[Federal Register Volume 70, Number 168 (Wednesday, August 31, 2005)]
[Rules and Regulations]
[Pages 51910-51927]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-16649]
[[Page 51910]]
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OFFICE OF MANAGEMENT AND BUDGET
2 CFR Part 225
Cost Principles for State, Local, and Indian Tribal Governments
(OMB Circular A-87)
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-87, ``Cost Principles for State, Local, and Indian Tribal
Governments,'' to Title 2 in the Code of Federal Regulations (2 CFR),
Subtitle A, Chapter II, part 225 as part of an initiative to provide
the public with a central location for Federal government policies on
grants and other financial assistance and nonprocurement agreements.
Consolidating the OMB guidance and co-locating the agency regulations
provides a good foundation for streamlining and simplifying the policy
framework for grants and agreements as part of the efforts to implement
the Federal Financial Assistance Management Improvement Act of 1999
(Pub. L. 106-107).
DATES: This document is effective August 31, 2005. This document
republishes the existing OMB Circular A-87, 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-87 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-87 does not change the substance
of the circular. Other than adjustments needed to conform to the
formatting requirements of the CFR, this notice relocates in 2 CFR the
version of OMB Circular A-87 as revised by the May 10, 2004 notice.
List of Subjects in 2 CFR Part 225
Accounting, Grant administration, Grant programs, Reporting and
recordkeeping requirements, State, local, and Indian tribal
governments.
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 225 as set forth
below.
PART 225--COST PRINCIPLES FOR STATE, LOCAL, AND INDIAN TRIBAL
GOVERNMENTS (OMB CIRCULAR A-87)
Sec.
225.5 Purpose.
225.10 Authority
225.15 Background
225.20 Policy.
225.25 Definitions.
225.30 OMB responsibilities.
225.35 Federal agency responsibilities.
225.40 Effective date of changes.
225.45 Relationship to previous issuance.
225.50 Policy review date.
225.55 Information Contact.
Appendix A to Part 225--General Principles for Determining Allowable
Costs
Appendix B to Part 225--Selected Items of Cost
Appendix C to Part 225--State/Local-Wide Central Service Cost
Allocation Plans
Appendix D to Part 225--Public Assistance Cost Allocation Plans
Appendix E to Part 225--State and Local Indirect Cost Rate Proposals
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. 225.5 Purpose.
This part establishes principles and standards for determining
costs for Federal awards carried out through grants, cost reimbursement
contracts, and other agreements with State and local governments and
federally-recognized Indian tribal governments (governmental units).
Sec. 225.10 Authority.
This part is issued under the authority of the Budget and
Accounting Act of 1921, as amended; the Budget and Accounting
Procedures Act of 1950, as amended; the Chief Financial Officers Act of
1990; Reorganization Plan No. 2 of 1970; and Executive Order No. 11541
(``Prescribing the Duties of the Office of Management and Budget and
the Domestic Policy Council in the Executive Office of the
President'').
Sec. 225.15 Background.
As part of the government-wide grant streamlining effort under
Public Law 106-107, Federal Financial Award Management Improvement Act
of 1999, OMB led an interagency workgroup to simplify and make
consistent, to the extent feasible, the various rules used to award
Federal grants. An interagency task force was established in 2001 to
review existing cost principles for Federal awards to State, local, and
Indian tribal governments; colleges and universities; and non-profit
organizations. The task force studied ``Selected Items of Cost'' in
each of the three cost principles to determine which items of costs
could be stated consistently and/or more clearly.
Sec. 225.20 Policy.
This part establishes principles and standards to provide a uniform
approach for determining costs and to promote effective program
delivery, efficiency, and better relationships between governmental
units and the Federal Government. The principles are for determining
allowable costs only. They are not intended to identify the
circumstances or to dictate the extent of Federal and governmental unit
participation in the financing of a particular Federal award. Provision
for profit or other increment above cost is outside the scope of this
part.
Sec. 225.25 Definitions.
Definitions of key terms used in this part are contained in
Appendix A to this part, Section B.
Sec. 225.30 OMB responsibilities.
The Office of Management and Budget (OMB) will review agency
regulations and implementation of this part, and will provide policy
interpretations and assistance to insure effective and efficient
implementation. Any exceptions will be subject to approval by OMB.
Exceptions will only be made in particular cases where adequate
justification is presented.
Sec. 225.35 Federal agency responsibilities.
Agencies responsible for administering programs that involve cost
reimbursement contracts, grants, and other agreements with governmental
units shall issue regulations to implement the provisions of this part
and its appendices.
Sec. 225.40 Effective date of changes.
This part is effective August 31, 2005.
Sec. 225.45 Relationship to previous issuance.
(a) The guidance in this part previously was issued as OMB Circular
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A-87. 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); Appendix C contains the information that was in Attachment C
(state/local-wide central service cost allocation plans); Appendix D
contains the guidance that was in Attachment D (public assistance cost
allocation plans); and Appendix E contains the guidance that was in
Attachment E (state and local indirect cost rate proposals).
(b) This part supersedes OMB Circular A-87, as amended May 10,
2004, which superseded Circular A-87, as amended and issued May 4,
1995.
Sec. 225.50 Policy review date.
This part will have a policy review three years from the date of
issuance.
Sec. 225.55 Information contact.
Further information concerning this part may be obtained by
contacting the Office of Federal Financial Management, Financial
Standards and Reporting Branch, Office of Management and Budget,
Washington, DC 20503, telephone 202-395-3993.
Appendix A to Part 225--General Principles for Determining Allowable
Costs
Table of Contents
A. Purpose and Scope
1. Objectives
2. Policy guides
3. Application
B. Definitions
1. Approval or authorization of the awarding or cognizant
Federal agency
2. Award
3. Awarding agency
4. Central service cost allocation plan
5. Claim
6. Cognizant agency
7. Common rule
8. Contract
9. Cost
10. Cost allocation plan
11. Cost objective
12. Federally-recognized Indian tribal government
13. Governmental unit
14. Grantee department or agency
15. Indirect cost rate proposal
16. Local government
17. Public assistance cost allocation plan
18. State
C. Basic Guidelines
1. Factors affecting allowability of costs
2. Reasonable costs
3. Allocable costs
4. Applicable credits
D. Composition of Cost
1. Total cost
2. Classification of costs
E. Direct Costs
1. General
2. Application
3. Minor items
F. Indirect Costs
1. General
2. Cost allocation plans and indirect cost proposals
3. Limitation on indirect or administrative costs
G. Interagency Services
H. Required Certifications
General Principles for Determining Allowable Costs
A. Purpose and Scope
1. Objectives. This Appendix establishes principles for
determining the allowable costs incurred by State, local, and
federally-recognized Indian tribal governments (governmental units)
under grants, cost reimbursement contracts, and other agreements
with the Federal Government (collectively referred to in this
appendix and other appendices to 2 CFR part 225 as ``Federal
awards''). The principles are for the purpose of cost determination
and are not intended to identify the circumstances or dictate the
extent of Federal or governmental unit participation in the
financing of a particular program or project. The principles are
designed to provide that Federal awards bear their fair share of
cost recognized under these principles except where restricted or
prohibited by law. Provision for profit or other increment above
cost is outside the scope of 2 CFR part 225.
2. Policy guides.
a. The application of these principles is based on the
fundamental premises that:
(1) Governmental units are responsible for the efficient and
effective administration of Federal awards through the application
of sound management practices.
(2) Governmental units assume responsibility for administering
Federal funds in a manner consistent with underlying agreements,
program objectives, and the terms and conditions of the Federal
award.
(3) Each governmental unit, in recognition of its own unique
combination of staff, facilities, and experience, will have the
primary responsibility for employing whatever form of organization
and management techniques may be necessary to assure proper and
efficient administration of Federal awards.
b. Federal agencies should work with States or localities which
wish to test alternative mechanisms for paying costs for
administering Federal programs. The Office of Management and Budget
(OMB) encourages Federal agencies to test fee-for-service
alternatives as a replacement for current cost-reimbursement payment
methods in response to the National Performance Review's (NPR)
recommendation. The NPR recommended the fee-for-service approach to
reduce the burden associated with maintaining systems for charging
administrative costs to Federal programs and preparing and approving
cost allocation plans. This approach should also increase incentives
for administrative efficiencies and improve outcomes.
3. Application.
a. These principles will be applied by all Federal agencies in
determining costs incurred by governmental units under Federal
awards (including subawards) except those with (1) publicly-financed
educational institutions subject to, 2 CFR part 220, Cost Principles
for Educational Institutions (OMB Circular A-21), and (2) programs
administered by publicly-owned hospitals and other providers of
medical care that are subject to requirements promulgated by the
sponsoring Federal agencies. However, 2 CFR part 225 does apply to
all central service and department/agency costs that are allocated
or billed to those educational institutions, hospitals, and other
providers of medical care or services by other State and local
government departments and agencies.
b. All subawards are subject to those Federal cost principles
applicable to the particular organization concerned. Thus, if a
subaward is to a governmental unit (other than a college, university
or hospital), 2 CFR part 225 shall apply; if a subaward is to a
commercial organization, the cost principles applicable to
commercial organizations shall apply; if a subaward is to a college
or university, 2 CFR part 220 (Circular A-21) shall apply; if a
subaward is to a hospital, the cost principles used by the Federal
awarding agency for awards to hospitals shall apply, subject to the
provisions of subsection A.3.a. of this Appendix; if a subaward is
to some other non-profit organization, 2 CFR part 230, Cost
Principles for Non-Profit Organizations (Circular A-122), shall
apply.
c. These principles shall be used as a guide in the pricing of
fixed price arrangements where costs are used in determining the
appropriate price.
d. Where a Federal contract awarded to a governmental unit
incorporates a Cost Accounting Standards (CAS) clause, the
requirements of that clause shall apply. In such cases, the
governmental unit and the cognizant Federal agency shall establish
an appropriate advance agreement on how the governmental unit will
comply with applicable CAS requirements when estimating,
accumulating and reporting costs under CAS-covered contracts. The
agreement shall indicate that 2 CFR part 225 (OMB Circular A-87)
requirements will be applied to other Federal awards. In all cases,
only one set of records needs to be maintained by the governmental
unit.
e. Conditional exemptions.
(1) OMB authorizes conditional exemption from OMB administrative
requirements and cost principles for certain Federal programs with
statutorily-authorized consolidated planning and consolidated
administrative funding, that are identified by a Federal agency and
approved by the head of the Executive department or establishment. A
Federal agency shall consult with OMB during its consideration of
whether to grant such an exemption.
(2) To promote efficiency in State and local program
administration, when Federal non-entitlement programs with common
purposes have specific statutorily-authorized consolidated planning
and consolidated administrative funding and where most of the State
agency's resources come from non-Federal sources, Federal agencies
may exempt these covered State-administered, non-entitlement grant
programs from certain OMB grants management requirements. The
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exemptions would be from all but the allocability of costs
provisions of Appendix A subsection C.3 of 2 CFR part 225, Cost
Principles for State, Local, and Indian Tribal Governments (OMB
Circular A-87); Appendix A, Section C.4 of 2 CFR 220, Cost
Principles for Educational Institutions (Circular A-21); Appendix A,
subsection A.4 of 2 CFR 230 Cost Principles for Non-Profit
Organizations (Circular A-122); and from all of the administrative
requirements provisions of 2 CFR part 215, Uniform Administrative
Requirements for Grants and Agreements with Institutions of Higher
Education, Hospitals, and Other Non-Profit Organizations (Circular
A-110), and the agencies' grants management common rule.
(3) When a Federal agency provides this flexibility, as a
prerequisite to a State's exercising this option, a State must adopt
its own written fiscal and administrative requirements for expending
and accounting for all funds, which are consistent with the
provisions of 2 CFR part 225 (OMB Circular A-87), and extend such
policies to all subrecipients. These fiscal and administrative
requirements must be sufficiently specific to ensure that: Funds are
used in compliance with all applicable Federal statutory and
regulatory provisions, costs are reasonable and necessary for
operating these programs, and funds are not used for general
expenses required to carry out other responsibilities of a State or
its subrecipients.
B. Definitions
1. ``Approval or authorization of the awarding or cognizant
Federal agency'' means documentation evidencing consent prior to
incurring a specific cost. If such costs are specifically identified
in a Federal award document, approval of the document constitutes
approval of the costs. If the costs are covered by a State/local-
wide cost allocation plan or an indirect cost proposal, approval of
the plan constitutes the approval.
2. ``Award'' means grants, cost reimbursement contracts and
other agreements between a State, local and Indian tribal government
and the Federal Government.
3. ``Awarding agency'' means (a) with respect to a grant,
cooperative agreement, or cost reimbursement contract, the Federal
agency, and (b) with respect to a subaward, the party that awarded
the subaward.
4. ``Central service cost allocation plan'' means the
documentation identifying, accumulating, and allocating or
developing billing rates based on the allowable costs of services
provided by a governmental unit on a centralized basis to its
departments and agencies. The costs of these services may be
allocated or billed to users.
5. ``Claim'' means a written demand or written assertion by the
governmental unit or grantor seeking, as a matter of right, the
payment of money in a sum certain, the adjustment or interpretation
of award terms, or other relief arising under or relating to the
award. A voucher, invoice or other routine request for payment that
is not a dispute when submitted is not a claim. Appeals, such as
those filed by a governmental unit in response to questioned audit
costs, are not considered claims until a final management decision
is made by the Federal awarding agency.
6. ``Cognizant agency'' means the Federal agency responsible for
reviewing, negotiating, and approving cost allocation plans or
indirect cost proposals developed under 2 CFR part 225 on behalf of
all Federal agencies. OMB publishes a listing of cognizant agencies.
7. ``Common Rule'' means the ``Uniform Administrative
Requirements for Grants and Cooperative Agreements to State and
Local Governments; Final Rule'' originally issued at 53 FR 8034-8103
(March 11, 1988). Other common rules will be referred to by their
specific titles.
8. ``Contract'' means a mutually binding legal relationship
obligating the seller to furnish the supplies or services (including
construction) and the buyer to pay for them. It includes all types
of commitments that obligate the government to an expenditure of
appropriated funds and that, except as otherwise authorized, are in
writing. In addition to bilateral instruments, contracts include
(but are not limited to): Awards and notices of awards; job orders
or task orders issued under basic ordering agreements; letter
contracts; orders, such as purchase orders, under which the contract
becomes effective by written acceptance or performance; and,
bilateral contract modifications. Contracts do not include grants
and cooperative agreements covered by 31 U.S.C. 6301 et seq.
9. ``Cost'' means an amount as determined on a cash, accrual, or
other basis acceptable to the Federal awarding or cognizant agency.
It does not include transfers to a general or similar fund.
10. ``Cost allocation plan'' means central service cost
allocation plan, public assistance cost allocation plan, and
indirect cost rate proposal. Each of these terms is further defined
in this section.
11. ``Cost objective'' means a function, organizational
subdivision, contract, grant, or other activity for which cost data
are needed and for which costs are incurred.
12. ``Federally-recognized Indian tribal government'' means the
governing body or a governmental agency of any Indian tribe, band,
nation, or other organized group or community (including any native
village as defined in Section 3 of the Alaska Native Claims
Settlement Act, 85 Stat. 688) certified by the Secretary of the
Interior as eligible for the special programs and services provided
through the Bureau of Indian Affairs.
13. ``Governmental unit'' means the entire State, local, or
federally-recognized Indian tribal government, including any
component thereof. Components of governmental units may function
independently of the governmental unit in accordance with the term
of the award.
14. ``Grantee department or agency'' means the component of a
State, local, or federally-recognized Indian tribal government which
is responsible for the performance or administration of all or some
part of a Federal award.
15. ``Indirect cost rate proposal'' means the documentation
prepared by a governmental unit or component thereof to substantiate
its request for the establishment of an indirect cost rate as
described in Appendix E of 2 CFR part 225.
16. ``Local government'' means a county, municipality, city,
town, township, local public authority, school district, special
district, intrastate district, council of governments (whether or
not incorporated as a non-profit corporation under State law), any
other regional or interstate government entity, or any agency or
instrumentality of a local government.
17. ``Public assistance cost allocation plan'' means a narrative
description of the procedures that will be used in identifying,
measuring and allocating all administrative costs to all of the
programs administered or supervised by State public assistance
agencies as described in Appendix D of 2 CFR part 225.
18. ``State'' means any of the several States of the United
States, the District of Columbia, the Commonwealth of Puerto Rico,
any territory or possession of the United States, or any agency or
instrumentality of a State exclusive of local governments.
C. Basic Guidelines
1. Factors affecting allowability of costs. To be allowable
under Federal awards, costs must meet the following general
criteria:
a. Be necessary and reasonable for proper and efficient
performance and administration of Federal awards.
b. Be allocable to Federal awards under the provisions of 2 CFR
part 225.
c. Be authorized or not prohibited under State or local laws or
regulations.
d. Conform to any limitations or exclusions set forth in these
principles, Federal laws, terms and conditions of the Federal award,
or other governing regulations as to types or amounts of cost items.
e. Be consistent with policies, regulations, and procedures that
apply uniformly to both Federal awards and other activities of the
governmental unit.
f. Be accorded consistent treatment. A cost may not be assigned
to a Federal award as a direct cost if any other cost incurred for
the same purpose in like circumstances has been allocated to the
Federal award as an indirect cost.
g. Except as otherwise provided for in 2 CFR part 225, be
determined in accordance with generally accepted accounting
principles.
h. Not be included as a cost or used to meet cost sharing or
matching requirements of any other Federal award in either the
current or a prior period, except as specifically provided by
Federal law or regulation.
i. Be the net of all applicable credits.
j. Be adequately documented.
2. Reasonable costs. A cost is reasonable if, in its nature and
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 cost. The question of reasonableness is
particularly important when governmental units or components are
predominately federally-funded. In determining 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 governmental unit or
the performance of the Federal award.
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b. The restraints or requirements imposed by such factors as:
Sound business practices; arm's-length bargaining; Federal, State
and other laws and regulations; and, terms and conditions of the
Federal award.
c. Market prices for comparable goods or services.
d. Whether the individuals concerned acted with prudence in the
circumstances considering their responsibilities to the governmental
unit, its employees, the public at large, and the Federal
Government.
e. Significant deviations from the established practices of the
governmental unit which may unjustifiably increase the Federal
award's cost.
3. Allocable costs.
a. A cost is allocable to a particular cost objective if the
goods or services involved are chargeable or assignable to such cost
objective in accordance with relative benefits received.
b. All activities which benefit from the governmental unit's
indirect cost, including unallowable activities and services donated
to the governmental unit by third parties, will receive an
appropriate allocation of indirect costs.
c. Any cost allocable to a particular Federal award or cost
objective under the principles provided for in 2 CFR part 225 may
not be charged to other Federal awards to overcome fund
deficiencies, to avoid restrictions imposed by law or terms of the
Federal awards, or for other reasons.
d. Where an accumulation of indirect costs will ultimately
result in charges to a Federal award, a cost allocation plan will be
required as described in Appendices C, D, and E to this part.
4. Applicable credits.
a. Applicable credits refer to those receipts or reduction of
expenditure-type transactions that offset or reduce expense items
allocable to Federal awards as direct or indirect costs. Examples of
such transactions are: Purchase discounts, rebates or allowances,
recoveries or indemnities on losses, insurance refunds or rebates,
and adjustments of overpayments or erroneous charges. To the extent
that such credits accruing to or received by the governmental unit
relate to allowable costs, they shall be credited to the Federal
award either as a cost reduction or cash refund, as appropriate.
b. In some instances, the amounts received from the Federal
Government to finance activities or service operations of the
governmental unit should be treated as applicable credits.
Specifically, the concept of netting such credit items (including
any amounts used to meet cost sharing or matching requirements)
should be recognized in determining the rates or amounts to be
charged to Federal awards. (See Appendix B to this part, item 11,
``Depreciation and use allowances,'' for areas of potential
application in the matter of Federal financing of activities.)
D. Composition of Cost
1. Total cost. The total cost of Federal awards is comprised of
the allowable direct cost of the program, plus its allocable portion
of allowable indirect costs, less applicable credits.
2. Classification of costs. There is no universal rule for
classifying certain costs as either direct or indirect under every
accounting system. A cost may be direct with respect to some
specific service or function, but indirect with respect to the
Federal award or other final cost objective. Therefore, it is
essential that each item of cost be treated consistently in like
circumstances either as a direct or an indirect cost. Guidelines for
determining direct and indirect costs charged to Federal awards are
provided in the sections that follow.
E. Direct Costs
1. General. Direct costs are those that can be identified
specifically with a particular final cost objective.
2. Application. Typical direct costs chargeable to Federal
awards are:
a. Compensation of employees for the time devoted and identified
specifically to the performance of those awards.
b. Cost of materials acquired, consumed, or expended
specifically for the purpose of those awards.
c. Equipment and other approved capital expenditures.
d. Travel expenses incurred specifically to carry out the award.
3. Minor items. Any direct cost of a minor amount may be treated
as an indirect cost for reasons of practicality where such
accounting treatment for that item of cost is consistently applied
to all cost objectives.
F. Indirect Costs
1. General. Indirect costs are those: Incurred for a common or
joint purpose benefiting more than one cost objective, and not
readily assignable to the cost objectives specifically benefitted,
without effort disproportionate to the results achieved. The term
``indirect costs,'' as used herein, applies to costs of this type
originating in the grantee department, as well as those incurred by
other departments in supplying goods, services, and facilities. To
facilitate equitable distribution of indirect expenses to the cost
objectives served, it may be necessary to establish a number of
pools of indirect costs within a governmental unit department or in
other agencies providing services to a governmental unit department.
Indirect cost pools should be distributed to benefitted cost
objectives on bases that will produce an equitable result in
consideration of relative benefits derived.
2. Cost allocation plans and indirect cost proposals.
Requirements for development and submission of cost allocation plans
and indirect cost rate proposals are contained in Appendices C, D,
and E to this part.
3. Limitation on indirect or administrative costs.
a. In addition to restrictions contained in 2 CFR part 225,
there may be laws that further limit the amount of administrative or
indirect cost allowed.
b. Amounts not recoverable as indirect costs or administrative
costs under one Federal award may not be shifted to another Federal
award, unless specifically authorized by Federal legislation or
regulation.
G. Interagency Services. The cost of services provided by one
agency to another within the governmental unit may include allowable
direct costs of the service plus a pro rate share of indirect costs.
A standard indirect cost allowance equal to ten percent of the
direct salary and wage cost of providing the service (excluding
overtime, shift premiums, and fringe benefits) may be used in lieu
of determining the actual indirect costs of the service. These
services do not include centralized services included in central
service cost allocation plans as described in Appendix C to this
part.
H. Required Certifications. Each cost allocation plan or
indirect cost rate proposal required by Appendices C and E to this
part must comply with the following:
1. No proposal to establish a cost allocation plan or an
indirect cost rate, whether submitted to a Federal cognizant agency
or maintained on file by the governmental unit, shall be acceptable
unless such costs have been certified by the governmental unit using
the Certificate of Cost Allocation Plan or Certificate of Indirect
Costs as set forth in Appendices C and E to this part. The
certificate must be signed on behalf of the governmental unit by an
individual at a level no lower than chief financial officer of the
governmental unit that submits the proposal or component covered by
the proposal.
2. No cost allocation plan or indirect cost rate shall be
approved by the Federal Government unless the plan or rate proposal
has been certified. Where it is necessary to establish a cost
allocation plan or an indirect cost rate and the governmental unit
has not submitted a certified proposal for establishing such a plan
or rate in accordance with the requirements, the Federal Government
may either disallow all indirect costs or unilaterally establish
such a plan or rate. Such a plan or rate may be based upon audited
historical data or such other data that have been furnished to the
cognizant Federal agency and for which it can be demonstrated that
all unallowable costs have been excluded. When a cost allocation
plan or indirect cost rate is unilaterally established by the
Federal Government because of failure of the governmental unit to
submit a certified proposal, the plan or rate established will be
set to ensure that potentially unallowable costs will not be
reimbursed.
Appendix B to Part 225--Selected Items of Cost
Table of Contents
1. Advertising and public relations costs
2. Advisory councils
3. Alcoholic beverages
4. Audit costs and related services
5. Bad debts
6. Bonding costs
7. Communication costs
8. Compensation for personal services
9. Contingency provisions
10. Defense and prosecution of criminal and civil proceedings, and
claims
11. Depreciation and use allowances
12. Donations and contributions
13. Employee morale, health, and welfare costs
14. Entertainment costs
15. Equipment and other capital expenditures
16. Fines and penalties
17. Fund raising and investment management costs
18. Gains and losses on disposition of depreciable property and
other capital
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assets and substantial relocation of Federal programs
19. General government expenses
20. Goods or services for personal use
21. Idle facilities and idle capacity
22. Insurance and indemnification
23. Interest
24. Lobbying
25. Maintenance, operations, and repairs
26. Materials and supplies costs
27. Meetings and conferences
28. Memberships, subscriptions, and professional activity costs
29. Patent costs
30. Plant and homeland security costs
31. Pre-award costs
32. Professional service costs
33. Proposal costs
34. Publication and printing costs
35. Rearrangement and alteration costs
36. Reconversion costs
37. Rental costs of building and equipment
38. Royalties and other costs for the use of patents
39. Selling and marketing
40. Taxes
41. Termination costs applicable to sponsored agreements
42. Training costs
43. Travel costs
Sections 1 through 43 provide principles to be applied in
establishing the allowability or unallowability of certain items of
cost. These principles apply whether a cost is treated as direct or
indirect. A cost is allowable for Federal reimbursement only to the
extent of benefits received by Federal awards and its conformance
with the general policies and principles stated in Appendix A to
this part. Failure to mention a particular item of cost in these
sections is not intended to imply that it is either allowable or
unallowable; rather, determination of allowability in each case
should be based on the treatment or standards 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
governmental unit or maintaining or promoting understanding and
favorable relations with the community or public at large or any
segment of the public.
c. The only allowable advertising costs are those which are
solely for:
(1) The recruitment of personnel required for the performance by
the governmental unit of obligations arising under a Federal award;
(2) The procurement of goods and services for the performance of
a Federal award;
(3) The disposal of scrap or surplus materials acquired in the
performance of a Federal award except when governmental units are
reimbursed for disposal costs at a predetermined amount; or
(4) Other specific purposes necessary to meet the requirements
of the Federal award.
d. The only allowable public relations costs are:
(1) Costs specifically required by the Federal award;
(2) Costs of communicating with the public and press pertaining
to specific activities or accomplishments which result from
performance of Federal awards (these costs are considered necessary
as part of the outreach effort for the Federal award); or
(3) Costs of conducting general liaison with news media and
government public relations officers, to the extent that such
activities are limited to communication and liaison necessary keep
the public informed on matters of public concern, such as notices of
Federal contract/grant awards, financial matters, etc.
e. Costs identified in subsections c and d if incurred for more
than one Federal award or for both sponsored work and other work of
the governmental unit, are allowable to the extent that the
principles in Appendix A to this part, sections E. (``Direct
Costs'') and F. (``Indirect Costs'') are observed.
f. Unallowable advertising and public relations costs include
the following:
(1) All advertising and public relations costs other than as
specified in subsections 1.c, d, and e of this appendix;
(2) Costs of meetings, conventions, convocations, or other
events related to other activities of the governmental unit,
including:
(a) Costs of displays, demonstrations, and exhibits;
(b) Costs of meeting rooms, hospitality suites, and other
special facilities used in conjunction with shows and other special
events; and
(c) Salaries and wages of employees engaged in setting up and
displaying exhibits, making demonstrations, and providing briefings;
(3) Costs of promotional items and memorabilia, including
models, gifts, and souvenirs;
(4) Costs of advertising and public relations designed solely to
promote the governmental unit.
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 a cost
allocation plan or indirect cost proposal, or if specifically
approved by the awarding agency as a direct cost to an award.
c. The cost of agreed-upon procedures engagements to monitor
subrecipients who are exempted from A-133 under section 200(d) are
allowable, subject to the conditions listed in A-133, section 230
(b)(2).
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 governmental unit. They arise also in
instances where the governmental unit requires similar assurance.
Included are such bonds as bid, performance, payment, advance
payment, infringement, and fidelity bonds.
b. Costs of bonding required pursuant to the terms of the award
are allowable.
c. Costs of bonding required by the governmental unit in the
general conduct of its operations are allowable to the extent that
such bonding is in accordance with sound business practice and the
rates and premiums are reasonable under the circumstances.
7. Communication costs. Costs incurred for telephone services,
local and long distance telephone calls, telegrams, postage,
messenger, electronic or computer transmittal services and the like
are allowable.
8. Compensation for personal services.
a. General. Compensation for personnel services includes all
remuneration, paid currently or accrued, for services rendered
during the period of performance under Federal awards, including but
not necessarily limited to wages, salaries, and fringe benefits. The
costs of such compensation are allowable to the extent that they
satisfy the specific requirements of this and other appendices under
2 CFR Part 225, and that the total compensation for individual
employees:
(1) Is reasonable for the services rendered and conforms to the
established policy of the governmental unit consistently applied to
both Federal and non-Federal activities;
(2) Follows an appointment made in accordance with a
governmental unit's laws and rules and meets merit system or other
requirements required by Federal law, where applicable; and
(3) Is determined and supported as provided in subsection h.
b. Reasonableness. Compensation for employees engaged in work on
Federal awards will be considered reasonable to the extent that it
is consistent with that paid for similar work in other activities of
the governmental unit. In cases where the kinds of employees
required for Federal awards are not found in the other activities of
the governmental unit, compensation will be considered reasonable to
the extent that it is comparable to that paid for similar work in
the labor market in which the employing government competes for the
kind of employees involved. Compensation surveys providing data
representative of the labor market involved will be an acceptable
basis for evaluating reasonableness.
c. Unallowable costs. Costs which are unallowable under other
sections of these principles shall not be allowable under this
section solely on the basis that they constitute personnel
compensation.
d. Fringe benefits.
(1) Fringe benefits are allowances and services provided by
employers to their
[[Page 51915]]
employees as compensation in addition to regular salaries and wages.
Fringe benefits include, but are not limited to, the costs of leave,
employee insurance, pensions, and unemployment benefit plans. Except
as provided elsewhere in these principles, the costs of fringe
benefits are allowable to the extent that the benefits are
reasonable and are required by law, governmental unit-employee
agreement, or an established policy of the governmental unit.
(2) The cost of fringe benefits in the form of regular
compensation paid to employees during periods of authorized absences
from the job, such as for annual leave, sick leave, holidays, court
leave, military leave, and other similar benefits, are allowable if:
They are provided under established written leave policies; the
costs are equitably allocated to all related activities, including
Federal awards; and, the accounting basis (cash or accrual) selected
for costing each type of leave is consistently followed by the
governmental unit.
(3) When a governmental unit uses the cash basis of accounting,
the cost of leave is recognized in the period that the leave is
taken and paid for. Payments for unused leave when an employee
retires or terminates employment are allowable in the year of
payment provided they are allocated as a general administrative
expense to all activities of the governmental unit or component.
(4) The accrual basis may be only used for those types of leave
for which a liability as defined by Generally Accepted Accounting
Principles (GAAP) exists when the leave is earned. When a
governmental unit uses the accrual basis of accounting, in
accordance with GAAP, allowable leave costs are the lesser of the
amount accrued or funded.
(5) The cost of fringe benefits in the form of employer
contributions or expenses for social security; employee life,
health, unemployment, and worker's compensation insurance (except as
indicated in section 22, Insurance and indemnification); pension
plan costs (see subsection e.); and other similar benefits are
allowable, provided such benefits are granted under established
written policies. Such benefits, whether treated as indirect costs
or as direct costs, shall be allocated to Federal awards and all
other activities in a manner consistent with the pattern of benefits
attributable to the individuals or group(s) of employees whose
salaries and wages are chargeable to such Federal awards and other
activities.
e. Pension plan costs. Pension plan costs may be computed using
a pay-as-you-go method or an acceptable actuarial cost method in
accordance with established written policies of the governmental
unit.
(1) For pension plans financed on a pay-as-you-go method,
allowable costs will be limited to those representing actual
payments to retirees or their beneficiaries.
(2) Pension costs calculated using an actuarial cost-based
method recognized by GAAP are allowable for a given fiscal year if
they are funded for that year within six months after the end of
that year. Costs funded after the six month period (or a later
period agreed to by the cognizant agency) are allowable in the year
funded. The cognizant agency may agree to an extension of the six
month period if an appropriate adjustment is made to compensate for
the timing of the charges to the Federal Government and related
Federal reimbursement and the governmental unit's contribution to
the pension fund. Adjustments may be made by cash refund or other
equitable procedures to compensate the Federal Government for the
time value of Federal reimbursements in excess of contributions to
the pension fund.
(3) Amounts funded by the governmental unit in excess of the
actuarially determined amount for a fiscal year may be used as the
governmental unit's contribution in future periods.
(4) When a governmental unit converts to an acceptable actuarial
cost method, as defined by GAAP, and funds pension costs in
accordance with this method, the unfunded liability at the time of
conversion shall be allowable if amortized over a period of years in
accordance with GAAP.
(5) The Federal Government shall receive an equitable share of
any previously allowed pension costs (including earnings thereon)
which revert or inure to the governmental unit in the form of a
refund, withdrawal, or other credit.
f. Post-retirement health benefits. Post-retirement health
benefits (PRHB) refers to costs of health insurance or health
services not included in a pension plan covered by subsection 8.e.
of this appendix for retirees and their spouses, dependents, and
survivors. PRHB costs may be computed using a pay-as-you-go method
or an acceptable actuarial cost method in accordance with
established written polices of the governmental unit.
(1) For PRHB financed on a pay as-you-go method, allowable costs
will be limited to those representing actual payments to retirees or
their beneficiaries.
(2) PRHB costs calculated using an actuarial cost method
recognized by GAAP are allowable if they are funded for that year
within six months after the end of that year. Costs funded after the
six month period (or a later period agreed to by the cognizant
agency) are allowable in the year funded. The cognizant agency may
agree to an extension of the six month period if an appropriate
adjustment is made to compensate for the timing of the charges to
the Federal Government and related Federal reimbursements and the
governmental unit's contributions to the PRHB fund. Adjustments may
be made by cash refund, reduction in current year's PRHB costs, or
other equitable procedures to compensate the Federal Government for
the time value of Federal reimbursements in excess of contributions
to the PRHB fund.
(3) Amounts funded in excess of the actuarially determined
amount for a fiscal year may be used as the government's
contribution in a future period.
(4) When a governmental unit converts to an acceptable actuarial
cost method and funds PRHB costs in accordance with this method, the
initial unfunded liability attributable to prior years shall be
allowable if amortized over a period of years in accordance with
GAAP, or, if no such GAAP period exists, over a period negotiated
with the cognizant agency.
(5) To be allowable in the current year, the PRHB costs must be
paid either to:
(a) An insurer or other benefit provider as current year costs
or premiums, or
(b) An insurer or trustee to maintain a trust fund or reserve
for the sole purpose of providing post-retirement benefits to
retirees and other beneficiaries.
(6) The Federal Government shall receive an equitable share of
any amounts of previously allowed post-retirement benefit costs
(including earnings thereon) which revert or inure to the
governmental unit in the form of a refund, withdrawal, or other
credit.
g. Severance pay.
(1) Payments in addition to regular salaries and wages made to
workers whose employment is being terminated are allowable to the
extent that, in each case, they are required by law, employer-
employee agreement, or established written policy.
(2) Severance payments (but not accruals) associated with normal
turnover are allowable. Such payments shall be allocated to all
activities of the governmental unit as an indirect cost.
(3) Abnormal or mass severance pay will be considered on a case-
by-case basis and is allowable only if approved by the cognizant
Federal agency.
h. Support of salaries and wages. These standards regarding time
distribution are in addition to the standards for payroll
documentation.
(1) Charges to Federal awards for salaries and wages, whether
treated as direct or indirect costs, will be based on payrolls
documented in accordance with generally accepted practice of the
governmental unit and approved by a responsible official(s) of the
governmental unit.
(2) No further documentation is required for the salaries and
wages of employees who work in a single indirect cost activity.
(3) Where employees are expected to work solely on a single
Federal award or cost objective, charges for their salaries and
wages will be supported by periodic certifications that the
employees worked solely on that program for the period covered by
the certification. These certifications will be prepared at least
semi-annually and will be signed by the employee or supervisory
official having first hand knowledge of the work performed by the
employee.
(4) Where employees work on multiple activities or cost
objectives, a distribution of their salaries or wages will be
supported by personnel activity reports or equivalent documentation
which meets the standards in subsection 8.h.(5) of this appendix
unless a statistical sampling system (see subsection 8.h.(6) of this
appendix) or other substitute system has been approved by the
cognizant Federal agency. Such documentary support will be required
where employees work on:
(a) More than one Federal award,
(b) A Federal award and a non-Federal award,
(c) An indirect cost activity and a direct cost activity,
(d) Two or more indirect activities which are allocated using
different allocation bases, or
(e) An unallowable activity and a direct or indirect cost
activity.
[[Page 51916]]
(5) Personnel activity reports or equivalent documentation must
meet the following standards:
(a) They must reflect an after-the-fact distribution of the
actual activity of each employee,
(b) They must account for the total activity for which each
employee is compensated,
(c) They must be prepared at least monthly and must coincide
with one or more pay periods, and
(d) They must be signed by the employee.
(e) Budget estimates or other distribution percentages
determined before the services are performed do not qualify as
support for charges to Federal awards but may be used for interim
accounting purposes, provided that:
(i) The governmental unit's system for establishing the
estimates produces reasonable approximations of the activity
actually performed;
(ii) At least quarterly, comparisons of actual costs to budgeted
distributions based on the monthly activity reports are made. Costs
charged to Federal awards to reflect adjustments made as a result of
the activity actually performed may be recorded annually if the
quarterly comparisons show the differences between budgeted and
actual costs are less than ten percent; and
(iii) The budget estimates or other distribution percentages are
revised at least quarterly, if necessary, to reflect changed
circumstances.
(6) Substitute systems for allocating salaries and wages to
Federal awards may be used in place of activity reports. These
systems are subject to approval if required by the cognizant agency.
Such systems may include, but are not limited to, random moment
sampling, case counts, or other quantifiable measures of employee
effort.
(a) Substitute systems which use sampling methods (primarily for
Temporary Assistance to Needy Families (TANF), Medicaid, and other
public assistance programs) must meet acceptable statistical
sampling standards including:
(i) The sampling universe must include all of the employees
whose salaries and wages are to be allocated based on sample results
except as provided in subsection 8.h.(6)(c) of this appendix;
(ii) The entire time period involved must be covered by the
sample; and
(iii) The results must be statistically valid and applied to the
period being sampled.
(b) Allocating charges for the sampled employees' supervisors,
clerical and support staffs, based on the results of the sampled
employees, will be acceptable.
(c) Less than full compliance with the statistical sampling
standards noted in subsection 8.h.(6)(a) of this appendix may be
accepted by the cognizant agency if it concludes that the amounts to
be allocated to Federal awards will be minimal, or if it concludes
that the system proposed by the governmental unit will result in
lower costs to Federal awards than a system which complies with the
standards.
(7) Salaries and wages of employees used in meeting cost sharing
or matching requirements of Federal awards must be supported in the
same manner as those claimed as allowable costs under Federal
awards.
i. Donated services.
(1) Donated or volunteer services may be furnished to a
governmental unit by professional and technical personnel,
consultants, and other skilled and unskilled labor. The value of
these services is not reimbursable either as a direct or indirect
cost. However, the value of donated services may be used to meet
cost sharing or matching requirements in accordance with the
provisions of 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 governmental unit's indirect costs or
rate(s) and, accordingly, shall be allocated a proportionate share
of applicable indirect costs.
(3) To the extent feasible, donated services will be supported
by the same methods used by the governmental unit to support the
allocability of regular personnel services.
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
section 22.c. of this appendix), pension plan reserves (see section
8.e.), and post-retirement health and other benefit reserves
(section 8.f.) computed using acceptable actuarial cost methods.
10. Defense and prosecution of criminal and civil proceedings,
and claims.
a. The following costs are unallowable for contracts covered by
10 U.S.C. 2324(k), ``Allowable costs under defense contracts.''
(1) Costs incurred in defense of any civil or criminal fraud
proceeding or similar proceeding (including filing of false
certification brought by the United States where the contractor is
found liable or has pleaded nolo contendere to a charge of fraud or
similar proceeding (including filing of a false certification).
(2) Costs incurred by a contractor in connection with any
criminal, civil or administrative proceedings commenced by the
United States or a State to the extent provided in 10 U.S.C.
2324(k).
b. Legal expenses required in the administration of Federal
programs are allowable. Legal expenses for prosecution of claims
against the Federal Government are unallowable.
11. Depreciation and use allowances.
a. Depreciation and use allowances are means of allocating the
cost of fixed assets to periods benefiting from asset use.
Compensation for the use of fixed assets on hand may be made through
depreciation or use allowances. A combination of the two methods may
not be used in connection with a single class of fixed assets (e.g.,
buildings, office equipment, computer equipment, etc.) except as
provided for in subsection g. Except for enterprise funds and
internal service funds that are included as part of a State/local
cost allocation plan, classes of assets shall be determined on the
same basis used for the government-wide financial statements.
b. The computation of depreciation or use allowances shall be
based on the acquisition cost of the assets involved. Where actual
cost records have not been maintained, a reasonable estimate of the
original acquisition cost may be used. The value of an asset donated
to the governmental unit by an unrelated third party shall be its
fair market value at the time of donation. Governmental or quasi-
governmental organizations located within the same State shall not
be considered unrelated third parties for this purpose.
c. The computation of depreciation or use allowances will
exclude:
(1) The cost of land;
(2) Any portion of the cost of buildings and equipment borne by
or donated by the Federal Government irrespective of where title was
originally vested or where it presently resides; and
(3) Any portion of the cost of buildings and equipment
contributed by or for the governmental unit, or a related donor
organization, in satisfaction of a matching requirement.
d. Where the depreciation method is followed, the following
general criteria apply:
(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,
historical usage patterns, technological developments, and the
renewal and replacement policies of the governmental unit followed
for the individual items or classes of assets involved. In the
absence of clear evidence indicating that the expected consumption
of the asset will be significantly greater in the early portions
than in the later portions of its useful life, the straight line
method of depreciation shall be used.
(2) Depreciation methods once used shall not be changed unless
approved by the Federal cognizant or awarding agency. When the
depreciation method is introduced for application to an asset
previously subject to a use allowance, the annual depreciation
charge thereon may not exceed the amount that would have resulted
had the depreciation method been in effect from the date of
acquisition of the asset. The combination of use allowances and
depreciation applicable to the asset shall not exceed the total
acquisition cost of the asset or fair market value at time of
donation.
e. When the depreciation method is used for buildings, a
building's shell may be segregated from the major component of the
building (e.g., plumbing system, heating, and air conditioning
system, etc.) and each major component depreciated over its
estimated useful life, or the entire building (i.e., the shell and
all components) may be treated as a single asset and depreciated
over a single useful life.
f. Where the use allowance method is followed, the following
general criteria apply:
(1) The use allowance for buildings and improvements (including
land improvements, such as paved parking areas, fences, and
sidewalks) will be computed at an annual rate not exceeding two
percent of acquisition costs.
[[Page 51917]]
(2) The use allowance for equipment will be computed at an
annual rate not exceeding 6\2/3\ percent of acquisition cost.
(3) When the use allowance method is used for buildings, the
entire building must be treated as a single asset; the building's
components (e.g., plumbing system, heating and air condition, etc.)
cannot be segregated from the building's shell. The two percent
limitation, however, need not be applied to equipment which is
merely attached or fastened to the building but not permanently
fixed to it and which is used as furnishings or decorations or for
specialized purposes (e.g., dentist chairs and dental treatment
units, counters, laboratory benches bolted to the floor,
dishwashers, modular furniture, carpeting, etc.). Such equipment
will be considered as not being permanently fixed to the building if
it can be removed without the destruction of, or need for costly or
extensive alterations or repairs, to the building or the equipment.
Equipment that meets these criteria will be subject to the 6\2/3\
percent equipment use allowance limitation.
g. A reasonable use allowance may be negotiated for any assets
that are considered to be fully depreciated, after taking into
consideration the amount of depreciation previously charged to the
government, the estimated useful life remaining at the time of
negotiation, the effect of any increased maintenance charges,
decreased efficiency due to age, and any other factors pertinent to
the utilization of the asset for the purpose contemplated.
h. Charges for use allowances or depreciation must be supported
by adequate property records. Physical inventories must be taken at
least once every two years (a statistical sampling approach is
acceptable) to ensure that assets exist, and are in use.
Governmental units will manage equipment in accordance with State
laws and procedures. When the depreciation method is followed,
depreciation records indicating the amount of depreciation taken
each period must also be maintained.
12. Donations and contributions.
a. Contributions or donations rendered. Contributions or
donations, including cash, property, and services, made by the
governmental unit, regardless of the recipient, are unallowable.
b. Donated services received:
(1) Donated or volunteer services may be furnished to a
governmental unit by professional and technical personnel,
consultants, and other skilled and unskilled labor. The value of
these services is not reimbursable either as a direct or indirect
cost. However, the value of donated services may be used to meet
cost sharing or matching requirements in accordance with the Federal
Grants Management Common Rule.
(2) The value of donated services utilized in the performance of
a direct cost activity shall, when material in amount, be considered
in the determination of the governmental unit's indirect costs or
rate(s) and, accordingly, shall be allocated a proportionate share
of applicable indirect costs.
(3) To the extent feasible, donated services will be supported
by the same methods used by the governmental unit to support the
allocability of regular personnel services.
13. Employee morale, health, and welfare costs.
a. The costs of employee information publications, health or
first-aid clinics and/or infirmaries, recreational activities,
employee counseling services, and any other expenses incurred in
accordance with the governmental unit's established practice or
custom for the improvement of working conditions, employer-employee
relations, employee morale, and employee performance are allowable.
b. Such costs will be equitably apportioned to all activities of
the governmental unit. Income generated from any of these activities
will be offset against expenses.
14. Entertainment. Costs 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 subsection 15, the following definitions
apply:
(1) ``Capital Expenditures'' means expenditures for the
acquisition cost of capital assets (equipment, buildings, land), or
expenditures to make improvements to capital assets that materially
increase their value or useful life. Acquisition cost means the cost
of the asset including the cost to put it in place. Acquisition cost
for equipment, for example, means the net invoice price of the
equipment, including the cost of any modifications, attachments,
accessories, or auxiliary apparatus necessary to make it usable for
the purpose for which it is acquired. Ancillary charges, such as
taxes, duty, protective in transit insurance, freight, and
installation may be included in, or excluded from the acquisition
cost in accordance with the governmental unit's regular accounting
practices.
(2) ``Equipment'' means an article of nonexpendable, tangible
personal property having a useful life of more than one year and an
acquisition cost which equals or exceeds the lesser of the
capitalization level established by the governmental unit for
financial statement purposes, or $5000.
(3) ``Special purpose equipment'' means equipment which is used
only for research, medical, scientific, or other technical
activities. Examples of special purpose equipment include
microscopes, x-ray machines, surgical instruments, and
spectrometers.
(4) ``General purpose equipment'' means equipment, which is not
limited to research, medical, scientific or other technical
activities. Examples include office equipment and furnishings,
modular offices, telephone networks, information technology
equipment and systems, air conditioning equipment, reproduction and
printing equipment, and motor vehicles.
b. The following rules of allowability shall apply to equipment
and other capital expenditures:
(1) Capital expenditures for general purpose equipment,
buildings, and land are unallowable as direct charges, except where
approved in advance by the awarding agency.
(2) Capital expenditures for special purpose equipment are
allowable as direct costs, provided that items with a unit cost of
$5000 or more have the prior approval of the awarding agency.
(3) Capital expenditures for improvements to land, buildings, or
equipment which materially increase their value or useful life are
unallowable as a direct cost except with the prior approval of the
awarding agency.
(4) When approved as a direct charge pursuant to section
15.b(1), (2), and (3)of this appendix, capital expenditures will be
charged in the period in which the expenditure is incurred, or as
otherwise determined appropriate and negotiated with the awarding
agency. In addition, Federal awarding agencies are authorized at
their option to waive or delegate the prior approval requirement.
(5) Equipment and other capital expenditures are unallowable as
indirect costs. However, see section 11 of this appendix,
Depreciation and use allowance, for rules on the allowability of use
allowances or depreciation on buildings, capital improvements, and
equipment. Also, see section 37 of this appendix, Rental costs,
concerning the allowability of rental costs for land, buildings, and
equipment.
(6) The unamortized portion of any equipment written off as a
result of a change in capitalization levels may be recovered by
continuing to claim the otherwise allowable use allowances or
depreciation on the equipment, or by amortizing the amount to be
written off over a period of years negotiated with the cognizant
agency.
(7) When replacing equipment purchased in whole or in part with
Federal funds, the governmental unit may use the equipment to be
replaced as a trade-in or sell the property and use the proceeds to
offset the cost of the replacement property.
16. Fines and penalties. Fines, penalties, damages, and other
settlements resulting from violations (or alleged violations) of, or
failure of the governmental unit to comply with, Federal, State,
local, or Indian tribal laws and regulations are unallowable except
when incurred as a result of compliance with specific provisions of
the Federal award or written instructions by the awarding agency
authorizing in advance such payments.
17. Fund raising and investment management costs.
a. Costs of organized fund raising, including financial
campaigns, solicitation of gifts and bequests, and similar expenses
incurred to raise capital or obtain contributions are unallowable,
regardless of the purpose for which the funds will be used.
b. Costs of investment counsel and staff and similar expenses
incurred to enhance income from investments are unallowable.
However, such costs associated with investments covering pension,
self-insurance, or other funds which include Federal participation
allowed by this and other appendices of 2 CFR part 225 are
allowable.
c. Fund raising and investment activities shall be allocated an
appropriate share of indirect costs under the conditions described
in subsection C.3.b. of Appendix A to this part.
18. Gains and losses on disposition of depreciable property and
other capital assets
[[Page 51918]]
and substantial relocation of Federal programs.
a. (1) Gains and losses on the sale, retirement, or other
disposition of depreciable property shall be included in the year in
which they occur as credits or charges to the asset cost grouping(s)
in which the property was included. The amount of the gain or loss
to be included as a credit or charge to the appropriate asset cost
grouping(s) shall be the difference between the amount realized on
the property and the undepreciated basis of the property.
(2) Gains and losses on the disposition of depreciable property
shall not be recognized as a separate credit or charge under the
following conditions:
(a) The gain or loss is processed through a depreciation account
and is reflected in the depreciation allowable under sections 11 and
15 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 subsection 22.d of this
appendix.
(d) Compensation for the use of the property was provided
through use allowances in lieu of depreciation.
b. Substantial relocation of Federal awards from a facility
where the Federal Government participated in the financing to
another facility prior to the expiration of the useful life of the
financed facility requires Federal agency approval. The extent of
the relocation, the amount of the Federal participation in the
financing, and the depreciation charged to date may require
negotiation of space charges for Federal awards.
c. Gains or losses of any nature arising from the sale or
exchange of property other than the property covered in subsection
18.a. of this appendix, e.g., land or included in the fair market
value used in any adjustment resulting from a relocation of Federal
awards covered in subsection b. shall be excluded in computing
Federal award costs.
19. General government expenses.
a. The general costs of government are unallowable (except as
provided in section 43 of this appendix, Travel costs). These
include:
(1) Salaries and expenses of the Office of the Governor of a
State or the chief executive of a political subdivision or the chief
executive of federally-recognized Indian tribal government;
(2) Salaries and other expenses of a State legislature, tribal
council, or similar local governmental body, such as a county
supervisor, city council, school board, etc., whether incurred for
purposes of legislation or executive direction;
(3) Costs of the judiciary branch of a government;
(4) Costs of prosecutorial activities unless treated as a direct
cost to a specific program if authorized by program statute or
regulation (however, this does not preclude the allowability of
other legal activities of the Attorney General); and
(5) Costs of other general types of government services normally
provided to the general public, such as fire and police, unless
provided for as a direct cost under a program statute or regulation.
b. For federally-recognized Indian tribal governments and
Councils Of Governments (COGs), the portion of salaries and expenses
directly attributable to managing and operating Federal programs by
the chief executive and his staff is allowable.
20. Goods or services for personal use. Costs of goods or
services for personal use of the governmental unit's employees are
unallowable regardless of whether the cost is reported as taxable
income to the employees.
21. Idle facilities and idle capacity.
As used in this section the following terms have the meanings
set forth below:
(1) ``Facilities'' means land and buildings or any portion
thereof, equipment individually or collectively, or any other
tangible capital asset, wherever located, and whether owned or
leased by the governmental unit.
(2) ``Idle facilities'' means completely unused facilities that
are excess to the governmental unit's current needs.
(3) ``Idle capacity'' means the unused capacity of partially
used facilities. It is the difference between: 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 subsection, costs of idle facilities are allowable for a
reasonable period of time, ordinarily not to exceed one year,
depending on the initiative taken to use, lease, or dispose of such
facilities.
c. The costs of idle capacity are normal costs of doing business
and are a factor in the normal fluctuations of usage or indirect
cost rates from period to period. Such costs are allowable, provided
that the capacity is reasonably anticipated to be necessary or was
originally reasonable and is not subject to reduction or elimination
by use on other Federal awards, subletting, renting, or sale, in
accordance with sound business, economic, or security practices.
Widespread idle capacity throughout an entire facility or among a
group of assets having substantially the same function may be
considered idle facilities.
22. Insurance and indemnification.
a. Costs of insurance required or approved and maintained,
pursuant to the Federal award, are allowable.
b. Costs of other insurance in connection with the general
conduct of activities are allowable subject to the following
limitations:
(1) Types and extent and cost of coverage are in accordance with
the governmental unit's policy and sound business practice.
(2) Costs of insurance or of contributions to any reserve
covering the risk of loss of, or damage to, Federal Government
property are unallowable except to the extent that the awarding
agency has specifically required or approved such costs.
c. Actual losses which could have been covered by permissible
insurance (through a self-insurance program or otherwise) are
unallowable, unless expressly provided for in the Federal award or
as described below. However, the Federal Government will participate
in actual losses of a self insurance fund that are in excess of
reserves. Costs incurred because of losses not covered under nominal
deductible insurance coverage provided in keeping with sound
management practice, and minor losses not covered by insurance, such
as spoilage, breakage, and disappearance of small hand tools, which
occur in the ordinary course of operations, are allowable.
d. Contributions to a reserve for certain self-insurance
programs including workers compensation, unemployment compensation,
and severance pay are allowable subject to the following provisions:
(1) The type of coverage and the extent of coverage and the
rates and premiums would have been allowed had insurance (including
reinsurance) 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 discounted present value of the
liability. The rate used for discounting the liability must be
determined by giving consideration to such factors as the
governmental unit's settlement rate for those liabilities and its
investment rate of return.
(2) Earnings or investment income on reserves must be credited
to those reserves.
(3) Contributions to reserves must be based on sound actuarial
principles using historical experience and reasonable assumptions.
Reserve levels must be analyzed and updated at least biennially for
each major risk being insured and take into account any reinsurance,
coinsurance, etc. Reserve levels related to employee-related
coverages will normally be limited to the value of claims submitted
and adjudicated but not paid, submitted but not adjudicated, and
incurred but not submitted. Reserve levels in excess of the amounts
based on the above must be identified and justified in the cost
allocation plan or indirect cost rate proposal.
(4) Accounting records, actuarial studies, and cost allocations
(or billings) must recognize any significant differences due to
types of insured risk and losses generated by the various insured
activities or agencies of the governmental unit. If individual
departments or agencies of the governmental
[[Page 51919]]
unit experience significantly different levels of claims for a
particular risk, those differences are to be recognized by the use
of separate allocations or other techniques resulting in an
equitable allocation.
(5) Whenever funds are transferred from a self-insurance reserve
to other accounts (e.g., general fund), refunds shall be made to the
Federal Government for its share of funds transferred, including
earned or imputed interest from the date of transfer.
e. Actual claims paid to or on behalf of employees or former
employees for workers' compensation, unemployment compensation,
severance pay, and similar employee benefits (e.g., subsection 8.f.
for post retirement health benefits), are allowable in the year of
payment provided the governmental unit follows a consistent costing
policy and they are allocated as a general administrative expense to
all activities of the governmental unit.
f. Insurance refunds shall be credited against insurance costs
in the year the refund is received.
g. Indemnification includes securing the governmental unit
against liabilities to third persons and other losses not
compensated by insurance or otherwise. The Federal Government is
obligated to indemnify the governmental unit only to the extent
expressly provided for in the Federal award, except as provided in
subsection 22.d of this appendix.
h. Costs of commercial insurance that protects against the costs
of the contractor for correction of the contractor's own defects in
materials or workmanship are unallowable.
23. Interest.
a. Costs incurred for interest on borrowed capital or the use of
a governmental unit's own funds, however represented, are
unallowable except as specifically provided in subsection b. or
authorized by Federal legislation.
b. Financing costs (including interest) paid or incurred which
are associated with the otherwise allowable costs of building
acquisition, construction, or fabrication, reconstruction or
remodeling completed on or after October 1, 1980 is allowable
subject to the conditions in section 23.b.(1) through (4) of this
appendix. Financing costs (including interest) paid or incurred on
or after September 1, 1995 for land or associated with otherwise
allowable costs of equipment is allowable, subject to the conditions
in section 23.b. (1) through (4) of this appendix.
(1) The financing is provided (from other than tax or user fee
sources) by a bona fide third party external to the governmental
unit;
(2) The assets are used in support of Federal awards;
(3) Earnings on debt service reserve funds or interest earned on
borrowed funds pending payment of the construction or acquisition
costs are used to offset the current period's cost or the
capitalized interest, as appropriate. Earnings subject to being
reported to the Federal Internal Revenue Service under arbitrage
requirements are excludable.
(4) For debt arrangements over $1 million, unless the
governmental unit makes an initial equity contribution to the asset
purchase of 25 percent or more, the governmental unit shall reduce
claims for interest cost by an amount equal to imputed interest
earnings on excess cash flow, which is to be calculated as follows.
Annually, non-Federal entities shall prepare a cumulative (from the
inception of the project) report of monthly cash flows that includes
inflows and outflows, regardless of the funding source. Inflows
consist of depreciation expense, amortization of capitalized
construction interest, and annual interest cost. For cash flow
calculations, the annual inflow figures shall be divided by the
number of months in the year (i.e., usually 12) that the building is
in service for monthly amounts. Outflows consist of initial equity
contributions, debt principal payments (less the pro rata share
attributable to the unallowable costs of land) and interest
payments. Where cumulative inflows exceed cumulative outflows,
interest shall be calculated on the excess inflows for that period
and be treated as a reduction to allowable interest cost. The rate
of interest to be used to compute earnings on excess cash flows
shall be the three-month Treasury bill closing rate as of the last
business day of that month.
(5) Interest attributable to fully depreciated assets is
unallowable.
24. Lobbying.
a. General. The cost of certain influencing activities
associated with obtaining grants, contracts, cooperative agreements,
or loans is an unallowable cost. Lobbying with respect to certain
grants, contracts, cooperative agreements, and loans shall be
governed by the common rule, ``New Restrictions on Lobbying'' (see
Section J.24 of Appendix A to 2 CFR part 220), including
definitions, and the Office of Management and Budget ``Government-
wide Guidance for New Restrictions on Lobbying'' and notices
published at 54 FR 52306 (December 20, 1989), 55 FR 24540 (June 15,
1990), and 57 FR 1772 (January 15, 1992), respectively.
b. Executive lobbying costs. Costs incurred in attempting to
improperly influence either directly or indirectly, an employee or
officer of the Executive Branch of the Federal Government to give
consideration or to act regarding a sponsored agreement or a
regulatory matter are unallowable. Improper influence means any
influence that induces or tends to induce a Federal employee or
officer to give consideration or to act regarding a federally-
sponsored agreement or regulatory matter on any basis other than the
merits of the matter.
25. Maintenance, operations, and repairs. Unless prohibited by
law, the cost of utilities, insurance, security, janitorial
services, elevator service, upkeep of grounds, necessary
maintenance, normal repairs and alterations, and the like are
allowable to the extent that they: keep property (including Federal
property, unless otherwise provided for) in an efficient operating
condition, do not add to the permanent value of property or
appreciably prolong its intended life, and are not otherwise
included in rental or other charges for space. Costs which add to
the permanent value of property or appreciably prolong its intended
life shall be treated as capital expenditures (see sections 11 and
15 of this appendix).
26. Materials and supplies costs.
a. Costs incurred for materials, supplies, and fabricated parts
necessary to carry out a Federal award are allowable.
b. Purchased materials and supplies shall be charged at their
actual prices, net of applicable credits. Withdrawals from general
stores or stockrooms should be charged at their actual net cost
under any recognized method of pricing inventory withdrawals,
consistently applied. Incoming transportation charges are a proper
part of materials and supplies costs.
c. Only materials and supplies actually used for the performance
of a Federal award may be charged as direct costs.
d. Where federally-donated or furnished materials are used in
performing the Federal award, such materials will be used without
charge.
27. Meetings and conferences. Costs of meetings and conferences,
the primary purpose of which is the dissemination of technical
information, are allowable. This includes costs of meals,
transportation, rental of facilities, speakers' fees, and other
items incidental to such meetings or conferences. But see section
14, Entertainment costs, of this appendix.
28. Memberships, subscriptions, and professional activity costs.
a. Costs of the governmental unit's memberships in business,
technical, and professional organizations are allowable.
b. Costs of the governmental unit's subscriptions to business,
professional, and technical periodicals are allowable.
c. Costs of membership in civic and community, social
organizations are allowable as a direct cost with the approval of
the Federal awarding agency.
d. Costs of membership in organizations substantially engaged in
lobbying are unallowable.
29. Patent costs.
a. The following costs relating to patent and copyright matters
are allowable: 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; 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 sections 32, Professional service costs, and 38, 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: 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; 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 section 38, Royalties and other costs for use of patents
and copyrights, of this appendix).
[[Page 51920]]
30. Plant and homeland security costs. Necessary and reasonable
expenses incurred for routine and homeland security to protect
facilities, personnel, and work products are allowable. Such costs
include, but are not limited to, wages and uniforms of personnel
engaged in security activities; equipment; barriers; contractual
security services; consultants; etc. Capital expenditures for
homeland and plant security purposes are subject to section 15,
Equipment and other capital expenditures, of this appendix.
31. Pre-award costs. Pre-award costs are those incurred prior to
the effective date of the award directly pursuant to the negotiation
and in anticipation of the award where such costs are necessary to
comply with the proposed delivery schedule or period of performance.
Such costs are allowable only to the extent that they would have
been allowable if incurred after the date of the award and only with
the written approval of the awarding agency.
32. Professional service costs.
a. Costs of professional and consultant services rendered by
persons who are members of a particular profession or possess a
special skill, and who are not officers or employees of the
governmental unit, are allowable, subject to 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 section 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 governmental unit's capability in the particular area.
(3) The past pattern of such costs, particularly in the years
prior to Federal awards.
(4) The impact of Federal awards on the governmental unit's
business (i.e., what new problems have arisen).
(5) Whether the proportion of Federal work to the governmental
unit's total business is such as to influence the governmental unit
in favor of incurring the cost, particularly where the services
rendered are not of a continuing nature and have little relationship
to work under Federal grants and contracts.
(6) Whether the service can be performed more economically by
direct employment rather than contracting.
(7) The qualifications of the individual or concern rendering
the service and the customary fees charged, especially on non-
Federal awards.
(8) Adequacy of the contractual agreement for the service (e.g.,
description of the service, estimate of time required, rate of
compensation, and termination provisions).
c. In addition to the factors in subparagraph b, retainer fees
to be allowable must be supported by available or rendered evidence
of bona fide services available or rendered.
33. Proposal costs. Costs of preparing proposals for potential
Federal awards are allowable. Proposal costs should normally be
treated as indirect costs and should be allocated to all activities
of the governmental unit utilizing the cost allocation plan and
indirect cost rate proposal. However, proposal costs may be charged
directly to Federal awards with the prior approval of the Federal
awarding agency.
34. Publication and printing costs.
a. Publication costs include the costs of printing (including
the processes of composition, plate-making, press work, binding, and
the end products produced by such processes), distribution,
promotion, mailing, and general handling. Publication costs also
include page charges in professional publications.
b. If these costs are not identifiable with a particular cost
objective, they should be allocated as indirect costs to all
benefiting activities of the governmental unit.
c. Page charges for professional journal publications are
allowable as a necessary part of research costs where:
(1) The research papers report work supported by the Federal
Government; and
(2) The charges are levied impartially on all research papers
published by the journal, whether or not by federally-sponsored
authors.
35. Rearrangement and alteration costs. Costs incurred for
ordinary and normal rearrangement and alteration of facilities are
allowable. Special arrangements and alterations costs incurred
specifically for a Federal award are allowable with the prior
approval of the Federal awarding agency.
36. Reconversion costs. Costs incurred in the restoration or
rehabilitation of the governmental unit's facilities to
approximately the same condition existing immediately prior to
commencement of Federal awards, less costs related to normal wear
and tear, are allowable.
37. Rental costs of buildings and equipment.
a. Subject to the limitations described in subsections b.
through d. of this section, rental costs are allowable to the extent
that the rates are reasonable in light of such factors as: rental
costs of comparable property, if any; market conditions in the area;
alternatives available; and the type, life expectancy, condition,
and value of the property leased. Rental arrangements should be
reviewed periodically to determine if circumstances have changed and
other options are available.
b. Rental costs under ``sale and lease back'' arrangements are
allowable only up to the amount that would be allowed had the
governmental unit continued to own the property. This amount would
include expenses such as depreciation or use allowance, maintenance,
taxes, and insurance.
c. Rental costs under ``less-than-arm's-length'' leases are
allowable only up to the amount (as explained in section 37.b of
this appendix) that would be allowed had title to the property
vested in the governmental unit. For this purpose, a less-than-
arm's-length lease is one under which one party to the lease
agreement is able to control or substantially influence the actions
of the other. Such leases include, but are not limited to those
between divisions of a governmental unit; governmental units under
common control through common officers, directors, or members; and a
governmental unit and a director, trustee, officer, or key employee
of the governmental unit or his immediate family, either directly or
through corporations, trusts, or similar arrangements in which they
hold a controlling interest. For example, a governmental unit may
establish a separate corporation for the sole purpose of owning
property and leasing it back to the governmental unit.
d. Rental costs under leases which are required to be treated as
capital leases under GAAP are allowable only up to the amount (as
explained in subsection 37.b of this appendix) that would be allowed
had the governmental unit purchased the property on the date the
lease agreement was executed. The provisions of Financial Accounting
Standards Board Statement 13, Accounting for Leases, shall be used
to determine whether a lease is a capital lease. Interest costs
related to capital leases are allowable to the extent they meet the
criteria in section 23 of this appendix. Unallowable costs include
amounts paid for profit, management fees, and taxes that would not
have been incurred had the governmental unit purchased the facility.
38. Royalties and other costs for the use of patents.
a. Royalties on a patent or copyright or amortization of the
cost of acquiring by purchase a copyright, patent, or rights
thereto, necessary for the proper performance of the award are
allowable unless:
(1) The Federal Government has a license or the right to free
use of the patent or copyright.
(2) The patent or copyright has been adjudicated to be invalid,
or has been administratively determined to be invalid.
(3) The patent or copyright is considered to be unenforceable.
(4) The patent or copyright is expired.
b. Special care should be exercised in determining
reasonableness where the royalties may have been arrived at as a
result of less-than-arm's-length bargaining, e.g.:
(1) Royalties paid to persons, including corporations,
affiliated with the governmental unit.
(2) Royalties paid to unaffiliated parties, including
corporations, under an agreement entered into in contemplation that
a Federal award would be made.
(3) Royalties paid under an agreement entered into after an
award is made to a governmental unit.
c. In any case involving a patent or copyright formerly owned by
the governmental unit, the amount of royalty allowed should not
exceed the cost which would have been allowed had the governmental
unit retained title thereto.
39. Selling and marketing. Costs of selling and marketing any
products or services of the governmental unit are unallowable
(unless allowed under section 1. of this appendix as allowable
public relations costs or under section 33. of this appendix as
allowable proposal costs.
40. Taxes.
a. Taxes that a governmental unit is legally required to pay are
allowable, except for self-
[[Page 51921]]
assessed taxes that disproportionately affect Federal programs or
changes in tax policies that disproportionately affect Federal
programs. This provision is applicable to taxes paid during the
governmental unit's first fiscal year that begins on or after
January 1, 1998, and applies thereafter.
b. Gasoline taxes, motor vehicle fees, and other taxes that are
in effect user fees for benefits provided to the Federal Government
are allowable.
c. This provision does not restrict the authority of Federal
agencies to identify taxes where Federal participation is
inappropriate. Where the identification of the amount of unallowable
taxes would require an inordinate amount of effort, the cognizant
agency may accept a reasonable approximation thereof.
41. 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 governmental
unit's other work shall not be allowable unless the governmental
unit submits evidence that it would not retain such items at cost
without sustaining a loss. In deciding whether such items are
reasonably usable on other work of the governmental unit, the
awarding agency should consider the governmental unit's plans and
orders for current and scheduled activity. Contemporaneous purchases
of common items by the governmental unit shall be regarded as
evidence that such items are reasonably usable on the governmental
unit's other work. Any acceptance of common items as allocable to
the terminated portion of the Federal award shall be limited to the
extent that the quantities of such items on hand, in transit, and on
order are in excess of the reasonable quantitative requirements of
other work.
b. If in a particular case, despite all reasonable efforts by
the governmental unit, certain costs cannot be discontinued
immediately after the effective date of termination, such costs are
generally allowable within the limitations set forth in this and
other appendices of 2 CFR part 225, except that any such costs
continuing after termination due to the negligent or willful failure
of the governmental unit to discontinue such costs shall be
unallowable.
c. Loss of useful value of special tooling, machinery, and
equipment is generally allowable if:
(1) Such special tooling, special machinery, or equipment is not
reasonably capable of use in the other work of the governmental
unit,
(2) The interest of the Federal Government is protected by
transfer of title or by other means deemed appropriate by the
awarding agency, and
(3) The loss of useful value for any one terminated Federal
award is limited to that portion of the acquisition cost which bears
the same ratio to the total acquisition cost as the terminated
portion of the Federal award bears to the entire terminated Federal
award and other Federal awards for which the special tooling,
machinery, or equipment was acquired.
d. Rental costs under unexpired leases are generally allowable
where clearly shown to have been reasonably necessary for the
performance of the terminated Federal award less the residual value
of such leases, if:
(1) The amount of such rental claimed does not exceed the
reasonable use value of the property leased for the period of the
Federal award and such further period as may be reasonable, and
(2) The governmental unit makes all reasonable efforts to
terminate, assign, settle, or otherwise reduce the cost of such
lease. There also may be included the cost of alterations of such
leased property, provided such alterations were necessary for the
performance of the Federal award, and of reasonable restoration
required by the provisions of the lease.
e. Settlement expenses including the following are generally
allowable:
(1) Accounting, legal, clerical, and similar costs reasonably
necessary for:
(a) The preparation and presentation to the awarding agency of
settlement claims and supporting data with respect to the terminated
portion of the Federal award, unless the termination is for default
(see Subpart --.44 of the Grants Management Common Rule (see Sec.
215.5) implementing OMB Circular A-102); and
(b) The termination and settlement of subawards.
(2) Reasonable costs for the storage, transportation,
protection, and disposition of property provided by the Federal
Government or acquired or produced for the Federal award, except
when grantees or contractors are reimbursed for disposals at a
predetermined amount in accordance with Subparts --.31 and --.32 of
the Grants Management Common Rule (see Sec. 215.5) implementing OMB
Circular A-102.
f. Claims under subawards, including the allocable portion of
claims which are common to the Federal award, and to other work of
the governmental unit are generally allowable. An appropriate share
of the governmental unit's indirect expense may be allocated to the
amount of settlements with subcontractors and/or subgrantees,
provided that the amount allocated is otherwise consistent with the
basic guidelines contained in Appendix A to this part. The indirect
expense so allocated shall exclude the same and similar costs
claimed directly or indirectly as settlement expenses.
42. Training costs. The cost of training provided for employee
development is allowable.
43. Travel costs.
a. General. Travel costs are the expenses for transportation,
lodging, subsistence, and related items incurred by employees who
are in travel status on official business of the governmental unit.
Such costs may be charged on an actual cost basis, on a per diem or
mileage basis in lieu of actual costs incurred, or on a combination
of the two, provided the method used is applied to an entire trip
and not to selected days of the trip, and results in charges
consistent with those normally allowed in like circumstances in the
governmental unit's non-federally-sponsored activities.
Notwithstanding the provisions of section 19 of this appendix,
General government expenses, travel costs of officials covered by
that section are allowable with the prior approval of an awarding
agency when they are specifically related to Federal awards.
b. Lodging and subsistence. Costs incurred by employees and
officers for travel, including costs of lodging, other subsistence,
and incidental expenses, shall be considered reasonable and
allowable only to the extent such costs do not exceed charges
normally allowed by the governmental unit in its regular operations
as the result of the governmental unit's written travel policy. In
the absence of an acceptable, written governmental unit policy
regarding travel costs, the rates and amounts established under
subchapter I of Chapter 57, Title 5, United States Code (``Travel
and Subsistence Expenses; Mileage Allowances''), or by the
Administrator of General Services, or by the President (or his or
her designee) pursuant to any provisions of such subchapter shall
apply to travel under Federal awards (48 CFR 31.205-46(a)).
c. Commercial air travel.
(1) Airfare costs in excess of the customary standard commercial
airfare (coach or equivalent), Federal Government contract airfare
(where authorized and available), or the lowest commercial discount
airfare are unallowable except when such accommodations would:
(a) Require circuitous routing;
(b) Require travel during unreasonable hours;
(c) Excessively prolong travel;
(d) Result in additional costs that would offset the
transportation savings; or
(e) Offer accommodations not reasonably adequate for the
traveler's medical needs. The governmental unit must justify and
document these conditions on a case-by-case basis in order for the
use of first-class airfare to be allowable in such cases.
(2) Unless a pattern of avoidance is detected, the Federal
Government will generally not question a governmental unit's
determinations that customary standard airfare or other discount
airfare is unavailable for specific trips if the governmental unit
can demonstrate either of the following:
(aa) That such airfare was not available in the specific case;
or
(b) That it is the governmental unit's overall practice to make
routine use of such airfare.
d. Air travel by other than commercial carrier. Costs of travel
by governmental unit-owned, -leased, or -chartered aircraft include
the cost of lease, charter, operation (including personnel costs),
maintenance, depreciation, insurance, and other related costs. The
portion of such costs that exceeds the cost of allowable commercial
air travel, as provided for in subsection 43.c. of this appendix, 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
[[Page 51922]]
must receive such approval. For purposes of this provision,
``foreign travel'' includes any travel outside Canada, Mexico, the
United States, and any United States territories and possessions.
However, the term ``foreign travel'' for a governmental unit located
in a foreign country means travel outside that country.
Appendix C to Part 225--State/Local-Wide Central Service Cost
Allocation Plans
Table of Contents
A. General
B. Definitions
1. Billed central services
2. Allocated central services
3. Agency or operating agency
C. Scope of the Central Service Cost Allocation Plans
D. Submission Requirements
E. Documentation Requirements for Submitted Plans
1. General
2. Allocated central services
3. Billed services
a. General
b. Internal service funds
c. Self-insurance funds
d. Fringe benefits
4. Required certification
F. Negotiation and Approval of Central Service Plans
G. Other Policies
1. Billed central service activities
2. Working capital reserves
3. Carry-forward adjustments of allocated central service costs
4. Adjustments of billed central services
5. Records retention
6. Appeals
7. OMB assistance State/Local-Wide Central Service Cost
Allocation Plans
A. General.
1. Most governmental units provide certain services, such as
motor pools, computer centers, purchasing, accounting, etc., to
operating agencies on a centralized basis. Since federally-supported
awards are performed within the individual operating agencies, there
needs to be a process whereby these central service costs can be
identified and assigned to benefitted activities on a reasonable and
consistent basis. The central service cost allocation plan provides
that process. All costs and other data used to distribute the costs
included in the plan should be supported by formal accounting and
other records that will support the propriety of the costs assigned
to Federal awards.
2. Guidelines and illustrations of central service cost
allocation plans are provided in a brochure published by the
Department of Health and Human Services entitled ``A Guide for State
and Local Government Agencies: Cost Principles and Procedures for
Establishing Cost Allocation Plans and Indirect Cost Rates for
Grants and Contracts with the Federal Government.'' A copy of this
brochure may be obtained from the Superintendent of Documents, U.S.
Government Printing Office, Washington, DC 20401.
B. Definitions.
1. ``Billed central services'' means central services that are
billed to benefitted agencies and/or programs on an individual fee-
for-service or similar basis. Typical examples of billed central
services include computer services, transportation services,
insurance, and fringe benefits.
2. ``Allocated central services'' means central services that
benefit operating agencies but are not billed to the agencies on a
fee-for-service or similar basis. These costs are allocated to
benefitted agencies on some reasonable basis. Examples of such
services might include general accounting, personnel administration,
purchasing, etc.
3. ``Agency or operating agency'' means an organizational unit
or sub-division within a governmental unit that is responsible for
the performance or administration of awards or activities of the
governmental unit.
C. Scope of the Central Service Cost Allocation Plans. The
central service cost allocation plan will include all central
service costs that will be claimed (either as a billed or an
allocated cost) under Federal awards and will be documented as
described in section E. Costs of central services omitted from the
plan will not be reimbursed.
D. Submission Requirements.
1. Each State will submit a plan to the Department of Health and
Human Services for each year in which it claims central service
costs under Federal awards. The plan should include a projection of
the next year's allocated central service cost (based either on
actual costs for the most recently completed year or the budget
projection for the coming year), and a reconciliation of actual
allocated central service costs to the estimated costs used for
either the most recently completed year or the year immediately
preceding the most recently completed year.
2. Each local government that has been designated as a ``major
local government'' by the Office of Management and Budget (OMB) is
also required to submit a plan to its cognizant agency annually. OMB
periodically lists major local governments in the Federal Register.
3. All other local governments claiming central service costs
must develop a plan in accordance with the requirements described in
this appendix and maintain the plan and related supporting
documentation for audit. These local governments are not required to
submit their plans for Federal approval unless they are specifically
requested to do so by the cognizant agency. Where a local government
only receives funds as a sub-recipient, the primary recipient will
be responsible for negotiating indirect cost rates and/or monitoring
the sub-recipient's plan.
4. All central service cost allocation plans will be prepared
and, when required, submitted within six months prior to the
beginning of each of the governmental unit's fiscal years in which
it proposes to claim central service costs. Extensions may be
granted by the cognizant agency on a case-by-case basis.
E. Documentation Requirements for Submitted Plans. The
documentation requirements described in this section may be
modified, expanded, or reduced by the cognizant agency on a case-by-
case basis. For example, the requirements may be reduced for those
central services which have little or no impact on Federal awards.
Conversely, if a review of a plan indicates that certain additional
information is needed, and will likely be needed in future years, it
may be routinely requested in future plan submissions. Items marked
with an asterisk (*) should be submitted only once; subsequent plans
should merely indicate any changes since the last plan.
1. General. All proposed plans must be accompanied by the
following: An organization chart sufficiently detailed to show
operations including the central service activities of the State/
local government whether or not they are shown as benefiting from
central service functions; a copy of the Comprehensive Annual
Financial Report (or a copy of the Executive Budget if budgeted
costs are being proposed) to support the allowable costs of each
central service activity included in the plan; and, a certification
(see subsection 4.) that the plan was prepared in accordance with
this and other appendices to this part, contains only allowable
costs, and was prepared in a manner that treated similar costs
consistently among the various Federal awards and between Federal
and non-Federal awards/activities.
2. Allocated central services. For each allocated central
service, the plan must also include the following: A brief
description of the service*, an identification of the unit rendering
the service and the operating agencies receiving the service, the
items of expense included in the cost of the service, the method
used to distribute the cost of the service to benefitted agencies,
and a summary schedule showing the allocation of each service to the
specific benefitted agencies. If any self-insurance funds or fringe
benefits costs are treated as allocated (rather than billed) central
services, documentation discussed in subsections 3.b. and c. shall
also be included.
3. Billed services.
a. General. The information described below shall be provided
for all billed central services, including internal service funds,
self-insurance funds, and fringe benefit funds.
b. Internal service funds.
(1) For each internal service fund or similar activity with an
operating budget of $5 million or more, the plan shall include: A
brief description of each service; a balance sheet for each fund
based on individual accounts contained in the governmental unit's
accounting system; a revenue/expenses statement, with revenues
broken out by source, e.g., regular billings, interest earned, etc.;
a listing of all non-operating transfers (as defined by Generally
Accepted Accounting Principles (GAAP)) into and out of the fund; a
description of the procedures (methodology) used to charge the costs
of each service to users, including how billing rates are
determined; a schedule of current rates; and, a schedule comparing
total revenues (including imputed revenues) generated by the service
to the allowable costs of the service, as determined under this and
other appendices of this part, with an explanation of how variances
will be handled.
[[Page 51923]]
(2) Revenues shall consist of all revenues generated by the
service, including unbilled and uncollected revenues. If some users
were not billed for the services (or were not billed at the full
rate for that class of users), a schedule showing the full imputed
revenues associated with these users shall be provided. Expenses
shall be broken out by object cost categories (e.g., salaries,
supplies, etc.).
c. Self-insurance funds. For each self-insurance fund, the plan
shall include: The fund balance sheet; a statement of revenue and
expenses including a summary of billings and claims paid by agency;
a listing of all non-operating transfers into and out of the fund;
the type(s) of risk(s) covered by the fund (e.g., automobile
liability, workers' compensation, etc.); an explanation of how the
level of fund contributions are determined, including a copy of the
current actuarial report (with the actuarial assumptions used) if
the contributions are determined on an actuarial basis; and, a
description of the procedures used to charge or allocate fund
contributions to benefitted activities. Reserve levels in excess of
claims submitted and adjudicated but not paid, submitted but not
adjudicated, and incurred but not submitted must be identified and
explained.
d. Fringe benefits. For fringe benefit costs, the plan shall
include: A listing of fringe benefits provided to covered employees,
and the overall annual cost of each type of benefit; current fringe
benefit policies*; and procedures used to charge or allocate the
costs of the benefits to benefitted activities. In addition, for
pension and post-retirement health insurance plans, the following
information shall be provided: the governmental unit's funding
policies, e.g., legislative bills, trust agreements, or State-
mandated contribution rules, if different from actuarially
determined rates; the pension plan's costs accrued for the year; the
amount funded, and date(s) of funding; a copy of the current
actuarial report (including the actuarial assumptions); the plan
trustee's report; and, a schedule from the activity showing the
value of the interest cost associated with late funding.
4. Required certification. Each central service cost allocation
plan will be accompanied by a certification in the following form:
Certificate of Cost Allocation Plan
This is to certify that I have reviewed the cost allocation plan
submitted herewith and to the best of my knowledge and belief:
(1) All costs included in this proposal [identify date] to
establish cost allocations or billings for [identify period covered
by plan] are allowable in accordance with the requirements of 2 CFR
Part 225, Cost Principles for State, Local, and Indian Tribal
Governments (OMB Circular A-87), and the Federal award(s) to which
they apply. Unallowable costs have been adjusted for in allocating
costs as indicated in the cost allocation plan.
(2) All costs included in this proposal are properly allocable
to Federal awards on the basis of a beneficial or causal
relationship between the expenses incurred and the awards to which
they are allocated in accordance with applicable requirements.
Further, the same costs that have been treated as indirect costs
have not been claimed as direct costs. Similar types of costs have
been accounted for consistently.
I declare that the foregoing is true and correct.
Governmental Unit:----------------------------------------------------
Signature:------------------------------------------------------------
Name of Official:-----------------------------------------------------
Title:----------------------------------------------------------------
Date of Execution:----------------------------------------------------
F. Negotiation and Approval of Central Service Plans.
1. All proposed central service cost allocation plans that are
required to be submitted will be reviewed, negotiated, and approved
by the Federal cognizant agency on a timely basis. The cognizant
agency will review the proposal within six months of receipt of the
proposal and either negotiate/approve the proposal or advise the
governmental unit of the additional documentation needed to support/
evaluate the proposed plan or the changes required to make the
proposal acceptable. Once an agreement with the governmental unit
has been reached, the agreement will be accepted and used by all
Federal agencies, unless prohibited or limited by statute. Where a
Federal funding agency has reason to believe that special operating
factors affecting its awards necessitate special consideration, the
funding agency will, prior to the time the plans are negotiated,
notify the cognizant agency.
2. The results of each negotiation shall be formalized in a
written agreement between the cognizant agency and the governmental
unit. This agreement will be subject to re-opening if the agreement
is subsequently found to violate a statute or the information upon
which the plan was negotiated is later found to be materially
incomplete or inaccurate. The results of the negotiation shall be
made available to all Federal agencies for their use.
3. Negotiated cost allocation plans based on a proposal later
found to have included costs that: Are unallowable as specified by
law or regulation, as identified in Appendix B of this part, or by
the terms and conditions of Federal awards, or are unallowable
because they are clearly not allocable to Federal awards, shall be
adjusted, or a refund shall be made at the option of the Federal
cognizant agency. These adjustments or refunds are designed to
correct the plans and do not constitute a reopening of the
negotiation.
G. Other Policies.
1. Billed central service activities. Each billed central
service activity must separately account for all revenues (including
imputed revenues) generated by the service, expenses incurred to
furnish the service, and profit/loss.
2. Working capital reserves. Internal service funds are
dependent upon a reasonable level of working capital reserve to
operate from one billing cycle to the next. Charges by an internal
service activity to provide for the establishment and maintenance of
a reasonable level of working capital reserve, in addition to the
full recovery of costs, are allowable. A working capital reserve as
part of retained earnings of up to 60 days cash expenses for normal
operating purposes is considered reasonable. A working capital
reserve exceeding 60 days may be approved by the cognizant Federal
agency in exceptional cases.
3. Carry-forward adjustments of allocated central service costs.
Allocated central service costs are usually negotiated and approved
for a future fiscal year on a ``fixed with carry-forward'' basis.
Under this procedure, the fixed amounts for the future year covered
by agreement are not subject to adjustment for that year. However,
when the actual costs of the year involved become known, the
differences between the fixed amounts previously approved and the
actual costs will be carried forward and used as an adjustment to
the fixed amounts established for a later year. This ``carry-
forward'' procedure applies to all central services whose costs were
fixed in the approved plan. However, a carry-forward adjustment is
not permitted, for a central service activity that was not included
in the approved plan, or for unallowable costs that must be
reimbursed immediately.
4. Adjustments of billed central services. Billing rates used to
charge Federal awards shall be based on the estimated costs of
providing the services, including an estimate of the allocable
central service costs. A comparison of the revenue generated by each
billed service (including total revenues whether or not billed or
collected) to the actual allowable costs of the service will be made
at least annually, and an adjustment will be made for the difference
between the revenue and the allowable costs. These adjustments will
be made through one of the following adjustment methods: A cash
refund to the Federal Government for the Federal share of the
adjustment, credits to the amounts charged to the individual
programs, adjustments to future billing rates, or adjustments to
allocated central service costs. Adjustments to allocated central
services will not be permitted where the total amount of the
adjustment for a particular service (Federal share and non-Federal)
share exceeds $500,000.
5. Records retention. All central service cost allocation plans
and related documentation used as a basis for claiming costs under
Federal awards must be retained for audit in accordance with the
records retention requirements contained in the Common Rule.
6. Appeals. If a dispute arises in the negotiation of a plan
between the cognizant agency and the governmental unit, the dispute
shall be resolved in accordance with the appeals procedures of the
cognizant agency.
7. OMB assistance. To the extent that problems are encountered
among the Federal agencies and/or governmental units in connection
with the negotiation and approval process, OMB will lend assistance,
as required, to resolve such problems in a timely manner.
[[Page 51924]]
Appendix D to Part 225--Public Assistance Cost Allocation Plans
Table of Contents
A. General
B. Definitions
1. State public assistance agency
2. State public assistance agency costs
C. Policy
D. Submission, Documentation, and Approval of Public Assistance Cost
Allocation Plans
E. Review of Implementation of Approved Plans
F. Unallowable Costs
A. General. Federally-financed programs administered by State
public assistance agencies are funded predominately by the
Department of Health and Human Services (HHS). In support of its
stewardship requirements, HHS has published requirements for the
development, documentation, submission, negotiation, and approval of
public assistance cost allocation plans in Subpart E of 45 CFR part
95. All administrative costs (direct and indirect) are normally
charged to Federal awards by implementing the public assistance cost
allocation plan. This appendix extends these requirements to all
Federal agencies whose programs are administered by a State public
assistance agency. Major federally-financed programs typically
administered by State public assistance agencies include: Temporary
Assistance to Needy Families (TANF), Medicaid, Food Stamps, Child
Support Enforcement, Adoption Assistance and Foster Care, and Social
Services Block Grant.
B. Definitions.
1. ``State public assistance agency'' means a State agency
administering or supervising the administration of one or more
public assistance programs operated by the State as identified in
Subpart E of 45 CFR part 95. For the purpose of this appendix, these
programs include all programs administered by the State public
assistance agency.
2. ``State public assistance agency costs'' means all costs
incurred by, or allocable to, the State public assistance agency,
except expenditures for financial assistance, medical vendor
payments, food stamps, and payments for services and goods provided
directly to program recipients.
C. Policy. State public assistance agencies will develop,
document and implement, and the Federal Government will review,
negotiate, and approve, public assistance cost allocation plans in
accordance with Subpart E of 45 CFR part 95. The plan will include
all programs administered by the State public assistance agency.
Where a letter of approval or disapproval is transmitted to a State
public assistance agency in accordance with Subpart E, the letter
will apply to all Federal agencies and programs. The remaining
sections of this appendix (except for the requirement for
certification) summarize the provisions of Subpart E of 45 CFR part
95.
D. Submission, Documentation, and Approval of Public Assistance
Cost Allocation Plans.
1. State public assistance agencies are required to promptly
submit amendments to the cost allocation plan to HHS for review and
approval.
2. Under the coordination process outlined in subsection E,
affected Federal agencies will review all new plans and plan
amendments and provide comments, as appropriate, to HHS. The
effective date of the plan or plan amendment will be the first day
of the quarter following the submission of the plan or amendment,
unless another date is specifically approved by HHS. HHS, as the
cognizant agency acting on behalf of all affected Federal agencies,
will, as necessary, conduct negotiations with the State public
assistance agency and will inform the State agency of the action
taken on the plan or plan amendment.
E. Review of Implementation of Approved Plans.
1. Since public assistance cost allocation plans are of a
narrative nature, the review during the plan approval process
consists of evaluating the appropriateness of the proposed groupings
of costs (cost centers) and the related allocation bases. As such,
the Federal Government needs some assurance that the cost allocation
plan has been implemented as approved. This is accomplished by
reviews by the funding agencies, single audits, or audits conducted
by the cognizant audit agency.
2. Where inappropriate charges affecting more than one funding
agency are identified, the cognizant HHS cost negotiation office
will be advised and will take the lead in resolving the issue(s) as
provided for in Subpart E of 45 CFR part 95.
3. If a dispute arises in the negotiation of a plan or from a
disallowance involving two or more funding agencies, the dispute
shall be resolved in accordance with the appeals procedures set out
in 45 CFR part 75. Disputes involving only one funding agency will
be resolved in accordance with the funding agency's appeal process.
4. To the extent that problems are encountered among the Federal
agencies and/or governmental units in connection with the
negotiation and approval process, the Office of Management and
Budget will lend assistance, as required, to resolve such problems
in a timely manner.
F. Unallowable Costs. Claims developed under approved cost
allocation plans will be based on allowable costs as identified in 2
CFR part 225. Where unallowable costs have been claimed and
reimbursed, they will be refunded to the program that reimbursed the
unallowable cost using one of the following methods: a cash refund,
offset to a subsequent claim, or credits to the amounts charged to
individual awards.
Appendix E to Part 225--State and Local Indirect Cost Rate Proposals
Table of Contents
A. General
B. Definitions
1. Indirect cost rate proposal
2. Indirect cost rate
3. Indirect cost pool
4. Base
5. Predetermined rate
6. Fixed rate
7. Provisional rate
8. Final rate
9. Base period
C. Allocation of Indirect Costs and Determination of Indirect Cost
Rates
1. General
2. Simplified method
3. Multiple allocation base method
4. Special indirect cost rates
D. Submission and Documentation of Proposals
1. Submission of indirect cost rate proposals
2. Documentation of proposals
3. Required certification
E. Negotiation and Approval of Rates
F. Other Policies
1. Fringe benefit rates
2. Billed services provided by the grantee agency
3. Indirect cost allocations not using rates
4. Appeals
5. Collections of unallowable costs and erroneous payments
6. OMB assistance
A. General.
1. Indirect costs are those that have been incurred for common
or joint purposes. These costs benefit more than one cost objective
and cannot be readily identified with a particular final cost
objective without effort disproportionate to the results achieved.
After direct costs have been determined and assigned directly to
Federal awards and other activities as appropriate, indirect costs
are those remaining to be allocated to benefitted cost objectives. A
cost may not be allocated to a Federal award as an indirect cost if
any other cost incurred for the same purpose, in like circumstances,
has been assigned to a Federal award as a direct cost.
2. Indirect costs include the indirect costs originating in each
department or agency of the governmental unit carrying out Federal
awards and the costs of central governmental services distributed
through the central service cost allocation plan (as described in
Appendix C to this part) and not otherwise treated as direct costs.
3. Indirect costs are normally charged to Federal awards by the
use of an indirect cost rate. A separate indirect cost rate(s) is
usually necessary for each department or agency of the governmental
unit claiming indirect costs under Federal awards. Guidelines and
illustrations of indirect cost proposals are provided in a brochure
published by the Department of Health and Human Services entitled
``A Guide for State and Local Government Agencies: Cost Principles
and Procedures for Establishing Cost Allocation Plans and Indirect
Cost Rates for Grants and Contracts with the Federal Government.'' A
copy of this brochure may be obtained from the Superintendent of
Documents, U.S. Government Printing Office, Washington, DC 20401.
4. Because of the diverse characteristics and accounting
practices of governmental units, the types of costs which may be
classified as indirect costs cannot be specified in all situations.
However, typical examples of indirect costs may include certain
State/local-wide central service costs, general administration of
the grantee department or agency, accounting and personnel services
performed within the grantee department or agency, depreciation
[[Page 51925]]
or use allowances on buildings and equipment, the costs of operating
and maintaining facilities, etc.
5. This appendix does not apply to State public assistance
agencies. These agencies should refer instead to Appendix D to this
part.
B. Definitions.
1. ``Indirect cost rate proposal'' means the documentation
prepared by a governmental unit or subdivision thereof to
substantiate its request for the establishment of an indirect cost
rate.
2. ``Indirect cost rate'' is a device for determining in a
reasonable manner the proportion of indirect costs each program
should bear. It is the ratio (expressed as a percentage) of the
indirect costs to a direct cost base.
3. ``Indirect cost pool'' is the accumulated costs that jointly
benefit two or more programs or other cost objectives.
4. ``Base'' means the accumulated direct costs (normally either
total direct salaries and wages or total direct costs exclusive of
any extraordinary or distorting expenditures) used to distribute
indirect costs to individual Federal awards. The direct cost base
selected should result in each award bearing a fair share of the
indirect costs in reasonable relation to the benefits received from
the costs.
5. ``Predetermined rate'' means an indirect cost rate,
applicable to a specified current or future period, usually the
governmental unit's fiscal year. This rate is based on an estimate
of the costs to be incurred during the period. Except under very
unusual circumstances, a predetermined rate is not subject to
adjustment. (Because of legal constraints, predetermined rates are
not permitted for Federal contracts; they may, however, be used for
grants or cooperative agreements.) Predetermined rates may not be
used by governmental units that have not submitted and negotiated
the rate with the cognizant agency. In view of the potential
advantages offered by this procedure, negotiation of predetermined
rates for indirect costs for a period of two to four years should be
the norm in those situations where the cost experience and other
pertinent facts available are deemed sufficient to enable the
parties involved to reach an informed judgment as to the probable
level of indirect costs during the ensuing accounting periods.
6. ``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, allowable costs of the
period covered by the rate is carried forward as an adjustment to
the rate computation of a subsequent period.
7. ``Provisional rate'' means a temporary indirect cost rate
applicable to a specified period which is used for funding, interim
reimbursement, and reporting indirect costs on Federal awards
pending the establishment of a ``final'' rate for that period.
8. ``Final rate'' means an indirect cost rate applicable to a
specified past period which is based on the actual allowable costs
of the period. A final audited rate is not subject to adjustment.
9. ``Base period'' for the allocation of indirect costs is the
period in which such costs are incurred and accumulated for
allocation to activities performed in that period. The base period
normally should coincide with the governmental unit's fiscal year,
but in any event, shall be so selected as to avoid inequities in the
allocation of costs.
C. Allocation of Indirect Costs and Determination of Indirect
Cost Rates.
1. General.
a. Where a governmental unit's department or agency has only one
major function, or where all its major functions benefit from the
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 subsection 2 of this appendix.
b. Where a governmental unit's department or agency has several
major functions which benefit from its indirect costs in varying
degrees, the allocation of indirect costs may require the
accumulation of such costs into separate cost groupings which then
are allocated individually to benefitted 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. 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 subsections 2, 3 and 4 of
this appendix.
2. Simplified method.
a. Where a grantee agency's major functions benefit from its
indirect costs to approximately the same degree, the allocation of
indirect costs may be accomplished by classifying the grantee
agency'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 Federal 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 a governmental unit's department or agency has only
one major function encompassing a number of individual projects or
activities, and may be used where the level of Federal awards to
that department or agency is relatively small.
b. Both the direct costs and the indirect costs shall exclude
capital expenditures and unallowable costs. However, unallowable
costs must be included in the direct costs if they represent
activities to which indirect costs are properly allocable.
c. The distribution base may be total direct costs (excluding
capital expenditures and other distorting items, such as pass-
through funds, major subcontracts, etc.), direct salaries and wages,
or another base which results in an equitable distribution.
3. Multiple allocation base method.
a. Where a grantee agency'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 benefitted functions by means of a base which best
measures the relative benefits.
b. The cost groupings should 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
needed.
c. Actual conditions must be taken into account in selecting the
base to be used in allocating the expenses in each grouping to
benefitted functions. When an allocation can be made by assignment
of a cost grouping directly to the function benefitted, 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 governmental unit.
In general, any cost element or related factor associated with the
governmental unit's activities is potentially adaptable for use as
an allocation base provided that: 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 it is common to the benefitted functions during
the base period.
d. Except where a special indirect cost rate(s) is required in
accordance with subsection 4, 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 Federal 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 pass-through funds,
major subcontracts, etc.), direct salaries and wages, or another
base which results in an equitable distribution. 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
relationship between the particular indirect cost pool and the
distribution base identified with that pool.
4. Special indirect cost rates.
a. In some instances, a single indirect cost rate for all
activities of a grantee department or agency or for each major
function of the agency may not be appropriate. It may not take into
account those different factors which may substantially affect the
indirect costs applicable to a particular program or group of
programs. The factors may include the physical location of the work,
the level of administrative support required, the nature of the
facilities or other resources
[[Page 51926]]
employed, the organizational arrangements used, or any combination
thereof. When a particular award is carried out 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 that award. 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 that: the rate differs significantly from
the rate which would have been developed under subsections 2. and 3.
of this appendix, and the award to which the rate would apply is
material in amount.
b. Although 2 CFR part 225 adopts the concept of the full
allocation of indirect costs, there are some Federal statutes which
restrict the reimbursement of certain indirect costs. Where such
restrictions exist, it may be necessary to develop a special rate
for the affected award. Where a ``restricted rate'' is required, the
procedure for developing a non-restricted rate will be used except
for the additional step of the elimination from the indirect cost
pool those costs for which the law prohibits reimbursement.
D. Submission and Documentation of Proposals.
1. Submission of indirect cost rate proposals.
a. All departments or agencies of the governmental unit desiring
to claim indirect costs under Federal awards must prepare an
indirect cost rate proposal and related documentation to support
those costs. The proposal and related documentation must be retained
for audit in accordance with the records retention requirements
contained in the Common Rule.
b. A governmental unit for which a cognizant agency assignment
has been specifically designated must submit its indirect cost rate
proposal to its cognizant agency. The Office of Management and
Budget (OMB) will periodically publish lists of governmental units
identifying the appropriate Federal cognizant agencies. The
cognizant agency for all governmental units or agencies not
identified by OMB will be determined based on the Federal agency
providing the largest amount of Federal funds. In these cases, a
governmental unit must develop an indirect cost proposal in
accordance with the requirements of 2 CFR 225 and maintain the
proposal and related supporting documentation for audit. These
governmental units are not required to submit their proposals unless
they are specifically requested to do so by the cognizant agency.
Where a local government only receives funds as a sub-recipient, the
primary recipient will be responsible for negotiating and/or
monitoring the sub-recipient's plan.
c. Each Indian tribal government desiring reimbursement of
indirect costs must submit its indirect cost proposal to the
Department of the Interior (its cognizant Federal agency).
d. Indirect cost proposals must be developed (and, when
required, submitted) within six months after the close of the
governmental unit's fiscal year, unless an exception is approved by
the cognizant Federal agency. If the proposed central service cost
allocation plan for the same period has not been approved by that
time, the indirect cost proposal may be prepared including an amount
for central services that is based on the latest federally-approved
central service cost allocation plan. The difference between these
central service amounts and the amounts ultimately approved will be
compensated for by an adjustment in a subsequent period.
2. Documentation of proposals. The following shall be included
with each indirect cost proposal:
a. The rates proposed, including subsidiary work sheets and
other relevant data, cross referenced and reconciled to the
financial data noted in subsection b of this appendix. Allocated
central service costs will be supported by the summary table
included in the approved central service cost allocation plan. This
summary table is not required to be submitted with the indirect cost
proposal if the central service cost allocation plan for the same
fiscal year has been approved by the cognizant agency and is
available to the funding agency.
b. A copy of the financial data (financial statements,
comprehensive annual financial report, executive budgets, accounting
reports, etc.) upon which the rate is based. Adjustments resulting
from the use of unaudited data will be recognized, where
appropriate, by the Federal cognizant agency in a subsequent
proposal.
c. The approximate amount of direct base costs incurred under
Federal awards. These costs should be broken out between salaries
and wages and other direct costs.
d. A chart showing the organizational structure of the agency
during the period for which the proposal applies, along with a
functional statement(s) noting the duties and/or responsibilities of
all units that comprise the agency. (Once this is submitted, only
revisions need be submitted with subsequent proposals.)
3. Required certification. Each indirect cost rate proposal
shall be accompanied by a certification in the following form:
Certificate of Indirect Costs
This is to certify that I have reviewed the indirect cost rate
proposal submitted herewith and to the best of my knowledge and
belief:
(1) All costs included in this proposal [identify date] to
establish billing or final indirect costs rates for [identify period
covered by rate] are allowable in accordance with the requirements
of the Federal award(s) to which they apply and 2 CFR part 225, Cost
Principles for State, Local, and Indian Tribal Governments (OMB
Circular A-87). Unallowable costs have been adjusted for in
allocating costs as indicated in the cost allocation plan.
(2) All costs included in this proposal are properly allocable
to Federal awards on the basis of a beneficial or causal
relationship between the expenses incurred and the agreements to
which they are allocated in accordance with applicable requirements.
Further, the same costs that have been treated as indirect costs
have not been claimed as direct costs. Similar types of costs have
been accounted for consistently and the Federal Government will be
notified of any accounting changes that would affect the
predetermined rate.
I declare that the foregoing is true and correct.
Governmental Unit:-----------------------------------------------------
Signature:-------------------------------------------------------------
Name of Official:------------------------------------------------------
Title:-----------------------------------------------------------------
Date of Execution:-----------------------------------------------------
E. Negotiation and Approval of Rates.
1. Indirect cost rates will be reviewed, negotiated, and
approved by the cognizant Federal agency on a timely basis. Once a
rate has been agreed upon, it will be accepted and used by all
Federal agencies unless prohibited or limited by statute. Where a
Federal funding agency has reason to believe that special operating
factors affecting its awards necessitate special indirect cost
rates, the funding agency will, prior to the time the rates are
negotiated, notify the cognizant Federal agency.
2. The use of predetermined rates, if allowed, is encouraged
where the cognizant agency has reasonable assurance based on past
experience and reliable projection of the grantee agency's costs,
that the rate is not likely to exceed a rate based on actual costs.
Long-term agreements utilizing predetermined rates extending over
two or more years are encouraged, where appropriate.
3. The results of each negotiation shall be formalized in a
written agreement between the cognizant agency and the governmental
unit. This agreement will be subject to re-opening if the agreement
is subsequently found to violate a statute, or the information upon
which the plan was negotiated is later found to be materially
incomplete or inaccurate. The agreed upon rates shall be made
available to all Federal agencies for their use.
4. Refunds shall be made if proposals are later found to have
included costs that are unallowable as specified by law or
regulation, as identified in Appendix B to this part, or by the
terms and conditions of Federal awards, or are unallowable because
they are clearly not allocable to Federal awards. These adjustments
or refunds will be made regardless of the type of rate negotiated
(predetermined, final, fixed, or provisional).
F. Other Policies.
1. Fringe benefit rates. If overall fringe benefit rates are not
approved for the governmental unit as part of the central service
cost allocation plan, these rates will be reviewed, negotiated and
approved for individual grantee agencies during the indirect cost
negotiation process. In these cases, a proposed fringe benefit rate
computation should accompany the indirect cost proposal. If fringe
benefit rates are not used at the grantee agency level (i.e., the
agency specifically identifies fringe benefit costs to individual
employees), the governmental unit should so advise the cognizant
agency.
2. Billed services provided by the grantee agency. In some
cases, governmental units provide and bill for services similar to
those covered by central service cost allocation plans (e.g.,
computer centers). Where this
[[Page 51927]]
occurs, the governmental unit should be guided by the requirements
in Appendix C to this part relating to the development of billing
rates and documentation requirements, and should advise the
cognizant agency of any billed services. Reviews of these types of
services (including reviews of costing/billing methodology, profits
or losses, etc.) will be made on a case-by-case basis as warranted
by the circumstances involved.
3. Indirect cost allocations not using rates. In certain
situations, a governmental unit, because of the nature of its
awards, may be required to develop a cost allocation plan that
distributes indirect (and, in some cases, direct) costs to the
specific funding sources. In these cases, a narrative cost
allocation methodology should be developed, documented, maintained
for audit, or submitted, as appropriate, to the cognizant agency for
review, negotiation, and approval.
4. Appeals. If a dispute arises in a negotiation of an indirect
cost rate (or other rate) between the cognizant agency and the
governmental unit, the dispute shall be resolved in accordance with
the appeals procedures of the cognizant agency.
5. Collection of unallowable costs and erroneous payments. Costs
specifically identified as unallowable and charged to Federal awards
either directly or indirectly will be refunded (including interest
chargeable in accordance with applicable Federal agency
regulations).
6. OMB assistance. To the extent that problems are encountered
among the Federal agencies and/or governmental units in connection
with the negotiation and approval process, OMB will lend assistance,
as required, to resolve such problems in a timely manner.
[FR Doc. 05-16649 Filed 8-30-05; 8:45 am]
BILLING CODE 3110-01-P