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CIRCULAR A-21 (Revised 8/8/00)
CIRCULAR NO. A-21
TO THE HEADS OF EXECUTIVE DEPARTMENTS AND ESTABLISHMENTS
SUBJECT: Cost Principles for Educational Institutions
1. Purpose. This Circular establishes principles for determining costs applicable to
grants, contracts, and other agreements with educational institutions . The principles deal with
the subject of cost determination, and make no attempt to identify the circumstances or dictate
the extent of agency and institutional participation in the financing of a particular project. The
principles are designed to provide that the Federal Government bear its fair share of total costs,
determined in accordance with generally accepted accounting principles, except where restricted
or prohibited by law. Agencies are not expected to place additional restrictions on individual
items of cost. Provision for profit or other increment above cost is outside the scope of this
2. Supersession. The Circular supersedes Federal Management Circular 73-8, dated
December 19, 1973. FMC 73-8 is revised and reissued under its original designation of
OMB Circular No. A-21.
a. All Federal agencies that sponsor research and development, training, and other work
at educational institutions shall apply the provisions of this Circular in determining the costs
incurred for such work. The principles shall also be used as a guide in the pricing of fixed price
or lump sum agreements.
b. In addition, Federally Funded Research and Development Centers associated with
educational institutions shall be required to comply with the Cost Accounting Standards, rules
and regulations issued by the Cost Accounting Standards Board, and set forth in 48 CFR part 99;
provided that they are subject thereto under defense related contracts.
4. Responsibilities. The successful application of cost accounting principles requires
development of mutual understanding between representatives of educational institutions and of
the Federal Government as to their scope, implementation, and interpretation.
5. Attachment. The principles and related policy guides are set forth in the
Attachment, "Principles for determining costs applicable to grants, contracts, and other
agreements with educational institutions."
6. Effective date. The provisions of this Circular shall be effective October 1, 1979,
subsequent amendments incorporated herein for which the effective dates were specified in these revisions (47 FR 33658, 51 FR 20908, 51 FR 43487, 56 FR 50224, 58 FR 39996, 61 FR 20880, 63 FR 29786, 63 FR 57332, and 65 FR 48566). The provisions shall be implemented by institutions as
of the start of their first fiscal year beginning after that date. Earlier implementation, or a delay in
implementation of individual provisions, is permitted by mutual agreement between an
institution and the cognizant Federal agency.
7. Inquiries. Further information concerning this Circular may be obtained by
contacting the Office of Federal Financial Management, Office of Management and Budget,
Washington, DC 20503, telephone (202) 395-3993.
PRINCIPLES FOR DETERMINING COSTS APPLICABLE TO
GRANTS, CONTRACTS, AND OTHER AGREEMENTS WITH EDUCATIONAL INSTITUTIONS TABLE OF CONTENTS
10. Consistency in estimating, accumulating and reporting costs
11. Consistency in allocating costs incurred for the same purpose
12. Accounting for unallowable costs
13. Cost accounting period
14. Disclosure statement
D. Direct costs
2. Application to sponsored agreements
E. F&A costs
2. Criteria for distribution
F. Identification and assignment of F&A costs
1. Definition of Facilities and Administration.
2. Depreciation and use allowances
4. Operation and maintenance expenses
5. General administration and general expenses
6. Departmental administration expenses
7. Sponsored projects administration
8. Library expenses
9. Student administration and services
10. Offset for F&A expenses otherwise provided for by the Federal
G. Determination and application of F&A cost rate or rates
1. F&A cost pools
2. The distribution basis
3. Negotiated lump sum for F&A costs
4. Predetermined rates for F&A costs
5. Negotiated fixed rates and carry-forward provisions
6. Provisional and final rates for F&A costs
7. Fixed rates for the life of the sponsored agreement
8. Limitation on reimbursement of administrative costs
9. Alternative method for administrative costs
10. Individual rate components
11. Negotiation and approval of F&A rate
12. Standard format for submission
H. Simplified method for small institutions
2. Simplified procedure
J. General provisions for selected items of cost
1. Advertising and public relations costs
2. Alcoholic beverages
3. Alumni/ae activities
4. Bad debts
5. Civil defense costs
6. Commencement and convocation costs
7. Communication costs
8. Compensation for personal services
9. Contingency provisions
10. Deans of faculty and graduate schools
11. Defense and prosecution of criminal and civil proceedings, claims, appeals and
12. Depreciation and use allowances
13. Donations and contributions
14. Employee morale, health, and welfare costs and credits
15. Entertainment costs
16. Equipment and other capital expenditures
17. Executive lobbying costs
18. Fines and penalties
19. Goods or services for personal use
20. Housing and personal living expenses
21. Insurance and indemnification
22. Interest, fund raising, and investment management costs
23. Labor relations costs
25. Losses on other sponsored agreements or contracts
26. Maintenance and repair costs
27. Material costs
28. Memberships, subscriptions and professional activity costs
29. Patent costs
30. Plant security costs
31. Preagreement costs
32. Professional services costs
33. Profits and losses on disposition of plant equipment or other capital assets
34. Proposal costs
35. Rearrangement and alteration costs
36. Reconversion costs
37. Recruiting costs
38. Rental cost of buildings and equipment
39. Royalties and other costs for use of patents
40. Sabbatical leave costs
41. Scholarships and student aid costs
42. Selling and marketing
43. Severance pay
44. Specialized service facilities
45. Student activity costs
47. Transportation costs
48. Travel costs
49. Termination costs applicable to sponsored agreements
K. Certification of charges
Exhibit A - List of Colleges and Universities Subject to Section J.12.f
of Circular A-21 Exhibit B - Listing of Institutions that are eligible for the utility cost
adjustment Exhibit C - Examples of "major project" where direct charging of
administrative or clerical staff
salaries may be appropriate
Appendix A - CASB's Cost Accounting Standards (CAS) Appendix B - CASB's Disclosure Statement (DS-2) Appendix C - Documentation Requirements for Facilities and Administrative (F&A) Rate Proposals
PRINCIPLES FOR DETERMINING COSTS APPLICABLE TO
GRANTS, CONTRACTS, AND OTHER AGREEMENTS WITH EDUCATIONAL INSTITUTIONS
A. Purpose and scope.
1. Objectives. This Attachment provides principles for determining the costs
research and development, training, and other sponsored work performed by colleges and
universities under grants, contracts, and other agreements with the Federal Government. These
agreements are referred to as sponsored agreements.
2. Policy guides. The successful application of these cost accounting principles
development of mutual understanding between representatives of universities and of the Federal
Government as to their scope, implementation, and interpretation. It is recognized that --
a. The arrangements for Federal agency and institutional participation in the financing
research, training, or other project are properly subject to negotiation between the agency and the
institution concerned, in accordance with such governmentwide criteria or legal requirements as
may be applicable.
b. Each institution, possessing its own unique combination of staff, facilities, and
should be encouraged to conduct research and educational activities in a manner consonant with
its own academic philosophies and institutional objectives.
c. The dual role of students engaged in research and the resulting benefits to
agreements are fundamental to the research effort and shall be recognized in the application of
d. Each institution, in the fulfillment of its obligations, should employ sound
e. The application of these cost accounting principles should require no significant
changes in the generally accepted accounting practices of colleges and universities. However, the
accounting practices of individual colleges and universities must support the accumulation of
costs as required by the principles, and must provide for adequate documentation to support costs
charged to sponsored agreements.
f. Cognizant Federal agencies involved in negotiating facilities and administrative
(F&A) cost rates and auditing should assure that institutions are generally applying these
cost accounting principles on a consistent basis. Where wide variations exist in the treatment of a
given cost item among institutions, the reasonableness and equitableness of such treatments
should be fully considered during the rate negotiations and audit.
3. Application. These principles shall be used in determining the allowable costs of
performed by colleges and universities under sponsored agreements. The principles shall also be
used in determining the costs of work performed by such institutions under subgrants,
cost-reimbursement subcontracts, and other awards made to them under sponsored agreements.
They also shall be used as a guide in the pricing of fixed-price contracts and subcontracts where
costs are used in determining the appropriate price. The principles do not apply to:
a. Arrangements under which Federal financing is in the form of loans, scholarships,
fellowships, traineeships, or other fixed amounts based on such items as education allowance or
published tuition rates and fees of an institution.
b. Capitation awards.
c. Other awards under which the institution is not required to account to the Federal
Government for actual costs incurred.
d. Conditional exemptions.
(1) 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.
(2) To promote efficiency in State and local program administration,
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.
(3) When a Federal agency provides this flexibility, as a prerequisite to a
State's exercising this
option, a State must adopt its own written fiscal and administrative requirements for expending
and accounting for all funds, which are consistent with the provisions of 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.
4. Inquiries. All inquiries from Federal agencies
concerning the cost principles contained in this Circular, including the administration and
implementation of the Cost Accounting Standards (CAS) (described in Sections C.10
through C.13) and disclosure statement (DS-2) requirements, shall be addressed by the Office of
Management and Budget (OMB), Office of Federal Financial Management, in coordination with
the Cost Accounting Standard Board (CASB) with respect to inquiries concerning CAS.
Educational institutions' inquiries should be addressed to the cognizant agency.
B. Definition of terms.
1. Major functions of an institution refers to instruction, organized research, other
sponsored activities and other institutional activities as defined below:
a. Instruction means the teaching and training activities of an institution. Except
for research training as provided in subsection b, this term includes all teaching and
training activities, whether they are offered for credits toward a degree or certificate or on a
non-credit basis, and whether they are offered through regular academic departments or separate
divisions, such as a summer school division or an extension division. Also considered part of this
major function are departmental research, and, where agreed to, university research.
(1) Sponsored instruction and training means specific
instructional or training activity established
by grant, contract, or cooperative agreement. For purposes of the cost principles, this activity
may be considered a major function even though an institution's accounting treatment may
include it in the instruction function.
(2) Departmental research means research, development and
scholarly activities that are not
organized research and, consequently, are not separately budgeted and accounted for.
Departmental research, for purposes of this document, is not considered as a major function, but
as a part of the instruction function of the institution.
b. Organized research means all research and development activities of an
institution that are separately budgeted and accounted for. It includes:
(1) Sponsored research means all research and development
activities that are sponsored by
Federal and non-Federal agencies and organizations . This term includes activities involving the
training of individuals in research techniques (commonly called research training) where such
activities utilize the same facilities as other research and development activities and where such
activities are not included in the instruction function.
(2) University research means all research and development
activities that are separately
budgeted and accounted for by the institution under an internal application of institutional funds.
University research, for purposes of this document, shall be combined with sponsored research
under the function of organized research.
c. Other sponsored activities means programs and projects financed by Federal
agencies and organizations which involve the performance of work other than instruction and
organized research. Examples of such programs and projects are health service projects, and
community service programs. However, when any of these activities are undertaken by the
institution without outside support, they may be classified as other institutional activities.
d. Other institutional activities means all activities of an institution except:
(1) instruction, departmental research, organized research, and other
sponsored activities, as defined above;
(2) F&A cost activities identified in Section F; and
(3) specialized service facilities described in Section J.44. Other
institutional activities include
operation of residence halls, dining halls, hospitals and clinics, student unions, intercollegiate
athletics, bookstores, faculty housing, student apartments, guest houses, chapels, theaters, public
museums, and other similar auxiliary enterprises. This definition also includes any other
categories of activities, costs of which are "unallowable" to sponsored agreements, unless
otherwise indicated in the agreements.
2. Sponsored agreement, for purposes of this Circular, means any grant, contract, or
other agreement between the institution and the Federal Government.
3. Allocation means the process of assigning a cost, or a group of costs, to one or
more cost objective, in reasonable and realistic proportion to the benefit provided or other
equitable relationship. A cost objective may be a major function of the institution, a particular
service or project, a sponsored agreement, or a F&A cost activity, as described in Section F.
The process may entail assigning a cost(s) directly to a final cost objective or through one or
more intermediate cost objectives.
4. Facilities and administrative (F&A) costs, for the purpose
of this Circular, means costs that are
incurred for common or joint objectives and, therefore, cannot be identified readily and
specifically with a particular sponsored project, an instructional activity, or any other
institutional activity. F&A costs are synonymous with "indirect" costs, as
previously used in this Circular and as currently used in Appendices A and B. The
F&A cost categories are described in Section F.1.
C. Basic considerations.
1. Composition of total costs. The cost of a sponsored agreement is comprised of the
allowable direct costs incident to its performance, plus the allocable portion of the allowable
F&A costs of the institution, less applicable credits as described in subsection 5.
2. Factors affecting allowability of costs. The tests of allowability of costs under
are: (a) they must be reasonable; (b) they must be allocable to sponsored agreements under the
principles and methods provided herein; (c) they must be given consistent treatment through
application of those generally accepted accounting principles appropriate to the circumstances;
and (d) they must conform to any limitations or exclusions set forth in these principles or in the
sponsored agreement as to types or amounts of cost items.
3. Reasonable costs. A cost may be considered reasonable if the nature of the goods
acquired or applied, and the amount involved therefor, reflect the action that a prudent person
would have taken under the circumstances prevailing at the time the decision to incur the cost
was made. Major considerations involved in the determination of the reasonableness of a cost
are: (a) whether or not the cost is of a type generally recognized as necessary for the operation of
the institution or the performance of the sponsored agreement; (b) the restraints or requirements
imposed by such factors as arm's-length bargaining, Federal and State laws and regulations, and
sponsored agreement terms and conditions; (c) whether or not the individuals concerned acted
with due prudence in the circumstances, considering their responsibilities to the institution, its
employees, its students, the Federal Government, and the public at large; and, (d) the extent to
which the actions taken with respect to the incurrence of the cost are consistent with established
institutional policies and practices applicable to the work of the institution generally, including
4. Allocable costs.
a. A cost is allocable to a particular cost objective (i.e., a specific function, project,
agreement, department, or the like) if the goods or services involved are chargeable or assignable
to such cost objective in accordance with relative benefits received or other equitable
relationship. Subject to the foregoing, a cost is allocable to a sponsored agreement if (1) it is
incurred solely to advance the work under the sponsored agreement; (2) it benefits both the
sponsored agreement and other work of the institution, in proportions that can be approximated
through use of reasonable methods, or (3) it is necessary to the overall operation of the institution
and, in light of the principles provided in this Circular, is deemed to be assignable in part to
sponsored projects. Where the purchase of equipment or other capital items is specifically
authorized under a sponsored agreement, the amounts thus authorized for such purchases are
assignable to the sponsored agreement regardless of the use that may subsequently be made of
the equipment or other capital items involved.
b. Any costs allocable to a particular sponsored agreement under the standards provided
Circular may not be shifted to other sponsored agreements in order to meet deficiencies caused
by overruns or other fund considerations, to avoid restrictions imposed by law or by terms of the
sponsored agreement, or for other reasons of convenience.
c. Any costs allocable to activities sponsored by industry, foreign governments or other
sponsors may not be shifted to federally-sponsored agreements.
d. Allocation and documentation standard.
(1) Cost principles. The recipient institution is responsible for
ensuring that costs charged to a
sponsored agreement are allowable, allocable, and reasonable under these cost principles.
(2) Internal controls. The institution's financial management
system shall ensure that no one person has complete control over all aspects of a financial
(3) Direct cost allocation principles. If a cost benefits two or
more projects or activities in
proportions that can be determined without undue effort or cost, the cost should be allocated to
the projects based on the proportional benefit. If a cost benefits two or more projects or activities
in proportions that cannot be determined because of the interrelationship of the work involved,
then, notwithstanding subsection b, the costs may be allocated or transferred
to benefited projects on any reasonable basis, consistent with subsections d.(1) and (2).
(4) Documentation. Federal requirements for documentation are
specified in this Circular,
Circular A-110, "Uniform Administrative Requirements for Grants and Agreements with
Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations," and specific
agency policies on cost transfers. If the institution authorizes the principal investigator or other
individual to have primary responsibility, given the requirements of subsection d.(2), for the
management of sponsored agreement funds, then the institution's documentation requirements for
the actions of those individuals (e.g., signature or initials of the principal investigator or designee
or use of a password) will normally be considered sufficient.
5. Applicable credits.
a. The term "applicable credits" refers to those receipts or negative expenditures that
offset or reduce direct or F&A cost items. Typical examples of such
transactions are: purchase
discounts, rebates, or allowances; recoveries or indemnities on losses; and adjustments of
overpayments or erroneous charges. This term also includes "educational discounts" on products
or services provided specifically to educational institutions, such as discounts on computer
equipment, except where the arrangement is clearly and explicitly identified as a gift by the
b. In some instances, the amounts received from the Federal Government to finance
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 institution in
determining the rates or amounts to be charged to sponsored agreements 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. (See Sections F.10, J.12.a, and J.44 for areas of
potential application in the matter of direct Federal financing.)
6. Costs incurred by State and local governments. Costs incurred or paid by State or
governments on behalf of their colleges and universities for fringe benefit programs, such as
pension costs and FICA and any other costs specifically incurred on behalf of, and in direct
benefit to, the institutions, are allowable costs of such institutions whether or not these costs are
recorded in the accounting records of the institutions, subject to the following:
a. The costs meet the requirements of subsections 1 through 5.
b. The costs are properly supported by cost allocation plans in accordance with
applicable Federal cost accounting principles.
c. The costs are not otherwise borne directly or indirectly by the Federal Government.
7. Limitations on allowance of costs. Sponsored agreements may be subject to
requirements that limit the allowance of costs. When the maximum amount allowable under a
limitation is less than the total amount determined in accordance with the principles in this
Circular, the amount not recoverable under a sponsored agreement may not be charged to other
8. Collection of unallowable costs, excess costs due to noncompliance with cost policies,
increased costs due to failure to follow a disclosed accounting practice and increased costs
resulting from a change in cost accounting practice. The following costs shall be refunded
(including interest) in accordance with applicable Federal agency regulations:
a. Costs specifically identified as unallowable in Section J, either directly
or indirectly, and charged to the Federal Government.
b. Excess costs due to failure by the educational institution to comply with the cost
policies in this Circular.
c. Increased costs due to a noncompliant cost accounting practice used to estimate,
accumulate, or report costs.
d. Increased costs resulting from a change in accounting practice.
9. Adjustment of previously negotiated F&A cost rates containing unallowable
costs. Negotiated F&A cost rates based on a proposal later found to have included costs
that (a) are unallowable as specified by (i) law or regulation, (ii) Section J of this Circular, (iii)
terms and conditions of sponsored agreements, or (b) are unallowable because they are clearly
not allocable to sponsored agreements, shall be adjusted, or a refund shall be made, in
accordance with the requirements of this section. These adjustments or refunds are designed to
correct the proposals used to establish the rates and do not constitute a reopening of the rate
negotiation. The adjustments or refunds will be made regardless of the type of rate negotiated
(predetermined, final, fixed, or provisional).
a. For rates covering a future fiscal year of the institution, the unallowable costs will be
removed from the F&A cost pools and the rates appropriately adjusted.
b. For rates covering a past period, the Federal share of the unallowable costs will be
computed for each year involved and a cash refund (including interest chargeable in accordance
applicable regulations) will be made to the Federal Government. If cash refunds are made for
past periods covered by provisional or fixed rates, appropriate adjustments will be made when
the rates are finalized to avoid duplicate recovery of the unallowable costs by the Federal
c. For rates covering the current period, either a rate adjustment or a refund, as
described in subsections a and b, shall be required by the cognizant agency. The choice of
method shall be at the discretion of the cognizant agency, based on its judgment as to which
method would be most practical.
d. The amount or proportion of unallowable costs included in each year's rate will be
assumed to be the same as the amount or proportion of unallowable costs included in the base
year proposal used to establish the rate.
10. Consistency in estimating, accumulating and reporting costs.
a. An educational institution's practices used in estimating costs in pricing a proposal
consistent with the educational institution's cost accounting practices used in accumulating and
b. An educational institution's cost accounting practices used in accumulating and
actual costs for a sponsored agreement shall be consistent with the educational institution's
practices used in estimating costs in pricing the related proposal or application.
c. The grouping of homogeneous costs in estimates prepared for proposal purposes shall
not per se be deemed an inconsistent application of cost accounting practices under
subsection a when such costs are accumulated and reported in greater detail on an actual cost
basis during performance of the sponsored agreement.
d. Appendix A also reflects this requirement, along with the purpose,
definitions, and techniques for application, all of which are authoritative.
11. Consistency in allocating costs incurred for the same purpose.
a. All costs incurred for the same purpose, in like circumstances, are either direct costs
only or F&A costs only with respect to final cost objectives. No final cost objective shall
have allocated to it as a cost any cost, if other costs incurred for the same purpose, in like
circumstances, have been included as a direct cost of that or any other final cost objective.
Further, no final cost objective shall have allocated to it as a direct cost any cost, if other costs
incurred for the same purpose, in like circumstances, have been included in any F&A cost
pool to be allocated to that or any other final cost objective.
b. Appendix A reflects this requirement along with its purpose, definitions, techniques
for application, illustrations and interpretations, all of which are authoritative.
12. Accounting for unallowable costs.
a. Costs expressly unallowable or mutually agreed to be unallowable, including costs
mutually agreed to be unallowable directly associated costs, shall be identified and excluded
from any billing, claim, application, or proposal applicable to a sponsored agreement.
b. Costs which specifically become designated as unallowable as a result of a written
furnished by a Federal official pursuant to sponsored agreement disputes procedures shall be
identified if included in or used in the computation of any billing, claim, or proposal applicable
to a sponsored agreement. This identification requirement applies also to any costs incurred for
the same purpose under like circumstances as the costs specifically identified as unallowable
under either this subsection or subsection a.
c. Costs which, in a Federal official's written decision furnished pursuant to sponsored
agreement disputes procedures, are designated as unallowable directly associated costs of
unallowable costs covered by either subsection a or b shall be accorded the identification
required by subsection b.
d. The costs of any work project not contractually authorized by a sponsored agreement,
or not related to performance of a proposed or existing sponsored agreement, shall be accounted
for, to the extent appropriate, in a manner which permits ready separation from the costs of
authorized work projects.
e. All unallowable costs covered by subsections a through d shall be subject to the same
cost accounting principles governing cost allocability as allowable costs. In circumstances where
these unallowable costs normally would be part of a regular F&A cost allocation base or
bases, they shall remain in such base or bases. Where a directly associated cost is part of a
category of costs normally included in a F&A cost pool that shall be allocated over a
base containing the unallowable cost with which it is associated, such a directly associated cost
shall be retained in the F&A cost pool and be allocated through the regular allocation
f. Where the total of the allocable and otherwise allowable costs exceeds a
limitation-of-cost or ceiling-price provision in a sponsored agreement, full direct and F&A
cost allocation shall be
made to the sponsored agreement cost objective, in accordance with established cost accounting
practices and standards which regularly govern a given entity's allocations to sponsored
agreement cost objectives. In any determination of a cost overrun, the amount thereof shall be
identified in terms of the excess of allowable costs over the ceiling amount, rather than through
specific identification of particular cost items or cost elements.
g. Appendix A reflects this requirement, along with its purpose, definitions, techniques
for application, and illustrations of this standard, all of which are authoritative.
13. Cost accounting period.
a. Educational institutions shall use their fiscal year as their cost accounting period,
(1) Costs of a F&A function which exists for only a part of a cost
accounting period may be
allocated to cost objectives of that same part of the period on the basis of data for that part of the
cost accounting period if the cost is: (i) material in amount, (ii) accumulated in a separate
cost pool or expense pool, and (iii) allocated on the basis of an appropriate direct measure of the
activity or output of the function during that part of the period.
(2) An annual period other than the fiscal year may, upon mutual
agreement with the Federal
Government, be used as the cost accounting period if the use of such period is an established
practice of the educational institution and is consistently used for managing and controlling
revenues and disbursements, and appropriate accruals, deferrals or other adjustments are made
with respect to such annual periods.
(3) A transitional cost accounting period other than a year shall be used
whenever a change of fiscal year occurs.
b. An educational institution shall follow consistent practices in the selection of the cost
accounting period or periods in which any types of expense and any types of adjustment to
expense (including prior-period adjustments) are accumulated and allocated.
c. The same cost accounting period shall be used for accumulating costs in a
F&A cost pool as
for establishing its allocation base, except that the Federal Government and educational
institution may agree to use a different period for establishing an allocation base, provided:
(1) The practice is necessary to obtain significant administrative
(2) The practice is consistently followed by the educational institution,
(3) The annual period used is representative of the activity of the cost
accounting period for which the F&A costs to be allocated are accumulated, and
(4) The practice can reasonably be estimated to provide a distribution to
cost objectives of the cost accounting period not materially different from that which otherwise
would be obtained.
d. Appendix A reflects this requirement, along with its purpose, definitions, techniques
for application and illustrations, all of which are authoritative.
14. Disclosure Statement.
a. Educational institutions that received aggregate sponsored agreements totaling $25
million or more subject to this Circular during their most recently completed fiscal year shall
disclose their cost accounting practices by filing a Disclosure Statement (DS-2), which is
reproduced in Appendix B. With the approval of the cognizant agency, an educational
institution may meet the DS-2 submission by submitting the DS-2 for each business unit that
received $25 million or more in sponsored agreements.
b. The DS-2 shall be submitted to the cognizant agency with a copy to the educational
institution's audit cognizant office.
c. Educational institutions receiving $25 million or more in sponsored agreements that
are not required to file a DS-2 pursuant to 48 CFR 9903.202-1 shall file a DS-2 covering the first
fiscal year beginning after the publication date of this revision, within six months after the end of
that fiscal year. Extensions beyond the above due date may be granted by the cognizant agency
on a case-by-case basis.
d. Educational institutions are responsible for maintaining an accurate DS-2 and
disclosed cost accounting practices. Educational institutions must file amendments to the DS-2
when disclosed practices are changed to comply with a new or modified standard, or when
practices are changed for other reasons. Amendments of a DS-2 may be submitted at any time. If
the change is expected to have a material impact on the educational institution's negotiated
cost rates, the revision shall be approved by the cognizant agency before it is implemented.
Resubmission of a complete, updated DS-2 is discouraged except when there are extensive
changes to disclosed practices.
e. Cost and funding adjustments. Cost adjustments shall be made by the cognizant
agency if an
educational institution fails to comply with the cost policies in this Circular or fails to
consistently follow its established or disclosed cost accounting practices when estimating,
accumulating or reporting the costs of sponsored agreements, if aggregate cost impact on
sponsored agreements is material. The cost adjustment shall normally be made on an aggregate
basis for all affected sponsored agreements through an adjustment of the educational institution's
future F&A costs rates or other means considered appropriate by the
cognizant agency. Under
the terms of CAS-covered contracts, adjustments in the amount of funding provided may also be
required when the estimated proposal costs were not determined in accordance with established
cost accounting practices.
f. Overpayments. Excess amounts paid in the aggregate by the Federal Government
under sponsored agreements due to a noncompliant cost accounting practice used to estimate,
accumulate, or report costs shall be credited or refunded, as deemed appropriate by the cognizant
agency. Interest applicable to the excess amounts paid in the aggregate during the period of
noncompliance shall also be determined and collected in accordance with applicable Federal
g. Compliant cost accounting practice changes. Changes from one compliant cost
practice to another compliant practice that are approved by the cognizant agency may require
cost adjustments if the change has a material effect on sponsored agreements and the changes are
deemed appropriate by the cognizant agency.
h. Responsibilities. The cognizant agency shall:
(1) Determine cost adjustments for all sponsored agreements in the
aggregate on behalf of the Federal Government. Actions of the cognizant agency official in
making cost adjustment determinations shall be coordinated with all affected Federal agencies to
the extent necessary.
(2) Prescribe guidelines and establish internal procedures to promptly
determine on behalf of the
Federal Government that a DS-2 adequately discloses the educational institution's cost
accounting practices and that the disclosed practices are compliant with applicable CAS and the
requirements of this Circular.
(3) Distribute to all affected agencies any DS-2 determination of
adequacy and/or noncompliance.
D. Direct costs.
1. General. Direct costs are those costs that can be identified specifically with a
sponsored project, an instructional activity, or any other institutional activity, or that can be
directly assigned to such activities relatively easily with a high degree of accuracy. Costs
incurred for the same purpose in like circumstances must be treated consistently as either direct
or F&A costs. Where an institution treats a particular type of cost as a
direct cost of sponsored
agreements, all costs incurred for the same purpose in like circumstances shall be treated as
direct costs of all activities of the institution.
2. Application to sponsored agreements. Identification with the sponsored work
rather than the
nature of the goods and services involved is the determining factor in distinguishing direct from
F&A costs of sponsored agreements. Typical costs charged directly to a
sponsored agreement are
the compensation of employees for performance of work under the sponsored agreement,
including related fringe benefit costs to the extent they are consistently treated, in like
circumstances, by the institution as direct rather than F&A costs; the
costs of materials
consumed or expended in the performance of the work; and other items of expense incurred for
the sponsored agreement, including extraordinary utility consumption. The cost of materials
supplied from stock or services rendered by specialized facilities or other institutional service
operations may be included as direct costs of sponsored agreements, provided such items are
consistently treated, in like circumstances, by the institution as direct rather than
F&A costs, and
are charged under a recognized method of computing actual costs, and conform to generally
accepted cost accounting practices consistently followed by the institution.
E. F&A costs.
1. General. F&A costs are those that are incurred for common or joint objectives
and therefore cannot be identified readily and specifically with a particular sponsored project, an
instructional activity, or any other institutional activity. See Section F.1 for a discussion of the
components of F&A costs.
2. Criteria for distribution.
a. Base period. A base period for distribution of F&A costs
is the period during which the costs
are incurred. The base period normally should coincide with the fiscal year established by the
institution, but in any event the base period should be so selected as to avoid inequities in the
distribution of costs.
b. Need for cost groupings. The overall objective of the F&A cost
allocation process is to distribute the F&A costs described in Section F to the
major functions of the institution in proportions reasonably consistent with the nature and extent
of their use of the institution's resources. In order to achieve this objective, it may be necessary to
provide for selective distribution by establishing separate groupings of cost within one or more
of the F&A cost categories referred to in subsection 1. In general, the cost groupings
established within a category should constitute, in each case, a pool of those items of expense
that are considered to be of like nature in terms of their relative contribution to (or degree of
remoteness from) the particular cost objectives to which distribution is appropriate. Cost
groupings should be established considering the general guides provided in subsection c. Each
such pool or cost grouping should then be distributed individually to the related cost objectives,
using the distribution base or method most appropriate in the light of the guides set forth in
c. General considerations on cost groupings. The extent to which separate cost
selective distribution would be appropriate at an institution is a matter of judgment to be
determined on a case-by-case basis. Typical situations which may warrant the establishment of
two or more separate cost groupings (based on account classification or analysis) within a
cost category include but are not limited to the following:
(1) Where certain items or categories of expense relate solely to one of
the major functions of the
institution or to less than all functions, such expenses should be set aside as a separate cost
grouping for direct assignment or selective allocation in accordance with the guides provided in
subsections b and d.
(2) Where any types of expense ordinarily treated as general
administration or departmental administration are charged to sponsored agreements as direct
costs, expenses applicable to other activities of the institution when incurred for the same
purposes in like circumstances must, through separate cost groupings, be excluded from the
F&A costs allocable to those sponsored agreements and included in the direct cost of other
activities for cost allocation purposes.
(3) Where it is determined that certain expenses are for the support of a
service unit or facility
whose output is susceptible of measurement on a workload or other quantitative basis, such
expenses should be set aside as a separate cost grouping for distribution on such basis to
organized research, instructional, and other activities at the institution or within the department.
(4) Where activities provide their own purchasing, personnel
administration, building maintenance or similar service, the distribution of general administration
and general expenses, or operation and maintenance expenses to such activities should be
accomplished through cost groupings which include only that portion of central F&A costs
(such as for overall management) which are properly allocable to such activities.
(5) Where the institution elects to treat fringe benefits as F&A
charges, such costs should be set
aside as a separate cost grouping for selective distribution to related cost objectives.
(6) The number of separate cost groupings within a category should be
held within practical
limits, after taking into consideration the materiality of the amounts involved and the degree of
precision attainable through less selective methods of distribution.
d. Selection of distribution method.
(1) Actual conditions must be taken into account in selecting the method
or base to be used in
distributing individual cost groupings. The essential consideration in selecting a base is that it be
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 benefit nor
cause and effect relationship is determinable.
(2) Where a cost grouping can be identified directly with the cost
objective benefited, it should be assigned to that cost objective.
(3) Where the expenses in a cost grouping are more general in nature, the
distribution may be
based on a cost analysis study which results in an equitable distribution of the costs. Such cost
analysis studies may take into consideration weighting factors, population, or space occupied if
appropriate. Cost analysis studies, however, must (a) be appropriately documented in sufficient
detail for subsequent review by the cognizant Federal agency, (b) distribute the costs to the
related cost objectives in accordance with the relative benefits derived, (c) be statistically sound,
(d) be performed specifically at the institution at which the results are to be used, and (e) be
reviewed periodically, but not less frequently than every two years, updated if necessary, and
used consistently. Any assumptions made in the study must be stated and explained. The use of
cost analysis studies and periodic changes in the method of cost distribution must be fully
(4) If a cost analysis study is not performed, or if the study does not
result in an equitable distribution of the costs, the distribution shall be made in accordance with
the appropriate base cited in Section F, unless one of the following conditions is met: (a) 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
agreements, or (b) the institution qualifies for, and elects to use, the simplified method for
computing F&A cost rates described in Section H.
(5) Notwithstanding subsection (3), effective July 1, 1998, a cost
analysis or base other than that in Section F shall not be used to distribute utility or student
services costs. Instead, subsections F.4.c and F.4.d may be used in the recovery of utility costs.
e. Order of distribution.
(1) F&A costs are the broad categories of costs discussed in
(2) Depreciation and use allowances, operation and maintenance
expenses, and general administrative and general expenses should be allocated in that order to the
remaining F&A cost categories as well as to the major functions and specialized service
facilities of the institution. Other cost categories may be allocated in the order determined to be
most appropriate by the institutions. When cross allocation of costs is made as provided in
subsection (3), this order of allocation does not apply.
(3) Normally a F&A cost category will be considered closed once it
has been allocated to other cost objectives, and costs may not be subsequently allocated to it.
However, a cross allocation of costs between two or more F&A cost categories may 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 F&A cost categories described in
Section F is required.
F. Identification and assignment of F&A costs.
1. Definition of Facilities and Administration. F&A costs are broad categories of
costs. "Facilities" is defined as depreciation and use allowances, interest on debt associated with
certain buildings, equipment and capital improvements, operation and maintenance expenses,
and library expenses. "Administration" is defined as general administration and general expenses,
departmental administration, sponsored projects administration, student administration and
services, and all other types of expenditures not listed specifically under one of the subcategories
of Facilities (including cross allocations from other pools).
2. Depreciation and use allowances.
a. The expenses under this heading are the portion of the costs of the institution's
buildings, capital improvements to land and buildings, and equipment which are computed in
accordance with Section J.12.
b. In the absence of the alternatives provided for in Section E.2.d, the
expenses included in this category shall be allocated in the following manner:
(1) 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.
(2) 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 rest rooms.
(3) Depreciation or use allowances on buildings, capital improvements and equipment related
to space (e.g., individual rooms, 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 benefiting functions on the basis of:
(a) the employee full-time equivalents (FTEs) or salaries and wages of those individual
functions benefiting from the use of that space; or
(b) institution-wide employee FTEs or salaries and wages applicable to the benefiting
major functions (see Section B.1) of the institution.
(4) 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 of students and employees on a full-time equivalent basis. The
amount allocated to the student category shall be assigned to the instruction function of the
institution. The amount allocated to the employee category shall be further allocated to the major
functions of the institution in proportion to the salaries and wages of all employees applicable to
c. Large research facilities. The following provisions apply to large research
facilities, that are included in F&A rate proposals negotiated after January 1, 2000, and on
which the design and construction begin after July 1, 1998. Large facilities, for this provision, are
defined as buildings with construction costs of more than $10 million. The determination of the
Federal participation (use) percentage in a building is based on institution's estimates of building
use over its life, and is made during the planning phase for the building.
(1) When an institution has large research facilities, of which 40 percent
or more of total assignable space is expected for Federal use, the institution must maintain an
adequate review and approval process to ensure that construction costs are reasonable. The
review process shall address and document relevant factors affecting construction costs, such as:
- Life cycle costs
- Unique research needs
- Special building needs
- Building site preparation
- Environmental consideration
- Federal construction code requirements
- Competitive procurement practices
The approval process shall include review and approval of the projects by the institution's
Board of Trustees (which can also be called Board of Directors, Governors or Regents) or other
(2) For research facilities costing more than $25 million, of which 50
percent or more of total
assignable space is expected for Federal use, the institution must document the review steps
performed to assure that construction costs are reasonable. The review should include an analysis
of construction costs and a comparison of these costs with relevant construction data, including
the National Science Foundation data for research facilities based on its biennial survey, "Science
and Engineering Facilities at Colleges and Universities." The documentation must be made
available for review by Federal negotiators, when requested.
3. Interest. Interest on debt associated with certain buildings, equipment and capital
improvements, as defined in Sections J.22.e and f, shall be classified as an expenditure under
the category Facilities. These costs shall be allocated in the same manner as the depreciation or
use allowances on the buildings, equipment and capital improvements to which the interest
4. Operation and maintenance expenses.
a. The expenses under this heading are those that have been incurred for the
supervision, operation, maintenance, preservation, and protection of the institution'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 all
other insurance relating to property; space and capital leasing; facility planning and management;
and, central receiving. The operation and maintenance expense category should also include its
allocable share of fringe benefit costs, depreciation and use allowances, and interest costs.
b. In the absence of the alternatives provided for in Section E.2.d, the expenses included
in this category shall be allocated in the same manner as described in subsection 2.b for
depreciation and use allowances.
c. For F&A rates negotiated on or after July 1, 1998, an institution that previously
employed a utility special cost study in its most recently negotiated F&A rate proposal in
accordance with Section E.2.d, may add a utility cost adjustment (UCA) of 1.3 percentage points
to its negotiated overall F&A rate for organized research. Exhibit B displays the list of
eligible institutions. The allocation of utility costs to the benefitting functions shall otherwise be
made in the same manner as described in subsection F.4.b. Beginning on July 1, 2002, Federal
agencies shall reassess periodically the eligibility of institutions to receive the UCA.
d. Beginning on July 1, 2002, Federal agencies may receive applications for utilization
of the UCA from institutions not subject to the provisions of subsection F.4.c.
5. General administration and general expenses.
a. The expenses under this heading are those that have been incurred for the general
and administrative offices of educational institutions and other expense of a general character
which do not relate solely to any major function of the institution; i.e., solely to (1) instruction,
(2) organized research, (3) other sponsored activities, or (4) other institutional activities. The
general administration and general expense category should also include its allocable share of
fringe benefit costs, operation and maintenance expense, depreciation and use allowances, and
interest costs. Examples of general administration and general expenses include: those expenses
incurred by administrative offices that serve the entire university system of which the institution
is a part; central offices of the institution such as the President's or Chancellor's office, the offices
for institution-wide financial management, business services, budget and planning, personnel
management, and safety and risk management; the office of the General Counsel; and, the
operations of the central administrative management information systems. General
administration and general expenses shall not include expenses incurred within
non-university-wide deans' offices, academic departments, organized research units, or similar
organizational units. (See subsection 6, Departmental administration expenses.)
b. In the absence of the alternatives provided for in Section E.2.d, the expenses included
in this category shall be grouped first according to common major functions of the institution to
which they render services or provide benefits. The aggregate expenses of each group shall then
be allocated to serviced or benefitted functions on the modified total cost basis. Modified total
costs consist of the same elements as those in Section G.2. When an activity included in this
F&A cost category provides a service or product to another institution or organization, an
appropriate adjustment must be made to either the expenses or the basis of allocation or both, to
assure a proper allocation of costs.
6. Departmental administration expenses.
a. The expenses under this heading are those that have been incurred for administrative
supporting services that benefit common or joint departmental activities or objectives in
academic deans' offices, academic departments and divisions, and organized research units.
Organized research units include such units as institutes, study centers, and research centers.
Departmental administration expenses are subject to the following limitations.
(1) Academic deans' offices. Salaries and operating expenses are limited
to those attributable to administrative functions.
(2) Academic departments:
(a) Salaries and fringe benefits attributable to the administrative work
(including bid and
proposal preparation) of faculty (including department heads), and other professional personnel
conducting research and/or instruction, shall be allowed at a rate of 3.6 percent of modified total
direct costs. This category does not include professional business or professional administrative
officers. This allowance shall be added to the computation of the F&A
cost rate for major functions in Section G; the expenses covered by the allowance shall be
excluded from the
departmental administration cost pool. No documentation is required to support this allowance.
(b) Other administrative and supporting expenses incurred within
academic departments are
allowable provided they are treated consistently in like circumstances. This would include
expenses such as the salaries of secretarial and clerical staffs, the salaries of administrative
officers and assistants, travel, office supplies, stockrooms, and the like.
(3) Other fringe benefit costs applicable to the salaries and wages
included in subsections (1) and (2) are allowable, as well as an appropriate share of general
administration and general expenses, operation and maintenance expenses, and depreciation
and/or use allowances.
(4) Federal agencies may authorize reimbursement of additional costs for
department heads and
faculty only in exceptional cases where an institution can demonstrate undue hardship or
detriment to project performance.
b. The following guidelines apply to the determination of departmental administrative
costs as direct or F&A costs.
(1) In developing the departmental administration 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 F&A costs. For example, salaries of technical staff,
laboratory supplies (e.g.,
chemicals), telephone toll charges, animals, animal care costs, computer costs, travel costs, and
specialized shop costs shall be treated as direct cost wherever identifiable to a particular cost
objective. Direct charging of these costs may be accomplished through specific identification of
individual costs to benefiting cost objectives, or through recharge centers or specialized service
facilities, as appropriate under the circumstances.
(2) The salaries of administrative and clerical staff should normally be
treated as F&A costs.
Direct charging of these costs may be appropriate where a major project or activity explicitly
budgets for administrative or clerical services and individuals involved can be specifically
identified with the project or activity. "Major project" is defined as a project that requires an
extensive amount of administrative or clerical support, which is significantly greater than the
routine level of such services provided by academic departments. Some examples of major
projects are described in Exhibit C.
(3) Items such as office supplies, postage, local telephone costs, and
memberships shall normally be treated as F&A costs.
c. In the absence of the alternatives provided for in Section E.2.d, the expenses included
in this category shall be allocated as follows:
(1) The administrative expenses of the dean's office of each college and
school shall be allocated
to the academic departments within that college or school on the modified total cost basis.
(2) The administrative expenses of each academic department, and the
department's share of the expenses allocated in subsection (1) shall be allocated to the
appropriate functions of the department on the modified total cost basis.
7. Sponsored projects administration.
a. The expenses under this heading are limited to those incurred by a separate
established primarily to administer sponsored projects, including such functions as grant and
contract administration (Federal and non-Federal), special security, purchasing, personnel,
administration, and editing and publishing of research and other reports. They include the
salaries and expenses of the head of such organization, assistants, and immediate staff, together
with the salaries and expenses of personnel engaged in supporting activities maintained by the
organization, such as stock rooms, stenographic pools and the like. This category also includes
an allocable share of fringe benefit costs, general administration and general expenses, operation
and maintenance expenses, depreciation/use allowances. Appropriate adjustments will be made
for services provided to other functions or organizations.
b. In the absence of the alternatives provided for in Section E.2.d, the
expenses included in this
category shall be allocated to the major functions of the institution under which the sponsored
projects are conducted on the basis of the modified total cost of sponsored projects.
c. An appropriate adjustment shall be made to eliminate any duplicate charges to
sponsored agreements when this category includes similar or identical activities as those included
in the general administration and general expense category or other F&A cost items, such as
accounting, procurement, or personnel administration.
8. Library expenses.
a. The expenses under this heading are those that have been incurred for the operation
library, including the cost of books and library materials purchased for the library, less any items
of library income that qualify as applicable credits under Section C.5. The
category should also include the fringe benefits applicable to the salaries and wages included
therein, an appropriate share of general administration and general expense, operation and
maintenance expense, and depreciation and use allowances. Costs incurred in the purchases of
rare books (museum-type books) with no value to sponsored agreements should not be allocated
b. In the absence of the alternatives provided for in Section E.2.d, the
expenses included in this
category shall be allocated first on the basis of primary categories of users, including students,
professional employees, and other users.
(1) The student category shall consist of full-time equivalent students
enrolled at the institution, regardless of whether they earn credits toward a degree or certificate.
(2) The professional employee category shall consist of all faculty
members and other professional employees of the institution, on a full-time equivalent basis.
(3) The other users category shall consist of all other users of library
c. Amount allocated in subsection b shall be assigned further as
(1) The amount in the student category shall be assigned to the
instruction function of the institution.
(2) The amount in the professional employee category shall be assigned
to the major functions of
the institution in proportion to the salaries and wages of all faculty members and other
professional employees applicable to those functions.