OFFICE OF MANAGEMENT AND
Cost Principles for Educational
Office of Management and Budget.
Revision and Recompilation of OMB Circular A-21.
The Office of Management and Budget (OMB) revises OMB Circular A-21, "Cost
Principles for Educational Institutions," by incorporating four Cost Accounting
Standards applicable to educational institutions, issued by the Cost Accounting
Standards Board (CASB) on November 8, 1994 (59 FR 55746), and extending
these standards to all sponsored agreements. The revision also: requires
certain large institutions to disclose their cost accounting practices
by the submission of a Disclosure Statement prescribed by the CASB; amends
the definition of equipment; eliminates in 1998 the use of special cost
studies to allocate utility, library and student services costs; and,
requires the use of fixed facilities and administrative cost rates for
the life of sponsored agreements. Further, the revision establishes cost
negotiation cognizant agency responsibilities, replaces the term "indirect
costs" with "facilities and administrative costs" (to describe more accurately
the various cost components of sponsored agreements), clarifies the policy
for a change from use allowance to depreciation, adds criteria to interest
allowability, and disallows tuition benefits for employee family members.
Finally, the revision rescinds OMB Circular A-88, "Indirect Cost Rates,
Audits, and Audit Follow-up at Educational Institutions," in its entirety.
The recompilation of Circular A-21 in its entirety appears after the revision.
The effective date of this revision is the issuance date of this revision
in the Federal Register, unless otherwise noted within this revision.
FOR FURTHER INFORMATION:
Educational institutions should contact the educational institution's
cognizant Federal agency. Federal agencies should contact Gilbert Tran,
Office of Financial Federal Financial Management, Office of Management
and Budget, (202) 395-3993.
A. Purpose of Circular
A-21. Office of Management and Budget (OMB) Circular A-21, "Cost Principles
for Educational Institutions," establishes principles for determining costs
applicable to Federal grants, contracts, and other sponsored agreements
with educational institutions.
B. Recent Prior
Revisions. Circular A-21 was last amended in 1991 and 1993 (56 FR
50224 of 10/1/91 and 58 FR 39996 of 7/15/93, respectively). The 1991 revisions
made certain specified costs unallowable for Federal reimbursement and
placed a limit on the amount of reimbursable administrative costs. That
revision also required a certification to accompany each rate proposal.
The 1991 revisions also added Exhibit A containing a list of colleges
and universities subject to Section J.12.F, Depreciation and Use Allowance.
The 1993 revisions further clarified and standardized the Circular's principles
for determining allowable costs.
C. Current Revisions.
On February 6, 1995, OMB proposed revisions in 60 FR 7104 and 60 FR 7106.
In 60 FR 7104, OMB proposed the extension of the four cost accounting
standards (CAS) applicable to educational institutions to all sponsored
agreements and an amendment to the definition of equipment. In 60 FR 7106,
OMB proposed eight additional revisions, including the rescission of OMB
Circular A-88, "Indirect Cost Rate, Audits, and Audit Follow-up at Educational
Institutions," and mentioned six other revisions for future consideration.
Circular A-21 is
1. Incorporate the
four CAS (48 CFR 9905) and the Disclosure Statement (the Cost Accounting
Standards Board's (CASB) form DS-2) and associated administrative requirements
promulgated by the CASB for educational institutions. This action will
extend the four CAS to all sponsored agreements (see Sections C.10, 11,
12 and 13 and Appendix A) and extend the applicability of the DS-2 (48
CFR 9903.202) to major educational institutions (see Sections C.14, K.2.b
and Appendix B). Guidance for the implementation and administration of
the CAS requirements and the submission of required DS-2s is also provided.
2. Replace the term
"indirect" costs with "facilities and administrative" (F&A) costs. F&A
costs are synonymous with "indirect" costs, as previously used in this
Circular and as currently used in Appendices A and B.
3. Eliminate the
use of special cost studies to allocate utility, library and student services
costs effective July 1, 1998, at which time an alternative methodology
making payments on utility costs will be in place (see Section E.2.d(5)).
4. Require Federal
funding agencies to use F&A rates in effect at the time of an initial
award throughout the life of the sponsored agreement (see Section G.7).
5. Rescind Circular
A-88 and establish cost negotiation cognizance for educational institutions
and cognizant agency responsibilities in Circular A-21 (see Section G.11).
6. Eliminate the
allowability of dependent tuition benefits (see Section J.8.f(2)).
7. Clarify the policy
governing the transition from use allowance to depreciation (see Section
8. Amend the definition
of equipment by increasing the capitalization threshold to the lesser
of the amount used for financial statement purposes or $5000 (see Section
9. Establish criteria
for reimbursement of interest costs (see Section J.22.f).
Circular A-21, as
amended by this revision, consists of the Circular published at 44 FR
12368 (2/26/79), as amended by Transmittal Memoranda Numbers 1 through
5, at 47 FR 33658 (7/23/82), 51 FR 20908 (6/9/86), 51 FR 43487 (12/2/86),
56 FR 50224 (10/01/91), 58 FR 39996 (7/15/93), respectively, and the amendments
herein. A recompilation of the entire Circular A-21 with all its amendments
to date appears at the end of this notice and is available in electronic
form on the OMB Home Page at /OMB, or in hard copy by calling OMB's Publication
Office at (202) 395-7332.
D. Paperwork Reduction
This revision includes
an information collection requirement for educational institutions receiving
more than $25 million in federally-sponsored agreements to file the CASB's
DS-2. This revision's information collection requirement covers more educational
institutions than those subject to CASB's regulatory requirement for filing
the DS-2, pursuant to Public Law 100-679, which was previously approved
and assigned OMB control number 0348-0055 (which expires August 31, 1997).
On February 6, 1995 (60 FR 7104), OMB requested comments on this proposed
information collection requirement in accordance with the Paperwork Reduction
Act (44 U.S.C. Chapter 35 et seq.). The proposed information requirement
will not be effective until another notice is published in the Federal Register.
The subsequent notice will provide the effective date and the OMB control
E. Comments and
OMB received about 200
comments from colleges and universities, Federal agencies, professional
organizations, and accounting firms. The comments and OMB's responses are
included in this notice. Several of the comments resulted in modifications
to OMB's original proposal.
The comments received
and OMB's responses are summarized below.
Standards (CAS) (Sections C.10-13 & Appendix A)
commenters stated that OMB Circular A-21 currently provides adequate rules
and guidelines regarding cost reimbursements for Federal grants and contracts.
Therefore, they argued that the proposed incorporation of the CAS would
duplicates Circular A-21's requirements.
OMB concurs that many of the requirements covered under the CAS currently
exist in OMB Circular A-21. However, the four CAS are being incorporated
since they provide more explicit provisions and guidance regarding the
consistent application of cost accounting practices at educational institutions.
To minimize potential conflict between OMB policies and the Cost Accounting
Standards Board (CASB) regulations at 48 CFR 9903, the CASB has committed
to perform an analysis to identify administrative requirements -- especially
those relating to contract clauses, definitions of a cost accounting practice,
and the cost impact process -- that may not be readily adaptable to colleges
and universities. The CASB will separately evaluate the need to establish
any unique or alternative provisions that should be applied to colleges
and universities based on the changes in Circular A-21. Recognizing that
the two sets of documents should be compatible, the CASB will, within
the limitations imposed by the statutory requirements of the CASB's organic
statute, examine the administrative requirements issue in order to determine
what improvements can be made to the administrative requirements of the
CASB's rules as they effect colleges, universities and Federal cognizant
The CAS language refers to contracts. Language in the Circular needs to
be amended to cover sponsored agreements.
The CAS language in Sections C.10, 11, 12 and 13 and Appendix A of the
Circular has been changed to cover all forms of sponsored agreements.
The proposal stated that the CAS provisions will not go into effect on
January 9, 1995; however, no other effective date was provided. When will
the CAS language become effective?
For CAS-covered contracts, the CASB's effective date for the application
of CAS was January 9, 1995. For other sponsored agreements, the application
of CAS is effective for the educational institution's fiscal year starting
on or after the publication date of this revision.
The CAS were intended for commercial enterprises and are not appropriate
for colleges and universities. Also, commercial enterprises are not limited
by a 26 percent administrative cap; therefore, they can recover additional
administrative costs to comply with CAS.
Commercial contractors are subject to 19 CAS. Only four of those CAS are
being applied to universities. The four CAS are for: (1) consistency in
estimating, accumulating and reporting costs; (2) consistency in allocating
costs incurred for the same purpose; (3) accounting for unallowable costs;
and, (4) cost accounting period. Since these CAS merely strengthen the
cost principles currently in Circular A-21, the implementation of CAS
should not significantly increase burden or result in any additional costs
The revision limits an educational institution's flexibility to take necessary
or advantageous action in a changing environment.
The application of the four CAS should not limit an educational institution's
flexibility in a changing business environment. The standards only require
that costs be treated consistently and, if an educational institution
makes an accounting change that materially impacts sponsored agreement
reimbursement, then the change and its impact need to be reported. These
requirements currently exist in Circular A-21. A change that converts
a cost from direct to F&A (during a period where an educational institution
has a predetermined F&A rate) normally is not considered a significant
change, because it does not have a material impact on sponsored agreement
Limit CAS coverage to sponsored agreements in excess of $500,000, which
is consistent with CAS coverage of contracts. Some universities have several
thousand agreements. Most of them are smaller than the $500,000 threshold.
The smaller agreements should not be covered by these requirements. To
cover smaller agreements would hold educational institutions to a higher
standard than the industry's standard. At issue is whether or not a cost
impact proposal or some other form of submission for an equitable adjustment
should be made on all agreements.
The four CAS promote consistency in cost accounting practices used by
an educational institution to estimate, accumulate and report costs charged
against federally-sponsored agreements. These underlining principles currently
exist in Circular A-21 which covers all sponsored agreements. The four
CAS set forth more explicit fundamental requirements, techniques and illustrations
on how to comply with these principles. Therefore, it is appropriate to
extend these CAS to all sponsored agreements.
Furthermore, a cost
impact proposal is not required to be prepared for each agreement when
an educational institution changes accounting practices. Instead, CAS
regulations (48 CFR 9903.306 (e) and (f)) allow the use of "any other
suitable technique" for cost impact adjustment. Thus, a cost impact adjustment
could be done through the F&A cost negotiation process and rate agreement
if deemed appropriate by the cognizant agency.
Educational institutions do not have sufficient funds to build accounting
systems effective enough to comply with CAS. Commenters suggested an increase
of the administrative cap of 26 percent of modified total direct costs
(MTDC) to cover the increased paperwork burden. Failing this, the commenters
requested an increase of the alternative administrative threshold rate
from 24 percent, as allowed in Section G.8, to 26 percent.
Compliance with CAS should not require educational institutions to acquire
additional accounting systems. Since the CAS only clarify existing provisions
for sponsored agreements, existing accounting systems that comply with
___.21, Standards for financial management systems, in OMB Circular A-110,
"Uniform Administrative Requirements for Grants and Agreements with Institutions
of Higher Education, Hospitals and Non-Profit Organizations," should require
The Circular should stipulate that Federal agencies retain the latitude
to permit certain administrative expenditures to be charged directly to
a project when they believe that these costs are essential for the conduct
of the project.
Section C.11 states that "all costs incurred for the same purpose, in
like circumstances, are either direct costs only or F&A costs only with
respect to final costs objectives." However, there are circumstances where
it is appropriate to direct charge costs, such as administrative and clerical
salaries, when these costs are normally charged indirectly. For example,
direct charging of these costs may be appropriate where a major project
or activity requires a significant level of administrative or clerical
services and individuals involved can be specifically identified with
the project or activity. In this example, the administrative or clerical
service costs are not incurred for the same purpose and under like circumstances
as are administrative and clerical service costs associated with general
university functions, such accounting operations or general administrative
activities, which do not result from specifically identifiable requirements.
CAS definitions (for direct cost, "indirect" cost, consistency and accounting
change) are more limiting than in Circular A-21. How will such inconsistencies
between the two documents be handled?
Inconsistency in definitions and cost policy interpretations do not exist
between the two documents. To further assure consistency between the two
documents, all inquiries related to the CAS applicable to educational
institutions will be addressed by OMB's Office of Federal Financial Management,
in coordination with the CASB.
The precision required by CAS would not be consistent with future proposed
systems of benchmarking, thresholds, caps, and other limiting factors.
OMB is sending out mixed messages.
The purposes of the four CAS and future proposed revisions to Circular
A-21 are different. The four CAS incorporated in the Circular serve to
promote consistent treatment of estimated costs proposed to the Federal
Government and actual costs charged as reimbursable cost against federally-
sponsored agreements. The purposes of the future proposed revisions are
to assure the consistent treatment of costs proposed and charged to federally-sponsored
Some small colleges have training grants with 8 percent overhead limits.
Could CAS requirements and disclosures be waived for those educational
institutions with low overhead rates (perhaps 10 percent)?
Small colleges with less than $25 million in Federal funding covered under
this Circular will be subject to the CAS but are exempt from the Disclosure
Statement filing requirements.
(DS-2) (Section C.14 & Appendix B)
commenters express concerns that the preparation of the Disclosure Statement
(DS-2) can take as much as 2500 hours. A suggestion was made to require
a submission only for the year when the educational institution is required
to submit a F&A cost rate proposal.
OMB disagrees that the DS-2 can take as much as 2500 hours to complete
unless a university does not currently have adequate written cost accounting
policies. The DS-2 is a 20-page document that provides a summary of an
educational institution's cost accounting system for Federal grants and
contracts. The cost accounting practices used for Federal grants and contracts
should already be properly documented as required by Subpart C, ___.21,
Standards for financial management systems, in OMB Circular A-110. Therefore,
the effort to summarize the existing practices in the DS-2 should not
be overly burdensome to complete.
In addition, educational
institutions do not have to file the DS-2 on an annual basis. Educational
institutions are only required to file an initial DS-2 in accordance with
the time frame described in Section C.14 and thereafter, educational institutions
only need to submit amendments of sections affected by changes in cost
accounting practices deemed significant by the cognizant agency. Section
C.14.d discourages the resubmission of a complete, updated DS-2 except
for extensive changes.
DS-2 submission is required only for educational institutions receiving
more than $25 million in federally-sponsored agreements during their most
recently completed fiscal year.
The paperwork burden imposed has not proven necessary and the costs of
providing the information outweigh the benefits to be derived.
OMB believes that the DS-2 requires no more information than would normally
be provided to the cognizant agency for review of an educational institution's
F&A cost rate proposal and for negotiation of the associated rate agreement.
OMB does not intend for the paperwork to be an arduous process, rather
a reasonable representation of the accounting practices and policies that
are used by the educational institution in recovering costs under Federal
The DS-2 will result in additional work and expense, but, because of the
26 percent cap, educational institutions will not be allowed to recover
OMB believes that the information required by the DS-2 is of the type
that historically should have been submitted during F&A cost rate negotiations
and made available for audits of grants and contracts in accordance OMB
Circular A-133, "Audits of Institutions of Higher Education and Other
Non-Profit Institutions." Therefore, the only additional time requirements
should be to put the same information in the format required by the DS-2
and to submit information on accounting changes, as needed. Subsequently,
the information will not have to be resubmitted every time a rate proposal
is submitted. Only changes in cost accounting practices need to be addressed
as the changes are made. This should result in administrative cost savings
in the long term.
The revision should clarify what constitutes an accounting change, and
provide a materiality threshold so that insignificant changes do not have
to be reported.
OMB does not intend for educational institutions to report insignificant
accounting changes. Sections C.14.d and g emphasize that a change is to
be reported and approved by the cognizant agency only when "the change
is expected to have a material impact on the educational institution's
negotiated F&A rates ..." (emphasis added). The determination of whether
an accounting change is significant and, therefore, requires an amendment
to the DS-2 and possibly a cost impact proposal is to be made by the cognizant
agency. However, educational institutions are prohibited under the allocability
clauses of the Circular from double-counting any costs to the Federal
Government which could result from a change in accounting.
There were many comments about confusion over the submission dates for
the initial DS-2 between the proposed dates stated in the proposed revision
to Circular A-21 and the dates published by the CASB on November 8, 1994.
In order to clarify the submission dates for the initial DS-2, and to
prevent confusion, the DS-2 submission dates in this Circular for CAS-covered
educational institutions are the same as those published by the CASB on
November 8, 1994. The DS-2 submission date for educational institution
not covered by the CASB requirements is six months after the end of the
fiscal year which starts after the publication date of this revision.
In addition, the cognizant agency has the authority to provide a filing
date extension on a case-by-case basis, unless the DS-2 submission date
is defined by receipt of a CAS-covered contract by the educational institution.
Small colleges and universities are disproportionately affected by the
DS-2 submission requirements since a small university which received a
CAS-covered contract and $25 million in sponsored awards could have the
same submission due date as the top 20 universities which receive substantially
more Federal awards (approximately $150 million or more).
To provide consistency and avoid confusion among all colleges and universities
regarding the submission due dates for the DS-2, OMB has revised the due
dates to correspond with the due dates published by the CASB. A cognizant
agency has the authority to grant a filing date extension.
A definition is needed for "a component unit" or the previously-defined
terms "segment" and "a business unit" should be used.
"A component unit" in Section C.14 is replaced with "a business unit."
A business unit at colleges and universities means any unit of an educational
institution which is not divided into segments. Segment means one of two
or more divisions, campus locations, or other subdivisions of an educational
institution that operate as independent organizational entities under
the auspices of the parent educational institution and report directly
to an intermediary group office or the governing central system office
of the parent educational institution.
For those educational institutions that are required to file a DS-2, there
should be a transition time period (e.g., within one year after submittal)
in which the cognizant agency is required to identify any procedures or
descriptions that it believes would lead to disallowance of costs in the
future and the educational institution should be given an opportunity
to correct these procedures or descriptions without a penalty. When the
document is found acceptable to the cognizant agency, then it should receive
a written acknowledgment that, in the agency's opinion, the document describes
acceptable practices. An educational institution would then only be subject
to disallowances if it is found to be violating its described practices
in such a way that unallowable costs were being incurred.
OMB disagrees. The DS-2 should disclose the cost accounting practices
used to estimate, accumulate and report the costs of sponsored agreements
over the award periods of performance. If the cognizant agency identifies
established or disclosed cost accounting practices that would lead to
disallowance of costs, it would require the educational institution to
correct the practice and may also compute a cost adjustment, if material,
in accordance with Section C.14.e.
Any subsequent cost adjustments for procedures that are inconsistent with
those disclosed in the DS-2 and result in unallowable costs should be
limited to the time period beginning after acceptance of the DS-2 by the
While the purpose of the DS-2 is to disclose an educational institution's
current cost accounting practices and is intended more for future purposes
than for a review of past practices, it may be necessary to make adjustments
for some unallowable costs that may have been reimbursed in the past.
These adjustments will be made at the discretion of the cognizant agency.
Adjustments for the effects of deviations from the practices disclosed
in the DS-2 can occur only after the filing. However, the effect of deviations
by an educational institution from established practices, whether or not
a DS-2 submission is required, will continue to be subject to adjustments
in accordance with Section C.8.
In resolving questions about costs incurred, any claimed disallowances
should be based on requirements of Circular A-21 with regards to allowability
of costs and not some procedural issue related to following a procedure
described in the DS-2.
OMB agrees that Circular A-21 should provide the basis of allowability
of costs. However, in some instances, the DS-2 will help to clarify how
such costs are allocated and may effect the reimbursement of costs claimed
as allocable and, therefore, reimbursable costs.
The DS-2 will be difficult to manage when the reporting entity manages
grants from various locations. OMB should clarify disclosure requirements
for multi-campus and multi-location educational institutions.
OMB expects that educational institutions' accounting policies would be
the same, particularly if the locations are all covered by the same cost
pools. If this is not the case, OMB believes that preparation of the DS-2
will help educational institutions to develop consistent accounting policies.
However, if for some justified reasons various locations maintain different
cost accounting practices, a separate DS-2 should be submitted for each
business unit as stated in Section C.14.a.
commenters agreed with the proposed change of terminology from "indirect"
costs to "facilities and administrative" costs. However, some commenters
noted that this change will create confusion and conflicts with other OMB
cost principles circulars and OMB grants management circulars that still
use the term "indirect" costs.
OMB agrees that inconsistent terminology may cause short term problems.
However, this change is needed to more accurately describe the several
cost pools for sponsored agreements at educational institutions. The replacement
of the term "indirect" costs will be limited to Circular A-21 and not
extended to other OMB grants management circulars because of the several
cost pools that exist only in Circular A-21. The term "indirect" costs
still appears in Appendix A - CASB's Cost Accounting Standards and Appendix
B -Disclosure Statement (DS-2) since these appendices are directly from
the CASB's regulations.
Special cost studies
provision to limit special cost studies to allocate utility, library and
student costs should be delayed until reasonable benchmarks can be established
for the payment of these costs.
Benchmark studies to develop alternative payment methods for facility
construction, utilities and library costs are currently underway. In the
meantime, due to the ambiguous nature of special cost studies that were
the source of disagreement between cognizant agencies and institutions,
OMB plans to make utility, library and student services cost recoveries
based on special cost studies unallowable costs. This restriction's effective
date is delayed until July 1, 1998 at which time OMB will have in place
an alternative method to pay utility costs. Utility, library and student
services cost allocations based on special cost studies will be disallowed
for administrative and facilities payment rates negotiated on or after
July 1, 1998. The special cost studies cannot be used to establish rates
beyond fiscal year ending in 1998, unless a rate agreement in effect at
the time of this publication extends beyond 1998, in which case the use
of special cost studies will terminate at the end of the rate agreement
period. OMB is currently reviewing proposals for alternative methodologies
for making payments on costs related to utilities. OMB will publish the
proposals for public comments prior to July 1, 1997.
Instead of eliminating the special cost studies, OMB should develop standards,
methodology and criteria for conducting special cost studies that would
be acceptable for the Federal Government.
Special cost studies were cited as an example of an area of potential
abuse and source of disagreement and distrust between cognizant agencies
and institutions. Rather than try to devise a set of complex parameters
that would preclude any opportunity for abuse, OMB decided to disallow
any cost allocations based upon those studies and, instead, to provide
an alternative payment mechanism.
Fixed Rates (Section
of "life of agreement" is needed since a project can extend over a long
period of time exceeding ten or fifteen years at times. Does it mean each
continuing period of an award or each competing renewal of an award? Fixed
rates should only apply prospectively to new awards. "Life" should mean
each competitive renewal period. A commenter suggested that a fixed rate
apply for a period of three years.
OMB has clarified "life of agreement" to mean each new competitive segment.
A competitive segment is a period of years approved for a project at the
time of the award, usually three to five years. Fixed rates will apply
only to awards made after the publication date of this revision.
A clarification is needed for the impact of a fixed rate throughout the
life of the award on the various types of rates, i.e., provisional, predetermined
and fixed rates.
The revision requires that the Federal funding agencies use rates in effect
at time of award throughout the life of the award, using the negotiated
rates (predetermined, fixed or provisional) at the time of the award.
For example, if an educational institution has a provisional rate of 40
percent at the time of the award, the 40 percent rate will be used for
funding and reimbursement throughout the life of that award. If an educational
institution has predetermined rates of 40 percent (first year), 42 percent
(second year) and 45 percent (third year), then a five-year project would
have rates of 40 percent (first year), 42 percent (second year) and 45
percent (third, fourth and fifth years).
When an educational
institution does not have a negotiated rate with the Federal Government
at the time of the award (because the educational institution is a new
grantee or the parties cannot reach agreement on a rate), the provisional
rate used at the time of the award will be adjusted after a rate is negotiated
and approved by the cognizant agency.
To implement a fixed rate throughout the life of an award penalizes a
university with growth in facility costs. This would discourage colleges
and universities from investing in facility costs.
When entering into an agreement with educational institutions to perform
a specific project, it is only fair for the Federal Government to commit
funding and reimbursement based on the conditions as they are understood
to exist at that time. Most research project activities remain in the
same laboratory during the entire life of the project and, therefore,
the facility costs should remain at the same level. A fixed rate throughout
the life of an award would only adversely affect an educational institution
when, after the award date, the educational institution moved the project
into a more modern and expensive facility. Therefore, for future awards,
an educational institution with growth in facility costs should seek to
establish future cost rates (fixed or predetermined) that reflect the
growing cost pattern.
It is not clear what rate is to be used when the educational institution's
rate is decreasing during the life of the award.
In the case of anticipated declining cost rates, the educational institution
should provide the basis for the anticipated decline. Total funding for
the award would reflect the anticipated decline. If a declining cost rate
is not anticipated at the time of award, the educational institution may
recover the costs at the rates in effect at the time of the award.
Fixed rates should not be applied to primate centers that are funded by
the National Institutes of Health P-51 awards, since these centers are
involved in a very long-term agreement with the Federal Government for
specific research activities.
The fixed rates concept does not apply to the seven primate animal care
facilities that are involved in special animal research funded under the
National Institutes of Health P-51 - Primate Research Center Grant. These
centers are primarily federally-funded and are involved in a very long-term
agreement with the Federal Government. The federally-funded F&A costs
that make up the rates are used to charge the educational institution's
users of the facility and are treated as program income and returned to
the Federal awards.
Fixed rates should only be used for funding a total project, regardless
of Federal reimbursement of a university's F&A costs. This policy is consistent
with the funding and reimbursement policies for grants by the National
Science Foundation (NSF).
Current NSF policies award a fixed amount (direct and F&A costs) for the
conduct of an entire project. This policy allows the educational institution
to recover more F&A costs than originally budgeted as long as the total
reimbursement for the project does not exceed the funding for the total
award. The revision in Section G.7 provides that a fixed rate shall be
used for both funding and reimbursement of F&A costs during an award's
life (or a competitive segment's life). This policy assures that the Federal
Government is receiving the level of services (i.e., research) agreed
to by the educational institution and the Federal agency when the award
was made. If the fixed rate concept is used only for funding of the award
and not reimbursement of F&A costs, during periods of increasing rates,
while the total funding for the award remains the same, then a shift of
funding available for direct costs to F&A costs would occur. Therefore,
the funding available for direct cost activities would decrease and so
would the level of services (or research).
Cognizance (Section G.11)
Circular should address the effects that a change in cost negotiation cognizance
would have on an educational institution's administrative functions.
A change in cost negotiation cognizance should have no impact on an educational
institution's administrative functions. The consolidation of cognizant
agencies for cost negotiation will enhance the consistency in the application
and interpretations of the Circular's cost principles and in the review
of cost rate proposals.
Several commenters suggest that the period for cognizant agency assignment
should be ten years rather than five since universities frequently negotiate
multiple year rates for two or three years.
The assignment period for a cognizant agency will remain at five years,
as proposed. A five-year period assignment should normally extend over
more than two normal negotiation cycles. Furthermore, since the funding
pattern from particular Federal agencies at a particular university usually
does not change over a short time period, the cognizance should remain
One commenter suggests that financial statements rather National Science
Foundation (NSF) data should be used in the determination of a cognizant
The preferable source for cognizant agency determination would be the
Schedule of Federal Awards, as required by OMB Circular A-133, that accompanies
an educational institution's financial statements. However, information
on the Schedules of Federal Awards has not yet been automated in a Federal
data base. Therefore, the best source data are the most recent three years
of data published by NSF in its annual report ("Selected Data on Federal
Support to Universities and Colleges"), in the table at page 5, entitled
"Federal obligations for science and engineering research and development
to universities and colleges, ranked by total amount received, by agency;
fiscal year." OMB is revising Circular A-133 which will establish a data
base that can be used for this purpose.
Which would be the cognizant agency for educational institutions that
do not receive either HHS or the Department of Defense, Office of Naval
Research (DOD) funding? One commenter suggested that an agency which has
a predominant interest and an on-site presence should be the cognizant
agency. The concern is that the major funding agency may not have the
authority to address cost issues that impact its funded projects.
The Circular has been revised to provide that an educational institution
will have an assigned cognizant agency even when HHS or DOD provides little
or no funding at that educational institution. Cognizance is assigned
to either HHS or DOD depending on which of the two agencies (HHS or DOD)
provides more funds to the educational institution. In cases where neither
HHS nor DOD provides any funding, the cognizant agency assignment shall
default to HHS. Other arrangements for cognizance of a particular educational
institution may also be made based on mutual agreement by both HHS and
Section G.11 also
states that the cognizant agency is responsible for coordinating the formal
negotiation and arranging a pre-negotiation conference if there is interest
from another agency. This process assures that an interested major funding
agency is not precluded from participating in the negotiation process.
The agency with Federal audit cognizance (established by Circular A-133)
and cost negotiation cognizance (established by Circular A-21) should
be the same for each educational institution.
With the rescission of OMB A-88, which assigned a single Federal cognizant
agency for rate negotiation, audit and audit follow-up, an educational
institution may have two different agencies responsible for audit and
cost cognizance. OMB believes that the audit function and cost negotiation
functions are different functions. This division of responsibility works
effectively for State and local governments under Circulars A-87, "Cost
Principles for State, Local and Indian Tribal Governments" (60 FR 26484;
May 17, 1995), and A-128, "Audits of State and Local Governments" (50
FR 19114; May 10,1985).
Which agency would be the cognizant cost negotiation agency for the Federally-Funded
Research and Development Centers (FFRDCs) associated with educational
institutions? Is the FFRDC included in the total dollar amount received
by the educational institution for the determination of a cognizant agency?
Federal responsibilities associated with FFRDCs are not affected by the
revision to Circular A-21. FFRDCs associated with educational institutions
are independent organizations that function outside the operational activities
of the educational institutions. They are required to comply with the
CAS and rules and regulations issued by the CASB set forth in 48 CFR Chapter
99. The determination of their cognizant agency will continue to be based
on the primary funding source. Federal funding to FFRDCs shall be excluded
from the determination of cost cognizance for an educational institution.
Several commenters suggested that Federal agencies do not have the authority
to use a F&A rate for a class of sponsored agreements or a single agreement
other than the negotiated rates. To allow this would defeat the purpose
of standardized rate agreements.
Under normal circumstances, the negotiated rates established between the
educational institution and the cognizant agency should be used by all
agencies. The Circular has been revised to state that only under special
circumstances prescribed by law or regulation can an agency use a rate
other than the negotiated rate.
The proposed revision stated that cognizant assignments as of December
31, 1995, will continue in effect through an educational institution's
fiscal years ending during 1997. Is this based on the receipt of the educational
institution's cost proposal or is it based on the year for which the proposal
The transfer of cognizance assignment is based on the receipt date of
the cost proposal. The cognizant agency for an educational institution
as of December 31, 1995, is responsible for the review and negotiation
of rates for all cost proposals submitted to that agency through fiscal
years ending during 1997. The cognizant agency is also responsible for
any disputes or appeals that result from proposals submitted through fiscal
years ending during 1997.
Benefits (Section J.8)
Comment: Most commenters
stated that dependent tuition benefits are legitimate fringe benefit costs,
as are health benefits, and are commonly used by a university to attract
the best faculty and staff. This benefit should not be eliminated. A comparison
of this benefit to the private sector should not be made since the salary
for faculty and staff are typically much lower and university employees
do not receive some benefits offered by the private sector, such as stock
options. Eliminating the dependent tuition benefit will cause universities
to raise wages for their employees, thus ultimately resulting in higher
costs for Federal research.
OMB disagrees for the following reasons:
(1) Some universities
charge federally-sponsored agreements for dependent tuition assistance
even when there is no actual cost incurred by the university. For example,
in the four universities covered by a recent General Accounting Office
(GAO) study ("University Research - U.S. Reimbursement of Tuition Costs
for University Employee Family Members," GAO/NSIAD-95-19), when a dependent
attended the university where an employee worked, the four universities
charged tuition in full or in part to federally-sponsored agreements.
GAO's report provided an example in which an institution "would have charged
$18,000 to the fringe benefit pool for a child of a tenured faculty member
attending the university during 1993." Generally, provision of substantial
fringe benefits that do not in fact impose a measurable cost on an entity
are not a "cost" that is properly chargeable to the government.
(2) Since 1977,
the Federal Acquisition Regulation (FAR)(48 CFR Subpart 31.205-44, "Training
and education costs"), which applies to Federal contracts with commercial
firms, has treated dependent tuition benefit as an unallowable cost. This
change was made because the procurement regulation review committee, which
studied changes to the FAR in the mid 1970's, believed that there was
no benefit to the government from subsidizing tuition costs of employee
(3) Dependent tuition
benefits are unique to educational institutions, i.e., they are not available
as a normal business practice for the private sector (subject to the FAR),
State and local governments (subject to OMB Circular A-87), and non-profit
organizations (subject to OMB Circular A-122, "Cost Principles for Non-Profit
Organizations"). Allowing dependent tuition benefits to educational institutions
would provide allowable costs for only one group of grantees and contractors.
(4) No evidence
has been offered to support the comment that compensation for educational
institution faculty and staff currently is much lower than compensation
in the private sector for the same discipline. If higher salary levels
are required to attract faculty and staff, then such salaries will be
chargeable to Federal awards to the extent allowable under this Circular
and the terms of the awards.
Based on the above
reasons, the Circular is revised to disallow dependent tuition benefits
for educational institutions' fiscal years starting on or after September
A phase-in period with an effective date of 1998 should be allowed for
the total elimination of this benefit.
Given existing contractual commitments to faculty and staff, the effective
date for making the dependent tuition an unallowable cost is the educational
institution's fiscal years beginning on or after September 30, 1998.
educational institution should be allowed to depreciate the remaining (full)
value of the assets at the time of conversion, using the depreciation rate
until the assets are disposed.
For claiming its costs on a single class of assets, an educational institution
always has the choice of selecting either the use allowance or depreciation
methodology. These two methodologies are based on different cost reimbursement
principles (i.e., use allowance allows cost recovery beyond useful lives
as long as the asset is in use, while depreciation allows a quicker cost
recovery based on a depreciable life only). The selection of recovery
method is up to the educational institution.
Circular A-21 does
not require the educational institution to convert from the use allowance
method to the depreciation method. The revision in Section J.12.b.(3)
simply clarifies that, in the case where an educational institution, by
its own choice, elects to convert from use allowance to the depreciation
method, the conversion should be made as if the depreciation method had
been used over the entire life of the asset.
"allocability principle" in Section C.4 of Circular A-21 states that "a
cost is allocable to a particular cost objective if the goods or services
involved are chargeable or assignable to such cost objective in accordance
with relative benefits received or other equitable relationship" (emphasis
added). 44 FR 12368 (February 26, 1979). The allocability principle would
be violated if unclaimed costs could be charged to the future periods
that do not benefit from the use of the asset.
Circular A-21 should allow the use allowance method for old buildings
and the depreciation method for new buildings rather than restrict the
use of one method of reimbursement for one type of assets. The provision
should apply to new assets only and not all assets. The commenter recommends
changing the language to "a combination of the depreciation and use allowances
may not be used for new assets."
Section J.12.d has provided that a combination of the depreciation and
use allowance may not be used, in like circumstances, for a single class
of assets. To allow the use of both methods for a single class of assets
would violate the consistent treatment principle of the Circular, complicate
the depreciation/use allowance calculation process, and create inequities
in the recovery of asset costs against Federal programs. This provision
prevents an educational institution from both using depreciation to recover
the cost of assets with useful lives that are shorter than the average
lives reflected in the use allowance rates (50 years for buildings and
15 years for equipment) AND using allowance for the recovery of assets
with longer useful lives. The mix of the two methods for a single class
of assets is clearly inequitable to the Federal Government since the use
allowance method is a simplified recovery method that is based on an averaging
concept which implicitly recognizes that certain assets within each broad
category have lives that differ from the average. OMB does not see the
need to change this policy since it is the educational institution's choice
to select the appropriate method of recovery for facility costs.
The provision should allow full recovery of assets that are converted
from use allowance to depreciation. This could be done by allowing use
allowance beyond the asset's depreciable "life" -- as long as the assets
are in use -- until the full cost is recovered. Authorization from the
cognizant agency shall be obtained.
OMB disagrees. If the depreciation method is used, Section J.12.b.(5)
provides that depreciation is not allowed on any assets that have outlived
their depreciable lives. However, Section J.12.c.(3) allows a "reasonable
use allowance" for any assets that are considered to be fully depreciated
after considering the amount of depreciation previously charged to the
Federal Government, the estimated useful life remaining at the time of
negotiation, the effect of any increased maintenance charges, decreased
efficiency due to age, and any other factors pertinent to the utilization
of the asset for the purposed contemplated. The allowable amounts are
determined by the cognizant agency. This provision allows a use allowance
for fully depreciated assets only under the most extraordinary circumstances
and is not applicable when converting from use allowance to depreciation.
This provision is intended to permit reimbursement under unusual circumstances
where an asset is treated as having outlived its useful life but nevertheless
has future cost consequences that are not recoverable through capitalized
repair and replacement costs or as current period expenses.
An example of a
"reasonable use allowance" is for the use of an electronic microscope
by the educational institution after its useful life. At the start of
its service life, a reasonable estimate of the useful life of an electronic
microscope is five years. However, after five years, when the asset is
fully depreciated and its costs fully recovered, if it is still functional
and is used to support Federal projects, then consideration may be given
by the cognizant agency for a reasonable use allowance. This approach
results in cost savings both for the educational institution and the Federal
Government since the educational institution could have replaced the old
electronic microscope with a new, more expensive one and then appropriately
charge a use allowance to the Federal projects.
effective date of the equipment definition change should be prior to the
expiration of an educational institution's F&A cost rate agreements.
In order to simplify the transition, the effective date of the equipment
definition change will be at the beginning of the next F&A cost rate agreement.
An educational institution with predetermined or fixed rates that wishes
to raise its equipment threshold earlier should contact its cognizant
agency for approval. While educational institutions are free to change
their capitalization policy at any time, there should be limitations as
to when sponsoring agencies may recognize the change. To do otherwise
could result in direct costs and F&A costs being reimbursed under conditions
different from those upon which the F&A cost rate was predicated. Federal
sponsoring agencies are to award, and grantees are to claim, costs in
accordance with the policies in effect at the time the cost rate agreement
was issued. At the cognizant agency's discretion, revised cost rates may
be established based on an analysis of the impact on cost rates of the
Clarification is needed on the treatment of depreciation of those assets
which had costs between the old $500 threshold and the new $5000.
In order to clarify the accounting for the unamortized portion of any
equipment costs as a result of a change in capitalization levels, language
has been added to Section J.16.a.(1) to explain that the unamortized portion
may be recovered by continuing to claim the otherwise allowable use allowance
or depreciation on the equipment, or by amortizing the amount to be written
off over a period of years negotiated with the cognizant agency.
are needed for the calculations used in the lease-purchase analysis and
the cash-flow analysis.
The commenter is correct. The Circular has been revised to provide the
following clarifications for the interest requirements. A threshold of
$500,000 has been set for the requirement of a lease-purchase analysis
for a facility acquisition, a cash-flow analysis is required for debt
arrangements over $1 million (when the initial equity contribution by
the educational institution is less than 25 percent), and notification
is required in case of a substantial relocation from a building funded
in part or whole through Federal reimbursements. The same clarifications
adopted in the final revision of the interest provision of Circular A-122
(60 FR 52516), have been included in this revision to Circular A-21 in
Section J.22.f. This will maintain conformity across the cost principles
The requirements under the interest criteria create an additional administrative
burden for colleges and universities in a period when the administrative
costs are already capped.
OMB recognizes that there might be a nominal increase in an administrative
burden in a few cases. However, OMB believes that these requirements are
needed to protect the Federal Government against abusive financing arrangements
(such as "balloon financing method" where the entire principal amount
is made at the end of the finance term).
The requirements should only apply prospectively to future asset acquisitions.
OMB revises the provision in Section J.22.f to state that the criteria
for interest allowability in this revision apply only to facilities and
equipment acquired after the effective date of this revision.
What are the reimbursement limitations when the least expensive alternative
is not chosen?
As the revision in Section J.22.f states, when a lease-purchase analysis
is required to be performed, reimbursement will be limited to the least
expensive alternative available, whether or not it is the chosen alternative.
Where a facility is acquired and the components are depreciated over varying
lives, can interest on debt associated with fully depreciated assets be
No. Under the allocability provisions of Section C.4.a, interest costs
on fully depreciated, retired, scrapped, or nonexistent assets are unallowable.
Where a new facility is acquired or constructed with excess capacity intended
to meet future needs, can interest costs be claimed for that portion of
the facility that is currently excess and not in use?
No. Under the allocability provisions of Section C.4.a, interest costs
on excess or idle capacity are not allocable to Federal programs and are,
therefore, unallowable. This provision also applies to any related costs,
such as depreciation.
Comment: A higher
threshold should be established for the requirement of the lease-purchase
analysis. Thresholds of $50 million and $25 million were recommended.
Many commenters indicated that lease-purchase analyses are generally performed
by the educational institutions as a common business practice. Such analyses
normally are performed for assets under the suggested $25 million threshold,
whether or not Federal funds are involved. The expense of the analysis
is justified when one considers the considerably greater amounts that
are at stake in a real estate lease or purchase. Also, by identifying
the most economical acquisition alternative, such analyses can pay for
themselves. Section C.3 of Circular A-21 requires that, to be allowable,
costs must be reasonable. A lease-purchase analysis provides such supporting
documentation. A threshold of $25 million or $50 million is simply too
high to protect the interests of the Federal Government
However, OMB recognizes
that a lease-purchase analysis may not be cost effective for smaller facility
acquisitions. Therefore, a threshold of $500,000 has been established
in the final revision for the lease-purchase analysis requirement for
facilities. Additionally, the analysis is not required to be submitted
but is only to be maintained on file for cognizant agency review upon
request. There is no requirement for a lease-purchase analysis for equipment.
(Note: Sample A-21
Excess Cash-Flow Calculation is shown at the end of this document.)
The educational institution should have the option of rolling forward
the "excess" cash recovery to future years rather than being disallowed
in the year incurred since interest costs are often based on a declining
principal balance and are not spread evenly over the life of the mortgage.
The provision on "excess" cash flow addresses the interest costs to the
Federal Government in instances where cash flow from depreciation exceeds
debt principal payments (e.g., a "balloon" payment arrangement). In such
case, where the entire principal amount is paid at the end of the finance
period, the cash flow received by the educational institution for reimbursement
of depreciation and interest expenses on a facility would exceed the payments
made by the educational institution for interest and principal, thus resulting
in an excessive cash flow. The interest on the excess cash flow should
be deducted from interest costs in the year earned and not spread out
over the life of the mortgage since the Federal Government pays its proportionate
share of future period interest.
The provision requiring
an adjustment to allowable interest for positive cash flow does not result
in a "disallowance" of depreciation exceeding principal payments. When
inflows exceed outflows, earnings are to be imputed on the excess cash
flow and offset against interest costs for the 12-month period. The educational
institution, however, retains the excess cash flow which will be needed
during periods of negative cash flow.
A sample cash-flow
analysis is presented hereafter.
The provision requires that earnings on positive cash flows be offset
against interest costs. If principal payments include the cost of land,
the positive cash flow and imputed earnings will be understated.
OMB agrees. While interest on debt to acquire land is allowable, the cost
of land is not. Accordingly, when computing cash flows, each debt principal
payment shall be reduced by an amount equal to the portion of the principal
payment attributed to the acquisition of land. This requirement is included
in Section J.22.f.
establishment of a Federal interagency group for the development of grant
and contract policy should be addressed in Circular A-110 rather than Circular
A-21. This group should include representatives from colleges and universities.
The commenter is correct that the interagency policy group should be formed
under broader auspices than just Circular A-21. In response, the proposal
has been deleted from the final revision of this Circular. This proposal
is not being pursued at this time.
Alice M. Rivlin
April 26, 1996
Circular No. A-21
Transmittal Memorandum No. 6
TO THE HEADS OF
EXECUTIVE DEPARTMENTS AND ESTABLISHMENTS
Principles for Educational Institutions
memorandum revises OMB Circular No. A-21, "Cost Principles for Educational
Institutions." The attached revision further clarifies and standardizes
the Circular's principles for determining costs applicable to grants,
contracts, and other agreements with educational institutions, and rescinds
OMB Circular A-88, "Indirect Cost Rates, Audits, and Audit Follow-up at
Educational Institutions." This revision is effective on the date of its
publication in the Federal Register, unless otherwise noted within this
Also attached is
a recompilation of Circular A-21 that consists of the original Circular
published at 44 FR 12368 (February 26, 1979), as amended by Transmittal
Memoranda Numbers 1 through 5, at 47 FR 33658 (July 23, 1982), 51 FR 20908
(June 9, 1986), 51 FR 43487 (December 2, 1986), 56 FR 50224 (October 1,
1991), 58 FR 39996 (July 15, 1993), respectively, and the amendments herein.
Alice M. Rivlin
I. Circular A-88 is rescinded,
effective July 1, 1996.
1. In Section A, add
subsection 4 to read as follows:
4. Inquiries. All inquiries from Federal agencies concerning the cost principles
contained in this Circular, including the administration and implementation
of the Cost Accounting Standards (CAS)(described in Sections C.10 through
C.13) and disclosure statement (DS-2) requirements, shall be addressed by
the Office of Management and Budget (OMB), Office of Federal Financial Management,
in coordination with the Cost Accounting Standard Board (CASB) with respect
to inquiries concerning CAS. Educational institutions' inquiries should
be addressed to the cognizant agency. 2.
In Section C, change subsection 8 as follows.8.
Collection of unallowable costs, excess costs due to noncompliance with
cost policies, increased costs due to failure to follow a disclosed accounting
practice and increased costs resulting from a change in cost accounting
practice. The following costs shall be refunded (including interest) in
accordance with applicable Federal agency regulations:
II. Circular A-21 is revised
as follows: Revise Sections A, C, G, J and K as follows.
specifically identified as unallowable in Section J, either directly or
indirectly, and charged to the Federal Government.
costs due to failure by the educational institution to comply with the
cost policies in this Circular.
costs due to a noncompliant cost accounting practice used to estimate,
accumulate, or report costs.
costs resulting from a change in accounting practice.
3. In Section C, add
subsection 10 to read as follows:10.
Consistency in estimating, accumulating and reporting costs.
a. An educational
institution's practices used in estimating costs in pricing a proposal
shall be consistent with the educational institution's cost accounting
practices used in accumulating and reporting costs.
b. An educational
institution's cost accounting practices used in accumulating and reporting
actual costs for a sponsored agreement shall be consistent with the educational
institution's practices used in estimating costs in pricing the related
proposal or application.
grouping of homogeneous costs in estimates prepared for proposal purposes
shall not per se be deemed an inconsistent application of cost accounting
practices under subsection a when such costs are accumulated and reported
in greater detail on an actual cost basis during performance of the sponsored
A also reflects this requirement, along with the purpose, definitions,
and techniques for application, all of which are authoritative.
4. In Section C, add
subsection 11 to read as follows: 11.
Consistency in allocating costs incurred for the same purpose.
costs incurred for the same purpose, in like circumstances, are either
direct costs only or F&A costs only with respect to final cost objectives.
No final cost objective shall have allocated to it as a cost any cost,
if other costs incurred for the same purpose, in like circumstances, have
been included as a direct cost of that or any other final cost objective.
Further, no final cost objective shall have allocated to it as a direct
cost any cost, if other costs incurred for the same purpose, in like circumstances,
have been included in any F&A cost pool to be allocated to that or any
other final cost objective.
A reflects this requirement along with its purpose, definitions, techniques
for application, illustrations and interpretations, all of which are authoritative.
5. In Section C, add
subsection 12 to read as follows: 12.
Accounting for unallowable costs.
expressly unallowable or mutually agreed to be unallowable, including
costs mutually agreed to be unallowable directly associated costs, shall
be identified and excluded from any billing, claim, application, or proposal
applicable to a sponsored agreement.
which specifically become designated as unallowable as a result of a written
decision furnished by a Federal official pursuant to sponsored agreement
disputes procedures shall be identified if included in or used in the
computation of any billing, claim, or proposal applicable to a sponsored
agreement. This identification requirement applies also to any costs incurred
for the same purpose under like circumstances as the costs specifically
identified as unallowable under either this subsection or subsection a.
which, in a Federal official's written decision furnished pursuant to
sponsored agreement disputes procedures, are designated as unallowable
directly associated costs of unallowable costs covered by either subsection
a or b shall be accorded the identification required by subsection b.
costs of any work project not contractually authorized by a sponsored
agreement, whether or not related to performance of a proposed or existing
sponsored agreement, shall be accounted for, to the extent appropriate,
in a manner which permits ready separation from the costs of authorized
unallowable costs covered by subsections a through d shall be subject
to the same cost accounting principles governing cost allocability as
allowable costs. In circumstances where these unallowable costs normally
would be part of a regular F&A cost allocation base or bases, they shall
remain in such base or bases. Where a directly associated cost is part
of a category of costs normally included in a F&A cost pool that shall
be allocated over a base containing the unallowable cost with which it
is associated, such a directly associated cost shall be retained in the
F&A cost pool and be allocated through the regular allocation process.
the total of the allocable and otherwise allowable costs exceeds a limitation-of-cost
or ceiling-price provision in a sponsored agreement, full direct and F&A
cost allocation shall be made to the sponsored agreement cost objective,
in accordance with established cost accounting practices and standards
which regularly govern a given entity's allocations to sponsored agreement
cost objectives. In any determination of a cost overrun, the amount thereof
shall be identified in terms of the excess of allowable costs over the
ceiling amount, rather than through specific identification of particular
cost items or cost elements.
A reflects this requirement, along with its purpose, definitions, techniques
for application, and illustrations of this standard, all of which are
6. In Section C, add
subsection 13 to read as follows: 13.
Cost accounting period.
institutions shall use their fiscal year as their cost accounting period,
of a F&A function which exists for only a part of a cost accounting period
may be allocated to cost objectives of that same part of the period on
the basis of data for that part of the cost accounting period if the cost
is: (i) material in amount, (ii) accumulated in a separate F&A cost pool
or expense pool, and (iii) allocated on the basis of an appropriate direct
measure of the activity or output of the function during that part of
annual period other than the fiscal year may, upon mutual agreement with
the Federal Government, be used as the cost accounting period if the use
of such period is an established practice of the educational institution
and is consistently used for managing and controlling revenues and disbursements,
and appropriate accruals, deferrals or other adjustments are made with
respect to such annual periods.
(3) A transitional
cost accounting period other than a year shall be used whenever a change
of fiscal year occurs.
b. An educational
institution shall follow consistent practices in the selection of the
cost accounting period or periods in which any types of expense and any
types of adjustment to expense (including prior-period adjustments) are
accumulated and allocated.
same cost accounting period shall be used for accumulating costs in a
F&A cost pool as for establishing its allocation base, except that the
Federal Government and educational institution may agree to use a different
period for establishing an allocation base, provided:
practice is necessary to obtain significant administrative convenience,
practice is consistently followed by the educational institution,
annual period used is representative of the activity of the cost accounting
period for which the F&A costs to be allocated are accumulated, and
practice can reasonably be estimated to provide a distribution to cost
objectives of the cost accounting period not materially different from
that which otherwise would be obtained.
A reflects this requirement, along with its purpose, definitions, techniques
for application and illustrations, all of which are authoritative.
7. In Section C, add
subsection 14 to read as follows:14.
institutions that received aggregate sponsored agreements totaling $25
million or more subject to this Circular during their most recently completed
fiscal year shall disclose their cost accounting practices by filing a
Disclosure Statement (DS-2), which is reproduced in Appendix B. With the
approval of the cognizant agency, an educational institution may meet
the DS-2 submission by submitting the DS-2 for each business unit that
received $25 million or more in sponsored agreements.
DS-2 shall be submitted to the cognizant agency with a copy to the educational
institution's audit cognizant office.
institutions receiving $25 million or more in sponsored agreements that
are not required to file a DS-2 pursuant to 48 CFR 9903.202-1 shall file
a DS-2 covering the first fiscal year beginning after the publication
date of this revision, within six months after the end of that fiscal
year. Extensions beyond the above due date may be granted by the cognizant
agency on a case-by-case basis.
institutions are responsible for maintaining an accurate DS-2 and complying
with disclosed cost accounting practices. Educational institutions must
file amendments to the DS-2 when disclosed practices are changed to comply
with a new or modified standard, or when practices are changed for other
reasons. Amendments of a DS-2 may be submitted at any time. If the change
is expected to have a material impact on the educational institution's
negotiated F&A cost rates, the revision shall be approved by the cognizant
agency before it is implemented. Resubmission of a complete, updated DS-2
is discouraged except when there are extensive changes to disclosed practices.
and funding adjustments. Cost adjustments shall be made by the cognizant
agency if an educational institution fails to comply with the cost policies
in this Circular or fails to consistently follow its established or disclosed
cost accounting practices when estimating, accumulating or reporting the
costs of sponsored agreements, if aggregate cost impact on sponsored agreements
is material. The cost adjustment shall normally be made on an aggregate
basis for all affected sponsored agreements through an adjustment of the
educational institution's future F&A costs rates or other means considered
appropriate by the cognizant agency. Under the terms of CAS-covered contracts,
adjustments in the amount of funding provided may also be required when
the estimated proposal costs were not determined in accordance with established
cost accounting practices.
Excess amounts paid in the aggregate by the Federal Government under sponsored
agreements due to a noncompliant cost accounting practice used to estimate,
accumulate, or report costs shall be credited or refunded, as deemed appropriate
by the cognizant agency. Interest applicable to the excess amounts paid
in the aggregate during the period of noncompliance shall also be determined
and collected in accordance with applicable Federal agency regulations.
cost accounting practice changes. Changes from one compliant cost accounting
practice to another compliant practice that are approved by the cognizant
agency may require cost adjustments if the change has a material effect
on sponsored agreements and the changes are deemed appropriate by the
The cognizant agency shall:
cost adjustments for all sponsored agreements in the aggregate on behalf
of the Federal Government. Actions of the cognizant agency official in
making cost adjustment determinations shall be coordinated with all affected
Federal agencies to the extent necessary.
guidelines and establish internal procedures to promptly determine on
behalf of the Federal Government that a DS-2 adequately discloses the
educational institution's cost accounting practices and that the disclosed
practices are compliant with applicable CAS and the requirements of this
to all affected agencies any DS-2 determination of adequacy and/or noncompliance.
8. In Section E, add
subsection 2.d(5) to read as follows:2.d(5)
Notwithstanding subsection (3), effective July 1, 1998, a cost analysis
study or base other than that in Section F shall not be used to distribute
utility, library or student services costs. By that date, OMB shall have
in place an alternative methodology for making payments on costs related
to utilities. 9.
In Section G, add a new subsection 7 to read as follows, and renumber all
subsequent subsections from 7, 8 and 9 to 8, 9 and 10, respectively:7.
Fixed rates for the life of the sponsored agreement.
agencies shall use the negotiated rates for F&A costs in effect at the
time of the initial award throughout the life of the sponsored agreement.
"Life" for the purpose of this subsection means each competitive segment
of a project. A competitive segment is a period of years approved by the
Federal funding agency at the time of the award. If negotiated rate agreements
do not extend through the life of the sponsored agreement at the time
of the initial award, then the negotiated rate for the last year of the
sponsored agreement shall be extended through the end of the life of the
sponsored agreement. Award levels for sponsored agreements may not be
adjusted in future years as a result of changes in negotiated rates.
an educational institution does not have a negotiated rate with the Federal
Government at the time of the award (because the educational institution
is a new grantee or the parties cannot reach agreement on a rate), the
provisional rate used at the time of the award shall be adjusted once
a rate is negotiated and approved by the cognizant agency.
10. In Section G, add
subsection 11 to read as follows:11.
Negotiation and approval of F&A rate.
agency assignments. "A cognizant agency" means the Federal agency responsible
for negotiating and approving F&A rates for an educational institution
on behalf of all Federal agencies.
negotiation cognizance is assigned to the Department of Health and Human
Services (HHS) or the Department of Defense's Office of Naval Research
(DOD), normally depending on which of the two agencies (HHS or DOD) provides
more funds to the educational institution for the most recent three years.
Information on funding shall be derived from relevant data gathered by
the National Science Foundation. In cases where neither HHS nor DOD provides
Federal funding to an educational institution, the cognizant agency assignment
shall default to HHS. Notwithstanding the method for cognizance determination
described above, other arrangements for cognizance of a particular educational
institution may also be based in part on the types of research performed
at the educational institution and shall be decided based on mutual agreement
between HHS and DOD.
assignments as of December 31, 1995, shall continue in effect through
educational institutions' fiscal years ending during 1997, or the period
covered by negotiated agreements in effect on December 31, 1995, whichever
is later, except for those educational institutions with cognizant agencies
other than HHS or DOD. Cognizance for these educational institutions shall
transfer to HHS or DOD at the end of the period covered by the current
negotiated rate agreement. After cognizance is established, it shall continue
for a five-year period.
of rates. The negotiated rates shall be accepted by all Federal agencies.
Only under special circumstances, when required by law or regulation,
may an agency use a rate different from the negotiated rate for a class
of sponsored agreements or a single sponsored agreement.
deficiencies. The cognizant agency shall negotiate changes needed to correct
systems deficiencies relating to accountability for sponsored agreements.
Cognizant agencies shall address the concerns of other affected agencies,
questioned costs. The cognizant agency shall conduct any necessary negotiations
with an educational institution regarding amounts questioned by audit
that are due the Federal Government related to costs covered by a negotiated
Reimbursement to cognizant agencies for work performed under Circular
A-21 may be made by reimbursement billing under the Economy Act, 31 U.S.C.
for establishing facilities and administrative rates. The cognizant agency
shall arrange with the educational institution to provide copies of rate
proposals to all interested agencies. Agencies wanting such copies should
notify the cognizant agency. Rates shall be established by one of the
negotiation. The cognizant agency is responsible for negotiating and approving
rates for an educational institution on behalf of all Federal agencies.
Non-cognizant Federal agencies, which award sponsored agreements to an
educational institution, shall notify the cognizant agency of specific
concerns (i.e., a need to establish special cost rates) which could affect
the negotiation process. The cognizant agency shall address the concerns
of all interested agencies, as appropriate. A pre-negotiation conference
may be scheduled among all interested agencies, if necessary. The cognizant
agency shall then arrange a negotiation conference with the educational
than formal negotiation. The cognizant agency and educational institution
may reach an agreement on rates without a formal negotiation conference;
for example, through correspondence or use of the simplified method described
in this Circular.
determinations and agreements. The cognizant agency shall formalize all
determinations or agreements reached with an educational institution and
provide copies to other agencies having an interest.
and disagreements. Where the cognizant agency is unable to reach agreement
with an educational institution with regard to rates or audit resolution,
the appeal system of the cognizant agency shall be followed for resolution
of the disagreement.
11. In Section J, replace
subsection 8.f.(2) to read as follows:8.f.(2)
Fringe benefits in the form of employer contributions or expenses for social
security, employee insurance, workmen's compensation insurance, tuition
or remission of tuition for individual employees are allowable, provided
such benefits are granted in accordance with established educational institutional
policies, and are distributed to all institutional activities on an equitable
basis. Tuition benefits for family members other than the employee are unallowable
for fiscal years beginning after September 30, 1998. See Section J.41.b,
Scholarships and student aid costs, for treatment of tuition remission provided
to students. 12.
In Section J, add subsection 12.b.(3) to read as follows:12.b.(3)
Where the depreciation method is introduced to replace the use allowance
method, depreciation shall be computed as if the asset had been depreciated
over its entire life (i.e., from the date the asset was acquired and ready
for use to the date of disposal or withdrawal from service). The aggregate
amount of use allowances and depreciation attributable to an asset (including
imputed depreciation applicable to periods prior to the conversion to the
use allowance method as well as depreciation after the conversion) may be
less than, and in no case, greater than the total acquisition cost of the
asset. 13. In
Section J, add subsection 12 c.(4) to read as follows:12.c.(4)
Notwithstanding subsection(3), once an educational institution converts
from one cost recovery methodology to another, acquisition costs not recovered
may not be used in the calculation of the use allowance in subsection(3).
14. In Section
J, amend subsections 16.a.(1) and 16.b.(2) to read as follows:16.a.(1)
"Equipment" means an article of nonexpendable, tangible personal property
having a useful life of more than one year and an acquisition cost which
equals or exceeds the lesser of the capitalization level established by
the organization for financial statement purposes, or $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 negotiated with the cognizant agency.
for special purpose equipment are allowable as direct charges with the approval
of the sponsoring agency. 15.
In Section J, add subsection 22.f to read as follows:22.f.
Interest on debt incurred after the effective date of this revision to acquire,
replace or renovate 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 subject to the following conditions:
facilities costing over $500,000, the educational institution shall prepare,
prior to the acquisition or replacement of the facility, a lease-purchase
analysis in accordance with ___.44 of OMB Circular A-110, which shows
that a financed purchase, including a capital lease is less costly to
the educational institution than other operating lease alternatives, on
a net present value basis. Discount rates used shall be equal to the educational
institution's anticipated interest rates and shall be no higher than the
fair market rate available to the educational institution 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 educational institution. 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 defined period. 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 defined period. 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 educational institution directly
or as part of the lease arrangement.
actual interest cost claimed is predicated upon interest rates that are
no higher than the fair market rate available to the educational institution
from an unrelated (arm's length) third party.
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 subsection (1). 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 required to be performed, Federal reimbursement
shall be based upon the least expensive alternative.
institutions are also subject to the following conditions:
debt arrangements over $1 million, unless the educational institution
makes an initial equity contribution to the asset purchase of 25 percent
or more, educational institutions shall reduce claims for interest cost
by an amount equal to imputed interest earnings on excess cash flow, which
is to be calculated as follows. Annually, educational institutions 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 cost. For cash flow calculations,
the annual inflow figures shall be divided by the number of months in
the year (i.e., 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 cost. 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 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.
allowable costs to acquire facilities and equipment are limited to a fair
market value available to the educational institution from an unrelated
(arm's length) third party.
following definitions are to be used for purposes of this section:
equity contribution" means the amount or value of contributions made by
non-Federal entities for the acquisition of the asset prior to occupancy
costs" means the capitalizable costs of an asset, including construction
costs, acquisition costs, and other such costs capitalized in accordance
with Generally Accepted Accounting Principles (GAAP).
16. In Section K, add
an instruction and subsection 2.b(5) under the "Certificate of F&A Costs"
to read as follows: For
educational institutions that are required to file a DS-2 in accordance
with Section C.14, the following statement shall be added to the "Certificate
of F&A Costs":
rate proposal is prepared using the same cost accounting practices that
are disclosed in the DS-2, including its amendments and revisions, filed
with and approved by the cognizant agency.
17. Throughout the entire
Circular, except for in Appendices A and B, replace the term "indirect costs"
with "facilities and administrative costs" and make the following additional
a. In Section
B, add the definition of facilities and administrative (F&A) costs to
read as follows:
and administrative (F&A) costs, for the purpose of this Circular, means
costs that are incurred for common or joint objectives and, therefore,
cannot be identified readily and specifically with a particular sponsored
project, an instructional activity, or any other institutional activity.
F&A costs are synonymous with "indirect" costs, as previously used in
this Circular and as currently used in Appendices A and B. The F&A cost
categories are described in Section F.1.
b. In Section
E, replace subsection 1 to read as follows:
F&A costs are those that are incurred for common or joint objectives and
therefore cannot be identified readily and specifically with a particular
sponsored project, an institutional activity, or any other institutional
activity. See Section F.1 for a discussion of the components of F&A costs.
c. In Section
E, replace subsection 2.e.(1) to read as follows:
F&A costs are the broad categories of costs discussed in Section F.1.
d. In Section
F, replace the first sentence of subsection 1 to read as follows:
of Facilities and Administration. F&A costs are broad categories of costs.
18. Add Appendices A
and B for the CASB's Cost Accounting Standards (CAS) and the CASB's Disclosure
In OMB's recompilation of Circular A-21 and its six Transmittal Memoranda,
throughout the Circular, consistent conventions were introduced, including
some numbering changes, punctuation changes, correction of typographical
errors, etc. In addition, in Section J, former subsections 29, "Public information
services costs," and 39, "Special services costs," were removed since their
contents were merged into subsections 1 and 3 in Transmittal Memorandum
No. 4. BILLING
Cash-Flow Calculation -
Sample Format for Annual Report
Applicable for debt
arrangements over $1 million, unless initial equity contribution equals
25 percent or more
Month 1 2 3 4 ....... 12 Annual Total
Year ____ of ____ Years
Line 1 -- Prior period's cumulative cash flow balance
(Prior Month's or Year's Line 9)
Add this period's inflows:
Line 2 -- Depreciation expense (Note 1)
Line 3 -- Interest expense (Note 2)
Line 4 -- Amortization of debt issuance costs (Note 2)
Subtract this period's outflows:
Line 5 -- Principal payments (Note 3)
Line 6 -- Interest payments (Note 3)
Line 7 -- Subtotal of cumulative cash flows
Line 8 -- In initial period only, subtract initial equity contribution (Note
(Will be zero after initial period)
Line 9 -- Total of cumulative cash flows
(In initial period, Line 7 - Line 8)
(In subsequent periods, equals Line 7)
Line 10 -- If line 9 is positive, state month's closing interest rate on
3-month Treasury Bill
If line 9 is negative, put "0" (zero)
Line 11 -- Imputed interest income on cumulative positive cash flow
Monthly columns = (Line 10 x Line 9)/12
Line 12 -- Allowable interest for period
(Line 6 - Line 11)
Note 1: May include amortization of capitalized construction interest
in accordance with GAAP. Depreciation expenses should be reported on a monthly
basis (Annual expense/12).
Interest expense and amortization of debt issuance costs that are not included
in loan amount should be reported on a monthly basis (Annual expense/12).
Note 3: If land is included in the financing arrangement, Line 5 would
be calculated as: principal payment - (Debt proceeds used to purchase land
/ total debt proceeds x principal payment). Principal and interest payments
should be reported in the month that payments were made.
Note 4: This line may only include amounts of initial equity contribution
made prior to occupancy of the facility. The amount is to be entered only
in the initial period covered by the cash flow submission, and should be
left blank in future periods.