[Code of Federal Regulations]
[Title 48, Volume 7]
[Revised as of October 1, 2001]
From the U.S. Government Printing Office via GPO Access
[CITE: 48CFR9905.505-60]

[Page 486-487]
 
            TITLE 48--FEDERAL ACQUISITION REGULATIONS SYSTEM
 
     CHAPTER 99--COST ACCOUNTING STANDARDS BOARD, OFFICE OF FEDERAL 
           PROCUREMENT POLICY, OFFICE OF MANAGEMENT AND BUDGET
 
PART 9905--COST ACCOUNTING STANDARDS FOR EDUCATIONAL INSTITUTIONS--Table of Contents
 
Sec. 9905.505-60  Illustrations.

    (a) An auditor recommends disallowance of certain direct labor and 
direct material costs, for which a billing has been submitted under a 
contract, on the basis that these particular costs were not required for 
performance and were not authorized by the contract. The contracting 
officer issues a written decision which supports the auditor's position 
that the questioned costs are unallowable. Following receipt of the 
contracting officer's decision, the educational institution must clearly 
identify the disallowed direct labor and direct material costs in the 
institution's accounting records and reports covering any subsequent 
submission which includes such costs. Also, if the educational 
institution's base for allocation of any indirect cost pool relevant to 
the subject contract consists of direct labor, direct material, total 
prime cost, total cost input, etc., the institution must include the 
disallowed direct labor and material costs in its allocation base for 
such pool. Had the contracting officer's decision been against the 
auditor, the educational institution would not, of course, have been 
required to account separately for the costs questioned by the auditor.
    (b) An educational institution incurs, and separately identifies, as 
a part of a service center or expense pool, certain costs which are 
expressly unallowable under the existing and currently effective 
regulations. If the costs of the service center or indirect expense pool 
are regularly a part of the educational institution's base for 
allocation of other indirect expenses, the educational institution must 
allocate the other indirect expenses to contracts and other final cost 
objectives by means of a base which includes the identified unallowable 
indirect costs.
    (c) An auditor recommends disallowance of certain indirect costs. 
The educational institution claims that the costs in question are 
allowable under the provisions of Office Of Management and Budget 
Circular A-21, Cost Principles For Educational Institutions; the auditor 
disagrees. The issue is referred to the contracting officer for 
resolution pursuant to the contract disputes clause. The contracting 
officer issues a written decision supporting the auditor's position that 
the total costs questioned are unallowable under the Circular. Following 
receipt of the contracting officer's decision, the educational 
institution must identify the disallowed costs and specific other costs 
incurred for the same purpose in like circumstances in any subsequent 
estimating, cost accumulation or reporting for Government contracts, in 
which such costs are included. If the contracting officer's decision had 
supported the educational institution's contention, the costs questioned 
by the auditor would have been allowable and the educational institution 
would not have been required to provide special identification.
    (d) An educational institution incurred certain unallowable costs 
that were charged indirectly as general administration and general 
expenses (GA&GE). In the educational institution's proposals for final 
indirect cost rates to be applied in determining allowable contract 
costs, the educational institution identified and excluded the expressly 
unallowable GA&GE costs form the applicable indirect cost pools. In 
addition, during the course of negotiation of indirect cost rates to be 
used for bidding and billing purposes, the educational institution 
agreed to classify as unallowable cost, various directly associated 
costs of the identifiable unallowable costs. On the basis of 
negotiations and agreements between the educational institution and the 
contracting officer's authorized representatives, indirect cost rates 
were established, based on the net balance of allowable GA&GE. 
Application of the rates negotiated to proposals, and to billings, for 
covered contracts constitutes compliance with the Standard.
    (e) An employee, whose salary, travel, and subsistence expenses are 
charged regularly to the general administration and general expenses 
(GA&GE), an indirect cost category, takes several business associates on 
what is clearly a business entertainment trip. The entertainment costs 
of such trips is expressly unallowable because it constitutes 
entertainment expense prohibited by OMB Circular A-21, and is separately 
identified by the educational institution. In these circumstances, the 
employee's travel and

[[Page 487]]

subsistence expenses would be directly associated costs for 
identification with the unallowable entertainment expense. However, 
unless this type of activity constituted a significant part of the 
employee's regular duties and responsibilities on which his salary was 
based, no part of the employee's salary would be required to be 
identified as a directly associated cost of the unallowable 
entertainment expense.