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OFFICE
OF MANAGEMENT AND BUDGET Governmentwide
Grants Management Requirements AGENCY:
Office of Management and Budget. ACTION:
Proposed Revision of OMB Circulars A-21, A-87, A-102, A-110 and
A-122. SUMMARY:
The Office of Management and Budget (OMB) proposes to revise
OMB Circulars A-21, "Cost Principles for Educational Institutions,"
A-87, "Cost Principles for State and Local Governments," A-102,
"Grants and Cooperative Agreements with State and Local Governments,"
A-110, "Uniform Administrative Requirements for Grants and Agreements
with Institutions of Higher Education, Hospitals, and Other Non-Profit
Organizations," and A-122, "Cost Principles for Non-Profit Organizations,"
to provide a conditional exemption from OMB's grants management
requirements and a conditional class deviation from the agencies'
Grants Management Common Rule for certain Federal grant programs
with statutorily-authorized consolidated planning and consolidated
administrative funding, that are identified by a Federal agency
and approved by the head of the Executive department or establishment.
A recompiled Circular A-122 is also provided. DATES: All comments on this proposal should be in writing and must be received by [60 days from publication]. Late comments will be considered to the extent practicable. ADDRESSES:
Comments should be mailed to Grants Management Exemption
Docket, Office of Federal Financial Management, Office of Management
and Budget, Room 6025 New Executive Office Building, Washington,
DC 20503. Electronic mail (E-mail) comments may
be submitted via the Internet to kahlow_b@a1.eop.gov. Please include
the full body of E-mail comments in the text of the message and
not as an attachment. Please include the name, title, organization,
postal address, and E-mail address in the text of the message. FOR FURTHER INFORMATION CONTACT: Barbara F. Kahlow, Office of Federal Financial Management, Office of Management and Budget, (202) 395-3053. The text of this proposed revision and of the current OMB Circulars A-21, A-87, A-102, and A-110 are available electronically on the OMB Home Page at /OMB. The text of a fully recompiled Circular A-122 is appended to this proposal and will also be available electronically on the OMB Home Page. The current version of OMB Circulars A-21, A-87, A-102, and A-110 are available in paper format by contacting the OMB Publications Office at (202) 395-7332. SUPPLEMENTARY
INFORMATION: The Administration believes in greater flexibility
for State-administered grant programs in return for greater accountability.
Therefore, the Office of Management and Budget (OMB) proposes to
revise OMB Circulars A-21, "Cost Principles for Educational Institutions,"
A-87, "Cost Principles for State and Local Governments," A-102,
"Grants and Cooperative Agreements with State and Local Governments,"
A-110, "Uniform Administrative Requirements for Grants and Agreements
with Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations," and A-122, "Cost Principles for Non-Profit Organizations," to provide a conditional exemption from OMB's grants management requirements and a conditional class deviation from the agencies' Grants Management Common Rule (GMCR) for certain Federal grant programs with statutorily-authorized consolidated planning and consolidated administrative funding, that are identified by a Federal agency and approved by the head of the Executive department or establishment. This exemption could be granted to related Federal non-entitlement grant programs which are administered by State and local governments and which have the following characteristics: the related programs (1) serve a common program purpose, (2) have specific statutorily-authorized consolidated planning and consolidated administrative funding, and (3) are administered by State agencies which are funded mostly by non-Federal sources. In order to promote efficiency in the State and local program administration of such related programs, Federal agencies could exempt these covered State-administered, non-entitlement grant programs from Federal grants management requirements in OMB Circulars A-21, A-87, A-110, and A-122, and the GMCR. The exemptions would be from all but the allocability-of-costs provisions of Circulars A-21 (Section C, subpart 4), A-87 (Attachment A, subsection C.3), and A-122 (Attachment A, subsection A.4), and from all of the administrative requirements provisions of Circular A-110 and the GMCR. A Federal agency would have the discretion to exempt a Federal grant program from the Federal grants management requirements. A Federal agency shall consult with OMB during its consideration of whether to grant such an exemption. If a Federal agency exempts a Federal grant program from these requirements, a State would only qualify if it adopts its own written fiscal and administrative requirements for expending and accounting for all funds, which are consistent with the provisions of OMB Circular A-87, and extends such requirements to all subrecipients. These fiscal and administrative requirements must be sufficiently specific to ensure that: funds are used in compliance with all applicable Federal statutory and regulatory provisions, costs are reasonable and necessary for operating these programs, and funds are not to be used for general expenses required to carry out other responsibilities of a State or its subrecipients. If a State does not adopt such fiscal and administrative requirements, then it would continue to be subject to the Federal grants management requirements. To
provide such a conditional exemption, Section A.3 of Circular A-21,
Attachment A Section A.3 of Circular A-87, Section 2 of Circular
A-102, Subpart C of Circular A-110, and Attachment A Section A of
Circular A-122 are proposed for amendment. Franklin D. Raines, Director
OMB
proposes to add the following language: (1) as a new paragraph d
under A.3 Purpose and Scope, Application of Circular A-21; (2) as
a new paragraph e under Attachment A, A.3 Purpose and Scope, Application
of Circular A-87; (3) as a new paragraph j under Section 2, Post-award
Policies of Circular A-102; (4) as a new Section __.45 under Subpart
C, Post-award Requirements of Circular A-110; and, (5) as a new
paragraph 7 under Attachment A, A. Basic Considerations of Circular
A-122: Conditional exemptions. OMB authorizes conditional exemption from OMB administrative requirements and cost principles circulars for certain Federal programs with statutorily-authorized consolidated planning and consolidated administrative funding, that are identified by a Federal agency and approved by the head of the Executive department or establishment. A Federal agency shall consult with OMB during its consideration of whether to grant such an exemption. To
promote efficiency in State and local program administration, when
Federal non-entitlement programs with common purposes have specific
statutorily-authorized consolidated planning and consolidated administrative
funding and where most of the State agency's resources come from
non-Federal sources, Federal agencies may exempt these covered State-administered,
non-entitlement grant programs from certain OMB grants management
requirements. The exemptions would be from all but the allocability
of costs provisions of OMB Circulars A-87 (Attachment A, subsection
C.3), "Cost Principles for State, Local, and Indian Tribal Governments,"
A-21 (Section C, subpart 4), "Cost Principles for Educational Institutions,"
and A-122 (Attachment A, subsection A.4), "Cost Principles for Non-Profit
Organizations," and from all of the administrative requirements
provisions of OMB Circular A-110, "Uniform Administrative Requirements
for Grants and Agreements with Institutions of Higher Education,
Hospitals, and Other Non-Profit Organizations," and the agencies'
grants management common rule. When a Federal agency provides this flexibility, as a prerequisite to a State's exercising this option, a State must adopt its own written fiscal and administrative requirements for expending and accounting for all funds, which are consistent with the provisions of OMB Circular A-87, and extend such policies to all subrecipients. These fiscal and administrative requirements must be sufficiently specific to ensure that: funds are used in compliance with all applicable Federal statutory and regulatory provisions, costs are reasonable and necessary for operating these programs, and funds are not be used for general expenses required to carry out other responsibilities of a State or its subrecipients. Appendix OMB originally issued Circular A-122 on June 27, 1980 (45 FR 46022). OMB amended the Circular on April 25, 1984 (49 FR 18260), on May 19, 1987 (52 FR 19788), and on September 29, 1995 (60 FR 52516). This Appendix presents the fully recompiled Circular A-122. It reflects all of the amendments and all of OMB's current editorial conventions, and incorporates various non-substantive technical corrections. In addition, the recompilation includes the following three clarifying changes in Attachment B which reflect what has been OMB's interpretation: (a) under Idle facilities and idle capacity, Subparagraph 16.b.(1) now reads "They are necessary to meet fluctuations in workload" instead of "They are unnecessary to meet fluctuations in workload;" (b) under Lobbying, Subparagraph 21.a.(3) now reads "... or with any Federal official or employee in connection with a decision to sign or veto enrolled legislation" instead of "... or with any Government official or employee in connection with a decision to sign or veto enrolled legislation;" and, (c) under Taxes, Subparagraph 47.a now reads "... based on an exemption afforded the Federal Government" instead of "... based on an exemption afforded the Government." The text of the recompiled Circular follows:
Revised -- May 8, 1997 (Transmittal Memorandum No. 4) TO THE HEADS OF EXECUTIVE DEPARTMENTS AND ESTABLISHMENTS SUBJECT:
Cost Principles for Non-Profit Organizations This
transmittal memorandum is a recompilation of Circular A-122, "Cost
Principles for Non-Profit Organizations," that consists of the original
Circular published at 45 FR 46022 (June 27, 1980), as amended by
Transmittal Memoranda Numbers 1 through 3, at 49 FR 18260 (April
25, 1984) 52 FR 19788 (May 19, 1987), and 60 FR 52516 (September
29, 1995), respectively. This recompilation reflects all of the
amendments and all of the Office of Management and Budget's current
editorial conventions, and includes various non-substantive technical
corrections and two clarifying changes.
OMB
Circular No. A-122
TO
THE HEADS OF EXECUTIVE DEPARTMENTS AND ESTABLISHMENTS SUBJECT:
Cost principles for non-profit organizations 1.
Purpose. This Circular establishes principles for determining
costs of grants, contracts and other agreements with non-profit
organizations. It does not apply to colleges and universities which
are covered by Office of Management and Budget (OMB) Circular A-21,
"Cost Principles for Educational Institutions"; State, local, and
federally-recognized Indian tribal governments which are covered
by OMB Circular A-87, "Cost Principles for State and Local Governments";
or hospitals. The principles are designed to provide that the Federal
Government bear its fair share of costs except where restricted
or prohibited by law. The principles do not attempt to prescribe
the extent of cost sharing or matching on grants, contracts, or
other agreements. However, such cost sharing or matching shall not
be accomplished through arbitrary limitations on individual cost
elements by Federal agencies. Provision for profit or other increment
above cost is outside the scope of this Circular. 2.
Supersession. This Circular supersedes cost principles issued
by individual agencies for non-profit organizations. 3.
Applicability. a.
These principles shall be used by all Federal agencies in determining
the costs of work performed by non-profit organizations under grants,
cooperative agreements, cost reimbursement contracts, and other
contracts in which costs are used in pricing, administration, or
settlement. All of these instruments are hereafter referred to as
awards. The principles do not apply to awards under which an organization
is not required to account to the Federal Government for actual
costs incurred. b. All cost reimbursement subawards (subgrants, subcontracts, etc.) are subject to those Federal cost principles applicable to the particular organization concerned. Thus, if a subaward is to a non-profit organization, this Circular shall apply; if a subaward is to a commercial organization, the cost principles applicable to commercial concerns shall apply; if a subaward is to a college or university, Circular A-21 shall apply; if a subaward is to a State, local, or federally-recognized Indian tribal government, Circular A-87 shall apply. 4.
Definitions a.
Non-profit organization means any corporation, trust, association,
cooperative, or other organization which: (1)
is operated primarily for scientific, educational, service, charitable,
or similar purposes in the public interest; (2)
is not organized primarily for profit; and (3)
uses its net proceeds to maintain, improve, and/or expand its operations.
For this purpose, the term "non-profit organization" excludes (i)
colleges and universities; (ii) hospitals; (iii) State, local, and
federally-recognized Indian tribal governments; and (iv) those n-profit
organizations which are excluded from coverage of this Circular
in accordance with paragraph 5. b.
Prior approval means securing the awarding agency's permission
in advance to incur cost for those items that are designated as
requiring prior approval by the Circular. Generally this permission
will be in writing. Where an item of cost requiring prior approval
is specified in the budget of an award, approval of the budget constitutes
approval of that cost. 5.
Exclusion of some non-profit organizations. Some non-profit
organizations, because of their size and nature of operations, can
be considered to be similar to commercial concerns for purpose of
applicability of cost principles. Such non-profit organizations
shall operate under Federal cost principles applicable to commercial
concerns. A listing of these organizations is contained in Attachment
C. Other organizations may be added from time to time. 6.
Responsibilities. Agencies responsible for administering
programs that involve awards to non-profit organizations shall implement
the provisions of this Circular. Upon request, implementing instruction
shall be furnished to OMB. Agencies shall designate a liaison official
to serve as the agency representative on matters relating to the
implementation of this Circular. The name and title of such representative
shall be furnished to OMB within 30 days of the date of this Circular.
7.
Attachments. The principles and related policy guides are
set forth in the following Attachments: Attachment
A - General Principles Attachment
B - Selected Items of Cost Attachment
C - Non-Profit Organizations Not Subject To This Circular 8.
Requests for exceptions. OMB may grant exceptions to the
requirements of this Circular when permissible under existing law.
However, in the interest of achieving maximum uniformity, exceptions
will be permitted only in highly unusual circumstances. 9.
Effective Date. The provisions of this Circular are effective
immediately. Implementation shall be phased in by incorporating
the provisions into new awards made after the start of the organization's
next fiscal year. For existing awards, the new principles may be
applied if an organization and the cognizant Federal agency agree.
Earlier implementation, or a delay in implementation of individual
provisions, is also permitted by mutual agreement between an organization
and the cognizant Federal agency. 10.
Inquiries. Further information concerning this Circular may
be obtained by contacting the Office of Federal Financial Management,
OMB, Washington, DC 20503, telephone (202) 395-3993. Attachments
ATTACHMENT
A GENERAL
PRINCIPLES Table
of Contents A.
Basic Considerations 1.
Composition of total costs 2.
Factors affecting allowability of costs 3.
Reasonable costs 4.
Allocable costs 5.
Applicable credits 6.
Advance understandings B.
Direct Costs C.
Indirect Costs D.
Allocation of Indirect Costs and Determination of Indirect Cost
Rates 1.
General 2.
Simplified allocation method 3.
Multiple allocation base method 4.
Direct allocation method 5.
Special indirect cost rates E.
Negotiation and Approval of Indirect Cost Rates 1.
Definitions 2.
Negotiations and approval of rates
Circular No. A-122 ATTACHMENT
A GENERAL
PRINCIPLES A.
Basic Considerations 1.
Composition of total costs. The total cost of an award
is the sum of the allowable direct and allocable indirect costs
less any applicable credits. 2.
Factors affecting allowability of costs. To be allowable
under an award, costs must meet the following general criteria:
a.
Be reasonable for the performance of the award and be allocable
thereto under these principles. b.
Conform to any limitations or exclusions set forth in these principles
or in the award as to types or amount of cost items. c.
Be consistent with policies and procedures that apply uniformly
to both federally-financed and other activities of the organization.
d.
Be accorded consistent treatment. e.
Be determined in accordance with generally accepted accounting principles
(GAAP). f.
Not be included as a cost or used to meet cost sharing or matching
requirements of any other federally-financed program in either the
current or a prior period. g.
Be adequately documented. 3.
Reasonable costs. A cost is reasonable if, in its nature
or amount, it does not exceed that which would be incurred by a
prudent person under the circumstances prevailing at the time the
decision was made to incur the costs. The question of the reasonableness
of specific costs must be scrutinized with particular care in connection
with organizations or separate divisions thereof which receive the
preponderance of their support from awards made by Federal agencies.
In determining the reasonableness of a given cost, consideration
shall be given to: a.
Whether the cost is of a type generally recognized as ordinary and
necessary for the operation of the organization or the performance
of the award. b.
The restraints or requirements imposed by such factors as generally
accepted sound business practices, arms length bargaining, Federal
and State laws and regulations, and terms and conditions of the
award. c.
Whether the individuals concerned acted with prudence in the circumstances,
considering their responsibilities to the organization, its members,
employees, and clients, the public at large, and the Federal Government.
d.
Significant deviations from the established practices of the organization
which may unjustifiably increase the award costs. 4.
Allocable costs. a.
A cost is allocable to a particular cost objective, such as a grant,
contract, project, service, or other activity, in accordance with
the relative benefits received. A cost is allocable to a Federal
award if it is treated consistently with other costs incurred for
the same purpose in like circumstances and if it: (1)
Is incurred specifically for the award. (2)
Benefits both the award and other work and can be distributed in
reasonable proportion to the benefits received, or (3)
Is necessary to the overall operation of the organization, although
a direct relationship to any particular cost objective cannot be
shown. b.
Any cost allocable to a particular award or other cost objective
under these principles may not be shifted to other Federal awards
to overcome funding deficiencies, or to avoid restrictions imposed
by law or by the terms of the award. 5.
Applicable credits. a.
The term applicable credits refers to those receipts, or reduction
of expenditures which operate to offset or reduce expense items
that are allocable to awards as direct or indirect costs. Typical
examples of such transactions are: purchase discounts, rebates or
allowances, recoveries or indemnities on losses, insurance refunds,
and adjustments of overpayments or erroneous charges. To the extent
that such credits accruing or received by the organization relate
to allowable cost, they shall be credited to the Federal Government
either as a cost reduction or cash refund, as appropriate. b.
In some instances, the amounts received from the Federal Government
to finance organizational activities or service operations should
be treated as applicable credits. Specifically, the concept of netting
such credit items against related expenditures should be applied
by the organization in determining the rates or amounts to be charged
to Federal awards for services rendered whenever the facilities
or other resources used in providing such services have been financed
directly, in whole or in part, by Federal funds. c.
For rules covering program income (i.e., gross income earned from
federally-supported activities) see Sec. __.24 of Office of Management
and Budget (OMB) Circular A-110, "Uniform Administrative Requirements
for Grants and Agreements with Institutions of Higher Education,
Hospitals, and Other Non-Profit Organizations." 6.
Advance understandings. Under any given award, the reasonableness
and allocability of certain items of costs may be difficult to determine.
This is particularly true in connection with organizations that
receive a preponderance of their support from Federal agencies.
In order to avoid subsequent disallowance or dispute based on unreasonableness
or nonallocability, it is often desirable to seek a written agreement
with the cognizant or awarding agency in advance of the incurrence
of special or unusual costs. The absence of an advance agreement
on any element of cost will not, in itself, affect the reasonableness
or allocability of that element. B.
Direct Costs 1.
Direct costs are those that can be identified specifically with
a particular final cost objective, i.e., a particular award, project,
service, or other direct activity of an organization. However, a
cost may not be assigned to an award as a direct cost if any other
cost incurred for the same purpose, in like circumstance, has been
allocated to an award as an indirect cost. Costs identified specifically
with awards are direct costs of the awards and are to be assigned
directly thereto. Costs identified specifically with other final
cost objectives of the organization are direct costs of those cost
objectives and are not to be assigned to other awards directly or
indirectly. 2.
Any direct cost of a minor amount may be treated as an indirect
cost for reasons of practicality where the accounting treatment
for such cost is consistently applied to all final cost objectives.
3.
The cost of certain activities are not allowable as charges to Federal
awards (see, for example, fundraising costs in paragraph
19 of Attachment B). However, even though these costs are
unallowable for purposes of computing charges to Federal awards,
they nonetheless must be treated as direct costs for purposes of
determining indirect cost rates and be allocated their share of
the organization's indirect costs if they represent activities which
(1) include the salaries of personnel, (2) occupy space, and (3)
benefit from the organization's indirect costs. 4.
The costs of activities performed primarily as a service to members,
clients, or the general public when significant and necessary to
the organization's mission must be treated as direct costs whether
or not allowable and be allocated an equitable share of indirect
costs. Some examples of these types of activities include: a.
Maintenance of membership rolls, subscriptions, publications, and
related functions. b.
Providing services and information to members, legislative or administrative
bodies, or the public. c.
Promotion, lobbying, and other forms of public relations. d.
Meetings and conferences except those held to conduct the general
administration of the organization. e.
Maintenance, protection, and investment of special funds not used
in operation of the organization. f.
Administration of group benefits on behalf of members or clients,
including life and hospital insurance, annuity or retirement plans,
financial aid, etc. C.
Indirect Costs 1.
Indirect costs are those that have been incurred for common or joint
objectives and cannot be readily identified with a particular final
cost objective. Direct cost of minor amounts may be treated as indirect
costs under the conditions described in subparagraph B.2.
After direct costs have been determined and assigned directly to
awards or other work as appropriate, indirect costs are those remaining
to be allocated to benefiting cost objectives. A cost may not be
allocated to an award as an indirect cost if any other cost incurred
for the same purpose, in like circumstances, has been assigned to
an award as a direct cost. 2.
Because of the diverse characteristics and accounting practices
of non-profit organizations, it is not possible to specify the types
of cost which may be classified as indirect cost in all situations.
However, typical examples of indirect cost for many non-profit organizations
may include depreciation or use allowances on buildings and equipment,
the costs of operating and maintaining facilities, and general administration
and general expenses, such as the salaries and expenses of executive
officers, personnel administration, and accounting. D.
Allocation of Indirect Costs and Determination of Indirect Cost
Rates 1.
General. a.
Where a non-profit organization has only one major function, or
where all its major functions benefit from its indirect costs to
approximately the same degree, the allocation of indirect costs
and the computation of an indirect cost rate may be accomplished
through simplified allocation procedures, as described in subparagraph
2. b.
Where an organization has several major functions which benefit
from its indirect costs in varying degrees, allocation of indirect
costs may require the accumulation of such costs into separate cost
groupings which then are allocated individually to benefiting functions
by means of a base which best measures the relative degree of benefit.
The indirect costs allocated to each function are then distributed
to individual awards and other activities included in that function
by means of an indirect cost rate(s). c.
The determination of what constitutes an organization's major functions
will depend on its purpose in being; the types of services it renders
to the public, its clients, and its members; and the amount of effort
it devotes to such activities as fundraising, public information
and membership activities. d.
Specific methods for allocating indirect costs and computing indirect
cost rates along with the conditions under which each method should
be used are described in subparagraphs 2 through 5.
e.
The base period for the allocation of indirect costs is the period
in which such costs are incurred and accumulated for allocation
to work performed in that period. The base period normally should
coincide with the organization's fiscal year but, in any event,
shall be so selected as to avoid inequities in the allocation of
the costs. 2.
Simplified allocation method. a.
Where an organization's major functions benefit from its indirect
costs to approximately the same degree, the allocation of indirect
costs may be accomplished by (i) separating the organization's total
costs for the base period as either direct or indirect, and (ii)
dividing the total allowable indirect costs (net of applicable credits)
by an equitable distribution base. The result of this process is
an indirect cost rate which is used to distribute indirect costs
to individual awards. The rate should be expressed as the percentage
which the total amount of allowable indirect costs bears to the
base selected. This method should also be used where an organization
has only one major function encompassing a number of individual
projects or activities, and may be used where the level of Federal
awards to an organization is relatively small. b.
Both the direct costs and the indirect costs shall exclude capital
expenditures and unallowable costs. However, unallowable costs which
represent activities must be included in the direct costs under
the conditions described in subparagraph B.3.
c.
The distribution base may be total direct costs (excluding capital
expenditures and other distorting items, such as major subcontracts
or subgrants), direct salaries and wages, or other base which results
in an equitable distribution. The distribution base shall generally
exclude participant support costs as defined in paragraph
30 of Attachment B. d.
Except where a special rate(s) is required in accordance with subparagraph
5, the indirect cost rate developed under the above
principles is applicable to all awards at the organization. If a
special rate(s) is required, appropriate modifications shall be
made in order to develop the special rate(s). 3.
Multiple allocation base method. a.
Where an organization's indirect costs benefit its major functions
in varying degrees, such costs shall be accumulated into separate
cost groupings. Each grouping shall then be allocated individually
to benefiting functions by means of a base which best measures the
relative benefits. b.
The groupings shall be established so as to permit the allocation
of each grouping on the basis of benefits provided to the major
functions. Each grouping should constitute a pool of expenses that
are of like character in terms of the functions they benefit and
in terms of the allocation base which best measures the relative
benefits provided to each function. The number of separate groupings
should be held within practical limits, taking into consideration
the materiality of the amounts involved and the degree of precision
desired. c.
Actual conditions must be taken into account in selecting the base
to be used in allocating the expenses in each grouping to benefiting
functions. When an allocation can be made by assignment of a cost
grouping directly to the function benefited, the allocation shall
be made in that manner. When the expenses in a grouping are more
general in nature, the allocation should be made through the use
of a selected base which produces results that are equitable to
both the Federal Government and the organization. In general, any
cost element or cost related factor associated with the organization's
work is potentially adaptable for use as an allocation base, provided
(i) it can readily be expressed in terms of dollars or other quantitative
measures (total direct costs, direct salaries and wages, staff hours
applied, square feet used, hours of usage, number of documents processed,
population served, and the like) and (ii) it is common to the benefiting
functions during the base period. d.
Except where a special indirect cost rate(s) is required in accordance
with subparagraph 5, the separate
groupings of indirect costs allocated to each major function shall
be aggregated and treated as a common pool for that function. The
costs in the common pool shall then be distributed to individual
awards included in that function by use of a single indirect cost
rate. e.
The distribution base used in computing the indirect cost rate for
each function may be total direct costs (excluding capital expenditures
and other distorting items such as major subcontracts and subgrants),
direct salaries and wages, or other base which results in an equitable
distribution. The distribution base shall generally exclude participant
support costs as defined in paragraph 30, Attachment B.
An indirect cost rate should be developed for each separate indirect
cost pool developed. The rate in each case should be stated as the
percentage which the amount of the particular indirect cost pool
is of the distribution base identified with that pool. 4.
Direct allocation method. a.
Some non-profit organizations treat all costs as direct costs except
general administration and general expenses. These organizations
generally separate their costs into three basic categories: (i)
General administration and general expenses, (ii) fundraising, and
(iii) other direct functions (including projects performed under
Federal awards). Joint costs, such as depreciation, rental costs,
operation and maintenance of facilities, telephone expenses, and
the like are prorated individually as direct costs to each category
and to each award or other activity using a base most appropriate
to the particular cost being prorated. b.
This method is acceptable, provided each joint cost is prorated
using a base which accurately measures the benefits provided to
each award or other activity. The bases must be established in accordance
with reasonable criteria, and be supported by current data. This
method is compatible with the Standards of Accounting and Financial
Reporting for Voluntary Health and Welfare Organizations issued
jointly by the National Health Council, Inc., the National Assembly
of Voluntary Health and Social Welfare Organizations, and the United
Way of America. c.
Under this method, indirect costs consist exclusively of general
administration and general expenses. In all other respects, the
organization's indirect cost rates shall be computed in the same
manner as that described in subparagraph 2.
5.
Special indirect cost rates. In some instances, a single
indirect cost rate for all activities of an organization or for
each major function of the organization may not be appropriate,
since it would not take into account those different factors which
may substantially affect the indirect costs applicable to a particular
segment of work. For this purpose, a particular segment of work
may be that performed under a single award or it may consist of
work under a group of awards performed in a common environment.
These factors may include the physical location of the work, the
level of administrative support required, the nature of the facilities
or other resources employed, the scientific disciplines or technical
skills involved, the organizational arrangements used, or any combination
thereof. When a particular segment of work is performed in an environment
which appears to generate a significantly different level of indirect
costs, provisions should be made for a separate indirect cost pool
applicable to such work. The separate indirect cost pool should
be developed during the course of the regular allocation process,
and the separate indirect cost rate resulting therefrom should be
used, provided it is determined that (i) the rate differs significantly
from that which would have been obtained under subparagraphs
2, 3, and 4, and (ii) the volume of work to which
the rate would apply is material. E.
Negotiation and Approval of Indirect Cost Rates 1. Definitions. As used in this section, the following terms have the meanings set forth
below: a.
Cognizant agency means the Federal agency responsible for
negotiating and approving indirect cost rates for a non-profit organization
on behalf of all Federal agencies. b.
Predetermined rate means an indirect cost rate, applicable
to a specified current or future period, usually the organization's
fiscal year. The rate is based on an estimate of the costs to be
incurred during the period. A predetermined rate is not subject
to adjustment. c.
Fixed rate means an indirect cost rate which has the same
characteristics as a predetermined rate, except that the difference
between the estimated costs and the actual costs of the period covered
by the rate is carried forward as an adjustment to the rate computation
of a subsequent period. d. Final rate means an indirect cost rate applicable to a specified past period which is based on the actual costs of the period. A final rate is not subject to adjustment. e.
Provisional rate or billing rate means a temporary indirect
cost rate applicable to a specified period which is used for funding,
interim reimbursement, and reporting indirect costs on awards pending
the establishment of a final rate for the period. f.
Indirect cost proposal means the documentation prepared by
an organization to substantiate its claim for the reimbursement
of indirect costs. This proposal provides the basis for the review
and negotiation leading to the establishment of an organization's
indirect cost rate. g.
Cost objective means a function, organizational subdivision,
contract, grant, or other work unit for which cost data are desired
and for which provision is made to accumulate and measure the cost
of processes, projects, jobs and capitalized projects. 2.
Negotiation and approval of rates. a.
Unless different arrangements are agreed to by the agencies concerned,
the Federal agency with the largest dollar value of awards with
an organization will be designated as the cognizant agency for the
negotiation and approval of the indirect cost rates and, where necessary,
other rates such as fringe benefit and computer charge-out rates.
Once an agency is assigned cognizance for a particular non-profit
organization, the assignment will not be changed unless there is
a major long-term shift in the dollar volume of the Federal awards
to the organization. All concerned Federal agencies shall be given
the opportunity to participate in the negotiation process but, after
a rate has been agreed upon, it will be accepted by all Federal
agencies. When a Federal agency has reason to believe that special
operating factors affecting its awards necessitate special indirect
cost rates in accordance with subparagraph D.5,
it will, prior to the time the rates are negotiated, notify the
cognizant agency. b.
A non-profit organization which has not previously established an
indirect cost rate with a Federal agency shall submit its initial
indirect cost proposal immediately after the organization is advised
that an award will be made and, in no event, later than three months
after the effective date of the award. c.
Organizations that have previously established indirect cost rates
must submit a new indirect cost proposal to the cognizant agency
within six months after the close of each fiscal year. d.
A predetermined rate may be negotiated for use on awards where there
is reasonable assurance, based on past experience and reliable projection
of the organization's costs, that the rate is not likely to exceed
a rate based on the organization's actual costs. e.
Fixed rates may be negotiated where predetermined rates are not
considered appropriate. A fixed rate, however, shall not be negotiated
if (i) all or a substantial portion of the organization's awards
are expected to expire before the carry-forward adjustment can be
made; (ii) the mix of Federal and non-Federal work at the organization
is too erratic to permit an equitable carry-forward adjustment;
or (iii) the organization's operations fluctuate significantly from
year to year. f.
Provisional and final rates shall be negotiated where neither predetermined
nor fixed rates are appropriate. g.
The results of each negotiation shall be formalized in a written
agreement between the cognizant agency and the non-profit organization.
The cognizant agency shall distribute copies of the agreement to
all concerned Federal agencies. h.
If a dispute arises in a negotiation of an indirect cost rate between
the cognizant agency and the non-profit organization, the dispute
shall be resolved in accordance with the appeals procedures of the
cognizant agency. i.
To the extent that problems are encountered among the Federal agencies
in connection with the negotiation and approval process, OMB will
lend assistance as required to resolve such problems in a timely
manner.
Circular No. A-122 SELECTED
ITEMS OF COST Table
of Contents 1. Advertising costs 2. Bad debts 3. Bid and proposal costs (reserved) 4. Bonding costs 5. Communication costs 6. Compensation for personal services 7. Contingency provisions 8. Contributions 9. Depreciation and use allowances 10. Donations 11. Employee morale, health, and welfare costs and credits 12. Entertainment costs 13. Equipment and other capital expenditures 14. Fines and penalties 15. Fringe benefits 16. Idle facilities and idle capacity 17. Independent research and development (reserved) 18. Insurance and indemnification 19. Interest, fundraising, and investment management costs 20. Labor relations costs 21. Lobbying 22. Losses on other awards 23. Maintenance and repair costs 24. Materials and supplies 25. Meetings and conferences 26. Membership, subscription, and professional activity costs 27. Organization costs 28. Overtime, extra-pay shift, and multi-shift premiums 29. Page charges in professional journals 30. Participant support costs 31. Patent costs 32. Pension plans 33. Plant security costs 34. Pre-award costs 35. Professional service costs 36. Profits and losses on disposition of depreciable property or other capital assets 37. Public information service costs 38. Publication and printing costs 39. Rearrangement and alteration costs 40. Reconversion costs 41. Recruiting costs 42. Relocation costs 43. Rental costs 44. Royalties and other costs for use of patents and copyrights 45. Severance pay 46. Specialized service facilities 47. Taxes 48. Termination costs 49. Training and education costs 50. Transportation costs 51.
Travel costs
Circular No. A-122 ATTACHMENT
B SELECTED
ITEMS OF COST Paragraphs
1 through 51 provide principles to be applied in establishing
the allowability of certain items of cost. These principles apply
whether a cost is treated as direct or indirect. Failure to mention
a particular item of cost is not intended to imply that it is unallowable;
rather, determination as to allowability in each case should be
based on the treatment or principles provided for similar or related
items of cost. 1.
Advertising costs. a.
Advertising costs mean the costs of media services and associated
costs. Media advertising includes magazines, newspapers, radio and
television programs, direct mail, exhibits, and the like. b.
The only advertising costs allowable are those which are solely
for (i) the recruitment of personnel when considered in conjunction
with all other recruitment costs, as set forth in paragraph
41; (ii) the procurement of goods and services; (iii) the
disposal of surplus materials acquired in the performance of the
award except when organizations are reimbursed for disposals at
a predetermined amount in accordance with Office of Management and
Budget (OMB) Circular A-110, "Uniform Administrative Requirements
for Grants and Agreements with Institutions of Higher Education,
Hospitals, and Other Non-Profit Organizations;" or (iv) specific
requirements of the award. 2.
Bad debts. Bad debts, including losses (whether actual or
estimated) arising from uncollectible accounts and other claims,
related collection costs, and related legal costs, are unallowable.
3.
Bid and proposal costs. (reserved) 4.
Bonding costs. a.
Bonding costs arise when the Federal Government requires assurance
against financial loss to itself or others by reason of the act
or default of the organization. They arise also in instances where
the organization requires similar assurance. Included are such bonds
as bid, performance, payment, advance payment, infringement, and
fidelity bonds. b.
Costs of bonding required pursuant to the terms of the award are
allowable. c.
Costs of bonding required by the organization in the general conduct
of its operations are allowable to the extent that such bonding
is in accordance with sound business practice and the rates and
premiums are reasonable under the circumstances. 5.
Communication costs. Costs incurred for telephone services,
local and long distance telephone calls, telegrams, radiograms,
postage and the like are allowable. 6.
Compensation for personal services. a.
Definition. Compensation for personal services includes all
compensation paid currently or accrued by the organization for services
of employees rendered during the period of the award (except as
otherwise provided in subparagraph g).
It includes, but is not limited to, salaries, wages, director's
and executive committee member's fees, incentive awards, fringe
benefits, pension plan costs, allowances for off-site pay, incentive
pay, location allowances, hardship pay, and cost of living differentials.
b.
Allowability. Except as otherwise specifically provided in
this paragraph, the costs of such compensation are allowable to
the extent that: (1)
Total compensation to individual employees is reasonable for the
services rendered and conforms to the established policy of the
organization consistently applied to both Federal and non-Federal
activities; and (2)
Charges to awards whether treated as direct or indirect costs are
determined and supported as required in this paragraph. c.
Reasonableness. (1)
When the organization is predominantly engaged in activities other
than those sponsored by the Federal Government, compensation for
employees on federally-sponsored work will be considered reasonable
to the extent that it is consistent with that paid for similar work
in the organization's other activities. (2)
When the organization is predominantly engaged in federally-sponsored
activities and in cases where the kind of employees required for
the Federal activities are not found in the organization's other
activities, compensation for employees on federally-sponsored work
will be considered reasonable to the extent that it is comparable
to that paid for similar work in the labor markets in which the
organization competes for the kind of employees involved. d.
Special considerations in determining allowability. Certain
conditions require special consideration and possible limitations
in determining costs under Federal awards where amounts or types
of compensation appear unreasonable. Among such conditions are the
following: (1)
Compensation to members of non-profit organizations, trustees, directors,
associates, officers, or the immediate families thereof. Determination
should be made that such compensation is reasonable for the actual
personal services rendered rather than a distribution of earnings
in excess of costs. (2)
Any change in an organization's compensation policy resulting in
a substantial increase in the organization's level of compensation,
particularly when it was concurrent with an increase in the ratio
of Federal awards to other activities of the organization or any
change in the treatment of allowability of specific types of compensation
due to changes in Federal policy. e.
Unallowable costs. Costs which are unallowable under other
paragraphs of this Attachment shall not be allowable under this
paragraph solely on the basis that they constitute personal compensation.
f.
Fringe benefits. (1)
Fringe benefits in the form of regular compensation paid to employees
during periods of authorized absences from the job, such as vacation
leave, sick leave, military leave, and the like, are allowable,
provided such costs are absorbed by all organization activities
in proportion to the relative amount of time or effort actually
devoted to each. (2)
Fringe benefits in the form of employer contributions or expenses
for social security, employee insurance, workmen's compensation
insurance, pension plan costs (see subparagraph g),
and the like, are allowable, provided such benefits are granted
in accordance with established written organization policies. Such
benefits whether treated as indirect costs or as direct costs, shall
be distributed to particular awards and other activities in a manner
consistent with the pattern of benefits accruing to the individuals
or group of employees whose salaries and wages are chargeable to
such awards and other activities. (3)
(a) Provisions for a reserve under a self-insurance program for
unemployment compensation or workers' compensation are allowable
to the extent that the provisions represent reasonable estimates
of the liabilities for such compensation, and the types of coverage,
extent of coverage, and rates and premiums would have been allowable
had insurance been purchased to cover the risks. However, provisions
for self-insured liabilities which do not become payable for more
than one year after the provision is made shall not exceed the present
value of the liability. (b)
Where an organization follows a consistent policy of expensing actual
payments to, or on behalf of, employees or former employees for
unemployment compensation or workers' compensation, such payments
are allowable in the year of payment with the prior approval of
the awarding agency, provided they are allocated to all activities
of the organization. (4)
Costs of insurance on the lives of trustees, officers, or other
employees holding positions of similar responsibility are allowable
only to the extent that the insurance represents additional compensation.
The costs of such insurance when the organization is named as beneficiary
are unallowable. g.
Pension plan costs. (1)
Costs of the organization's pension plan which are incurred in accordance
with the established policies of the organization are allowable,
provided: (a)
Such policies meet the test of reasonableness; (b)
The methods of cost allocation are not discriminatory; (c)
The cost assigned to each fiscal year is determined in accordance
with generally accepted accounting principles (GAAP), as prescribed
in Accounting Principles Board Opinion No. 8 issued by the American
Institute of Certified Public Accountants; and (d)
The costs assigned to a given fiscal year are funded for all plan
participants within six months after the end of that year. However,
increases to normal and past service pension costs caused by a delay
in funding the actuarial liability beyond 30 days after each quarter
of the year to which such costs are assignable are unallowable.
(2)
Pension plan termination insurance premiums paid pursuant to the
Employee Retirement Income Security Act (ERISA) of 1974 (Pub. L.
93-406) are allowable. Late payment charges on such premiums are
unallowable. (3)
Excise taxes on accumulated funding deficiencies and other penalties
imposed under ERISA are unallowable. h.
Incentive compensation. Incentive compensation to employees
based on cost reduction, or efficient performance, suggestion awards,
safety awards, etc., are allowable to the extent that the overall
compensation is determined to be reasonable and such costs are paid
or accrued pursuant to an agreement entered into in good faith between
the organization and the employees before the services were rendered,
or pursuant to an established plan followed by the organization
so consistently as to imply, in effect, an agreement to make such
payment. i.
Overtime, extra pay shift, and multi-shift premiums. See
paragraph 28. j.
Severance pay. See paragraph 45.
k.
Training and education costs. See paragraph
49. l.
Support of salaries and wages. (1)
Charges to awards for salaries and wages, whether treated as direct
costs or indirect costs, will be based on documented payrolls approved
by a responsible official(s) of the organization. The distribution
of salaries and wages to awards must be supported by personnel activity
reports, as prescribed in subparagraph (2),
except when a substitute system has been approved in writing by
the cognizant agency. (See subparagraph E.2 of Attachment
A.) (2)
Reports reflecting the distribution of activity of each employee
must be maintained for all staff members (professionals and nonprofessionals)
whose compensation is charged, in whole or in part, directly to
awards. In addition, in order to support the allocation of indirect
costs, such reports must also be maintained for other employees
whose work involves two or more functions or activities if a distribution
of their compensation between such functions or activities is needed
in the determination of the organization's indirect cost rate(s)
(e.g., an employee engaged part-time in indirect cost activities
and part-time in a direct function). Reports maintained by non-profit
organizations to satisfy these requirements must meet the following
standards: (a)
The reports must reflect an after-the-fact determination
of the actual activity of each employee. Budget estimates (i.e.,
estimates determined before the services are performed) do not qualify
as support for charges to awards. (b)
Each report must account for the total activity for which employees
are compensated and which is required in fulfillment of their obligations
to the organization. (c)
The reports must be signed by the individual employee, or by a responsible
supervisory official having first hand knowledge of the activities
performed by the employee, that the distribution of activity represents
a reasonable estimate of the actual work performed by the employee
during the periods covered by the reports. (d)
The reports must be prepared at least monthly and must coincide
with one or more pay periods. (3)
Charges for the salaries and wages of nonprofessional employees,
in addition to the supporting documentation described in subparagraphs
(1) and (2), must also be supported by records
indicating the total number of hours worked each day maintained
in conformance with Department of Labor regulations implementing
the Fair Labor Standards Act (FLSA) (29 CFR Part 516). For this
purpose, the term "nonprofessional employee" shall have the same
meaning as "nonexempt employee," under FLSA. (4)
Salaries and wages of employees used in meeting cost sharing or
matching requirements on awards must be supported in the same manner
as salaries and wages claimed for reimbursement from awarding agencies.
7.
Contingency provisions. Contributions to a contingency reserve
or any similar provision made for events the occurrence of which
cannot be foretold with certainty as to time, intensity, or with
an assurance of their happening, are unallowable. The term "contingency
reserve" excludes self-insurance reserves (see subparagraphs
6.f (3) and 18.a(2)(d); pension funds (see subparagraph
6.g); and reserves for normal severance pay (see
subparagraph 45.b(1)). 8.
Contributions. Contributions and donations by the organization
to others are unallowable. 9.
Depreciation and use allowances. a.
Compensation for the use of buildings, other capital improvements,
and equipment on hand may be made through use allowances or depreciation.
However, except as provided in subparagraph f,
a combination of the two methods may not be used in connection with
a single class of fixed assets (e.g., buildings, office equipment,
computer equipment, etc.). b.
The computation of use allowances or depreciation shall be based
on the acquisition cost of the assets involved. The acquisition
cost of an asset donated to the organization by a third party shall
be its fair market value at the time of the donation. c.
The computation of use allowances or depreciation will exclude:
(1)
The cost of land; (2)
Any portion of the cost of buildings and equipment borne by or donated
by the Federal Government irrespective of where title was originally
vested or where it presently resides; and (3)
Any portion of the cost of buildings and equipment contributed by
or for the organization in satisfaction of a statutory matching
requirement. d.
Where the use allowance method is followed, the use allowance for
buildings and improvement (including land improvements, such as
paved parking areas, fences, and sidewalks) will be computed at
an annual rate not exceeding two percent of acquisition cost. The
use allowance for equipment will be computed at an annual rate not
exceeding six and two-thirds percent of acquisition cost. When the
use allowance method is used for buildings, the entire building
must be treated as a single asset; the building's components (e.g.,
plumbing system, heating and air conditioning, etc.) cannot be segregated
from the building's shell. The two percent limitation, however,
need not be applied to equipment which is merely attached or fastened
to the building but not permanently fixed to it and which is used
as furnishings or decorations or for specialized purposes (e.g.,
dentist chairs and dental treatment units, counters, laboratory
benches bolted to the floor, dishwashers, carpeting, etc.). Such
equipment will be considered as not being permanently fixed to the
building if it can be removed without the need for costly or extensive
alterations or repairs to the building or the equipment. Equipment
that meets these criteria will be subject to the six and two-thirds
percent equipment use allowance limitation. e.
Where depreciation method is followed, the period of useful service
(useful life) established in each case for usable capital assets
must take into consideration such factors as type of construction,
nature of the equipment used, technological developments in the
particular program area, and the renewal and replacement policies
followed for the individual items or classes of assets involved.
The method of depreciation used to assign the cost of an asset (or
group of assets) to accounting periods shall reflect the pattern
of consumption of the asset during its useful life. In the absence
of clear evidence indicating that the expected consumption of the
asset will be significantly greater or lesser in the early portions
of its useful life than in the later portions, the straight-line
method shall be presumed to be the appropriate method. Depreciation
methods once used shall not be changed unless approved in advance
by the cognizant Federal agency. When the depreciation method is
introduced for application to assets previously subject to a use
allowance, the combination of use allowances and depreciation applicable
to such assets must not exceed the total acquisition cost of the
assets. When the depreciation method is used for buildings, a building's
shell may be segregated from each building component (e.g., plumbing
system, heating, and air conditioning system, etc.) and each item
depreciated over its estimated useful life; or the entire building
(i.e., the shell and all components) may be treated as a single
asset and depreciated over a single useful life. f.
When the depreciation method is used for a particular class of assets,
no depreciation may be allowed on any such assets that, under subparagraph
e, would be viewed as fully depreciated. However,
a reasonable use allowance may be negotiated for such assets if
warranted after taking into consideration the amount of depreciation
previously charged to the Federal Government, the estimated useful
life remaining at time of negotiation, the effect of any increased
maintenance charges or decreased efficiency due to age, and any
other factors pertinent to the utilization of the asset for the
purpose contemplated. g.
Charges for use allowances or depreciation must be supported by
adequate property records and physical inventories must be taken
at least once every two years (a statistical sampling basis is acceptable)
to ensure that assets exist and are usable and needed. When the
depreciation method is followed, adequate depreciation records indicating
the amount of depreciation taken each period must also be maintained.
10.
Donations. a.
Services received. (1)
Donated or volunteer services may be furnished to an organization
by professional and technical personnel, consultants, and other
skilled and unskilled labor. The value of these services is not
reimbursable either as a direct or indirect cost. (2)
The value of donated services utilized in the performance of a direct
cost activity shall be considered in the determination of the organization's
indirect cost rate(s) and, accordingly, shall be allocated a proportionate
share of applicable indirect costs when the following circumstances
exist: (a)
The aggregate value of the services is material; (b)
The services are supported by a significant amount of the indirect
costs incurred by the organization; (c)
The direct cost activity is not pursued primarily for the benefit
of the Federal Government, (3)
In those instances where there is no basis for determining the fair
market value of the services rendered, the recipient and the cognizant
agency shall negotiate an appropriate allocation of indirect cost
to the services. (4)
Where donated services directly benefit a project supported by an
award, the indirect costs allocated to the services will be considered
as a part of the total costs of the project. Such indirect costs
may be reimbursed under the award or used to meet cost sharing or
matching requirements. (5)
The value of the donated services may be used to meet cost sharing
or matching requirements under conditions described in Sec. __.23
of Circular A-110. Where donated services are treated as indirect
costs, indirect cost rates will separate the value of the donations
so that reimbursement will not be made. (6)
Fair market value of donated services shall be computed as follows:
(a)
Rates for volunteer services. Rates for volunteers shall
be consistent with those regular rates paid for similar work in
other activities of the organization. In cases where the kinds of
skills involved are not found in other activities of the organization,
the rates used shall be consistent with those paid for similar work
in the labor market in which the organization competes for such
skills. (b)
Services donated by other organizations. When an employer
donates the services of an employee, these services shall be valued
at the employee's regular rate of pay (exclusive of fringe benefits
and indirect costs), provided the services are in the same skill
for which the employee is normally paid. If the services are not
in the same skill for which the employee is normally paid, fair
market value shall be computed in accordance with subparagraph
(a). b.
Goods and space. (1)
Donated goods; i.e., expendable personal property/supplies, and
donated use of space may be furnished to an organization. The value
of the goods and space is not reimbursable either as a direct or
indirect cost. (2)
The value of the donations may be used to meet cost sharing or matching
share requirements under the conditions described in Sec. __.23
of Circular A-110. The value of the donations shall be determined
in accordance with Sec. __.23 of Circular A-110. Where donations
are treated as indirect costs, indirect cost rates will separate
the value of the donations so that reimbursement will not be made.
11.
Employee morale, health, and welfare costs and credits. The
costs of house publications, health or first-aid clinics, and/or
infirmaries, recreational activities, employees' counseling services,
and other expenses incurred in accordance with the organization's
established practice or custom for the improvement of working conditions,
employer-employee relations, employee morale, and employee performance
are allowable. Such costs will be equitably apportioned to all activities
of the organization. Income generated from any of these activities
will be credited to the cost thereof unless such income has been
irrevocably set over to employee welfare organizations. 12.
Entertainment costs. Costs of amusement, diversion, social
activities, ceremonials, and costs relating thereto, such as meals,
lodging, rentals, transportation, and gratuities are unallowable
(but see paragraphs 11 and 26).
13.
Equipment and other capital expenditures. a.
As used in this paragraph, the following terms have the meanings
set forth below: (1)
Equipment means an article of nonexpendable tangible personal
property having a useful life of more than two years and an acquisition
cost of $500 or more per unit. An organization may use its own definition,
provided that it at least includes all nonexpendable tangible personal
property as defined herein. (2)
Acquisition cost means the net invoice unit price of an item
of equipment, including the cost of any modifications, attachments,
accessories, or auxiliary apparatus necessary to make it usable
for the purpose for which it is acquired. Ancillary charges, such
as taxes, duty, protective in-transit insurance, freight, and installation
shall be included in or excluded from acquisition cost in accordance
with the organization's regular written accounting practices. (3)
Special purpose equipment means equipment which is usable
only for research, medical, scientific, or technical activities.
Examples of special purpose equipment include microscopes, x-ray
machines, surgical instruments, and spectrometers. (4)
General purpose equipment means equipment which is usable
for other than research, medical, scientific, or technical activities,
whether or not special modifications are needed to make them suitable
for a particular purpose. Examples of general purpose equipment
include office equipment and furnishings, air conditioning equipment,
reproduction and printing equipment, motor vehicles, and automatic
data processing equipment. b.
(1) Capital expenditures for general purpose equipment are unallowable
as a direct cost except with the prior approval of the awarding
agency. (2)
Capital expenditures for special purpose equipment are allowable
as direct costs, provided that items with a unit cost of $1000 or
more have the prior approval of the awarding agency. c.
Capital expenditures for land or buildings are unallowable as a
direct cost except with the prior approval of the awarding agency.
d.
Capital expenditures for improvements to land, buildings, or equipment
which materially increase their value or useful life are unallowable
as a direct cost except with the prior approval of the awarding
agency. e.
Equipment and other capital expenditures are unallowable as indirect
costs. However, see paragraph 9
for allowability of use allowances or depreciation on buildings,
capital improvements, and equipment. Also, see paragraph
43 for allowability of rental costs for land, buildings,
and equipment. 14.
Fines and penalties. Costs of fines and penalties resulting
from violations of, or failure of the organization to comply with
Federal, State, and local laws and regulations are unallowable except
when incurred as a result of compliance with specific provisions
of an award or instructions in writing from the awarding agency.
15.
Fringe benefits. See subparagraph 6.f.
16.
Idle facilities and idle capacity. a.
As used in this paragraph, the following terms have the meanings
set forth below: (1)
Facilities means land and buildings or any portion thereof,
equipment individually or collectively, or any other tangible capital
asset, wherever located, and whether owned or leased by the organization.
(2)
Idle facilities means completely unused facilities that are
excess to the organization's current needs. (3)
Idle capacity means the unused capacity of partially used
facilities. It is the difference between that which a facility could
achieve under 100 percent operating time on a one-shift basis less
operating interruptions resulting from time lost for repairs, setups,
unsatisfactory materials, and other normal delays, and the extent
to which the facility was actually used to meet demands during the
accounting period. A multi-shift basis may be used if it can be
shown that this amount of usage could normally be expected for the
type of facility involved. (4)
Costs of idle facilities or idle capacity means costs such
as maintenance, repair, housing, rent, and other related costs,
e.g., property taxes, insurance, and depreciation or use allowances.
b.
The costs of idle facilities are unallowable except to the extent
that: (1)
They are necessary to meet fluctuations in workload; or (2)
Although not necessary to meet fluctuations in workload, they were
necessary when acquired and are now idle because of changes in program
requirements, efforts to achieve more economical operations, reorganization,
termination, or other causes which could not have been reasonably
foreseen. Under the exception stated in this subparagraph, costs
of idle facilities are allowable for a reasonable period of time,
ordinarily not to exceed one year, depending upon the initiative
taken to use, lease, or dispose of such facilities (but see subparagraphs
48.b and d). c.
The costs of idle capacity are normal costs of doing business and
are a factor in the normal fluctuations of usage or indirect cost
rates from period to period. Such costs are allowable, provided
the capacity is reasonably anticipated to be necessary or was originally
reasonable and is not subject to reduction or elimination by subletting,
renting, or sale, in accordance with sound business, economics,
or security practices. Widespread idle capacity throughout an entire
facility or among a group of assets having substantially the same
function may be idle facilities. 17.
Independent research and development. [Reserved] 18.
Insurance and indemnification. a.
Insurance includes insurance which the organization is required
to carry, or which is approved, under the terms of the award and
any other insurance which the organization maintains in connection
with the general conduct of its operations. This paragraph does
not apply to insurance which represents fringe benefits for employees
(see subparagraphs 6.f and 6.g(2)).
(1)
Costs of insurance required or approved, and maintained, pursuant
to the award are allowable. (2)
Costs of other insurance maintained by the organization in connection
with the general conduct of its operations are allowable subject
to the following limitations: (a)
Types and extent of coverage shall be in accordance with sound business
practice and the rates and premiums shall be reasonable under the
circumstances. (b)
Costs allowed for business interruption or other similar insurance
shall be limited to exclude coverage of management fees. (c)
Costs of insurance or of any provisions for a reserve covering the
risk of loss or damage to Federal property are allowable only to
the extent that the organization is liable for such loss or damage.
(d)
Provisions for a reserve under a self-insurance program are allowable
to the extent that types of coverage, extent of coverage, rates,
and premiums would have been allowed had insurance been purchased
to cover the risks. However, provision for known or reasonably estimated
self-insured liabilities, which do not become payable for more than
one year after the provision is made, shall not exceed the present
value of the liability. (e)
Costs of insurance on the lives of trustees, officers, or other
employees holding positions of similar responsibilities are allowable
only to the extent that the insurance represents additional compensation
(see subparagraph 6.f(4)). The
cost of such insurance when the organization is identified as the
beneficiary is unallowable. (3)
Actual losses which could have been covered by permissible insurance
(through the purchase of insurance or a self-insurance program)
are unallowable unless expressly provided for in the award, except:
(a)
Costs incurred because of losses not covered under nominal deductible
insurance coverage provided in keeping with sound business practice
are allowable. (b)
Minor losses not covered by insurance, such as spoilage, breakage,
and disappearance of supplies, which occur in the ordinary course
of operations, are allowable. b.
Indemnification includes securing the organization against liabilities
to third persons and any other loss or damage, not compensated by
insurance or otherwise. The Federal Government is obligated to indemnify
the organization only to the extent expressly provided in the award.
19.
Interest, fundraising, and investment management costs. a.
Interest. (1)
Costs incurred for interest on borrowed capital or temporary use
of endowment funds, however represented, are unallowable. However,
interest on debt incurred after the effective date of this revision
to acquire or replace capital assets (including renovations, alterations,
equipment, land, and capital assets acquired through capital leases),
acquired after the effective date of this revision and used in support
of sponsored agreements is allowable, provided that: (a)
For facilities acquisitions (excluding renovations and alterations)
costing over $10 million where the Federal Government's reimbursement
is expected to equal or exceed 40 percent of an asset's cost, the
non-profit organization prepares, prior to the acquisition or replacement
of the capital asset(s), a justification that demonstrates the need
for the facility in the conduct of federally-sponsored activities.
Upon request, the needs justification must be provided to the Federal
agency with cost cognizance authority as a prerequisite to the continued
allowability of interest on debt and depreciation related to the
facility. The needs justification for the acquisition of a facility
should include, at a minimum, the following:
(b)
For facilities costing over $500,000, the non-profit organization
prepares, prior to the acquisition or replacement of the facility,
a lease/purchase analysis in accordance with the provisions of Sec.
__.30 through __.37 of Circular A-110, which shows that a financed
purchase or capital lease is less costly to the organization than
other leasing alternatives, on a net present value basis. Discount
rates used should be equal to the non-profit organization's anticipated
interest rates and should be no higher than the fair market rate
available to the non-profit organization from an unrelated ("arm's
length") third-party. The lease/purchase analysis shall include
a comparison of the net present value of the projected total cost
comparisons of both alternatives over the period the asset is expected
to be used by the non-profit organization. The cost comparisons
associated with purchasing the facility shall include the estimated
purchase price, anticipated operating and maintenance costs (including
property taxes, if applicable) not included in the debt financing,
less any estimated asset salvage value at the end of the period
defined above. The cost comparison for a capital lease shall include
the estimated total lease payments, any estimated bargain purchase
option, operating and maintenance costs, and taxes not included
in the capital leasing arrangement, less any estimated credits due
under the lease at the end of the period defined above. Projected
operating lease costs shall be based on the anticipated cost of
leasing comparable facilities at fair market rates under rental
agreements that would be renewed or reestablished over the period
defined above, and any expected maintenance costs and allowable
property taxes to be borne by the non-profit organization directly
or as part of the lease arrangement. (c)
The actual interest cost claimed is predicated upon interest rates
that are no higher than the fair market rate available to the non-profit
organization from an unrelated ("arm's length") third party. (d)
Investment earnings, including interest income, on bond or loan
principal, pending payment of the construction or acquisition costs,
are used to offset allowable interest cost. Arbitrage earnings reportable
to the Internal Revenue Service are not required to be offset against
allowable interest costs. (e)
Reimbursements are limited to the least costly alternative based
on the total cost analysis required under subparagraph (b).
For example, if an operating lease is determined to be less costly
than purchasing through debt financing, then reimbursement is limited
to the amount determined if leasing had been used. In all cases
where a lease/purchase analysis is performed, Federal reimbursement
shall be based upon the least expensive alternative. (f)
Non-profit organizations are also subject to the following conditions:
(i)
Interest on debt incurred to finance or refinance assets acquired
before or reacquired after the effective date of this Circular is
not allowable. (ii)
For debt arrangements over $1 million, unless the non-profit organization
makes an initial equity contribution to the asset purchase of 25
percent or more, non-profit organizations shall reduce claims for
interest expense by an amount equal to imputed interest earnings
on excess cash flow, which is to be calculated as follows. Annually,
non-profit organizations shall prepare a cumulative (from the inception
of the project) report of monthly cash flows that includes inflows
and outflows, regardless of the funding source. Inflows consist
of depreciation expense, amortization of capitalized construction
interest, and annual interest expense. For cash flow calculations,
the annual inflow figures shall be divided by the number of months
in the year (usually 12) that the building is in service for monthly
amounts. Outflows consist of initial equity contributions, debt
principal payments (less the pro rata share attributable to the
unallowable costs of land) and interest payments. Where cumulative
inflows exceed cumulative outflows, interest shall be calculated
on the excess inflows for that period and be treated as a reduction
to allowable interest expense. The rate of interest to be used to
compute earnings on excess cash flows shall be the three month Treasury
Bill closing rate as of the last business day of that month. (iii)
Substantial relocation of federally-sponsored activities from a
facility financed by indebtedness, the cost of which was funded
in whole or part through Federal reimbursements, to another facility
prior to the expiration of a period of 20 years requires notice
to the Federal cognizant agency. The extent of the relocation, the
amount of the Federal participation in the financing, and the depreciation
and interest charged to date may require negotiation and/or downward
adjustments of replacement space charged to Federal programs in
the future. (iv)
The allowable costs to acquire facilities and equipment are limited
to a fair market value available to the non-profit organization
from an unrelated ("arm's length") third party. (2) For non-profit organizations subject to "full coverage"' under the Cost Accounting Standards (CAS) as defined at 48 CFR 9903.201, the interest allowability provisions of subparagraph a do not apply. Instead, these organizations' sponsored agreements are subject to CAS 414 (48 CFR 9903.414), cost of money |
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