 
Agreements with Institutions of Higher Education, Hospitals, and Other 
Non-Profit Organizations,''); and
    (5) The agencies' grants management common rule (see Sec.  215.5).
* * * * *
0
6. Section 215.36 is amended as follows:
0
a. Paragraph (d) is redesignated as paragraph (e).
0
b. Paragraph (c) is amended by removing from the first sentence 
``Unless waived by the Federal awarding agency,'' and capitalizing the 
new opening word ``The''.
0
c. A new paragraph (d) is added, as follows:


Sec.  215.36  Intangible property.

* * * * *
    (d) (1) In addition, in response to a Freedom of Information Act 
(FOIA) request for research data relating to published research 
findings produced under an award that was used by the Federal 
Government in developing an agency action that has the force and effect 
of law, the Federal awarding agency shall request, and the recipient 
shall provide, within a reasonable time, the research data so that they 
can be made available to the public through the procedures established 
under the FOIA. If the Federal awarding agency obtains the research 
data solely in response to a FOIA request, the agency may charge the 
requester a reasonable fee equaling the full incremental cost of 
obtaining the research data. This fee should reflect costs incurred by 
the agency, the recipient, and the applicable subrecipients. This fee 
is in addition to any fees the agency may assess under the FOIA (5 
U.S.C. 552(a)(4)(A)).
    (2) The following definitions apply for purposes of paragraph (d) 
of this section:
    (i) Research data is defined as the recorded factual material 
commonly accepted in the scientific community as necessary to validate 
research findings, but not any of the following: Preliminary analyses, 
drafts of scientific papers, plans for future research, peer reviews, 
or communications with colleagues. This ``recorded'' material excludes 
physical objects (e.g., laboratory samples). Research data also do not 
include:
    (A) Trade secrets, commercial information, materials necessary to 
be held confidential by a researcher until they are published, or 
similar information which is protected under law; and
    (B) Personnel and medical information and similar information the 
disclosure of which would constitute a clearly unwarranted invasion of 
personal privacy, such as information that could be used to identify a 
particular person in a research study.
    (ii) Published is defined as either when:
    (A) Research findings are published in a peer-reviewed scientific 
or technical journal; or
    (B) A Federal agency publicly and officially cites the research 
findings in support of an agency action that has the force and effect 
of law.
    (iii) Used by the Federal Government in developing an agency action 
that has the force and effect of law is defined as when an agency 
publicly and officially cites the research findings in support of an 
agency action that has the force and effect of law.
* * * * *


Sec.  215.72  [Amended]

0
7. Section 215.72 is amended by removing from paragraph (b) the 
reference to ``Sec.  215.73(a),'' and adding ``paragraph (a) of this 
section,'' in its place.

0
8. Part 220 is added to Chapter II to read as follows:

PART 220--COST PRINCIPLES FOR EDUCATIONAL INSTITUTIONS (OMB 
CIRCULAR A-21)

Sec.
220.5 Purpose.

[[Page 51882]]

220.10 Scope.
220.15 Policy.
220.20 Applicability.
220.25 OMB responsibilities.
220.30 Federal agency responsibilities.
220.35 Effective date of changes.
220.40 Relationship to previous issuance.
220.45 Information contact.

Appendix A to Part 220--Principles for Determining Costs Applicable 
to Grants, Contracts, and Other Agreements with Educational 
Institutions

    Authority: 31 U.S.C. 503; 31 U.S.C. 1111; 41 U.S.C. 405; 
Reorganization Plan No. 2 of 1970; E.O. 11541, 35 FR 10737, 3 CFR, 
1966-1970, p. 939.


Sec.  220.5  Purpose.

    This part establishes principles for determining costs applicable 
to grants, contracts, and other agreements with educational 
institutions.


Sec.  220.10  Scope.

    The principles in this part deal with the subject of cost 
determination, and make no attempt to identify the circumstances or 
dictate the extent of agency and institutional participation in the 
financing of a particular project. Provision for profit or other 
increment above cost is outside the scope of this part.


Sec.  220.15  Policy.

    The principles in this part are designed to provide that the 
Federal Government bear its fair share of total costs, determined in 
accordance with generally accepted accounting principles, except where 
restricted or prohibited by law. Agencies are not expected to place 
additional restrictions on individual items of cost. The successful 
application of cost accounting principles requires development of 
mutual understanding between representatives of educational 
institutions and of the Federal Government as to their scope, 
implementation, and interpretation.


Sec.  220.20  Applicability.

    (a) All Federal agencies that sponsor research and development, 
training, and other work at educational institutions shall apply the 
provisions of Appendix A to this part in determining the costs incurred 
for such work. The principles shall also be used as a guide in the 
pricing of fixed price or lump sum agreements.
    (b) Each federal agency that awards defense-related contracts to a 
Federally Funded Research and Development Center (FFRDC) associated 
with an educational institution shall require the FFRDC to comply with 
the Cost Accounting Standards and with the rules and regulations issued 
by the Cost Accounting Standards Board and set forth in 47 CFR part 99.


Sec.  220.25  OMB responsibilities.

    OMB is responsible for:
    (a) Issuing and maintaining the guidance in this part.
    (b) Interpreting the policy requirements in this part and providing 
assistance to ensure effective and efficient implementation.
    (c) Granting any deviations to Federal agencies from the guidance 
in this part, as provided in Appendix A to this part. Exceptions will 
only be made in particular cases where adequate justification is 
presented.
    (d) Conducting broad oversight of government-wide compliance with 
the guidance in this part.


Sec.  220.30  Federal Agency responsibilities.

    The head of each Federal agency that awards and administers grants 
and agreements subject to this part is responsible for requesting 
approval from and/or consulting with OMB (as applicable) for deviations 
from the guidance in Appendix A to this part and performing the 
applicable functions specified in Appendix A to this part.


Sec.  220.35  Effective date for changes.

    Institutions as of the start of their first fiscal year beginning 
after that date shall implement the provisions. Earlier implementation, 
or a delay in implementation of individual provisions, is permitted by 
mutual agreement between an institution and the cognizant Federal 
agency.


Sec.  220.40  Relationship to previous issuance.

    (a) The guidance in this part previously was issued as OMB Circular 
A-21. Designations of the attachment to the Circular and the appendices 
to that attachment have changed, as shown in the following table:

------------------------------------------------------------------------
 The portion of OMB Circular A-21 that   Is designated in this part as .
        was designated as . . .                        . .
------------------------------------------------------------------------
(1) The Attachment to the circular,      Appendix A to Part 220--
 entitled ``Principles For Determining    Principles For Determining
 Costs Applicable to Grants, Contracts,   Costs Applicable to Grants,
 and Other Agreements with Educational    Contracts, and Other
 Institutions,''.                         Agreements with Educational
                                          Institutions.
(2) Exhibit A in the attachment to the   Exhibit A, List of Colleges and
 circular, entitled ``List of Colleges    Universities Subject to
 and Universities Subject to Section      Section J.12.h of Circular A-
 J.12.h of Circular A-21,''.              21, to Appendix A.
(3) Exhibit B in the attachment to the   Exhibit B, Listing of
 circular, entitled ``Listing of          Institutions that are eligible
 Institutions that are eligible for the   for the utility cost
 utility cost adjustment,''.              adjustment, to Appendix A.
(4) Exhibit C in the attachment to the   Exhibit C, Examples of ``major
 circular, entitled ``Examples of         project'' where direct
 `major project' where direct charging    charging of administrative or
 of administrative or clerical staff      clerical staff salaries may be
 salaries may be appropriate,''.          appropriate, to Appendix A.
(5) Appendix A to the attachment to the  Attachment A, CASB's Cost
 circular, entitled ``CASB's Cost         Accounting Standards (CAS), to
 Accounting Standards (CAS),''.           Appendix A.
(6) Appendix B to the attachment to the  Attachment B, CASB's Disclosure
 circular, entitled ``CASB's Disclosure   Statement (DS-2), to Appendix
 Statement (DS-2),''.                     A.
(7) Appendix C to the attachment to the  Attachment C, Documentation
 circular, entitled ``Documentation       Requirements for Facilities
 Requirements for Facilities and          and Administrative (F&A) Rate
 Administrative (F&A) Rate Proposals,''.  Proposals, to Appendix A.
------------------------------------------------------------------------

    (b) Historically, OMB Circular A-21 superseded Federal Management 
Circular 73-8, dated December 19, 1973. FMC 73-8 was revised and 
reissued under its original designation of OMB Circular No. A-21. The 
provisions of A-21 were effective October 1, 1979, except for 
subsequent amendments incorporated herein for which the effective dates 
were specified in these revisions (47 FR 33658, 51 FR 20908, 51 FR 
43487, 56 FR 50224, 58 FR 39996, 61 FR 20880, 63 FR 29786, 63 FR 57332, 
65 FR 48566 and 69 FR 25970).


Sec.  220.45  Information contact.

    Further information concerning this part may be obtained by 
contacting the Office of Federal Financial Management, Office of 
Management and Budget, Washington, DC 20503, telephone (202) 395-3993.

[[Page 51883]]

Appendix A to Part 220--Principles for Determining Costs Applicable to 
Grants, Contracts, and Other Agreements With Educational Institutions

Table of Contents

A. Purpose and Scope
    1. Objectives
    2. Policy guides
    3. Application
    4. Inquiries
B. Definition of Terms
    1. Major functions of an institution
    2. Sponsored agreement
    3. Allocation
    4. Facilities and administrative (F&A) costs
C. Basic Considerations
    1. Composition of total costs
    2. Factors affecting allowability of costs
    3. Reasonable costs
    4. Allocable costs
    5. Applicable credits
    6. Costs incurred by State and local governments
    7. Limitations on allowance of costs
    8. Collection of unallowable costs
    9. Adjustment of previously negotiated F&A cost rates containing 
unallowable costs
    10. Consistency in estimating, accumulating and reporting costs
    11. Consistency in allocating costs incurred for the same 
purpose
    12. Accounting for unallowable costs
    13. Cost accounting period
    14. Disclosure statement
D. Direct Costs
    1. General
    2. Application to sponsored agreements
E. F&A Costs
    1. General
    2. Criteria for distribution
F. Identification and Assignment of F&A Costs
    1. Definition of Facilities and Administration.
    2. Depreciation and use allowances
    3. Interest
    4. Operation and maintenance expenses
    5. General administration and general expenses
    6. Departmental administration expenses
    7. Sponsored projects administration
    8. Library expenses
    9. Student administration and services
    10. Offset for F&A expenses otherwise provided for by the 
Federal Government
G. Determination and Application of F&A Cost Rate or Rates
    1. F&A cost pools
    2. The distribution basis
    3. Negotiated lump sum for F&A costs
    4. Predetermined rates for F&A costs
    5. Negotiated fixed rates and carry-forward provisions
    6. Provisional and final rates for F&A costs
    7. Fixed rates for the life of the sponsored agreement
    8. Limitation on reimbursement of administrative costs
    9. Alternative method for administrative costs
    10. Individual rate components
    11. Negotiation and approval of F&A rate
    12. Standard format for submission
H. Simplified Method for Small Institutions
    1. General
    2. Simplified procedure
I. Reserved
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 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. Fund raising and investment costs
    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 capacity
    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
K. Certification of Charges
Exhibit A to Appendix A--List of Colleges and Universities Subject 
to Section J.12.h of Appendix A
Exhibit B to Appendix A--Listing of Institutions That are Eligible 
for the Utility Cost Adjustment
Exhibit C to Appendix A--Examples of ``major project'' Where Direct 
Charging of Administrative or Clerical Staff Salaries May Be 
Appropriate
Attachment A to Appendix A--Cost Accounting Standards (CAS) for 
Educational Institutions
Attachment B to Appendix A--CASB's Disclosure Statement (DS-2)
Attachment C to Appendix A--Documentation Requirements for 
Facilities and Administrative (F&A) Rate Proposals

A. Purpose and Scope

    1. Objectives. This Appendix provides principles for determining 
the costs applicable to research and development, training, and 
other sponsored work performed by colleges and universities under 
grants, contracts, and other agreements with the Federal Government. 
These agreements are referred to as sponsored agreements.
    2. Policy guides. The successful application of these cost 
accounting principles requires development of mutual understanding 
between representatives of universities and of the Federal 
Government as to their scope, implementation, and interpretation. It 
is recognized that--
    a. The arrangements for Federal agency and institutional 
participation in the financing of a research, training, or other 
project are properly subject to negotiation between the agency and 
the institution concerned, in accordance with such governmentwide 
criteria or legal requirements as may be applicable.
    b. Each institution, possessing its own unique combination of 
staff, facilities, and experience, should be encouraged to conduct 
research and educational activities in a manner consonant with its 
own academic philosophies and institutional objectives.
    c. The dual role of students engaged in research and the 
resulting benefits to sponsored agreements are fundamental to the 
research effort and shall be recognized in the application of these 
principles.
    d. Each institution, in the fulfillment of its obligations, 
should employ sound management practices.
    e. The application of these cost accounting principles should 
require no significant changes in the generally accepted accounting 
practices of colleges and universities. However, the accounting 
practices of individual colleges and universities must support the 
accumulation of costs as required by the principles, and must 
provide for adequate documentation to support costs charged to 
sponsored agreements.
    f. Cognizant Federal agencies involved in negotiating facilities 
and administrative (F&A) cost rates and auditing should assure that 
institutions are generally applying these cost accounting principles 
on a consistent basis. Where wide variations exist in the treatment 
of a given cost item among institutions, the reasonableness and 
equitableness of such treatments should be fully considered during 
the rate negotiations and audit.
    3. Application. These principles shall be used in determining 
the allowable costs of work performed by colleges and universities

[[Page 51884]]

under sponsored agreements. The principles shall also be used in 
determining the costs of work performed by such institutions under 
subgrants, cost-reimbursement subcontracts, and other awards made to 
them under sponsored agreements. They also shall be used as a guide 
in the pricing of fixed-price contracts and subcontracts where costs 
are used in determining the appropriate price. The principles do not 
apply to:
    a. Arrangements under which Federal financing is in the form of 
loans, scholarships, fellowships, traineeships, or other fixed 
amounts based on such items as education allowance or published 
tuition rates and fees of an institution.
    b. Capitation awards.
    c. Other awards under which the institution is not required to 
account to the Federal Government for actual costs incurred.
    d. Conditional exemptions.
    (1) OMB authorizes conditional exemption from OMB administrative 
requirements and cost principles for certain Federal programs with 
statutorily-authorized consolidated planning and consolidated 
administrative funding, that are identified by a Federal agency and 
approved by the head of the Executive department or establishment. A 
Federal agency shall consult with OMB during its consideration of 
whether to grant such an exemption.
    (2) To promote efficiency in State and local program 
administration, when Federal non-entitlement programs with common 
purposes have specific statutorily-authorized consolidated planning 
and consolidated administrative funding and where most of the State 
agency's resources come from non-Federal sources, Federal agencies 
may exempt these covered State-administered, non-entitlement grant 
programs from certain OMB grants management requirements. The 
exemptions would be from all but the allocability of costs 
provisions of subsection C.3 of Appendix A to 2 CFR part 225 Cost 
Principles for State, Local, and Indian Tribal Governments (OMB 
Circular A-87), Section C, subpart 4 to 2 CFR part 220 Cost 
Principles for Educational Institutions (OMB Circular A-21), and 
subsection A.4 of Appendix A to 2 CFR part 230 Cost Principles for 
Non-Profit Organizations,'' (OMB Circular A-122), and from all of 
the administrative requirements provisions of 2 CFR part 215, 
Uniform Administrative Requirements for Grants and Agreements with 
Institutions of Higher Education, Hospitals, and Other Non-Profit 
Organizations (OMB Circular A-110), and the agencies' grants 
management common rule (see Sec.  215.5 of this subtitle).
    (3) When a Federal agency provides this flexibility, as a 
prerequisite to a State's exercising this option, a State must adopt 
its own written fiscal and administrative requirements for expending 
and accounting for all funds, which are consistent with the 
provisions of 2 CFR part 225 (OMB Circular A-87), and extend such 
policies to all subrecipients. These fiscal and administrative 
requirements must be sufficiently specific to ensure that: Funds are 
used in compliance with all applicable Federal statutory and 
regulatory provisions, costs are reasonable and necessary for 
operating these programs, and funds are not to be used for general 
expenses required to carry out other responsibilities of a State or 
its subrecipients.
    4. Inquiries.
    All inquiries from Federal agencies concerning the cost 
principles contained in this Appendix to 2 CFR part 220, including 
the administration and implementation of the Cost Accounting 
Standards (CAS) (described in Sections C.10 through C.13) and 
disclosure statement (DS-2) requirements, shall be addressed by the 
Office of Management and Budget (OMB), Office of Federal Financial 
Management, in coordination with the Cost Accounting Standard Board 
(CASB) with respect to inquiries concerning CAS. Educational 
institutions' inquiries should be addressed to the cognizant agency.

B. Definition of Terms

    1. Major functions of an institution refers to instruction, 
organized research, other sponsored activities and other 
institutional activities as defined below:
    a. Instruction means the teaching and training activities of an 
institution. Except for research training as provided in subsection 
b, this term includes all teaching and training activities, whether 
they are offered for credits toward a degree or certificate or on a 
non-credit basis, and whether they are offered through regular 
academic departments or separate divisions, such as a summer school 
division or an extension division. Also considered part of this 
major function are departmental research, and, where agreed to, 
university research.
    (1) Sponsored instruction and training means specific 
instructional or training activity established by grant, contract, 
or cooperative agreement. For purposes of the cost principles, this 
activity may be considered a major function even though an 
institution's accounting treatment may include it in the instruction 
function.
    (2) Departmental research means research, development and 
scholarly activities that are not organized research and, 
consequently, are not separately budgeted and accounted for. 
Departmental research, for purposes of this document, is not 
considered as a major function, but as a part of the instruction 
function of the institution.
    b. Organized research means all research and development 
activities of an institution that are separately budgeted and 
accounted for. It includes:
    (1) Sponsored research means all research and development 
activities that are sponsored by Federal and non-Federal agencies 
and organizations. This term includes activities involving the 
training of individuals in research techniques (commonly called 
research training) where such activities utilize the same facilities 
as other research and development activities and where such 
activities are not included in the instruction function.
    (2) University research means all research and development 
activities that are separately budgeted and accounted for by the 
institution under an internal application of institutional funds. 
University research, for purposes of this document, shall be 
combined with sponsored research under the function of organized 
research.
    c. Other sponsored activities means programs and projects 
financed by Federal and non-Federal agencies and organizations which 
involve the performance of work other than instruction and organized 
research. Examples of such programs and projects are health service 
projects, and community service programs. However, when any of these 
activities are undertaken by the institution without outside 
support, they may be classified as other institutional activities.
    d. Other institutional activities means all activities of an 
institution except:
    (1) Instruction, departmental research, organized research, and 
other sponsored activities, as defined above;
    (2) F&A cost activities identified in Section F of this 
Appendix; and
    (3) Specialized service facilities described in Section J.47 of 
this Appendix. Other institutional activities include operation of 
residence halls, dining halls, hospitals and clinics, student 
unions, intercollegiate athletics, bookstores, faculty housing, 
student apartments, guest houses, chapels, theaters, public museums, 
and other similar auxiliary enterprises. This definition also 
includes any other categories of activities, costs of which are 
``unallowable'' to sponsored agreements, unless otherwise indicated 
in the agreements.
    2. Sponsored agreement, for purposes of this Appendix, means any 
grant, contract, or other agreement between the institution and the 
Federal Government.
    3. Allocation means the process of assigning a cost, or a group 
of costs, to one or more cost objective, in reasonable and realistic 
proportion to the benefit provided or other equitable relationship. 
A cost objective may be a major function of the institution, a 
particular service or project, a sponsored agreement, or an F&A cost 
activity, as described in Section F of this Appendix. The process 
may entail assigning a cost(s) directly to a final cost objective or 
through one or more intermediate cost objectives.
    4. Facilities and administrative (F&A) costs, for the purpose of 
this Appendix, means costs that are incurred for common or joint 
objectives and, therefore, cannot be identified readily and 
specifically with a particular sponsored project, an instructional 
activity, or any other institutional activity. F&A costs are 
synonymous with ``indirect'' costs, as previously used in this 
Appendix and as currently used in attachments A and B to this 
Appendix. The F&A cost categories are described in Section F.1 of 
this Appendix.

C. Basic Considerations

    1. Composition of total costs. The cost of a sponsored agreement 
is comprised of the allowable direct costs incident to its 
performance, plus the allocable portion of the allowable F&A costs 
of the institution, less applicable credits as described in 
subsection C.5 of this Appendix.
    2. Factors affecting allowability of costs. The tests of 
allowability of costs under these principles are: they must be 
reasonable; they must be allocable to sponsored agreements under the 
principles and methods provided herein; they must be given 
consistent treatment through application of those generally accepted 
accounting principles

[[Page 51885]]

appropriate to the circumstances; and they must conform to any 
limitations or exclusions set forth in these principles or in the 
sponsored agreement as to types or amounts of cost items.
    3. Reasonable costs. A cost may be considered reasonable if the 
nature of the goods or services acquired or applied, and the amount 
involved therefore, reflect the action that a prudent person would 
have taken under the circumstances prevailing at the time the 
decision to incur the cost was made. Major considerations involved 
in the determination of the reasonableness of a cost are: whether or 
not the cost is of a type generally recognized as necessary for the 
operation of the institution or the performance of the sponsored 
agreement; the restraints or requirements imposed by such factors as 
arm's-length bargaining, Federal and State laws and regulations, and 
sponsored agreement terms and conditions; whether or not the 
individuals concerned acted with due prudence in the circumstances, 
considering their responsibilities to the institution, its 
employees, its students, the Federal Government, and the public at 
large; and, the extent to which the actions taken with respect to 
the incurrence of the cost are consistent with established 
institutional policies and practices applicable to the work of the 
institution generally, including sponsored agreements.
    4. Allocable costs.
    a. A cost is allocable to a particular cost objective (i.e., a 
specific function, project, sponsored agreement, department, or the 
like) if the goods or services involved are chargeable or assignable 
to such cost objective in accordance with relative benefits received 
or other equitable relationship. Subject to the foregoing, a cost is 
allocable to a sponsored agreement if it is incurred solely to 
advance the work under the sponsored agreement; it benefits both the 
sponsored agreement and other work of the institution, in 
proportions that can be approximated through use of reasonable 
methods, or it is necessary to the overall operation of the 
institution and, in light of the principles provided in this 
Appendix, is deemed to be assignable in part to sponsored projects. 
Where the purchase of equipment or other capital items is 
specifically authorized under a sponsored agreement, the amounts 
thus authorized for such purchases are assignable to the sponsored 
agreement regardless of the use that may subsequently be made of the 
equipment or other capital items involved.
    b. Any costs allocable to a particular sponsored agreement under 
the standards provided in this Appendix may not be shifted to other 
sponsored agreements in order to meet deficiencies caused by 
overruns or other fund considerations, to avoid restrictions imposed 
by law or by terms of the sponsored agreement, or for other reasons 
of convenience.
    c. Any costs allocable to activities sponsored by industry, 
foreign governments or other sponsors may not be shifted to 
federally-sponsored agreements.
    d. Allocation and documentation standard.
    (1) Cost principles. The recipient institution is responsible 
for ensuring that costs charged to a sponsored agreement are 
allowable, allocable, and reasonable under these cost principles.
    (2) Internal controls. The institution's financial management 
system shall ensure that no one person has complete control over all 
aspects of a financial transaction.
    (3) Direct cost allocation principles. If a cost benefits two or 
more projects or activities in proportions that can be determined 
without undue effort or cost, the cost should be allocated to the 
projects based on the proportional benefit. If a cost benefits two 
or more projects or activities in proportions that cannot be 
determined because of the interrelationship of the work involved, 
then, notwithstanding subsection b, the costs may be allocated or 
transferred to benefited projects on any reasonable basis, 
consistent with subsections C.4.d. (1) and (2) of this Appendix.
    (4) Documentation. Federal requirements for documentation are 
specified in this Appendix, 2 CFR Part 215, ``Uniform Administrative 
Requirements for Grants and Agreements with Institutions of Higher 
Education, Hospitals, and Other Non-Profit Organizations,'' and 
specific agency policies on cost transfers. If the institution 
authorizes the principal investigator or other individual to have 
primary responsibility, given the requirements of subsection C.4.d. 
(2) of this Appendix, for the management of sponsored agreement 
funds, then the institution's documentation requirements for the 
actions of those individuals (e.g., signature or initials of the 
principal investigator or designee or use of a password) will 
normally be considered sufficient.
    5. Applicable credits.
    a. The term ``applicable credits'' refers to those receipts or 
negative expenditures that operate to offset or reduce direct or F&A 
cost items. Typical examples of such transactions are: purchase 
discounts, rebates, or allowances; recoveries or indemnities on 
losses; and adjustments of overpayments or erroneous charges. This 
term also includes ``educational discounts'' on products or services 
provided specifically to educational institutions, such as discounts 
on computer equipment, except where the arrangement is clearly and 
explicitly identified as a gift by the vendor.
    b. In some instances, the amounts received from the Federal 
Government to finance institutional activities or service operations 
should be treated as applicable credits. Specifically, the concept 
of netting such credit items against related expenditures should be 
applied by the institution in determining the rates or amounts to be 
charged to sponsored agreements for services rendered whenever the 
facilities or other resources used in providing such services have 
been financed directly, in whole or in part, by Federal funds. (See 
Sections F.10, J.14, and J.47 of this Appendix for areas of 
potential application in the matter of direct Federal financing.)
    6. Costs incurred by State and local governments. Costs incurred 
or paid by State or local governments on behalf of their colleges 
and universities for fringe benefit programs, such as pension costs 
and FICA and any other costs specifically incurred on behalf of, and 
in direct benefit to, the institutions, are allowable costs of such 
institutions whether or not these costs are recorded in the 
accounting records of the institutions, subject to the following:
    a. The costs meet the requirements of subsections C.1 through 5 
of this Appendix.
    b. The costs are properly supported by cost allocation plans in 
accordance with applicable Federal cost accounting principles.
    c. The costs are not otherwise borne directly or indirectly by 
the Federal Government.
    7. Limitations on allowance of costs. Sponsored agreements may 
be subject to statutory requirements that limit the allowance of 
costs. When the maximum amount allowable under a limitation is less 
than the total amount determined in accordance with the principles 
in this Appendix, the amount not recoverable under a sponsored 
agreement may not be charged to other sponsored agreements.
    8. Collection of unallowable costs, excess costs due to 
noncompliance with cost policies, increased costs due to failure to 
follow a disclosed accounting practice and increased costs resulting 
from a change in cost accounting practice. The following costs shall 
be refunded (including interest) in accordance with applicable 
Federal agency regulations:
    a. Costs specifically identified as unallowable in Section J of 
this Appendix, either directly or indirectly, and charged to the 
Federal Government.
    b. Excess costs due to failure by the educational institution to 
comply with the cost policies in this Appendix.
    c. Increased costs due to a noncompliant cost accounting 
practice used to estimate, accumulate, or report costs.
    d. Increased costs resulting from a change in accounting 
practice.
    9. Adjustment of previously negotiated F&A cost rates containing 
unallowable costs. Negotiated F&A cost rates based on a proposal 
later found to have included costs that are unallowable as specified 
by law or regulation, Section J of this Appendix, terms and 
conditions of sponsored agreements, or, are unallowable because they 
are clearly not allocable to sponsored agreements, shall be 
adjusted, or a refund shall be made, in accordance with the 
requirements of this section. These adjustments or refunds are 
designed to correct the proposals used to establish the rates and do 
not constitute a reopening of the rate negotiation. The adjustments 
or refunds will be made regardless of the type of rate negotiated 
(predetermined, final, fixed, or provisional).
    a. For rates covering a future fiscal year of the institution, 
the unallowable costs will be removed from the F&A cost pools and 
the rates appropriately adjusted.
    b. For rates covering a past period, the Federal share of the 
unallowable costs will be computed for each year involved and a cash 
refund (including interest chargeable in accordance with applicable 
regulations) will be made to the Federal Government. If cash refunds 
are made for past periods covered by provisional or fixed rates, 
appropriate adjustments will be made when the rates are

[[Page 51886]]

finalized to avoid duplicate recovery of the unallowable costs by 
the Federal Government.
    c. For rates covering the current period, either a rate 
adjustment or a refund, as described in subsections a and b, shall 
be required by the cognizant agency. The choice of method shall be 
at the discretion of the cognizant agency, based on its judgment as 
to which method would be most practical.
    d. The amount or proportion of unallowable costs included in 
each year's rate will be assumed to be the same as the amount or 
proportion of unallowable costs included in the base year proposal 
used to establish the rate.
    10. Consistency in estimating, accumulating and reporting costs.
    a. An educational institution's practices used in estimating 
costs in pricing a proposal shall be consistent with the educational 
institution's cost accounting practices used in accumulating and 
reporting costs.
    b. An educational institution's cost accounting practices used 
in accumulating and reporting actual costs for a sponsored agreement 
shall be consistent with the educational institution's practices 
used in estimating costs in pricing the related proposal or 
application.
    c. The grouping of homogeneous costs in estimates prepared for 
proposal purposes shall not per se be deemed an inconsistent 
application of cost accounting practices under subsection a when 
such costs are accumulated and reported in greater detail on an 
actual cost basis during performance of the sponsored agreement.
    d. Attachment A to this Appendix also reflects this requirement, 
along with the purpose, definitions, and techniques for application, 
all of which are authoritative.
    11. Consistency in allocating costs incurred for the same 
purpose.
    a. All costs incurred for the same purpose, in like 
circumstances, are either direct costs only or F&A costs only with 
respect to final cost objectives. No final cost objective shall have 
allocated to it as a cost any cost, if other costs incurred for the 
same purpose, in like circumstances, have been included as a direct 
cost of that or any other final cost objective. Further, no final 
cost objective shall have allocated to it as a direct cost any cost, 
if other costs incurred for the same purpose, in like circumstances, 
have been included in any F&A cost pool to be allocated to that or 
any other final cost objective.
    b. Attachment A to this Appendix reflects this requirement along 
with its purpose, definitions, and techniques for application, 
illustrations and interpretations, all of which are authoritative.
    12. Accounting for unallowable costs.
    a. Costs expressly unallowable or mutually agreed to be 
unallowable, including costs mutually agreed to be unallowable 
directly associated costs, shall be identified and excluded from any 
billing, claim, application, or proposal applicable to a sponsored 
agreement.
    b. Costs which specifically become designated as unallowable as 
a result of a written decision furnished by a Federal official 
pursuant to sponsored agreement disputes procedures shall be 
identified if included in or used in the computation of any billing, 
claim, or proposal applicable to a sponsored agreement. This 
identification requirement applies also to any costs incurred for 
the same purpose under like circumstances as the costs specifically 
identified as unallowable under either this subsection or subsection 
a.
    c. Costs which, in a Federal official's written decision 
furnished pursuant to sponsored agreement disputes procedures, are 
designated as unallowable directly associated costs of unallowable 
costs covered by either subsection a or b shall be accorded the 
identification required by subsection b.
    d. The costs of any work project not contractually authorized by 
a sponsored agreement, whether or not related to performance of a 
proposed or existing sponsored agreement, shall be accounted for, to 
the extent appropriate, in a manner which permits ready separation 
from the costs of authorized work projects.
    e. All unallowable costs covered by subsections a through d 
shall be subject to the same cost accounting principles governing 
cost allocability as allowable costs. In circumstances where these 
unallowable costs normally would be part of a regular F&A cost 
allocation base or bases, they shall remain in such base or bases. 
Where a directly associated cost is part of a category of costs 
normally included in a F&A cost pool that shall be allocated over a 
base containing the unallowable cost with which it is associated, 
such a directly associated cost shall be retained in the F&A cost 
pool and be allocated through the regular allocation process.
    f. Where the total of the allocable and otherwise allowable 
costs exceeds a limitation-of-cost or ceiling-price provision in a 
sponsored agreement, full direct and F&A cost allocation shall be 
made to the sponsored agreement cost objective, in accordance with 
established cost accounting practices and standards which regularly 
govern a given entity's allocations to sponsored agreement cost 
objectives. In any determination of a cost overrun, the amount 
thereof shall be identified in terms of the excess of allowable 
costs over the ceiling amount, rather than through specific 
identification of particular cost items or cost elements.
    g. Attachment A reflects this requirement, along with its 
purpose, definitions, techniques for application, and illustrations 
of this standard, all of which are authoritative.
    13. Cost accounting period.
    a. Educational institutions shall use their fiscal year as their 
cost accounting period, except that:
    (1) Costs of a F&A function which exists for only a part of a 
cost accounting period may be allocated to cost objectives of that 
same part of the period on the basis of data for that part of the 
cost accounting period if the cost is material in amount, 
accumulated in a separate F&A cost pool or expense pool, and 
allocated on the basis of an appropriate direct measure of the 
activity or output of the function during that part of the period.
    (2) An annual period other than the fiscal year may, upon mutual 
agreement with the Federal Government, be used as the cost 
accounting period if the use of such period is an established 
practice of the educational institution and is consistently used for 
managing and controlling revenues and disbursements, and appropriate 
accruals, deferrals or other adjustments are made with respect to 
such annual periods.
    (3) A transitional cost accounting period other than a year 
shall be used whenever a change of fiscal year occurs.
    b. An educational institution shall follow consistent practices 
in the selection of the cost accounting period or periods in which 
any types of expense and any types of adjustment to expense 
(including prior-period adjustments) are accumulated and allocated.
    c. The same cost accounting period shall be used for 
accumulating costs in a F&A cost pool as for establishing its 
allocation base, except that the Federal Government and educational 
institution may agree to use a different period for establishing an 
allocation base, provided:
    (1) The practice is necessary to obtain significant 
administrative convenience,
    (2) The practice is consistently followed by the educational 
institution,
    (3) The annual period used is representative of the activity of 
the cost accounting period for which the F&A costs to be allocated 
are accumulated, and
    (4) The practice can reasonably be estimated to provide a 
distribution to cost objectives of the cost accounting period not 
materially different from that which otherwise would be obtained.
    d. Attachment A reflects this requirement, along with its 
purpose, definitions, techniques for application and illustrations, 
all of which are authoritative.
    14. Disclosure Statement.
    a. Educational institutions that received aggregate sponsored 
agreements totaling $25 million or more subject to this Appendix 
during their most recently completed fiscal year shall disclose 
their cost accounting practices by filing a Disclosure Statement 
(DS-2), which is reproduced in Attachment B to this Appendix. With 
the approval of the cognizant agency, an educational institution may 
meet the DS-2 submission by submitting the DS-2 for each business 
unit that received $25 million or more in sponsored agreements.
    b. The DS-2 shall be submitted to the cognizant agency with a 
copy to the educational institution's audit cognizant office.
    c. Educational institutions receiving $25 million or more in 
sponsored agreements that are not required to file a DS-2 pursuant 
to 48 CFR 9903.202-1 shall file a DS-2 covering the first fiscal 
year beginning after the publication date of this revision, within 
six months after the end of that fiscal year. Extensions beyond the 
above due date may be granted by the cognizant agency on a case-by-
case basis.
    d. Educational institutions are responsible for maintaining an 
accurate DS-2 and complying with disclosed cost accounting 
practices. Educational institutions must file amendments to the DS-2 
when disclosed practices are changed to comply with a new

[[Page 51887]]

or modified standard, or when practices are changed for other 
reasons. Amendments of a DS-2 may be submitted at any time. If the 
change is expected to have a material impact on the educational 
institution's negotiated F&A cost rates, the revision shall be 
approved by the cognizant agency before it is implemented. 
Resubmission of a complete, updated DS-2 is discouraged except when 
there are extensive changes to disclosed practices.
    e. Cost and funding adjustments. Cost adjustments shall be made 
by the cognizant agency if an educational institution fails to 
comply with the cost policies in this Appendix or fails to 
consistently follow its established or disclosed cost accounting 
practices when estimating, accumulating or reporting the costs of 
sponsored agreements, if aggregate cost impact on sponsored 
agreements is material. The cost adjustment shall normally be made 
on an aggregate basis for all affected sponsored agreements through 
an adjustment of the educational institution's future F&A costs 
rates or other means considered appropriate by the cognizant agency. 
Under the terms of CAS-covered contracts, adjustments in the amount 
of funding provided may also be required when the estimated proposal 
costs were not determined in accordance with established cost 
accounting practices.
    f. Overpayments. Excess amounts paid in the aggregate by the 
Federal Government under sponsored agreements due to a noncompliant 
cost accounting practice used to estimate, accumulate, or report 
costs shall be credited or refunded, as deemed appropriate by the 
cognizant agency. Interest applicable to the excess amounts paid in 
the aggregate during the period of noncompliance shall also be 
determined and collected in accordance with applicable Federal 
agency regulations.
    g. Compliant cost accounting practice changes. Changes from one 
compliant cost accounting practice to another compliant practice 
that are approved by the cognizant agency may require cost 
adjustments if the change has a material effect on sponsored 
agreements and the changes are deemed appropriate by the cognizant 
agency.
    h. Responsibilities. The cognizant agency shall:
    (1) Determine cost adjustments for all sponsored agreements in 
the aggregate on behalf of the Federal Government. Actions of the 
cognizant agency official in making cost adjustment determinations 
shall be coordinated with all affected Federal agencies to the 
extent necessary.
    (2) Prescribe guidelines and establish internal procedures to 
promptly determine on behalf of the Federal Government that a DS-2 
adequately discloses the educational institution's cost accounting 
practices and that the disclosed practices are compliant with 
applicable CAS and the requirements of Attachment A to this 
Appendix.
    (3) Distribute to all affected agencies any DS-2 determination 
of adequacy and/or noncompliance.

D. Direct Costs

    1. General. Direct costs are those costs that can be identified 
specifically with a particular sponsored project, an instructional 
activity, or any other institutional activity, or that can be 
directly assigned to such activities relatively easily with a high 
degree of accuracy. Costs incurred for the same purpose in like 
circumstances must be treated consistently as either direct or F&A 
costs. Where an institution treats a particular type of cost as a 
direct cost of sponsored agreements, all costs incurred for the same 
purpose in like circumstances shall be treated as direct costs of 
all activities of the institution.
    2. Application to sponsored agreements. Identification with the 
sponsored work rather than the nature of the goods and services 
involved is the determining factor in distinguishing direct from F&A 
costs of sponsored agreements. Typical costs charged directly to a 
sponsored agreement are the compensation of employees for 
performance of work under the sponsored agreement, including related 
fringe benefit costs to the extent they are consistently treated, in 
like circumstances, by the institution as direct rather than F&A 
costs; the costs of materials consumed or expended in the 
performance of the work; and other items of expense incurred for the 
sponsored agreement, including extraordinary utility consumption. 
The cost of materials supplied from stock or services rendered by 
specialized facilities or other institutional service operations may 
be included as direct costs of sponsored agreements, provided such 
items are consistently treated, in like circumstances, by the 
institution as direct rather than F&A costs, and are charged under a 
recognized method of computing actual costs, and conform to 
generally accepted cost accounting practices consistently followed 
by the institution.

E. F&A Costs

    1. General. F&A costs are those that are incurred for common or 
joint objectives and therefore cannot be identified readily and 
specifically with a particular sponsored project, an instructional 
activity, or any other institutional activity. See Section F.1 of 
this Appendix for a discussion of the components of F&A costs.
    2. Criteria for distribution.
    a. Base period. A base period for distribution of F&A costs is 
the period during which the costs are incurred. The base period 
normally should coincide with the fiscal year established by the 
institution, but in any event the base period should be so selected 
as to avoid inequities in the distribution of costs.
    b. Need for cost groupings. The overall objective of the F&A 
cost allocation process is to distribute the F&A costs described in 
Section F of this Appendix to the major functions of the institution 
in proportions reasonably consistent with the nature and extent of 
their use of the institution's resources. In order to achieve this 
objective, it may be necessary to provide for selective distribution 
by establishing separate groupings of cost within one or more of the 
F&A cost categories referred to in subsection E.1 of this Appendix. 
In general, the cost groupings established within a category should 
constitute, in each case, a pool of those items of expense that are 
considered to be of like nature in terms of their relative 
contribution to (or degree of remoteness from) the particular cost 
objectives to which distribution is appropriate. Cost groupings 
should be established considering the general guides provided in 
subsection E.2.c. of this Appendix. Each such pool or cost grouping 
should then be distributed individually to the related cost 
objectives, using the distribution base or method most appropriate 
in the light of the guides set forth in subsection E.2.d. of this 
Appendix.
    c. General considerations on cost groupings. The extent to which 
separate cost groupings and selective distribution would be 
appropriate at an institution is a matter of judgment to be 
determined on a case-by-case basis. Typical situations which may 
warrant the establishment of two or more separate cost groupings 
(based on account classification or analysis) within an F&A cost 
category include but are not limited to the following:
    (1) Where certain items or categories of expense relate solely 
to one of the major functions of the institution or to less than all 
functions, such expenses should be set aside as a separate cost 
grouping for direct assignment or selective allocation in accordance 
with the guides provided in subsections b and d.
    (2) Where any types of expense ordinarily treated as general 
administration or departmental administration are charged to 
sponsored agreements as direct costs, expenses applicable to other 
activities of the institution when incurred for the same purposes in 
like circumstances must, through separate cost groupings, be 
excluded from the F&A costs allocable to those sponsored agreements 
and included in the direct cost of other activities for cost 
allocation purposes.
    (3) Where it is determined that certain expenses are for the 
support of a service unit or facility whose output is susceptible of 
measurement on a workload or other quantitative basis, such expenses 
should be set aside as a separate cost grouping for distribution on 
such basis to organized research, instructional, and other 
activities at the institution or within the department.
    (4) Where activities provide their own purchasing, personnel 
administration, building maintenance or similar service, the 
distribution of general administration and general expenses, or 
operation and maintenance expenses to such activities should be 
accomplished through cost groupings which include only that portion 
of central F&A costs (such as for overall management) which are 
properly allocable to such activities.
    (5) Where the institution elects to treat fringe benefits as F&A 
charges, such costs should be set aside as a separate cost grouping 
for selective distribution to related cost objectives.
    (6) The number of separate cost groupings within a category 
should be held within practical limits, after taking into 
consideration the materiality of the amounts involved and the degree 
of precision attainable through less selective methods of 
distribution.
    d. Selection of distribution method.

[[Page 51888]]

    (1) Actual conditions must be taken into account in selecting 
the method or base to be used in distributing individual cost 
groupings. The essential consideration in selecting a base is that 
it be the one best suited for assigning the pool of costs to cost 
objectives in accordance with benefits derived; a traceable cause 
and effect relationship; or logic and reason, where neither benefit 
nor cause and effect relationship is determinable.
    (2) Where a cost grouping can be identified directly with the 
cost objective benefited, it should be assigned to that cost 
objective.
    (3) Where the expenses in a cost grouping are more general in 
nature, the distribution may be based on a cost analysis study which 
results in an equitable distribution of the costs. Such cost 
analysis studies may take into consideration weighting factors, 
population, or space occupied if appropriate. Cost analysis studies, 
however, must be appropriately documented in sufficient detail for 
subsequent review by the cognizant Federal agency, distribute the 
costs to the related cost objectives in accordance with the relative 
benefits derived, be statistically sound, be performed specifically 
at the institution at which the results are to be used, and be 
reviewed periodically, but not less frequently than every two years, 
updated if necessary, and used consistently. Any assumptions made in 
the study must be stated and explained. The use of cost analysis 
studies and periodic changes in the method of cost distribution must 
be fully justified.
    (4) If a cost analysis study is not performed, or if the study 
does not result in an equitable distribution of the costs, the 
distribution shall be made in accordance with the appropriate base 
cited in Section F, unless one of the following conditions is met: 
it can be demonstrated that the use of a different base would result 
in a more equitable allocation of the costs, or that a more readily 
available base would not increase the costs charged to sponsored 
agreements, or the institution qualifies for, and elects to use, the 
simplified method for computing F&A cost rates described in Section 
H of this Appendix.
    (5) Notwithstanding subsection E.2.d.(3) of this Appendix, 
effective July 1, 1998, a cost analysis or base other than that in 
Section F of this Appendix shall not be used to distribute utility 
or student services costs. Instead, subsections F.4.c and F.4.d may 
be used in the recovery of utility costs.
    e. Order of distribution.
    (1) F&A costs are the broad categories of costs discussed in 
Section F.1 of this Appendix.
    (2) Depreciation and use allowances, operation and maintenance 
expenses, and general administrative and general expenses should be 
allocated in that order to the remaining F&A cost categories as well 
as to the major functions and specialized service facilities of the 
institution. Other cost categories may be allocated in the order 
determined to be most appropriate by the institutions. When cross 
allocation of costs is made as provided in subsection (3), this 
order of allocation does not apply.
    (3) Normally an F&A cost category will be considered closed once 
it has been allocated to other cost objectives, and costs may not be 
subsequently allocated to it. However, a cross allocation of costs 
between two or more F&A cost categories may be used if such 
allocation will result in a more equitable allocation of costs. If a 
cross allocation is used, an appropriate modification to the 
composition of the F&A cost categories described in Section F of 
this Appendix is required.

F. Identification and Assignment of F&A Costs

    1. Definition of Facilities and Administration. F&A costs are 
broad categories of costs. ``Facilities'' is defined as depreciation 
and use allowances, interest on debt associated with certain 
buildings, equipment and capital improvements, operation and 
maintenance expenses, and library expenses. ``Administration'' is 
defined as general administration and general expenses, departmental 
administration, sponsored projects administration, student 
administration and services, and all other types of expenditures not 
listed specifically under one of the subcategories of Facilities 
(including cross allocations from other pools).
    2. Depreciation and use allowances.
    a. The expenses under this heading are the portion of the costs 
of the institution's buildings, capital improvements to land and 
buildings, and equipment which are computed in accordance with 
Section J.14 of this Appendix.
    b. In the absence of the alternatives provided for in Section 
E.2.d of this Appendix, the expenses included in this category shall 
be allocated in the following manner:
    (1) Depreciation or use allowances on buildings used exclusively 
in the conduct of a single function, and on capital improvements and 
equipment used in such buildings, shall be assigned to that 
function.
    (2) Depreciation or use allowances on buildings used for more 
than one function, and on capital improvements and equipment used in 
such buildings, shall be allocated to the individual functions 
performed in each building on the basis of usable square feet of 
space, excluding common areas such as hallways, stairwells, and rest 
rooms.
    (3) Depreciation or use allowances on buildings, capital 
improvements and equipment related to space (e.g., individual rooms, 
laboratories) used jointly by more than one function (as determined 
by the users of the space) shall be treated as follows. The cost of 
each jointly used unit of space shall be allocated to benefiting 
functions on the basis of:
    (a) The employee full-time equivalents (FTEs) or salaries and 
wages of those individual functions benefiting from the use of that 
space; or
    (b) Institution-wide employee FTEs or salaries and wages 
applicable to the benefiting major functions (see Section B.1 of 
this Appendix) of the institution.
    (4) Depreciation or use allowances on certain capital 
improvements to land, such as paved parking areas, fences, 
sidewalks, and the like, not included in the cost of buildings, 
shall be allocated to user categories of students and employees on a 
full-time equivalent basis. The amount allocated to the student 
category shall be assigned to the instruction function of the 
institution. The amount allocated to the employee category shall be 
further allocated to the major functions of the institution in 
proportion to the salaries and wages of all employees applicable to 
those functions.
    c. Large research facilities. The following provisions apply to 
large research facilities that are included in F&A rate proposals 
negotiated after January 1, 2000, and on which the design and 
construction begin after July 1, 1998. Large facilities, for this 
provision, are defined as buildings with construction costs of more 
than $10 million. The determination of the Federal participation 
(use) percentage in a building is based on institution's estimates 
of building use over its life, and is made during the planning phase 
for the building.
    (1) When an institution has large research facilities, of which 
40 percent or more of total assignable space is expected for Federal 
use, the institution must maintain an adequate review and approval 
process to ensure that construction costs are reasonable.
    (a)The review process shall address and document relevant 
factors affecting construction costs, such as:

i. Life cycle costs
ii. Unique research needs
iii. Special building needs
iv. Building site preparation
v. Environmental consideration
vi. Federal construction code requirements
vii. Competitive procurement practices

    (b) The approval process shall include review and approval of 
the projects by the institution's Board of Trustees (which can also 
be called Board of Directors, Governors or Regents) or other 
independent entities.
    (2) For research facilities costing more than $25 million, of 
which 50 percent or more of total assignable space is expected for 
Federal use, the institution must document the review steps 
performed to assure that construction costs are reasonable. The 
review should include an analysis of construction costs and a 
comparison of these costs with relevant construction data, including 
the National Science Foundation data for research facilities based 
on its biennial survey, ``Science and Engineering Facilities at 
Colleges and Universities.'' The documentation must be made 
available for review by Federal negotiators, when requested.
    3. Interest. Interest on debt associated with certain buildings, 
equipment and capital improvements, as defined in Section J.25 of 
this Appendix, shall be classified as an expenditure under the 
category Facilities. These costs shall be allocated in the same 
manner as the depreciation or use allowances on the buildings, 
equipment and capital improvements to which the interest relates.
    4. Operation and maintenance expenses.
    a. The expenses under this heading are those that have been 
incurred for the administration, supervision, operation, 
maintenance, preservation, and protection of the institution's 
physical plant. They include expenses normally incurred for such 
items as janitorial and utility services; repairs and ordinary or 
normal alterations of buildings,

[[Page 51889]]

furniture and equipment; care of grounds; maintenance and operation 
of buildings and other plant facilities; security; earthquake and 
disaster preparedness; environmental safety; hazardous waste 
disposal; property, liability and all other insurance relating to 
property; space and capital leasing; facility planning and 
management; and, central receiving. The operation and maintenance 
expense category should also include its allocable share of fringe 
benefit costs, depreciation and use allowances, and interest costs.
    b. In the absence of the alternatives provided for in Section 
E.2.d of this Appendix, the expenses included in this category shall 
be allocated in the same manner as described in subsection E.2.b for 
depreciation and use allowances.
    c. For F&A rates negotiated on or after July 1, 1998, an 
institution that previously employed a utility special cost study in 
its most recently negotiated F&A rate proposal in accordance with 
Section E.2.d of this Appendix, may add a utility cost adjustment 
(UCA) of 1.3 percentage points to its negotiated overall F&A rate 
for organized research. Exhibit B to this Appendix displays the list 
of eligible institutions. The allocation of utility costs to the 
benefiting functions shall otherwise be made in the same manner as 
described in subsection F.4.b of this Appendix. Beginning on July 1, 
2002, Federal agencies shall reassess periodically the eligibility 
of institutions to receive the UCA.
    d. Beginning on July 1, 2002, Federal agencies may receive 
applications for utilization of the UCA from institutions not 
subject to the provisions of subsection F.4.c of this Appendix.
    5. General administration and general expenses.
    a. The expenses under this heading are those that have been 
incurred for the general executive and administrative offices of 
educational institutions and other expense of a general character 
which do not relate solely to any major function of the institution; 
i.e., solely to instruction, organized research, other sponsored 
activities, or other institutional activities. The general 
administration and general expense category should also include its 
allocable share of fringe benefit costs, operation and maintenance 
expense, depreciation and use allowances, and interest costs. 
Examples of general administration and general expenses include: 
those expenses incurred by administrative offices that serve the 
entire university system of which the institution is a part; central 
offices of the institution such as the President's or Chancellor's 
office, the offices for institution-wide financial management, 
business services, budget and planning, personnel management, and 
safety and risk management; the office of the General Counsel; and, 
the operations of the central administrative management information 
systems. General administration and general expenses shall not 
include expenses incurred within non-university-wide deans' offices, 
academic departments, organized research units, or similar 
organizational units. (See subsection F.6. of this Appendix, 
Departmental administration expenses.)
    b. In the absence of the alternatives provided for in Section 
E.2.d of this Appendix, the expenses included in this category shall 
be grouped first according to common major functions of the 
institution to which they render services or provide benefits. The 
aggregate expenses of each group shall then be allocated to serviced 
or benefited functions on the modified total cost basis. Modified 
total costs consist of the same elements as those in Section G.2 of 
this Appendix. When an activity included in this F&A cost category 
provides a service or product to another institution or 
organization, an appropriate adjustment must be made to either the 
expenses or the basis of allocation or both, to assure a proper 
allocation of costs.
    6. Departmental administration expenses.
    a. The expenses under this heading are those that have been 
incurred for administrative and supporting services that benefit 
common or joint departmental activities or objectives in academic 
deans' offices, academic departments and divisions, and organized 
research units. Organized research units include such units as 
institutes, study centers, and research centers. Departmental 
administration expenses are subject to the following limitations.
    (1) Academic deans' offices. Salaries and operating expenses are 
limited to those attributable to administrative functions.
    (2) Academic departments:
    (a) Salaries and fringe benefits attributable to the 
administrative work (including bid and proposal preparation) of 
faculty (including department heads), and other professional 
personnel conducting research and/or instruction, shall be allowed 
at a rate of 3.6 percent of modified total direct costs. This 
category does not include professional business or professional 
administrative officers. This allowance shall be added to the 
computation of the F&A cost rate for major functions in Section G of 
this Appendix; the expenses covered by the allowance shall be 
excluded from the departmental administration cost pool. No 
documentation is required to support this allowance.
    (b) Other administrative and supporting expenses incurred within 
academic departments are allowable provided they are treated 
consistently in like circumstances. This would include expenses such 
as the salaries of secretarial and clerical staffs, the salaries of 
administrative officers and assistants, travel, office supplies, 
stockrooms, and the like.
    (3) Other fringe benefit costs applicable to the salaries and 
wages included in subsections F.6.a.(1) and (2) of this Appendix are 
allowable, as well as an appropriate share of general administration 
and general expenses, operation and maintenance expenses, and 
depreciation and/or use allowances.
    (4) Federal agencies may authorize reimbursement of additional 
costs for department heads and faculty only in exceptional cases 
where an institution can demonstrate undue hardship or detriment to 
project performance.
    b. The following guidelines apply to the determination of 
departmental administrative costs as direct or F&A costs.
    (1) In developing the departmental administration cost pool, 
special care should be exercised to ensure that costs incurred for 
the same purpose in like circumstances are treated consistently as 
either direct or F&A costs. For example, salaries of technical 
staff, laboratory supplies (e.g., chemicals), telephone toll 
charges, animals, animal care costs, computer costs, travel costs, 
and specialized shop costs shall be treated as direct cost wherever 
identifiable to a particular cost objective. Direct charging of 
these costs may be accomplished through specific identification of 
individual costs to benefiting cost objectives, or through recharge 
centers or specialized service facilities, as appropriate under the 
circumstances.
    (2) The salaries of administrative and clerical staff should 
normally be treated as F&A costs. Direct charging of these costs may 
be appropriate where a major project or activity explicitly budgets 
for administrative or clerical services and individuals involved can 
be specifically identified with the project or activity. ``Major 
project'' is defined as a project that requires an extensive amount 
of administrative or clerical support, which is significantly 
greater than the routine level of such services provided by academic 
departments. Some examples of major projects are described in 
Exhibit C to this Appendix.
    (3) Items such as office supplies, postage, local telephone 
costs, and memberships shall normally be treated as F&A costs.
    c. In the absence of the alternatives provided for in Section 
E.2.d of this Appendix, the expenses included in this category shall 
be allocated as follows:
    (1) The administrative expenses of the dean's office of each 
college and school shall be allocated to the academic departments 
within that college or school on the modified total cost basis.
    (2) The administrative expenses of each academic department, and 
the department's share of the expenses allocated in subsection 
F.6.b.(1) of this Appendix shall be allocated to the appropriate 
functions of the department on the modified total cost basis.
    7. Sponsored projects administration.
    a. The expenses under this heading are limited to those incurred 
by a separate organization(s) established primarily to administer 
sponsored projects, including such functions as grant and contract 
administration (Federal and non-Federal), special security, 
purchasing, personnel, administration, and editing and publishing of 
research and other reports. They include the salaries and expenses 
of the head of such organization, assistants, and immediate staff, 
together with the salaries and expenses of personnel engaged in 
supporting activities maintained by the organization, such as stock 
rooms, stenographic pools and the like. This category also includes 
an allocable share of fringe benefit costs, general administration 
and general expenses, operation and maintenance expenses, 
depreciation/use allowances. Appropriate adjustments will be made 
for services provided to other functions or organizations.
    b. In the absence of the alternatives provided for in Section 
E.2.d of this

[[Page 51890]]

Appendix, the expenses included in this category shall be allocated 
to the major functions of the institution under which the sponsored 
projects are conducted on the basis of the modified total cost of 
sponsored projects.
    c. An appropriate adjustment shall be made to eliminate any 
duplicate charges to sponsored agreements when this category 
includes similar or identical activities as those included in the 
general administration and general expense category or other F&A 
cost items, such as accounting, procurement, or personnel 
administration.
    8. Library expenses.
    a. The expenses under this heading are those that have been 
incurred for the operation of the library, including the cost of 
books and library materials purchased for the library, less any 
items of library income that qualify as applicable credits under 
Section C.5 of this Appendix. The library expense category should 
also include the fringe benefits applicable to the salaries and 
wages included therein, an appropriate share of general 
administration and general expense, operation and maintenance 
expense, and depreciation and use allowances. Costs incurred in the 
purchases of rare books (museum-type books) with no value to 
sponsored agreements should not be allocated to them.
    b. In the absence of the alternatives provided for in Section 
E.2.d of this Appendix, the expenses included in this category shall 
be allocated first on the basis of primary categories of users, 
including students, professional employees, and other users.
    (1) The student category shall consist of full-time equivalent 
students enrolled at the institution, regardless of whether they 
earn credits toward a degree or certificate.
    (2) The professional employee category shall consist of all 
faculty members and other professional employees of the institution, 
on a full-time equivalent basis.
    (3) The other users category shall consist of all other users of 
library facilities.
    c. Amount allocated in subsection E.8.b of this Appendix shall 
be assigned further as follows:
    (1) The amount in the student category shall be assigned to the 
instruction function of the institution.
    (2) The amount in the professional employee category shall be 
assigned to the major functions of the institution in proportion to 
the salaries and wages of all faculty members and other professional 
employees applicable to those functions.
    (3) The amount in the other users category shall be assigned to 
the other institutional activities function of the institution.
    9. Student administration and services.
    a. The expenses under this heading are those that have been 
incurred for the administration of student affairs and for services 
to students, including expenses of such activities as deans of 
students, admissions, registrar, counseling and placement services, 
student advisers, student health and infirmary services, catalogs, 
and commencements and convocations. The salaries of members of the 
academic staff whose responsibilities to the institution require 
administrative work that benefits sponsored projects may also be 
included to the extent that the portion charged to student 
administration is determined in accordance with Section J.10 of this 
Appendix. This expense category also includes the fringe benefit 
costs applicable to the salaries and wages included therein, an 
appropriate share of general administration and general expenses, 
operation and maintenance, and use allowances and/or depreciation.
    b. In the absence of the alternatives provided for in Section 
E.2.d of this Appendix, the expenses in this category shall be 
allocated to the instruction function, and subsequently to sponsored 
agreements in that function.
    10. Offset for F&A expenses otherwise provided for by the 
Federal Government.
    a. The items to be accumulated under this heading are the 
reimbursements and other payments from the Federal Government that 
are made to the institution to support solely, specifically, and 
directly, in whole or in part, any of the administrative or service 
activities described in subsections F.2 through 9 of this Appendix.
    b. The items in this group shall be treated as a credit to the 
affected individual F&A cost category before that category is 
allocated to benefiting functions.

G. Determination and Application of F&A Cost Rate or Rates

    1. F&A cost pools.
    a. (1) Subject to subsection b, the separate categories of F&A 
costs allocated to each major function of the institution as 
prescribed in Section F shall be aggregated and treated as a common 
pool for that function. The amount in each pool shall be divided by 
the distribution base described in subsection G.2 of this Appendix 
to arrive at a single F&A cost rate for each function.
    (2) The rate for each function is used to distribute F&A costs 
to individual sponsored agreements of that function. Since a common 
pool is established for each major function of the institution, a 
separate F&A cost rate would be established for each of the major 
functions described in Section B.1 of this Appendix under which 
sponsored agreements are carried out.
    (3) Each institution's F&A cost rate process must be 
appropriately designed to ensure that Federal sponsors do not in any 
way subsidize the F&A costs of other sponsors, specifically 
activities sponsored by industry and foreign governments. 
Accordingly, each allocation method used to identify and allocate 
the F&A cost pools, as described in Sections E.2 and F.2 through F.9 
of this Appendix, must contain the full amount of the institution's 
modified total costs or other appropriate units of measurement used 
to make the computations. In addition, the final rate distribution 
base (as defined in subsection G.2 of this Appendix) for each major 
function (organized research, instruction, etc., as described in 
Section B.1 of this Appendix) shall contain all the programs or 
activities that utilize the F&A costs allocated to that major 
function. At the time a F&A cost proposal is submitted to a 
cognizant Federal agency, each institution must describe the process 
it uses to ensure that Federal funds are not used to subsidize 
industry and foreign government funded programs.
    b. In some instances a single rate basis for use across the 
board on all work within a major function at an institution may not 
be appropriate. A single rate for research, for example, might not 
take into account those different environmental factors and other 
conditions which may affect substantially the F&A costs applicable 
to a particular segment of research at the institution. A particular 
segment of research may be that performed under a single sponsored 
agreement or it may consist of research under a group of sponsored 
agreements performed in a common environment. The environmental 
factors are not limited to the physical location of the work. Other 
important factors are the level of the administrative support 
required, the nature of the facilities or other resources employed, 
the scientific disciplines or technical skills involved, the 
organizational arrangements used, or any combination thereof. Where 
a particular segment of a sponsored agreement is performed within an 
environment which appears to generate a significantly different 
level of F&A costs, provisions should be made for a separate F&A 
cost pool applicable to such work. The separate F&A cost pool should 
be developed during the regular course of the rate determination 
process and the separate F&A cost rate resulting therefrom should be 
utilized; provided it is determined that such F&A cost rate differs 
significantly from that which would have been obtained under 
subsection G.1.a of this Appendix, and the volume of work to which 
such rate would apply is material in relation to other sponsored 
agreements at the institution.
    2. The distribution basis. F&A costs shall be distributed to 
applicable sponsored agreements and other benefiting activities 
within each major function (see Section B.1) on the basis of 
modified total direct costs, consisting of all salaries and wages, 
fringe benefits, materials and supplies, services, travel, and 
subgrants and subcontracts up to the first $25,000 of each subgrant 
or subcontract (regardless of the period covered by the subgrant or 
subcontract). Equipment, capital expenditures, charges for patient 
care and tuition remission, rental costs, scholarships, and 
fellowships as well as the portion of each subgrant and subcontract 
in excess of $25,000 shall be excluded from modified total direct 
costs. Other items may only be excluded where necessary to avoid a 
serious inequity in the distribution of F&A costs. For this purpose, 
a F&A cost rate should be determined for each of the separate F&A 
cost pools developed pursuant to subsection G.1 of this Appendix. 
The rate in each case should be stated as the percentage that the 
amount of the particular F&A cost pool is of the modified total 
direct costs identified with such pool.
    3. Negotiated lump sum for F&A costs. A negotiated fixed amount 
in lieu of F&A costs may be appropriate for self-contained, off-
campus, or primarily subcontracted activities where the benefits 
derived from an institution's F&A services cannot be readily 
determined. Such negotiated F&A costs will

[[Page 51891]]

be treated as an offset before allocation to instruction, organized 
research, other sponsored activities, and other institutional 
activities. The base on which such remaining expenses are allocated 
should be appropriately adjusted.
    4. Predetermined rates for F&A costs. Public Law 87-638 (76 
Stat. 437) authorizes the use of predetermined rates in determining 
the ``indirect costs'' (F&A costs in this Appendix) applicable under 
research agreements with educational institutions. The stated 
objectives of the law are to simplify the administration of cost-
type research and development contracts (including grants) with 
educational institutions, to facilitate the preparation of their 
budgets, and to permit more expeditious closeout of such contracts 
when the work is completed. In view of the potential advantages 
offered by this procedure, negotiation of predetermined rates for 
F&A costs for a period of two to four years should be the norm in 
those situations where the cost experience and other pertinent facts 
available are deemed sufficient to enable the parties involved to 
reach an informed judgment as to the probable level of F&A costs 
during the ensuing accounting periods.
    5. Negotiated fixed rates and carry-forward provisions. When a 
fixed rate is negotiated in advance for a fiscal year (or other time 
period), the over- or under-recovery for that year may be included 
as an adjustment to the F&A cost for the next rate negotiation. When 
the rate is negotiated before the carry-forward adjustment is 
determined, the carry-forward amount may be applied to the next 
subsequent rate negotiation. When such adjustments are to be made, 
each fixed rate negotiated in advance for a given period will be 
computed by applying the expected F&A costs allocable to sponsored 
agreements for the forecast period plus or minus the carry-forward 
adjustment (over- or under-recovery) from the prior period, to the 
forecast distribution base. Unrecovered amounts under lump-sum 
agreements or cost-sharing provisions of prior years shall not be 
carried forward for consideration in the new rate negotiation. There 
must, however, be an advance understanding in each case between the 
institution and the cognizant Federal agency as to whether these 
differences will be considered in the rate negotiation rather than 
making the determination after the differences are known. Further, 
institutions electing to use this carry-forward provision may not 
subsequently change without prior approval of the cognizant Federal 
agency. In the event that an institution returns to a postdetermined 
rate, any over- or under-recovery during the period in which 
negotiated fixed rates and carry-forward provisions were followed 
will be included in the subsequent postdetermined rates. Where 
multiple rates are used, the same procedure will be applicable for 
determining each rate.
    6. Provisional and final rates for F&A costs. Where the 
cognizant agency determines that cost experience and other pertinent 
facts do not justify the use of predetermined rates, or a fixed rate 
with a carry-forward, or if the parties cannot agree on an equitable 
rate, a provisional rate shall be established. To prevent 
substantial overpayment or underpayment, the provisional rate may be 
adjusted by the cognizant agency during the institution's fiscal 
year. Predetermined or fixed rates may replace provisional rates at 
any time prior to the close of the institution's fiscal year. If a 
provisional rate is not replaced by a predetermined or fixed rate 
prior to the end of the institution's fiscal year, a final rate will 
be established and upward or downward adjustments will be made based 
on the actual allowable costs incurred for the period involved.
    7. Fixed rates for the life of the sponsored agreement.
    a. Federal agencies shall use the negotiated rates for F&A costs 
in effect at the time of the initial award throughout the life of 
the sponsored agreement. ``Life'' for the purpose of this subsection 
means each competitive segment of a project. A competitive segment 
is a period of years approved by the Federal funding agency at the 
time of the award. If negotiated rate agreements do not extend 
through the life of the sponsored agreement at the time of the 
initial award, then the negotiated rate for the last year of the 
sponsored agreement shall be extended through the end of the life of 
the sponsored agreement. Award levels for sponsored agreements may 
not be adjusted in future years as a result of changes in negotiated 
rates.
    b. When an educational institution does not have a negotiated 
rate with the Federal Government at the time of the award (because 
the educational institution is a new grantee or the parties cannot 
reach agreement on a rate), the provisional rate used at the time of 
the award shall be adjusted once a rate is negotiated and approved 
by the cognizant agency.
    8. Limitation on reimbursement of administrative costs.
    a. Notwithstanding the provisions of subsection G.1.a of this 
Appendix, the administrative costs charged to sponsored agreements 
awarded or amended (including continuation and renewal awards) with 
effective dates beginning on or after the start of the institution's 
first fiscal year which begins on or after October 1, 1991, shall be 
limited to 26% of modified total direct costs (as defined in 
subsection G.2 of this Appendix) for the total of General 
Administration and General Expenses, Departmental Administration, 
Sponsored Projects Administration, and Student Administration and 
Services (including their allocable share of depreciation and/or use 
allowances, interest costs, operation and maintenance expenses, and 
fringe benefits costs, as provided by Sections F.5, F.6, F.7 and F.9 
of this Appendix) and all other types of expenditures not listed 
specifically under one of the subcategories of facilities in Section 
F of this Appendix.
    b. Existing F&A cost rates that affect institutions' fiscal 
years which begin on or after October 1, 1991, shall be unilaterally 
amended by the cognizant Federal agency to reflect the cost 
limitation in subsection G.8.a of this Appendix.
    c. Permanent rates established prior to this revision that have 
been amended in accordance with subsection G.8.b of this Appendix 
may be renegotiated. However, no such renegotiated rate may exceed 
the rate which would have been in effect if the agreement had 
remained in effect; nor may the administrative portion of any 
renegotiated rate exceed the limitation in subsection a.
    d. Institutions should not change their accounting or cost 
allocation methods which were in effect on May 1, 1991, if the 
effect is to change the charging of a particular type of cost from 
F&A to direct, or reclassify costs, or increase allocations, from 
the administrative pools identified in subsection to the other F&A 
cost pools or fringe benefits. Cognizant Federal agencies are 
authorized to permit changes where an institution's charging 
practices are at variance with acceptable practices followed by a 
substantial majority of other institutions.
    9. Alternative method for administrative costs.
    a. Notwithstanding the provisions of subsection 1.a, an 
institution may elect to claim fixed allowance for the 
``Administration'' portion of F&A costs. The allowance could be 
either 24% of modified total direct costs or a percentage equal to 
95% of the most recently negotiated fixed or predetermined rate for 
the cost pools included under ``Administration'' as defined in 
Section F.1 of this Appendix, whichever is less, provided that no 
accounting or cost allocation changes with the effects described in 
subsection G.8.d of this Appendix have occurred. Under this 
alternative, no cost proposal need be prepared for the 
``Administration'' portion of the F&A cost rate nor is further 
identification or documentation of these costs required (see 
subsection G.9.c of this Appendix). Where a negotiated F&A cost 
agreement includes this alternative, an institution shall make no 
further charges for the expenditure categories described in Sections 
F.5, F.6, F.7 and F.9 of this Appendix.
    b. In negotiations of rates for subsequent periods, an 
institution that has elected the option of subsection a may continue 
to exercise it at the same rate without further identification or 
documentation of costs, provided that no accounting or cost 
allocation changes with the effects described in subsection G.8.d of 
this Appendix have occurred.
    c. If an institution elects to accept a threshold rate, it is 
not required to perform a detailed analysis of its administrative 
costs. However, in order to compute the facilities components of its 
F&A cost rate, the institution must reconcile its F&A cost proposal 
to its financial statements and make appropriate adjustments and 
reclassifications to identify the costs of each major function as 
defined in Section B.1 of this Appendix, as well as to identify and 
allocate the facilities components. Administrative costs that are 
not identified as such by the institution's accounting system (such 
as those incurred in academic departments) will be classified as 
instructional costs for purposes of reconciling F&A cost proposals 
to financial statements and allocating facilities costs.
    10. Individual rate components.
    In order to satisfy the requirements of Section J.14 of this 
Appendix and to provide

[[Page 51892]]

mutually agreed upon information for management purposes, each F&A 
cost rate negotiation or determination shall include development of 
a rate for each F&A cost pool as well as the overall F&A cost rate.
    11. Negotiation and approval of F&A rate.
    a. Cognizant agency assignments. ``A cognizant agency'' means 
the Federal agency responsible for negotiating and approving F&A 
rates for an educational institution on behalf of all Federal 
agencies.
    (1) Cost negotiation cognizance is assigned to the Department of 
Health and Human Services (HHS) or the Department of Defense's 
Office of Naval Research (DOD), normally depending on which of the 
two agencies (HHS or DOD) provides more funds to the educational 
institution for the most recent three years. Information on funding 
shall be derived from relevant data gathered by the National Science 
Foundation. In cases where neither HHS nor DOD provides Federal 
funding to an educational institution, the cognizant agency 
assignment shall default to HHS. Notwithstanding the method for 
cognizance determination described above, other arrangements for 
cognizance of a particular educational institution may also be based 
in part on the types of research performed at the educational 
institution and shall be decided based on mutual agreement between 
HHS and DOD.
    (2) Cognizant assignments as of December 31, 1995, shall 
continue in effect through educational institutions' fiscal years 
ending during 1997, or the period covered by negotiated agreements 
in effect on December 31, 1995, whichever is later, except for those 
educational institutions with cognizant agencies other than HHS or 
DOD. Cognizance for these educational institutions shall transfer to 
HHS or DOD at the end of the period covered by the current 
negotiated rate agreement. After cognizance is established, it shall 
continue for a five-year period.
    b. Acceptance of rates. The negotiated rates shall be accepted 
by all Federal agencies. Only under special circumstances, when 
required by law or regulation, may an agency use a rate different 
from the negotiated rate for a class of sponsored agreements or a 
single sponsored agreement.
    c. Correcting deficiencies. The cognizant agency shall negotiate 
changes needed to correct systems deficiencies relating to 
accountability for sponsored agreements. Cognizant agencies shall 
address the concerns of other affected agencies, as appropriate.
    d. Resolving questioned costs. The cognizant agency shall 
conduct any necessary negotiations with an educational institution 
regarding amounts questioned by audit that are due the Federal 
Government related to costs covered by a negotiated agreement.
    e. Reimbursement. Reimbursement to cognizant agencies for work 
performed under Part 220 may be made by reimbursement billing under 
the Economy Act, 31 U.S.C. 1535.
    f. Procedure for establishing facilities and administrative 
rates. The cognizant agency shall arrange with the educational 
institution to provide copies of rate proposals to all interested 
agencies. Agencies wanting such copies should notify the cognizant 
agency. Rates shall be established by one of the following methods:
    (1) Formal negotiation. The cognizant agency is responsible for 
negotiating and approving rates for an educational institution on 
behalf of all Federal agencies. Non-cognizant Federal agencies, 
which award sponsored agreements to an educational institution, 
shall notify the cognizant agency of specific concerns (i.e., a need 
to establish special cost rates) that could affect the negotiation 
process. The cognizant agency shall address the concerns of all 
interested agencies, as appropriate. A pre-negotiation conference 
may be scheduled among all interested agencies, if necessary. The 
cognizant agency shall then arrange a negotiation conference with 
the educational institution.
    (2) Other than formal negotiation. The cognizant agency and 
educational institution may reach an agreement on rates without a 
formal negotiation conference; for example, through correspondence 
or use of the simplified method described in this Appendix.
    g. Formalizing determinations and agreements. The cognizant 
agency shall formalize all determinations or agreements reached with 
an educational institution and provide copies to other agencies 
having an interest.
    h. Disputes and disagreements. Where the cognizant agency is 
unable to reach agreement with an educational institution with 
regard to rates or audit resolution, the appeal system of the 
cognizant agency shall be followed for resolution of the 
disagreement.
    12. Standard Format for Submission. For facilities and 
administrative (F&A) rate proposals submitted on or after July 1, 
2001, educational institutions shall use the standard format, shown 
in Attachment C to this Appendix, to submit their F&A rate proposal 
to the cognizant agency. The cognizant agency may, on an 
institution-by-institution basis, grant exceptions from all or 
portions of Part II of the standard format requirement. This 
requirement does not apply to educational institutions that use the 
simplified method for calculating F&A rates, as described in Section 
H of this Appendix.

H. Simplified Method for Small Institutions

    1. General.
    a. Where the total direct cost of work covered by Part 220 at an 
institution does not exceed $10 million in a fiscal year, the use of 
the simplified procedure described in subsections H.2 or 3 of this 
Appendix, may be used in determining allowable F&A costs. Under this 
simplified procedure, the institution's most recent annual financial 
report and immediately available supporting information shall be 
utilized as basis for determining the F&A cost rate applicable to 
all sponsored agreements. The institution may use either the 
salaries and wages (see subsection H.2 of this Appendix) or modified 
total direct costs (see subsection H.3 of this Appendix) as 
distribution basis.
    b. The simplified procedure should not be used where it produces 
results that appear inequitable to the Federal Government or the 
institution. In any such case, F&A costs should be determined 
through use of the regular procedure.
    2. Simplified procedure--Salaries and wages base.
    a. Establish the total amount of salaries and wages paid to all 
employees of the institution.
    b. Establish an F&A cost pool consisting of the expenditures 
(exclusive of capital items and other costs specifically identified 
as unallowable) that customarily are classified under the following 
titles or their equivalents:
    (1) General administration and general expenses (exclusive of 
costs of student administration and services, student activities, 
student aid, and scholarships). In those cases where expenditures 
have previously been allocated to other institutional activities, 
they may be included in the F&A cost pool. The total amount of 
salaries and wages included in the F&A cost pool must be separately 
identified.
    (2) Operation and maintenance of physical plant; and 
depreciation and use allowances; after appropriate adjustment for 
costs applicable to other institutional activities.
    (3) Library.
    (4) Department administration expenses, which will be computed 
as 20 percent of the salaries and expenses of deans and heads of 
departments.
    c. Establish a salary and wage distribution base, determined by 
deducting from the total of salaries and wages as established in 
subsection a the amount of salaries and wages included under 
subsection H.2.b of this Appendix.
    d. Establish the F&A cost rate, determined by dividing the 
amount in the F&A cost pool, subsection H.2.b of this Appendix, by 
the amount of the distribution base, subsection H.2.c of this 
Appendix.
    e. Apply the F&A cost rate to direct salaries and wages for 
individual agreements to determine the amount of F&A costs allocable 
to such agreements.
    3. Simplified procedure--Modified total direct cost base.
    a. Establish the total costs incurred by the institution for the 
base period.
    b. Establish a F&A cost pool consisting of the expenditures 
(exclusive of capital items and other costs specifically identified 
as unallowable) that customarily are classified under the following 
titles or their equivalents:
    (1) General administration and general expenses (exclusive of 
costs of student administration and services, student activities, 
student aid, and scholarships). In those cases where expenditures 
have previously been allocated to other institutional activities, 
they may be included in the F&A cost pool. The modified total direct 
costs amount included in the F&A cost pool must be separately 
identified.
    (2) Operation and maintenance of physical plant; and 
depreciation and use allowances; after appropriate adjustment for 
costs applicable to other institutional activities.
    (3) Library.
    (4) Department administration expenses, which will be computed 
as 20 percent of the salaries and expenses of deans and heads of 
departments.

[[Page 51893]]

    c. Establish a modified total direct cost distribution base, as 
defined in Section G.2 of this Appendix, that consists of all 
institution's direct functions.
    d. Establish the F&A cost rate, determined by dividing the 
amount in the F&A cost pool, subsection b, by the amount of the 
distribution base, subsection c.
    e. Apply the F&A cost rate to the modified total direct costs 
for individual agreements to determine the amount of F&A costs 
allocable to such agreements.

I. Reserved

J. General Provisions for Selected Items of Cost

    Sections J.1 through 54 of this Appendix provide principles to 
be applied in establishing the allowability of certain items 
involved in determining cost. These principles should apply 
irrespective of whether a particular item of cost is properly 
treated as direct cost or F&A cost. Failure to mention a particular 
item of cost is not intended to imply that it is either allowable or 
unallowable; rather, determination as to allowability in each case 
should be based on the treatment provided for similar or related 
items of cost. In case of a discrepancy between the provisions of a 
specific sponsored agreement and the provisions below, the agreement 
should govern.
    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 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 section J.42.b of this Appendix, 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 non-Federal 
entities 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'') of this Appendix 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 J.1.c, 1.d and 1.e of this Appendix.
    (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.
    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.
    3. Alcoholic beverages.
    Costs of alcoholic beverages are unallowable.
    4. Alumni/ae activities.
    Costs incurred for, or in support of, alumni/ae activities and 
similar services are unallowable.
    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. Bad Debt.
    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. 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. Commencement and convocation costs.
    Costs incurred for commencements and convocations are 
unallowable, except as provided for in Section F.9 of this Appendix.
    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.
    10. Compensation for personal services.
    a. General. Compensation for personal services covers all 
amounts paid currently or accrued by the institution for services of 
employees rendered during the period of performance under sponsored 
agreements. Such amounts include salaries, wages, and fringe 
benefits (see subsection J.10.f of this Appendix). These costs are 
allowable to the extent that the total compensation to individual 
employees conforms to the established policies of the institution, 
consistently applied, and provided that the charges for work 
performed directly on sponsored agreements and for other work 
allocable as F&A costs are determined and supported as provided 
below. Charges to sponsored agreements may include reasonable 
amounts for activities contributing and intimately related to work 
under the agreements, such as delivering special lectures about 
specific aspects of the ongoing activity, writing reports and 
articles, participating in appropriate seminars, consulting with 
colleagues and graduate students, and attending meetings and 
conferences. Incidental work (that in excess of normal for the 
individual), for which supplemental compensation is paid by an 
institution under institutional policy, need not be included in the 
payroll distribution systems described below, provided such work and 
compensation are separately identified and documented in the 
financial management system of the institution.
    b. Payroll distribution.
    (1) General Principles.
    (a) The distribution of salaries and wages, whether treated as 
direct or F&A costs, will be based on payrolls documented in 
accordance with the generally accepted practices of colleges and 
universities. Institutions may include in a residual category all 
activities that are not directly charged to sponsored agreements, 
and that need not be distributed to more than one activity for 
purposes of identifying F&A costs and the functions to which they 
are allocable. The components of the residual category are not 
required to be separately documented.

[[Page 51894]]

    (b) The apportionment of employees' salaries and wages which are 
chargeable to more than one sponsored agreement or other cost 
objective will be accomplished by methods which will--
    (1) Be in accordance with Sections A.2 and C of this Appendix;
    (2) Produce an equitable distribution of charges for employee's 
activities; and
    (3) Distinguish the employees' direct activities from their F&A 
activities.
    (c) In the use of any methods for apportioning salaries, it is 
recognized that, in an academic setting, teaching, research, 
service, and administration are often inextricably intermingled. A 
precise assessment of factors that contribute to costs is not always 
feasible, nor is it expected. Reliance, therefore, is placed on 
estimates in which a degree of tolerance is appropriate.
    (d) There is no single best method for documenting the 
distribution of charges for personal services. Methods for 
apportioning salaries and wages, however, must meet the criteria 
specified in subsection J.10.b.(2) of this Appendix. Examples of 
acceptable methods are contained in subsection c. Other methods that 
meet the criteria specified in subsection J.10.b.(2) of this 
Appendix also shall be deemed acceptable, if a mutually satisfactory 
alternative agreement is reached.
    (2) Criteria for Acceptable Methods.
    (a) The payroll distribution system will be incorporated into 
the official records of the institution; reasonably reflect the 
activity for which the employee is compensated by the institution; 
and encompass both sponsored and all other activities on an 
integrated basis, but may include the use of subsidiary records. 
(Compensation for incidental work described in subsection a need not 
be included.)
    (b) The method must recognize the principle of after-the-fact 
confirmation or determination so that costs distributed represent 
actual costs, unless a mutually satisfactory alternative agreement 
is reached. Direct cost activities and F&A cost activities may be 
confirmed by responsible persons with suitable means of verification 
that the work was performed. Confirmation by the employee is not a 
requirement for either direct or F&A cost activities if other 
responsible persons make appropriate confirmations.
    (c) The payroll distribution system will allow confirmation of 
activity allocable to each sponsored agreement and each of the 
categories of activity needed to identify F&A costs and the 
functions to which they are allocable. The activities chargeable to 
F&A cost categories or the major functions of the institution for 
employees whose salaries must be apportioned (see subsection 
J.10.b.(1)(b) of this Appendix), if not initially identified as 
separate categories, may be subsequently distributed by any 
reasonable method mutually agreed to, including, but not limited to, 
suitably conducted surveys, statistical sampling procedures, or the 
application of negotiated fixed rates.
    (d) Practices vary among institutions and within institutions as 
to the activity constituting a full workload. Therefore, the payroll 
distribution system may reflect categories of activities expressed 
as a percentage distribution of total activities.
    (e) Direct and F&A charges may be made initially to sponsored 
agreements on the basis of estimates made before services are 
performed. When such estimates are used, significant changes in the 
corresponding work activity must be identified and entered into the 
payroll distribution system. Short-term (such as one or two months) 
fluctuation between workload categories need not be considered as 
long as the distribution of salaries and wages is reasonable over 
the longer term, such as an academic period.
    (f) The system will provide for independent internal evaluations 
to ensure the system's effectiveness and compliance with the above 
standards.
    (g) For systems which meet these standards, the institution will 
not be required to provide additional support or documentation for 
the effort actually performed.
    c. Examples of Acceptable Methods for Payroll Distribution:
    (1) Plan-Confirmation: Under this method, the distribution of 
salaries and wages of professorial and professional staff applicable 
to sponsored agreements is based on budgeted, planned, or assigned 
work activity, updated to reflect any significant changes in work 
distribution. A plan-confirmation system used for salaries and wages 
charged directly or indirectly to sponsored agreements will meet the 
following standards:
    (a) A system of budgeted, planned, or assigned work activity 
will be incorporated into the official records of the institution 
and encompass both sponsored and all other activities on an 
integrated basis. The system may include the use of subsidiary 
records.
    (b) The system will reasonably reflect only the activity for 
which the employee is compensated by the institution (compensation 
for incidental work described in subsection a need not be included). 
Practices vary among institutions and within institutions as to the 
activity constituting a full workload. Hence, the system will 
reflect categories of activities expressed as a percentage 
distribution of total activities. (See Section H of this Appendix 
for treatment of F&A costs under the simplified method for small 
institutions.)
    (c) The system will reflect activity applicable to each 
sponsored agreement and to each category needed to identify F&A 
costs and the functions to which they are allocable. The system may 
treat F&A cost activities initially within a residual category and 
subsequently determine them by alternate methods as discussed in 
subsection J.10.c.(2)(c) of this Appendix.
    (d) The system will provide for modification of an individual's 
salary or salary distribution commensurate with a significant change 
in the employee's work activity. Short-term (such as one or two 
months) fluctuation between workload categories need not be 
considered as long as the distribution of salaries and wages is 
reasonable over the longer term, such as an academic period. 
Whenever it is apparent that a significant change in work activity 
that is directly or indirectly charged to sponsored agreements will 
occur or has occurred, the change will be documented over the 
signature of a responsible official and entered into the system.
    (e) At least annually a statement will be signed by the 
employee, principal investigator, or responsible official(s) using 
suitable means of verification that the work was performed, stating 
that salaries and wages charged to sponsored agreements as direct 
charges, and to residual, F&A cost or other categories are 
reasonable in relation to work performed.
    (f) The system will provide for independent internal evaluation 
to ensure the system's integrity and compliance with the above 
standards.
    (g) In the use of this method, an institution shall not be 
required to provide additional support or documentation for the 
effort actually performed.
    (2) After-the-fact Activity Records: Under this system the 
distribution of salaries and wages by the institution will be 
supported by activity reports as prescribed below.
    (a) Activity reports will reflect the distribution of activity 
expended by employees covered by the system (compensation for 
incidental work as described in subsection a need not be included).
    (b) These reports will reflect an after-the-fact reporting of 
the percentage distribution of activity of employees. Charges may be 
made initially on the basis of estimates made before the services 
are performed, provided that such charges are promptly adjusted if 
significant differences are indicated by activity records.
    (c) Reports will reasonably reflect the activities for which 
employees are compensated by the institution. To confirm that the 
distribution of activity represents a reasonable estimate of the 
work performed by the employee during the period, the reports will 
be signed by the employee, principal investigator, or responsible 
official(s) using suitable means of verification that the work was 
performed.
    (d) The system will reflect activity applicable to each 
sponsored agreement and to each category needed to identify F&A 
costs and the functions to which they are allocable. The system may 
treat F&A cost activities initially within a residual category and 
subsequently determine them by alternate methods as discussed in 
subsection J.10.b.(2)(c) of this Appendix.
    (e) For professorial and professional staff, the reports will be 
prepared each academic term, but no less frequently than every six 
months. For other employees, unless alternate arrangements are 
agreed to, the reports will be prepared no less frequently than 
monthly and will coincide with one or more pay periods.
    (f) Where the institution uses time cards or other forms of 
after-the-fact payroll documents as original documentation for 
payroll and payroll charges, such documents shall qualify as records 
for this purpose, provided that they meet the requirements in 
subsections J.10.c.(2)(a) through (e) of this Appendix.
    (3) Multiple Confirmation Records: Under this system, the 
distribution of salaries and wages of professorial and professional 
staff will be supported by records which certify

[[Page 51895]]

separately for direct and F&A cost activities as prescribed below.
    (a) For employees covered by the system, there will be direct 
cost records to reflect the distribution of that activity expended 
which is to be allocable as direct cost to each sponsored agreement. 
There will also be F&A cost records to reflect the distribution of 
that activity to F&A costs. These records may be kept jointly or 
separately (but are to be certified separately, see below).
    (b) Salary and wage charges may be made initially on the basis 
of estimates made before the services are performed, provided that 
such charges are promptly adjusted if significant differences occur.
    (c) Institutional records will reasonably reflect only the 
activity for which employees are compensated by the institution 
(compensation for incidental work as described in subsection a need 
not be included).
    (d) The system will reflect activity applicable to each 
sponsored agreement and to each category needed to identify F&A 
costs and the functions to which they are allocable.
    (e) To confirm that distribution of activity represents a 
reasonable estimate of the work performed by the employee during the 
period, the record for each employee will include:
    (1) The signature of the employee or of a person having direct 
knowledge of the work, confirming that the record of activities 
allocable as direct costs of each sponsored agreement is 
appropriate; and,
    (2) The record of F&A costs will include the signature of 
responsible person(s) who use suitable means of verification that 
the work was performed and is consistent with the overall 
distribution of the employee's compensated activities. These 
signatures may all be on the same document.
    (f) The reports will be prepared each academic term, but no less 
frequently than every six months.
    (g) Where the institution uses time cards or other forms of 
after-the-fact payroll documents as original documentation for 
payroll and payroll charges, such documents shall qualify as records 
for this purpose, provided they meet the requirements in subsections 
J.10.c.(3)(a) through (f) of this Appendix.
    d. Salary rates for faculty members.
    (1) Salary rates for academic year. Charges for work performed 
on sponsored agreements by faculty members during the academic year 
will be based on the individual faculty member's regular 
compensation for the continuous period which, under the policy of 
the institution concerned, constitutes the basis of his salary. 
Charges for work performed on sponsored agreements during all or any 
portion of such period are allowable at the base salary rate. In no 
event will charges to sponsored agreements, irrespective of the 
basis of computation, exceed the proportionate share of the base 
salary for that period. This principle applies to all members of the 
faculty at an institution. Since intra-university consulting is 
assumed to be undertaken as a university obligation requiring no 
compensation in addition to full-time base salary, the principle 
also applies to faculty members who function as consultants or 
otherwise contribute to a sponsored agreement conducted by another 
faculty member of the same institution. However, in unusual cases 
where consultation is across departmental lines or involves a 
separate or remote operation, and the work performed by the 
consultant is in addition to his regular departmental load, any 
charges for such work representing extra compensation above the base 
salary are allowable provided that such consulting arrangements are 
specifically provided for in the agreement or approved in writing by 
the sponsoring agency.
    (2) Periods outside the academic year.
    (a) Except as otherwise specified for teaching activity in 
subsection J.10.d.(2)(b) of this Appendix, charges for work 
performed by faculty members on sponsored agreements during the 
summer months or other period not included in the base salary period 
will be determined for each faculty member at a rate not in excess 
of the base salary divided by the period to which the base salary 
relates, and will be limited to charges made in accordance with 
other parts of this section. The base salary period used in 
computing charges for work performed during the summer months will 
be the number of months covered by the faculty member's official 
academic year appointment.
    (b) Charges for teaching activities performed by faculty members 
on sponsored agreements during the summer months or other periods 
not included in the base salary period will be based on the normal 
policy of the institution governing compensation to faculty members 
for teaching assignments during such periods.
    (3) Part-time faculty. Charges for work performed on sponsored 
agreements by faculty members having only part-time appointments 
will be determined at a rate not in excess of that regularly paid 
for the part-time assignments. For example, an institution pays 
$5000 to a faculty member for half-time teaching during the academic 
year. He devoted one-half of his remaining time to a sponsored 
agreement. Thus, his additional compensation, chargeable by the 
institution to the agreement, would be one-half of $5000, or $2500.
    e. Noninstitutional professional activities. Unless an 
arrangement is specifically authorized by a Federal sponsoring 
agency, an institution must follow its institution-wide policies and 
practices concerning the permissible extent of professional services 
that can be provided outside the institution for noninstitutional 
compensation. Where such institution-wide policies do not exist or 
do not adequately define the permissible extent of consulting or 
other noninstitutional activities undertaken for extra outside pay, 
the Federal Government may require that the effort of professional 
staff working on sponsored agreements be allocated between 
institutional activities, and noninstitutional professional 
activities. If the sponsoring agency considers the extent of 
noninstitutional professional effort excessive, appropriate 
arrangements governing compensation will be negotiated on a case-by-
case basis.
    f. Fringe benefits.
    (1) Fringe benefits in the form of regular compensation paid to 
employees during periods of authorized absences from the job, such 
as for annual leave, sick leave, military leave, and the like, are 
allowable, provided such costs are distributed to all institutional 
activities in proportion to the relative amount of time or effort 
actually devoted by the employees. See subsection J.11.f.(4) of this 
Appendix for treatment of sabbatical leave.
    (2) Fringe benefits in the form of employer contributions or 
expenses for social security, employee insurance, workmen's 
compensation insurance, tuition or remission of tuition for 
individual employees are allowable, provided such benefits are 
granted in accordance with established educational institutional 
policies, and are distributed to all institutional activities on an 
equitable basis. Tuition benefits for family members other than the 
employee are unallowable for fiscal years beginning after September 
30, 1998. See Section J.45.b, Scholarships and student aid costs, of 
this Appendix for treatment of tuition remission provided to 
students.
    (3) Rules for pension plan costs are as follows:
    (a) Costs of the institution's pension plan which are incurred 
in accordance with the established policies of the institution are 
allowable, provided such policies meet the test of reasonableness, 
the methods of cost allocation are equitable for all activities, the 
amount of pension cost assigned to each fiscal year is determined in 
accordance with subsection (b), and the cost assigned to a given 
fiscal year is paid or funded for all plan participants within six 
months after the end of that year. However, increases to normal and 
past service pension costs caused by a delay in funding the 
actuarial liability beyond 30 days after each quarter of the year to 
which such costs are assignable are unallowable.
    (b) The amount of pension cost assigned to each fiscal year 
shall be determined in accordance with generally accepted accounting 
principles. Institutions may elect to follow the ``Cost Accounting 
Standard for Composition and Measurement of Pension Cost'' (48 Part 
9904-412).
    (c) Premiums paid for pension plan termination insurance 
pursuant to the Employee Retirement Income Security Act (ERISA) of 
1974 (Pub. L. 93-406) are allowable. Late payment charges on such 
premiums are unallowable. Excise taxes on accumulated funding 
deficiencies and prohibited transactions of pension plan fiduciaries 
imposed under ERISA are also unallowable.
    (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

[[Page 51896]]

relation to the institution's actual experience under its sabbatical 
leave policy.
    (5) Fringe benefits may be assigned to cost objectives by 
identifying specific benefits to specific individual employees or by 
allocating on the basis of institution-wide salaries and wages of 
the employees receiving the benefits. When the allocation method is 
used, separate allocations must be made to selective groupings of 
employees, unless the institution demonstrates that costs in 
relationship to salaries and wages do not differ significantly for 
different groups of employees. Fringe benefits shall be treated in 
the same manner as the salaries and wages of the employees receiving 
the benefits. The benefits related to salaries and wages treated as 
direct costs shall also be treated as direct costs; the benefits 
related to salaries and wages treated as F&A costs shall be treated 
as F&A costs.
    g. Institution-furnished automobiles.
    That portion of the cost of institution-furnished automobiles 
that relates to personal use by employees (including transportation 
to and from work) is unallowable regardless of whether the cost is 
reported as taxable income to the employees.
    h. Severance pay.
    (1) Severance pay is compensation in addition to regular salary 
and wages which is 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 J.10.h.(1) of 
this Appendix 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.
    (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.
    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 Appendix regarding self-insurance, pensions, severance and 
post-retirement health costs.
    12. Deans of faculty and graduate schools.
    The salaries and expenses of deans of faculty and graduate 
schools, or their equivalents, and their staffs, are allowable.
    13. Defense and prosecution of criminal and civil proceedings, 
claims, appeals and patent infringement.
    a. Definitions.
    ``Conviction,'' as used herein, means a judgment or conviction 
of a criminal offense by any court of competent jurisdiction, 
whether entered upon verdict or a plea, including a conviction due 
to a plea of nolo contendere.
    ``Costs,'' include, but are not limited to, administrative and 
clerical expenses; the cost of legal services, whether performed by 
in-house or private counsel; the costs of the services of 
accountants, consultants, or others retained by the institution to 
assist it; costs of employees, officers and trustees, and any 
similar costs incurred before, during, and after commencement of a 
judicial or administrative proceeding that bears a direct 
relationship to the proceedings.
    ``Fraud,'' as used herein, means--
    (1) Acts of fraud or corruption or attempts to defraud the 
Federal Government or to corrupt its agents;
    (2) Acts that constitute a cause for debarment or suspension (as 
specified in agency regulations), and
    (3) Acts which violate the False Claims Act, 31 U.S.C., sections 
3729-3731, or the Anti-kickback Act, 41 U.S.C., sections 51 and 54.
    ``Penalty,'' does not include restitution, reimbursement, or 
compensatory damages.
    ``Proceeding,'' includes an investigation.
    b. (1) Except as otherwise described herein, costs incurred in 
connection with any criminal, civil or administrative proceeding 
(including filing of a false certification) commenced by the Federal 
Government, or a State, local or foreign government, are not 
allowable if the proceeding
    (a) Relates to a violation of, or failure to comply with, a 
Federal, State, local or foreign statute or regulation, by the 
institution (including its agents and employees); and
    (b) Results in any of the following dispositions:
    (i) In a criminal proceeding, a conviction.
    (ii) In a civil or administrative proceeding involving an 
allegation of fraud or similar misconduct, a determination of 
institutional liability.
    (iii) In the case of any civil or administrative proceeding, the 
imposition of a monetary penalty.
    (iv) A final decision by an appropriate Federal official to 
debar or suspend the institution, to rescind or void an award, or to 
terminate an award for default by reason of a violation or failure 
to comply with a law or regulation.
    (v) A disposition by consent or compromise, if the action could 
have resulted in any of the dispositions described in subsections 
J.13.b.(1)(b)(i) through (iv) of this Appendix.
    (2) If more than one proceeding involves the same alleged 
misconduct, the costs of all such proceedings shall be unallowable 
if any one of them results in one of the dispositions shown in 
subsection b.
    c. If a proceeding referred to in subsection J.13.b. of this 
Appendix is commenced by the Federal Government and is resolved by 
consent or compromise pursuant to an agreement entered into by the 
institution and the Federal Government, then the costs incurred by 
the institution in connection with such proceedings that are 
otherwise not allowable under subsection b. may be allowed to the 
extent specifically provided in such agreement.
    d. If a proceeding referred to in subsection J.13.b. of this 
Appendix is commenced by a State, local or foreign government, the 
authorized Federal official may allow the costs incurred by the 
institution for such proceedings, if such authorized official 
determines that the costs were incurred as a result of--
    (1) A specific term or condition of a federally-sponsored 
agreement; or
    (2) Specific written direction of an authorized official of the 
sponsoring agency.
    e. Costs incurred in connection with proceedings described in 
subsection J.13.b of this Appendix, but which are not made 
unallowable by that subsection, may be allowed by the Federal 
Government, but only to the extent that:
    (1) The costs are reasonable in relation to the activities 
required to deal with the proceeding and the underlying cause of 
action;
    (2) Payment of the costs incurred, as allowable and allocable 
costs, is not prohibited by any other provision(s) of the sponsored 
agreement;
    (3) The costs are not otherwise recovered from the Federal 
Government or a third party, either directly as a result of the 
proceeding or otherwise; and,
    (4) The percentage of costs allowed does not exceed the 
percentage determined by an authorized Federal official to be 
appropriate considering the complexity of procurement litigation, 
generally accepted principles governing the award of legal fees in 
civil actions involving the United States as a party, and such other 
factors as may be appropriate. Such percentage shall not exceed 80 
percent. However, if an agreement reached under subsection c has 
explicitly considered this 80 percent limitation and permitted a 
higher percentage, then the full amount of costs resulting from that 
agreement shall be allowable.
    f. Costs incurred by the institution in connection with the 
defense of suits brought by its employees or ex-employees under 
section 2 of the Major Fraud Act of 1988 (Pub. L. 100-700), 
including the cost of all relief necessary to make such employee 
whole, where the institution was found liable or settled, are 
unallowable.
    g. Costs of legal, accounting, and consultant services, and 
related costs, incurred in connection with defense against Federal 
Government claims or appeals, or the prosecution of claims or 
appeals against the Federal Government, are unallowable.
    h. Costs of legal, accounting, and consultant services, and 
related costs, incurred in connection with patent infringement 
litigation, are unallowable unless otherwise provided for in the 
sponsored agreements.
    i. Costs, which may be unallowable under this section, including 
directly associated costs, shall be segregated and accounted for by 
the institution separately. During the

[[Page 51897]]

pendency of any proceeding covered by subsections J.13.b and f of 
this Appendix, the Federal Government shall generally withhold 
payment of such costs. However, if in the best interests of the 
Federal Government, the Federal Government may provide for 
conditional payment upon provision of adequate security, or other 
adequate assurance, and agreement by the institution to repay all 
unallowable costs, plus interest, if the costs are subsequently 
determined to be unallowable.
    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 of this Appendix. 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 a institution to use more 
than these three groupings. When a institution 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 
J.14.e.(3) of this Appendix)
    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 J.14.e.(3) of this Appendix, once 
a institution converts from one cost recovery methodology to 
another, acquisition costs not recovered may not be used in the 
calculation of the use allowance in subsection J.14.e.(3) of this 
Appendix.
    f. Except as otherwise provided in subsections J.14.b. through 
e. of this Appendix, 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.h of this Appendix.
    (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 of this Appendix, 
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 liquidation of the 
principal of debts incurred to acquire assets that are used directly 
for organized research activities, or 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

[[Page 51898]]

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 2 CFR Part 215.
    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 2 CFR Part 215.
    16. Employee morale, health, and welfare costs and 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 where the institution can 
demonstrate unusual circumstances, and 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) through (3) of this Appendix, 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 of this Appendix, 
Depreciation and use allowances, for rules on the allowability of 
use allowances or depreciation on buildings, capital improvements, 
and equipment. Also, see section J.43 of this Appendix, 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.
    19. Fines and penalties.
    Costs resulting from violations of, or failure of the 
institution to comply with, Federal, State, and local or foreign 
laws and regulations are unallowable, except when incurred as a 
result of compliance with specific provisions of the sponsored 
agreement, or instructions in writing from the authorized official 
of the sponsoring agency authorizing in advance such payments.
    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 of 
this Appendix.
    (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.25 of this 
Appendix.
    (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 2 CFR Part 215, Uniform Administrative Requirements 
for Grants and Agreements with Institutions of Higher Education, 
Hospitals, and Other Non-Profit Organizations (OMB Circular A-110).
    22. Goods or services for personal use.

[[Page 51899]]

    Costs of goods or services for personal use of the institution's 
employees are unallowable regardless of whether the cost is reported 
as taxable income to the employees.
    23. Housing and personal living expenses.
    a. Costs of housing (e.g., depreciation, maintenance, utilities, 
furnishings, rent, etc.), housing allowances and personal living 
expenses for/of the institution's officers are unallowable 
regardless of whether the cost is reported as taxable income to the 
employees.
    b. The term ``officers'' includes current and past officers.
    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.
    25. Insurance and indemnification.
    a. Costs of insurance required or approved, and maintained, 
pursuant to the sponsored agreement, are allowable.
    b. Costs of other insurance maintained by the institution in 
connection with the general conduct of its activities, are allowable 
subject to the following limitations:
    (1) Types and extent and cost of coverage must be in accordance 
with sound institutional practice;
    (2) Costs of insurance or of any contributions to any reserve 
covering the risk of loss of or damage to federally-owned property 
are unallowable, except to the extent that the Federal Government 
has specifically required or approved such costs; and
    (3) Costs of insurance on the lives of officers or trustees are 
unallowable except where such insurance is part of an employee plan 
which is not unduly restricted.
    c. Contributions to a reserve for a self-insurance program are 
allowable, to the extent that the types of coverage, extent of 
coverage, and the rates and premiums would have been allowed had 
insurance been purchased to cover the risks.
    d. Actual losses which could have been covered by permissible 
insurance (whether through purchased insurance or self-insurance) 
are unallowable, unless expressly provided for in the sponsored 
agreement, except that costs incurred because of losses not covered 
under existing deductible clauses for insurance coverage provided in 
keeping with sound management practice as well as minor losses not 
covered by insurance, such as spoilage, breakage and disappearance 
of small hand tools, which occur in the ordinary course of 
operations, are allowable.
    e. Indemnification includes securing the institution against 
liabilities to third persons and other losses not compensated by 
insurance or otherwise. The Federal Government is obligated to 
indemnify the institution only to the extent expressly provided for 
in the sponsored agreement, except as provided in subsection J.25.d 
of this Appendix.
    f. Insurance against defects. Costs of insurance with respect to 
any costs incurred to correct defects in the institution's materials 
or workmanship are unallowable.
    g. Medical liability (malpractice) insurance is an allowable 
cost of research programs only to the extent that the research 
involves human subjects. Medical liability insurance costs shall be 
treated as a direct cost and shall be assigned to individual 
projects based on the manner in which the insurer allocates the risk 
to the population covered by the insurance.
    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. Sec.  215.30 through 215.37 of 2 CFR part 215 (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 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 
J.26.b.(1) of this Appendix. 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

[[Page 51900]]

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-Federal entities 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 non-Federal entities 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).
    27. Labor relations costs.
    Costs incurred in maintaining satisfactory relations between the 
institution and its employees, including costs of labor management 
committees, employees' publications, and other related activities, 
are allowable.
    28. Lobbying.
    Reference is made to the common rule published at 7 CFR part 
3018, 10 CFR parts 600 and 601, 12 CFR part 411, 13 CFR part 146, 14 
CFR part 1271, 15 CFR part 28, 18 CFR part 1315, 22 CFR parts 138, 
227, 311, 519 and 712, 24 CFR part 87, 28 CFR part 69, 29 CFR part 
93, 31 CFR part 21, 32 CFR part 282, 34 CFR part 82, 38 CFR part 85, 
40 CFR part 34, 41 CFR part 105-69, 43 CFR part 18, 44 CFR part 18, 
45 CFR parts 93, 604, 1158, 1168 and 1230, and 49 CFR part 20, and 
OMB's governmentwide guidance, amendments to OMB's governmentwide 
guidance, and OMB's clarification notices published at 54 FR 52306 
(12/20/89), 61 FR 1412 (1/19/96), 55 FR 24540 (6/15/90) and 57 FR 
1772 (1/15/92), respectively. In addition, the following 
restrictions shall apply:
    a. Notwithstanding other provisions of this Appendix, costs 
associated with the following activities are unallowable:
    (1) Attempts to influence the outcomes of any Federal, State, or 
local election, referendum, initiative, or similar procedure, 
through in kind or cash contributions, endorsements, publicity, or 
similar activity;
    (2) Establishing, administering, contributing to, or paying the 
expenses of a political party, campaign, political action committee, 
or other organization established for the purpose of influencing the 
outcomes of elections;
    (3) Any attempt to influence The introduction of Federal or 
State legislation; The enactment or modification of any pending 
Federal or State legislation through communication with any member 
or employee of the Congress or State legislature, including efforts 
to influence State or local officials to engage in similar lobbying 
activity; or any government official or employee in connection with 
a decision to sign or veto enrolled legislation;
    (4) Any attempt to influence The introduction of Federal or 
State legislation; or The enactment or modification of any pending 
Federal or State legislation by preparing, distributing, or using 
publicity or propaganda, or by urging members of the general public, 
or any segment thereof, to contribute to or participate in any mass 
demonstration, march, rally, fund raising drive, lobbying campaign 
or letter writing or telephone campaign; or
    (5) Legislative liaison activities, including attendance at 
legislative sessions or committee hearings, gathering information 
regarding legislation, and analyzing the effect of legislation, when 
such activities are carried on in support of or in knowing 
preparation for an effort to engage in unallowable lobbying.
    b. The following activities are excepted from the coverage of 
subsection J.28.a of this Appendix:
    (1) Technical and factual presentations on topics directly 
related to the performance of a grant, contract, or other agreement 
(through hearing testimony, statements, or letters to the Congress 
or a State legislature, or subdivision, member, or cognizant staff 
member thereof), in response to a documented request (including a 
Congressional Record notice requesting testimony or statements for 
the record at a regularly scheduled hearing) made by the recipient 
member, legislative body or subdivision, or a cognizant staff member 
thereof, provided such information is readily obtainable and can be 
readily put in deliverable form, and further provided that costs 
under this section for travel, lodging or meals are unallowable 
unless incurred to offer testimony at a regularly scheduled 
Congressional hearing pursuant to a written request for such 
presentation made by the Chairman or Ranking Minority Member of the 
Committee or Subcommittee conducting such hearings;
    (2) Any lobbying made unallowable by subsection J.28.a.(3) of 
this Appendix to influence State legislation in order to directly 
reduce the cost, or to avoid material impairment of the 
institution's authority to perform the grant, contract, or other 
agreement; or
    (3) Any activity specifically authorized by statute to be 
undertaken with funds from the grant, contract, or other agreement.
    c. When an institution seeks reimbursement for F&A costs, total 
lobbying costs shall be separately identified in the F&A cost rate 
proposal, and thereafter treated as other unallowable activity costs 
in accordance with the procedures of Section B.1.d of this Appendix.
    d. Institutions shall submit as part of their annual F&A cost 
rate proposal a certification that the requirements and standards of 
this section have been complied with.
    e. Institutions shall maintain adequate records to demonstrate 
that the determination of costs as being allowable or unallowable 
pursuant to this section complies with the requirements of this 
Appendix.
    f. Time logs, calendars, or similar records shall not be 
required to be created for purposes of complying with this section 
during any particular calendar month when:
    (1) the employee engages in lobbying (as defined in subsections 
J.28.a and b of this Appendix) 25 percent or less of the employee's 
compensated hours of employment during that calendar month; and
    (2) within the preceding five-year period, the institution has 
not materially misstated allowable or unallowable costs of any 
nature, including legislative lobbying costs. When conditions in 
subsections J.28.f.(1) and (2) of this Appendix are met, 
institutions are not required to establish records to support the 
allowability of claimed costs in addition to records already 
required or maintained. Also, when conditions in subsections J.28.f. 
(1) and (2) of this Appendix are met, the absence of time logs, 
calendars, or similar records will not serve as a basis for 
disallowing costs by contesting estimates of lobbying time spent by 
employees during a calendar month.
    g. Agencies shall establish procedures for resolving in advance, 
in consultation with OMB, any significant questions or disagreements 
concerning the interpretation or application of this section. Any 
such advance resolutions shall be binding in any subsequent 
settlements, audits, or investigations with respect to that grant or 
contract for purposes of interpretation of this Appendix, provided, 
however, that this shall not be construed to prevent a contractor or

[[Page 51901]]

grantee from contesting the lawfulness of such a determination.
    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.
    29. Losses on other sponsored agreements or contracts.
    Any excess of costs over income under any other sponsored 
agreement or contract of any nature is unallowable. This includes, 
but is not limited to, the institution's contributed portion by 
reason of cost-sharing agreements or any under-recoveries through 
negotiation of flat amounts for F&A costs.
    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 J.18.a(1) of this 
Appendix).
    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 incidental to such meetings or 
conferences. But see section J.17 of this Appendix, 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 service costs, and J.44, Royalties and other costs for 
use of patents, of this Appendix).
    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 sponsored agreement award 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, of this 
Appendix).
    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 Appendix.
    36. Preagreement costs. Costs incurred prior to the effective 
date of the sponsored agreement, whether or not they would have been 
allowable thereunder if incurred after such date, are unallowable 
unless approved by the sponsoring agency.
    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 subparagraphs J.37.b and c of 
this Appendix 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 of this Appendix.
    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 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 subparagraph J.37.b of this 
Appendix, retainer fees to be allowable must be supported by 
evidence of bona fide services available or rendered.
    38. Proposal costs.
    Proposal costs are the costs of preparing bids or proposals on 
potential federally and non-federally-funded sponsored agreements or 
projects, including the development of data necessary to support the 
institution's bids or proposals. Proposal costs of the current 
accounting period of both successful and unsuccessful bids and 
proposals normally should be treated as F&A costs and allocated 
currently to all activities of the institution, and no proposal 
costs of past accounting periods will be allocable to the current 
period. However, the institution's established practices may be to 
treat proposal costs by some other recognized method. Regardless of 
the method used, the results obtained may be accepted only if found 
to be reasonable and equitable.
    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

[[Page 51902]]

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.
    42. Recruiting costs.
    a. Subject to subsections J.42.b, c, and d of this Appendix, and 
provided that the size of the staff recruited and maintained is in 
keeping with workload requirements, costs of ``help wanted'' 
advertising, operating costs of an employment office necessary to 
secure and maintain an adequate staff, costs of operating an 
aptitude and educational testing program, travel costs of employees 
while engaged in recruiting personnel, travel costs of applicants 
for interviews for prospective employment, and relocation costs 
incurred incident to recruitment of new employees, are allowable to 
the extent that such costs are incurred pursuant to a well-managed 
recruitment program. Where the institution uses employment agencies, 
costs not in excess of standard commercial rates for such services 
are allowable.
    b. In publications, costs of help wanted advertising that 
includes color, includes advertising material for other than 
recruitment purposes, or is excessive in size (taking into 
consideration recruitment purposes for which intended and normal 
institutional practices in this respect), are unallowable.
    c. Costs of help wanted advertising, special emoluments, fringe 
benefits, and salary allowances incurred to attract professional 
personnel from other institutions that do not meet the test of 
reasonableness or do not conform with the established practices of 
the institution, are unallowable.
    d. Where relocation costs incurred incident to recruitment of a 
new employee have been allowed either as an allocable direct or F&A 
cost, and the newly hired employee resigns for reasons within his 
control within 12 months after hire, the institution will be 
required to refund or credit such relocation costs to the Federal 
Government.
    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 J.43.b 
of this Appendix) that would be allowed had title to the property 
vested in the institution. 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--
    (1) Divisions of a institution;
    (2) Non-Federal entities 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, a 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 J.43.b of this Appendix) 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.26 of this Appendix. 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 award 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 the institution 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 of 
this Appendix, 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 subsection J.1 of 
this Appendix as allowable public relations costs or under 
subsection J.38 of this Appendix 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 
J.47.b. or 47.c. of this Appendix and, in addition, take into 
account any items of income or Federal financing that qualify as 
applicable credits under subsection C.5. of this Appendix.
    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

[[Page 51903]]

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.
    48. Student activity costs.
    Costs incurred for intramural activities, student publications, 
student clubs, and other student activities, are unallowable, unless 
specifically provided for in the sponsored agreements.
    49. Taxes.
    a. In general, taxes which the institution is required to pay 
and which are paid or accrued in accordance with generally accepted 
accounting principles are allowable. Payments made to local 
governments in lieu of taxes which are commensurate with the local 
government services received are allowable, except for--
    (1) Taxes from which exemptions are available to the institution 
directly or which are available to the institution based on an 
exemption afforded the Federal Government, and in the latter case 
when the sponsoring agency makes available the necessary exemption 
certificates; and
    (2) Special assessments on land which represent capital 
improvements.
    b. Any refund of taxes, interest, or penalties, and any payment 
to the institution of interest thereon, attributable to taxes, 
interest, or penalties which were allowed as sponsored agreement 
costs, will be credited or paid to the Federal Government in the 
manner directed by the Federal Government. However, any interest 
actually paid or credited to an institution incident to a refund of 
tax, interest, and penalty will be paid or credited to the Federal 
Government only to the extent that such interest accrued over the 
period during which the institution has been reimbursed by the 
Federal Government for the taxes, interest, and penalties.
    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 Appendix 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 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 Appendix, 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 award 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 Sec.  215.61 of 2 CFR Part 215); 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 institutions are reimbursed for disposals at a 
predetermined amount in accordance with Sec.  215.32 through Sec.  
215.37 of 2 CFR Part 215.
    (3) F&A costs related to salaries and wages incurred as 
settlement expenses in subsections J.50.b.(1) and (2) of this 
Appendix. 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.
    g. 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.
    51. Training costs.
    The cost of training provided for employee development is 
allowable.
    52. Transportation costs.
    Costs incurred for freight, express, cartage, postage, and other 
transportation services relating either to goods purchased, in 
process, or delivered, are allowable. When such costs can readily be 
identified with the items involved, they may be charged directly as 
transportation costs or added to the cost of such items. Where 
identification with the materials received cannot readily be made, 
inbound transportation cost may be charged to the appropriate F&A 
cost accounts if the institution follows a consistent, equitable 
procedure in this respect. Outbound freight, if reimbursable under 
the terms of the sponsored agreement, should be treated as a direct 
cost.
    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)).

[[Page 51904]]

    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. of this Appendix, is unallowable.
    54. Trustees.
    Travel and subsistence costs of trustees (or directors) are 
allowable. The costs are subject to restrictions regarding lodging, 
subsistence and air travel costs provided in Section J.53 of this 
Appendix.

K. Certification of Charges

    1. To assure that expenditures for sponsored agreements are 
proper and in accordance with the agreement documents and approved 
project budgets, the annual and/or final fiscal reports or vouchers 
requesting payment under the agreements will include a 
certification, signed by an authorized official of the university, 
which reads essentially as follows: ``I certify that all 
expenditures reported (or payment requested) are for appropriate 
purposes and in accordance with the provisions of the application 
and award documents.''
    2. Certification of F&A costs.
    a. Policy.
    (1) No proposal to establish F&A cost rates shall be acceptable 
unless such costs have been certified by the educational institution 
using the Certificate of F&A Costs set forth in subsection K.2.b of 
this Appendix. The certificate must be signed on behalf of the 
institution by an individual at a level no lower than vice president 
or chief financial officer of the institution that submits the 
proposal.
    (2) No F&A cost rate shall be binding upon the Federal 
Government if the most recent required proposal from the institution 
has not been certified. Where it is necessary to establish F&A cost 
rates, and the institution has not submitted a certified proposal 
for establishing such rates in accordance with the requirements of 
this section, the Federal Government shall unilaterally establish 
such rates. Such rates may be based upon audited historical data or 
such other data that have been furnished to the cognizant Federal 
agency and for which it can be demonstrated that all unallowable 
costs have been excluded. When F&A cost rates are unilaterally 
established by the Federal Government because of failure of the 
institution to submit a certified proposal for establishing such 
rates in accordance with this section, the rates established will be 
set at a level low enough to ensure that potentially unallowable 
costs will not be reimbursed.
    b. Certificate. The certificate required by this section shall 
be in the following form:
    Certificate of F&A Costs
    This is to certify that to the best of my knowledge and belief:
    (1) I have reviewed the F&A cost proposal submitted herewith;
    (2) All costs included in this proposal [identify date] to 
establish billing or final F&A costs rate for [identify period 
covered by rate] are allowable in accordance with the requirements 
of the Federal agreement(s) to which they apply and with the cost 
principles applicable to those agreements.
    (3) This proposal does not include any costs which are 
unallowable under applicable cost principles such as (without 
limitation): advertising and public relations costs, contributions 
and donations, entertainment costs, fines and penalties, lobbying 
costs, and defense of fraud proceedings; and
    (4) All costs included in this proposal are properly allocable 
to Federal agreements on the basis of a beneficial or causal 
relationship between the expenses incurred and the agreements to 
which they are allocated in accordance with applicable requirements.
    For educational institutions that are required to file a DS-2 in 
accordance with Section C.14 of this Appendix, the following 
statement shall be added to the ``Certificate of F&A Costs'':
    (5) The rate proposal is prepared using the same cost accounting 
practices that are disclosed in the DS-2, including its amendments 
and revisions, filed with and approved by the cognizant agency.

I declare under penalty of perjury that the foregoing is true and 
correct.
 Institution:----------------------------------------------------------
 Signature:------------------------------------------------------------
 Name of Official:-----------------------------------------------------
 Title:----------------------------------------------------------------
 Date of Execution:----------------------------------------------------

Exhibit A--List of Colleges and Universities Subject to Section J.12.h 
of This Appendix

1. Johns Hopkins University
2. Stanford University
3. Massachusetts Institute of Technology
4. University of Washington
5. University of California--Los Angeles
6. University of Michigan
7. University of California--San Diego
8. University of California--San Francisco
9. University of Wisconsin--Madison
10. Columbia University
11. Yale University
12. Harvard University
13. Cornell University
14. University of Pennsylvania
15. University of California--Berkeley
16. University of Minnesota
17. Pennsylvania State University
18. University of Southern California
19. Duke University
20. Washington University
21. University of Colorado
22. University of Illinois--Urbana
23. University of Rochester
24. University of North Carolina--Chapel Hill
25. University of Pittsburgh
26. University of Chicago
27. University of Texas--Austin
28. University of Arizona
29. New York University
30. University of Iowa
31. Ohio State University
32. University of Alabama--Birmingham
33. Case Western Reserve
34. Baylor College of Medicine
35. California Institute of Technology
36. Yeshiva University
37. University of Massachusetts
38. Vanderbilt University
39. Purdue University
40. University of Utah
41. Georgia Institute of Technology
42. University of Maryland--College Park
43. University of Miami
44. University of California--Davis
45. Boston University
46. University of Florida
47. Carnegie-Mellon University
48. Northwestern University
49. Indiana University
50. Michigan State University
51. University of Virginia
52. University of Texas--SW Medical Center
53. University of California--Irvine
54. Princeton University
55. Tulane University of Louisiana
56. Emory University
57. University of Georgia
58. Texas A&M University--all campuses
59. New Mexico State University
60. North Carolina State University--Raleigh
61. University of Illinois--Chicago
62. Utah State University
63. Virginia Commonwealth University
64. Oregon State University
65. SUNY-Stony Brook
66. University of Cincinnati
67. CUNY-Mount Sinai School of Medicine
68. University of Connecticut
69. Louisiana State University
70. Tufts University
71. University of California--Santa Barbara
72. University of Hawaii--Manoa
73. Rutgers State University of New Jersey
74. Colorado State University
75. Rockefeller University
76. University of Maryland--Baltimore
77. Virginia Polytechnic Institute & State University
78. SUNY--Buffalo
79. Brown University
80. University of Medicine & Dentistry of New Jersey

[[Page 51905]]

81. University of Texas--Health Science Center San Antonio
82. University of Vermont
83. University of Texas--Health Science Center Houston
84. Florida State University
85. University of Texas--MD Anderson Cancer Center
86. University of Kentucky
87. Wake Forest University
88. Wayne State University
89. Iowa State University of Science & Technology
90. University of New Mexico
91. Georgetown University
92. Dartmouth College
93. University of Kansas
94. Oregon Health Sciences University
95. University of Texas--Medical Branch-Galveston
96. University of Missouri--Columbia
97. Temple University
98. George Washington University
99. University of Dayton

Exhibit B--Listing of Institutions That Are Eligible for the Utility 
Cost Adjustment

1. Baylor University
2. Boston College
3. Boston University
4. California Institute of Technology
5. Carnegie-Mellon University
6. Case Western University
7. Columbia University
8. Cornell University (Endowed)
9. Cornell University (Statutory)
10. Cornell University (Medical)
11. Dayton University
12. Emory University
13. George Washington University (Medical)
14. Georgetown University
15. Harvard Medical School
16. Harvard University (Main Campus)
17. Harvard University (School of Public Health)
18. Johns Hopkins University
19. Massachusetts Institute of Technology
20. Medical University of South Carolina
21. Mount Sinai School of Medicine
22. New York University (except New York University Medical Center)
23. New York University Medical Center
24. North Carolina State University
25. Northeastern University
26. Northwestern University
27. Oregon Health Sciences University
28. Oregon State University
29. Rice University
30. Rockefeller University
31. Stanford University
32. Tufts University
33. Tulane University
34. Vanderbilt University
35. Virginia Commonwealth University
36. Virginia Polytechnic Institute and State University
37. University of Arizona
38. University of CA, Berkeley
39. University of CA, Irvine
40. University of CA, Los Angeles
41. University of CA, San Diego
42. University of CA, San Francisco
43. University of Chicago
44. University of Cincinnati
45. University of Colorado, Health Sciences Center
46. University of Connecticut, Health Sciences Center
47. University of Health Science and The Chicago Medical School
48. University of Illinois, Urbana
49. University of Massachusetts, Medical Center
50. University of Medicine & Dentistry of New Jersey
51. University of Michigan
52. University of Pennsylvania
53. University of Pittsburgh
54. University of Rochester
55. University of Southern California
56. University of Tennessee, Knoxville
57. University of Texas, Galveston
58. University of Texas, Austin
60. University of Texas Southwestern Medical Center
61. University of Virginia
62. University of Vermont & State Agriculture College
63. University of Washington
64. Washington University
65. Yale University
66. Yeshiva University

Exhibit C--Examples of ``Major Project'' Where Direct Charging of 
Administrative or Clerical Staff Salaries May Be Appropriate

    1. As used in paragraph F.6.b.(2) of this Appendix, below are 
examples of ``major projects'':
    a. Large, complex programs such as General Clinical Research 
Centers, Primate Centers, Program Projects, environmental research 
centers, engineering research centers, and other grants and 
contracts that entail assembling and managing teams of investigators 
from a number of institutions.
    b. Projects which involve extensive data accumulation, analysis 
and entry, surveying, tabulation, cataloging, searching literature, 
and reporting (such as epidemiological studies, clinical trials, and 
retrospective clinical records studies).
    c. Projects that require making travel and meeting arrangements 
for large numbers of participants, such as conferences and seminars.
    d. Projects whose principal focus is the preparation and 
production of manuals and large reports, books and monographs 
(excluding routine progress and technical reports).
    e. Projects that are geographically inaccessible to normal 
departmental administrative services, such as research vessels, 
radio astronomy projects, and other research fields sites that are 
remote from campus.
    f. Individual projects requiring project-specific database 
management; individualized graphics or manuscript preparation; human 
or animal protocols; and multiple project-related investigator 
coordination and communications.
    2. These examples are not exhaustive nor are they intended to 
imply that direct charging of administrative or clerical salaries 
would always be appropriate for the situations illustrated in the 
examples. For instance, the examples would be appropriate when the 
costs of such activities are incurred in unlike circumstances, i.e., 
the actual activities charged direct are not the same as the actual 
activities normally included in the institution's facilities and 
administrative (F&A) cost pools or, if the same, the indirect 
activity costs are immaterial in amount. It would be inappropriate 
to charge the cost of such activities directly to specific sponsored 
agreements if, in similar circumstances, the costs of performing the 
same type of activity for other sponsored agreements were included 
as allocable costs in the institution's F&A cost pools. Application 
of negotiated predetermined F&A cost rates may also be inappropriate 
if such activity costs charged directly were not provided for in the 
allocation base that was used to determine the predetermined F&A 
cost rates.

Attachment A to Appendix A--CASB's Cost Accounting Standards (CAS)

    A. CAS 9905.501--Consistency in estimating, accumulating and 
reporting costs by educational institutions.

1. Purpose

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

2. Definitions

    (a) The following are definitions of terms which are prominent 
in this standard.
    (1) Accumulating costs means the collecting of cost data in an 
organized manner, such as through a system of accounts.
    (2) Actual cost means an amount determined on the basis of cost 
incurred (as distinguished from forecasted cost), including standard 
cost properly adjusted for applicable variance.
    (3) Estimating costs means the process of forecasting a future 
result in terms of cost, based upon information available at the 
time.
    (4) Indirect cost pool means a grouping of incurred costs 
identified with two or more objectives but not identified 
specifically with any final cost objective.
    (5) Pricing means the process of establishing the amount or 
amounts to be paid in return for goods or services.
    (6) Proposal means any offer or other submission used as a basis 
for pricing a sponsored agreement, sponsored agreement modification 
or termination settlement or for securing payments thereunder.
    (7) Reporting costs means the providing of cost information to 
others.

[[Page 51906]]

3. Fundamental Requirement

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

4. Techniques for application

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

B. CAS 9905.502--Consistency in Allocating Costs Incurred for the Same 
Purpose by Educational Institutions

1. Purpose

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

2. Definitions

    (a) The following are definitions of terms which are prominent 
in this standard.
    (1) Allocate means to assign an item of cost, or a group of 
items of cost, to one or more cost objectives. This term includes 
both direct assignment of cost and the reassignment of a share from 
an indirect cost pool.
    (2) Cost objective means a function, organizational subdivision, 
sponsored agreement, or other work unit for which cost data are 
desired and for which provision is made to accumulate and measure 
the cost of processes, products, jobs, capitalized projects, etc.
    (3) Direct cost means any cost which is identified specifically 
with a particular final cost objective. Direct costs are not limited 
to items which are incorporated in the end product as material or 
labor. Costs identified specifically with a sponsored agreement are 
direct costs of that sponsored agreement. All costs identified 
specifically with other final cost objectives of the educational 
institution are direct costs of those cost objectives.
    (4) Final cost objective means a cost objective which has 
allocated to it both direct and indirect costs, and in the 
educational institution's accumulation system, is one of the final 
accumulation points.
    (5) Indirect cost means any cost not directly identified with a 
single final cost objective, but identified with two or more final 
cost objectives or with at least one intermediate cost objective.
    (6) Indirect cost pool means a grouping of incurred costs 
identified with two or more cost objectives but not identified with 
any final cost objective.
    (7) Intermediate cost objective means a cost objective that is 
used to accumulate indirect costs or service center costs that are 
subsequently allocated to one or more indirect cost pools and/or 
final cost objectives.

3. Fundamental Requirement

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

4. Techniques for Application

    (a) The Fundamental Requirement is stated in terms of cost 
incurred and is equally applicable to estimates of costs to be 
incurred as used in sponsored agreement proposals.
    (b) The Disclosure Statement to be submitted by the educational 
institution will require that the educational institution set forth 
its cost accounting practices with regard to the distinction between 
direct and indirect costs. In addition, for those types of cost 
which are sometimes accounted for as direct and sometimes accounted 
for as indirect, the educational institution will set forth in its 
Disclosure Statement the specific criteria and circumstances for 
making such distinctions. In essence, the Disclosure Statement 
submitted by the educational institution, by distinguishing between 
direct and indirect costs, and by describing the criteria and 
circumstances for allocating those items which are sometimes direct 
and sometimes indirect, will be determinative as to whether or not 
costs are incurred for the same purpose. Disclosure Statement as 
used herein refers to the statement required to be submitted by 
educational institutions in Appendix A to Part 220, Section C.14.
    (c) In the event that an educational institution has not 
submitted a Disclosure Statement, the determination of whether 
specific costs are directly allocable to sponsored agreements shall 
be based upon the educational institution's cost accounting 
practices used at the time of sponsored agreement proposal.
    (d) Whenever costs which serve the same purpose cannot equitably 
be indirectly allocated to one or more final cost objectives in 
accordance with the educational institution's disclosed accounting 
practices, the educational institution may either (1) use a method 
for reassigning all such costs which would provide an equitable 
distribution to all final cost objectives, or (2) directly assign 
all such costs to final cost objectives with which they are 
specifically identified. In the event the educational institution 
decides to make a change for either purpose, the Disclosure 
Statement shall be amended to reflect the revised accounting 
practices involved.
    (e) Any direct cost of minor dollar amount may be treated as an 
indirect cost for reasons of practicality where the accounting 
treatment for such cost is consistently applied to all final cost 
objectives, provided that such treatment produces results which are 
substantially the same as the results which would have been obtained 
if such cost had been treated as a direct cost.

[[Page 51907]]

5. Illustrations

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

6. Interpretation

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

C. CAS 9905.505--Accounting for Unallowable Costs--Educational 
Institutions

1. Purpose

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

2. Definitions

    (a) The following are definitions of terms which are prominent 
in this standard.
    (1) Directly associated cost means any cost which is generated 
solely as a result of the incurrence of another cost, and which 
would not have been incurred had the other cost not been incurred.
    (2) Expressly unallowable cost means a particular item or type 
of cost which, under the express provisions of an applicable law, 
regulation, or sponsored agreement, is specifically named and stated 
to be unallowable.
    (3) Indirect cost means any cost not directly identified with a 
single final cost objective, but identified with two or more final 
cost objectives or with at least one intermediate cost objective.
    (4) Unallowable cost means any cost which, under the provisions 
of any pertinent law, regulation, or sponsored agreement, cannot be 
included in prices, cost reimbursements, or settlements under a 
Government sponsored agreement to which it is allocable.

3. Fundamental Requirement

    (a) Costs expressly unallowable or mutually agreed to be 
unallowable, including costs mutually agreed to be unallowable 
directly associated costs, shall be identified and excluded from any 
billing, claim, application, or proposal applicable to a Government 
sponsored agreement.
    (b) Costs which specifically become designated as unallowable as 
a result of a written decision furnished by a Federal official 
pursuant to sponsored agreement disputes procedures shall be 
identified if included in or used in the computation of any billing, 
claim, or proposal applicable to a sponsored agreement. This 
identification requirement applies also to any costs incurred for 
the same purpose under like circumstances as the costs specifically 
identified as unallowable under either this paragraph or paragraph 
(a) of this subsection.
    (c) Costs which, in a Federal official's written decision 
furnished pursuant to disputes procedures, are designated as 
unallowable directly associated costs of unallowable costs covered 
by either paragraph (a) or (b) of this subsection shall be accorded 
the identification required by paragraph b. of this subsection.
    (d) The costs of any work project not contractually authorized, 
whether or not related to performance of a proposed or existing 
contract, shall be accounted for, to the extent appropriate, in a 
manner which permits ready separation from the costs of authorized 
work projects.
    (e) All unallowable costs covered by paragraphs (a) through (d) 
of this subsection shall be subject to the same cost accounting 
principles governing cost allocability as allowable costs. In 
circumstances where these unallowable costs normally would be

[[Page 51908]]

part of a regular indirect-cost allocation base or bases, they shall 
remain in such base or bases. Where a directly associated cost is 
part of a category of costs normally included in an indirect-cost 
pool that will be allocated over a base containing the unallowable 
cost with which it is associated, such a directly associated cost 
shall be retained in the indirect-cost pool and be allocated through 
the regular allocation process.
    (f) Where the total of the allocable and otherwise allowable 
costs exceeds a limitation-of-cost or ceiling-price provision in a 
sponsored agreement, full direct and indirect cost allocation shall 
be made to the cost objective, in accordance with established cost 
accounting practices and Standards which regularly govern a given 
entity's allocations to Government sponsored agreement cost 
objectives. In any determination of unallowable cost overrun, the 
amount thereof shall be identified in terms of the excess of 
allowable costs over the ceiling amount, rather than through 
specific identification of particular cost items or cost elements.

4. Techniques for Application

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

5. Illustrations

    (a) An auditor recommends disallowance of certain direct labor 
and direct material costs, for which a billing has been submitted 
under a sponsored agreement, on the basis that these particular 
costs were not required for performance and were not authorized by 
the sponsored agreement. The Federal officer issues a written 
decision which supports the auditor's position that the questioned 
costs are unallowable. Following receipt of the Federal officer's 
decision, the educational institution must clearly identify the 
disallowed direct labor and direct material costs in the educational 
institution's accounting records and reports covering any subsequent 
submission which includes such costs. Also, if the educational 
institution's base for allocation of any indirect cost pool relevant 
to the subject sponsored agreement consists of direct labor, direct 
material, total prime cost, total cost input, etc., the educational 
institution must include the disallowed direct labor and material 
costs in its allocation base for such pool. Had the Federal 
officer's decision been against the auditor, the educational 
institution would not, of course, have been required to account 
separately for the costs questioned by the auditor.
    (b) An educational institution incurs, and separately 
identifies, as a part of a service center or expense pool, certain 
costs which are expressly unallowable under the existing and 
currently effective regulations. If the costs of the service center 
or indirect expense pool are regularly a part of the educational 
institution's base for allocation of general administration and 
general expenses (GA&GE) or other indirect expenses, the educational 
institution must allocate the GA&GE or other indirect expenses to 
sponsored agreements and other final cost objectives by means of a 
base which includes the identified unallowable indirect costs.
    (c) An auditor recommends disallowance of certain indirect 
costs. The educational institution claims that the costs in question 
are allowable under the provisions of Appendix A to Part 220, Cost 
Principles For Educational Institutions; the auditor disagrees. The 
issue is referred to the Federal officer for resolution pursuant to 
the sponsored agreement disputes clause. The Federal officer issues 
a written decision supporting the auditor's position that the total 
costs questioned are unallowable under Appendix A. Following receipt 
of the Federal officer's decision, the educational institution must 
identify the disallowed costs and specific other costs incurred for 
the same purpose in like circumstances in any subsequent estimating, 
cost accumulation or reporting for Government sponsored agreements, 
in which such costs are included. If the Federal officer's decision 
had supported the educational institution's contention, the costs 
questioned by the auditor would have been allowable and the 
educational institution would not have been required to provide 
special identification.
    (d) An educational institution incurred certain unallowable 
costs that were charged indirectly as general administration and 
general expenses (GA&GE). In the educational institution's proposals 
for final indirect cost rates to be applied in determining allowable 
sponsored agreement costs, the educational institution identified 
and excluded the expressly unallowable costs. In addition, during 
the course of negotiation of indirect cost rates to be used for 
bidding and billing purposes, the educational institution agreed to 
classify as unallowable cost, various directly associated costs of 
the identifiable unallowable costs. On the basis of negotiations and 
agreements between the educational institution and the Federal 
officer's authorized representatives, indirect cost rates were 
established, based on the net balance of allowable GA&GE. 
Application of the rates negotiated to proposals, and to billings, 
for covered sponsored agreements constitutes compliance with the 
standard.
    (e) An employee, whose salary, travel, and subsistence expenses 
are charged regularly to the general administration and general 
expenses (GA&GE) pool, takes several business associates on what is 
clearly a business entertainment trip. The entertainment costs of 
such trips is expressly unallowable because it constitutes 
entertainment expense prohibited by Appendix A to Part 220, and is 
separately identified by the educational institution. The 
educational institution does not regularly include its GA&GE in any 
indirect-expense allocation base. In these circumstances, the 
employee's travel and subsistence expenses would be directly 
associated costs for identification with the unallowable 
entertainment expense. However, unless this type of activity 
constituted a significant part of the employee's regular duties and 
responsibilities on which his salary was based, no part of the 
employee's salary would be required to be identified as a directly 
associated cost of the unallowable entertainment expense.

D. CAS 9905.506--Cost Accounting Period--Educational Institutions

1. Purpose

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

2. Definitions

    (a) The following are definitions of terms which are prominent 
in this standard.
    (1) Allocate means to assign an item of cost, or a group of 
items of cost, to one or

[[Page 51909]]

more cost objectives. This term includes both direct assignment of 
cost and the reassignment of a share from an indirect cost pool.
    (2) Cost Objective means a function, organizational subdivision, 
sponsored agreement, or other work unit for which cost data are 
desired and for which provision is made to accumulate and measure 
the cost of processes, products, jobs, capitalized projects, etc.
    (3) Fiscal year means the accounting period for which annual 
financial statements are regularly prepared, generally a period of 
12 months, 52 weeks, or 53 weeks.
    (4) Indirect cost pool means a grouping of incurred costs 
identified with two or more cost objectives but not identified 
specifically with any final cost objective.

3. Fundamental Requirement

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

4. Techniques for Application

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

5. Illustrations

    (a) An educational institution allocates indirect expenses for 
Organized Research on the basis of a modified total direct cost 
base. In a proposal for a sponsored agreement, it estimates the 
allocable expenses based solely on the estimated amount of indirect 
costs allocated to Organized Research and the amount of the modified 
total direct cost base estimated to be incurred during the 8 months 
in which performance is scheduled to be commenced and completed. 
Such a proposal would be in violation of the requirements of this 
standard that the calculation of the amounts of both the indirect 
cost pools and the allocation bases be based on the educational 
institution's cost accounting period.
    (b) An educational institution whose cost accounting period is 
the calendar year, installs a computer service center to begin 
operations on May 1. The operating expense related to the new 
service center is expected to be material in amount, will be 
accumulated in an intermediate cost objective, and will be allocated 
to the benefitting cost objectives on the basis of measured usage. 
The total operating expenses of the computer service center for the 
8-month part of the cost accounting period may be allocated to the 
benefitting cost objectives of that same 8-month period.
    (c) An educational institution changes its fiscal year from a 
calendar year to the 12-month period ending May 31. For financial 
reporting purposes, it has a 5-month transitional ``fiscal year.'' 
The same 5-month period must be used as the transitional cost 
accounting period; it may not be combined, because the transitional 
period would be longer than 15 months. The new fiscal year must be 
adopted thereafter as its regular cost accounting period. The change 
in its cost accounting period is a change in accounting practices; 
adjustments of the sponsored agreement prices may thereafter be 
required.
    (d) Financial reports are prepared on a calendar year basis on a 
university-wide basis. However, the contracting segment does all 
internal financial planning, budgeting, and internal reporting on 
the basis of a twelve month period ended June 30. The contracting 
parties agree to use the period ended June 30 and they agree to 
overhead rates on the June 30 basis. They also agree on a technique 
for prorating fiscal year assignment of the university's central 
system office expenses between such June 30 periods. This practice 
is permitted by the standard.
    (e) Most financial accounts and sponsored agreement cost records 
are maintained on the basis of a fiscal year which ends November 30 
each year. However, employee vacation allowances are regularly 
managed on the basis of a ``vacation year'' which ends September 30 
each year. Vacation expenses are estimated uniformly during each 
``vacation year.'' Adjustments are made each October to adjust the 
accrued liability to actual, and the estimating rates are modified 
to the extent deemed appropriate. This use of a separate annual 
period for determining the amounts of vacation expense is permitted.
    Attachment B to Appendix A--CASB's Disclosure Statement (DS-2) 
is available on the OMB Web site at http://www.whitehouse.gov/omb/grants/a21-appx_b.pdf
    Attachment C to Appendix A--Documentation Requirements for 
Facilities and Administrative (F&A) Rate Proposals is available on 
the OMB Web site at http://www.whitehouse.gov/omb/grants/a21-appx_c.pdf

[FR Doc. 05-16648 Filed 8-30-05; 8:45 am]
BILLING CODE 3110-01-P