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