Cost Principles for Educational Institutions (OMB Circular A-21), 51880-51909 [05-16648]

Agencies

• Office of Management and Budget
• Management and Budget Office

[Federal Register Volume 70, Number 168 (Wednesday, August 31, 2005)]
[Rules and Regulations]
[Pages 51880-51909]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-16648]


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OFFICE OF MANAGEMENT AND BUDGET

2 CFR Parts 215 and 220


Cost Principles for Educational Institutions (OMB Circular A-21)

AGENCY: Office of Management and Budget.

ACTION: Relocation of policy guidance to 2 CFR chapter II.

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SUMMARY: The Office of Management and Budget (OMB) is relocating OMB 
Circular A-21, ``Cost Principles for Educational Institutions,'' to 
Title 2 in the Code of Federal Regulations (2 CFR), subtitle A, chapter 
II, part 220. This relocation is part of our broader initiative to 
create 2 CFR as a single location where the public can find both OMB 
guidance for grants and agreements and the associated Federal agency 
implementing regulations. The broader initiative provides a good 
foundation for streamlining and simplifying the policy framework for 
grants and agreements, one objective of OMB and Federal agency efforts 
to implement the Federal Financial Assistance Management Improvement 
Act of 1999 (Pub. L. 106-107).
    Furthermore, this document makes changes to 2 CFR part 215, Uniform 
Administrative Requirements for Grants and Agreements With Institutions 
of Higher Education, Hospitals, and Other Non-Profit Organizations (OMB 
Circular A-110). The changes will add to part 215 new references to 2 
CFR parts 220, 225, and 230 for the cost principles in OMB Circulars A-
21, A-87, and A-122, respectively; will update part 215 to include a 
citation for the Social Security Administration's grant regulation; and 
will correct part 215 to add the amendatory language of A-110 published 
on October 8, 1999, and to correct a typographic error.

DATES: This document is effective August 31, 2005. This document 
republishes the existing OMB Circular A-21, which already is in effect.

FOR FURTHER INFORMATION CONTACT: Gil Tran, Office of Federal Financial 
Management, Office of Management and Budget, telephone (202) 395-3052 
(direct) or (202) 395-3993 (main office) and e-mail Hai--M.--
Tran@omb.eop.gov.

SUPPLEMENTARY INFORMATION: On May 10, 2004 [69 FR 25970], we revised 
the three OMB circulars containing Federal cost principles. The purpose 
of those revisions was to simplify the cost principles by making the 
descriptions of similar cost items consistent across the circulars 
where possible, thereby reducing the possibility of misinterpretation. 
Those revisions resulted from OMB and Federal agency efforts to 
implement Public Law 106-107, and were effective on June 9, 2004.
    In this document and the two documents immediately following this 
one, we relocate those three OMB circulars to the CFR, in Title 2 which 
was established on May 11, 2004 [69 FR 26276] as a central location for 
OMB and Federal agency policies on grants and agreements. When we 
established 2 CFR and relocated OMB Circular A-110 in that new title, 
we stated that we would relocate in the near future the other OMB 
circulars related to grants and agreements. Today's documents are a 
significant step toward that end.
    Our relocation of OMB Circular A-21 does not change the substance 
of the circular. Other than adjustments needed to conform to the 
formatting requirements of the CFR, this notice relocates in 2 CFR the 
version of OMB Circular A-21 as revised by the May 10, 2004 notice.
    Conforming changes to 2 CFR part 215. There is a need for 
conforming changes to 2 CFR part 215, which contains administrative 
requirements for grants and other financial assistance agreements with 
educational institutions and other nonprofit organizations. The 
amendments to Sec.  215.25(c)(6) and (e), Sec.  215.27, and Sec.  
215.29(b) add the new references to 2 CFR parts 220, 225, and 230 for 
the cost principles in OMB Circulars A-21, A-87, and A-122, 
respectively.
    Update and corrections to 2 CFR part 215. Additional changes to 2 
CFR part 215 are needed to update Sec.  215.5 and to correct Sec.  
215.36 and Sec.  215.72. The update to Sec.  215.5 adds the CFR 
citation for the Social Security Administration's (SSA) implementation 
of the grants management common rule, ``Uniform Administrative 
Requirements for Grants and Cooperative Agreements to State and Local 
Governments.'' The changes to Sec.  215.36 provide the corrections 
needed to include the amendments to OMB Circular A-110 that were 
published as final on October 8, 1999 [64 FR 54926] and were 
inadvertently omitted from our publication of part 215 last year [69 FR 
26281]. The change to Sec.  215.72 provides correction for a long-
standing typo.

List of Subjects

2 CFR Part 215

    Accounting, Colleges and universities, Cooperative agreements, 
Grant programs, Grants administration, Hospitals, Nonprofit 
organizations, Reporting and recordkeeping requirements.

2 CFR Part 220

    Accounting, Colleges and universities, Grant programs, Grant 
administrations, Reporting and recordkeeping requirements.

    Dated: August 8, 2005.
Joshua B. Bolten,
Director.

Authority and Issuance

0
For the reasons set forth above, the Office of Management and Budget 
amends 2 CFR, subtitle A, chapter II, as follows:

PART 215--[AMENDED]

0
1. The authority citation for part 215 continues to read as follows:

    Authority: 31 U.S.C. 503; 31 U.S.C. 1111; 41 U.S.C. 405; 
Reorganization Plan No. 2 of 1970; E.O. 11541, 35 FR 10737, 3 CFR, 
1966-1970, p. 939.


Sec.  215.5  [Amended]

0
2. Section 215.5 is amended by adding ``20 CFR part 437,'' following 
``15 CFR part 24,''.

0
3. Section 215.25 is amended by revising paragraphs (c)(6) and (e) to 
read as follows:


Sec.  215.25  Revision of budget and program plans.

* * * * *
    (c) * * *
    (6) The inclusion, unless waived by the Federal awarding agency, of 
costs that require prior approval in accordance with any of the 
following, as applicable:
    (i) 2 CFR part 220, ``Cost Principles for Educational Institutions 
(OMB Circular A-21);''
    (ii) 2 CFR part 230, ``Cost Principles for Non-Profit Organizations 
(OMB Circular A-122);''
    (iii) 45 CFR part 74, Appendix E, ``Principles for Determining 
Costs Applicable to Research and Development under Grants and Contracts 
with Hospitals;'' and
    (iv) 48 CFR part 31, ``Contract Cost Principles and Procedures.''
* * * * *
    (e) Except for requirements listed in paragraphs (c)(1) and (c)(4) 
of this

[[Page 51881]]

section, Federal awarding agencies are authorized, at their option, to 
waive cost-related and administrative prior written approvals required 
by 2 CFR parts 220 and 230 (OMB Circulars A-21 and A-122). Such waivers 
may include authorizing recipients to do any one or more of the 
following.
* * * * *

0
4. Section 215.27 is revised to read as follows:


Sec.  215.27  Allowable costs.

    For each kind of recipient, there is a set of Federal principles 
for determining allowable costs. Allowability of costs shall be 
determined in accordance with the cost principles applicable to the 
entity incurring the costs. Thus, allowability of costs incurred by 
State, local or federally-recognized Indian tribal governments is 
determined in accordance with the provisions of 2 CFR part 225, ``Cost 
Principles for State, Local, and Indian Tribal Governments (OMB 
Circular A-87.'' The allowability of costs incurred by non-profit 
organizations is determined in accordance with the provisions of 2 CFR 
part 230, ``Cost Principles for Non-Profit Organizations (OMB Circular 
A-122).'' The allowability of costs incurred by institutions of higher 
education is determined in accordance with the provisions of 2 CFR part 
220, ``Cost Principles for Educational Institutions (OMB Circular A-
21).'' The allowability of costs incurred by hospitals is determined in 
accordance with the provisions of Appendix E of 45 CFR part 74, 
``Principles for Determining Costs Applicable to Research and 
Development Under Grants and Contracts with Hospitals.'' The 
allowability of costs incurred by commercial organizations and those 
non-profit organizations listed in Attachment C to Circular A-122 is 
determined in accordance with the provisions of the Federal Acquisition 
Regulation (FAR) at 48 CFR part 31.

0
5. Section 215.29 is amended by:
0
a. Revising paragraph (b) to read as set forth below; and
0
b. Revising ``the provisions of OMB Circular A-87 and extend such 
policies'' in paragraph (c) to read ``the provisions of 2 CFR part 225, 
``Cost Principles for State, Local, and Indian Tribal Governments (OMB 
Circular A-87)'' and extend such policies''.


Sec.  215.29  Conditional exemptions.

* * * * *
    (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:
    (1) The requirements in 2 CFR part 225, ``Cost Principles for 
State, Local, and Indian Tribal Governments (OMB Circular A-87)'' other 
than the allocability of costs provisions that are contained in 
subsection C.3 of Appendix A to that part;
    (2) The requirements in 2 CFR part 220, ``Cost Principles for 
Educational Institutions (OMB Circular A-21)'' other than the 
allocability of costs provisions that are contained in paragraph C.4 in 
section C of the Appendix to that part;
    (3) The requirements in 2 CFR part 230, ``Cost Principles for Non-
Profit Organizations (OMB Circular A-122)'' other than the allocability 
of costs provisions that are in paragraph A.4 in section A of Appendix 
A to that part;
    (4) The administrative requirements provisions of part 215 (OMB 
Circular A-110, ``Uniform Administrative Requirements for Grants and 
Agreements with Institutions of Higher Education, Hospitals, and Other 
Non-Profit Organizations,''); and
    (5) The agencies' grants management common rule (see Sec.  215.5).
* * * * *
0
6. Section 215.36 is amended as follows:
0
a. Paragraph (d) is redesignated as paragraph (e).
0
b. Paragraph (c) is amended by removing from the first sentence 
``Unless waived by the Federal awarding agency,'' and capitalizing the 
new opening word ``The''.
0
c. A new paragraph (d) is added, as follows:


Sec.  215.36  Intangible property.

* * * * *
    (d) (1) In addition, in response to a Freedom of Information Act 
(FOIA) request for research data relating to published research 
findings produced under an award that was used by the Federal 
Government in developing an agency action that has the force and effect 
of law, the Federal awarding agency shall request, and the recipient 
shall provide, within a reasonable time, the research data so that they 
can be made available to the public through the procedures established 
under the FOIA. If the Federal awarding agency obtains the research 
data solely in response to a FOIA request, the agency may charge the 
requester a reasonable fee equaling the full incremental cost of 
obtaining the research data. This fee should reflect costs incurred by 
the agency, the recipient, and the applicable subrecipients. This fee 
is in addition to any fees the agency may assess under the FOIA (5 
U.S.C. 552(a)(4)(A)).
    (2) The following definitions apply for purposes of paragraph (d) 
of this section:
    (i) Research data is defined as the recorded factual material 
commonly accepted in the scientific community as necessary to validate 
research findings, but not any of the following: Preliminary analyses, 
drafts of scientific papers, plans for future research, peer reviews, 
or communications with colleagues. This ``recorded'' material excludes 
physical objects (e.g., laboratory samples). Research data also do not 
include:
    (A) Trade secrets, commercial information, materials necessary to 
be held confidential by a researcher until they are published, or 
similar information which is protected under law; and
    (B) Personnel and medical information and similar information the 
disclosure of which would constitute a clearly unwarranted invasion of 
personal privacy, such as information that could be used to identify a 
particular person in a research study.
    (ii) Published is defined as either when:
    (A) Research findings are published in a peer-reviewed scientific 
or technical journal; or
    (B) A Federal agency publicly and officially cites the research 
findings in support of an agency action that has the force and effect 
of law.
    (iii) Used by the Federal Government in developing an agency action 
that has the force and effect of law is defined as when an agency 
publicly and officially cites the research findings in support of an 
agency action that has the force and effect of law.
* * * * *


Sec.  215.72  [Amended]

0
7. Section 215.72 is amended by removing from paragraph (b) the 
reference to ``Sec.  215.73(a),'' and adding ``paragraph (a) of this 
section,'' in its place.

0
8. Part 220 is added to Chapter II to read as follows:

PART 220--COST PRINCIPLES FOR EDUCATIONAL INSTITUTIONS (OMB 
CIRCULAR A-21)

Sec.
220.5 Purpose.

[[Page 51882]]

220.10 Scope.
220.15 Policy.
220.20 Applicability.
220.25 OMB responsibilities.
220.30 Federal agency responsibilities.
220.35 Effective date of changes.
220.40 Relationship to previous issuance.
220.45 Information contact.

Appendix A to Part 220--Principles for Determining Costs Applicable 
to Grants, Contracts, and Other Agreements with Educational 
Institutions

    Authority: 31 U.S.C. 503; 31 U.S.C. 1111; 41 U.S.C. 405; 
Reorganization Plan No. 2 of 1970; E.O. 11541, 35 FR 10737, 3 CFR, 
1966-1970, p. 939.


Sec.  220.5  Purpose.

    This part establishes principles for determining costs applicable 
to grants, contracts, and other agreements with educational 
institutions.


Sec.  220.10  Scope.

    The principles in this part 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. Provision for profit or other 
increment above cost is outside the scope of this part.


Sec.  220.15  Policy.

    The principles in this part 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. 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.


Sec.  220.20  Applicability.

    (a) All Federal agencies that sponsor research and development, 
training, and other work at educational institutions shall apply the 
provisions of Appendix A to this part 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) Each federal agency that awards defense-related contracts to a 
Federally Funded Research and Development Center (FFRDC) associated 
with an educational institution shall require the FFRDC to comply with 
the Cost Accounting Standards and with the rules and regulations issued 
by the Cost Accounting Standards Board and set forth in 47 CFR part 99.


Sec.  220.25  OMB responsibilities.

    OMB is responsible for:
    (a) Issuing and maintaining the guidance in this part.
    (b) Interpreting the policy requirements in this part and providing 
assistance to ensure effective and efficient implementation.
    (c) Granting any deviations to Federal agencies from the guidance 
in this part, as provided in Appendix A to this part. Exceptions will 
only be made in particular cases where adequate justification is 
presented.
    (d) Conducting broad oversight of government-wide compliance with 
the guidance in this part.


Sec.  220.30  Federal Agency responsibilities.

    The head of each Federal agency that awards and administers grants 
and agreements subject to this part is responsible for requesting 
approval from and/or consulting with OMB (as applicable) for deviations 
from the guidance in Appendix A to this part and performing the 
applicable functions specified in Appendix A to this part.


Sec.  220.35  Effective date for changes.

    Institutions as of the start of their first fiscal year beginning 
after that date shall implement the provisions. Earlier implementation, 
or a delay in implementation of individual provisions, is permitted by 
mutual agreement between an institution and the cognizant Federal 
agency.


Sec.  220.40  Relationship to previous issuance.

    (a) The guidance in this part previously was issued as OMB Circular 
A-21. Designations of the attachment to the Circular and the appendices 
to that attachment have changed, as shown in the following table:

------------------------------------------------------------------------
 The portion of OMB Circular A-21 that   Is designated in this part as .
        was designated as . . .                        . .
------------------------------------------------------------------------
(1) The Attachment to the circular,      Appendix A to Part 220--
 entitled ``Principles For Determining    Principles For Determining
 Costs Applicable to Grants, Contracts,   Costs Applicable to Grants,
 and Other Agreements with Educational    Contracts, and Other
 Institutions,''.                         Agreements with Educational
                                          Institutions.
(2) Exhibit A in the attachment to the   Exhibit A, List of Colleges and
 circular, entitled ``List of Colleges    Universities Subject to
 and Universities Subject to Section      Section J.12.h of Circular A-
 J.12.h of Circular A-21,''.              21, to Appendix A.
(3) Exhibit B in the attachment to the   Exhibit B, Listing of
 circular, entitled ``Listing of          Institutions that are eligible
 Institutions that are eligible for the   for the utility cost
 utility cost adjustment,''.              adjustment, to Appendix A.
(4) Exhibit C in the attachment to the   Exhibit C, Examples of ``major
 circular, entitled ``Examples of         project'' where direct
 `major project' where direct charging    charging of administrative or
 of administrative or clerical staff      clerical staff salaries may be
 salaries may be appropriate,''.          appropriate, to Appendix A.
(5) Appendix A to the attachment to the  Attachment A, CASB's Cost
 circular, entitled ``CASB's Cost         Accounting Standards (CAS), to
 Accounting Standards (CAS),''.           Appendix A.
(6) Appendix B to the attachment to the  Attachment B, CASB's Disclosure
 circular, entitled ``CASB's Disclosure   Statement (DS-2), to Appendix
 Statement (DS-2),''.                     A.
(7) Appendix C to the attachment to the  Attachment C, Documentation
 circular, entitled ``Documentation       Requirements for Facilities
 Requirements for Facilities and          and Administrative (F&A) Rate
 Administrative (F&A) Rate Proposals,''.  Proposals, to Appendix A.
------------------------------------------------------------------------

    (b) Historically, OMB Circular A-21 superseded Federal Management 
Circular 73-8, dated December 19, 1973. FMC 73-8 was revised and 
reissued under its original designation of OMB Circular No. A-21. The 
provisions of A-21 were effective October 1, 1979, except for 
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, 
65 FR 48566 and 69 FR 25970).


Sec.  220.45  Information contact.

    Further information concerning this part may be obtained by 
contacting the Office of Federal Financial Management, Office of 
Management and Budget, Washington, DC 20503, telephone (202) 395-3993.

[[Page 51883]]

Appendix A to Part 220--Principles for Determining Costs Applicable to 
Grants, Contracts, and Other Agreements With Educational Institutions

Table of Contents

A. Purpose and Scope
    1. Objectives
    2. Policy guides
    3. Application
    4. Inquiries
B. Definition of Terms
    1. Major functions of an institution
    2. Sponsored agreement
    3. Allocation
    4. Facilities and administrative (F&A) costs
C. Basic Considerations
    1. Composition of total costs
    2. Factors affecting allowability of costs
    3. Reasonable costs
    4. Allocable costs
    5. Applicable credits
    6. Costs incurred by State and local governments
    7. Limitations on allowance of costs
    8. Collection of unallowable costs
    9. Adjustment of previously negotiated F&A cost rates containing 
unallowable costs
    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
    1. General
    2. Application to sponsored agreements
E. F&A Costs
    1. General
    2. Criteria for distribution
F. Identification and Assignment of F&A Costs
    1. Definition of Facilities and Administration.
    2. Depreciation and use allowances
    3. Interest
    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 Government
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
    1. General
    2. Simplified procedure
I. Reserved
J. General Provisions for Selected Items of Cost
    1. Advertising and public relations costs
    2. Advisory councils
    3. Alcoholic beverages
    4. Alumni/ae activities
    5. Audit and related services
    6. Bad debts
    7. Bonding costs
    8. Commencement and convocation costs
    9. Communication costs
    10. Compensation for personal services
    11. Contingency provisions
    12. Deans of faculty and graduate schools
    13. Defense and prosecution of criminal and civil proceedings, 
claims, appeals and patent infringement
    14. Depreciation and use allowances
    15. Donations and contributions
    16. Employee morale, health, and welfare costs
    17. Entertainment costs
    18. Equipment and other capital expenditures
    19. Fines and penalties
    20. Fund raising and investment costs
    21. Gains and losses on depreciable assets
    22. Goods or services for personal use
    23. Housing and personal living expenses
    24. Idle facilities and idle capacity
    25. Insurance and indemnification
    26. Interest
    27. Labor relations costs
    28. Lobbying
    29. Losses on other sponsored agreements or contracts
    30. Maintenance and repair costs
    31. Material and supplies costs
    32. Meetings and conferences
    33. Memberships, subscriptions and professional activity costs
    34. Patent costs
    35. Plant and homeland security costs
    36. Pre-agreement costs
    37. Professional service costs
    38. Proposal costs
    39. Publication and printing costs
    40. Rearrangement and alteration costs
    41. Reconversion costs
    42. Recruiting costs
    43. Rental costs of buildings and equipment
    44. Royalties and other costs for use of patents
    45. Scholarships and student aid costs
    46. Selling and marketing
    47. Specialized service facilities
    48. Student activity costs
    49. Taxes
    50. Termination costs applicable to sponsored agreements
    51. Training costs
    52. Transportation costs
    53. Travel costs
    54. Trustees
K. Certification of Charges
Exhibit A to Appendix A--List of Colleges and Universities Subject 
to Section J.12.h of Appendix A
Exhibit B to Appendix A--Listing of Institutions That are Eligible 
for the Utility Cost Adjustment
Exhibit C to Appendix A--Examples of ``major project'' Where Direct 
Charging of Administrative or Clerical Staff Salaries May Be 
Appropriate
Attachment A to Appendix A--Cost Accounting Standards (CAS) for 
Educational Institutions
Attachment B to Appendix A--CASB's Disclosure Statement (DS-2)
Attachment C to Appendix A--Documentation Requirements for 
Facilities and Administrative (F&A) Rate Proposals

A. Purpose and Scope

    1. Objectives. This Appendix provides principles for determining 
the costs applicable to 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 requires 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 of a 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 experience, 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 sponsored agreements are fundamental to the 
research effort and shall be recognized in the application of these 
principles.
    d. Each institution, in the fulfillment of its obligations, 
should employ sound management practices.
    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 work performed by colleges and universities

[[Page 51884]]

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 for certain Federal programs with 
statutorily-authorized consolidated planning and consolidated 
administrative funding, that are identified by a Federal agency and 
approved by the head of the Executive department or establishment. A 
Federal agency shall consult with OMB during its consideration of 
whether to grant such an exemption.
    (2) To promote efficiency in State and local program 
administration, when Federal non-entitlement programs with common 
purposes have specific statutorily-authorized consolidated planning 
and consolidated administrative funding and where most of the State 
agency's resources come from non-Federal sources, Federal agencies 
may exempt these covered State-administered, non-entitlement grant 
programs from certain OMB grants management requirements. The 
exemptions would be from all but the allocability of costs 
provisions of subsection C.3 of Appendix A to 2 CFR part 225 Cost 
Principles for State, Local, and Indian Tribal Governments (OMB 
Circular A-87), Section C, subpart 4 to 2 CFR part 220 Cost 
Principles for Educational Institutions (OMB Circular A-21), and 
subsection A.4 of Appendix A to 2 CFR part 230 Cost Principles for 
Non-Profit Organizations,'' (OMB Circular A-122), and from all of 
the administrative requirements provisions of 2 CFR part 215, 
Uniform Administrative Requirements for Grants and Agreements with 
Institutions of Higher Education, Hospitals, and Other Non-Profit 
Organizations (OMB Circular A-110), and the agencies' grants 
management common rule (see Sec.  215.5 of this subtitle).
    (3) When a Federal agency provides this flexibility, as a 
prerequisite to a State's exercising this option, a State must adopt 
its own written fiscal and administrative requirements for expending 
and accounting for all funds, which are consistent with the 
provisions of 2 CFR part 225 (OMB Circular A-87), and extend such 
policies to all subrecipients. These fiscal and administrative 
requirements must be sufficiently specific to ensure that: Funds are 
used in compliance with all applicable Federal statutory and 
regulatory provisions, costs are reasonable and necessary for 
operating these programs, and funds are not to 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 Appendix to 2 CFR part 220, 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 and non-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 of this 
Appendix; and
    (3) Specialized service facilities described in Section J.47 of 
this Appendix. 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 Appendix, 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 an F&A cost 
activity, as described in Section F of this Appendix. 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 Appendix, 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 
Appendix and as currently used in attachments A and B to this 
Appendix. The F&A cost categories are described in Section F.1 of 
this Appendix.

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 C.5 of this Appendix.
    2. Factors affecting allowability of costs. The tests of 
allowability of costs under these principles are: they must be 
reasonable; they must be allocable to sponsored agreements under the 
principles and methods provided herein; they must be given 
consistent treatment through application of those generally accepted 
accounting principles

[[Page 51885]]

appropriate to the circumstances; and 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 or services acquired or applied, and the amount 
involved therefore, 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: 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; 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; 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, 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 sponsored agreements.
    4. Allocable costs.
    a. A cost is allocable to a particular cost objective (i.e., a 
specific function, project, sponsored 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 it is incurred solely to 
advance the work under the sponsored agreement; it benefits both the 
sponsored agreement and other work of the institution, in 
proportions that can be approximated through use of reasonable 
methods, or it is necessary to the overall operation of the 
institution and, in light of the principles provided in this 
Appendix, 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 in this Appendix 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 transaction.
    (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 C.4.d. (1) and (2) of this Appendix.
    (4) Documentation. Federal requirements for documentation are 
specified in this Appendix, 2 CFR Part 215, ``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 C.4.d. 
(2) of this Appendix, 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 operate to 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 vendor.
    b. In some instances, the amounts received from the Federal 
Government to finance institutional 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.14, and J.47 of this Appendix 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 local 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 C.1 through 5 
of this Appendix.
    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 statutory 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 Appendix, the amount not recoverable under a sponsored 
agreement may not be charged to other sponsored agreements.
    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 of 
this Appendix, 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 Appendix.
    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 are unallowable as specified 
by law or regulation, Section J of this Appendix, terms and 
conditions of sponsored agreements, or, 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 with 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

[[Page 51886]]

finalized to avoid duplicate recovery of the unallowable costs by 
the Federal Government.
    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 shall be consistent with the educational 
institution's cost accounting practices used in accumulating and 
reporting costs.
    b. An educational institution's cost accounting practices used 
in accumulating and reporting 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. Attachment A to this Appendix 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. Attachment A to this Appendix reflects this requirement along 
with its purpose, definitions, and 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 decision 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, whether 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 process.
    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. Attachment 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, except that:
    (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 material in amount, 
accumulated in a separate F&A cost pool or expense pool, and 
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 convenience,
    (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. Attachment 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 Appendix 
during their most recently completed fiscal year shall disclose 
their cost accounting practices by filing a Disclosure Statement 
(DS-2), which is reproduced in Attachment B to this Appendix. 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 complying with disclosed cost accounting 
practices. Educational institutions must file amendments to the DS-2 
when disclosed practices are changed to comply with a new

[[Page 51887]]

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 F&A 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 Appendix 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 
agency regulations.
    g. Compliant cost accounting practice changes. Changes from one 
compliant cost accounting 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 Attachment A to this 
Appendix.
    (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 particular 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 of 
this Appendix 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 of this Appendix 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 E.1 of this Appendix. 
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 E.2.c. of this Appendix. 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 subsection E.2.d. of this 
Appendix.
    c. General considerations on cost groupings. The extent to which 
separate cost groupings and 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 an F&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 group