Cost Principles for Non-Profit Organizations (OMB Circular A-122), 51927-51943 [05-16650]

Agencies

• Office of Management and Budget
• Management and Budget Office

[Federal Register Volume 70, Number 168 (Wednesday, August 31, 2005)]
[Rules and Regulations]
[Pages 51927-51943]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-16650]


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OFFICE OF MANAGEMENT AND BUDGET

2 CFR Part 230


Cost Principles for Non-Profit Organizations (OMB Circular A-122)

AGENCY: Office of Management and Budget.

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

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SUMMARY: The Office of Management and Budget (OMB) is relocating 
Circular A-122, ``Cost Principles for Non-Profit Organizations,'' to 
Title 2 in the Code of Federal Regulations (CFR), subtitle A, chapter 
II, part 230. 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).

DATES: Part 230 is effective August 31, 2005. This document republishes 
the existing OMB Circular A-122, 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, a result of OMB and Federal agency efforts to 
implement Public Law 106-107, were effective on June 9, 2004.
    In this document, we relocate OMB Circular A-122 to the CFR, in 
Title 2 which was established on May 11, 2004 [69 FR 26276] as a 
central location for OMB and Federal agency policies on grants and 
agreements.
    Our relocation of OMB Circular A-122 does not change the substance 
of the circular. Other than adjustments needed to conform to the 
formatting requirements of the CFR, this document relocates in 2 CFR 
the version of OMB Circular A-122 as revised by the May 10, 2004 
notice.

List of Subjects in 2 CFR Part 230

    Accounting, Grant programs, Grants administration, Non-profit 
organizations, 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, by adding a part 230 as set forth 
below.

PART 230--COST PRINCIPLES FOR NON-PROFIT ORGANIZATIONS (OMB 
CIRCULAR A-122)

Sec.
230.5 Purpose.
230.10 Scope.
230.15 Policy.
230.20 Applicability.
230.25 Definitions
230.30 OMB responsibilities.
230.35 Federal agency responsibilities.
230.40 Effective date of changes.
230.45 Relationship to previous issuance.
230.50 Information Contact.
Appendix A to Part 230--General Principles
Appendix B to Part 230--Selected Items of Cost
Appendix C to Part 230--Non-Profit Organizations Not Subject to This 
Part

    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.  230.5  Purpose.

    This part establishes principles for determining costs of grants, 
contracts and other agreements with non-profit organizations.


Sec.  230.10  Scope.

    (a) This part does not apply to colleges and universities which are 
covered by 2 CFR part 220 Cost Principles for Educational Institutions 
(OMB Circular A-21); State, local, and federally-recognized Indian 
tribal governments which are covered by 2 CFR part 225 Cost Principles 
for State, Local, and Indian Tribal Governments (OMB Circular A-87); or 
hospitals.
    (b) The principles deal with the subject of cost determination, and 
make no attempt to identify the circumstances or dictate the extent of 
agency and non-profit organization participation in the financing of a 
particular project. Provision for profit or other increment above cost 
is outside the scope of this part.


Sec.  230.15  Policy.

    The principles are designed to provide that the Federal Government 
bear its fair share of costs except where restricted or prohibited by 
law. The principles do not attempt to prescribe the extent of cost 
sharing or matching on grants, contracts, or other agreements. However, 
such cost sharing or matching shall not be accomplished through 
arbitrary limitations on individual cost elements by Federal agencies.


Sec.  230.20  Applicability.

    (a) These principles shall be used by all Federal agencies in 
determining the costs of work performed by non-profit organizations 
under grants, cooperative agreements, cost reimbursement contracts, and 
other contracts in which costs are used in pricing, administration, or 
settlement. All of these instruments are hereafter referred to as 
awards. The principles do not apply to awards under which an 
organization is not required to account to the Federal Government for 
actual costs incurred.

[[Page 51928]]

    (b) All cost reimbursement subawards (subgrants, subcontracts, 
etc.) are subject to those Federal cost principles applicable to the 
particular organization concerned. Thus, if a subaward is to a non-
profit organization, this part shall apply; if a subaward is to a 
commercial organization, the cost principles applicable to commercial 
concerns shall apply; if a subaward is to a college or university, 2 
CFR part 220 shall apply; if a subaward is to a State, local, or 
federally-recognized Indian tribal government, 2 CFR part 225 shall 
apply.
    (c) Exclusion of some non-profit organizations. Some non-profit 
organizations, because of their size and nature of operations, can be 
considered to be similar to commercial concerns for purpose of 
applicability of cost principles. Such non-profit organizations shall 
operate under Federal cost principles applicable to commercial 
concerns. A listing of these organizations is contained in Appendix C 
to this part. Other organizations may be added from time to time.


Sec.  230.25  Definitions.

    (a) Non-profit organization means any corporation, trust, 
association, cooperative, or other organization which:
    (1) Is operated primarily for scientific, educational, service, 
charitable, or similar purposes in the public interest;
    (2) Is not organized primarily for profit; and
    (3) Uses its net proceeds to maintain, improve, and/or expand its 
operations. For this purpose, the term ``non-profit organization'' 
excludes colleges and universities; hospitals; State, local, and 
federally-recognized Indian tribal governments; and those non-profit 
organizations which are excluded from coverage of this part in 
accordance with Sec.  230.20(c).
    (b) Prior approval means securing the awarding agency's permission 
in advance to incur cost for those items that are designated as 
requiring prior approval by the part and its Appendices. Generally this 
permission will be in writing. Where an item of cost requiring prior 
approval is specified in the budget of an award, approval of the budget 
constitutes approval of that cost.


Sec.  230.30  OMB responsibilities.

    OMB may grant exceptions to the requirements of this part when 
permissible under existing law. However, in the interest of achieving 
maximum uniformity, exceptions will be permitted only in highly unusual 
circumstances.


Sec.  230.35  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 the appendices to this part and performing the 
applicable functions specified in the appendices to this part.


Sec.  230.40  Effective date of changes.

    The provisions of this part are effective August 31, 2005. 
Implementation shall be phased in by incorporating the provisions into 
new awards made after the start of the organization's next fiscal year. 
For existing awards, the new principles may be applied if an 
organization and the cognizant Federal agency agree. Earlier 
implementation, or a delay in implementation of individual provisions, 
is also permitted by mutual agreement between an organization and the 
cognizant Federal agency.


Sec.  230.45  Relationship to previous issuance.

    (a) The guidance in this part previously was issued as OMB Circular 
A-122. Appendix A to this part contains the guidance that was in 
Attachment A (general principles) to the OMB circular; Appendix B 
contains the guidance that was in Attachment B (selected items of cost) 
to the OMB circular; and Appendix C contains the information that was 
in Attachment C (non-profit organizations not subject to the Circular) 
to the OMB circular.
    (b) Historically, OMB Circular A-122 superseded cost principles 
issued by individual agencies for non-profit organizations.


Sec.  230.50  Information contact.

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

Appendix A to Part 230--General Principles

General Principles

Table of Contents

A. Basic Considerations
    1. Composition of total costs
    2. Factors affecting allowability of costs
    3. Reasonable costs
    4. Allocable costs
    5. Applicable credits
    6. Advance understandings
    7. Conditional exemptions
B. Direct Costs
C. Indirect Costs
D. Allocation of Indirect Costs and Determination of Indirect Cost 
Rates
    1. General
    2. Simplified allocation method
    3. Multiple allocation base method
    4. Direct allocation method
    5. Special indirect cost rates
E. Negotiation and Approval of Indirect Cost Rates
    1. Definitions
    2. Negotiation and approval of rates

General Principles

A. Basic Considerations

    1. Composition of total costs. The total cost of an award is the 
sum of the allowable direct and allocable indirect costs less any 
applicable credits.
    2. Factors affecting allowability of costs. To be allowable 
under an award, costs must meet the following general criteria:
    a. Be reasonable for the performance of the award and be 
allocable thereto under these principles.
    b. Conform to any limitations or exclusions set forth in these 
principles or in the award as to types or amount of cost items.
    c. Be consistent with policies and procedures that apply 
uniformly to both federally-financed and other activities of the 
organization.
    d. Be accorded consistent treatment.
    e. Be determined in accordance with generally accepted 
accounting principles (GAAP).
    f. Not be included as a cost or used to meet cost sharing or 
matching requirements of any other federally-financed program in 
either the current or a prior period.
    g. Be adequately documented.
    3. Reasonable costs. A cost is reasonable if, in its nature or 
amount, it does not exceed that which would be incurred by a prudent 
person under the circumstances prevailing at the time the decision 
was made to incur the costs. The question of the reasonableness of 
specific costs must be scrutinized with particular care in 
connection with organizations or separate divisions thereof which 
receive the preponderance of their support from awards made by 
Federal agencies. In determining the reasonableness of a given cost, 
consideration shall be given to:
    a. Whether the cost is of a type generally recognized as 
ordinary and necessary for the operation of the organization or the 
performance of the award.
    b. The restraints or requirements imposed by such factors as 
generally accepted sound business practices, arms length bargaining, 
Federal and State laws and regulations, and terms and conditions of 
the award.
    c. Whether the individuals concerned acted with prudence in the 
circumstances, considering their responsibilities to the 
organization, its members, employees, and clients, the public at 
large, and the Federal Government.
    d. Significant deviations from the established practices of the 
organization which may unjustifiably increase the award costs.
    4. Allocable costs. a. A cost is allocable to a particular cost 
objective, such as a grant, contract, project, service, or other 
activity, in accordance with the relative benefits received. A cost 
is allocable to a Federal award if it is treated consistently with 
other

[[Page 51929]]

costs incurred for the same purpose in like circumstances and if it:
    (1) Is incurred specifically for the award.
    (2) Benefits both the award and other work and can be 
distributed in reasonable proportion to the benefits received, or
    (3) Is necessary to the overall operation of the organization, 
although a direct relationship to any particular cost objective 
cannot be shown.
    b. Any cost allocable to a particular award or other cost 
objective under these principles may not be shifted to other Federal 
awards to overcome funding deficiencies, or to avoid restrictions 
imposed by law or by the terms of the award.
    5. Applicable credits. a. The term applicable credits refers to 
those receipts, or reduction of expenditures which operate to offset 
or reduce expense items that are allocable to awards as direct or 
indirect costs. Typical examples of such transactions are: Purchase 
discounts, rebates or allowances, recoveries or indemnities on 
losses, insurance refunds, and adjustments of overpayments or 
erroneous charges. To the extent that such credits accruing or 
received by the organization relate to allowable cost, they shall be 
credited to the Federal Government either as a cost reduction or 
cash refund, as appropriate.
    b. In some instances, the amounts received from the Federal 
Government to finance organizational activities or service 
operations should be treated as applicable credits. Specifically, 
the concept of netting such credit items against related 
expenditures should be applied by the organization in determining 
the rates or amounts to be charged to Federal awards for services 
rendered whenever the facilities or other resources used in 
providing such services have been financed directly, in whole or in 
part, by Federal funds.
    c. For rules covering program income (i.e., gross income earned 
from federally-supported activities) see Sec.  215.24 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).
    6. Advance understandings. Under any given award, the 
reasonableness and allocability of certain items of costs may be 
difficult to determine. This is particularly true in connection with 
organizations that receive a preponderance of their support from 
Federal agencies. In order to avoid subsequent disallowance or 
dispute based on unreasonableness or nonallocability, it is often 
desirable to seek a written agreement with the cognizant or awarding 
agency in advance of the incurrence of special or unusual costs. The 
absence of an advance agreement on any element of cost will not, in 
itself, affect the reasonableness or allocability of that element.
    7. Conditional exemptions. a. OMB authorizes conditional 
exemption from OMB administrative requirements and cost principles 
for certain Federal programs with statutorily-authorized 
consolidated planning and consolidated administrative funding, that 
are identified by a Federal agency and approved by the head of the 
Executive department or establishment. A Federal agency shall 
consult with OMB during its consideration of whether to grant such 
an exemption.
    b. To promote efficiency in State and local program 
administration, when Federal non-entitlement programs with common 
purposes have specific statutorily-authorized consolidated planning 
and consolidated administrative funding and where most of the State 
agency's resources come from non-Federal sources, Federal agencies 
may exempt these covered State-administered, non-entitlement grant 
programs from certain OMB grants management requirements. The 
exemptions would be from all but the allocability of costs 
provisions of Appendix A, subsection C.e. of 2 CFR part 225 (OMB 
Circular A-87); Appendix A, Section C.4. of 2 CFR part 220 (OMB 
Circular A-21); Section A.4. of this appendix; and from all of the 
administrative requirements provisions of 2 CFR part 215 (OMB 
Circular A-110) and the agencies' grants management common rule.
    c. When a Federal agency provides this flexibility, as a 
prerequisite to a State's exercising this option, a State must adopt 
its own written fiscal and administrative requirements for expending 
and accounting for all funds, which are consistent with the 
provisions of 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.

B. Direct Costs

    1. Direct costs are those that can be identified specifically 
with a particular final cost objective, i.e., a particular award, 
project, service, or other direct activity of an organization. 
However, a cost may not be assigned to an award as a direct cost if 
any other cost incurred for the same purpose, in like circumstance, 
has been allocated to an award as an indirect cost. Costs identified 
specifically with awards are direct costs of the awards and are to 
be assigned directly thereto. Costs identified specifically with 
other final cost objectives of the organization are direct costs of 
those cost objectives and are not to be assigned to other awards 
directly or indirectly.
    2. Any direct cost of a minor amount may be treated as an 
indirect cost for reasons of practicality where the accounting 
treatment for such cost is consistently applied to all final cost 
objectives.
    3. The cost of certain activities are not allowable as charges 
to Federal awards (see, for example, fundraising costs in paragraph 
17 of Appendix B to this part). However, even though these costs are 
unallowable for purposes of computing charges to Federal awards, 
they nonetheless must be treated as direct costs for purposes of 
determining indirect cost rates and be allocated their share of the 
organization's indirect costs if they represent activities which 
include the salaries of personnel, occupy space, and benefit from 
the organization's indirect costs.
    4. The costs of activities performed primarily as a service to 
members, clients, or the general public when significant and 
necessary to the organization's mission must be treated as direct 
costs whether or not allowable and be allocated an equitable share 
of indirect costs. Some examples of these types of activities 
include:
    a. Maintenance of membership rolls, subscriptions, publications, 
and related functions.
    b. Providing services and information to members, legislative or 
administrative bodies, or the public.
    c. Promotion, lobbying, and other forms of public relations.
    d. Meetings and conferences except those held to conduct the 
general administration of the organization.
    e. Maintenance, protection, and investment of special funds not 
used in operation of the organization.
    f. Administration of group benefits on behalf of members or 
clients, including life and hospital insurance, annuity or 
retirement plans, financial aid, etc.

C. Indirect Costs

    1. Indirect costs are those that have been incurred for common 
or joint objectives and cannot be readily identified with a 
particular final cost objective. Direct cost of minor amounts may be 
treated as indirect costs under the conditions described in 
subparagraph B.2 of this appendix. After direct costs have been 
determined and assigned directly to awards or other work as 
appropriate, indirect costs are those remaining to be allocated to 
benefiting cost objectives. A cost may not be allocated to an award 
as an indirect cost if any other cost incurred for the same purpose, 
in like circumstances, has been assigned to an award as a direct 
cost.
    2. Because of the diverse characteristics and accounting 
practices of non-profit organizations, it is not possible to specify 
the types of cost which may be classified as indirect cost in all 
situations. However, typical examples of indirect cost for many non-
profit organizations may include depreciation or use allowances on 
buildings and equipment, the costs of operating and maintaining 
facilities, and general administration and general expenses, such as 
the salaries and expenses of executive officers, personnel 
administration, and accounting.
    3. Indirect costs shall be classified within two broad 
categories: ``Facilities'' and ``Administration.'' ``Facilities'' is 
defined as depreciation and use allowances on buildings, equipment 
and capital improvement, interest on debt associated with certain 
buildings, equipment and capital improvements, and operations and 
maintenance expenses. ``Administration'' is defined as general 
administration and general expenses such as the director's office, 
accounting, personnel, library expenses and all other types of 
expenditures not listed specifically under one of the subcategories 
of ``Facilities'' (including cross allocations from other pools, 
where applicable). See indirect cost rate reporting requirements in

[[Page 51930]]

subparagraphs D.2.e and D.3.g of this appendix.

D. Allocation of Indirect Costs and Determination of Indirect Cost 
Rates

    1. General. a. Where a non-profit organization has only one 
major function, or where all its major functions benefit from its 
indirect costs to approximately the same degree, the allocation of 
indirect costs and the computation of an indirect cost rate may be 
accomplished through simplified allocation procedures, as described 
in subparagraph D.2 of this appendix.
    b. Where an organization has several major functions which 
benefit from its indirect costs in varying degrees, allocation of 
indirect costs may require the accumulation of such costs into 
separate cost groupings which then are allocated individually to 
benefiting functions by means of a base which best measures the 
relative degree of benefit. The indirect costs allocated to each 
function are then distributed to individual awards and other 
activities included in that function by means of an indirect cost 
rate(s).
    c. The determination of what constitutes an organization's major 
functions will depend on its purpose in being; the types of services 
it renders to the public, its clients, and its members; and the 
amount of effort it devotes to such activities as fundraising, 
public information and membership activities.
    d. Specific methods for allocating indirect costs and computing 
indirect cost rates along with the conditions under which each 
method should be used are described in subparagraphs D.2 through 5 
of this appendix.
    e. The base period for the allocation of indirect costs is the 
period in which such costs are incurred and accumulated for 
allocation to work performed in that period. The base period 
normally should coincide with the organization's fiscal year but, in 
any event, shall be so selected as to avoid inequities in the 
allocation of the costs.
    2. Simplified allocation method. a. Where an organization's 
major functions benefit from its indirect costs to approximately the 
same degree, the allocation of indirect costs may be accomplished by 
separating the organization's total costs for the base period as 
either direct or indirect, and dividing the total allowable indirect 
costs (net of applicable credits) by an equitable distribution base. 
The result of this process is an indirect cost rate which is used to 
distribute indirect costs to individual awards. The rate should be 
expressed as the percentage which the total amount of allowable 
indirect costs bears to the base selected. This method should also 
be used where an organization has only one major function 
encompassing a number of individual projects or activities, and may 
be used where the level of Federal awards to an organization is 
relatively small.
    b. Both the direct costs and the indirect costs shall exclude 
capital expenditures and unallowable costs. However, unallowable 
costs which represent activities must be included in the direct 
costs under the conditions described in subparagraph B.3 of this 
appendix.
    c. The distribution base may be total direct costs (excluding 
capital expenditures and other distorting items, such as major 
subcontracts or subgrants), direct salaries and wages, or other base 
which results in an equitable distribution. The distribution base 
shall generally exclude participant support costs as defined in 
paragraph 32 of Appendix B.
    d. Except where a special rate(s) is required in accordance with 
subparagraph 5 of this appendix, the indirect cost rate developed 
under the above principles is applicable to all awards at the 
organization. If a special rate(s) is required, appropriate 
modifications shall be made in order to develop the special rate(s).
    e. For an organization that receives more than $10 million in 
Federal funding of direct costs in a fiscal year, a breakout of the 
indirect cost component into two broad categories, Facilities and 
Administration as defined in subparagraph C.3 of this appendix, is 
required. The rate in each case shall be stated as the percentage 
which the amount of the particular indirect cost category (i.e., 
Facilities or Administration) is of the distribution base identified 
with that category.
    3. Multiple allocation base method.
    a. General. Where an organization's indirect costs benefit its 
major functions in varying degrees, indirect costs shall be 
accumulated into separate cost groupings, as described in 
subparagraph D.3.b of this appendix. Each grouping shall then be 
allocated individually to benefiting functions by means of a base 
which best measures the relative benefits. The default allocation 
bases by cost pool are described in subparagraph D.3.c of this 
appendix.
    b. Identification of indirect costs. Cost groupings shall be 
established so as to permit the allocation of each grouping on the 
basis of benefits provided to the major functions. Each grouping 
shall constitute a pool of expenses that are of like character in 
terms of functions they benefit and in terms of the allocation base 
which best measures the relative benefits provided to each function. 
The groupings are classified within the two broad categories: 
``Facilities'' and ``Administration,'' as described in subparagraph 
C.3 of this appendix. The indirect cost pools are defined as 
follows:
    (1) Depreciation and use allowances. The expenses under this 
heading are the portion of the costs of the organization's 
buildings, capital improvements to land and buildings, and equipment 
which are computed in accordance with paragraph 11 of Appendix B to 
this part (``Depreciation and use allowances'').
    (2) Interest. Interest on debt associated with certain 
buildings, equipment and capital improvements are computed in 
accordance with paragraph 23 of Appendix B to this part 
(``Interest'').
    (3) Operation and maintenance expenses. The expenses under this 
heading are those that have been incurred for the administration, 
operation, maintenance, preservation, and protection of the 
organization's physical plant. They include expenses normally 
incurred for such items as: Janitorial and utility services; repairs 
and ordinary or normal alterations of buildings, furniture and 
equipment; care of grounds; maintenance and operation of buildings 
and other plant facilities; security; earthquake and disaster 
preparedness; environmental safety; hazardous waste disposal; 
property, liability and other insurance relating to property; space 
and capital leasing; facility planning and management; and, central 
receiving. The operation and maintenance expenses category shall 
also include its allocable share of fringe benefit costs, 
depreciation and use allowances, and interest costs.
    (4) General administration and general expenses. (a) The 
expenses under this heading are those that have been incurred for 
the overall general executive and administrative offices of the 
organization and other expenses of a general nature which do not 
relate solely to any major function of the organization. This 
category shall also include its allocable share of fringe benefit 
costs, operation and maintenance expense, depreciation and use 
allowances, and interest costs. Examples of this category include 
central offices, such as the director's office, the office of 
finance, business services, budget and planning, personnel, safety 
and risk management, general counsel, management information 
systems, and library costs.
    (b) In developing this cost pool, special care should be 
exercised to ensure that costs incurred for the same purpose in like 
circumstances are treated consistently as either direct or indirect 
costs. For example, salaries of technical staff, project supplies, 
project publication, telephone toll charges, computer costs, travel 
costs, and specialized services costs shall be treated as direct 
costs wherever identifiable to a particular program. The salaries 
and wages of administrative and pooled clerical staff should 
normally be treated as indirect costs. Direct charging of these 
costs may be appropriate where a major project or activity 
explicitly requires and budgets for administrative or clerical 
services and other individuals involved can be identified with the 
program or activity. Items such as office supplies, postage, local 
telephone costs, periodicals and memberships should normally be 
treated as indirect costs.
    c. Allocation bases. Actual conditions shall be taken into 
account in selecting the base to be used in allocating the expenses 
in each grouping to benefiting functions. The essential 
consideration in selecting a method or a base is that it is the one 
best suited for assigning the pool of costs to cost objectives in 
accordance with benefits derived; a traceable cause and effect 
relationship; or logic and reason, where neither the cause nor the 
effect of the relationship is determinable. When an allocation can 
be made by assignment of a cost grouping directly to the function 
benefited, the allocation shall be made in that manner. When the 
expenses in a cost grouping are more general in nature, the 
allocation shall be made through the use of a selected base which 
produces results that are equitable to both the Federal Government 
and the organization. The distribution shall be made in accordance 
with the bases described herein unless it can be demonstrated that 
the use of a different base would result in a more equitable 
allocation

[[Page 51931]]

of the costs, or that a more readily available base would not 
increase the costs charged to sponsored awards. The results of 
special cost studies (such as an engineering utility study) shall 
not be used to determine and allocate the indirect costs to 
sponsored awards.
    (1) Depreciation and use allowances. Depreciation and use 
allowances expenses shall be allocated in the following manner:
    (a) Depreciation or use allowances on buildings used exclusively 
in the conduct of a single function, and on capital improvements and 
equipment used in such buildings, shall be assigned to that 
function.
    (b) Depreciation or use allowances on buildings used for more 
than one function, and on capital improvements and equipment used in 
such buildings, shall be allocated to the individual functions 
performed in each building on the basis of usable square feet of 
space, excluding common areas, such as hallways, stairwells, and 
restrooms.
    (c) Depreciation or use allowances on buildings, capital 
improvements and equipment related space (e.g., individual rooms, 
and laboratories) used jointly by more than one function (as 
determined by the users of the space) shall be treated as follows. 
The cost of each jointly used unit of space shall be allocated to 
the benefiting functions on the basis of either the employees and 
other users on a full-time equivalent (FTE) basis or salaries and 
wages of those individual functions benefiting from the use of that 
space; or organization-wide employee FTEs or salaries and wages 
applicable to the benefiting functions of the organization.
    (d) Depreciation or use allowances on certain capital 
improvements to land, such as paved parking areas, fences, 
sidewalks, and the like, not included in the cost of buildings, 
shall be allocated to user categories on a FTE basis and distributed 
to major functions in proportion to the salaries and wages of all 
employees applicable to the functions.
    (2) Interest. Interest costs shall be allocated in the same 
manner as the depreciation or use allowances on the buildings, 
equipment and capital equipments to which the interest relates.
    (3) Operation and maintenance expenses. Operation and 
maintenance expenses shall be allocated in the same manner as the 
depreciation and use allowances.
    (4) General administration and general expenses. General 
administration and general expenses shall be allocated to benefiting 
functions based on modified total direct costs (MTDC), as described 
in subparagraph D.3.f of this appendix. The expenses included in 
this category could be grouped first according to major functions of 
the organization to which they render services or provide benefits. 
The aggregate expenses of each group shall then be allocated to 
benefiting functions based on MTDC.
    d. Order of distribution. (1) Indirect cost categories 
consisting of depreciation and use allowances, interest, operation 
and maintenance, and general administration and general expenses 
shall be allocated in that order to the remaining indirect cost 
categories as well as to the major functions of the organization. 
Other cost categories could be allocated in the order determined to 
be most appropriate by the organization. When cross allocation of 
costs is made as provided in subparagraph D.3.d.(2) of this 
appendix, this order of allocation does not apply.
    (2) Normally, an indirect cost category will be considered 
closed once it has been allocated to other cost objectives, and 
costs shall not be subsequently allocated to it. However, a cross 
allocation of costs between two or more indirect costs categories 
could be used if such allocation will result in a more equitable 
allocation of costs. If a cross allocation is used, an appropriate 
modification to the composition of the indirect cost categories is 
required.
    e. Application of indirect cost rate or rates. Except where a 
special indirect cost rate(s) is required in accordance with 
subparagraph D.5 of this appendix, the separate groupings of 
indirect costs allocated to each major function shall be aggregated 
and treated as a common pool for that function. The costs in the 
common pool shall then be distributed to individual awards included 
in that function by use of a single indirect cost rate.
    f. Distribution basis. Indirect costs shall be distributed to 
applicable sponsored awards and other benefiting activities within 
each major function on the basis of MTDC. MTDC consists of all 
salaries and wages, fringe benefits, materials and supplies, 
services, travel, and subgrants and subcontracts up to the first 
$25,000 of each subgrant or subcontract (regardless of the period 
covered by the subgrant or subcontract). Equipment, capital 
expenditures, charges for patient care, rental costs and the portion 
in excess of $25,000 shall be excluded from MTDC. Participant 
support costs shall generally be excluded from MTDC. Other items may 
only be excluded when the Federal cost cognizant agency determines 
that an exclusion is necessary to avoid a serious inequity in the 
distribution of indirect costs.
    g. Individual Rate Components. An indirect cost rate shall be 
determined for each separate indirect cost pool developed. The rate 
in each case shall be stated as the percentage which the amount of 
the particular indirect cost pool is of the distribution base 
identified with that pool. Each indirect cost rate negotiation or 
determination agreement shall include development of the rate for 
each indirect cost pool as well as the overall indirect cost rate. 
The indirect cost pools shall be classified within two broad 
categories: ``Facilities'' and ``Administration,'' as described in 
subparagraph C.3 of this appendix.
    4. Direct allocation method. a. Some non-profit organizations 
treat all costs as direct costs except general administration and 
general expenses. These organizations generally separate their costs 
into three basic categories: General administration and general 
expenses, fundraising, and other direct functions (including 
projects performed under Federal awards). Joint costs, such as 
depreciation, rental costs, operation and maintenance of facilities, 
telephone expenses, and the like are prorated individually as direct 
costs to each category and to each award or other activity using a 
base most appropriate to the particular cost being prorated.
    b. This method is acceptable, provided each joint cost is 
prorated using a base which accurately measures the benefits 
provided to each award or other activity. The bases must be 
established in accordance with reasonable criteria, and be supported 
by current data. This method is compatible with the Standards of 
Accounting and Financial Reporting for Voluntary Health and Welfare 
Organizations issued jointly by the National Health Council, Inc., 
the National Assembly of Voluntary Health and Social Welfare 
Organizations, and the United Way of America.
    c. Under this method, indirect costs consist exclusively of 
general administration and general expenses. In all other respects, 
the organization's indirect cost rates shall be computed in the same 
manner as that described in subparagraph D.2 of this appendix.
    5. Special indirect cost rates. In some instances, a single 
indirect cost rate for all activities of an organization or for each 
major function of the organization may not be appropriate, since it 
would not take into account those different factors which may 
substantially affect the indirect costs applicable to a particular 
segment of work. For this purpose, a particular segment of work may 
be that performed under a single award or it may consist of work 
under a group of awards performed in a common environment. These 
factors may include the physical location of the work, the level of 
administrative support required, the nature of the facilities or 
other resources employed, the scientific disciplines or technical 
skills involved, the organizational arrangements used, or any 
combination thereof. When a particular segment of work is performed 
in an environment which appears to generate a significantly 
different level of indirect costs, provisions should be made for a 
separate indirect cost pool applicable to such work. The separate 
indirect cost pool should be developed during the course of the 
regular allocation process, and the separate indirect cost rate 
resulting therefrom should be used, provided it is determined that 
the rate differs significantly from that which would have been 
obtained under subparagraphs D.2, 3, and 4 of this appendix, and the 
volume of work to which the rate would apply is material.

E. Negotiation and Approval of Indirect Cost Rates

    1. Definitions. As used in this section, the following terms 
have the meanings set forth below:
    a. Cognizant agency means the Federal agency responsible for 
negotiating and approving indirect cost rates for a non-profit 
organization on behalf of all Federal agencies.
    b. Predetermined rate means an indirect cost rate, applicable to 
a specified current or future period, usually the organization's 
fiscal year. The rate is based on an estimate of the costs to be 
incurred during the period. A predetermined rate is not subject to 
adjustment.
    c. Fixed rate means an indirect cost rate which has the same 
characteristics as a predetermined rate, except that the difference 
between the estimated costs and the actual costs of the period 
covered by the rate is

[[Page 51932]]

carried forward as an adjustment to the rate computation of a 
subsequent period.
    d. Final rate means an indirect cost rate applicable to a 
specified past period which is based on the actual costs of the 
period. A final rate is not subject to adjustment.
    e. Provisional rate or billing rate means a temporary indirect 
cost rate applicable to a specified period which is used for 
funding, interim reimbursement, and reporting indirect costs on 
awards pending the establishment of a final rate for the period.
    f. Indirect cost proposal means the documentation prepared by an 
organization to substantiate its claim for the reimbursement of 
indirect costs. This proposal provides the basis for the review and 
negotiation leading to the establishment of an organization's 
indirect cost rate.
    g. Cost objective means a function, organizational subdivision, 
contract, grant, or other work unit for which cost data are desired 
and for which provision is made to accumulate and measure the cost 
of processes, projects, jobs and capitalized projects.
    2. Negotiation and approval of rates. a. Unless different 
arrangements are agreed to by the agencies concerned, the Federal 
agency with the largest dollar value of awards with an organization 
will be designated as the cognizant agency for the negotiation and 
approval of the indirect cost rates and, where necessary, other 
rates such as fringe benefit and computer charge-out rates. Once an 
agency is assigned cognizance for a particular non-profit 
organization, the assignment will not be changed unless there is a 
major long-term shift in the dollar volume of the Federal awards to 
the organization. All concerned Federal agencies shall be given the 
opportunity to participate in the negotiation process but, after a 
rate has been agreed upon, it will be accepted by all Federal 
agencies. When a Federal agency has reason to believe that special 
operating factors affecting its awards necessitate special indirect 
cost rates in accordance with subparagraph D.5 of this appendix, it 
will, prior to the time the rates are negotiated, notify the 
cognizant agency.
    b. A non-profit organization which has not previously 
established an indirect cost rate with a Federal agency shall submit 
its initial indirect cost proposal immediately after the 
organization is advised that an award will be made and, in no event, 
later than three months after the effective date of the award.
    c. Organizations that have previously established indirect cost 
rates must submit a new indirect cost proposal to the cognizant 
agency within six months after the close of each fiscal year.
    d. A predetermined rate may be negotiated for use on awards 
where there is reasonable assurance, based on past experience and 
reliable projection of the organization's costs, that the rate is 
not likely to exceed a rate based on the organization's actual 
costs.
    e. Fixed rates may be negotiated where predetermined rates are 
not considered appropriate. A fixed rate, however, shall not be 
negotiated if all or a substantial portion of the organization's 
awards are expected to expire before the carry-forward adjustment 
can be made; the mix of Federal and non-Federal work at the 
organization is too erratic to permit an equitable carry-forward 
adjustment; or the organization's operations fluctuate significantly 
from year to year.
    f. Provisional and final rates shall be negotiated where neither 
predetermined nor fixed rates are appropriate.
    g. The results of each negotiation shall be formalized in a 
written agreement between the cognizant agency and the non-profit 
organization. The cognizant agency shall distribute copies of the 
agreement to all concerned Federal agencies.
    h. If a dispute arises in a negotiation of an indirect cost rate 
between the cognizant agency and the non-profit organization, the 
dispute shall be resolved in accordance with the appeals procedures 
of the cognizant agency.
    i. To the extent that problems are encountered among the Federal 
agencies in connection with the negotiation and approval process, 
OMB will lend assistance as required to resolve such problems in a 
timely manner.

Appendix B to Part 230--Selected Items of Cost

Selected Items of Cost

Table of Contents

    1. Advertising and public relations costs
    2. Advisory councils
    3. Alcoholic beverages
    4. Audit costs and related services
    5. Bad debts
    6. Bonding costs
    7. Communication costs
    8. Compensation for personal services
    9. Contingency provisions
    10. Defense and prosecution of criminal and civil proceedings, 
claims, appeals and patent infringement
    11. Depreciation and use allowances
    12. Donations and contributions
    13. Employee morale, health, and welfare costs
    14. Entertainment costs
    15. Equipment and other capital expenditures
    16. Fines and penalties
    17. Fund raising and investment management costs
    18. Gains and losses on depreciable assets
    19. Goods or services for personal use
    20. Housing and personal living expenses
    21. Idle facilities and idle capacity
    22. Insurance and indemnification
    23. Interest
    24. Labor relations costs
    25. Lobbying
    26. Losses on other sponsored agreements or contracts
    27. Maintenance and repair costs
    28. Materials and supplies costs
    29. Meetings and conferences
    30. Memberships, subscriptions, and professional activity costs
    31. Organization costs
    32. Page charges in professional journals
    33. Participant support costs
    34. Patent costs
    35. Plant and homeland security costs
    36. Pre-agreement costs
    37. Professional services costs
    38. Publication and printing costs
    39. Rearrangement and alteration costs
    40. Reconversion costs
    41. Recruiting costs
    42. Relocation costs
    43. Rental costs of buildings and equipment
    44. Royalties and other costs for use of patents and copyrights
    45. Selling and marketing
    46. Specialized service facilities
    47. Taxes
    48. Termination costs applicable to sponsored agreements
    49. Training costs
    50. Transportation costs
    51. Travel costs
    52. Trustees

Appendix B to Part 230--Selected Items of Cost

    Paragraphs 1 through 52 of this appendix provide principles to 
be applied in establishing the allowability of certain items of 
cost. These principles apply whether a cost is treated as direct or 
indirect. Failure to mention a particular item of cost is not 
intended to imply that it is unallowable; rather, determination as 
to allowability in each case should be based on the treatment or 
principles provided for similar or related items of cost.
    1. Advertising and public relations costs. a. The term 
advertising costs means the costs of advertising media and corollary 
administrative costs. Advertising media include magazines, 
newspapers, radio and television, direct mail, exhibits, electronic 
or computer transmittals, and the like.
    b. The term public relations includes community relations and 
means those activities dedicated to maintaining the image of the 
non-profit organization or maintaining or promoting understanding 
and favorable relations with the community or public at large or any 
segment of the public.
    c. The only allowable advertising costs are those which are 
solely for:
    (1) The recruitment of personnel required for the performance by 
the non-profit organization of obligations arising under a Federal 
award (See also paragraph 41, Recruiting costs, and paragraph 42, 
Relocation costs, of this appendix);
    (2) The procurement of goods and services for the performance of 
a Federal award;
    (3) The disposal of scrap or surplus materials acquired in the 
performance of a Federal award except when non-profit organizations 
are reimbursed for disposal costs at a predetermined amount; or
    (4) Other specific purposes necessary to meet the requirements 
of the Federal award.
    d. The only allowable public relations costs are:
    (1) Costs specifically required by the Federal award;
    (2) Costs of communicating with the public and press pertaining 
to specific activities or accomplishments which result from 
performance of Federal awards (these costs are considered necessary 
as part of the outreach effort for the Federal award); or
    (3) Costs of conducting general liaison with news media and 
government public relations officers, to the extent that such 
activities are limited to communication and liaison

[[Page 51933]]

necessary keep the public informed on matters of public concern, 
such as notices of Federal contract/grant awards, financial matters, 
etc.
    e. Costs identified in subparagraphs c and d if incurred for 
more than one Federal award or for both sponsored work and other 
work of the non-profit organization, are allowable to the extent 
that the principles in Appendix A to this part, paragraphs B. 
(``Direct Costs'') and C. (``Indirect Costs'') are observed.
    f. Unallowable advertising and public relations costs include 
the following:
    (1) All advertising and public relations costs other than as 
specified in subparagraphs c, d, and e;
    (2) Costs of meetings, conventions, convocations, or other 
events related to other activities of the non-profit organization, 
including:
    (a) Costs of displays, demonstrations, and exhibits;
    (b) Costs of meeting rooms, hospitality suites, and other 
special facilities used in conjunction with shows and other special 
events; and
    (c) Salaries and wages of employees engaged in setting up and 
displaying exhibits, making demonstrations, and providing briefings;
    (3) Costs of promotional items and memorabilia, including 
models, gifts, and souvenirs;
    (4) Costs of advertising and public relations designed solely to 
promote the non-profit organization.
    2. Advisory Councils. Costs incurred by advisory councils or 
committees are allowable as a direct cost where authorized by the 
Federal awarding agency or as an indirect cost where allocable to 
Federal awards.
    3. Alcoholic beverages. Costs of alcoholic beverages are 
unallowable.
    4. Audit costs and related services. a. The costs of audits 
required by, and performed in accordance with, the Single Audit Act, 
as implemented by Circular A-133, ``Audits of States, Local 
Governments, and Non-Profit Organizations'' are allowable. Also see 
31 U.S.C. 7505(b) and section 230 (``Audit Costs'') of Circular A-
133.
    b. Other audit costs are allowable if included in an indirect 
cost rate proposal, or if specifically approved by the awarding 
agency as a direct cost to an award.
    c. The cost of agreed-upon procedures engagements to monitor 
subrecipients who are exempted from A-133 under section 200(d) are 
allowable, subject to the conditions listed in A-133, section 230 
(b)(2).
    5. Bad debts. Bad debts, including losses (whether actual or 
estimated) arising from uncollectable accounts and other claims, 
related collection costs, and related legal costs, are unallowable.
    6. Bonding costs. a. Bonding costs arise when the Federal 
Government requires assurance against financial loss to itself or 
others by reason of the act or default of the non-profit 
organization. They arise also in instances where the non-profit 
organization requires similar assurance. Included are such bonds as 
bid, performance, payment, advance payment, infringement, and 
fidelity bonds.
    b. Costs of bonding required pursuant to the terms of the award 
are allowable.
    c. Costs of bonding required by the non-profit organization in 
the general conduct of its operations are allowable to the extent 
that such bonding is in accordance with sound business practice and 
the rates and premiums are reasonable under the circumstances.
    7. Communication costs. Costs incurred for telephone services, 
local and long distance telephone calls, telegrams, postage, 
messenger, electronic or computer transmittal services and the like 
are allowable.
    8. Compensation for personal services. a. Definition. 
Compensation for personal services includes all compensation paid 
currently or accrued by the organization for services of employees 
rendered during the period of the award (except as otherwise 
provided in subparagraph 8.h of this appendix). It includes, but is 
not limited to, salaries, wages, director's and executive committee 
member's fees, incentive awards, fringe benefits, pension plan 
costs, allowances for off-site pay, incentive pay, location 
allowances, hardship pay, and cost of living differentials.
    b. Allowability. Except as otherwise specifically provided in 
this paragraph, the costs of such compensation are allowable to the 
extent that:
    (1) Total compensation to individual employees is reasonable for 
the services rendered and conforms to the established policy of the 
organization consistently applied to both Federal and non-Federal 
activities; and
    (2) Charges to awards whether treated as direct or indirect 
costs are determined and supported as required in this paragraph.
    c. Reasonableness. (1) When the organization is predominantly 
engaged in activities other than those sponsored by the Federal 
Government, compensation for employees on federally-sponsored work 
will be considered reasonable to the extent that it is consistent 
with that paid for similar work in the organization's other 
activities.
    (2) When the organization is predominantly engaged in federally-
sponsored activities and in cases where the kind of employees 
required for the Federal activities are not found in the 
organization's other activities, compensation for employees on 
federally-sponsored work will be considered reasonable to the extent 
that it is comparable to that paid for similar work in the labor 
markets in which the organization competes for the kind of employees 
involved.
    d. Special considerations in determining allowability. Certain 
conditions require special consideration and possible limitations in 
determining costs under Federal awards where amounts or types of 
compensation appear unreasonable. Among such conditions are the 
following:
    (1) Compensation to members of non-profit organizations, 
trustees, directors, associates, officers, or the immediate families 
thereof. Determination should be made that such compensation is 
reasonable for the actual personal services rendered rather than a 
distribution of earnings in excess of costs.
    (2) Any change in an organization's compensation policy 
resulting in a substantial increase in the organization's level of 
compensation, particularly when it was concurrent with an increase 
in the ratio of Federal awards to other activities of the 
organization or any change in the treatment of allowability of 
specific types of compensation due to changes in Federal policy.
    e. Unallowable costs. Costs which are unallowable under other 
paragraphs of this appendix shall not be allowable under this 
paragraph solely on the basis that they constitute personal 
compensation.
    f. Overtime, extra-pay shift, and multi-shift premiums. Premiums 
for overtime, extra-pay shifts, and multi-shift work are allowable 
only with the prior approval of the awarding agency except:
    (1) When necessary to cope with emergencies, such as those 
resulting from accidents, natural disasters, breakdowns of 
equipment, or occasional operational bottlenecks of a sporadic 
nature.
    (2) When employees are performing indirect functions, such as 
administration, maintenance, or accounting.
    (3) In the performance of tests, laboratory procedures, or other 
similar operations which are continuous in nature and cannot 
reasonably be interrupted or otherwise completed.
    (4) When lower overall cost to the Federal Government will 
result.
    g. Fringe benefits. (1) Fringe benefits in the form of regular 
compensation paid to employees during periods of authorized absences 
from the job, such as vacation leave, sick leave, military leave, 
and the like, are allowable, provided such costs are absorbed by all 
organization activities in proportion to the relative amount of time 
or effort actually devoted to each.
    (2) Fringe benefits in the form of employer contributions or 
expenses for social security, employee insurance, workmen's 
compensation insurance, pension plan costs (see subparagraph 8.h of 
this appendix), and the like, are allowable, provided such benefits 
are granted in accordance with established written organization 
policies. Such benefits whether treated as indirect costs or as 
direct costs, shall be distributed to particular awards and other 
activities in a manner consistent with the pattern of benefits 
accruing to the individuals or group of employees whose salaries and 
wages are chargeable to such awards and other activities.
    (3)(a) Provisions for a reserve under a self-insurance program 
for unemployment compensation or workers' compensation are allowable 
to the extent that the provisions represent reasonable estimates of 
the liabilities for such compensation, and the types of coverage, 
extent of coverage, and rates and premiums would have been allowable 
had insurance been purchased to cover the risks. However, provisions 
for self-insured liabilities which do not become payable for more 
than one year after the provision is made shall not exceed the 
present value of the liability.
    (b) Where an organization follows a consistent policy of 
expensing actual payments to, or on behalf of, employees or former 
employees for unemployment

[[Page 51934]]

compensation or workers' compensation, such payments are allowable 
in the year of payment with the prior approval of the awarding 
agency, provided they are allocated to all activities of the 
organization.
    (4) Costs of insurance on the lives of trustees, officers, or 
other employees holding positions of similar responsibility are 
allowable only to the extent that the insurance represents 
additional compensation. The costs of such insurance when the 
organization is named as beneficiary are unallowable.
    h. Organization-furnished automobiles. That portion of the cost 
of organization-furnished automobiles that relates to personal use 
by employees (including transportation to and from work) is 
unallowable as fringe benefit or indirect costs regardless of 
whether the cost is reported as taxable income to the employees. 
These costs are allowable as direct costs to sponsored award when 
necessary for the performance of the sponsored award and approved by 
awarding agencies.
    i. Pension plan costs. (1) Costs of the organization's pension 
plan which are incurred in accordance with the established policies 
of the organization are allowable, provided:
    (a) Such policies meet the test of reasonableness;
    (b) The methods of cost allocation are not discriminatory;
    (c) The cost assigned to each fiscal year is determined in 
accordance with generally accepted accounting principles (GAAP), as 
prescribed in Accounting Principles Board Opinion No. 8 issued by 
the American Institute of Certified Public Accountants; and
    (d) The costs assigned to a given fiscal year are funded for all 
plan participants within six months after the end of that year. 
However, increases to normal and past service pension costs caused 
by a delay in funding the actuarial liability beyond 30 days after 
each quarter of the year to which such costs are assignable are 
unallowable.
    (2) Pension plan termination insurance premiums paid pursuant to 
the Employee Retirement Income Security Act (ERISA) of 1974 (Pub. L. 
93-406) are allowable. Late payment charges on such premiums are 
unallowable.
    (3) Excise taxes on accumulated funding deficiencies and other 
penalties imposed under ERISA are unallowable.
    j. Incentive compensation. Incentive compensation to employees 
based on cost reduction, or efficient performance, suggestion 
awards, safety awards, etc., are allowable to the extent that the 
overall compensation is determined to be reasonable and such costs 
are paid or accrued pursuant to an agreement entered into in good 
faith between the organization and the employees before the services 
were rendered, or pursuant to an established plan followed by the 
organization so consistently as to imply, in effect, an agreement to 
make such payment.
    k. Severance pay. (1) Severance pay, also commonly referred to 
as dismissal wages, is a payment in addition to regular salaries and 
wages, by organizations to workers whose employment is being 
terminated. Costs of severance pay are allowable only to the extent 
that in each case, it is required by:

(a) Law
(b) Employer-employee agreement
(c) Established policy that constitutes, in effect, an implied 
agreement on the organization's part, or
(d) Circumstances of the particular employment.

    (2) Costs of severance payments are divided into two categories 
as follows:
    (a) Actual normal turnover severance payments shall be allocated 
to all activities; or, where the organization provides for a reserve 
for normal severances, such method will be acceptable if the charge 
to current operations is reasonable in light of payments actually 
made for normal severances over a representative past period, and if 
amounts charged are allocated to all activities of the organization.
    (b) Abnormal or mass severance pay is of such a conjectural 
nature that measurement of costs by means of an accrual will not 
achieve equity to both parties. Thus, accruals for this purpose are 
not allowable. However, the Federal Government recognizes its 
obligation to participate, to the extent of its fair share, in any 
specific payment. Thus, allowability will be considered on a case-
by-case basis in the event or occurrence.
    (c) Costs incurred in certain severance pay packages (commonly 
known as ``a golden parachute'' payment) which are in an amount in 
excess of the normal severance pay paid by the organization to an 
employee upon termination of employment and are paid to the employee 
contingent upon a change in management control over, or ownership 
of, the organization's assets are unallowable.
    (d) Severance payments to foreign nationals employed by the 
organization outside the United States, to the extent that the 
amount exceeds the customary or prevailing practices for the 
organization in the United States are unallowable, unless they are 
necessary for the performance of Federal programs and approved by 
awarding agencies.
    (e) Severance payments to foreign nationals employed by the 
organization outside the United States due to the termination of the 
foreign national as a result of the closing of, or curtailment of 
activities by, the organization in that country, are unallowable, 
unless they are necessary for the performance of Federal programs 
and approved by awarding agencies.
    l. Training costs. See paragraph 49 of this appendix.
    m. Support of salaries and wages.
    (1) Charges to awards for salaries and wages, whether treated as 
direct costs or indirect costs, will be based on documented payrolls 
approved by a responsible official(s) of the organization. The 
distribution of salaries and wages to awards must be supported by 
personnel activity reports, as prescribed in subparagraph 8.m.(2) of 
this appendix, except when a substitute system has been approved in 
writing by the cognizant agency. (See subparagraph E.2 of Appendix A 
to this part.)
    (2) Reports reflecting the distribution of activity of each 
employee must be maintained for all staff members (professionals and 
nonprofe