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OFFICE OF MANAGEMENT AND BUDGET
Cost Principles for Non-Profit Organizations
AGENCY: Office of Management and Budget
ACTION: Final revision of OMB Circular A-122, "Cost Principles for Non-Profit Organizations"
SUMMARY: The Office of Management and Budget (OMB) revises OMB Circular A-122 by
amending the definition for equipment; requiring the breakout of indirect costs into two categories
(facilities and administration) for certain non-profit organizations; modifying the multiple
allocation basis; and, clarifying the treatment of certain cost items.
DATES: The revision is effective on June 1, 1998.
FOR FURTHER INFORMATION CONTACT: Federal agencies should contact Gilbert Tran,
Office of Federal Financial Management, Office of Management and Budget, (202) 395-3993.
Non-Federal organizations should contact the organization's Federal cognizant agency.
SUPPLEMENTARY INFORMATION:
A. Background
On October 6, 1995, the Office of Management and Budget (OMB) issued a final revision to
OMB Circular A-122, "Cost Principles for Non-Profit Organizations," in the Federal Register (60
FR 52516) regarding interest allowability. The revision was made in a continuing effort to
increase consistency across OMB's cost principles circulars A-122, A-21, "Cost Principles for
Educational Institutions," and A-87, "Cost Principles for State, Local and Indian Tribal
Governments." To further the goals of consistency, OMB proposed on the same date (60 FR
52522) to revise the definition of equipment, to clarify the treatment of certain types of costs, to
modify the multiple allocation base method for computing indirect cost rate(s), and to place an
upper-limit on payments of administrative expenses for certain non-profit organizations.
With this final revision, Circular A-122 consists of the Circular as issued in 1980 (45 FR 46022;
July 8, 1980), as amended in 1984 (49 FR 18260; April 27, 1984), in 1987 (52 FR 19788; May
27, 1987), in 1995 (60 FR 52516; October 6, 1995), in 1997 (62 FR 45934; August 29, 1997),
and in this notice. A recompilation of the entire Circular A-122, with all its amendments,
accompanies the notice and is available in electronic form on the OMB Home Page at
/OMB.
B. Current Revisions
Circular A-122 is revised in this notice to:
1. Amend the definition of equipment by increasing the capitalization threshold to the lesser
amount used for financial statement purposes or $5,000 (see paragraph 15).
2. Require major non-profit organizations (those receiving more than $10 million in direct Federal funding) to report indirect cost rates by two major component categories: facilities and administration (see paragraph D, Attachment A). 3. Modify the multiple allocation base method (MAB) to be consistent with OMB Circular A-21
(see paragraph D.3). However, major non-profit organizations are not required to use the
multiple allocation base method. MAB remains one of the three available methodologies for
computing indirect costs.
4. Clarify the treatment of the following cost items to provide consistency across OMB's cost
principles circulars (A-21 and A-87) and the Federal Acquisition Regulations, where applicable:
OMB is not implementing the proposed restrictions on trustees' travel expenses at non-profit organizations. In line with this decision, and to further consistency between cost circulars, OMB will be amending Circular A-21 to allow trustees' travel expenses. OMB defers considering an upper-limit on payment of administrative expenses until better data on
indirect costs at non-profit organizations are collected.
C. Comments and Responses
OMB received about 185 comments from non-profit organizations, Federal agencies, professional
organizations and accounting firms. A summary of comments and OMB's responses are included
in this notice. Several comments resulted in modifications to OMB's original proposal.
The comments and OMB's responses are summarized by section as follow.
Equipment Definition
Comment: Clarification is needed on the treatment of depreciation of those assets which had
costs between the old $500 threshold and the new $5,000.
Response: In order to clarify the accounting for the undepreciated portion of any equipment costs
as a result of a change in capitalization levels, paragraph 15 has been added to explain that the
undepreciated amount may be recovered by continuing to claim otherwise allowable use
allowances or depreciation on the equipment, or by amortizing the amount to be written off over a
period of years as negotiated with the Federal cognizant agency.
Comment: Clarification is needed on whether equipment under the $5,000 threshold, as
established by the non-profit organizations' policy, requires Federal approval prior to acquisition.
Response: Equipment under the $5,000 threshold, as established by the non-profit organization's
policy, can be directly charged to sponsored agreements (subparagraph 15.b) without prior
Federal approval.
Comment: Current subparagraph 13.b requires prior approval for special purpose equipment, as
direct costs, with a unit cost of $1,000 or more. This requirement is not consistent with the
higher threshold of $5,000 allowed in the proposed revision. This requirement should be revised
to be consistent with the proposed revision.
Response: OMB agrees. The Circular is revised to require prior Federal approval only for special
purpose equipment with a unit cost of $5,000 or more.
Unallowable Cost Items
These ten revised cost items are already unallowable under OMB Circulars A-21, "Cost Principles
for Educational Institutions," and A-87, "Cost Principles for State, Local and Indian Tribal
Governments," and/or the Federal Acquisition Regulations. OMB addressed the issue of trustees'
travel in response to the comments received. For the other items, consistency across Federal cost
regulations was a more significant issue than most of the commenters' concerns. Comments
related to specific cost items are presented below, followed by OMB's responses.
Advertising and Public Relations Costs
Comment: Current paragraph 37, Public information service costs, should be combined with the
"Advertising" paragraph to be consistent with other OMB cost principles in Circulars A-21 and
A-87.
Response: The commenter is correct. The treatment of public information service costs is now
addressed in revised paragraph 1, Advertising and public relations costs. Current paragraph 37 is
deleted.
Comment: Clarify the types of activities that are allowable as public relations costs. Public
relations costs to carry out certain functions, such as legitimate program outreach, that are
required under sponsored programs and contracts should be allowable.
Response: The Circular is revised to clarify that certain public relations costs for the purpose of
communicating specific activities related to the sponsored programs to the public or the press are
allowable costs. When they are necessary for program outreach effort as required by sponsored
programs, public relations costs are allowable. Costs of advertising and public relations incurred
solely to promote the organization are unallowable.
Comment: Clarify whether advertising media costs such as radio and television are allowable.
Response: As long as the public relations costs are specifically required by the sponsored
programs or are related to the promotion of sponsored programs, any reasonable advertising
media, including magazines, newspapers, radio, television, direct mail, exhibits, and the like, can
be used and its costs are allowable. See paragraph 1.a.
Comment: Community relation costs should be allowable as part of program outreach effort for
Federal sponsored programs.
Response: Community relations are defined in subparagraph 1.b as "those activities dedicated to
maintain the image of the organization or promoting understanding and favorable relations with
the community or public at large or any segment of the public." Costs related to community
relations are allowable when the costs are required or necessary to the performance of the
sponsored programs.
Organization-furnished automobiles for personal use Comment: For security and economic reasons, non-profit organizations often furnish automobiles
and housing for its personnel working on Federal projects (e.g., overseas projects sponsored by
the U.S. Agency for International Development or the U.S. State Department). These costs
should be allowable as direct costs.
Response: The Circular is revised to allow these costs when they are necessary to perform the
Federal projects, particularly the overseas sponsored projects with prior approval by the Federal
awarding agency. These costs are allowable only as direct costs to the Federal projects, and not
as fringe benefit or indirect costs.
Comment: The Circular should specify which types of automobiles are allowable or unallowable
(e.g., cars, vans, trucks and buses).
Response: The types of automobiles are irrelevant for the purpose of determining the allowability
of automobile costs. Rather, the determinant factors should be whether the automobile costs are
reasonable and necessary for the performance of the Federal projects and authorized by the
Federal awarding agency.
Defense and prosecution of criminal and civil proceedings, claims, appeals and patent
infringements
Comment: Current paragraph 35.d, Professional service costs, should be combined with new
paragraph 10.
Response: OMB agrees. Current paragraph 35.d is deleted. Professional service costs related to
defense of antitrust suits, prosecution of claims against the Federal Government and patent
infringement litigation are discussed in new paragraph 10. Professional service costs incurred for
organization and reorganization are discussed in paragraph 31, Organization costs.
Comment: Clarification is needed as to when legal costs related to claims, appeals or proceeding
become unallowable. Commenters noted that Federal agencies are inconsistent in the
determination of the allowability of legal costs as one agency would allow legal costs up to the
point where the case goes out of the Federal agency appeal process and to the courts, whereas
other agencies would only allow legal costs through the first phase of appeals within the Federal
agency.
Response: The policy makes unallowable legal and related costs for either defending against
claims made by the Federal Government or prosecuting claims against the Government. As such,
once a final management decision letter is issued by the agency (for example, a disallowance
letter), all legal and related costs are unallowable from that point forward. Unallowable costs
would include claims and defenses pursued through agencies' formal appeal procedures such as
administrative law judges and agency appeal boards. Note that legal and related costs may be
allowable if the non-profit organization's position is sustained by the administrative appeal process
or an agreement is reached between the organization and the Federal Government (see
subparagraghs 10.b, 10.c, 10.d and 10.e). This revision is consistent with the language contained
in OMB Circular A-21, "Cost Principles for Educational Institutions."
Comment: Some commenters objected to the proposed 80 percent limitation on reimbursement
when the institution is found innocent.
Response: The proposed revision was retained because it provides consistency with procurement
contracts. This limitation is based on the statutory language of Public Law 100-700, Major Fraud
Act of 1988, November 19, 1988 (41 U.S.C., 256 (k)(5)), which only allows recovery of 80
percent of the legal costs.
Comment: Legal expenses to defend against lawsuits brought by a foreign government for
violation of that country's law should be allowable.
Response: The Circular is revised in subparagraph 10.d to authorize Federal agencies to allow
legal expenses to defend against lawsuits brought by a foreign government for violation of its law
when such costs were necessary or were direct results of the performance of Federal sponsored
programs. The same authorizations apply for legal costs for defense against lawsuits brought by
state or local governments.
Comment: Legal fees to defend against lawsuits filed by former employees for termination or by
subrecipients should be allowable.
Response: Legal fees incurred in defense of lawsuits not brought by a Federal, State, local or
foreign government, except when the suits are brought by former employees under Section 2 of
the Major Fraud Act of 1988 (Pub. L. 100-700), are allowable.
Housing and living expenses
Comment: For security and economic reasons, non-profit organizations often furnish automobiles
and housing for its personnel working on overseas Federal projects (e.g., overseas projects
sponsored by the U.S. Agency for International Development). These costs should be allowable
as direct costs.
Response: As previously noted (in the discussion of automobiles), the Circular is revised to allow
these costs when they are necessary to perform the Federal projects and when they are approved
by the Federal awarding agency. These costs are allowable only as direct costs to the Federal
projects, and not as fringe benefit or indirect costs.
Insurance
Comment: General and casualty liability insurance costs for organization's directors and
administrators should be allowable.
Response: General and casualty liability insurance costs for organization's directors and
administrators are allowable, subject to limitations, as described in subparagraph 22.a.(2). New
subparagraph 22.a.(2).f, Insurance against defects, prohibits the reimbursement of costs against
Federally sponsored awards for product (or services) liability insurance costs.
Comment: Medical liability insurance costs for participants in Federal training programs should
be allowable.
Response: Medical liability insurance costs associated with participants in Federal training
programs are allowable to Federal programs as direct costs.
Comment: Malpractice insurance costs for physicians should be direct charged to Federal
programs while malpractice insurance costs for nurses or laboratory assistants, which are
immaterial in most cases, should be charged as indirect costs.
Response: Subparagraph B.2 of Attachment A provides that when a direct cost is of minor
amounts, it may be treated as an indirect cost for reasons of practicality and efficiency, provided
that the accounting treatment for such cost is consistently applied to all final cost objectives.
Therefore, when malpractice insurance costs for nurses or lab technicians are immaterial in
relation to its effect on the overall indirect cost rates of the organization, they may be treated as
indirect costs.
Memberships
Comment: Membership costs in civic and community organizations should be allowable.
Response: Membership costs are allowable for business and professional organizations. The
Circular is further revised to allow membership costs in civic and community organizations when
associations with these organizations are essential to the performance of the Federal programs (as
an outreach function). These membership costs must be approved by the Federal cognizant
agency.
Comment: Costs of membership in organizations that lobby should be unallowable.
Response: Paragraph 25 of the Circular disallows lobbying costs. Membership dues to lobbying
organizations are therefore unallowable. The unallowable portion of membership dues is
determined by the percentage of lobbying activities versus other allowable activities of the
lobbying organization.
Selling or Marketing of Goods and Services
Comment: Clarification is needed for what types of activities are considered to be the selling or
marketing of goods and services.
Response: Selling or marketing of goods and services generally include an organization's efforts
to market the organization's products or services such as through advertising, organizational
image enhancement, market planning and direct selling. Direct selling efforts are those acts or
actions used to induce particular customers to purchase particular products or services of the
organization. The allowability provisions for advertising costs are described in paragraph 1.
Comment: The guidelines for selling or marketing of goods and services should be consistent
with those in FAR 31.205.38(c)(1).
Response: FAR 31.205.38(c)(1) allows direct selling costs at commercial contractors if they are
reasonable in amount. By contrast to the commercial contract context, direct selling costs are
generally not considered to be necessary costs for the performance of Federal sponsored
programs by non-profit organizations. In those cases where they are essential for certain Federal
sponsored programs, these costs can be charged as direct costs to the Federal sponsored
programs if they are approved by the Federal awarding agency.
Comment: Given that the Bayh-Dole Act encouraged technology transfer, selling or marketing
costs of goods or services should be allowable costs. At the minimum, these costs should be
allowable as direct costs to the Federal projects.
Response: The Circular is revised to allow selling or marketing costs as direct costs to some
Federal sponsored programs when approved by the Federal awarding agency.
Severance Pay
Comment: Early retirement benefits should be allowable costs.
Response: Early retirement benefit costs are allowable costs, subject to limitations, and are
discussed in subparagraph 6.f, Fringe Benefits, along with other forms of fringe benefits.
Paragraph 49, Severance Pay, deals only with severance policy, i.e., dismissal, and the
reimbursement of its costs.
Comment: Guidelines for costs of severance pay to foreign nationals in excess of customary or
prevailing practices should be consistent with section 2151 of the Federal Acquisition
Streamlining Act of 1994 (FASA).
Response: OMB agrees. The Circular is revised to be consistent with FASA guidelines for
severance pay to foreign nationals in excess of customary or prevailing practices. As a result, the
Federal awarding agency may allow these costs when they are necessary for the performance of
the Federal sponsored programs.
Trustees' Travel
Comment: Several commenters opposed the proposal to disallow trustees' travel costs citing the
difficulty of retaining or obtaining members to serve voluntarily on the Board of Trustees (or
Directors) of a non-profit organization, if Board members have to pay for their own travel
expenses to attend Board meetings. The commenters added that since serving on a non-profit
organization's Board is often not as prestigious and desirable as serving on a University's Board
(where trustees' travel costs are unallowable under Circular A-21), non-reimbursement of the
travel costs would inhibit the recruitment of Board members.
Response: OMB concurs that disallowing the reimbursement of trustees' travel costs could inhibit
the recruitment of qualified Board members (particularly at smaller non-profit organizations),
thereby hampering the operations of a non-profit organization. OMB also recognizes that
trustees' travel costs are reasonable and necessary business costs. As a result, trustees' travel
costs remain allowable.
Comment: Trustees' travel costs should be allowable if they are reasonable. Some suggested
tests for reasonableness of trustees' travel costs are: limit number of allowed trips per year,
restriction of trips to organization's principal place of business or reasonable surroundings,
distinction between scheduled Board meetings and emergency Board meetings, and disallowance
of first-class airfare travels.
Response: All costs charged to Federal projects must satisfy a reasonableness test. Although
some of the suggested reasonableness tests appear to be good, OMB does not believe it is
necessary at this time to impose specific restrictions on trustees' travel expenses. The
reasonableness of a particular travel expense remains at the judgement of Federal negotiators.
Comment: At Head Start organizations, some Trustee members are first sent for training in the
operations of a Head Start program. These travel costs related to training should be allowable.
Response: Travel costs related to training and education are allowable, subject to limitations, and
are addressed in paragraph 53 of the Circular, Training and education costs.
Comment: At Head Start organizations, there often are several advisory boards in addition to the
Board of Trustees (or Directors). These advisory boards are involved in day-to-day operations of
the organizations and often incur travel costs. Are these costs subject to the same restrictions as
trustees' travel?
Response: Travel costs for members of advisory groups are allowable, subject to the limitations
in paragraph 55, Travel costs.
Multiple Allocation Basis (MAB)
Comment: The multiple allocation method for calculating indirect costs rates is much more
complicated and burdensome than the simplified method and it will cost non-profit organizations
much more to prepare the indirect cost proposal. Several commenters recommended the
flexibility of using one of the three different allocation methods as they are currently described in
the Circular. The multiple allocation basis (MAB) should remain an optional allocation
methodology rather than a required methodology for certain organizations.
Response: The use of MAB for major non-profit organizations promotes consistency in the
calculation and the reporting of indirect costs. It would facilitate the accumulation of indirect cost
data by cost components (i.e., facilities and administration) and provide comparable rates between
major research non-profit organizations and universities. However, OMB recognizes that a
conversion to MAB may require some substantial changes in the organization's accounting system
and that MAB is not practical for single-function organizations. Therefore, the Circular continues
to allow non-profit organizations to use any of the current three allocation methodologies.
Comment: Several commenters suggested raising the threshold for the requirement to $25 million
in direct Federal funding. Several commenters also suggested an exemption from this requirement
for single-function organizations regardless of Federal funding levels.
Response: The Circular is revised to allow the use of the current three allocation methodologies
for all non-profit organizations. For organizations that receive more than $10 million in direct
Federal funding, a breakout of indirect costs into two components, facilities and administration, is
required regardless of the selected allocation methodology.
Comment: The allocation methodology for general administration under MAB on the basis of
modified total direct costs conflicts with the required methodology under Cost Accounting
Standard (CAS) 410 applicable to contracts using the salaries and wages basis. One commenter
suggested that a fully CAS-covered non-profit organization be exempted from the MAB
requirement.
Response: MAB is not a requirement for non-profit organizations and remains one of the three
available methodologies in the Circular for computing indirect costs. In addition, CAS-covered
non-profit organizations should continue to follow CAS with respect to the measurement,
assignment and allocation of costs.
Comment: The revision should clarify that the modified total direct cost base should only include
the first $25,000 of a subcontract regardless of the period during which the project is started
(consistent with OMB Circular A-21).
Response: The modified total direct cost base, described in subparagraph D.3.f of the Circular,
includes the first $25,000 of each subgrant or subcontract regardless of the period covered by the
subgrant or subcontract. Subgrant or subcontract costs above $25,000 shall be excluded from the
modified total direct cost base. For example, for a $300,000 subgrant that lasts three years, only
the first $25,000 incurred on the award should be included in the modified total direct cost base.
Administrative Cap of 26 percent
Comment: Most commenters strongly opposed the 26 percent administrative cap stating that
such limitation on cost reimbursement is arbitrary, capricious, and unnecessary. Some argued that
a cap would be financially disastrous to non-profit organizations because they receive most of
their funding from Federal sources (unlike universities). A detailed analysis is urged to determine
the average administrative costs applicable to non-profit organizations, if an administrative cap is
to be implemented at non-profit organizations.
Response: Based on the comments against the implementation of an administrative cap at non-profit organizations, OMB defers the consideration of establishing any administrative cap until better data on indirect costs at non-profit organizations can be collected. If OMB believes that an administrative cap should be implemented, it would be proposed in a subsequent notice. Other
Comment: Attachment C of the Circular should be updated since a few listed organizations no longer exist. Response: OMB agrees. Attachment C is updated to delete those organizations that no longer
exist or are no longer exempted from OMB Circular A-122.
Franklin D. Raines Attachments A, B and C of Circular A-122 are revised as follows: A. Attachment A
1. Add subparagraph 3 to paragraph C ("Indirect Costs").
3. Indirect costs shall be classified within two broad categories: "Facilities" and "Administration."
"Facilities" is defined as depreciation and use allowances on buildings, equipment and capital
improvement, interest on debt associated with certain buildings, equipment and capital
improvements, and operations and maintenance expenses. "Administration" is defined as general
administration and general expenses such as the director's office, accounting, personnel, library
expenses and all other types of expenditures not listed specifically under one of the subcategories
of "Facilities" (including cross allocations from other pools, where applicable). See indirect cost
rate reporting requirements in subparagraphs D.2.e and D.3.g.
2. Add subparagraph 2.e to paragraph D. e. For an organization that receives more than $10 million in Federal funding of direct costs in a
fiscal year, a breakout of the indirect cost component into two broad categories, Facilities and
Administration as defined in subparagraph C.3, is required. The rate in each case shall be stated
as the percentage which the amount of the particular indirect cost category (i.e., Facilities or
Administration) is of the distribution base identified with that category.
3. Replace subparagraph D.3 with the following:
3. Multiple allocation base method.
a. General. Where an organization's indirect costs benefit its major functions in varying degrees,
indirect costs shall be accumulated into separate cost groupings, as described in subparagraph b.
Each grouping shall then be allocated individually to benefitting functions by means of a base
which best measures the relative benefits. The default allocation bases by cost pool are described
in subparagraph c.
b. Identification of indirect costs. Cost groupings shall be established so as to permit the
allocation of each grouping on the basis of benefits provided to the major functions. Each
grouping shall constitute a pool of expenses that are of like character in terms of functions they
benefit and in terms of the allocation base which best measures the relative benefits provided to
each function. The groupings are classified within the two broad categories: "Facilities" and
"Administration," as described in subparagraph C.3. The indirect cost pools are defined as
follows:
(1) Depreciation and use allowances. The expenses under this heading are the portion of the costs
of the organization's buildings, capital improvements to land and buildings, and equipment which
are computed in accordance with paragraph 11 of Attachment B ("Depreciation and use
allowances").
(2) Interest. Interest on debt associated with certain buildings, equipment and capital
improvements are computed in accordance with paragraph 23 of Attachment B ("Interest, fund
raising, and investment management costs").
(3) Operation and maintenance expenses. The expenses under this heading are those that have
been incurred for the administration, operation, maintenance, preservation, and protection of the
organization's physical plant. They include expenses normally incurred for such items as:
janitorial and utility services; repairs and ordinary or normal alterations of buildings, furniture and
equipment; care of grounds; maintenance and operation of buildings and other plant facilities;
security; earthquake and disaster preparedness; environmental safety; hazardous waste disposal;
property, liability and other insurance relating to property; space and capital leasing; facility
planning and management; and, central receiving. The operation and maintenance expenses
category shall also include its allocable share of fringe benefit costs, depreciation and use
allowances, and interest costs.
(4) General administration and general expenses. The expenses under this heading are those that
have been incurred for the overall general executive and administrative offices of the organization
and other expenses of a general nature which do not relate solely to any major function of the
organization. This category shall also include its allocable share of fringe benefit costs, operation
and maintenance expense, depreciation and use allowances, and interest costs. Examples of this
category include central offices, such as the director's office, the office of finance, business
services, budget and planning, personnel, safety and risk management, general counsel,
management information systems, and library costs.
In developing this cost pool, special care should be exercised to ensure that costs incurred for the same purpose in like circumstances are treated consistently as either direct or indirect costs. For example, salaries of technical staff, project supplies, project publication, telephone toll charges, computer costs, travel costs, and specialized services costs shall be treated as direct costs wherever identifiable to a particular program. The salaries and wages of administrative and pooled clerical staff should normally be treated as indirect costs. Direct charging of these costs may be appropriate where a major project or activity explicitly requires and budgets for administrative or clerical services and other individuals involved can be identified with the program or activity. Items such as office supplies, postage, local telephone costs, periodicals and memberships should normally be treated as indirect costs. c. Allocation bases. Actual conditions shall be taken into account in selecting the base to be used
in allocating the expenses in each grouping to benefitting functions. The essential consideration in
selecting a method or a base is that it is the one best suited for assigning the pool of costs to cost
objectives in accordance with benefits derived; a traceable cause and effect relationship; or logic
and reason, where neither the cause nor the effect of the relationship is determinable. When an
allocation can be made by assignment of a cost grouping directly to the function benefited, the
allocation shall be made in that manner. When the expenses in a cost grouping are more general in
nature, the allocation shall be made through the use of a selected base which produces results that
are equitable to both the Federal Government and the organization. The distribution shall be
made in accordance with the bases described herein unless it can be demonstrated that the use of a
different base would result in a more equitable allocation of the costs, or that a more readily
available base would not increase the costs charged to sponsored awards. The results of special
cost studies (such as an engineering utility study) shall not be used to determine and allocate the
indirect costs to sponsored awards.
(1) Depreciation and use allowances. Depreciation and use allowances expenses shall be allocated
in the following manner:
(a) Depreciation or use allowances on buildings used exclusively in the conduct of a single
function, and on capital improvements and equipment used in such buildings, shall be assigned to
that function.
(b) Depreciation or use allowances on buildings used for more than one function, and on capital
improvements and equipment used in such buildings, shall be allocated to the individual functions
performed in each building on the basis of usable square feet of space, excluding common areas,
such as hallways, stairwells, and restrooms.
(c) Depreciation or use allowances on buildings, capital improvements and equipment related
space (e.g., individual rooms, and laboratories) used jointly by more than one function (as
determined by the users of the space) shall be treated as follows. The cost of each jointly used
unit of space shall be allocated to the benefitting functions on the basis of:
(i) the employees and other users on a full-time equivalent (FTE) basis or salaries and wages of
those individual functions benefitting from the use of that space; or
(ii) organization-wide employee FTEs or salaries and wages applicable to the benefitting functions
of the organization.
(d) Depreciation or use allowances on certain capital improvements to land, such as paved
parking areas, fences, sidewalks, and the like, not included in the cost of buildings, shall be
allocated to user categories on a FTE basis and distributed to major functions in proportion to the
salaries and wages of all employees applicable to the functions.
(2) Interest. Interest costs shall be allocated in the same manner as the depreciation or use
allowances on the buildings, equipment and capital equipments to which the interest relates.
(3) Operation and maintenance expenses. Operation and maintenance expenses shall be allocated
in the same manner as the depreciation and use allowances.
(4) General administration and general expenses. General administration and general expenses
shall be allocated to benefitting functions based on modified total direct costs (MTDC), as
described in subparagraph D.3.f. The expenses included in this category could be grouped first
according to major functions of the organization to which they render services or provide benefits.
The aggregate expenses of each group shall then be allocated to benefitting functions based on
MTDC.
d. Order of distribution.
(1) Indirect cost categories consisting of depreciation and use allowances, interest, operation and
maintenance, and general administration and general expenses shall be allocated in that order to
the remaining indirect cost categories as well as to the major functions of the organization. Other
cost categories could be allocated in the order determined to be most appropriate by the
organization. When cross allocation of costs is made as provided in subparagraph (2), this order
of allocation does not apply.
(2) Normally, an indirect cost category will be considered closed once it has been allocated to
other cost objectives, and costs shall not be subsequently allocated to it. However, a cross
allocation of costs between two or more indirect costs categories could be used if such allocation
will result in a more equitable allocation of costs. If a cross allocation is used, an appropriate
modification to the composition of the indirect cost categories is required.
e. Application of indirect cost rate or rates. Except where a special indirect cost rate(s) is
required in accordance with subparagraph D.5, the separate groupings of indirect costs allocated
to each major function shall be aggregated and treated as a common pool for that function. The
costs in the common pool shall then be distributed to individual awards included in that function
by use of a single indirect cost rate.
f. Distribution basis. Indirect costs shall be distributed to applicable sponsored awards and other
benefitting activities within each major function on the basis of MTDC. MTDC consists of all
salaries and wages, fringe benefits, materials and supplies, services, travel, and subgrants and
subcontracts up to the first $25,000 of each subgrant or subcontract (regardless of the period
covered by the subgrant or subcontract). Equipment, capital expenditures, charges for patient
care, rental costs and the portion in excess of $25,000 shall be excluded from MTDC. Participant
support costs shall generally be excluded from MTDC. Other items may only be excluded when
the Federal cost cognizant agency determines that an exclusion is necessary to avoid a serious
inequity in the distribution of indirect costs.
g. Individual Rate Components. An indirect cost rate shall be determined for each separate indirect cost pool developed. The rate in each case shall be stated as the percentage which the amount of the particular indirect cost pool is of the distribution base identified with that pool. Each indirect cost rate negotiation or determination agreement shall include development of the rate for each indirect cost pool as well as the overall indirect cost rate. The indirect cost pools shall be classified within two broad categories: "Facilities" and "Administration," as described in subparagraph C.3. B. Attachment B Revise the following cost items in Attachment B to Circular A-122 ("Selected Items of Cost").
1. Revise the Table of Contents for Attachment B to read:
1. Advertising and public relations costs 2. Revise and retitle paragraph 1 to read:
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 programs, direct
mail, exhibits, and the like.
b. The term public relations includes community relations and means those activities dedicated to
maintaining the image of the organization or maintaining or promoting understanding and
favorable relations with the community or public at large or any segment of the public.
c. The only allowable advertising costs are those which are solely for:
(1) The recruitment of personnel required for the performance by the organization of obligations
arising under a sponsored award, when considered in conjunction with all other recruitment costs,
as set forth in paragraph 44 ("Recruiting costs");
(2) The procurement of goods and services for the performance of a sponsored award;
(3) The disposal of scrap or surplus materials acquired in the performance of a sponsored award
except when organizations are reimbursed for disposal costs at a predetermined amount in
accordance with OMB Circular A-110, Sec.___.34, "Equipment"; or
(4) Other specific purposes necessary to meet the requirements of the sponsored award.
d. The only allowable public relations costs are:
(1) Costs specifically required by sponsored awards;
(2) Costs of communicating with the public and press pertaining to specific activities or
accomplishments which result from performance of sponsored awards (these costs are considered
necessary as part of the outreach effort for the sponsored awards); 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 to keep the
public informed on matters of public concern, such as notices of contract/grant awards, financial
matters, etc.
e. Costs identified in subparagraphs c and d if incurred for more than one sponsored award or for
both sponsored work and other work of the organization, are allowable to the extent that the
principles in paragraphs B ("Direct Costs") and C ("Indirect Costs") of Attachment A are
observed.
f. Unallowable advertising and public relations costs include the following:
(1) All advertising and public relations costs other than as specified in subparagraphs c, d, and e;
(2) Costs of meetings or other events related to fund raising or other organizational activities
including:
(i) Costs of displays, demonstrations, and exhibits;
(ii) Costs of meeting rooms, hospitality suites, and other special facilities used in conjunction with
shows and other special events; and
(iii) Salaries and wages of employees or cost of services 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 organization.
3. Renumber current paragraphs 2 through 8 as paragraphs 3 through 9, respectively.
4. Add the following new paragraph 2:
2. Alcoholic beverages. Costs of alcoholic beverages are unallowable. 5. In paragraph 7 ("Compensation for personal services"), as renumbered above in item 3, rename
the current subparagraph g ("Pension costs"), as subparagraph h. Add a new subparagraph g:
g. Organization-furnished automobiles. That portion of the cost of organization-furnished
automobiles that relates to personal use by employees (including transportation to and from work)
is unallowable as fringe benefit or indirect costs regardless of whether the cost is reported as
taxable income to the employees. These costs are allowable as direct costs to sponsored award
when necessary for the performance of the sponsored award and approved by awarding agencies.
6. Renumber current paragraphs 9 through 15 as paragraphs 11 through 17, respectively. 7. Add new paragraph 10:
10. Defense and prosecution of criminal and civil proceedings, claims, appeals and patent
infringement.
a. Definitions.
(1) Conviction, as used herein, means a judgment or a conviction of a criminal offense by any
court of competent jurisdiction, whether entered upon as a verdict or a plea, including a
conviction due to a plea of nolo contendere.
(2) Costs include, but are not limited to, administrative and clerical expenses; the cost of legal
services, whether performed by in-house or private counsel; and the costs of the services of
accountants, consultants, or others retained by the organization to assist it; costs of employees,
officers and trustees, and any similar costs incurred before, during, and after commencement of a
judicial or administrative proceeding that bears a direct relationship to the proceedings.
(3) Fraud, as used herein, means (i) acts of fraud corruption or attempts to defraud the Federal
Government or to corrupt its agents, (ii) acts that constitute a cause for debarment or suspension
(as specified in agency regulations), and (iii) acts which violate the False Claims Act, 31 U.S.C.,
sections 3729-3731, or the Anti-Kickback Act, 41 U.S.C., sections 51 and 54.
(4) Penalty does not include restitution, reimbursement, or compensatory damages.
(5) Proceeding includes an investigation.
b. (1) Except as otherwise described herein, costs incurred in connection with any criminal, civil
or administrative proceeding (including filing of a false certification) commenced by the Federal
Government, or a State, local or foreign government, are not allowable if the proceeding: (1)
relates to a violation of, or failure to comply with, a Federal, State, local or foreign statute or
regulation by the organization (including its agents and employees), and (2) results in any of the
following dispositions:
(a) In a criminal proceeding, a conviction.
(b) In a civil or administrative proceeding involving an allegation of fraud or similar misconduct, a
determination of organizational liability.
(c) In the case of any civil or administrative proceeding, the imposition of a monetary penalty.
(d) A final decision by an appropriate Federal official to debar or suspend the organization, to
rescind or void an award, or to terminate an award for default by reason of a violation or failure
to comply with a law or regulation.
(e) A disposition by consent or compromise, if the action could have resulted in any of the
dispositions described in (a), (b), (c) or (d).
(2) If more than one proceeding involves the same alleged misconduct, the costs of all such
proceedings shall be unallowable if any one of them results in one of the dispositions shown in
subparagraph b.(1).
c. If a proceeding referred to in subparagraph b is commenced by the Federal Government and is
resolved by consent or compromise pursuant to an agreement entered into by the organization and
the Federal Government, then the costs incurred by the organization in connection with such
proceedings that are otherwise not allowable under subparagraph b may be allowed to the extent
specifically provided in such agreement.
d. If a proceeding referred to in subparagraph b is commenced by a State, local or foreign
government, the authorized Federal official may allow the costs incurred by the organization for
such proceedings, if such authorized official determines that the costs were incurred as a result of
(1) a specific term or condition of a federally-sponsored award, or (2) specific written direction of
an authorized official of the sponsoring agency.
e. Costs incurred in connection with proceedings described in subparagraph b, but which are not
made unallowable by that subparagraph, may be allowed by the Federal Government, but only to
the extent that:
(1) The costs are reasonable in relation to the activities required to deal with the proceeding and
the underlying cause of action;
(2) Payment of the costs incurred, as allowable and allocable costs, is not prohibited by any other
provision(s) of the sponsored award;
(3) The costs are not otherwise recovered from the Federal Government or a third party, either
directly as a result of the proceeding or otherwise; and,
(4) The percentage of costs allowed does not exceed the percentage determined by an authorized
Federal official to be appropriate, considering the complexity of the litigation, generally accepted
principles governing the award of legal fees in civil actions involving the United States as a party,
and such other factors as may be appropriate. Such percentage shall not exceed 80 percent.
However, if an agreement reached under subparagraph c has explicitly considered this 80 percent
limitation and permitted a higher percentage, then the full amount of costs resulting from that
agreement shall be allowable.
f. Costs incurred by the organization in connection with the defense of suits brought by its
employees or ex-employees under section 2 of the Major Fraud Act of 1988 (Pub. L. 100-700),
including the cost of all relief necessary to make such employee whole, where the organization
was found liable or settled, are unallowable.
g. Costs of legal, accounting, and consultant services, and related costs, incurred in connection
with defense against Federal Government claims or appeals, antitrust suits, or the prosecution of
claims or appeals against the Federal Government, are unallowable.
h. Costs of legal, accounting, and consultant services, and related costs, incurred in connection
with patent infringement litigation, are unallowable unless otherwise provided for in the sponsored
awards.
i. Costs which may be unallowable under this paragraph, including directly associated costs, shall
be segregated and accounted for by the organization separately. During the pendency of any
proceeding covered by subparagraphs b and f, the Federal Government shall generally withhold
payment of such costs. However, if in the best interests of the Federal Government, the Federal
Government may provide for conditional payment upon provision of adequate security, or other
adequate assurance, and agreements by the organization to repay all unallowable costs, plus
interest, if the costs are subsequently determined to be unallowable.
8. In paragraph 15 ("Equipment and other capital expenditures"), as renumbered in item 6 above,
replace subparagraphs 15.a.(1) and 15.b.(2) to read:
15.a.(1) "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 (a)
the capitalization level established by the organization for the financial statement purposes, or (b)
$5000. 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 as negotiated with the Federal cognizant agency.
15.b.(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 awarding
agency.
9. Renumber current paragraphs 16 through 36 as paragraphs 20 through 40, respectively.
10. Add new paragraph 18:
18. Goods or services for personal use. Costs of goods or services for personal use of the organization's employees are unallowable regardless of whether the cost is reported as taxable income to the employees. 11. Add new paragraph 19:
19. Housing and personal living expenses.
a. Costs of housing (e.g., depreciation, maintenance, utilities, furnishings, rent, etc.), housing
allowances and personal living expenses for/of the organization's officers are unallowable as fringe
benefit or indirect costs regardless of whether the cost is reported as taxable income to the
employees. These costs are allowable as direct costs to sponsored awards when necessary for the
performance of the sponsored award and approved by awarding agencies.
b. The term "officers" includes current and past officers and employees.
12. Add to paragraph 22.a.(2) ("Insurance and indemnification"), as renumbered in item 9, subparagraphs (f) and (g): (f) Insurance against defects. Costs of insurance with respect to any costs incurred to correct
defects in the organization's materials or workmanship are unallowable.
(g) Medical liability (malpractice) insurance. Medical liability insurance is an allowable cost of
Federal research programs only to the extent that the Federal research programs involve human
subjects or training of participants in research techniques. Medical liability insurance costs shall
be treated as a direct cost and shall be assigned to individual projects based on the manner in
which the insurer allocates the risk to the population covered by the insurance.
13. Revise paragraph 30, as renumbered in item 9, to read: 30. Memberships, subscriptions and professional activity costs.
a. Costs of the organization's membership in business, technical, and professional organizations
are allowable.
b. Costs of the organization's subscriptions to business, professional, and technical periodicals
are allowable.
c. Costs of meetings and conferences, when the primary purpose is the dissemination of technical
information, are allowable. This includes costs of meals, transportation, rental of facilities, and
other items incidental to such meetings or conferences.
d. Costs of membership in any civic or community organization are allowable with prior approval
by Federal cognizant agency.
e. Costs of membership in any country club or social or dining club or organization are
unallowable.
14. Delete subparagraph 39.d, as renumbered in item 9. 15. Delete current paragraph 37 ("Public service costs"). 16. Renumber current paragraphs 38 through 44 as paragraphs 41 through 47, respectively.
17. Revise paragraph 44, as renumbered in item 16, to read:
44. Recruiting costs.
a. Subject to subparagraphs b, c, and d, and provided that the size of the staff recruited and
maintained is in keeping with workload requirements, costs of "help wanted" advertising,
operating costs of an employment office necessary to secure and maintain an adequate staff, costs
of operating an aptitude and educational testing program, travel costs of employees while engaged
in recruiting personnel, travel costs of applicants for interviews for prospective employment, and
relocation costs incurred incident to recruitment of new employees, are allowable to the extent
that such costs are incurred pursuant to a well-managed recruitment program. Where the
organization uses employment agencies, costs that are not in excess of standard commercial rates
for such services are allowable.
b. In publications, costs of help wanted advertising that includes color, includes advertising
material for other than recruitment purposes, or is excessive in size (taking into consideration
recruitment purposes for which intended and normal organizational practices in this respect), are
unallowable.
c. Costs of help wanted advertising, special emoluments, fringe benefits, and salary allowances
incurred to attract professional personnel from other organizations that do not meet the test of
reasonableness or do not conform with the established practices of the organization, are
unallowable.
d. Where relocation costs incurred incident to recruitment of a new employee have been allowed
either as an allocable direct or indirect cost, and the newly hired employee resigns for reasons
within his control within twelve months after being hired, the organization will be required to
refund or credit such relocation costs to the Federal Government.
18. Renumber current paragraphs 45 through 51 as paragraphs 49 through 55, respectively.
19. Add new paragraph 48:
48. Selling and marketing. Costs of selling and marketing any products or services of the
organization (unless allowed under paragraph 1 as allowable public relations costs) are
unallowable. These costs, however, are allowable as direct costs, with prior approval by
awarding agencies, when they are necessary for the performance of Federal programs.
20. Add new subparagraphs c, d and e to paragraph 49 ("Severance pay"), as renumbered in item
18, as follow:
c. Costs incurred in certain severance pay packages (commonly known as "a golden parachute"
payment) which are in an amount in excess of the normal severance pay paid by the organization
to an employee upon termination of employment and are paid to the employee contingent upon a
change in management control over, or ownership of, the organization's assets are unallowable.
d. Severance payments to foreign nationals employed by the organization outside the United
States, to the extent that the amount exceeds the customary or prevailing practices for the
organization in the United States are unallowable, unless they are necessary for the performance
of Federal programs and approved by awarding agencies.
e. Severance payments to foreign nationals employed by the organization outside the United
States due to the termination of the foreign national as a result of the closing of, or curtailment of
activities by, the organization in that country, are unallowable, unless they are necessary for the
performance of Federal programs and approved by awarding agencies.
21. Add new paragraph 56:
56. Trustees. Travel and subsistence costs of trustees (or directors) are allowable. The costs are subject to restrictions regarding lodging, subsistence and air travel costs provided in paragraph 55. C. Attachment C 1. Delete the following organizations from Attachment C. These organizations either no longer
exist or are no longer exempted from complying with Circular A-122.
2. Change Argonne Universities Association, Chicago, Illinois to Argonne National Laboratory,
Chicago, Illinois.
3. Change the location of the Institute for Defense Analysis in Virginia from Arlington to Alexandria. 4. Replace Midwest Research Institute, Headquartered in Kansas City, Missouri to National
Renewable Energy Laboratory, Golden, Colorado.
D. A recompilation of the entire Circular A-122, with all its amendments, follows:
CIRCULAR NO. A-122 Revised TO THE HEADS OF EXECUTIVE DEPARTMENTS AND ESTABLISHMENTS
SUBJECT: Cost Principles for Non-Profit Organizations
1. Purpose. This Circular establishes principles for determining costs of grants, contracts and
other agreements with non-profit organizations. It does not apply to colleges and universities
which are covered by Office of Management and Budget (OMB) Circular A-21, "Cost Principles
for Educational Institutions"; State, local, and federally-recognized Indian tribal governments
which are covered by OMB Circular A-87, "Cost Principles for State, Local, and Indian Tribal
Governments"; or hospitals. The principles are designed to provide that the Federal Government
bear its fair share of costs except where restricted or prohibited by law. The principles do not
attempt to prescribe the extent of cost sharing or matching on grants, contracts, or other
agreements. However, such cost sharing or matching shall not be accomplished through arbitrary
limitations on individual cost elements by Federal agencies. Provision for profit or other
increment above cost is outside the scope of this Circular.
2. Supersession. This Circular supersedes cost principles issued by individual agencies for
non-profit organizations.
3. Applicability.
a. These principles shall be used by all Federal agencies in determining the costs of work performed by non-profit organizations under grants, cooperative agreements, cost reimbursement contracts, and other contracts in which costs are used in pricing, administration, or settlement. All of these instruments are hereafter referred to as awards. The principles do not apply to awards under which an organization is not required to account to the Federal Government for actual costs incurred. b. All cost reimbursement subawards (subgrants, subcontracts, etc.) are subject to those Federal
cost principles applicable to the particular organization concerned. Thus, if a subaward is to a
non-profit organization, this Circular shall apply; if a subaward is to a commercial organization,
the cost principles applicable to commercial concerns shall apply; if a subaward is to a college or
university, Circular A-21 shall apply; if a subaward is to a State, local, or federally-recognized
Indian tribal government, Circular A-87 shall apply.
4. Definitions.
a. Non-profit organization means any corporation, trust, association, cooperative, or other organization which: (1) is operated primarily for scientific, educational, service, charitable, or similar purposes in the public interest; (2) is not organized primarily for profit; and (3) uses its net proceeds to maintain, improve, and/or expand its operations. For this purpose, the term "non-profit organization" excludes (i) colleges and universities; (ii) hospitals; (iii) State, local, and federally-recognized Indian tribal governments; and (iv) those non-profit organizations which are excluded from coverage of this Circular in accordance with paragraph 5. b. Prior approval means securing the awarding agency's permission in advance to incur cost for
those items that are designated as requiring prior approval by the Circular. Generally this
permission will be in writing. Where an item of cost requiring prior approval is specified in the
budget of an award, approval of the budget constitutes approval of that cost.
5. Exclusion of some non-profit organizations. Some non-profit organizations, because of their
size and nature of operations, can be considered to be similar to commercial concerns for purpose
of applicability of cost principles. Such non-profit organizations shall operate under Federal cost
principles applicable to commercial concerns. A listing of these organizations is contained in
Attachment C. Other organizations may be added from time to time.
6. Responsibilities. Agencies responsible for administering programs that involve awards to
non-profit organizations shall implement the provisions of this Circular. Upon request,
implementing instruction shall be furnished to OMB. Agencies shall designate a liaison official to
serve as the agency representative on matters relating to the implementation of this Circular. The
name and title of such representative shall be furnished to OMB within 30 days of the date of this
Circular.
7. Attachments. The principles and related policy guides are set forth in the following
Attachments:
Attachment A - General Principles Attachment B - Selected Items of Cost Attachment C - Non-Profit Organizations Not Subject To This Circular
8. Requests for exceptions. OMB may grant exceptions to the requirements of this Circular
when permissible under existing law. However, in the interest of achieving maximum uniformity,
exceptions will be permitted only in highly unusual circumstances.
9. Effective Date. The provisions of this Circular are effective immediately. Implementation shall
be phased in by incorporating the provisions into new awards made after the start of the
organization's next fiscal year. For existing awards, the new principles may be applied if an
organization and the cognizant Federal agency agree. Earlier implementation, or a delay in
implementation of individual provisions, is also permitted by mutual agreement between an
organization and the cognizant Federal agency.
10. Inquiries. Further information concerning this Circular may be obtained by contacting the
Office of Federal Financial Management, OMB, Washington, DC 20503, telephone (202)
395-3993.
Attachments ATTACHMENT A Circular No. A-122 GENERAL PRINCIPLES Table of Contents
A. Basic Considerations
1. Composition of total costs B. Direct Costs
C. Indirect Costs
D. Allocation of Indirect Costs and Determination of Indirect Cost Rates
1. General E. Negotiation and Approval of Indirect Cost Rates
1. Definitions ATTACHMENT A Circular No. A-122 GENERAL PRINCIPLES
A. Basic Considerations
1. Composition of total costs. The total cost of an award is the sum of the allowable direct and
allocable indirect costs less any applicable credits.
2. Factors affecting allowability of costs. To be allowable under an award, costs must meet the
following general criteria:
a. Be reasonable for the performance of the award and be allocable thereto under these principles. b. Conform to any limitations or exclusions set forth in these principles or in the award as to types or amount of cost items. c. Be consistent with policies and procedures that apply uniformly to both federally-financed and other activities of the organization. d. Be accorded consistent treatment. e. Be determined in accordance with generally accepted accounting principles (GAAP). f. Not be included as a cost or used to meet cost sharing or matching requirements of any other federally-financed program in either the current or a prior period. g. Be adequately documented.
3. Reasonable costs. A cost is reasonable if, in its nature or amount, it does not exceed that which
would be incurred by a prudent person under the circumstances prevailing at the time the decision
was made to incur the costs. The question of the reasonableness of specific costs must be
scrutinized with particular care in connection with organizations or separate divisions thereof
which receive the preponderance of their support from awards made by Federal agencies. In
determining the reasonableness of a given cost, consideration shall be given to:
a. Whether the cost is of a type generally recognized as ordinary and necessary for the operation of the organization or the performance of the award. b. The restraints or requirements imposed by such factors as generally accepted sound business practices, arms length bargaining, Federal and State laws and regulations, and terms and conditions of the award. c. Whether the individuals concerned acted with prudence in the circumstances, considering their responsibilities to the organization, its members, employees, and clients, the public at large, and the Federal Government. d. Significant deviations from the established practices of the organization which may
unjustifiably increase the award costs.
4. Allocable costs.
a. A cost is allocable to a particular cost objective, such as a grant, contract, project, service, or other activity, in accordance with the relative benefits received. A cost is allocable to a Federal award if it is treated consistently with other costs incurred for the same purpose in like circumstances and if it: (1) Is incurred specifically for the award. (2) Benefits both the award and other work and can be distributed in reasonable proportion to the benefits received, or (3) Is necessary to the overall operation of the organization, although a direct relationship to any particular cost objective cannot be shown. b. Any cost allocable to a particular award or other cost objective under these principles may not
be shifted to other Federal awards to overcome funding deficiencies, or to avoid restrictions
imposed by law or by the terms of the award.
5. Applicable credits.
a. The term applicable credits refers to those receipts, or reduction of expenditures which operate to offset or reduce expense items that are allocable to awards as direct or indirect costs. Typical examples of such transactions are: purchase discounts, rebates or allowances, recoveries or indemnities on losses, insurance refunds, and adjustments of overpayments or erroneous charges. To the extent that such credits accruing or received by the organization relate to allowable cost, they shall be credited to the Federal Government either as a cost reduction or cash refund, as appropriate. b. In some instances, the amounts received from the Federal Government to finance
organizational activities or service operations should be treated as applicable credits. Specifically,
the concept of netting such credit items against related expenditures should be applied by the
organization in determining the rates or amounts to be charged to Federal awards for services
rendered whenever the facilities or other resources used in providing such services have been
financed directly, in whole or in part, by Federal funds.
c. For rules covering program income (i.e., gross income earned from federally-supported
activities) see Sec. __.24 of Office of Management and Budget (OMB) Circular A-110, "Uniform
Administrative Requirements for Grants and Agreements with Institutions of Higher Education,
Hospitals, and Other Non-Profit Organizations."
6. Advance understandings. Under any given award, the reasonableness and allocability of
certain items of costs may be difficult to determine. This is particularly true in connection with
organizations that receive a preponderance of their support from Federal agencies. In order to
avoid subsequent disallowance or dispute based on unreasonableness or nonallocability, it is often
desirable to seek a written agreement with the cognizant or awarding agency in advance of the
incurrence of special or unusual costs. The absence of an advance agreement on any element of
cost will not, in itself, affect the reasonableness or allocability of that element.
7. Conditional exemptions.
a. OMB authorizes conditional exemption from OMB administrative requirements and cost
principles circulars for certain Federal programs with statutorily-authorized consolidated planning
and consolidated administrative funding, that are identified by a Federal agency and approved by
the head of the Executive department or establishment. A Federal agency shall consult with OMB
during its consideration of whether to grant such an exemption.
b. To promote efficiency in State and local program administration, when Federal
non-entitlement programs with common purposes have specific statutorily-authorized
consolidated planning and consolidated administrative funding and where most of the State
agency's resources come from non-Federal sources, Federal agencies may exempt these covered
State-administered, non-entitlement grant programs from certain OMB grants management
requirements. The exemptions would be from all but the allocability of costs provisions of OMB
Circulars A-87 (Attachment A, subsection C.3), "Cost Principles for State, Local, and Indian
Tribal Governments," A-21 (Section C, subpart 4), "Cost Principles for Educational Institutions,"
and A-122 (Attachment A, subsection A.4), "Cost Principles for Non-Profit Organizations," and
from all of the administrative requirements provisions of OMB Circular A-110, "Uniform
Administrative Requirements for Grants and Agreements with Institutions of Higher Education,
Hospitals, and Other Non-Profit Organizations," and the agencies' grants management common
rule.
c. When a Federal agency provides this flexibility, as a prerequisite to a State's exercising this
option, a State must adopt its own written fiscal and administrative requirements for expending
and accounting for all funds, which are consistent with the provisions of OMB Circular A-87, and
extend such policies to all subrecipients. These fiscal and administrative requirements must be
sufficiently specific to ensure that: funds are used in compliance with all applicable Federal
statutory and regulatory provisions, costs are reasonable and necessary for operating these
programs, and funds are not be used for general expenses required to carry out other
responsibilities of a State or its subrecipients.
B. Direct Costs
1. Direct costs are those that can be identified specifically with a particular final cost objective,
i.e., a particular award, project, service, or other direct activity of an organization. However, a
cost may not be assigned to an award as a direct cost if any other cost incurred for the same
purpose, in like circumstance, has been allocated to an award as an indirect cost. Costs identified
specifically with awards are direct costs of the awards and are to be assigned directly thereto.
Costs identified specifically with other final cost objectives of the organization are direct costs of
those cost objectives and are not to be assigned to other awards directly or indirectly.
2. Any direct cost of a minor amount may be treated as an indirect cost for reasons of practicality
where the accounting treatment for such cost is consistently applied to all final cost objectives.
3. The cost of certain activities are not allowable as charges to Federal awards (see, for example,
fundraising costs in paragraph 23 of Attachment B). However, even though these costs are
unallowable for purposes of computing charges to Federal awards, they nonetheless must be
treated as direct costs for purposes of determining indirect cost rates and be allocated their share
of the organization's indirect costs if they represent activities which (1) include the salaries of
personnel, (2) occupy space, and (3) benefit from the organization's indirect costs.
4. The costs of activities performed primarily as a service to members, clients, or the general
public when significant and necessary to the organization's mission must be treated as direct costs
whether or not allowable and be allocated an equitable share of indirect costs. Some examples of
these types of activities include:
a. Maintenance of membership rolls, subscriptions, publications, and related functions. b. Providing services and information to members, legislative or administrative bodies, or the public. c. Promotion, lobbying, and other forms of public relations. d. Meetings and conferences except those held to conduct the general administration of the organization. e. Maintenance, protection, and investment of special funds not used in operation of the organization. f. Administration of group benefits on behalf of members or clients, including life and hospital
insurance, annuity or retirement plans, financial aid, etc.
C. Indirect Costs
1. Indirect costs are those that have been incurred for common or joint objectives and cannot be
readily identified with a particular final cost objective. Direct cost of minor amounts may be
treated as indirect costs under the conditions described in subparagraph B.2. After direct costs
have been determined and assigned directly to awards or other work as appropriate, indirect costs
are those remaining to be allocated to benefiting cost objectives. A cost may not be allocated to
an award as an indirect cost if any other cost incurred for the same purpose, in like circumstances,
has been assigned to an award as a direct cost.
2. Because of the diverse characteristics and accounting practices of non-profit organizations, it
is not possible to specify the types of cost which may be classified as indirect cost in all situations.
However, typical examples of indirect cost for many non-profit organizations may include
depreciation or use allowances on buildings and equipment, the costs of operating and maintaining
facilities, and general administration and general expenses, such as the salaries and expenses of
executive officers, personnel administration, and accounting.
3. Indirect costs shall be classified within two broad categories: "Facilities" and "Administration."
"Facilities" is defined as depreciation and use allowances on buildings, equipment and capital
improvement, interest on debt associated with certain buildings, equipment and capital
improvements, and operations and maintenance expenses. "Administration" is defined as general
administration and general expenses such as the director's office, accounting, personnel, library
expenses and all other types of expenditures not listed specifically under one of the subcategories
of "Facilities" (including cross allocations from other pools, where applicable). See indirect cost
rate reporting requirements in subparagraphs D.2.e and D.3.g.
D. Allocation of Indirect Costs and Determination of Indirect Cost Rates
1. General.
a. Where a non-profit organization has only one major function, or where all its major functions benefit from its indirect costs to approximately the same degree, the allocation of indirect costs and the computation of an indirect cost rate may be accomplished through simplified allocation procedures, as described in subparagraph 2. b. Where an organization has several major functions which benefit from its indirect costs in
varying degrees, allocation of indirect costs may require the accumulation of such costs into
separate cost groupings which then are allocated individually to benefiting functions by means of a
base which best measures the relative degree of benefit. The indirect costs allocated to each
function are then distributed to individual awards and other activities included in that function by
means of an indirect cost rate(s).
c. The determination of what constitutes an organization's major functions will depend on its purpose in being; the types of services it renders to the public, its clients, and its members; and the amount of effort it devotes to such activities as fundraising, public information and membership activities. d. Specific methods for allocating indirect costs and computing indirect cost rates along with the
conditions under which each method should be used are described in subparagraphs 2 through
5.
e. The base period for the allocation of indirect costs is the period in which such costs are
incurred and accumulated for allocation to work performed in that period. The base period
normally should coincide with the organization's fiscal year but, in any event, shall be so selected
as to avoid inequities in the allocation of the costs.
2. Simplified allocation method.
a. Where an organization's major functions benefit from its indirect costs to approximately the same degree, the allocation of indirect costs may be accomplished by (i) separating the organization's total costs for the base period as either direct or indirect, and (ii) dividing the total allowable indirect costs (net of applicable credits) by an equitable distribution base. The result of this process is an indirect cost rate which is used to distribute indirect costs to individual awards. The rate should be expressed as the percentage which the total amount of allowable indirect costs bears to the base selected. This method should also be used where an organization has only one major function encompassing a number of individual projects or activities, and may be used where the level of Federal awards to an organization is relatively small. b. Both the direct costs and the indirect costs shall exclude capital expenditures and unallowable costs. However, unallowable costs which represent activities must be included in the direct costs under the conditions described in subparagraph B.3. c. The distribution base may be total direct costs (excluding capital expenditures and other distorting items, such as major subcontracts or subgrants), direct salaries and wages, or other base which results in an equitable distribution. The distribution base shall generally exclude participant support costs as defined in paragraph 34 of Attachment B. d. Except where a special rate(s) is required in accordance with subparagraph 5, the indirect
cost rate developed under the above principles is applicable to all awards at the organization. If a
special rate(s) is required, appropriate modifications shall be made in order to develop the special
rate(s).
e. For an organization that receives more than $10 million in Federal funding of direct costs in a
fiscal year, a breakout of the indirect cost component into two broad categories, Facilities and
Administration as defined in subparagraph C.3, is required. The rate in each case shall be stated
as the percentage which the amount of the particular indirect cost category (i.e., Facilities or
Administration) is of the distribution base identified with that category.
3. Multiple allocation base method
a. General. Where an organization's indirect costs benefit its major functions in varying degrees,
indirect costs shall be accumulated into separate cost groupings, as described in subparagraph b.
Each grouping shall then be allocated individually to benefitting functions by means of a base
which best measures the relative benefits. The default allocation bases by cost pool are described
in subparagraph c.
b. Identification of indirect costs. Cost groupings shall be established so as to permit the
allocation of each grouping on the basis of benefits provided to the major functions. Each
grouping shall constitute a pool of expenses that are of like character in terms of functions they
benefit and in terms of the allocation base which best measures the relative benefits provided to
each function. The groupings are classified within the two broad categories: "Facilities" and
"Administration," as described in subparagraph C.3. The indirect cost pools are defined as
follows:
(1) Depreciation and use allowances. The expenses under this heading are the portion of the costs
of the organization's buildings, capital improvements to land and buildings, and equipment which
are computed in accordance with paragraph 11 of Attachment B ("Depreciation and use
allowances").
(2) Interest. Interest on debt associated with certain buildings, equipment and capital
improvements are computed in accordance with paragraph 23 of Attachment B ("Interest,
fundraising, and investment management costs").
(3) Operation and maintenance expenses. The expenses under this heading are those that have
been incurred for the administration, operation, maintenance, preservation, and protection of the
organization's physical plant. They include expenses normally incurred for such items as:
janitorial and utility services; repairs and ordinary or normal alterations of buildings, furniture and
equipment; care of grounds; maintenance and operation of buildings and other plant facilities;
security; earthquake and disaster preparedness; environmental safety; hazardous waste disposal;
property, liability and other insurance relating to property; space and capital leasing; facility
planning and management; and, central receiving. The operation and maintenance expenses
category shall also include its allocable share of fringe benefit costs, depreciation and use
allowances, and interest costs.
(4) General administration and general expenses. The expenses under this heading are those that
have been incurred for the overall general executive and administrative offices of the organization
and other expenses of a general nature which do not relate solely to any major function of the
organization. This category shall also include its allocable share of fringe benefit costs, operation
and maintenance expense, depreciation and use allowances, and interest costs. Examples of this
category include central offices, such as the director's office, the office of finance, business
services, budget and planning, personnel, safety and risk management, general counsel,
management information systems, and library costs.
In developing this cost pool, special care should be exercised to ensure that costs incurred for the same purpose in like circumstances are treated consistently as either direct or indirect costs. For example, salaries of technical staff, project supplies, project publication, telephone toll charges, computer costs, travel costs, and specialized services costs shall be treated as direct costs wherever identifiable to a particular program. The salaries and wages of administrative and pooled clerical staff should normally be treated as indirect costs. Direct charging of these costs may be appropriate where a major project or activity explicitly requires and budgets for administrative or clerical services and other individuals involved can be identified with the program or activity. Items such as office supplies, postage, local telephone costs, periodicals and memberships should normally be treated as indirect costs. c. Allocation bases. Actual conditions shall be taken into account in selecting the base to be used
in allocating the expenses in each grouping to benefitting functions. The essential consideration in
selecting a method or a base is that it is the one best suited for assigning the pool of costs to cost
objectives in accordance with benefits derived; a traceable cause and effect relationship; or logic
and reason, where neither the cause nor the effect of the relationship is determinable. When an
allocation can be made by assignment of a cost grouping directly to the function benefited, the
allocation shall be made in that manner. When the expenses in a cost grouping are more general in
nature, the allocation shall be made through the use of a selected base which produces results that
are equitable to both the Federal Government and the organization. The distribution shall be
made in accordance with the bases described herein unless it can be demonstrated that the use of a
different base would result in a more equitable allocation of the costs, or that a more readily
available base would not increase the costs charged to sponsored awards. The results of special
cost studies (such as an engineering utility study) shall not be used to determine and allocate the
indirect costs to sponsored awards.
(1) Depreciation and use allowances. Depreciation and use allowances expenses shall be allocated
in the following manner:
(a) Depreciation or use allowances on buildings used exclusively in the conduct of a single
function, and on capital improvements and equipment used in such buildings, shall be assigned to
that function.
(b) Depreciation or use allowances on buildings used for more than one function, and on capital
improvements and equipment used in such buildings, shall be allocated to the individual functions
performed in each building on the basis of usable square feet of space, excluding common areas,
such as hallways, stairwells, and restrooms.
(c) Depreciation or use allowances on buildings, capital improvements and equipment related
space (e.g., individual rooms, and laboratories) used jointly by more than one function (as
determined by the users of the space) shall be treated as follows. The cost of each jointly used
unit of space shall be allocated to the benefitting functions on the basis of:
(i) the employees and other users on a full-time equivalent (FTE) basis or salaries and wages of
those individual functions benefitting from the use of that space; or
(ii) organization-wide employee FTEs or salaries and wages applicable to the benefitting functions
of the organization.
(d) Depreciation or use allowances on certain capital improvements to land, such as paved
parking areas, fences, sidewalks, and the like, not included in the cost of buildings, shall be
allocated to user categories on a FTE basis and distributed to major functions in proportion to the
salaries and wages of all employees applicable to the functions.
(2) Interest. Interest costs shall be allocated in the same manner as the depreciation or use
allowances on the buildings, equipment and capital equipments to which the interest relates.
(3) Operation and maintenance expenses. Operation and maintenance expenses shall be allocated
in the same manner as the depreciation and use allowances.
(4) General administration and general expenses. General administration and general expenses
shall be allocated to benefitting functions based on modified total direct costs (MTDC), as
described in subparagraph D.3.f. The expenses included in this category could be grouped first
according to major functions of the organization to which they render services or provide benefits.
The aggregate expenses of each group shall then be allocated to benefitting functions based on
MTDC.
d. Order of distribution.
(1) Indirect cost categories consisting of depreciation and use allowances, interest, operation and
maintenance, and general administration and general expenses shall be allocated in that order to
the remaining indirect cost categories as well as to the major functions of the organization. Other
cost categories could be allocated in the order determined to be most appropriate by the
organization. When cross allocation of costs is made as provided in subparagraph (2), this order
of allocation does not apply.
(2) Normally, an indirect cost category will be considered closed once it has been allocated to
other cost objectives, and costs shall not be subsequently allocated to it. However, a cross
allocation of costs between two or more indirect costs categories could be used if such allocation
will result in a more equitable allocation of costs. If a cross allocation is used, an appropriate
modification to the composition of the indirect cost categories is required.
e. Application of indirect cost rate or rates. Except where a special indirect cost rate(s) is
required in accordance with subparagraph D.5, the separate groupings of indirect costs allocated
to each major function shall be aggregated and treated as a common pool for that function. The
costs in the common pool shall then be distributed to individual awards included in that function
by use of a single indirect cost rate.
f. Distribution basis. Indirect costs shall be distributed to applicable sponsored awards and other
benefitting activities within each major function on the basis of MTDC. MTDC consists of all
salaries and wages, fringe benefits, materials and supplies, services, travel, and subgrants and
subcontracts up to the first $25,000 of each subgrant or subcontract (regardless of the period
covered by the subgrant or subcontract). Equipment, capital expenditures, charges for patient
care, rental costs and the portion in excess of $25,000 shall be excluded from MTDC. Participant
support costs shall generally be excluded from MTDC. Other items may only be excluded when
the Federal cost cognizant agency determines that an exclusion is necessary to avoid a serious
inequity in the distribution of indirect costs.
g. Individual Rate Components. An indirect cost rate shall be determined for each separate
indirect cost pool developed. The rate in each case shall be stated as the percentage which the
amount of the particular indirect cost pool is of the distribution base identified with that pool.
Each indirect cost rate negotiation or determination agreement shall include development of the
rate for each indirect cost pool as well as the overall indirect cost rate. The indirect cost pools
shall be classified within two broad categories: "Facilities" and "Administration," as described in
subparagraph C.3.
4. Direct allocation method.
a. Some non-profit organizations treat all costs as direct costs except general administration and
general expenses. These organizations generally separate their costs into three basic categories:
(i) General administration and general expenses, (ii) fundraising, and (iii) other direct functions
(including projects performed under Federal awards). Joint costs, such as depreciation, rental
costs, operation and maintenance of facilities, telephone expenses, and the like are prorated
individually as direct costs to each category and to each award or other activity using a base most
appropriate to the particular cost being prorated.
b. This method is acceptable, provided each joint cost is prorated using a base which accurately measures the benefits provided to each award or other activity. The bases must be established in accordance with reasonable criteria, and be supported by current data. This method is compatible with the Standards of Accounting and Financial Reporting for Voluntary Health and Welfare Organizations issued jointly by the National Health Council, Inc., the National Assembly of Voluntary Health and Social Welfare Organizations, and the United Way of America. c. Under this method, indirect costs consist exclusively of general administration and general
expenses. In all other respects, the organization's indirect cost rates shall be computed in the
same manner as that described in subparagraph 2.
5. Special indirect cost rates. In some instances, a single indirect cost rate for all activities of an
organization or for each major function of the organization may not be appropriate, since it would
not take into account those different factors which may substantially affect the indirect costs
applicable to a particular segment of work. For this purpose, a particular segment of work may
be that performed under a single award or it may consist of work under a group of awards
performed in a common environment. These factors may include the physical location of the
work, the level of administrative support required, the nature of the facilities or other resources
employed, the scientific disciplines or technical skills involved, the organizational arrangements
used, or any combination thereof. When a particular segment of work is performed in an
environment which appears to generate a significantly different level of indirect costs, provisions
should be made for a separate indirect cost pool applicable to such work. The separate indirect
cost pool should be developed during the course of the regular allocation process, and the
separate indirect cost rate resulting therefrom should be used, provided it is determined that (i)
the rate differs significantly from that which would have been obtained under subparagraphs 2,
3, and 4, and (ii) the volume of work to which the rate would apply is material.
E. Negotiation and Approval of Indirect Cost Rates
1. Definitions. As used in this section, the following terms have the meanings set forth below:
a. Cognizant agency means the Federal agency responsible for negotiating and approving indirect cost rates for a non-profit organization on behalf of all Federal agencies. b. Predetermined rate means an indirect cost rate, applicable to a specified current or future period, usually the organization's fiscal year. The rate is based on an estimate of the costs to be incurred during the period. A predetermined rate is not subject to adjustment. c. Fixed rate means an indirect cost rate which has the same characteristics as a predetermined rate, except that the difference between the estimated costs and the actual costs of the period covered by the rate is carried forward as an adjustment to the rate computation of a subsequent period. d. Final rate means an indirect cost rate applicable to a specified past period which is based on the actual costs of the period. A final rate is not subject to adjustment. e. Provisional rate or billing rate means a temporary indirect cost rate applicable to a specified period which is used for funding, interim reimbursement, and reporting indirect costs on awards pending the establishment of a final rate for the period. f. Indirect cost proposal means the documentation prepared by an organization to substantiate its claim for the reimbursement of indirect costs. This proposal provides the basis for the review and negotiation leading to the establishment of an organization's indirect cost rate. g. Cost objective means a function, organizational subdivision, contract, grant, or other work unit
for which cost data are desired and for which provision is made to accumulate and measure the
cost of processes, projects, jobs and capitalized projects.
2. Negotiation and approval of rates.
a. Unless different arrangements are agreed to by the agencies concerned, the Federal agency with the largest dollar value of awards with an organization will be designated as the cognizant agency for the negotiation and approval of the indirect cost rates and, where necessary, other rates such as fringe benefit and computer charge-out rates. Once an agency is assigned cognizance for a particular non-profit organization, the assignment will not be changed unless there is a major long-term shift in the dollar volume of the Federal awards to the organization. All concerned Federal agencies shall be given the opportunity to participate in the negotiation process but, after a rate has been agreed upon, it will be accepted by all Federal agencies. When a Federal agency has reason to believe that special operating factors affecting its awards necessitate special indirect cost rates in accordance with subparagraph D.5, it will, prior to the time the rates are negotiated, notify the cognizant agency. b. A non-profit organization which has not previously established an indirect cost rate with a Federal agency shall submit its initial indirect cost proposal immediately after the organization is advised that an award will be made and, in no event, later than three months after the effective date of the award. c. Organizations that have previously established indirect cost rates must submit a new indirect cost proposal to the cognizant agency within six months after the close of each fiscal year. d. A predetermined rate may be negotiated for use on awards where there is reasonable assurance, based on past experience and reliable projection of the organization's costs, that the rate is not likely to exceed a rate based on the organization's actual costs. e. Fixed rates may be negotiated where predetermined rates are not considered appropriate. A
fixed rate, however, shall not be negotiated if (i) all or a substantial portion of the organization's
awards are expected to expire before the carry-forward adjustment can be made; (ii) the mix of
Federal and non-Federal work at the organization is too erratic to permit an equitable
carry-forward adjustment; or (iii) the organization's operations fluctuate significantly from year to
year.
f. Provisional and final rates shall be negotiated where neither predetermined nor fixed rates are appropriate. g. The results of each negotiation shall be formalized in a written agreement between the cognizant agency and the non-profit organization. The cognizant agency shall distribute copies of the agreement to all concerned Federal agencies. h. If a dispute arises in a negotiation of an indirect cost rate between the cognizant agency and the non-profit organization, the dispute shall be resolved in accordance with the appeals procedures of the cognizant agency. i. To the extent that problems are encountered among the Federal agencies in connection with the negotiation and approval process, OMB will lend assistance as required to resolve such problems in a timely manner. ATTACHMENT B Circular No. A-122 SELECTED ITEMS OF COST Table of Contents
1. Advertising and public relations costs ATTACHMENT B Circular No. A-122 SELECTED ITEMS OF COST
Paragraphs 1 through 56 provide principles to be applied in establishing the allowability of
certain items of cost. These principles apply whether a cost is treated as direct or indirect. Failure
to mention a particular item of cost is not intended to imply that it is unallowable; rather,
determination as to allowability in each case should be based on the treatment or principles
provided for similar or related items of cost.
1. Advertising and public relations costs.
a. The term advertising costs means the costs of advertising media and corollary administrative
costs. Advertising media include magazines, newspapers, radio and television programs, direct
mail, exhibits, and the like.
b. The term public relations includes community relations and means those activities dedicated to
maintaining the image of the organization or maintaining or promoting understanding and
favorable relations with the community or public at large or any segment of the public.
c. The only allowable advertising costs are those which are solely for:
(1) The recruitment of personnel required for the performance by the organization of obligations
arising under a sponsored award, when considered in conjunction with all other recruitment costs,
as set forth in paragraph 44 ("Recruiting costs");
(2) The procurement of goods and services for the performance of a sponsored award;
(3) The disposal of scrap or surplus materials acquired in the performance of a sponsored award
except when organizations are reimbursed for disposal costs at a predetermined amount in
accordance with OMB Circular A-110, Sec.___.34, "Equipment"; or
(4) Other specific purposes necessary to meet the requirements of the sponsored award.
d. The only allowable public relations costs are:
(1) Costs specifically required by sponsored awards;
(2) Costs of communicating with the public and press pertaining to specific activities or
accomplishments which result from performance of sponsored awards (these costs are considered
necessary as part of the outreach effort for the sponsored awards); 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 to keep the
public informed on matters of public concern, such as notices of contract/grant awards, financial
matters, etc.
e. Costs identified in subparagraphs c and d if incurred for more than one sponsored award or
for both sponsored work and other work of the organization, are allowable to the extent that the
principles in paragraphs B ("Direct Costs") and C ("Indirect Costs") of Attachment A are
observed.
f. Unallowable advertising and public relations costs include the following:
(1) All advertising and public relations costs other than as specified in subparagraphs c, d, and
e;
(2) Costs of meetings or other events related to fund raising or other organizational activities
including:
(i) Costs of displays, demonstrations, and exhibits;
(ii) Costs of meeting rooms, hospitality suites, and other special facilities used in conjunction with
shows and other special events; and
(iii) Salaries and wages of employees or cost of services 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 organization.
2. Alcoholic beverages. Costs of alcoholic beverages are unallowable. 3. Bad debts. Bad debts, including losses (whether actual or estimated) arising from
uncollectible accounts and other claims, related collection costs, and related legal costs, are
unallowable.
4. Bid and proposal costs. (reserved)
5. Bonding costs.
a. Bonding costs arise when the Federal Government requires assurance against financial loss to itself or others by reason of the act or default of the organization. They arise also in instances where the organization requires similar assurance. Included are such bonds as bid, performance, payment, advance payment, infringement, and fidelity bonds. b. Costs of bonding required pursuant to the terms of the award are allowable. c. Costs of bonding required by the organization in the general conduct of its operations are
allowable to the extent that such bonding is in accordance with sound business practice and the
rates and premiums are reasonable under the circumstances.
6. Communication costs. Costs incurred for telephone services, local and long distance telephone
calls, telegrams, radiograms, postage and the like are allowable.
7. Compensation for personal services.
a. Definition. Compensation for personal services includes all compensation paid currently or accrued by the organization for services of employees rendered during the period of the award (except as otherwise provided in subparagraph h). It includes, but is not limited to, salaries, wages, director's and executive committee member's fees, incentive awards, fringe benefits, pension plan costs, allowances for off-site pay, incentive pay, location allowances, hardship pay, and cost of living differentials. b. Allowability. Except as otherwise specifically provided in this paragraph, the costs of such compensation are allowable to the extent that: (1) Total compensation to individual employees is reasonable for the services rendered and conforms to the established policy of the organization consistently applied to both Federal and non-Federal activities; and (2) Charges to awards whether treated as direct or indirect costs are determined and supported as required in this paragraph. c. Reasonableness. (1) When the organization is predominantly engaged in activities other than those sponsored by
the Federal Government, compensation for employees on federally-sponsored work will be
considered reasonable to the extent that it is consistent with that paid for similar work in the
organization's other activities.
(2) When the organization is predominantly engaged in federally-sponsored activities and in cases where the kind of employees required for the Federal activities are not found in the organization's other activities, compensation for employees on federally-sponsored work will be considered reasonable to the extent that it is comparable to that paid for similar work in the labor markets in which the organization competes for the kind of employees involved. d. Special considerations in determining allowability. Certain conditions require special consideration and possible limitations in determining costs under Federal awards where amounts or types of compensation appear unreasonable. Among such conditions are the following: (1) Compensation to members of non-profit organizations, trustees, directors, associates, officers, or the immediate families thereof. Determination should be made that such compensation is reasonable for the actual personal services rendered rather than a distribution of earnings in excess of costs. (2) Any change in an organization's compensation policy resulting in a substantial increase in the organization's level of compensation, particularly when it was concurrent with an increase in the ratio of Federal awards to other activities of the organization or any change in the treatment of allowability of specific types of compensation due to changes in Federal policy. e. Unallowable costs. Costs which are unallowable under other paragraphs of this Attachment shall not be allowable under this paragraph solely on the basis that they constitute personal compensation. f. Fringe benefits. (1) Fringe benefits in the form of regular compensation paid to employees during periods of authorized absences from the job, such as vacation leave, sick leave, military leave, and the like, are allowable, provided such costs are absorbed by all organization activities in proportion to the relative amount of time or effort actually devoted to each. (2) Fringe benefits in the form of employer contributions or expenses for social security, employee insurance, workmen's compensation insurance, pension plan costs (see subparagraph h), and the like, are allowable, provided such benefits are granted in accordance with established written organization policies. Such benefits whether treated as indirect costs or as direct costs, shall be distributed to particular awards and other activities in a manner consistent with the pattern of benefits accruing to the individuals or group of employees whose salaries and wages are chargeable to such awards and other activities. (3) (a) Provisions for a reserve under a self-insurance program for unemployment compensation or workers' compensation are allowable to the extent that the provisions represent reasonable estimates of the liabilities for such compensation, and the types of coverage, extent of coverage, and rates and premiums would have been allowable had insurance been purchased to cover the risks. However, provisions for self-insured liabilities which do not become payable for more than one year after the provision is made shall not exceed the present value of the liability. (b) Where an organization follows a consistent policy of expensing actual payments to, or on behalf of, employees or former employees for unemployment compensation or workers' compensation, such payments are allowable in the year of payment with the prior approval of the awarding agency, provided they are allocated to all activities of the organization. (4) Costs of insurance on the lives of trustees, officers, or other employees holding positions of
similar responsibility are allowable only to the extent that the insurance represents additional
compensation. The costs of such insurance when the organization is named as beneficiary are
unallowable.
g. Organization-furnished automobiles. That portion of the cost of organization-furnished
automobiles that relates to personal use by employees (including transportation to and from work)
is unallowable as fringe benefit or indirect costs regardless of whether the cost is reported as
taxable income to the employees. These costs are allowable as direct costs to sponsored award
when necessary for the performance of the sponsored award and approved by awarding agencies.
h. Pension plan costs. (1) Costs of the organization's pension plan which are incurred in accordance with the established policies of the organization are allowable, provided: (a) Such policies meet the test of reasonableness; (b) The methods of cost allocation are not discriminatory; (c) The cost assigned to each fiscal year is determined in accordance with generally accepted
accounting principles (GAAP), as prescribed in Accounting Principles Board Opinion No. 8
issued by the American Institute of Certified Public Accountants; and
(d) The costs assigned to a given fiscal year are funded for all plan participants within six months after the end of that year. However, increases to normal and past service pension costs caused by a delay in funding the actuarial liability beyond 30 days after each quarter of the year to which such costs are assignable are unallowable. (2) Pension plan termination insurance premiums paid pursuant to the Employee Retirement Income Security Act (ERISA) of 1974 (Pub. L. 93-406) are allowable. Late payment charges on such premiums are unallowable. (3) Excise taxes on accumulated funding deficiencies and other penalties imposed under ERISA are unallowable. i. Incentive compensation. Incentive compensation to employees based on cost reduction, or efficient performance, suggestion awards, safety awards, etc., are allowable to the extent that the overall compensation is determined to be reasonable and such costs are paid or accrued pursuant to an agreement entered into in good faith between the organization and the employees before the services were rendered, or pursuant to an established plan followed by the organization so consistently as to imply, in effect, an agreement to make such payment. j. Overtime, extra-pay shift, and multi-shift premiums. See paragraph 32. k. Severance pay. See paragraph 49. l. Training and education costs. See paragraph 53. m. Support of salaries and wages. (1) Charges to awards for salaries and wages, whether treated as direct costs or indirect costs, will be based on documented payrolls approved by a responsible official(s) of the organization. The distribution of salaries and wages to awards must be supported by personnel activity reports, as prescribed in subparagraph (2), except when a substitute system has been approved in writing by the cognizant agency. (See subparagraph E.2 of Attachment A.) (2) Reports reflecting the distribution of activity of each employee must be maintained for all staff members (professionals and nonprofessionals) whose compensation is charged, in whole or in part, directly to awards. In addition, in order to support the allocation of indirect costs, such reports must also be maintained for other employees whose work involves two or more functions or activities if a distribution of their compensation between such functions or activities is needed in the determination of the organization's indirect cost rate(s) (e.g., an employee engaged part-time in indirect cost activities and part-time in a direct function). Reports maintained by non-profit organizations to satisfy these requirements must meet the following standards: (a) The reports must reflect an after-the-fact determination of the actual activity of each employee. Budget estimates (i.e., estimates determined before the services are performed) do not qualify as support for charges to awards. (b) Each report must account for the total activity for which employees are compensated and which is required in fulfillment of their obligations to the organization. (c) The reports must be signed by the individual employee, or by a responsible supervisory official having first hand knowledge of the activities performed by the employee, that the distribution of activity represents a reasonable estimate of the actual work performed by the employee during the periods covered by the reports. (d) The reports must be prepared at least monthly and must coincide with one or more pay periods. (3) Charges for the salaries and wages of nonprofessional employees, in addition to the supporting documentation described in subparagraphs (1) and (2), must also be supported by records indicating the total number of hours worked each day maintained in conformance with Department of Labor regulations implementing the Fair Labor Standards Act (FLSA) (29 CFR Part 516). For this purpose, the term "nonprofessional employee" shall have the same meaning as "nonexempt employee," under FLSA. (4) Salaries and wages of employees used in meeting cost sharing or matching requirements on
awards must be supported in the same manner as salaries and wages claimed for reimbursement
from awarding agencies.
8. Contingency provisions. Contributions to a contingency reserve or any similar provision made
for events the occurrence of which cannot be foretold with certainty as to time, intensity, or with
an assurance of their happening, are unallowable. The term "contingency reserve" excludes
self-insurance reserves (see subparagraphs 7.f (3) and 22.a(2)(d); pension funds (see
subparagraph 7.h); and reserves for normal severance pay (see subparagraph 49.b(1)).
9. Contributions. Contributions and donations by the organization to others are unallowable.
10. Defense and prosecution of criminal and civil proceedings, claims, appeals and patent
infringement.
a. Definitions.
(1) Conviction, as used herein, means a judgment or a conviction of a criminal offense by any
court of competent jurisdiction, whether entered upon as a verdict or a plea, including a
conviction due to a plea of nolo contendere.
(2) Costs include, but are not limited to, administrative and clerical expenses; the cost of legal
services, whether performed by in-house or private counsel; and the costs of the services of
accountants, consultants, or others retained by the organization to assist it; costs of employees,
officers and trustees, and any similar costs incurred before, during, and after commencement of a
judicial or administrative proceeding that bears a direct relationship to the proceedings.
(3) Fraud, as used herein, means (i) acts of fraud corruption or attempts to defraud the Federal
Government or to corrupt its agents, (ii) acts that constitute a cause for debarment or suspension
(as specified in agency regulations), and (iii) acts which violate the False Claims Act, 31 U.S.C.,
sections 3729-3731, or the Anti-Kickback Act, 41 U.S.C., sections 51 and 54.
(4) Penalty does not include restitution, reimbursement, or compensatory damages.
(5) Proceeding includes an investigation.
b. (1) Except as otherwise described herein, costs incurred in connection with any criminal, civil
or administrative proceeding (including filing of a false certification) commenced by the Federal
Government, or a State, local or foreign government, are not allowable if the proceeding: (1)
relates to a violation of, or failure to comply with, a Federal, State, local or foreign statute or
regulation by the organization (including its agents and employees), and (2) results in any of the
following dispositions:
(a) In a criminal proceeding, a conviction.
(b) In a civil or administrative proceeding involving an allegation of fraud or similar misconduct, a
determination of organizational liability.
(c) In the case of any civil or administrative proceeding, the imposition of a monetary penalty.
(d) A final decision by an appropriate Federal official to debar or suspend the organization, to
rescind or void an award, or to terminate an award for default by reason of a violation or failure
to comply with a law or regulation.
(e) A disposition by consent or compromise, if the action could have resulted in any of the
dispositions described in (a), (b), (c) or (d).
(2) If more than one proceeding involves the same alleged misconduct, the costs of all such
proceedings shall be unallowable if any one of them results in one of the dispositions shown in
subparagraph b.(1).
c. If a proceeding referred to in subparagraph b is commenced by the Federal Government and
is resolved by consent or compromise pursuant to an agreement entered into by the organization
and the Federal Government, then the costs incurred by the organization in connection with such
proceedings that are otherwise not allowable under subparagraph b may be allowed to the
extent specifically provided in such agreement.
d. If a proceeding referred to in subparagraph b is commenced by a State, local or foreign
government, the authorized Federal official may allow the costs incurred by the organization for
such proceedings, if such authorized official determines that the costs were incurred as a result of
(1) a specific term or condition of a federally-sponsored award, or (2) specific written direction of
an authorized official of the sponsoring agency.
e. Costs incurred in connection with proceedings described in subparagraph b, but which are
not made unallowable by that subparagraph, may be allowed by the Federal Government, but only
to the extent that:
(1) The costs are reasonable in relation to the activities required to deal with the proceeding and
the underlying cause of action;
(2) Payment of the costs incurred, as allowable and allocable costs, is not prohibited by any other
provision(s) of the sponsored award;
(3) The costs are not otherwise recovered from the Federal Government or a third party, either
directly as a result of the proceeding or otherwise; and,
(4) The percentage of costs allowed does not exceed the percentage determined by an authorized
Federal official to be appropriate, considering the complexity of the litigation, generally accepted
principles governing the award of legal fees in civil actions involving the United States as a party,
and such other factors as may be appropriate. Such percentage shall not exceed 80 percent.
However, if an agreement reached under subparagraph c has explicitly considered this 80
percent limitation and permitted a higher percentage, then the full amount of costs resulting from
that agreement shall be allowable.
f. Costs incurred by the organization in connection with the defense of suits brought by its
employees or ex-employees under section 2 of the Major Fraud Act of 1988 (Pub. L. 100-700),
including the cost of all relief necessary to make such employee whole, where the organization
was found liable or settled, are unallowable.
g. Costs of legal, accounting, and consultant services, and related costs, incurred in connection
with defense against Federal Government claims or appeals, antitrust suits, or the prosecution of
claims or appeals against the Federal Government, are unallowable.
h. Costs of legal, accounting, and consultant services, and related costs, incurred in connection
with patent infringement litigation, are unallowable unless otherwise provided for in the sponsored
awards.
i. Costs which may be unallowable under this paragraph, including directly associated costs, shall
be segregated and accounted for by the organization separately. During the pendency of any
proceeding covered by subparagraphs b and f, the Federal Government shall generally withhold
payment of such costs. However, if in the best interests of the Federal Government, the Federal
Government may provide for conditional payment upon provision of adequate security, or other
adequate assurance, and agreements by the organization to repay all unallowable costs, plus
interest, if the costs are subsequently determined to be unallowable.
11. Depreciation and use allowances.
a. Compensation for the use of buildings, other capital improvements, and equipment on hand may be made through use allowances or depreciation. However, except as provided in subparagraph f, a combination of the two methods may not be used in connection with a single class of fixed assets (e.g., buildings, office equipment, computer equipment, etc.). b. The computation of use allowances or depreciation shall be based on the acquisition cost of the assets involved. The acquisition cost of an asset donated to the organization by a third party shall be its fair market value at the time of the donation. c. The computation of use allowances or depreciation will exclude: (1) The cost of land; (2) Any portion of the cost of buildings and equipment borne by or donated by the Federal Government irrespective of where title was originally vested or where it presently resides; and (3) Any portion of the cost of buildings and equipment contributed by or for the organization in satisfaction of a statutory matching requirement. d. Where the use allowance method is followed, the use allowance for buildings and improvement (including land improvements, such as paved parking areas, fences, and sidewalks) will be computed at an annual rate not exceeding two percent of acquisition cost. The use allowance for equipment will be computed at an annual rate not exceeding six and two-thirds percent of acquisition cost. When the use allowance method is used for buildings, the entire building must be treated as a single asset; the building's components (e.g., plumbing system, heating and air conditioning, etc.) cannot be segregated from the building's shell. The two percent limitation, however, need not be applied to equipment which is merely attached or fastened to the building but not permanently fixed to it and which is used as furnishings or decorations or for specialized purposes (e.g., dentist chairs and dental treatment units, counters, laboratory benches bolted to the floor, dishwashers, carpeting, etc.). Such equipment will be considered as not being permanently fixed to the building if it can be removed without the need for costly or extensive alterations or repairs to the building or the equipment. Equipment that meets these criteria will be subject to the six and two-thirds percent equipment use allowance limitation. e. Where depreciation method is followed, the period of useful service (useful life) established in each case for usable capital assets must take into consideration such factors as type of construction, nature of the equipment used, technological developments in the particular program area, and the renewal and replacement policies followed for the individual items or classes of assets involved. The method of depreciation used to assign the cost of an asset (or group of assets) to accounting periods shall reflect the pattern of consumption of the asset during its useful life. In the absence of clear evidence indicating that the expected consumption of the asset will be significantly greater or lesser in the early portions of its useful life than in the later portions, the straight-line method shall be presumed to be the appropriate method. Depreciation methods once used shall not be changed unless approved in advance by the cognizant Federal agency. When the depreciation method is introduced for application to assets previously subject to a use allowance, the combination of use allowances and depreciation applicable to such assets must not exceed the total acquisition cost of the assets. When the depreciation method is used for buildings, a building's shell may be segregated from each building component (e.g., plumbing system, heating, and air conditioning system, etc.) and each item depreciated over its estimated useful life; or the entire building (i.e., the shell and all components) may be treated as a single asset and depreciated over a single useful life. f. When the depreciation method is used for a particular class of assets, no depreciation may be allowed on any such assets that, under subparagraph e, would be viewed as fully depreciated. However, a reasonable use allowance may be negotiated for such assets if warranted after taking into consideration the amount of depreciation previously charged to the Federal Government, the estimated useful life remaining at time of negotiation, the effect of any increased maintenance charges or decreased efficiency due to age, and any other factors pertinent to the utilization of the asset for the purpose contemplated. g. Charges for use allowances or depreciation must be supported by adequate property records
and physical inventories must be taken at least once every two years (a statistical sampling basis is
acceptable) to ensure that assets exist and are usable and needed. When the depreciation method
is followed, adequate depreciation records indicating the amount of depreciation taken each
period must also be maintained.
12. Donations.
a. Services received. (1) Donated or volunteer services may be furnished to an organization by professional and technical personnel, consultants, and other skilled and unskilled labor. The value of these services is not reimbursable either as a direct or indirect cost. (2) The value of donated services utilized in the performance of a direct cost activity shall be
considered in the determination of the organization's indirect cost rate(s) and, accordingly, shall
be allocated a proportionate share of applicable indirect costs when the following circumstances
exist:
(a) The aggregate value of the services is material; (b) The services are supported by a significant amount of the indirect costs incurred by the
organization;
(c) The direct cost activity is not pursued primarily for the benefit of the Federal Government, (3) In those instances where there is no basis for determining the fair market value of the services rendered, the recipient and the cognizant agency shall negotiate an appropriate allocation of indirect cost to the services. (4) Where donated services directly benefit a project supported by an award, the indirect costs allocated to the services will be considered as a part of the total costs of the project. Such indirect costs may be reimbursed under the award or used to meet cost sharing or matching requirements. (5) The value of the donated services may be used to meet cost sharing or matching requirements under conditions described in Sec.__.23 of Circular A-110. Where donated services are treated as indirect costs, indirect cost rates will separate the value of the donations so that reimbursement will not be made. (6) Fair market value of donated services shall be computed as follows: (a) Rates for volunteer services. Rates for volunteers shall be consistent with those regular rates paid for similar work in other activities of the organization. In cases where the kinds of skills involved are not found in other activities of the organization, the rates used shall be consistent with those paid for similar work in the labor market in which the organization competes for such skills. (b) Services donated by other organizations. When an employer donates the services of an
employee, these services shall be valued at the employee's regular rate of pay (exclusive of fringe
benefits and indirect costs), provided the services are in the same skill for which the employee is
normally paid. If the services are not in the same skill for which the employee is normally paid,
fair market value shall be computed in accordance with subparagraph (a).
b. Goods and space. (1) Donated goods; i.e., expendable personal property/supplies, and donated use of space may be
furnished to an organization. The value of the goods and space is not reimbursable either as a
direct or indirect cost.
(2) The value of the donations may be used to meet cost sharing or matching share requirements
under the conditions described in Sec.__.23 of Circular A-110. The value of the donations shall
be determined in accordance with Sec.__.23 of Circular A-110. Where donations are treated as
indirect costs, indirect cost rates will separate the value of the donations so that reimbursement
will not be made.
13. Employee morale, health, and welfare costs and credits. The costs of house publications,
health or first-aid clinics, and/or infirmaries, recreational activities, employees' counseling services,
and other expenses incurred in accordance with the organization's established practice or custom
for the improvement of working conditions, employer-employee relations, employee morale, and
employee performance are allowable. Such costs will be equitably apportioned to all activities of
the organization. Income generated from any of these activities will be credited to the cost thereof
unless such income has been irrevocably set over to employee welfare organizations.
14. Entertainment costs. Costs of amusement, diversion, social activities, ceremonials, and costs
relating thereto, such as meals, lodging, rentals, transportation, and gratuities are unallowable (but
see paragraphs 13 and 30).
15. Equipment and other capital expenditures.
a. As used in this paragraph, the following terms have the meanings set forth below: (1) "Equipment" means an article of nonexpendable, tangible personal property having a useful
life of more than one year and an acquisition cost which equals or exceeds the lesser of (a) the
capitalization level established by the organization for the financial statement purposes, or (b)
$5000. 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 as negotiated with the Federal cognizant agency.
(2) Acquisition cost means the net invoice unit price of an item of equipment, including the cost of any modifications, attachments, accessories, or auxiliary apparatus necessary to make it usable for the purpose for which it is acquired. Ancillary charges, such as taxes, duty, protective in-transit insurance, freight, and installation shall be included in or excluded from acquisition cost in accordance with the organization's regular written accounting practices. (3) Special purpose equipment means equipment which is usable only for research, medical, scientific, or technical activities. Examples of special purpose equipment include microscopes, x-ray machines, surgical instruments, and spectrometers. (4) General purpose equipment means equipment which is usable for other than research, medical, scientific, or technical activities, whether or not special modifications are needed to make them suitable for a particular purpose. Examples of general purpose equipment include office equipment and furnishings, air conditioning equipment, reproduction and printing equipment, motor vehicles, and automatic data processing equipment. b. (1) Capital expenditures for general purpose equipment are unallowable as a direct cost except with the prior approval of the awarding agency. (2) Capital expenditures for special purpose equipment are allowable as direct costs, provided that
items with a unit cost of $5000 or more have the prior approval of awarding agency.
c. Capital expenditures for land or buildings are unallowable as a direct cost except with the prior approval of the awarding agency. d. Capital expenditures for improvements to land, buildings, or equipment which materially increase their value or useful life are unallowable as a direct cost except with the prior approval of the awarding agency. e. Equipment and other capital expenditures are unallowable as indirect costs. However, see
paragraph 11 for allowability of use allowances or depreciation on buildings, capital
improvements, and equipment. Also, see paragraph 46 for allowability of rental costs for land,
buildings, and equipment.
16. Fines and penalties. Costs of fines and penalties resulting from violations of, or failure of the
organization to comply with Federal, State, and local laws and regulations are unallowable except
when incurred as a result of compliance with specific provisions of an award or instructions in
writing from the awarding agency.
17. Fringe benefits. See subparagraph 7.f.
18. Goods or services for personal use. Costs of goods or services for personal use of the
organization's employees are unallowable regardless of whether the cost is reported as taxable
income to the employees.
19. Housing and personal living expenses.
a. Costs of housing (e.g., depreciation, maintenance, utilities, furnishings, rent, etc.), housing
allowances and personal living expenses for/of the organization's officers are unallowable as fringe
benefit or indirect costs regardless of whether the cost is reported as taxable income to the
employees. These costs are allowable as direct costs to sponsored award when necessary for the
performance of the sponsored award and approved by awarding agencies.
b. The term "officers" includes current and past officers and employees.
20. Idle facilities and idle capacity.
a. As used in this paragraph, the following terms have the meanings set forth below: (1) Facilities means land and buildings or any portion thereof, equipment individually or collectively, or any other tangible capital asset, wherever located, and whether owned or leased by the organization. (2) Idle facilities means completely unused facilities that are excess to the organization's current needs. (3) Idle capacity means the unused capacity of partially used facilities. It is the difference between that which a facility could achieve under 100 percent operating time on a one-shift basis less operating interruptions resulting from time lost for repairs, setups, unsatisfactory materials, and other normal delays, and the extent to which the facility was actually used to meet demands during the accounting period. A multi-shift basis may be used if it can be shown that this amount of usage could normally be expected for the type of facility involved. (4) Costs of idle facilities or idle capacity means costs such as maintenance, repair, housing, rent, and other related costs, e.g., property taxes, insurance, and depreciation or use allowances. b. The costs of idle facilities are unallowable except to the extent that: (1) They are necessary to meet fluctuations in workload; or (2) Although not necessary to meet fluctuations in workload, they were necessary when acquired
and are now idle because of changes in program requirements, efforts to achieve more economical
operations, reorganization, termination, or other causes which could not have been reasonably
foreseen. Under the exception stated in this subparagraph, costs of idle facilities are allowable for
a reasonable period of time, ordinarily not to exceed one year, depending upon the initiative taken
to use, lease, or dispose of such facilities (but see subparagraphs 48.b and d).
c. The costs of idle capacity are normal costs of doing business and are a factor in the normal
fluctuations of usage or indirect cost rates from period to period. Such costs are allowable,
provided the capacity is reasonably anticipated to be necessary or was originally reasonable and is
not subject to reduction or elimination by subletting, renting, or sale, in accordance with sound
business, economics, or security practices. Widespread idle capacity throughout an entire facility
or among a group of assets having substantially the same function may be idle facilities.
21. Independent research and development. [Reserved]
22. Insurance and indemnification.
a. Insurance includes insurance which the organization is required to carry, or which is approved, under the terms of the award and any other insurance which the organization maintains in connection with the general conduct of its operations. This paragraph does not apply to insurance which represents fringe benefits for employees (see subparagraphs 7.f and 7.h(2)). (1) Costs of insurance required or approved, and maintained, pursuant to the award are allowable. (2) Costs of other insurance maintained by the organization in connection with the general conduct of its operations are allowable subject to the following limitations: (a) Types and extent of coverage shall be in accordance with sound business practice and the rates and premiums shall be reasonable under the circumstances. (b) Costs allowed for business interruption or other similar insurance shall be limited to exclude coverage of management fees. (c) Costs of insurance or of any provisions for a reserve covering the risk of loss or damage to Federal property are allowable only to the extent that the organization is liable for such loss or damage. (d) Provisions for a reserve under a self-insurance program are allowable to the extent that types of coverage, extent of coverage, rates, and premiums would have been allowed had insurance been purchased to cover the risks. However, provision for known or reasonably estimated self-insured liabilities, which do not become payable for more than one year after the provision is made, shall not exceed the present value of the liability. (e) Costs of insurance on the lives of trustees, officers, or other employees holding positions of similar responsibilities are allowable only to the extent that the insurance represents additional compensation (see subparagraph 7.f(4)). The cost of such insurance when the organization is identified as the beneficiary is unallowable. (f) Insurance against defects. Costs of insurance with respect to any costs incurred to correct
defects in the organization's materials or workmanship are unallowable.
(g) Medical liability (malpractice) insurance. Medical liability insurance is an allowable cost of Federal research programs only to the extent that the Federal research programs involve human subjects or training of participants in research techniques. Medical liability insurance costs shall be treated as a direct cost and shall be assigned to individual projects based on the manner in which the insurer allocates the risk to the population covered by the insurance. (3) Actual losses which could have been covered by permissible insurance (through the purchase of insurance or a self-insurance program) are unallowable unless expressly provided for in the award, except: (a) Costs incurred because of losses not covered under nominal deductible insurance coverage provided in keeping with sound business practice are allowable. (b) Minor losses not covered by insurance, such as spoilage, breakage, and disappearance of supplies, which occur in the ordinary course of operations, are allowable. b. Indemnification includes securing the organization against liabilities to third persons and any
other loss or damage, not compensated by insurance or otherwise. The Federal Government is
obligated to indemnify the organization only to the extent expressly provided in the award.
23. Interest, fundraising, and investment management costs.
a. Interest.
(1) Costs incurred for interest on borrowed capital or temporary use of endowment funds, however represented, are unallowable. However, interest on debt incurred after the effective date of this revision to acquire or replace capital assets (including renovations, alterations, equipment, land, and capital assets acquired through capital leases), acquired after the effective date of this revision and used in support of sponsored agreements is allowable, provided that: (a) For facilities acquisitions (excluding renovations and alterations) costing over $10 million where the Federal Government's reimbursement is expected to equal or exceed 40 percent of an asset's cost, the non-profit organization prepares, prior to the acquisition or replacement of the capital asset(s), a justification that demonstrates the need for the facility in the conduct of federally-sponsored activities. Upon request, the needs justification must be provided to the Federal agency with cost cognizance authority as a prerequisite to the continued allowability of interest on debt and depreciation related to the facility. The needs justification for the acquisition of a facility should include, at a minimum, the following: A statement of purpose and justification for facility acquisition or replacement A statement as to why current facilities are not adequate A statement of planned future use of the facility A description of the financing agreement to be arranged for the facility A summary of the building contract with estimated cost information and statement of source and use of funds A schedule of planned occupancy dates (b) For facilities costing over $500,000, the non-profit organization prepares, prior to the acquisition or replacement of the facility, a lease/purchase analysis in accordance with the provisions of Sec. __.30 through __.37 of Circular A-110, which shows that a financed purchase or capital lease is less costly to the organization than other leasing alternatives, on a net present value basis. Discount rates used should be equal to the non-profit organization's anticipated interest rates and should be no higher than the fair market rate available to the non-profit organization from an unrelated ("arm's length") third-party. The lease/purchase analysis shall include a comparison of the net present value of the projected total cost comparisons of both alternatives over the period the asset is expected to be used by the non-profit organization. The cost comparisons associated with purchasing the facility shall include the estimated purchase price, anticipated operating and maintenance costs (including property taxes, if applicable) not included in the debt financing, less any estimated asset salvage value at the end of the period defined above. The cost comparison for a capital lease shall include the estimated total lease payments, any estimated bargain purchase option, operating and maintenance costs, and taxes not included in the capital leasing arrangement, less any estimated credits due under the lease at the end of the period defined above. Projected operating lease costs shall be based on the anticipated cost of leasing comparable facilities at fair market rates under rental agreements that would be renewed or reestablished over the period defined above, and any expected maintenance costs and allowable property taxes to be borne by the non-profit organization directly or as part of the lease arrangement. (c) The actual interest cost claimed is predicated upon interest rates that are no higher than the fair market rate available to the non-profit organization from an unrelated ("arm's length") third party. (d) Investment earnings, including interest income, on bond or loan principal, pending payment of the construction or acquisition costs, are used to offset allowable interest cost. Arbitrage earnings reportable to the Internal Revenue Service are not required to be offset against allowable interest costs. (e) Reimbursements are limited to the least costly alternative based on the total cost analysis
required under subparagraph (b). For example, if an operating lease is determined to be less
costly than purchasing through debt financing, then reimbursement is limited to the amount
determined if leasing had been used. In all cases where a lease/purchase analysis is performed,
Federal reimbursement shall be based upon the least expensive alternative.
(f) Non-profit organizations are also subject to the following conditions: (i) Interest on debt incurred to finance or refinance assets acquired before or reacquired after the effective date of this Circular is not allowable. (ii) For debt arrangements over $1 million, unless the non-profit organization makes an initial equity contribution to the asset purchase of 25 percent or more, non-profit organizations shall reduce claims for interest expense by an amount equal to imputed interest earnings on excess cash flow, which is to be calculated as follows. Annually, non-profit organizations shall prepare a cumulative (from the inception of the project) report of monthly cash flows that includes inflows and outflows, regardless of the funding source. Inflows consist of depreciation expense, amortization of capitalized construction interest, and annual interest expense. For cash flow calculations, the annual inflow figures shall be divided by the number of months in the year (usually 12) that the building is in service for monthly amounts. Outflows consist of initial equity contributions, debt principal payments (less the pro rata share attributable to the unallowable costs of land) and interest payments. Where cumulative inflows exceed cumulative outflows, interest shall be calculated on the excess inflows for that period and be treated as a reduction to allowable interest expense. The rate of interest to be used to compute earnings on excess cash flows shall be the three month Treasury Bill closing rate as of the last business day of that month. (iii) Substantial relocation of federally-sponsored activities from a facility financed by indebtedness, the cost of which was funded in whole or part through Federal reimbursements, to another facility prior to the expiration of a period of 20 years requires notice to the Federal cognizant agency. The extent of the relocation, the amount of the Federal participation in the financing, and the depreciation and interest charged to date may require negotiation and/or downward adjustments of replacement space charged to Federal programs in the future. (iv) The allowable costs to acquire facilities and equipment are limited to a fair market value available to the non-profit organization from an unrelated ("arm's length") third party. (2) For non-profit organizations subject to "full coverage"' under the Cost Accounting Standards
(CAS) as defined at 48 CFR 9903.201, the interest allowability provisions of subparagraph a do
not apply. Instead, these organizations' sponsored agreements are subject to CAS 414 (48 CFR
9903.414), cost of money as an element of the cost of facilities capital, and CAS 417 (48 CFR
9903.417), cost of money as an element of the cost of capital assets under construction.
(3) The following definitions are to be used for purposes of paragraph 23: (a) Re-acquired assets means assets held by the non-profit organization prior to the effective date
of this revision that have again come to be held by the organization, whether through repurchase
or refinancing. It does not include assets acquired to replace older assets.
(b) Initial equity contribution means the amount or value of contributions made by non-Federal entities for the acquisition of the asset or prior to occupancy of facilities. (c) Asset costs means the capitalizable costs of an asset, including construction costs, acquisition costs, and other such costs capitalized in accordance with GAAP. b. Costs of organized fundraising, including financial campaigns, endowment drives, solicitation of gifts and bequests, and similar expenses incurred solely to raise capital or obtain contributions are unallowable. c. Costs of investment counsel and staff and similar expenses incurred solely to enhance income from investments are unallowable. d. Fundraising and investment activities shall be allocated an appropriate share of indirect costs
under the conditions described in subparagraph B.3 of Attachment A.
24. Labor relations costs. Costs incurred in maintaining satisfactory relations between the
organization and its employees, including costs of labor management committees, employee
publications, and other related activities are allowable.
25. Lobbying.
a. Notwithstanding other provisions of this Circular, costs associated with the following activities are unallowable: (1) Attempts to influence the outcomes of any Federal, State, or local election, referendum, initiative, or similar procedure, through in kind or cash contributions, endorsements, publicity, or similar activity; (2) Establishing, administering, contributing to, or paying the expenses of a political party, campaign, political action committee, or other organization established for the purpose of influencing the outcomes of elections; (3) Any attempt to influence: (i) The introduction of Federal or State legislation; or (ii) the enactment or modification of any pending Federal or State legislation through communication with any member or employee of the Congress or State legislature (including efforts to influence State or local officials to engage in similar lobbying activity), or with any Government official or employee in connection with a decision to sign or veto enrolled legislation; (4) Any attempt to influence: (i) The introduction of Federal or State legislation; or (ii) the enactment or modification of any pending Federal or State legislation by preparing, distributing or using publicity or propaganda, or by urging members of the general public or any segment thereof to contribute to or participate in any mass demonstration, march, rally, fundraising drive, lobbying campaign or letter writing or telephone campaign; or (5) Legislative liaison activities, including attendance at legislative sessions or committee hearings,
gathering information regarding legislation, and analyzing the effect of legislation, when such
activities are carried on in support of or in knowing preparation for an effort to engage in
unallowable lobbying.
b. The following activities are excepted from the coverage of subparagraph a: (1) Providing a technical and factual presentation of information on a topic directly related to the
performance of a grant, contract or other agreement through hearing testimony, statements or
letters to the Congress or a State legislature, or subdivision, member, or cognizant staff member
thereof, in response to a documented request (including a Congressional Record notice requesting
testimony or statements for the record at a regularly scheduled hearing) made by the recipient
member, legislative body or subdivision, or a cognizant staff member thereof; provided such
information is readily obtainable and can be readily put in deliverable form; and further provided
that costs under this section for travel, lodging or meals are unallowable unless incurred to offer
testimony at a regularly scheduled Congressional hearing pursuant to a written request for such
presentation made by the Chairman or Ranking Minority Member of the Committee or
Subcommittee conducting such hearing.
(2) Any lobbying made unallowable by subparagraph a(3) to influence State legislation in order to directly reduce the cost, or to avoid material impairment of the organization's authority to perform the grant, contract, or other agreement. (3) Any activity specifically authorized by statute to be undertaken with funds from the grant, contract, or other agreement. c. (1) When an organization seeks reimbursement for indirect costs, total lobbying costs shall be separately identified in the indirect cost rate proposal, and thereafter treated as other unallowable activity costs in accordance with the procedures of subparagraph B.3 of Attachment A. (2) Organizations shall submit, as part of the annual indirect cost rate proposal, a certification that the requirements and standards of this paragraph have been complied with. (3) Organizations shall maintain adequate records to demonstrate that the determination of costs as being allowable or unallowable pursuant to paragraph 25 complies with the requirements of this Circular. (4) Time logs, calendars, or similar records shall not be required to be created for purposes of complying with this paragraph during any particular calendar month when: (1) the employee engages in lobbying (as defined in subparagraphs (a) and (b)) 25 percent or less of the employee's compensated hours of employment during that calendar month, and (2) within the preceding five-year period, the organization has not materially misstated allowable or unallowable costs of any nature, including legislative lobbying costs. When conditions (1) and (2) are met, organizations are not required to establish records to support the allowabliliy of claimed costs in addition to records already required or maintained. Also, when conditions (1) and (2) are met, the absence of time logs, calendars, or similar records will not serve as a basis for disallowing costs by contesting estimates of lobbying time spent by employees during a calendar month. (5) Agencies shall establish procedures for resolving in advance, in consultation with OMB, any
significant questions or disagreements concerning the interpretation or application of paragraph
25. Any such advance resolution shall be binding in any subsequent settlements, audits or
investigations with respect to that grant or contract for purposes of interpretation of this Circular;
provided, however, that this shall not be construed to prevent a contractor or grantee from
contesting the lawfulness of such a determination.
26. Losses on other awards. Any excess of costs over income on any award is unallowable as a
cost of any other award. This includes, but is not limited to, the organization's contributed
portion by reason of cost sharing agreements or any under-recoveries through negotiation of lump
sums for, or ceilings on, indirect costs.
27. Maintenance and repair costs. Costs incurred for necessary maintenance, repair, or upkeep of
buildings and equipment (including Federal property unless otherwise provided for) which neither
add to the permanent value of the property nor appreciably prolong its intended life, but keep it in
an efficient operating condition, are allowable. Costs incurred for improvements which add to the
permanent value of the buildings and equipment or appreciably prolong their intended life shall be
treated as capital expenditures (see paragraph 15).
28. Materials and supplies. The costs of materials and supplies necessary to carry out an award
are allowable. Such costs should be charged at their actual prices after deducting all cash
discounts, trade discounts, rebates, and allowances received by the organization. Withdrawals
from general stores or stockrooms should be charged at cost under any recognized method of
pricing consistently applied. Incoming transportation charges may be a proper part of material
cost. Materials and supplies charged as a direct cost should include only the materials and
supplies actually used for the performance of the contract or grant, and due credit should be given
for any excess materials or supplies retained, or returned to vendors.
29. Meetings and conferences.
a. Costs associated with the conduct of meetings and conferences include the cost of renting facilities, meals, speakers' fees, and the like. But see paragraph 14, Entertainment costs, and paragraph 34, Participant support costs. b. To the extent that these costs are identifiable with a particular cost objective, they should be charged to that objective (see paragraph B of Attachment A). These costs are allowable, provided that they meet the general tests of allowability, shown in paragraph A of Attachment A to this Circular. c. Costs of meetings and conferences held to conduct the general administration of the
organization are allowable.
30. Memberships, subscriptions, and professional activity costs.
a. Costs of the organization's membership in business, technical, and professional organizations
are allowable.
b. Costs of the organization's subscriptions to business, professional, and technical periodicals
are allowable.
c. Costs of meetings and conferences, when the primary purpose is the dissemination of technical
information, are allowable. This includes costs of meals, transportation, rental of facilities, and
other items incidental to such meetings or conferences.
d. Costs of membership in any civic or community organization are allowable with prior approval
by Federal cognizant agency.
e. Costs of membership in any country club or social or dining club or organization are
unallowable.
31. Organization costs. Expenditures, such as incorporation fees, brokers' fees, fees to
promoters, organizers or management consultants, attorneys, accountants, or investment
counselors, whether or not employees of the organization, in connection with establishment or
reorganization of an organization, are unallowable except with prior approval of the awarding
agency.
32. Overtime, extra-pay shift, and multi-shift premiums. Premiums for overtime, extra-pay shifts,
and multi-shift work are allowable only with the prior approval of the awarding agency except:
a. When necessary to cope with emergencies, such as those resulting from accidents, natural disasters, breakdowns of equipment, or occasional operational bottlenecks of a sporadic nature. b. When employees are performing indirect functions, such as administration, maintenance, or
accounting.
c. In the performance of tests, laboratory procedures, or other similar operations which are continuous in nature and cannot reasonably be interrupted or otherwise completed. d. When lower overall cost to the Federal Government will result.
33. Page charges in professional journals. Page charges for professional journal publications are
allowable as a necessary part of research costs, where:
a. The research papers report work supported by the Federal Government; and b. The charges are levied impartially on all research papers published by the journal, whether or
not by federally-sponsored authors.
34. Participant support costs. Participant support costs are direct costs for items such as stipends
or subsistence allowances, travel allowances, and registration fees paid to or on behalf of
participants or trainees (but not employees) in connection with meetings, conferences, symposia,
or training projects. These costs are allowable with the prior approval of the awarding agency.
35. Patent costs.
a. Costs of (i) preparing disclosures, reports, and other documents required by the award and of searching the art to the extent necessary to make such disclosures, (ii) 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 (iii) general counseling services relating to patent and copyright matters, such as advice on patent and copyright laws, regulations, clauses, and employee agreements are allowable (but see paragraph 39). b. Cost of preparing disclosures, reports, and other documents and of searching the art to the
extent necessary to make disclosures, if not required by the award, are unallowable. Costs in
connection with (i) filing and prosecuting any foreign patent application, or (ii) any United States
patent application, where the award does not require conveying title or a royalty-free license to
the Federal Government, are unallowable (also see paragraph 47).
36. Pension plans. See subparagraph 7.h.
37. Plant security costs. Necessary expenses incurred to comply with Federal security
requirements or for facilities protection, including wages, uniforms, and equipment of personnel
are allowable.
38. 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.
39. 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 organization, are allowable, subject to subparagraphs b and c when reasonable in relation to the services rendered and when not contingent upon recovery of the costs from the Federal Government. 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 organization's capability in the particular area. (3) The past pattern of such costs, particularly in the years prior to Federal awards. (4) The impact of Federal awards on the organization's business (i.e., what new problems have arisen). (5) Whether the proportion of Federal work to the organization's total business is such as to influence the organization in favor of incurring the cost, particularly where the services rendered are not of a continuing nature and have little relationship to work under Federal grants and contracts. (6) Whether the service can be performed more economically by direct employment rather than contracting. (7) The qualifications of the individual or concern rendering the service and the customary fees charged, especially on non-Federal awards. (8) Adequacy of the contractual agreement for the service (e.g., description of the service, estimate of time required, rate of compensation, and termination provisions). c. In addition to the factors in subparagraph b, retainer fees to be allowable must be supported
by evidence of bona fide services available or rendered.
40. Profits and losses on disposition of depreciable property or other capital assets.
a. (1) Gains and losses on sale, retirement, or other disposition of depreciable property shall be included in the year in which they occur as credits or charges to cost grouping(s) in which the depreciation applicable to such property was included. The amount of the gain or loss to be included as a credit or charge to the appropriate cost grouping(s) shall be the difference between the amount realized on the property and the undepreciated basis of the property. (2) Gains and losses on the disposition of depreciable property shall not be recognized as a separate credit or charge under the following conditions: (a) The gain or loss is processed through a depreciation reserve account and is reflected in the depreciation allowable under paragraph 11. (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 subparagraph 22.a(3). (d) Compensation for the use of the property was provided through use allowances in lieu of depreciation in accordance with paragraph 11. (e) Gains and losses arising from mass or extraordinary sales, retirements, or other dispositions shall be considered on a case-by-case basis. b. Gains or losses of any nature arising from the sale or exchange of property other than the
property covered in subparagraph a shall be excluded in computing award costs.
41. 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. 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 organization. c. Publication and printing costs are unallowable as direct costs except with the prior approval of the awarding agency. d. The cost of page charges in journals is addressed paragraph 33.
42. Rearrangement and alteration costs. Costs incurred for ordinary or normal rearrangement and
alteration of facilities are allowable. Special arrangement and alteration costs incurred specifically
for the project are allowable with the prior approval of the awarding agency.
43. Reconversion costs. Costs incurred in the restoration or rehabilitation of the organization's
facilities to approximately the same condition existing immediately prior to commencement of
Federal awards, fair wear and tear excepted, are allowable.
44. Recruiting costs.
a. Subject to subparagraphs b, c, and d, and provided that the size of the staff recruited and
maintained is in keeping with workload requirements, costs of "help wanted" advertising,
operating costs of an employment office necessary to secure and maintain an adequate staff, costs
of operating an aptitude and educational testing program, travel costs of employees while engaged
in recruiting personnel, travel costs of applicants for interviews for prospective employment, and
relocation costs incurred incident to recruitment of new employees, are allowable to the extent
that such costs are incurred pursuant to a well-managed recruitment program. Where the
organization uses employment agencies, costs that are not in excess of standard commercial rates
for such services are allowable.
b. In publications, costs of help wanted advertising that includes color, includes advertising
material for other than recruitment purposes, or is excessive in size (taking into consideration
recruitment purposes for which intended and normal organizational practices in this respect), are
unallowable.
c. Costs of help wanted advertising, special emoluments, fringe benefits, and salary allowances
incurred to attract professional personnel from other organizations that do not meet the test of
reasonableness or do not conform with the established practices of the organization, are
unallowable.
d. Where relocation costs incurred incident to recruitment of a new employee have been allowed
either as an allocable direct or indirect cost, and the newly hired employee resigns for reasons
within his control within twelve months after being hired, the organization will be required to
refund or credit such relocation costs to the Federal Government.
45. Relocation costs.
a. Relocation costs are costs incident to the permanent change of duty assignment (for an indefinite period or for a stated period of not less than 12 months) of an existing employee or upon recruitment of a new employee. Relocation costs are allowable, subject to the limitation described in subparagraphs b, c, and d, provided that: (1) The move is for the benefit of the employer. (2) Reimbursement to the employee is in accordance with an established written policy consistently followed by the employer. (3) The reimbursement does not exceed the employee's actual (or reasonably estimated) expenses. b. Allowable relocation costs for current employees are limited to the following: (1) The costs of transportation of the employee, members of his immediate family and his household, and personal effects to the new location. (2) The costs of finding a new home, such as advance trips by employees and spouses to locate living quarters and temporary lodging during the transition period, up to maximum period of 30 days, including advance trip time. (3) Closing costs, such as brokerage, legal, and appraisal fees, incident to the disposition of the employee's former home. These costs, together with those described in (4), are limited to 8 per cent of the sales price of the employee's former home. (4) The continuing costs of ownership of the vacant former home after the settlement or lease date of the employee's new permanent home, such as maintenance of buildings and grounds (exclusive of fixing up expenses), utilities, taxes, and property insurance. (5) Other necessary and reasonable expenses normally incident to relocation, such as the costs of canceling an unexpired lease, disconnecting and reinstalling household appliances, and purchasing insurance against loss of or damages to personal property. The cost of canceling an unexpired lease is limited to three times the monthly rental. c. Allowable relocation costs for new employees are limited to those described in (1) and (2) of subparagraph b. When relocation costs incurred incident to the recruitment of new employees have been allowed either as a direct or indirect cost and the employee resigns for reasons within his control within 12 months after hire, the organization shall refund or credit the Federal Government for its share of the cost. However, the costs of travel to an overseas location shall be considered travel costs in accordance with paragraph 55 and not relocation costs for the purpose of this paragraph if dependents are not permitted at the location for any reason and the costs do not include costs of transporting household goods. d. The following costs related to relocation are unallowable: (1) Fees and other costs associated with acquiring a new home. (2) A loss on the sale of a former home. (3) Continuing mortgage principal and interest payments on a home being sold. (4) Income taxes paid by an employee related to reimbursed relocation costs.
46. Rental costs.
a. Subject to the limitations described in subparagraphs b through d, 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. b. Rental costs under sale and leaseback arrangements are allowable only up to the amount that would be allowed had the organization continued to own the property. c. Rental costs under less-than-arms-length leases are allowable only up to the amount that would be allowed had title to the property vested in the organization. For this purpose, a less-than-arms-length lease is one under which one party to the lease agreement is able to control or substantially influence the actions of the other. Such leases include, but are not limited to those between (i) divisions of an organization; (ii) organizations under common control through common officers, directors, or members; and (iii) an organization and a director, trustee, officer, or key employee of the organization or his immediate family either directly or through corporations, trusts, or similar arrangements in which they hold a controlling interest. d. Rental costs under leases which are required to be treated as capital leases under GAAP, are
allowable only up to the amount that would be allowed had the organization purchased the
property on the date the lease agreement was executed, i.e., to the amount that minimally would
pay for depreciation or use allowances, maintenance, taxes, and insurance. Interest costs related
to capitalized leases are allowable to the extent they meet criteria in subparagraph 23.a.
Unallowable costs include amounts paid for profit, management fees, and taxes that would not
have been incurred had the organization purchased the facility.
47. Royalties and other costs for use of patents and copyrights.
a. Royalties on a patent or copyright or amortization of the cost of acquiring by purchase a copyright, patent, or rights thereto, necessary for the proper performance of the award are allowable unless: (1) The Federal Government has a license or the right to free use of the patent or copyright. (2) The patent or copyright has been adjudicated to be invalid, or has been administratively
determined to be invalid.
(3) The patent or copyright is considered to be unenforceable. (4) The patent or copyright is expired. b. Special care should be exercised in determining reasonableness where the royalties may have arrived at as a result of less-than-arm's-length bargaining, e.g.: (1) Royalties paid to persons, including corporations, affiliated with the organization. (2) Royalties paid to unaffiliated parties, including corporations, under an agreement entered into in contemplation that a Federal award would be made. (3) Royalties paid under an agreement entered into after an award is made to an organization. c. In any case involving a patent or copyright formerly owned by the organization, the amount of
royalty allowed should not exceed the cost which would have been allowed had the organization
retained title thereto.
48. Selling and marketing. Costs of selling and marketing any products or services of the
organization (unless allowed under paragraph 1 as allowable public relations costs) are
unallowable. These costs, however, are allowable as direct costs, with prior approval by
awarding agencies, when they are necessary for the performance of Federal programs.
49. Severance pay.
a. Severance pay, also commonly referred to as dismissal wages, is a payment in addition to regular salaries and wages, by organizations to workers whose employment is being terminated. Costs of severance pay are allowable only to the extent that in each case, it is required by (i) law, (ii) employer-employee agreement, (iii) established policy that constitutes, in effect, an implied agreement on the organization's part, or (iv) circumstances of the particular employment. b. Costs of severance payments are divided into two categories as follows: (1) Actual normal turnover severance payments shall be allocated to all activities; or, where the organization provides for a reserve for normal severances, such method will be acceptable if the charge to current operations is reasonable in light of payments actually made for normal severances over a representative past period, and if amounts charged are allocated to all activities of the organization. (2) Abnormal or mass severance pay is of such a conjectural nature that measurement of costs by
means of an accrual will not achieve equity to both parties. Thus, accruals for this purpose are not
allowable. However, the Federal Government recognizes its obligation to participate, to the
extent of its fair share, in any specific payment. Thus, allowability will be considered on a
case-by-case basis in the event or occurrence.
c. Costs incurred in certain severance pay packages (commonly known as "a golden parachute"
payment) which are in an amount in excess of the normal severance pay paid by the organization
to an employee upon termination of employment and are paid to the employee contingent upon a
change in management control over, or ownership of, the organization's assets are unallowable.
d. Severance payments to foreign nationals employed by the organization outside the United
States, to the extent that the amount exceeds the customary or prevailing practices for the
organization in the United States are unallowable, unless they are necessary for the performance
of Federal programs and approved by awarding agencies.
e. Severance payments to foreign nationals employed by the organization outside the United
States due to the termination of the foreign national as a result of the closing of, or curtailment of
activities by, the organization in that country, are unallowable, unless they are necessary for the
performance of Federal programs and approved by awarding agencies.
50. Specialized service facilities.
a. The costs of services provided by highly complex or specialized facilities operated by the organization, such as electronic computers and wind tunnels, are allowable, provided the charges for the services meet the conditions of either subparagraph b or c and, in addition, take into account any items of income or Federal financing that qualify as applicable credits under subparagraph A.5 of Attachment A. b. The costs of such services, when material, must be charged directly to applicable awards based on actual usage of the services on the basis of a schedule of rates or established methodology that (i) does not discriminate against federally-supported activities of the organization, including usage by the organization for internal purposes, and (ii) is designed to recover only the aggregate costs of the services. The costs of each service shall consist normally of both its direct costs and its allocable share of all indirect costs. Advance agreements pursuant to subparagraph A.6 of Attachment A are particularly important in this situation. c. Where the costs incurred for a service are not material, they may be allocated as indirect costs.
51. Taxes.
a. In general, taxes which the organization is required to pay and which are paid or accrued in accordance with GAAP, and payments made to local governments in lieu of taxes which are commensurate with the local government services received are allowable, except for (i) taxes from which exemptions are available to the organization directly or which are available to the organization based on an exemption afforded the Federal Government and in the latter case when the awarding agency makes available the necessary exemption certificates, (ii) special assessments on land which represent capital improvements, and (iii) Federal income taxes. b. Any refund of taxes, and any payment to the organization of interest thereon, which were
allowed as award costs, will be credited either as a cost reduction or cash refund, as appropriate,
to the Federal Government.
52. Termination costs. Termination of awards generally give rise to the incurrence of costs, or
the need for special treatment of costs, which would not have arisen had the 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 Circular in termination situations.
a. Common items. The cost of items reasonably usable on the organization's other work shall not be allowable unless the organization submits evidence that it would not retain such items at cost without sustaining a loss. In deciding whether such items are reasonably usable on other work of the organization, the awarding agency should consider the organization's plans and orders for current and scheduled activity. Contemporaneous purchases of common items by the organization shall be regarded as evidence that such items are reasonably usable on the organization's other work. Any acceptance of common items as allocable to the terminated portion of the 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. Costs continuing after termination. If in a particular case, despite all reasonable efforts by the organization, certain costs cannot be discontinued immediately after the effective date of termination, such costs are generally allowable within the limitations set forth in this Circular, except that any such costs continuing after termination due to the negligent or willful failure of the organization to discontinue such costs shall be unallowable. c. Loss of useful value. Loss of useful value of special tooling, machinery and equipment which was not charged to the award as a capital expenditure is generally allowable if: (1) Such special tooling, machinery, or equipment is not reasonably capable of use in the other work of the organization. (2) The interest of the Federal Government is protected by transfer of title or by other means deemed appropriate by the awarding agency; d. Rental costs. Rental costs under unexpired leases are generally allowable where clearly shown to have been reasonably necessary for the performance of the terminated award less the residual value of such leases, if (i) the amount of such rental claimed does not exceed the reasonable use value of the property leased for the period of the award and such further period as may be reasonable, and (ii) the organization makes all reasonable efforts to terminate, assign, settle, or otherwise reduce the cost of such lease. There also may be included the cost of alterations of such leased property, provided such alterations were necessary for the performance of the award, and of reasonable restoration required by the provisions of the lease. e. Settlement expenses. Settlement expenses including the following are generally allowable:
(1) Accounting, legal, clerical, and similar costs reasonably necessary for: (a) The preparation and presentation to awarding agency of settlement claims and supporting data with respect to the terminated portion of the award, unless the termination is for default (see Sec. __.61 of Circular A-110); and (b) The termination and settlement of subawards. (2) Reasonable costs for the storage, transportation, protection, and disposition of property provided by the Federal Government or acquired or produced for the award, except when grantees or contractors are reimbursed for disposals at a predetermined amount in accordance with Sec. __.30 through __.37 of Circular A-110. (3) Indirect costs related to salaries and wages incurred as settlement expenses in subparagraphs (1) and (2). Normally, such indirect costs shall be limited to fringe benefits, occupancy cost, and immediate supervision. f. Claims under subawards. Claims under subawards, including the allocable portion of claims
which are common to the award, and to other work of the organization are generally allowable.
An appropriate share of the organization's indirect expense may be allocated to the amount of
settlements with subcontractors and/or subgrantees, provided that the amount allocated is
otherwise consistent with the basic guidelines contained in Attachment A. The indirect expense
so allocated shall exclude the same and similar costs claimed directly or indirectly as settlement
expenses.
53. Training and education costs.
a. Costs of preparation and maintenance of a program of instruction including but not limited to on-the-job, classroom, and apprenticeship training, designed to increase the vocational effectiveness of employees, including training materials, textbooks, salaries or wages of trainees (excluding overtime compensation which might arise therefrom), and (i) salaries of the director of training and staff when the training program is conducted by the organization; or (ii) tuition and fees when the training is in an institution not operated by the organization, are allowable. b. Costs of part-time education, at an undergraduate or post-graduate college level, including that provided at the organization's own facilities, are allowable only when the course or degree pursued is relative to the field in which the employee is now working or may reasonably be expected to work, and are limited to: (1) Training materials. (2) Textbooks. (3) Fees charges by the educational institution. (4) Tuition charged by the educational institution or, in lieu of tuition, instructors' salaries and the related share of indirect costs of the educational institution to the extent that the sum thereof is not in excess of the tuition which would have been paid to the participating educational institution. (5) Salaries and related costs of instructors who are employees of the organization. (6) Straight-time compensation of each employee for time spent attending classes during working hours not in excess of 156 hours per year and only to the extent that circumstances do not permit the operation of classes or attendance at classes after regular working hours; otherwise, such compensation is unallowable. c. Costs of tuition, fees, training materials, and textbooks (but not subsistence, salary, or any other emoluments) in connection with full-time education, including that provided at the organization's own facilities, at a post-graduate (but not undergraduate) college level, are allowable only when the course or degree pursued is related to the field in which the employee is now working or may reasonably be expected to work, and only where the costs receive the prior approval of the awarding agency. Such costs are limited to the costs attributable to a total period not to exceed one school year for each employee so trained. In unusual cases the period may be extended. d. Costs of attendance of up to 16 weeks per employee per year at specialized programs specifically designed to enhance the effectiveness of executives or managers or to prepare employees for such positions are allowable. Such costs include enrollment fees, training materials, textbooks and related charges, employees' salaries, subsistence, and travel. Costs allowable under this paragraph do not include those for courses that are part of a degree-oriented curriculum, which are allowable only to the extent set forth in subparagraphs b and c. e. Maintenance expense, and normal depreciation or fair rental, on facilities owned or leased by the organization for training purposes are allowable to the extent set forth in paragraphs 11, 27, and 46. f. Contributions or donations to educational or training institutions, including the donation of facilities or other properties, and scholarships or fellowships, are unallowable. g. Training and education costs in excess of those otherwise allowable under subparagraphs b
and c may be allowed with prior approval of the awarding agency. To be considered for
approval, the organization must demonstrate that such costs are consistently incurred pursuant to
an established training and education program, and that the course or degree pursued is relative to
the field in which the employee is now working or may reasonably be expected to work.
54. Transportation costs. Transportation costs include freight, express, cartage, and postage
charges relating either to goods purchased, in process, or delivered. These costs are allowable.
When such costs can readily be identified with the items involved, they may be directly charged as
transportation costs or added to the cost of such items (see paragraph 28). Where identification
with the materials received cannot readily be made, transportation costs may be charged to the
appropriate indirect cost accounts if the organization follows a consistent, equitable procedure in
this respect.
55. Travel costs.
a. 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 organization. Travel costs are allowable subject to subparagraphs b through e, when they are directly attributable to specific work under an award or are incurred in the normal course of administration of the organization. b. Such costs may be charged on an actual 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 results in charges consistent with those normally allowed by the organization in its regular operations. c. The difference in cost between first-class air accommodations and less than first-class air accommodations is unallowable except when less than first-class air accommodations are not reasonably available to meet necessary mission requirements, such as where less than first-class accommodations would (i) require circuitous routing, (ii) require travel during unreasonable hours, (iii) greatly increase the duration of the flight, (iv) result in additional costs which would offset the transportation savings, or (v) offer accommodations which are not reasonably adequate for the medical needs of the traveler. d. Necessary and reasonable costs of family movements and personnel movements of a special or mass nature are allowable, pursuant to paragraphs 44 and 45, subject to allocation on the basis of work or time period benefited when appropriate. Advance agreements are particularly important. e. Direct charges for foreign travel costs are allowable only when the travel has received prior
approval of the awarding agency. Each separate foreign trip must be approved. For purposes of
this provision, foreign travel is defined as any travel outside of Canada and the United States and
its territories and possessions. However, for an organization located in foreign countries, the
term "foreign travel" means travel outside that country.
56. Trustees. Travel and subsistence costs of trustees (or directors) are allowable. The costs are subject to restrictions regarding lodging, subsistence and air travel costs provided in paragraph 55. ATTACHMENT C Circular No. A-122 NON-PROFIT ORGANIZATIONS NOT SUBJECT TO THIS CIRCULAR
Aerospace Corporation, El Segundo, California BILLING CODE 3110-01
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