[Federal Register Volume 70, Number 168 (Wednesday, August 31, 2005)]
[Rules and Regulations]
[Pages 51927-51943]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-16650]


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OFFICE OF MANAGEMENT AND BUDGET

2 CFR Part 230


Cost Principles for Non-Profit Organizations (OMB Circular A-122)

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 
Circular A-122, ``Cost Principles for Non-Profit Organizations,'' to 
Title 2 in the Code of Federal Regulations (CFR), subtitle A, chapter 
II, part 230. 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).

DATES: Part 230 is effective August 31, 2005. This document republishes 
the existing OMB Circular A-122, 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: [email protected].

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, a result of OMB and Federal agency efforts to 
implement Public Law 106-107, were effective on June 9, 2004.
    In this document, we relocate OMB Circular A-122 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.
    Our relocation of OMB Circular A-122 does not change the substance 
of the circular. Other than adjustments needed to conform to the 
formatting requirements of the CFR, this document relocates in 2 CFR 
the version of OMB Circular A-122 as revised by the May 10, 2004 
notice.

List of Subjects in 2 CFR Part 230

    Accounting, Grant programs, Grants administration, Non-profit 
organizations, 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, by adding a part 230 as set forth 
below.

PART 230--COST PRINCIPLES FOR NON-PROFIT ORGANIZATIONS (OMB 
CIRCULAR A-122)

Sec.
230.5 Purpose.
230.10 Scope.
230.15 Policy.
230.20 Applicability.
230.25 Definitions
230.30 OMB responsibilities.
230.35 Federal agency responsibilities.
230.40 Effective date of changes.
230.45 Relationship to previous issuance.
230.50 Information Contact.
Appendix A to Part 230--General Principles
Appendix B to Part 230--Selected Items of Cost
Appendix C to Part 230--Non-Profit Organizations Not Subject to This 
Part

    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.  230.5  Purpose.

    This part establishes principles for determining costs of grants, 
contracts and other agreements with non-profit organizations.


Sec.  230.10  Scope.

    (a) This part does not apply to colleges and universities which are 
covered by 2 CFR part 220 Cost Principles for Educational Institutions 
(OMB Circular A-21); State, local, and federally-recognized Indian 
tribal governments which are covered by 2 CFR part 225 Cost Principles 
for State, Local, and Indian Tribal Governments (OMB Circular A-87); or 
hospitals.
    (b) The principles deal with the subject of cost determination, and 
make no attempt to identify the circumstances or dictate the extent of 
agency and non-profit organization participation in the financing of a 
particular project. Provision for profit or other increment above cost 
is outside the scope of this part.


Sec.  230.15  Policy.

    The principles are designed to provide that the Federal Government 
bear its fair share of costs except where restricted or prohibited by 
law. The principles do not attempt to prescribe the extent of cost 
sharing or matching on grants, contracts, or other agreements. However, 
such cost sharing or matching shall not be accomplished through 
arbitrary limitations on individual cost elements by Federal agencies.


Sec.  230.20  Applicability.

    (a) These principles shall be used by all Federal agencies in 
determining the costs of work performed by non-profit organizations 
under grants, cooperative agreements, cost reimbursement contracts, and 
other contracts in which costs are used in pricing, administration, or 
settlement. All of these instruments are hereafter referred to as 
awards. The principles do not apply to awards under which an 
organization is not required to account to the Federal Government for 
actual costs incurred.

[[Page 51928]]

    (b) All cost reimbursement subawards (subgrants, subcontracts, 
etc.) are subject to those Federal cost principles applicable to the 
particular organization concerned. Thus, if a subaward is to a non-
profit organization, this part shall apply; if a subaward is to a 
commercial organization, the cost principles applicable to commercial 
concerns shall apply; if a subaward is to a college or university, 2 
CFR part 220 shall apply; if a subaward is to a State, local, or 
federally-recognized Indian tribal government, 2 CFR part 225 shall 
apply.
    (c) Exclusion of some non-profit organizations. Some non-profit 
organizations, because of their size and nature of operations, can be 
considered to be similar to commercial concerns for purpose of 
applicability of cost principles. Such non-profit organizations shall 
operate under Federal cost principles applicable to commercial 
concerns. A listing of these organizations is contained in Appendix C 
to this part. Other organizations may be added from time to time.


Sec.  230.25  Definitions.

    (a) Non-profit organization means any corporation, trust, 
association, cooperative, or other organization which:
    (1) Is operated primarily for scientific, educational, service, 
charitable, or similar purposes in the public interest;
    (2) Is not organized primarily for profit; and
    (3) Uses its net proceeds to maintain, improve, and/or expand its 
operations. For this purpose, the term ``non-profit organization'' 
excludes colleges and universities; hospitals; State, local, and 
federally-recognized Indian tribal governments; and those non-profit 
organizations which are excluded from coverage of this part in 
accordance with Sec.  230.20(c).
    (b) Prior approval means securing the awarding agency's permission 
in advance to incur cost for those items that are designated as 
requiring prior approval by the part and its Appendices. Generally this 
permission will be in writing. Where an item of cost requiring prior 
approval is specified in the budget of an award, approval of the budget 
constitutes approval of that cost.


Sec.  230.30  OMB responsibilities.

    OMB may grant exceptions to the requirements of this part when 
permissible under existing law. However, in the interest of achieving 
maximum uniformity, exceptions will be permitted only in highly unusual 
circumstances.


Sec.  230.35  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 the appendices to this part and performing the 
applicable functions specified in the appendices to this part.


Sec.  230.40  Effective date of changes.

    The provisions of this part are effective August 31, 2005. 
Implementation shall be phased in by incorporating the provisions into 
new awards made after the start of the organization's next fiscal year. 
For existing awards, the new principles may be applied if an 
organization and the cognizant Federal agency agree. Earlier 
implementation, or a delay in implementation of individual provisions, 
is also permitted by mutual agreement between an organization and the 
cognizant Federal agency.


Sec.  230.45  Relationship to previous issuance.

    (a) The guidance in this part previously was issued as OMB Circular 
A-122. Appendix A to this part contains the guidance that was in 
Attachment A (general principles) to the OMB circular; Appendix B 
contains the guidance that was in Attachment B (selected items of cost) 
to the OMB circular; and Appendix C contains the information that was 
in Attachment C (non-profit organizations not subject to the Circular) 
to the OMB circular.
    (b) Historically, OMB Circular A-122 superseded cost principles 
issued by individual agencies for non-profit organizations.


Sec.  230.50  Information contact.

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

Appendix A to Part 230--General Principles

General Principles

Table of Contents

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

General Principles

A. Basic Considerations

    1. Composition of total costs. The total cost of an award is the 
sum of the allowable direct and allocable indirect costs less any 
applicable credits.
    2. Factors affecting allowability of costs. To be allowable 
under an award, costs must meet the following general criteria:
    a. Be reasonable for the performance of the award and be 
allocable thereto under these principles.
    b. Conform to any limitations or exclusions set forth in these 
principles or in the award as to types or amount of cost items.
    c. Be consistent with policies and procedures that apply 
uniformly to both federally-financed and other activities of the 
organization.
    d. Be accorded consistent treatment.
    e. Be determined in accordance with generally accepted 
accounting principles (GAAP).
    f. Not be included as a cost or used to meet cost sharing or 
matching requirements of any other federally-financed program in 
either the current or a prior period.
    g. Be adequately documented.
    3. Reasonable costs. A cost is reasonable if, in its nature or 
amount, it does not exceed that which would be incurred by a prudent 
person under the circumstances prevailing at the time the decision 
was made to incur the costs. The question of the reasonableness of 
specific costs must be scrutinized with particular care in 
connection with organizations or separate divisions thereof which 
receive the preponderance of their support from awards made by 
Federal agencies. In determining the reasonableness of a given cost, 
consideration shall be given to:
    a. Whether the cost is of a type generally recognized as 
ordinary and necessary for the operation of the organization or the 
performance of the award.
    b. The restraints or requirements imposed by such factors as 
generally accepted sound business practices, arms length bargaining, 
Federal and State laws and regulations, and terms and conditions of 
the award.
    c. Whether the individuals concerned acted with prudence in the 
circumstances, considering their responsibilities to the 
organization, its members, employees, and clients, the public at 
large, and the Federal Government.
    d. Significant deviations from the established practices of the 
organization which may unjustifiably increase the award costs.
    4. Allocable costs. a. A cost is allocable to a particular cost 
objective, such as a grant, contract, project, service, or other 
activity, in accordance with the relative benefits received. A cost 
is allocable to a Federal award if it is treated consistently with 
other

[[Page 51929]]

costs incurred for the same purpose in like circumstances and if it:
    (1) Is incurred specifically for the award.
    (2) Benefits both the award and other work and can be 
distributed in reasonable proportion to the benefits received, or
    (3) Is necessary to the overall operation of the organization, 
although a direct relationship to any particular cost objective 
cannot be shown.
    b. Any cost allocable to a particular award or other cost 
objective under these principles may not be shifted to other Federal 
awards to overcome funding deficiencies, or to avoid restrictions 
imposed by law or by the terms of the award.
    5. Applicable credits. a. The term applicable credits refers to 
those receipts, or reduction of expenditures which operate to offset 
or reduce expense items that are allocable to awards as direct or 
indirect costs. Typical examples of such transactions are: Purchase 
discounts, rebates or allowances, recoveries or indemnities on 
losses, insurance refunds, and adjustments of overpayments or 
erroneous charges. To the extent that such credits accruing or 
received by the organization relate to allowable cost, they shall be 
credited to the Federal Government either as a cost reduction or 
cash refund, as appropriate.
    b. In some instances, the amounts received from the Federal 
Government to finance organizational activities or service 
operations should be treated as applicable credits. Specifically, 
the concept of netting such credit items against related 
expenditures should be applied by the organization in determining 
the rates or amounts to be charged to Federal awards for services 
rendered whenever the facilities or other resources used in 
providing such services have been financed directly, in whole or in 
part, by Federal funds.
    c. For rules covering program income (i.e., gross income earned 
from federally-supported activities) see Sec.  215.24 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).
    6. Advance understandings. Under any given award, the 
reasonableness and allocability of certain items of costs may be 
difficult to determine. This is particularly true in connection with 
organizations that receive a preponderance of their support from 
Federal agencies. In order to avoid subsequent disallowance or 
dispute based on unreasonableness or nonallocability, it is often 
desirable to seek a written agreement with the cognizant or awarding 
agency in advance of the incurrence of special or unusual costs. The 
absence of an advance agreement on any element of cost will not, in 
itself, affect the reasonableness or allocability of that element.
    7. Conditional exemptions. a. 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.
    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 all but the allocability of costs 
provisions of Appendix A, subsection C.e. of 2 CFR part 225 (OMB 
Circular A-87); Appendix A, Section C.4. of 2 CFR part 220 (OMB 
Circular A-21); Section A.4. of this appendix; and from all of the 
administrative requirements provisions of 2 CFR part 215 (OMB 
Circular A-110) and the agencies' grants management common rule.
    c. 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.

B. Direct Costs

    1. Direct costs are those that can be identified specifically 
with a particular final cost objective, i.e., a particular award, 
project, service, or other direct activity of an organization. 
However, a cost may not be assigned to an award as a direct cost if 
any other cost incurred for the same purpose, in like circumstance, 
has been allocated to an award as an indirect cost. Costs identified 
specifically with awards are direct costs of the awards and are to 
be assigned directly thereto. Costs identified specifically with 
other final cost objectives of the organization are direct costs of 
those cost objectives and are not to be assigned to other awards 
directly or indirectly.
    2. Any direct cost of a minor amount may be treated as an 
indirect cost for reasons of practicality where the accounting 
treatment for such cost is consistently applied to all final cost 
objectives.
    3. The cost of certain activities are not allowable as charges 
to Federal awards (see, for example, fundraising costs in paragraph 
17 of Appendix B to this part). However, even though these costs are 
unallowable for purposes of computing charges to Federal awards, 
they nonetheless must be treated as direct costs for purposes of 
determining indirect cost rates and be allocated their share of the 
organization's indirect costs if they represent activities which 
include the salaries of personnel, occupy space, and benefit from 
the organization's indirect costs.
    4. The costs of activities performed primarily as a service to 
members, clients, or the general public when significant and 
necessary to the organization's mission must be treated as direct 
costs whether or not allowable and be allocated an equitable share 
of indirect costs. Some examples of these types of activities 
include:
    a. Maintenance of membership rolls, subscriptions, publications, 
and related functions.
    b. Providing services and information to members, legislative or 
administrative bodies, or the public.
    c. Promotion, lobbying, and other forms of public relations.
    d. Meetings and conferences except those held to conduct the 
general administration of the organization.
    e. Maintenance, protection, and investment of special funds not 
used in operation of the organization.
    f. Administration of group benefits on behalf of members or 
clients, including life and hospital insurance, annuity or 
retirement plans, financial aid, etc.

C. Indirect Costs

    1. Indirect costs are those that have been incurred for common 
or joint objectives and cannot be readily identified with a 
particular final cost objective. Direct cost of minor amounts may be 
treated as indirect costs under the conditions described in 
subparagraph B.2 of this appendix. After direct costs have been 
determined and assigned directly to awards or other work as 
appropriate, indirect costs are those remaining to be allocated to 
benefiting cost objectives. A cost may not be allocated to an award 
as an indirect cost if any other cost incurred for the same purpose, 
in like circumstances, has been assigned to an award as a direct 
cost.
    2. Because of the diverse characteristics and accounting 
practices of non-profit organizations, it is not possible to specify 
the types of cost which may be classified as indirect cost in all 
situations. However, typical examples of indirect cost for many non-
profit organizations may include depreciation or use allowances on 
buildings and equipment, the costs of operating and maintaining 
facilities, and general administration and general expenses, such as 
the salaries and expenses of executive officers, personnel 
administration, and accounting.
    3. Indirect costs shall be classified within two broad 
categories: ``Facilities'' and ``Administration.'' ``Facilities'' is 
defined as depreciation and use allowances on buildings, equipment 
and capital improvement, interest on debt associated with certain 
buildings, equipment and capital improvements, and operations and 
maintenance expenses. ``Administration'' is defined as general 
administration and general expenses such as the director's office, 
accounting, personnel, library expenses and all other types of 
expenditures not listed specifically under one of the subcategories 
of ``Facilities'' (including cross allocations from other pools, 
where applicable). See indirect cost rate reporting requirements in

[[Page 51930]]

subparagraphs D.2.e and D.3.g of this appendix.

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

    1. General. a. Where a non-profit organization has only one 
major function, or where all its major functions benefit from its 
indirect costs to approximately the same degree, the allocation of 
indirect costs and the computation of an indirect cost rate may be 
accomplished through simplified allocation procedures, as described 
in subparagraph D.2 of this appendix.
    b. Where an organization has several major functions which 
benefit from its indirect costs in varying degrees, allocation of 
indirect costs may require the accumulation of such costs into 
separate cost groupings which then are allocated individually to 
benefiting functions by means of a base which best measures the 
relative degree of benefit. The indirect costs allocated to each 
function are then distributed to individual awards and other 
activities included in that function by means of an indirect cost 
rate(s).
    c. The determination of what constitutes an organization's major 
functions will depend on its purpose in being; the types of services 
it renders to the public, its clients, and its members; and the 
amount of effort it devotes to such activities as fundraising, 
public information and membership activities.
    d. Specific methods for allocating indirect costs and computing 
indirect cost rates along with the conditions under which each 
method should be used are described in subparagraphs D.2 through 5 
of this appendix.
    e. The base period for the allocation of indirect costs is the 
period in which such costs are incurred and accumulated for 
allocation to work performed in that period. The base period 
normally should coincide with the organization's fiscal year but, in 
any event, shall be so selected as to avoid inequities in the 
allocation of the costs.
    2. Simplified allocation method. a. Where an organization's 
major functions benefit from its indirect costs to approximately the 
same degree, the allocation of indirect costs may be accomplished by 
separating the organization's total costs for the base period as 
either direct or indirect, and dividing the total allowable indirect 
costs (net of applicable credits) by an equitable distribution base. 
The result of this process is an indirect cost rate which is used to 
distribute indirect costs to individual awards. The rate should be 
expressed as the percentage which the total amount of allowable 
indirect costs bears to the base selected. This method should also 
be used where an organization has only one major function 
encompassing a number of individual projects or activities, and may 
be used where the level of Federal awards to an organization is 
relatively small.
    b. Both the direct costs and the indirect costs shall exclude 
capital expenditures and unallowable costs. However, unallowable 
costs which represent activities must be included in the direct 
costs under the conditions described in subparagraph B.3 of this 
appendix.
    c. The distribution base may be total direct costs (excluding 
capital expenditures and other distorting items, such as major 
subcontracts or subgrants), direct salaries and wages, or other base 
which results in an equitable distribution. The distribution base 
shall generally exclude participant support costs as defined in 
paragraph 32 of Appendix B.
    d. Except where a special rate(s) is required in accordance with 
subparagraph 5 of this appendix, the indirect cost rate developed 
under the above principles is applicable to all awards at the 
organization. If a special rate(s) is required, appropriate 
modifications shall be made in order to develop the special rate(s).
    e. For an organization that receives more than $10 million in 
Federal funding of direct costs in a fiscal year, a breakout of the 
indirect cost component into two broad categories, Facilities and 
Administration as defined in subparagraph C.3 of this appendix, is 
required. The rate in each case shall be stated as the percentage 
which the amount of the particular indirect cost category (i.e., 
Facilities or Administration) is of the distribution base identified 
with that category.
    3. Multiple allocation base method.
    a. General. Where an organization's indirect costs benefit its 
major functions in varying degrees, indirect costs shall be 
accumulated into separate cost groupings, as described in 
subparagraph D.3.b of this appendix. Each grouping shall then be 
allocated individually to benefiting functions by means of a base 
which best measures the relative benefits. The default allocation 
bases by cost pool are described in subparagraph D.3.c of this 
appendix.
    b. Identification of indirect costs. Cost groupings shall be 
established so as to permit the allocation of each grouping on the 
basis of benefits provided to the major functions. Each grouping 
shall constitute a pool of expenses that are of like character in 
terms of functions they benefit and in terms of the allocation base 
which best measures the relative benefits provided to each function. 
The groupings are classified within the two broad categories: 
``Facilities'' and ``Administration,'' as described in subparagraph 
C.3 of this appendix. The indirect cost pools are defined as 
follows:
    (1) Depreciation and use allowances. The expenses under this 
heading are the portion of the costs of the organization's 
buildings, capital improvements to land and buildings, and equipment 
which are computed in accordance with paragraph 11 of Appendix B to 
this part (``Depreciation and use allowances'').
    (2) Interest. Interest on debt associated with certain 
buildings, equipment and capital improvements are computed in 
accordance with paragraph 23 of Appendix B to this part 
(``Interest'').
    (3) Operation and maintenance expenses. The expenses under this 
heading are those that have been incurred for the administration, 
operation, maintenance, preservation, and protection of the 
organization's physical plant. They include expenses normally 
incurred for such items as: Janitorial and utility services; repairs 
and ordinary or normal alterations of buildings, furniture and 
equipment; care of grounds; maintenance and operation of buildings 
and other plant facilities; security; earthquake and disaster 
preparedness; environmental safety; hazardous waste disposal; 
property, liability and other insurance relating to property; space 
and capital leasing; facility planning and management; and, central 
receiving. The operation and maintenance expenses category shall 
also include its allocable share of fringe benefit costs, 
depreciation and use allowances, and interest costs.
    (4) General administration and general expenses. (a) The 
expenses under this heading are those that have been incurred for 
the overall general executive and administrative offices of the 
organization and other expenses of a general nature which do not 
relate solely to any major function of the organization. This 
category shall also include its allocable share of fringe benefit 
costs, operation and maintenance expense, depreciation and use 
allowances, and interest costs. Examples of this category include 
central offices, such as the director's office, the office of 
finance, business services, budget and planning, personnel, safety 
and risk management, general counsel, management information 
systems, and library costs.
    (b) In developing this cost pool, special care should be 
exercised to ensure that costs incurred for the same purpose in like 
circumstances are treated consistently as either direct or indirect 
costs. For example, salaries of technical staff, project supplies, 
project publication, telephone toll charges, computer costs, travel 
costs, and specialized services costs shall be treated as direct 
costs wherever identifiable to a particular program. The salaries 
and wages of administrative and pooled clerical staff should 
normally be treated as indirect costs. Direct charging of these 
costs may be appropriate where a major project or activity 
explicitly requires and budgets for administrative or clerical 
services and other individuals involved can be identified with the 
program or activity. Items such as office supplies, postage, local 
telephone costs, periodicals and memberships should normally be 
treated as indirect costs.
    c. Allocation bases. Actual conditions shall be taken into 
account in selecting the base to be used in allocating the expenses 
in each grouping to benefiting functions. The essential 
consideration in selecting a method or a base is that it is the one 
best suited for assigning the pool of costs to cost objectives in 
accordance with benefits derived; a traceable cause and effect 
relationship; or logic and reason, where neither the cause nor the 
effect of the relationship is determinable. When an allocation can 
be made by assignment of a cost grouping directly to the function 
benefited, the allocation shall be made in that manner. When the 
expenses in a cost grouping are more general in nature, the 
allocation shall be made through the use of a selected base which 
produces results that are equitable to both the Federal Government 
and the organization. The distribution shall be made in accordance 
with the bases described herein unless it can be demonstrated that 
the use of a different base would result in a more equitable 
allocation

[[Page 51931]]

of the costs, or that a more readily available base would not 
increase the costs charged to sponsored awards. The results of 
special cost studies (such as an engineering utility study) shall 
not be used to determine and allocate the indirect costs to 
sponsored awards.
    (1) Depreciation and use allowances. Depreciation and use 
allowances expenses shall be allocated in the following manner:
    (a) 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.
    (b) 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 
restrooms.
    (c) Depreciation or use allowances on buildings, capital 
improvements and equipment related space (e.g., individual rooms, 
and laboratories) used jointly by more than one function (as 
determined by the users of the space) shall be treated as follows. 
The cost of each jointly used unit of space shall be allocated to 
the benefiting functions on the basis of either the employees and 
other users on a full-time equivalent (FTE) basis or salaries and 
wages of those individual functions benefiting from the use of that 
space; or organization-wide employee FTEs or salaries and wages 
applicable to the benefiting functions of the organization.
    (d) Depreciation or use allowances on certain capital 
improvements to land, such as paved parking areas, fences, 
sidewalks, and the like, not included in the cost of buildings, 
shall be allocated to user categories on a FTE basis and distributed 
to major functions in proportion to the salaries and wages of all 
employees applicable to the functions.
    (2) Interest. Interest costs shall be allocated in the same 
manner as the depreciation or use allowances on the buildings, 
equipment and capital equipments to which the interest relates.
    (3) Operation and maintenance expenses. Operation and 
maintenance expenses shall be allocated in the same manner as the 
depreciation and use allowances.
    (4) General administration and general expenses. General 
administration and general expenses shall be allocated to benefiting 
functions based on modified total direct costs (MTDC), as described 
in subparagraph D.3.f of this appendix. The expenses included in 
this category could be grouped first according to major functions of 
the organization to which they render services or provide benefits. 
The aggregate expenses of each group shall then be allocated to 
benefiting functions based on MTDC.
    d. Order of distribution. (1) Indirect cost categories 
consisting of depreciation and use allowances, interest, operation 
and maintenance, and general administration and general expenses 
shall be allocated in that order to the remaining indirect cost 
categories as well as to the major functions of the organization. 
Other cost categories could be allocated in the order determined to 
be most appropriate by the organization. When cross allocation of 
costs is made as provided in subparagraph D.3.d.(2) of this 
appendix, this order of allocation does not apply.
    (2) Normally, an indirect cost category will be considered 
closed once it has been allocated to other cost objectives, and 
costs shall not be subsequently allocated to it. However, a cross 
allocation of costs between two or more indirect costs categories 
could be used if such allocation will result in a more equitable 
allocation of costs. If a cross allocation is used, an appropriate 
modification to the composition of the indirect cost categories is 
required.
    e. Application of indirect cost rate or rates. Except where a 
special indirect cost rate(s) is required in accordance with 
subparagraph D.5 of this appendix, the separate groupings of 
indirect costs allocated to each major function shall be aggregated 
and treated as a common pool for that function. The costs in the 
common pool shall then be distributed to individual awards included 
in that function by use of a single indirect cost rate.
    f. Distribution basis. Indirect costs shall be distributed to 
applicable sponsored awards and other benefiting activities within 
each major function on the basis of MTDC. MTDC consists of all 
salaries and wages, fringe benefits, materials and supplies, 
services, travel, and subgrants and subcontracts up to the first 
$25,000 of each subgrant or subcontract (regardless of the period 
covered by the subgrant or subcontract). Equipment, capital 
expenditures, charges for patient care, rental costs and the portion 
in excess of $25,000 shall be excluded from MTDC. Participant 
support costs shall generally be excluded from MTDC. Other items may 
only be excluded when the Federal cost cognizant agency determines 
that an exclusion is necessary to avoid a serious inequity in the 
distribution of indirect costs.
    g. Individual Rate Components. An indirect cost rate shall be 
determined for each separate indirect cost pool developed. The rate 
in each case shall be stated as the percentage which the amount of 
the particular indirect cost pool is of the distribution base 
identified with that pool. Each indirect cost rate negotiation or 
determination agreement shall include development of the rate for 
each indirect cost pool as well as the overall indirect cost rate. 
The indirect cost pools shall be classified within two broad 
categories: ``Facilities'' and ``Administration,'' as described in 
subparagraph C.3 of this appendix.
    4. Direct allocation method. a. Some non-profit organizations 
treat all costs as direct costs except general administration and 
general expenses. These organizations generally separate their costs 
into three basic categories: General administration and general 
expenses, fundraising, and other direct functions (including 
projects performed under Federal awards). Joint costs, such as 
depreciation, rental costs, operation and maintenance of facilities, 
telephone expenses, and the like are prorated individually as direct 
costs to each category and to each award or other activity using a 
base most appropriate to the particular cost being prorated.
    b. This method is acceptable, provided each joint cost is 
prorated using a base which accurately measures the benefits 
provided to each award or other activity. The bases must be 
established in accordance with reasonable criteria, and be supported 
by current data. This method is compatible with the Standards of 
Accounting and Financial Reporting for Voluntary Health and Welfare 
Organizations issued jointly by the National Health Council, Inc., 
the National Assembly of Voluntary Health and Social Welfare 
Organizations, and the United Way of America.
    c. Under this method, indirect costs consist exclusively of 
general administration and general expenses. In all other respects, 
the organization's indirect cost rates shall be computed in the same 
manner as that described in subparagraph D.2 of this appendix.
    5. Special indirect cost rates. In some instances, a single 
indirect cost rate for all activities of an organization or for each 
major function of the organization may not be appropriate, since it 
would not take into account those different factors which may 
substantially affect the indirect costs applicable to a particular 
segment of work. For this purpose, a particular segment of work may 
be that performed under a single award or it may consist of work 
under a group of awards performed in a common environment. These 
factors may include the physical location of the work, the level of 
administrative support required, the nature of the facilities or 
other resources employed, the scientific disciplines or technical 
skills involved, the organizational arrangements used, or any 
combination thereof. When a particular segment of work is performed 
in an environment which appears to generate a significantly 
different level of indirect costs, provisions should be made for a 
separate indirect cost pool applicable to such work. The separate 
indirect cost pool should be developed during the course of the 
regular allocation process, and the separate indirect cost rate 
resulting therefrom should be used, provided it is determined that 
the rate differs significantly from that which would have been 
obtained under subparagraphs D.2, 3, and 4 of this appendix, and the 
volume of work to which the rate would apply is material.

E. Negotiation and Approval of Indirect Cost Rates

    1. Definitions. As used in this section, the following terms 
have the meanings set forth below:
    a. Cognizant agency means the Federal agency responsible for 
negotiating and approving indirect cost rates for a non-profit 
organization on behalf of all Federal agencies.
    b. Predetermined rate means an indirect cost rate, applicable to 
a specified current or future period, usually the organization's 
fiscal year. The rate is based on an estimate of the costs to be 
incurred during the period. A predetermined rate is not subject to 
adjustment.
    c. Fixed rate means an indirect cost rate which has the same 
characteristics as a predetermined rate, except that the difference 
between the estimated costs and the actual costs of the period 
covered by the rate is

[[Page 51932]]

carried forward as an adjustment to the rate computation of a 
subsequent period.
    d. Final rate means an indirect cost rate applicable to a 
specified past period which is based on the actual costs of the 
period. A final rate is not subject to adjustment.
    e. Provisional rate or billing rate means a temporary indirect 
cost rate applicable to a specified period which is used for 
funding, interim reimbursement, and reporting indirect costs on 
awards pending the establishment of a final rate for the period.
    f. Indirect cost proposal means the documentation prepared by an 
organization to substantiate its claim for the reimbursement of 
indirect costs. This proposal provides the basis for the review and 
negotiation leading to the establishment of an organization's 
indirect cost rate.
    g. Cost objective means a function, organizational subdivision, 
contract, grant, or other work unit for which cost data are desired 
and for which provision is made to accumulate and measure the cost 
of processes, projects, jobs and capitalized projects.
    2. Negotiation and approval of rates. a. Unless different 
arrangements are agreed to by the agencies concerned, the Federal 
agency with the largest dollar value of awards with an organization 
will be designated as the cognizant agency for the negotiation and 
approval of the indirect cost rates and, where necessary, other 
rates such as fringe benefit and computer charge-out rates. Once an 
agency is assigned cognizance for a particular non-profit 
organization, the assignment will not be changed unless there is a 
major long-term shift in the dollar volume of the Federal awards to 
the organization. All concerned Federal agencies shall be given the 
opportunity to participate in the negotiation process but, after a 
rate has been agreed upon, it will be accepted by all Federal 
agencies. When a Federal agency has reason to believe that special 
operating factors affecting its awards necessitate special indirect 
cost rates in accordance with subparagraph D.5 of this appendix, it 
will, prior to the time the rates are negotiated, notify the 
cognizant agency.
    b. A non-profit organization which has not previously 
established an indirect cost rate with a Federal agency shall submit 
its initial indirect cost proposal immediately after the 
organization is advised that an award will be made and, in no event, 
later than three months after the effective date of the award.
    c. Organizations that have previously established indirect cost 
rates must submit a new indirect cost proposal to the cognizant 
agency within six months after the close of each fiscal year.
    d. A predetermined rate may be negotiated for use on awards 
where there is reasonable assurance, based on past experience and 
reliable projection of the organization's costs, that the rate is 
not likely to exceed a rate based on the organization's actual 
costs.
    e. Fixed rates may be negotiated where predetermined rates are 
not considered appropriate. A fixed rate, however, shall not be 
negotiated if all or a substantial portion of the organization's 
awards are expected to expire before the carry-forward adjustment 
can be made; the mix of Federal and non-Federal work at the 
organization is too erratic to permit an equitable carry-forward 
adjustment; or the organization's operations fluctuate significantly 
from year to year.
    f. Provisional and final rates shall be negotiated where neither 
predetermined nor fixed rates are appropriate.
    g. The results of each negotiation shall be formalized in a 
written agreement between the cognizant agency and the non-profit 
organization. The cognizant agency shall distribute copies of the 
agreement to all concerned Federal agencies.
    h. If a dispute arises in a negotiation of an indirect cost rate 
between the cognizant agency and the non-profit organization, the 
dispute shall be resolved in accordance with the appeals procedures 
of the cognizant agency.
    i. To the extent that problems are encountered among the Federal 
agencies in connection with the negotiation and approval process, 
OMB will lend assistance as required to resolve such problems in a 
timely manner.

Appendix B to Part 230--Selected Items of Cost

Selected Items of Cost

Table of Contents

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

Appendix B to Part 230--Selected Items of Cost

    Paragraphs 1 through 52 of this appendix provide principles to 
be applied in establishing the allowability of certain items of 
cost. These principles apply whether a cost is treated as direct or 
indirect. Failure to mention a particular item of cost is not 
intended to imply that it is unallowable; rather, determination as 
to allowability in each case should be based on the treatment or 
principles provided for similar or related items of cost.
    1. Advertising 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 
non-profit organization or maintaining or promoting understanding 
and favorable relations with the community or public at large or any 
segment of the public.
    c. The only allowable advertising costs are those which are 
solely for:
    (1) The recruitment of personnel required for the performance by 
the non-profit organization of obligations arising under a Federal 
award (See also paragraph 41, Recruiting costs, and paragraph 42, 
Relocation costs, of this appendix);
    (2) The procurement of goods and services for the performance of 
a Federal award;
    (3) The disposal of scrap or surplus materials acquired in the 
performance of a Federal award except when non-profit organizations 
are reimbursed for disposal costs at a predetermined amount; or
    (4) Other specific purposes necessary to meet the requirements 
of the Federal award.
    d. The only allowable public relations costs are:
    (1) Costs specifically required by the Federal award;
    (2) Costs of communicating with the public and press pertaining 
to specific activities or accomplishments which result from 
performance of Federal awards (these costs are considered necessary 
as part of the outreach effort for the Federal award); or
    (3) Costs of conducting general liaison with news media and 
government public relations officers, to the extent that such 
activities are limited to communication and liaison

[[Page 51933]]

necessary keep the public informed on matters of public concern, 
such as notices of Federal contract/grant awards, financial matters, 
etc.
    e. Costs identified in subparagraphs c and d if incurred for 
more than one Federal award or for both sponsored work and other 
work of the non-profit organization, are allowable to the extent 
that the principles in Appendix A to this part, paragraphs B. 
(``Direct Costs'') and C. (``Indirect Costs'') are observed.
    f. Unallowable advertising and public relations costs include 
the following:
    (1) All advertising and public relations costs other than as 
specified in subparagraphs c, d, and e;
    (2) Costs of meetings, conventions, convocations, or other 
events related to other activities of the non-profit organization, 
including:
    (a) Costs of displays, demonstrations, and exhibits;
    (b) Costs of meeting rooms, hospitality suites, and other 
special facilities used in conjunction with shows and other special 
events; and
    (c) Salaries and wages of employees engaged in setting up and 
displaying exhibits, making demonstrations, and providing briefings;
    (3) Costs of promotional items and memorabilia, including 
models, gifts, and souvenirs;
    (4) Costs of advertising and public relations designed solely to 
promote the non-profit organization.
    2. Advisory Councils. Costs incurred by advisory councils or 
committees are allowable as a direct cost where authorized by the 
Federal awarding agency or as an indirect cost where allocable to 
Federal awards.
    3. Alcoholic beverages. Costs of alcoholic beverages are 
unallowable.
    4. Audit costs and related services. a. The costs of audits 
required by, and performed in accordance with, the Single Audit Act, 
as implemented by Circular A-133, ``Audits of States, Local 
Governments, and Non-Profit Organizations'' are allowable. Also see 
31 U.S.C. 7505(b) and section 230 (``Audit Costs'') of Circular A-
133.
    b. Other audit costs are allowable if included in an indirect 
cost rate proposal, or if specifically approved by the awarding 
agency as a direct cost to an award.
    c. The cost of agreed-upon procedures engagements to monitor 
subrecipients who are exempted from A-133 under section 200(d) are 
allowable, subject to the conditions listed in A-133, section 230 
(b)(2).
    5. Bad debts. Bad debts, including losses (whether actual or 
estimated) arising from uncollectable accounts and other claims, 
related collection costs, and related legal costs, are unallowable.
    6. Bonding costs. a. Bonding costs arise when the Federal 
Government requires assurance against financial loss to itself or 
others by reason of the act or default of the non-profit 
organization. They arise also in instances where the non-profit 
organization requires similar assurance. Included are such bonds as 
bid, performance, payment, advance payment, infringement, and 
fidelity bonds.
    b. Costs of bonding required pursuant to the terms of the award 
are allowable.
    c. Costs of bonding required by the non-profit organization in 
the general conduct of its operations are allowable to the extent 
that such bonding is in accordance with sound business practice and 
the rates and premiums are reasonable under the circumstances.
    7. Communication costs. Costs incurred for telephone services, 
local and long distance telephone calls, telegrams, postage, 
messenger, electronic or computer transmittal services and the like 
are allowable.
    8. Compensation for personal services. a. Definition. 
Compensation for personal services includes all compensation paid 
currently or accrued by the organization for services of employees 
rendered during the period of the award (except as otherwise 
provided in subparagraph 8.h of this appendix). It includes, but is 
not limited to, salaries, wages, director's and executive committee 
member's fees, incentive awards, fringe benefits, pension plan 
costs, allowances for off-site pay, incentive pay, location 
allowances, hardship pay, and cost of living differentials.
    b. Allowability. Except as otherwise specifically provided in 
this paragraph, the costs of such compensation are allowable to the 
extent that:
    (1) Total compensation to individual employees is reasonable for 
the services rendered and conforms to the established policy of the 
organization consistently applied to both Federal and non-Federal 
activities; and
    (2) Charges to awards whether treated as direct or indirect 
costs are determined and supported as required in this paragraph.
    c. Reasonableness. (1) When the organization is predominantly 
engaged in activities other than those sponsored by the Federal 
Government, compensation for employees on federally-sponsored work 
will be considered reasonable to the extent that it is consistent 
with that paid for similar work in the organization's other 
activities.
    (2) When the organization is predominantly engaged in federally-
sponsored activities and in cases where the kind of employees 
required for the Federal activities are not found in the 
organization's other activities, compensation for employees on 
federally-sponsored work will be considered reasonable to the extent 
that it is comparable to that paid for similar work in the labor 
markets in which the organization competes for the kind of employees 
involved.
    d. Special considerations in determining allowability. Certain 
conditions require special consideration and possible limitations in 
determining costs under Federal awards where amounts or types of 
compensation appear unreasonable. Among such conditions are the 
following:
    (1) Compensation to members of non-profit organizations, 
trustees, directors, associates, officers, or the immediate families 
thereof. Determination should be made that such compensation is 
reasonable for the actual personal services rendered rather than a 
distribution of earnings in excess of costs.
    (2) Any change in an organization's compensation policy 
resulting in a substantial increase in the organization's level of 
compensation, particularly when it was concurrent with an increase 
in the ratio of Federal awards to other activities of the 
organization or any change in the treatment of allowability of 
specific types of compensation due to changes in Federal policy.
    e. Unallowable costs. Costs which are unallowable under other 
paragraphs of this appendix shall not be allowable under this 
paragraph solely on the basis that they constitute personal 
compensation.
    f. Overtime, extra-pay shift, and multi-shift premiums. Premiums 
for overtime, extra-pay shifts, and multi-shift work are allowable 
only with the prior approval of the awarding agency except:
    (1) When necessary to cope with emergencies, such as those 
resulting from accidents, natural disasters, breakdowns of 
equipment, or occasional operational bottlenecks of a sporadic 
nature.
    (2) When employees are performing indirect functions, such as 
administration, maintenance, or accounting.
    (3) In the performance of tests, laboratory procedures, or other 
similar operations which are continuous in nature and cannot 
reasonably be interrupted or otherwise completed.
    (4) When lower overall cost to the Federal Government will 
result.
    g. Fringe benefits. (1) Fringe benefits in the form of regular 
compensation paid to employees during periods of authorized absences 
from the job, such as vacation leave, sick leave, military leave, 
and the like, are allowable, provided such costs are absorbed by all 
organization activities in proportion to the relative amount of time 
or effort actually devoted to each.
    (2) Fringe benefits in the form of employer contributions or 
expenses for social security, employee insurance, workmen's 
compensation insurance, pension plan costs (see subparagraph 8.h of 
this appendix), and the like, are allowable, provided such benefits 
are granted in accordance with established written organization 
policies. Such benefits whether treated as indirect costs or as 
direct costs, shall be distributed to particular awards and other 
activities in a manner consistent with the pattern of benefits 
accruing to the individuals or group of employees whose salaries and 
wages are chargeable to such awards and other activities.
    (3)(a) Provisions for a reserve under a self-insurance program 
for unemployment compensation or workers' compensation are allowable 
to the extent that the provisions represent reasonable estimates of 
the liabilities for such compensation, and the types of coverage, 
extent of coverage, and rates and premiums would have been allowable 
had insurance been purchased to cover the risks. However, provisions 
for self-insured liabilities which do not become payable for more 
than one year after the provision is made shall not exceed the 
present value of the liability.
    (b) Where an organization follows a consistent policy of 
expensing actual payments to, or on behalf of, employees or former 
employees for unemployment

[[Page 51934]]

compensation or workers' compensation, such payments are allowable 
in the year of payment with the prior approval of the awarding 
agency, provided they are allocated to all activities of the 
organization.
    (4) Costs of insurance on the lives of trustees, officers, or 
other employees holding positions of similar responsibility are 
allowable only to the extent that the insurance represents 
additional compensation. The costs of such insurance when the 
organization is named as beneficiary are unallowable.
    h. Organization-furnished automobiles. That portion of the cost 
of organization-furnished automobiles that relates to personal use 
by employees (including transportation to and from work) is 
unallowable as fringe benefit or indirect costs regardless of 
whether the cost is reported as taxable income to the employees. 
These costs are allowable as direct costs to sponsored award when 
necessary for the performance of the sponsored award and approved by 
awarding agencies.
    i. Pension plan costs. (1) Costs of the organization's pension 
plan which are incurred in accordance with the established policies 
of the organization are allowable, provided:
    (a) Such policies meet the test of reasonableness;
    (b) The methods of cost allocation are not discriminatory;
    (c) The cost assigned to each fiscal year is determined in 
accordance with generally accepted accounting principles (GAAP), as 
prescribed in Accounting Principles Board Opinion No. 8 issued by 
the American Institute of Certified Public Accountants; and
    (d) The costs assigned to a given fiscal year are funded for all 
plan participants within six months after the end of that year. 
However, increases to normal and past service pension costs caused 
by a delay in funding the actuarial liability beyond 30 days after 
each quarter of the year to which such costs are assignable are 
unallowable.
    (2) Pension plan termination insurance premiums paid pursuant to 
the Employee Retirement Income Security Act (ERISA) of 1974 (Pub. L. 
93-406) are allowable. Late payment charges on such premiums are 
unallowable.
    (3) Excise taxes on accumulated funding deficiencies and other 
penalties imposed under ERISA are unallowable.
    j. Incentive compensation. Incentive compensation to employees 
based on cost reduction, or efficient performance, suggestion 
awards, safety awards, etc., are allowable to the extent that the 
overall compensation is determined to be reasonable and such costs 
are paid or accrued pursuant to an agreement entered into in good 
faith between the organization and the employees before the services 
were rendered, or pursuant to an established plan followed by the 
organization so consistently as to imply, in effect, an agreement to 
make such payment.
    k. Severance pay. (1) Severance pay, also commonly referred to 
as dismissal wages, is a payment in addition to regular salaries and 
wages, by organizations to workers whose employment is being 
terminated. Costs of severance pay are allowable only to the extent 
that in each case, it is required by:

(a) Law
(b) Employer-employee agreement
(c) Established policy that constitutes, in effect, an implied 
agreement on the organization's part, or
(d) Circumstances of the particular employment.

    (2) Costs of severance payments are divided into two categories 
as follows:
    (a) Actual normal turnover severance payments shall be allocated 
to all activities; or, where the organization provides for a reserve 
for normal severances, such method will be acceptable if the charge 
to current operations is reasonable in light of payments actually 
made for normal severances over a representative past period, and if 
amounts charged are allocated to all activities of the organization.
    (b) Abnormal or mass severance pay is of such a conjectural 
nature that measurement of costs by means of an accrual will not 
achieve equity to both parties. Thus, accruals for this purpose are 
not allowable. However, the Federal Government recognizes its 
obligation to participate, to the extent of its fair share, in any 
specific payment. Thus, allowability will be considered on a case-
by-case basis in the event or occurrence.
    (c) Costs incurred in certain severance pay packages (commonly 
known as ``a golden parachute'' payment) which are in an amount in 
excess of the normal severance pay paid by the organization to an 
employee upon termination of employment and are paid to the employee 
contingent upon a change in management control over, or ownership 
of, the organization's assets are unallowable.
    (d) Severance payments to foreign nationals employed by the 
organization outside the United States, to the extent that the 
amount exceeds the customary or prevailing practices for the 
organization in the United States are unallowable, unless they are 
necessary for the performance of Federal programs and approved by 
awarding agencies.
    (e) Severance payments to foreign nationals employed by the 
organization outside the United States due to the termination of the 
foreign national as a result of the closing of, or curtailment of 
activities by, the organization in that country, are unallowable, 
unless they are necessary for the performance of Federal programs 
and approved by awarding agencies.
    l. Training costs. See paragraph 49 of this appendix.
    m. Support of salaries and wages.
    (1) Charges to awards for salaries and wages, whether treated as 
direct costs or indirect costs, will be based on documented payrolls 
approved by a responsible official(s) of the organization. The 
distribution of salaries and wages to awards must be supported by 
personnel activity reports, as prescribed in subparagraph 8.m.(2) of 
this appendix, except when a substitute system has been approved in 
writing by the cognizant agency. (See subparagraph E.2 of Appendix A 
to this part.)
    (2) Reports reflecting the distribution of activity of each 
employee must be maintained for all staff members (professionals and 
nonprofessionals) whose compensation is charged, in whole or in 
part, directly to awards. In addition, in order to support the 
allocation of indirect costs, such reports must also be maintained 
for other employees whose work involves two or more functions or 
activities if a distribution of their compensation between such 
functions or activities is needed in the determination of the 
organization's indirect cost rate(s) (e.g., an employee engaged 
part-time in indirect cost activities and part-time in a direct 
function). Reports maintained by non-profit organizations to satisfy 
these requirements must meet the following standards:
    (a) The reports must reflect an after-the-fact determination of 
the actual activity of each employee. Budget estimates (i.e., 
estimates determined before the services are performed) do not 
qualify as support for charges to awards.
    (b) Each report must account for the total activity for which 
employees are compensated and which is required in fulfillment of 
their obligations to the organization.
    (c) The reports must be signed by the individual employee, or by 
a responsible supervisory official having first hand knowledge of 
the activities performed by the employee, that the distribution of 
activity represents a reasonable estimate of the actual work 
performed by the employee during the periods covered by the reports.
    (d) The reports must be prepared at least monthly and must 
coincide with one or more pay periods.
    (3) Charges for the salaries and wages of nonprofessional 
employees, in addition to the supporting documentation described in 
subparagraphs (1) and (2), must also be supported by records 
indicating the total number of hours worked each day maintained in 
conformance with Department of Labor regulations implementing the 
Fair Labor Standards Act (FLSA) (29 CFR part 516). For this purpose, 
the term ``nonprofessional employee'' shall have the same meaning as 
``nonexempt employee,'' under FLSA.
    (4) Salaries and wages of employees used in meeting cost sharing 
or matching requirements on awards must be supported in the same 
manner as salaries and wages claimed for reimbursement from awarding 
agencies.
    9. Contingency provisions. Contributions to a contingency 
reserve or any similar provision made for events the occurrence of 
which cannot be foretold with certainty as to time, intensity, or 
with an assurance of their happening, are unallowable. The term 
``contingency reserve'' excludes self-insurance reserves (see 
Appendix B to this part, paragraphs 8.g.(3) and 22.a(2)(d)); pension 
funds (see paragraph 8.i): and reserves for normal severance pay 
(see paragraph 8.k.)
    10. Defense and prosecution of criminal and civil proceedings, 
claims, appeals and patent infringement.
    a. Definitions. (1) Conviction, as used herein, means a judgment 
or a conviction of a criminal offense by any court of competent 
jurisdiction, whether entered upon as a verdict or a plea, including 
a conviction due to a plea of nolo contendere.

[[Page 51935]]

    (2) Costs include, but are not limited to, administrative and 
clerical expenses; the cost of legal services, whether performed by 
in-house or private counsel; and the costs of the services of 
accountants, consultants, or others retained by the organization to 
assist it; costs of employees, officers and trustees, and any 
similar costs incurred before, during, and after commencement of a 
judicial or administrative proceeding that bears a direct 
relationship to the proceedings.
    (3) Fraud, as used herein, means acts of fraud corruption or 
attempts to defraud the Federal Government or to corrupt its agents, 
acts that constitute a cause for debarment or suspension (as 
specified in agency regulations), and acts which violate the False 
Claims Act, 31 U.S.C., sections 3729-3731, or the Anti-Kickback Act, 
41 U.S.C., sections 51 and 54.
    (4) Penalty does not include restitution, reimbursement, or 
compensatory damages.
    (5) Proceeding includes an investigation.
    b. (1) Except as otherwise described herein, costs incurred in 
connection with any criminal, civil or administrative proceeding 
(including filing of a false certification) commenced by the Federal 
Government, or a State, local or foreign government, are not 
allowable if the proceeding: Relates to a violation of, or failure 
to comply with, a Federal, State, local or foreign statute or 
regulation by the organization (including its agents and employees), 
and results in any of the following dispositions:
    (a) In a criminal proceeding, a conviction.
    (b) In a civil or administrative proceeding involving an 
allegation of fraud or similar misconduct, a determination of 
organizational liability.
    (c) In the case of any civil or administrative proceeding, the 
imposition of a monetary penalty.
    (d) A final decision by an appropriate Federal official to debar 
or suspend the organization, to rescind or void an award, or to 
terminate an award for default by reason of a violation or failure 
to comply with a law or regulation.
    (e) A disposition by consent or compromise, if the action could 
have resulted in any of the dispositions described in subparagraphs 
10.b.(1)(a), (b), (c) or (d) 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 
subparagraph 10.b.(1) of this appendix.
    c. If a proceeding referred to in subparagraph 10.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 
organization and the Federal Government, then the costs incurred by 
the organization in connection with such proceedings that are 
otherwise not allowable under subparagraph 10.b of this appendix may 
be allowed to the extent specifically provided in such agreement.
    d. If a proceeding referred to in subparagraph 10.b of this 
appendix is commenced by a State, local or foreign government, the 
authorized Federal official may allow the costs incurred by the 
organization for such proceedings, if such authorized official 
determines that the costs were incurred as a result of a specific 
term or condition of a federally-sponsored award, or specific 
written direction of an authorized official of the sponsoring 
agency.
    e. Costs incurred in connection with proceedings described in 
subparagraph 10.b of this appendix, but which are not made 
unallowable by that subparagraph, 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 
award;
    (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 the 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 subparagraph 10.c of 
this appendix has explicitly considered this 80 percent limitation 
and permitted a higher percentage, then the full amount of costs 
resulting from that agreement shall be allowable.
    f. Costs incurred by the organization in connection with the 
defense of suits brought by its employees or ex-employees under 
section 2 of the Major Fraud Act of 1988 (Pub. L. 100-700), 
including the cost of all relief necessary to make such employee 
whole, where the organization was found liable or settled, are 
unallowable.
    g. Costs of legal, accounting, and consultant services, and 
related costs, incurred in connection with defense against Federal 
Government claims or appeals, antitrust suits, 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 awards.
    i. Costs which may be unallowable under this paragraph, 
including directly associated costs, shall be segregated and 
accounted for by the organization separately. During the pendency of 
any proceeding covered by subparagraphs 10.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 
agreements by the organization to repay all unallowable costs, plus 
interest, if the costs are subsequently determined to be 
unallowable.
    11. Depreciation and use allowances. a. Compensation for the use 
of buildings, other capital improvements, and equipment on hand may 
be made through use allowance or depreciation. However, except as 
provided in paragraph 11.f of this appendix, a combination of the 
two methods may not be used in connection with a single class of 
fixed assets (e.g., buildings, office equipment, computer equipment, 
etc.).
    b. The computation of use allowances or depreciation shall be 
based on the acquisition cost of the assets involved. The 
acquisition cost of an asset donated to the non-profit organization 
by a third party shall be its fair market value at the time of the 
donation.
    c. The computation of use allowances or depreciation will 
exclude:
    (1) The cost of land;
    (2) Any portion of the cost of buildings and equipment borne by 
or donated by the Federal Government irrespective of where title was 
originally vested or where it presently resides; and
    (3) Any portion of the cost of buildings and equipment 
contributed by or for the non-profit organization in satisfaction of 
a statutory matching requirement.
    d. General criteria where depreciation method is followed:
    (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 used, 
technological developments in the particular program area, and the 
renewal and replacement policies followed for the individual items 
or classes of assets involved. The method of depreciation used to 
assign the cost of an asset (or group of assets) to accounting 
periods shall reflect the pattern of consumption of the asset during 
its useful life.
    (2) In the absence of clear evidence indicating that the 
expected consumption of the asset will be significantly greater or 
lesser in the early portions of its useful life than in the later 
portions, the straight-line method shall be presumed to be the 
appropriate method.
    (3) Depreciation methods once used shall not be changed unless 
approved in advance by the cognizant Federal agency. When the 
depreciation method is introduced for application to assets 
previously subject to a use allowance, the combination of use 
allowances and depreciation applicable to such assets must not 
exceed the total acquisition cost of the assets.
    e. When the depreciation method is used for buildings, a 
building's shell may be segregated from each building component 
(e.g., plumbing system, heating, and air conditioning system, etc.) 
and each item depreciated over its estimated useful life; or the 
entire building (i.e., the shell and all components) may be treated 
as a single asset and depreciated over a single useful life.
    f. When the depreciation method is used for a particular class 
of assets, no depreciation may be allowed on any such assets that, 
under subparagraph 11.d of this appendix, would be viewed as fully 
depreciated. However, a reasonable use allowance may be negotiated 
for such assets

[[Page 51936]]

if warranted after taking into consideration the amount of 
depreciation previously charged to the Federal Government, the 
estimated useful life remaining at time of negotiation, the effect 
of any increased maintenance charges or decreased efficiency due to 
age, and any other factors pertinent to the utilization of the asset 
for the purpose contemplated.
    g. Criteria where the use allowance method is followed:
    (1) The use allowance for buildings and improvement (including 
land improvements, such as paved parking areas, fences, and 
sidewalks) will be computed at an annual rate not exceeding two 
percent of acquisition cost.
    (2) The use allowance for equipment will be computed at an 
annual rate not exceeding six and two-thirds percent of acquisition 
cost. When the use allowance method is used for buildings, the 
entire building must be treated as a single asset; the building's 
components (e.g., plumbing system, heating and air conditioning, 
etc.) cannot be segregated from the building's shell.
    (3) The two percent limitation, however, need not be applied to 
equipment which is merely attached or fastened to the building but 
not permanently fixed to it and which is used as furnishings or 
decorations or for specialized purposes (e.g., dentist chairs and 
dental treatment units, counters, laboratory benches bolted to the 
floor, dishwashers, modular furniture, carpeting, etc.). Such 
equipment will be considered as not being permanently fixed to the 
building if it can be removed without the need for costly or 
extensive alterations or repairs to the building or the equipment. 
Equipment that meets these criteria will be subject to the 6\2/3\ 
percent equipment use allowance limitation.
    h. Charges for use allowances or depreciation must be supported 
by adequate property records and physical inventories must be taken 
at least once every two years (a statistical sampling basis is 
acceptable) to ensure that assets exist and are usable and needed. 
When the depreciation method is followed, adequate depreciation 
records indicating the amount of depreciation taken each period must 
also be maintained.
    12. Donations and contributions.
    a. Contributions or donations rendered. Contributions or 
donations, including cash, property, and services, made by the 
organization, regardless of the recipient, are unallowable.
    b. Donated services received:
    (1) Donated or volunteer services may be furnished to an 
organization by professional and technical personnel, consultants, 
and other skilled and unskilled labor. The value of these services 
is not reimbursable either as a direct or indirect cost. However, 
the value of donated services may be used to meet cost sharing or 
matching requirements in accordance with the Common Rule.
    (2) The value of donated services utilized in the performance of 
a direct cost activity shall, when material in amount, be considered 
in the determination of the non-profit organization's indirect costs 
or rate(s) and, accordingly, shall be allocated a proportionate 
share of applicable indirect costs when the following exist:
    (a) The aggregate value of the services is material;
    (b) The services are supported by a significant amount of the 
indirect costs incurred by the non-profit organization; and
    (c) The direct cost activity is not pursued primarily for the 
benefit of the Federal Government.
    (3) In those instances where there is no basis for determining 
the fair market value of the services rendered, the recipient and 
the cognizant agency shall negotiate an appropriate allocation of 
indirect cost to the services.
    (4) Where donated services directly benefit a project supported 
by an award, the indirect costs allocated to the services will be 
considered as a part of the total costs of the project. Such 
indirect costs may be reimbursed under the award or used to meet 
cost sharing or matching requirements.
    (5) The value of the donated services may be used to meet cost 
sharing or matching requirements under conditions described in 
Section 215.23 of 2 CFR part 215 (OMB Circular A-110). Where donated 
services are treated as indirect costs, indirect cost rates will 
separate the value of the donations so that reimbursement will not 
be made.
    c. Donated goods or space. (1) Donated goods; i.e., expendable 
personal property/supplies, and donated use of space may be 
furnished to a non-profit organization. The value of the goods and 
space is not reimbursable either as a direct or indirect cost.
    (2) The value of the donations may be used to meet cost sharing 
or matching share requirements under the conditions described in 2 
CFR part 215 (OMB Circular A-110). Where donations are treated as 
indirect costs, indirect cost rates will separate the value of the 
donations so that reimbursement will not be made.
    13. Employee morale, health, and welfare costs.
    a. The costs of employee information publications, health or 
first-aid clinics and/or infirmaries, recreational activities, 
employee counseling services, and any other expenses incurred in 
accordance with the non-profit organization's established practice 
or custom for the improvement of working conditions, employer-
employee relations, employee morale, and employee performance are 
allowable.
    b. Such costs will be equitably apportioned to all activities of 
the non-profit organization. Income generated from any of these 
activities will be credited to the cost thereof unless such income 
has been irrevocably set over to employee welfare organizations.
    14. Entertainment costs. Costs of entertainment, including 
amusement, diversion, and social activities and any costs directly 
associated with such costs (such as tickets to shows or sports 
events, meals, lodging, rentals, transportation, and gratuities) are 
unallowable.
    15. Equipment and other capital expenditures.
    a. For purposes of this subparagraph, the following definitions 
apply:
    (1) ``Capital Expenditures'' means expenditures for the 
acquisition cost of capital assets (equipment, buildings, land), or 
expenditures to make improvements to capital assets that materially 
increase their value or useful life. Acquisition cost means the cost 
of the asset including the cost to put it in place. Acquisition cost 
for equipment, for example, means the net invoice price of the 
equipment, including the cost of any modifications, attachments, 
accessories, or auxiliary apparatus necessary to make it usable for 
the purpose for which it is acquired. Ancillary charges, such as 
taxes, duty, protective in transit insurance, freight, and 
installation may be included in, or excluded from the acquisition 
cost in accordance with the non-profit organization's regular 
accounting practices.
    (2) ``Equipment'' means an article of nonexpendable, tangible 
personal property having a useful life of more than one year and an 
acquisition cost which equals or exceeds the lesser of the 
capitalization level established by the non-profit organization for 
financial statement purposes, or $5000.
    (3) ``Special purpose equipment'' means equipment which is used 
only for research, medical, scientific, or other technical 
activities. Examples of special purpose equipment include 
microscopes, x-ray machines, surgical instruments, and 
spectrometers.
    (4) ``General purpose equipment'' means equipment, which is not 
limited to research, medical, scientific or other technical 
activities. Examples include office equipment and furnishings, 
modular offices, telephone networks, information technology 
equipment and systems, air conditioning equipment, reproduction and 
printing equipment, and motor vehicles.
    b. The following rules of allowability shall apply to equipment 
and other capital expenditures:
    (1) Capital expenditures for general purpose equipment, 
buildings, and land are unallowable as direct charges, except where 
approved in advance by the awarding agency.
    (2) Capital expenditures for special purpose equipment are 
allowable as direct costs, provided that items with a unit cost of 
$5000 or more have the prior approval of the awarding agency.
    (3) Capital expenditures for improvements to land, buildings, or 
equipment which materially increase their value or useful life are 
unallowable as a direct cost except with the prior approval of the 
awarding agency.
    (4) When approved as a direct charge pursuant to paragraph 
15.b.(1), (2), and (3) above, 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 paragraph 11., Depreciation and use 
allowance, of this appendix for rules on the allowability of use 
allowances or depreciation on buildings, capital improvements, and 
equipment. Also, see paragraph 43., Rental costs of buildings and 
equipment, of this appendix 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

[[Page 51937]]

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.
    16. Fines and penalties. Costs of fines and penalties resulting 
from violations of, or failure of the organization to comply with 
Federal, State, and local laws and regulations are unallowable 
except when incurred as a result of compliance with specific 
provisions of an award or instructions in writing from the awarding 
agency.
    17. Fund raising and investment management 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. Fund raising and investment activities shall be allocated an 
appropriate share of indirect costs under the conditions described 
in subparagraph B.3 of Appendix A to this part.
    18. Gains and losses on depreciable assets. a. (1) Gains and 
losses on sale, retirement, or other disposition of depreciable 
property shall be included in the year in which they occur as 
credits or charges to cost grouping(s) in which the depreciation 
applicable to such property was included. The amount of the gain or 
loss to be included as a credit or charge to the appropriate cost 
grouping(s) shall be the difference between the amount realized on 
the property and the undepreciated basis of the property.
    (2) Gains and losses on the disposition of depreciable property 
shall not be recognized as a separate credit or charge under the 
following conditions:
    (a) The gain or loss is processed through a depreciation account 
and is reflected in the depreciation allowable under paragraph 11 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 paragraph 22 of this 
appendix.
    (d) Compensation for the use of the property was provided 
through use allowances in lieu of depreciation in accordance with 
paragraph 9 of this appendix.
    (e) Gains and losses arising from mass or extraordinary sales, 
retirements, or other dispositions shall be considered on a case-by-
case basis.
    b. Gains or losses of any nature arising from the sale or 
exchange of property other than the property covered in subparagraph 
a shall be excluded in computing award costs.
    19. Goods or services for personal use. Costs of goods or 
services for personal use of the organization's employees are 
unallowable regardless of whether the cost is reported as taxable 
income to the employees.
    20. Housing and personal living expenses. a. Costs of housing 
(e.g., depreciation, maintenance, utilities, furnishings, rent, 
etc.), housing allowances and personal living expenses for/of the 
organization's officers are unallowable as fringe benefit or 
indirect costs regardless of whether the cost is reported as taxable 
income to the employees. These costs are allowable as direct costs 
to sponsored award when necessary for the performance of the 
sponsored award and approved by awarding agencies.
    b. The term ``officers'' includes current and past officers and 
employees.
    21. Idle facilities and idle capacity. a. As used in this 
section the following terms have the meanings set forth below:
    (1) ``Facilities'' means land and buildings or any portion 
thereof, equipment individually or collectively, or any other 
tangible capital asset, wherever located, and whether owned or 
leased by the non-profit organization.
    (2) ``Idle facilities'' means completely unused facilities that 
are excess to the non-profit organization's current needs.
    (3) ``Idle capacity'' means the unused capacity of partially 
used facilities. It is the difference between: That which a facility 
could achieve under 100 percent operating time on a one-shift basis 
less operating interruptions resulting from time lost for repairs, 
setups, unsatisfactory materials, and other normal delays; and the 
extent to which the facility was actually used to meet demands 
during the accounting period. A multi-shift basis should be used if 
it can be shown that this amount of usage would normally be expected 
for the type of facility involved.
    (4) ``Cost of idle facilities or idle capacity'' means costs 
such as maintenance, repair, housing, rent, and other related costs, 
e.g., insurance, interest, property taxes and depreciation or use 
allowances.
    b. The costs of idle facilities are unallowable except to the 
extent that:
    (1) They are necessary to meet fluctuations in workload; or
    (2) Although not necessary to meet fluctuations in workload, 
they were necessary when acquired and are now idle because of 
changes in program requirements, efforts to achieve more economical 
operations, reorganization, termination, or other causes which could 
not have been reasonably foreseen. Under the exception stated in 
this subparagraph, costs of idle facilities are allowable for a 
reasonable period of time, ordinarily not to exceed one year, 
depending on the initiative taken to use, lease, or dispose of such 
facilities.
    c. The costs of idle capacity are normal costs of doing business 
and are a factor in the normal fluctuations of usage or indirect 
cost rates from period to period. Such costs are allowable, provided 
that the capacity is reasonably anticipated to be necessary or was 
originally reasonable and is not subject to reduction or elimination 
by use on other Federal awards, subletting, renting, or sale, in 
accordance with sound business, economic, or security practices. 
Widespread idle capacity throughout an entire facility or among a 
group of assets having substantially the same function may be 
considered idle facilities.
    22. Insurance and indemnification. a. Insurance includes 
insurance which the organization is required to carry, or which is 
approved, under the terms of the award and any other insurance which 
the organization maintains in connection with the general conduct of 
its operations. This paragraph does not apply to insurance which 
represents fringe benefits for employees (see subparagraphs 8.g and 
8.i(2) of this appendix).
    (1) Costs of insurance required or approved, and maintained, 
pursuant to the award are allowable.
    (2) Costs of other insurance maintained by the organization in 
connection with the general conduct of its operations are allowable 
subject to the following limitations:
    (a) Types and extent of coverage shall be in accordance with 
sound business practice and the rates and premiums shall be 
reasonable under the circumstances.
    (b) Costs allowed for business interruption or other similar 
insurance shall be limited to exclude coverage of management fees.
    (c) Costs of insurance or of any provisions for a reserve 
covering the risk of loss or damage to Federal property are 
allowable only to the extent that the organization is liable for 
such loss or damage.
    (d) Provisions for a reserve under a self-insurance program are 
allowable to the extent that types of coverage, extent of coverage, 
rates, and premiums would have been allowed had insurance been 
purchased to cover the risks. However, provision for known or 
reasonably estimated self-insured liabilities, which do not become 
payable for more than one year after the provision is made, shall 
not exceed the present value of the liability.
    (e) Costs of insurance on the lives of trustees, officers, or 
other employees holding positions of similar responsibilities are 
allowable only to the extent that the insurance represents 
additional compensation (see subparagraph 8.g(4) of this appendix). 
The cost of such insurance when the organization is identified as 
the beneficiary is unallowable.
    (f) Insurance against defects. Costs of insurance with respect 
to any costs incurred to correct defects in the organization's 
materials or workmanship are unallowable.
    (g) Medical liability (malpractice) insurance. Medical liability 
insurance is an allowable cost of Federal research programs only to 
the extent that the Federal research programs involve human subjects 
or training of participants in research techniques. 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.
    (3) Actual losses which could have been covered by permissible 
insurance (through the purchase of insurance or a self-insurance 
program) are unallowable unless expressly provided for in the award, 
except:
    (a) Costs incurred because of losses not covered under nominal 
deductible insurance coverage provided in keeping with sound 
business practice are allowable.
    (b) Minor losses not covered by insurance, such as spoilage, 
breakage, and

[[Page 51938]]

disappearance of supplies, which occur in the ordinary course of 
operations, are allowable.
    b. Indemnification includes securing the organization against 
liabilities to third persons and any other loss or damage, not 
compensated by insurance or otherwise. The Federal Government is 
obligated to indemnify the organization only to the extent expressly 
provided in the award.
    23. Interest. a. Costs incurred for interest on borrowed 
capital, temporary use of endowment funds, or the use of the non-
profit organization's own funds, however represented, are 
unallowable. However, interest on debt incurred after September 29, 
1995 to acquire or replace capital assets (including renovations, 
alterations, equipment, land, and capital assets acquired through 
capital leases), acquired after September 29, 1995 and used in 
support of Federal awards is allowable, provided that:
    (1) For facilities acquisitions (excluding renovations and 
alterations) costing over $10 million where the Federal Government's 
reimbursement is expected to equal or exceed 40 percent of an 
asset's cost, the non-profit organization prepares, prior to the 
acquisition or replacement of the capital asset(s), a justification 
that demonstrates the need for the facility in the conduct of 
federally-sponsored activities. Upon request, the needs 
justification must be provided to the Federal agency with cost 
cognizance authority as a prerequisite to the continued allowability 
of interest on debt and depreciation related to the facility. The 
needs justification for the acquisition of a facility should 
include, at a minimum, the following:
    (a) A statement of purpose and justification for facility 
acquisition or replacement.
    (b) A statement as to why current facilities are not adequate.
    (c) A statement of planned future use of the facility.
    (d) A description of the financing agreement to be arranged for 
the facility.
    (e) A summary of the building contract with estimated cost 
information and statement of source and use of funds.
    (f) A schedule of planned occupancy dates.
    (2) For facilities costing over $500,000, the non-profit 
organization prepares, prior to the acquisition or replacement of 
the facility, a lease/purchase analysis in accordance with the 
provisions of Sec. Sec.  215.30 through 215.37 of 2 CFR 215 (OMB 
Circular A-110), which shows that a financed purchase or capital 
lease is less costly to the organization than other leasing 
alternatives, on a net present value basis. Discount rates used 
should be equal to the non-profit organization's anticipated 
interest rates and should be no higher than the fair market rate 
available to the non-profit organization from an unrelated (``arm's 
length'') third-party. The lease/purchase analysis shall include a 
comparison of the net present value of the projected total cost 
comparisons of both alternatives over the period the asset is 
expected to be used by the non-profit organization. The cost 
comparisons associated with purchasing the facility shall include 
the estimated purchase price, anticipated operating and maintenance 
costs (including property taxes, if applicable) not included in the 
debt financing, less any estimated asset salvage value at the end of 
the period defined above. The cost comparison for a capital lease 
shall include the estimated total lease payments, any estimated 
bargain purchase option, operating and maintenance costs, and taxes 
not included in the capital leasing arrangement, less any estimated 
credits due under the lease at the end of the period defined above. 
Projected operating lease costs shall be based on the anticipated 
cost of leasing comparable facilities at fair market rates under 
rental agreements that would be renewed or reestablished over the 
period defined above, and any expected maintenance costs and 
allowable property taxes to be borne by the non-profit organization 
directly or as part of the lease arrangement.
    (3) The actual interest cost claimed is predicated upon interest 
rates that are no higher than the fair market rate available to the 
non-profit organization from an unrelated (``arm's length'') third 
party.
    (4) Investment earnings, including interest income, on bond or 
loan principal, pending payment of the construction or acquisition 
costs, are used to offset allowable interest cost. Arbitrage 
earnings reportable to the Internal Revenue Service are not required 
to be offset against allowable interest costs.
    (5) Reimbursements are limited to the least costly alternative 
based on the total cost analysis required under subparagraph 23.b. 
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 
performed, Federal reimbursement shall be based upon the least 
expensive alternative.
    (6) Non-profit organizations are also subject to the following 
conditions:
    (a) Interest on debt incurred to finance or refinance assets 
acquired before or reacquired after September 29, 1995, is not 
allowable.
    (b) Interest attributable to fully depreciated assets is 
unallowable.
    (c) For debt arrangements over $1 million, unless the non-profit 
organization makes an initial equity contribution to the asset 
purchase of 25 percent or more, non-profit organizations shall 
reduce claims for interest expense by an amount equal to imputed 
interest earnings on excess cash flow, which is to be calculated as 
follows. Annually, non-profit organizations shall prepare a 
cumulative (from the inception of the project) report of monthly 
cash flows that includes inflows and outflows, regardless of the 
funding source. Inflows consist of depreciation expense, 
amortization of capitalized construction interest, and annual 
interest expense. For cash flow calculations, the annual inflow 
figures shall be divided by the number of months in the year 
(usually 12) that the building is in service for monthly amounts. 
Outflows consist of initial equity contributions, debt principal 
payments (less the pro rata share attributable to the unallowable 
costs of land) and interest payments. Where cumulative inflows 
exceed cumulative outflows, interest shall be calculated on the 
excess inflows for that period and be treated as a reduction to 
allowable interest expense. The rate of interest to be used to 
compute earnings on excess cash flows shall be the three month 
Treasury Bill closing rate as of the last business day of that 
month.
    (d) Substantial relocation of federally-sponsored activities 
from a facility financed by indebtedness, the cost of which was 
funded in whole or part through Federal reimbursements, to another 
facility prior to the expiration of a period of 20 years requires 
notice to the Federal cognizant agency. The extent of the 
relocation, the amount of the Federal participation in the 
financing, and the depreciation and interest charged to date may 
require negotiation and/or downward adjustments of replacement space 
charged to Federal programs in the future.
    (e) The allowable costs to acquire facilities and equipment are 
limited to a fair market value available to the non-profit 
organization from an unrelated (``arm's length'') third party.
    b. For non-profit organizations subject to ``full coverage''' 
under the Cost Accounting Standards (CAS) as defined at 48 CFR 
9903.201, the interest allowability provisions of subparagraph a do 
not apply. Instead, these organizations' sponsored agreements are 
subject to CAS 414 (48 CFR 9903.414), cost of money as an element of 
the cost of facilities capital, and CAS 417 (48 CFR 9903.417), cost 
of money as an element of the cost of capital assets under 
construction.
    c. The following definitions are to be used for purposes of this 
paragraph:
    (1) Re-acquired assets means assets held by the non-profit 
organization prior to September 29, 1995 that have again come to be 
held by the organization, whether through repurchase or refinancing. 
It does not include assets acquired to replace older assets.
    (2) Initial equity contribution means the amount or value of 
contributions made by non-profit organizations for the acquisition 
of the asset or prior to occupancy of facilities.
    (3) Asset costs means the capitalizable costs of an asset, 
including construction costs, acquisition costs, and other such 
costs capitalized in accordance with GAAP.
    24. Labor relations costs. Costs incurred in maintaining 
satisfactory relations between the organization and its employees, 
including costs of labor management committees, employee 
publications, and other related activities are allowable.
    25. Lobbying. 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; or 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

[[Page 51939]]

officials to engage in similar lobbying activity), or with any 
Government official or employee in connection with a decision to 
sign or veto enrolled legislation;
    (4) Any attempt to influence: 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, fundraising 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 
subparagraph 25.a of this appendix:
    (1) Providing a technical and factual presentation of 
information on a topic directly related to the performance of a 
grant, contract or other agreement through hearing testimony, 
statements or letters to the Congress or a State legislature, or 
subdivision, member, or cognizant staff member thereof, in response 
to a documented request (including a Congressional Record notice 
requesting testimony or statements for the record at a regularly 
scheduled hearing) made by the recipient member, legislative body or 
subdivision, or a cognizant staff member thereof; provided such 
information is readily obtainable and can be readily put in 
deliverable form; and further provided that costs under this section 
for travel, lodging or meals are unallowable unless incurred to 
offer testimony at a regularly scheduled Congressional hearing 
pursuant to a written request for such presentation made by the 
Chairman or Ranking Minority Member of the Committee or Subcommittee 
conducting such hearing.
    (2) Any lobbying made unallowable by subparagraph 25.a.(3) of 
this appendix to influence State legislation in order to directly 
reduce the cost, or to avoid material impairment of the 
organization's authority to perform the grant, contract, or other 
agreement.
    (3) Any activity specifically authorized by statute to be 
undertaken with funds from the grant, contract, or other agreement.
    c. (1) When an organization seeks reimbursement for indirect 
costs, total lobbying costs shall be separately identified in the 
indirect cost rate proposal, and thereafter treated as other 
unallowable activity costs in accordance with the procedures of 
subparagraph B.3 of Appendix A to this part.
    (2) Organizations shall submit, as part of the annual indirect 
cost rate proposal, a certification that the requirements and 
standards of this paragraph have been complied with.
    (3) Organizations shall maintain adequate records to demonstrate 
that the determination of costs as being allowable or unallowable 
pursuant to paragraph 25 complies with the requirements of this 
Appendix.
    (4) Time logs, calendars, or similar records shall not be 
required to be created for purposes of complying with this paragraph 
during any particular calendar month when: the employee engages in 
lobbying (as defined in subparagraphs 25.a. and b. of this appendix) 
25 percent or less of the employee's compensated hours of employment 
during that calendar month, and within the preceding five-year 
period, the organization has not materially misstated allowable or 
unallowable costs of any nature, including legislative lobbying 
costs. When the conditions described in this subparagraph are met, 
organizations are not required to establish records to support the 
allowability of claimed costs in addition to records already 
required or maintained. Also, when the conditions described in this 
subparagraph are met, the absence of time logs, calendars, or 
similar records will not serve as a basis for disallowing costs by 
contesting estimates of lobbying time spent by employees during a 
calendar month.
    (5) Agencies shall establish procedures for resolving in 
advance, in consultation with OMB, any significant questions or 
disagreements concerning the interpretation or application of 
paragraph 25. Any such advance resolution shall be binding in any 
subsequent settlements, audits or investigations with respect to 
that grant or contract for purposes of interpretation of this 
Appendix; provided, however, that this shall not be construed to 
prevent a contractor or grantee from contesting the lawfulness of 
such a determination.
    d. Executive lobbying costs. Costs incurred in attempting to 
improperly influence either directly or indirectly, an employee or 
officer of the Executive Branch of the Federal Government to give 
consideration or to act regarding a sponsored agreement or a 
regulatory matter are unallowable. Improper influence means any 
influence that induces or tends to induce a Federal employee or 
officer to give consideration or to act regarding a federally-
sponsored agreement or regulatory matter on any basis other than the 
merits of the matter.
    26. Losses on other sponsored agreements or contracts. Any 
excess of costs over income on any award is unallowable as a cost of 
any other award. This includes, but is not limited to, the 
organization's contributed portion by reason of cost sharing 
agreements or any under-recoveries through negotiation of lump sums 
for, or ceilings on, indirect costs.
    27. Maintenance and repair costs. Costs incurred for necessary 
maintenance, repair, or upkeep of buildings and equipment (including 
Federal property unless otherwise provided for) which neither add to 
the permanent value of the property nor appreciably prolong its 
intended life, but keep it in an efficient operating condition, are 
allowable. Costs incurred for improvements which add to the 
permanent value of the buildings and equipment or appreciably 
prolong their intended life shall be treated as capital expenditures 
(see paragraph 15 of this appendix).
    28. Materials and supplies costs. a. Costs incurred for 
materials, supplies, and fabricated parts necessary to carry out a 
Federal award are allowable.
    b. Purchased materials and supplies shall be charged at their 
actual prices, net of applicable credits. Withdrawals from general 
stores or stockrooms should be charged at their actual net cost 
under any recognized method of pricing inventory withdrawals, 
consistently applied. Incoming transportation charges are a proper 
part of materials and supplies costs.
    c. Only materials and supplies actually used for the performance 
of a Federal award may be charged as direct costs.
    d. Where federally-donated or furnished materials are used in 
performing the Federal award, such materials will be used without 
charge.
    29. Meetings and conferences. Costs of meetings and conferences, 
the primary purpose of which is the dissemination of technical 
information, are allowable. This includes costs of meals, 
transportation, rental of facilities, speakers' fees, and other 
items incidental to such meetings or conferences. But see paragraphs 
14., Entertainment costs, and 33., Participant support costs of this 
appendix.
    30. Memberships, subscriptions, and professional activity costs. 
a. Costs of the non-profit organization's membership in business, 
technical, and professional organizations are allowable.
    b. Costs of the non-profit organization's subscriptions to 
business, professional, and technical periodicals are allowable.
    c. Costs of membership in any civic or community organization 
are allowable with prior approval by Federal cognizant agency.
    d. Costs of membership in any country club or social or dining 
club or organization are unallowable.
    31. Organization costs. Expenditures, such as incorporation 
fees, brokers' fees, fees to promoters, organizers or management 
consultants, attorneys, accountants, or investment counselors, 
whether or not employees of the organization, in connection with 
establishment or reorganization of an organization, are unallowable 
except with prior approval of the awarding agency.
    32. Page charges in professional journals. Page charges for 
professional journal publications are allowable as a necessary part 
of research costs, where:
    a. The research papers report work supported by the Federal 
Government; and
    b. The charges are levied impartially on all research papers 
published by the journal, whether or not by federally-sponsored 
authors.
    33. Participant support costs. Participant support costs are 
direct costs for items such as stipends or subsistence allowances, 
travel allowances, and registration fees paid to or on behalf of 
participants or trainees (but not employees) in connection with 
meetings, conferences, symposia, or training projects. These costs 
are allowable with the prior approval of the awarding agency.
    34. Patent costs. a. The following costs relating to patent and 
copyright matters are allowable: cost of preparing disclosures, 
reports, and other documents required by the Federal award and of 
searching the art to the extent necessary to make such disclosures;

[[Page 51940]]

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 
general counseling services relating to patent and copyright 
matters, such as advice on patent and copyright laws, regulations, 
clauses, and employee agreements (but see paragraphs 37., 
Professional services costs, and 44., Royalties and other costs for 
use of patents and copyrights, 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 Federal award does not require conveying title or a royalty-free 
license to the Federal Government (but see paragraph 45., Royalties 
and other costs for use of patents and copyrights, 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 paragraph 15., 
Equipment and other capital expenditures, of this appendix.
    36. Pre-agreement costs. Pre-award costs are those incurred 
prior to the effective date of the award directly pursuant to the 
negotiation and in anticipation of the award where such costs are 
necessary to comply with the proposed delivery schedule or period of 
performance. Such costs are allowable only to the extent that they 
would have been allowable if incurred after the date of the award 
and only with the written approval of the awarding agency.
    37. Professional services 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 non-profit organization, are allowable, 
subject to subparagraphs b and c when reasonable in relation to the 
services rendered and when not contingent upon recovery of the costs 
from the Federal Government. In addition, legal and related services 
are limited under paragraph 10 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 non-profit organization's capability in the particular area.
    (3) The past pattern of such costs, particularly in the years 
prior to Federal awards.
    (4) The impact of Federal awards on the non-profit 
organization's business (i.e., what new problems have arisen).
    (5) Whether the proportion of Federal work to the non-profit 
organization's total business is such as to influence the non-profit 
organization in favor of incurring the cost, particularly where the 
services rendered are not of a continuing nature and have little 
relationship to work under Federal grants and contracts.
    (6) Whether the service can be performed more economically by 
direct employment rather than contracting.
    (7) The qualifications of the individual or concern rendering 
the service and the customary fees charged, especially on non-
Federal awards.
    (8) Adequacy of the contractual agreement for the service (e.g., 
description of the service, estimate of time required, rate of 
compensation, and termination provisions).
    c. In addition to the factors in subparagraph 37.b of this 
appendix, retainer fees to be allowable must be supported by 
evidence of bona fide services available or rendered
    38. Publication and printing costs. a. Publication costs include 
the costs of printing (including the processes of composition, 
plate-making, press work, binding, and the end products produced by 
such processes), distribution, promotion, mailing, and general 
handling. Publication costs also include page charges in 
professional publications.
    b. If these costs are not identifiable with a particular cost 
objective, they should be allocated as indirect costs to all 
benefiting activities of the non-profit organization.
    c. Page charges for professional journal publications are 
allowable as a necessary part of research costs where:
    (1) The research papers report work supported by the Federal 
Government: and
    (2) The charges are levied impartially on all research papers 
published by the journal, whether or not by federally-sponsored 
authors.
    39. Rearrangement and alteration costs. Costs incurred for 
ordinary or normal rearrangement and alteration of facilities are 
allowable. Special arrangement and alteration costs incurred 
specifically for the project are allowable with the prior approval 
of the awarding agency.
    40. Reconversion costs. Costs incurred in the restoration or 
rehabilitation of the non-profit organization's facilities to 
approximately the same condition existing immediately prior to 
commencement of Federal awards, less costs related to normal wear 
and tear, are allowable.
    41. Recruiting costs. a. Subject to subparagraphs 41.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 organization uses 
employment agencies, costs that are not in excess of standard 
commercial rates for such services are allowable.
    b. In publications, costs of help wanted advertising that 
includes color, includes advertising material for other than 
recruitment purposes, or is excessive in size (taking into 
consideration recruitment purposes for which intended and normal 
organizational practices in this respect), are unallowable.
    c. Costs of help wanted advertising, special emoluments, fringe 
benefits, and salary allowances incurred to attract professional 
personnel from other organizations that do not meet the test of 
reasonableness or do not conform with the established practices of 
the organization, are unallowable.
    d. Where relocation costs incurred incident to recruitment of a 
new employee have been allowed either as an allocable direct or 
indirect cost, and the newly hired employee resigns for reasons 
within his control within twelve months after being hired, the 
organization will be required to refund or credit such relocation 
costs to the Federal Government.
    42. Relocation costs. a. Relocation costs are costs incident to 
the permanent change of duty assignment (for an indefinite period or 
for a stated period of not less than 12 months) of an existing 
employee or upon recruitment of a new employee. Relocation costs are 
allowable, subject to the limitation described in subparagraphs 
42.b, c, and d of this appendix, provided that:
    (1) The move is for the benefit of the employer.
    (2) Reimbursement to the employee is in accordance with an 
established written policy consistently followed by the employer.
    (3) The reimbursement does not exceed the employee's actual (or 
reasonably estimated) expenses.
    b. Allowable relocation costs for current employees are limited 
to the following:
    (1) The costs of transportation of the employee, members of his 
immediate family and his household, and personal effects to the new 
location.
    (2) The costs of finding a new home, such as advance trips by 
employees and spouses to locate living quarters and temporary 
lodging during the transition period, up to maximum period of 30 
days, including advance trip time.
    (3) Closing costs, such as brokerage, legal, and appraisal fees, 
incident to the disposition of the employee's former home. These 
costs, together with those described in subparagraph 42.b.(4) of 
this appendix, are limited to 8 percent of the sales price of the 
employee's former home.
    (4) The continuing costs of ownership of the vacant former home 
after the settlement or lease date of the employee's new permanent 
home, such as maintenance of buildings and grounds (exclusive of 
fixing up expenses), utilities, taxes, and property insurance.
    (5) Other necessary and reasonable expenses normally incident to 
relocation,

[[Page 51941]]

such as the costs of canceling an unexpired lease, disconnecting and 
reinstalling household appliances, and purchasing insurance against 
loss of or damages to personal property. The cost of canceling an 
unexpired lease is limited to three times the monthly rental.
    c. Allowable relocation costs for new employees are limited to 
those described in subparagraph 42.b(1) and (2) of this appendix. 
When relocation costs incurred incident to the recruitment of new 
employees have been allowed either as a direct or indirect cost and 
the employee resigns for reasons within his control within 12 months 
after hire, the organization shall refund or credit the Federal 
Government for its share of the cost. However, the costs of travel 
to an overseas location shall be considered travel costs in 
accordance with paragraph 50 and not relocation costs for the 
purpose of this paragraph if dependents are not permitted at the 
location for any reason and the costs do not include costs of 
transporting household goods.
    d. The following costs related to relocation are unallowable:
    (1) Fees and other costs associated with acquiring a new home.
    (2) A loss on the sale of a former home.
    (3) Continuing mortgage principal and interest payments on a 
home being sold.
    (4) Income taxes paid by an employee related to reimbursed 
relocation costs.
    43. Rental costs of buildings and equipment. a. Subject to the 
limitations described in subparagraphs 43.b. through d. of this 
appendix, 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 non-
profit organization continued to own the property. This amount would 
include expenses such as depreciation or use allowance, maintenance, 
taxes, and insurance.
    c. Rental costs under ``less-than-arms-length'' leases are 
allowable only up to the amount (as explained in subparagraph 43.b. 
of this appendix) that would be allowed had title to the property 
vested in the non-profit organization. For this purpose, a less-
than-arms-length lease is one under which one party to the lease 
agreement is able to control or substantially influence the actions 
of the other. Such leases include, but are not limited to those 
between divisions of a non-profit organization; non-profit 
organizations under common control through common officers, 
directors, or members; and a non-profit organization and a director, 
trustee, officer, or key employee of the non-profit organization or 
his immediate family, either directly or through corporations, 
trusts, or similar arrangements in which they hold a controlling 
interest. For example, a non-profit organization may establish a 
separate corporation for the sole purpose of owning property and 
leasing it back to the non-profit organization.
    d. Rental costs under leases which are required to be treated as 
capital leases under GAAP are allowable only up to the amount (as 
explained in subparagraph b) that would be allowed had the non-
profit organization purchased the property on the date the lease 
agreement was executed. The provisions of Financial Accounting 
Standards Board Statement 13, Accounting for Leases, shall be used 
to determine whether a lease is a capital lease. Interest costs 
related to capital leases are allowable to the extent they meet the 
criteria in paragraph 23 of this appendix. Unallowable costs include 
amounts paid for profit, management fees, and taxes that would not 
have been incurred had the non-profit organization purchased the 
facility.
    44. Royalties and other costs for use of patents and copyrights. 
a. Royalties on a patent or copyright or amortization of the cost of 
acquiring by purchase a copyright, patent, or rights thereto, 
necessary for the proper performance of the award are allowable 
unless:
    (1) The Federal Government has a license or the right to free 
use of the patent or copyright.
    (2) The patent or copyright has been adjudicated to be invalid, 
or has been administratively determined to be invalid.
    (3) The patent or copyright is considered to be unenforceable.
    (4) The patent or copyright is expired.
    b. Special care should be exercised in determining 
reasonableness where the royalties may have arrived at as a result 
of less-than-arm's-length bargaining, e.g.:
    (1) Royalties paid to persons, including corporations, 
affiliated with the non-profit organization.
    (2) Royalties paid to unaffiliated parties, including 
corporations, under an agreement entered into in contemplation that 
a Federal award would be made.
    (3) Royalties paid under an agreement entered into after an 
award is made to a non-profit organization.
    c. In any case involving a patent or copyright formerly owned by 
the non-profit organization, the amount of royalty allowed should 
not exceed the cost which would have been allowed had the non-profit 
organization retained title thereto.
    45. Selling and marketing. Costs of selling and marketing any 
products or services of the non-profit organization are unallowable 
(unless allowed under paragraph 1. of this appendix as allowable 
public relations cost. However, these costs are allowable as direct 
costs, with prior approval by awarding agencies, when they are 
necessary for the performance of Federal programs.
    46. Specialized service facilities. a. The costs of services 
provided by highly complex or specialized facilities operated by the 
non-profit organization, such as computers, wind tunnels, and 
reactors are allowable, provided the charges for the services meet 
the conditions of either paragraph 46 b. or c. of this appendix and, 
in addition, take into account any items of income or Federal 
financing that qualify as applicable credits under subparagraph A.5. 
of Appendix A to this part.
    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 
does not discriminate against federally-supported activities of the 
non-profit organization, including usage by the non-profit 
organization for internal purposes, and is designed to recover only 
the aggregate costs of the services. The costs of each service shall 
consist normally of both its direct costs and its allocable share of 
all indirect costs. Rates shall be adjusted at least biennially, and 
shall take into consideration over/under applied costs of the 
previous period(s).
    c. Where the costs incurred for a service are not material, they 
may be allocated as indirect costs.
    d. Under some extraordinary circumstances, where it is in the 
best interest of the Federal Government and the institution to 
establish alternative costing arrangements, such arrangements may be 
worked out with the cognizant Federal agency.
    47. Taxes. a. In general, taxes which the organization is 
required to pay and which are paid or accrued in accordance with 
GAAP, and payments made to local governments in lieu of taxes which 
are commensurate with the local government services received are 
allowable, except for taxes from which exemptions are available to 
the organization directly or which are available to the organization 
based on an exemption afforded the Federal Government and in the 
latter case when the awarding agency makes available the necessary 
exemption certificates, special assessments on land which represent 
capital improvements, and Federal income taxes.
    b. Any refund of taxes, and any payment to the organization of 
interest thereon, which were allowed as award costs, will be 
credited either as a cost reduction or cash refund, as appropriate, 
to the Federal Government.
    48. Termination costs 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 Federal award not been terminated. Cost 
principles covering these items are set forth below. They are to be 
used in conjunction with the other provisions of this appendix in 
termination situations.
    a. The cost of items reasonably usable on the non-profit 
organization's other work shall not be allowable unless the non-
profit organization submits evidence that it would not retain such 
items at cost without sustaining a loss. In deciding whether such 
items are reasonably usable on other work of the non-profit 
organization, the awarding agency should consider the non-profit 
organization's plans and orders for current and scheduled activity. 
Contemporaneous purchases of common items by the non-profit 
organization shall be regarded as evidence that such items are 
reasonably usable on the non-profit organization's other work. Any 
acceptance of common items as allocable to the terminated portion of 
the Federal award shall be limited to the extent that the quantities 
of such items on hand, in transit, and on order are in excess of the 
reasonable quantitative requirements of other work.

[[Page 51942]]

    b. If in a particular case, despite all reasonable efforts by 
the non-profit organization, certain costs cannot be discontinued 
immediately after the effective date of termination, such costs are 
generally allowable within the limitations set forth in this 
appendix, except that any such costs continuing after termination 
due to the negligent or willful failure of the non-profit 
organization to discontinue such costs shall be unallowable.
    c. Loss of useful value of special tooling, machinery, and is 
generally allowable if:
    (1) Such special tooling, special machinery, or equipment is not 
reasonably capable of use in the other work of the non-profit 
organization,
    (2) The interest of the Federal Government is protected by 
transfer of title or by other means deemed appropriate by the 
awarding agency, and
    (3) The loss of useful value for any one terminated Federal 
award is limited to that portion of the acquisition cost which bears 
the same ratio to the total acquisition cost as the terminated 
portion of the Federal award bears to the entire terminated Federal 
award and other Federal awards for which the special tooling, 
special machinery, or equipment was acquired.
    d. Rental costs under unexpired leases are generally allowable 
where clearly shown to have been reasonably necessary for the 
performance of the terminated Federal award less the residual value 
of such leases, if:
    (1) The amount of such rental claimed does not exceed the 
reasonable use value of the property leased for the period of the 
Federal award and such further period as may be reasonable, and
    (2) The non-profit organization makes all reasonable efforts to 
terminate, assign, settle, or otherwise reduce the cost of such 
lease. There also may be included the cost of alterations of such 
leased property, provided such alterations were necessary for the 
performance of the Federal award, and of reasonable restoration 
required by the provisions of the lease.
    e. Settlement expenses including the following are generally 
allowable:
    (1) Accounting, legal, clerical, and similar costs reasonably 
necessary for:
    (a) The preparation and presentation to the awarding agency of 
settlement claims and supporting data with respect to the terminated 
portion of the Federal award, unless the termination is for default 
(see Sec.  215.61 of 2 CFR part 215 (OMB Circular A-110)); and
    (b) The termination and settlement of subawards.
    (2) Reasonable costs for the storage, transportation, 
protection, and disposition of property provided by the Federal 
Government or acquired or produced for the Federal award, except 
when grantees or contractors are reimbursed for disposals at a 
predetermined amount in accordance with Sec.  215.32 through 215.37 
of 2 CFR part 215 (OMB Circular A-110).
    (3) Indirect costs related to salaries and wages incurred as 
settlement expenses in subparagraphs 48.e.(1) and (2) of this 
appendix. Normally, such indirect costs shall be limited to fringe 
benefits, occupancy cost, and immediate supervision.
    f. Claims under sub awards, including the allocable portion of 
claims which are common to the Federal award, and to other work of 
the non-profit organization are generally allowable.
    An appropriate share of the non-profit organization's indirect 
expense may be allocated to the amount of settlements with 
subcontractors and/or subgrantees, provided that the amount 
allocated is otherwise consistent with the basic guidelines 
contained in Appendix A. The indirect expense so allocated shall 
exclude the same and similar costs claimed directly or indirectly as 
settlement expenses.
    49. Training costs. a. Costs of preparation and maintenance of a 
program of instruction including but not limited to on-the-job, 
classroom, and apprenticeship training, designed to increase the 
vocational effectiveness of employees, including training materials, 
textbooks, salaries or wages of trainees (excluding overtime 
compensation which might arise therefrom), and (i) salaries of the 
director of training and staff when the training program is 
conducted by the organization; or (ii) tuition and fees when the 
training is in an institution not operated by the organization, are 
allowable.
    b. Costs of part-time education, at an undergraduate or post-
graduate college level, including that provided at the 
organization's own facilities, are allowable only when the course or 
degree pursued is relative to the field in which the employee is now 
working or may reasonably be expected to work, and are limited to:
    (1) Training materials.
    (2) Textbooks.
    (3) Fees charges by the educational institution.
    (4) Tuition charged by the educational institution or, in lieu 
of tuition, instructors' salaries and the related share of indirect 
costs of the educational institution to the extent that the sum 
thereof is not in excess of the tuition which would have been paid 
to the participating educational institution.
    (5) Salaries and related costs of instructors who are employees 
of the organization.
    (6) Straight-time compensation of each employee for time spent 
attending classes during working hours not in excess of 156 hours 
per year and only to the extent that circumstances do not permit the 
operation of classes or attendance at classes after regular working 
hours; otherwise, such compensation is unallowable.
    c. Costs of tuition, fees, training materials, and textbooks 
(but not subsistence, salary, or any other emoluments) in connection 
with full-time education, including that provided at the 
organization's own facilities, at a post-graduate (but not 
undergraduate) college level, are allowable only when the course or 
degree pursued is related to the field in which the employee is now 
working or may reasonably be expected to work, and only where the 
costs receive the prior approval of the awarding agency. Such costs 
are limited to the costs attributable to a total period not to 
exceed one school year for each employee so trained. In unusual 
cases the period may be extended.
    d. Costs of attendance of up to 16 weeks per employee per year 
at specialized programs specifically designed to enhance the 
effectiveness of executives or managers or to prepare employees for 
such positions are allowable. Such costs include enrollment fees, 
training materials, textbooks and related charges, employees' 
salaries, subsistence, and travel. Costs allowable under this 
paragraph do not include those for courses that are part of a 
degree-oriented curriculum, which are allowable only to the extent 
set forth in subparagraphs b and c.
    e. Maintenance expense, and normal depreciation or fair rental, 
on facilities owned or leased by the organization for training 
purposes are allowable to the extent set forth in paragraphs 11, 27, 
and 50 of this appendix.
    f. Contributions or donations to educational or training 
institutions, including the donation of facilities or other 
properties, and scholarships or fellowships, are unallowable.
    g. Training and education costs in excess of those otherwise 
allowable under subparagraphs 49.b and c of this appendix may be 
allowed with prior approval of the awarding agency. To be considered 
for approval, the organization must demonstrate that such costs are 
consistently incurred pursuant to an established training and 
education program, and that the course or degree pursued is relative 
to the field in which the employee is now working or may reasonably 
be expected to work.
    50. Transportation costs. Transportation costs include freight, 
express, cartage, and postage charges relating either to goods 
purchased, in process, or delivered. These costs are allowable. When 
such costs can readily be identified with the items involved, they 
may be directly charged as transportation costs or added to the cost 
of such items (see paragraph 28 of this appendix). Where 
identification with the materials received cannot readily be made, 
transportation costs may be charged to the appropriate indirect cost 
accounts if the organization follows a consistent, equitable 
procedure in this respect.
    51. Travel costs.
    a. 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 non-profit 
organization. Such costs may be charged on an actual cost basis, on 
a per diem or mileage basis in lieu of actual costs incurred, or on 
a combination of the two, provided the method used is applied to an 
entire trip and not to selected days of the trip, and results in 
charges consistent with those normally allowed in like circumstances 
in the non-profit organization's non-federally-sponsored activities.
    b. Lodging and subsistence. Costs incurred by employees and 
officers for travel, including costs of lodging, other subsistence, 
and incidental expenses, shall be considered reasonable and 
allowable only to the extent such costs do not exceed charges 
normally allowed by the non-profit organization in its regular 
operations as the result of the non-profit organization's written 
travel policy. In the absence of an acceptable, written non-profit 
organization policy regarding travel costs, the rates and amounts 
established

[[Page 51943]]

under subchapter I of Chapter 57, Title 5, United States Code 
(``Travel and Subsistence Expenses; Mileage Allowances''), or by the 
Administrator of General Services, or by the President (or his or 
her designee) pursuant to any provisions of such subchapter shall 
apply to travel under Federal awards (48 CFR 31.205-46(a)).
    c. Commercial air travel. (1) Airfare costs in excess of the 
customary standard commercial airfare (coach or equivalent), Federal 
Government contract airfare (where authorized and available), or the 
lowest commercial discount airfare are unallowable except when such 
accommodations would: require circuitous routing; require travel 
during unreasonable hours; excessively prolong travel; result in 
additional costs that would offset the transportation savings; or 
offer accommodations not reasonably adequate for the traveler's 
medical needs. The non-profit organization must justify and document 
these conditions on a case-by-case basis in order for the use of 
first-class airfare to be allowable in such cases.
    (2) Unless a pattern of avoidance is detected, the Federal 
Government will generally not question a non-profit organization's 
determinations that customary standard airfare or other discount 
airfare is unavailable for specific trips if the non-profit 
organization can demonstrate either of the following: that such 
airfare was not available in the specific case; or that it is the 
non-profit organization's overall practice to make routine use of 
such airfare.
    d. Air travel by other than commercial carrier. Costs of travel 
by non-profit organization-owned, -leased, or -chartered aircraft 
include the cost of lease, charter, operation (including personnel 
costs), maintenance, depreciation, insurance, and other related 
costs. The portion of such costs that exceeds the cost of allowable 
commercial air travel, as provided for in subparagraph] c., is 
unallowable.
    e. Foreign travel. Direct charges for foreign travel costs are 
allowable only when the travel has received prior approval of the 
awarding agency. Each separate foreign trip must receive such 
approval. For purposes of this provision, ``foreign travel'' 
includes any travel outside Canada, Mexico, the United States, and 
any United States territories and possessions. However, the term 
``foreign travel'' for a non-profit organization located in a 
foreign country means travel outside that country.
    52. 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 
paragraph 51 of this appendix.

Appendix C to Part 230--Non-Profit Organizations Not Subject to This 
Part

1. Advance Technology Institute (ATI), Charleston, South Carolina
2. Aerospace Corporation, El Segundo, California
3. American Institutes of Research (AIR), Washington DC
4. Argonne National Laboratory, Chicago, Illinois
5. Atomic Casualty Commission, Washington, DC
6. Battelle Memorial Institute, Headquartered in Columbus, Ohio
7. Brookhaven National Laboratory, Upton, New York
8. Charles Stark Draper Laboratory, Incorporated, Cambridge, 
Massachusetts
9. CNA Corporation (CNAC), Alexandria, Virginia
10. Environmental Institute of Michigan, Ann Arbor, Michigan
11. Georgia Institute of Technology/Georgia Tech Applied Research 
Corporation/Georgia Tech Research Institute, Atlanta, Georgia
12. Hanford Environmental Health Foundation, Richland, Washington
13. IIT Research Institute, Chicago, Illinois
14. Institute of Gas Technology, Chicago, Illinois
15. Institute for Defense Analysis, Alexandria, Virginia
16. LMI, McLean, Virginia
17. Mitre Corporation, Bedford, Massachusetts
18. Mitretek Systems, Inc., Falls Church, Virginia
19. National Radiological Astronomy Observatory, Green Bank, West 
Virginia
20. National Renewable Energy Laboratory, Golden, Colorado
21. Oak Ridge Associated Universities, Oak Ridge, Tennessee
22. Rand Corporation, Santa Monica, California
23. Research Triangle Institute, Research Triangle Park, North 
Carolina
24. Riverside Research Institute, New York, New York
25. South Carolina Research Authority (SCRA), Charleston, South 
Carolina
26. Southern Research Institute, Birmingham, Alabama
27. Southwest Research Institute, San Antonio, Texas
28. SRI International, Menlo Park, California
29. Syracuse Research Corporation, Syracuse, New York
30. Universities Research Association, Incorporated (National 
Acceleration Lab), Argonne, Illinois
31. Urban Institute, Washington DC
32. Non-profit insurance companies, such as Blue Cross and Blue 
Shield Organizations
33. Other non-profit organizations as negotiated with awarding 
agencies

[FR Doc. 05-16650 Filed 8-30-05; 8:45 am]
BILLING CODE 3110-01-P