|
MEMORANDUM FOR THE RECORD FROM: Norwood
J. Jackson SUBJECT: Recompilation of OMB Circular A-87 I certify that the attached document constitutes a recompilation of Office of Management and Budget Circular A-87, "Cost Principles for State, Local, and Indian Tribal Governments." The recompilation consists of the last complete revision of the Circular published at 60 FR 26484 (dated May 4, 1995, published May 17, 1995), as further amended at 62 FR 45934 (August 29, 1997).
OMB
CIRCULAR A-87 (REVISED 5/4/95, As Further Amended 8/29/97)
CIRCULAR
NO. A-87 TO THE HEADS
OF EXECUTIVE DEPARTMENTS AND ESTABLISHMENTS SUBJECT: Cost
Principles for State, Local, and Indian Tribal Governments 1. Purpose.
This Circular establishes principles and standards for determining
costs for Federal awards carried out through grants, cost reimbursement
contracts, and other agreements with State and local governments
and federally-recognized Indian tribal governments (governmental
units). 2. Authority.
This Circular is issued under the authority of the Budget and Accounting
Act of 1921, as amended; the Budget and Accounting Procedures Act
of 1950, as amended; the Chief Financial Officers Act of 1990; Reorganization
Plan No. 2 of 1970; and Executive Order No. 11541 ("Prescribing
the Duties of the Office of Management and Budget and the Domestic
Policy Council in the Executive Office of the President"). 3. Background.
An interagency task force was established in 1987 to review existing
cost principles for Federal awards to State, local, and Indian tribal
governments. The task force studied Inspector General reports and
recommendations, solicited suggestions for changes to the Circular
from governmental units, and compared for consistency the provisions
of other OMB cost principles circulars covering non-profit organizations
and universities. A proposed revised Circular reflecting the results
of those efforts was issued on October 12, 1988, and August 19,
1993. Extensive comments on the proposed revisions, discussions
with interest groups, and related developments were considered in
developing this revision. 4. Rescissions.
This Circular rescinds and supersedes Circular A-87, issued January
15, 1981. 5. Policy.
This Circular establishes principles and standards to provide a
uniform approach for determining costs and to promote effective
program delivery, efficiency, and better relationships between governmental
units and the Federal Government. The principles are for determining
allowable costs only. They are not intended to identify the circumstances
or to dictate the extent of Federal and governmental unit participation
in the financing of a particular Federal award. Provision for profit
or other increment above cost is outside the scope of this Circular.
6. Definitions.
Definitions of key terms used in this Circular are contained in
Attachment A, Section B. 7. Required
Action. Agencies responsible for administering programs that
involve cost reimbursement contracts, grants, and other agreements
with governmental units shall issue codified regulations to implement
the provisions of this Circular and its Attachments by September
1, 1995. 8. OMB Responsibilities.
The Office of Management and Budget (OMB) will review agency regulations
and implementation of this Circular, and will provide policy interpretations
and assistance to insure effective and efficient implementation.
Any exceptions will be subject to approval by OMB. Exceptions will
only be made in particular cases where adequate justification is
presented. 9. Information
Contact. Further information concerning this Circular may be
obtained by contacting the Office of Federal Financial Management,
Financial Standards and Reporting Branch, Office of Management and
Budget, Washington, DC 20503, telephone 202-395-3993. 10. Policy
Review Date. OMB Circular A-87 will have a policy review three
years from the date of issuance. 11. Effective
Date. This Circular is effective as follows: - For costs
charged indirectly or otherwise covered by the cost allocation plans
described in Attachments C, D and E, this revision shall be applied
to cost allocation plans and indirect cost proposals submitted or
prepared for a governmental unit's fiscal year that begins on or
after September 1, 1995. - For other
costs, this revision shall be applied to all awards or amendments,
including continuation or renewal awards, made on or after September
1, 1995. Attachments OMB
CIRCULAR NO. A-87 COST
PRINCIPLES FOR TABLE
OF CONTENTS
Attachment
A - General Principles for Determining Allowable Costs
ATTACHMENT
A GENERAL
PRINCIPLES FOR DETERMINING TABLE OF CONTENTS
A. Purpose and Scope 1. Objectives 2. Policy guides 3. Application
B. Definitions 1. Approval or authorization of the awarding or cognizant Federal agency 2. Award 3. Awarding agency 4. Central service cost allocation plan 5. Claim 6. Cognizant agency 7. Common rule 8. Contract 9. Cost 10. Cost allocation plan 11. Cost objective 12. Federally-recognized Indian tribal government 13. Governmental unit 14. Grantee department or agency 15. Indirect cost rate proposal 16. Local government 17. Public assistance cost allocation plan 18. State C. Basic Guidelines 1. Factors affecting allowability of costs 2. Reasonable costs 3. Allocable costs 4. Applicable
credits D. Composition of Cost 1. Total cost 2. Classification
of costs E. Direct Costs 1. General 2. Application 3. Minor items
F. Indirect Costs 1. General 2. Cost allocation plans and indirect cost proposals 3. Limitation
on indirect or administrative costs G. Interagency
Services H.
Required Certifications A. Purpose
and Scope 1. Objectives.
This Attachment establishes principles for determining the allowable
costs incurred by State, local, and federally-recognized Indian
tribal governments (governmental units) under grants, cost reimbursement
contracts, and other agreements with the Federal Government (collectively
referred to in this Circular as "Federal awards"). The principles
are for the purpose of cost determination and are not intended to
identify the circumstances or dictate the extent of Federal or governmental
unit participation in the financing of a particular program or project.
The principles are designed to provide that Federal awards bear
their fair share of cost recognized under these principles except
where restricted or prohibited by law. Provision for profit or other
increment above cost is outside the scope of this Circular. 2. Policy guides.
a. The application
of these principles is based on the fundamental premises that: (1) Governmental
units are responsible for the efficient and effective administration
of Federal awards through the application of sound management practices.
(2) Governmental units assume responsibility for administering Federal funds in a manner consistent with underlying agreements, program objectives, and the terms and conditions of the Federal award. (3) Each governmental
unit, in recognition of its own unique combination of staff, facilities,
and experience, will have the primary responsibility for employing
whatever form of organization and management techniques may be necessary
to assure proper and efficient administration of Federal awards.
b. Federal
agencies should work with States or localities which wish to test
alternative mechanisms for paying costs for administering Federal
programs. The Office of Management and Budget (OMB) encourages Federal
agencies to test fee-for-service alternatives as a replacement for
current cost-reimbursement payment methods in response to the National
Performance Review's (NPR) recommendation. The NPR recommended the
fee-for-service approach to reduce the burden associated with maintaining
systems for charging administrative costs to Federal programs and
preparing and approving cost allocation plans. This approach should
also increase incentives for administrative efficiencies and improve
outcomes. 3. Application.
a. These principles
will be applied by all Federal agencies in determining costs incurred
by governmental units under Federal awards (including subawards)
except those with (1) publicly-financed educational institutions
subject to OMB Circular A-21, "Cost Principles for Educational Institutions,"
and (2) programs administered by publicly-owned hospitals and other
providers of medical care that are subject to requirements promulgated
by the sponsoring Federal agencies. However, this Circular does
apply to all central service and department/agency costs that are
allocated or billed to those educational institutions, hospitals,
and other providers of medical care or services by other State and
local government departments and agencies. b. All subawards
are subject to those Federal cost principles applicable to the particular
organization concerned. Thus, if a subaward is to a governmental
unit (other than a college, university or hospital), this Circular
shall apply; if a subaward is to a commercial organization, the
cost principles applicable to commercial organizations shall apply;
if a subaward is to a college or university, Circular A-21 shall
apply; if a subaward is to a hospital, the cost principles used
by the Federal awarding agency for awards to hospitals shall apply,
subject to the provisions of subsection A.3.a. of this Attachment;
if a subaward is to some other non-profit organization, Circular
A-122, "Cost Principles for Non-Profit Organizations," shall apply.
c. These principles
shall be used as a guide in the pricing of fixed price arrangements
where costs are used in determining the appropriate price. d. Where a
Federal contract awarded to a governmental unit incorporates a Cost
Accounting Standards (CAS) clause, the requirements of that clause
shall apply. In such cases, the governmental unit and the cognizant
Federal agency shall establish an appropriate advance agreement
on how the governmental unit will comply with applicable CAS requirements
when estimating, accumulating and reporting costs under CAS-covered
contracts. The agreement shall indicate that OMB Circular A-87 requirements
will be applied to other Federal awards. In all cases, only one
set of records needs to be maintained by the governmental unit.
e. Conditional
exemptions. (1) OMB authorizes
conditional exemption from OMB administrative requirements and cost
principles circulars for certain Federal programs with statutorily-authorized
consolidated planning and consolidated administrative funding, that
are identified by a Federal agency and approved by the head of the
Executive department or establishment. A Federal agency shall consult
with OMB during its consideration of whether to grant such an exemption.
(2) To promote
efficiency in State and local program administration, 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. (3) When a
Federal agency provides this flexibility, as a prerequisite to a
State's exercising this option, a State must adopt its own written
fiscal and administrative requirements for expending and accounting
for all funds, which are consistent with the provisions of OMB Circular
A-87, and extend such policies to all subrecipients. These fiscal
and administrative requirements must be sufficiently specific to
ensure that: funds are used in compliance with all applicable Federal
statutory and regulatory provisions, costs are reasonable and necessary
for operating these programs, and funds are not be used for general
expenses required to carry out other responsibilities of a State
or its subrecipients. B. Definitions
1. "Approval
or authorization of the awarding or cognizant Federal agency" means
documentation evidencing consent prior to incurring a specific cost.
If such costs are specifically identified in a Federal award document,
approval of the document constitutes approval of the costs. If the
costs are covered by a State/local-wide cost allocation plan or
an indirect cost proposal, approval of the plan constitutes the
approval. 2. "Award"
means grants, cost reimbursement contracts and other agreements
between a State, local and Indian tribal government and the Federal
Government. 3. "Awarding
agency" means (a) with respect to a grant, cooperative agreement,
or cost reimbursement contract, the Federal agency, and (b) with
respect to a subaward, the party that awarded the subaward. 4. "Central
service cost allocation plan" means the documentation
identifying, accumulating, and allocating or developing billing
rates based on the allowable costs of services provided by a governmental
unit on a centralized basis to its departments and agencies. The
costs of these services may be allocated or billed to users. 5. "Claim"
means a written demand or written assertion by the governmental
unit or grantor seeking, as a matter of right, the payment of money
in a sum certain, the adjustment or interpretation of award terms,
or other relief arising under or relating to the award. A voucher,
invoice or other routine request for payment that is not a dispute
when submitted is not a claim. Appeals, such as those filed by a
governmental unit in response to questioned audit costs, are not
considered claims until a final management decision is made by the
Federal awarding agency. 6. "Cognizant
agency" means the Federal agency responsible for reviewing, negotiating,
and approving cost allocation plans or indirect cost proposals developed
under this Circular on behalf of all Federal agencies. OMB publishes
a listing of cognizant agencies. 7. "Common
Rule" means the "Uniform Administrative Requirements for Grants
and Cooperative Agreements to State and Local Governments; Final
Rule" originally issued at 53 FR 8034-8103 (March 11, 1988). Other
common rules will be referred to by their specific titles. 8. "Contract"
means a mutually binding legal relationship obligating the seller
to furnish the supplies or services (including construction) and
the buyer to pay for them. It includes all types of commitments
that obligate the government to an expenditure of appropriated funds
and that, except as otherwise authorized, are in writing. In addition
to bilateral instruments, contracts include (but are not limited
to): awards and notices of awards; job orders or task orders issued
under basic ordering agreements; letter contracts; orders, such
as purchase orders, under which the contract becomes effective by
written acceptance or performance; and, bilateral contract modifications.
Contracts do not include grants and cooperative agreements covered
by 31 U.S.C. 6301 et seq. 9. "Cost" means
an amount as determined on a cash, accrual, or other basis acceptable
to the Federal awarding or cognizant agency. It does not include
transfers to a general or similar fund. 10. "Cost allocation
plan" means central service cost allocation plan, public assistance
cost allocation plan, and indirect cost rate proposal. Each of these
terms are further defined in this section. 11. "Cost objective"
means a function, organizational subdivision, contract, grant, or
other activity for which cost data are needed and for which costs
are incurred. 12. "Federally-recognized
Indian tribal government" means the governing body or a governmental
agency of any Indian tribe, band, nation, or other organized group
or community (including any native village as defined in Section
3 of the Alaska Native Claims Settlement Act, 85 Stat. 688) certified
by the Secretary of the Interior as eligible for the special programs
and services provided through the Bureau of Indian Affairs. 13. "Governmental
unit" means the entire State, local, or federally-recognized Indian
tribal government, including any component thereof. Components of
governmental units may function independently of the governmental
unit in accordance with the term of the award. 14. "Grantee
department or agency" means the component of a State, local, or
federally-recognized Indian tribal government which is responsible
for the performance or administration of all or some part of a Federal
award. 15. "Indirect
cost rate proposal" means the documentation prepared by a governmental
unit or component thereof to substantiate its request for the establishment
of an indirect cost rate as described in Attachment E of this Circular.
16. "Local
government" means a county, municipality, city, town, township,
local public authority, school district, special district, intrastate
district, council of governments (whether or not incorporated as
a non-profit corporation under State law), any other regional or
interstate government entity, or any agency or instrumentality of
a local government. 17. "Public
assistance cost allocation plan" means a narrative description of
the procedures that will be used in identifying, measuring and allocating
all administrative costs to all of the programs administered or
supervised by State public assistance agencies as described in Attachment
D of this Circular. 18. "State"
means any of the several States of the United States, the District
of Columbia, the Commonwealth of Puerto Rico, any territory or possession
of the United States, or any agency or instrumentality of a State
exclusive of local governments. C. Basic
Guidelines 1. Factors
affecting allowability of costs. To be allowable under Federal awards,
costs must meet the following general criteria: a. Be necessary
and reasonable for proper and efficient performance and administration
of Federal awards. b. Be allocable
to Federal awards under the provisions of this Circular. c. Be authorized
or not prohibited under State or local laws or regulations. d. Conform to any limitations or exclusions set forth in these principles, Federal laws, terms and conditions of the Federal award, or other governing regulations as to types or amounts of cost items. e. Be consistent
with policies, regulations, and procedures that apply uniformly
to both Federal awards and other activities of the governmental
unit. f. Be accorded
consistent treatment. A cost may not be assigned to a Federal award
as a direct cost if any other cost incurred for the same purpose
in like circumstances has been allocated to the Federal award as
an indirect cost. g. Except as
otherwise provided for in this Circular, be determined in accordance
with generally accepted accounting principles. h. Not be included
as a cost or used to meet cost sharing or matching requirements
of any other Federal award in either the current or a prior period,
except as specifically provided by Federal law or regulation. i. Be the net
of all applicable credits. j. Be adequately
documented. 2. Reasonable
costs. A cost is reasonable if, in its nature and 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 cost. The question of reasonableness is particularly important
when governmental units or components are predominately federally-
funded. In determining 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 governmental unit or the performance of
the Federal award. b. The restraints
or requirements imposed by such factors as: sound business practices;
arms length bargaining; Federal, State and other laws and regulations;
and, terms and conditions of the Federal award. c. Market prices
for comparable goods or services. d. Whether
the individuals concerned acted with prudence in the circumstances
considering their responsibilities to the governmental unit, its
employees, the public at large, and the Federal Government. e. Significant
deviations from the established practices of the governmental unit
which may unjustifiably increase the Federal award's cost. 3. Allocable
costs. a. 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. b. All activities
which benefit from the governmental unit's indirect cost, including
unallowable activities and services donated to the governmental
unit by third parties, will receive an appropriate allocation of
indirect costs. c. Any cost allocable to a particular Federal award or cost objective under the principles provided for in this Circular may not be charged to other Federal awards to overcome fund deficiencies, to avoid restrictions imposed by law or terms of
the Federal awards, or for other reasons. However, this prohibition
would not preclude governmental units from shifting costs that are
allowable under two or more awards in accordance with existing program
agreements. d. Where an
accumulation of indirect costs will ultimately result in charges
to a Federal award, a cost allocation plan will be required as described
in Attachments C, D, and E. 4. Applicable
credits. a. Applicable
credits refer to those receipts or reduction of expenditure-type
transactions that offset or reduce expense items allocable to Federal
awards as direct or indirect costs. Examples of such transactions
are: purchase discounts, rebates or allowances, recoveries or indemnities
on losses, insurance refunds or rebates, and adjustments of overpayments
or erroneous charges. To the extent that such credits accruing to
or received by the governmental unit relate to allowable costs,
they shall be credited to the Federal award either as a cost reduction
or cash refund, as appropriate. b. In some instances, the amounts received from the Federal Government to finance activities or service operations of the governmental unit should be treated as applicable credits. Specifically, the concept of netting such credit items (including any amounts used to meet cost sharing or matching requirements) should be recognized in determining the rates or amounts to
be charged to Federal awards. (See Attachment B, item 15, "Depreciation
and use allowances," for areas of potential application in the matter
of Federal financing of activities.) D. Composition
of Cost 1. Total cost.
The total cost of Federal awards is comprised of the allowable direct
cost of the program, plus its allocable portion of allowable indirect
costs, less applicable credits. 2. Classification
of costs. There is no universal rule for classifying certain costs
as either direct or indirect under every accounting system. A cost
may be direct with respect to some specific service or function,
but indirect with respect to the Federal award or other final cost
objective. Therefore, it is essential that each item of cost be
treated consistently in like circumstances either as a direct or
an indirect cost. Guidelines for determining direct and indirect
costs charged to Federal awards are provided in the sections that
follow. E. Direct
Costs 1. General.
Direct costs are those that can be identified specifically with
a particular final cost objective. 2. Application.
Typical direct costs chargeable to Federal awards are: a. Compensation
of employees for the time devoted and identified specifically to
the performance of those awards. b. Cost of
materials acquired, consumed, or expended specifically for the purpose
of those awards. c. Equipment
and other approved capital expenditures. d. Travel expenses
incurred specifically to carry out the award. 3. Minor items.
Any direct cost of a minor amount may be treated as an indirect
cost for reasons of practicality where such accounting treatment
for that item of cost is consistently applied to all cost objectives.
F. Indirect
Costs 1. General.
Indirect costs are those: (a) incurred for a common or joint purpose
benefiting more than one cost objective, and (b) not readily assignable
to the cost objectives specifically benefitted, without effort disproportionate
to the results achieved. The term "indirect costs," as used herein,
applies to costs of this type originating in the grantee department,
as well as those incurred by other departments in supplying goods,
services, and facilities. To facilitate equitable distribution of
indirect expenses to the cost objectives served, it may be necessary
to establish a number of pools of indirect costs within a governmental
unit department or in other agencies providing services to a governmental
unit department. Indirect cost pools should be distributed to benefitted
cost objectives on bases that will produce an equitable result in
consideration of relative benefits derived. 2. Cost allocation
plans and indirect cost proposals. Requirements for development
and submission of cost allocation plans and indirect cost rate proposals
are contained in Attachments C, D, and E. 3. Limitation
on indirect or administrative costs. a. In addition
to restrictions contained in this Circular, there may be laws that
further limit the amount of administrative or indirect cost allowed.
b. Amounts
not recoverable as indirect costs or administrative costs under
one Federal award may not be shifted to another Federal award, unless
specifically authorized by Federal legislation or regulation. G. Interagency
Services. The cost of services provided by one agency to another
within the governmental unit may include allowable direct costs
of the service plus a pro rate share of indirect costs. A standard
indirect cost allowance equal to ten percent of the direct salary
and wage cost of providing the service (excluding overtime, shift
premiums, and fringe benefits) may be used in lieu of determining
the actual indirect costs of the service. These services do not
include centralized services included in central service cost allocation
plans as described in Attachment C. H. Required
Certifications. Each cost allocation plan or indirect cost rate
proposal required by Attachments C and E must comply with the following:
1. No proposal
to establish a cost allocation plan or an indirect cost rate, whether
submitted to a Federal cognizant agency or maintained on file by
the governmental unit, shall be acceptable unless such costs have
been certified by the governmental unit using the Certificate of
Cost Allocation Plan or Certificate of Indirect Costs as set forth
in Attachments C and E. The certificate must be signed on behalf
of the governmental unit by an individual at a level no lower than
chief financial officer of the governmental unit that submits the
proposal or component covered by the proposal. 2. No cost allocation plan or indirect cost rate shall be approved by the Federal Government unless the plan or rate proposal has been certified. Where it is necessary to establish a cost allocation plan or an indirect cost rate and the governmental unit has not submitted a certified proposal for establishing such a plan or rate in accordance with the requirements, the Federal Government may either disallow all indirect costs or unilaterally establish such a plan or rate. Such a plan or rate may be based upon audited historical data or such other data that have been furnished to the cognizant Federal agency and for which it can be demonstrated that all unallowable costs have been excluded. When a cost allocation plan or indirect cost rate is unilaterally established by the Federal Government because of failure of the governmental unit to submit a certified proposal, the plan or rate established will be set to ensure that potentially unallowable costs will not be reimbursed. ATTACHMENT
B SELECTED
ITEMS OF COST TABLE OF CONTENTS
1. Accounting Sections 1
through 42 provide principles to be applied in establishing the
allowability or unallowability of certain items of cost. These principles
apply whether a cost is treated as direct or indirect. A cost is
allowable for Federal reimbursement only to the extent of benefits
received by Federal awards and its conformance with the general
policies and principles stated in Attachment A to this Circular.
Failure to mention a particular item of cost in these sections is
not intended to imply that it is either allowable or unallowable;
rather, determination of allowability in each case should be based
on the treatment or standards provided for similar or related items
of cost. 1. Accounting.
The cost of establishing and maintaining accounting and other information
systems is allowable. 2. Advertising
and public relations costs. a. The term
"advertising costs" means the costs of advertising media and corollary
administrative costs. Advertising media include magazines, newspapers,
radio and television 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 governmental
unit or maintaining or promoting understanding and favorable relations
with the community or public at large or any segment of the public.
c. Advertising
costs are allowable only when incurred for the recruitment of personnel,
the procurement of goods and services, the disposal of surplus materials,
and any other specific purposes necessary to meet the requirements
of the Federal award. Advertising costs associated with the disposal
of surplus materials are not allowable where all disposal costs
are reimbursed based on a standard rate as specified in the grants
management common rule. d. Public relations
costs are allowable when: (1) Specifically
required by the Federal award and then only as a direct cost; (2) Incurred
to communicate with the public and press pertaining to specific
activities or accomplishments that result from performance of the
Federal award and then only as a direct cost; or (3) Necessary
to conduct 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 Federal contract/grant
awards, financial matters, etc. e. Unallowable
advertising and public relations costs include the following: (1) All advertising
and public relations costs other than as specified in subsections
c. and d.; (2) Except
as otherwise permitted by these cost principles, costs of conventions,
meetings, or other events related to other activities of the governmental
unit including: (a) Costs of
displays, demonstrations, and exhibits; (b) Costs of
meeting rooms, hospitality suites, and other special facilities
used in conjunction with shows and other special events; and (c) Salaries
and wages of employees engaged in setting up and displaying exhibits,
making demonstrations, and providing briefings; (3) Costs of
promotional items and memorabilia, including models, gifts, and
souvenirs; and (4) Costs of
advertising and public relations designed solely to promote the
governmental unit. 3. Advisory
councils. Costs incurred by advisory councils or committees
are allowable as a direct cost where authorized by the Federal awarding
agency or as an indirect cost where allocable to Federal awards.
4. Alcoholic
beverages. Costs of alcoholic beverages are unallowable. 5. Audit
services. The costs of audits are allowable provided that the
audits were performed in accordance with the Single Audit Act, as
implemented by Circular A-128, "Audits of State and Local Governments."
[Note: In June 1997, OMB rescinded Circular A-128 and co-located
all audit requirements in a re-titled Circular A-133, "Audits of
States, Local Governments, and Non-Profit Organizations."] Generally,
the percentage of costs charged to Federal awards for a single audit
shall not exceed the percentage derived by dividing Federal funds
expended by total funds expended by the recipient or subrecipient
(including program matching funds) during the fiscal year. The percentage
may be exceeded only if appropriate documentation demonstrates higher
actual costs. Other audit
costs are allowable if specifically approved by the awarding or
cognizant agency as a direct cost to an award or included as an
indirect cost in a cost allocation plan or rate. 6. Automatic
electronic data processing. The cost of data processing services
is allowable (but see section 19, Equipment and other capital expenditures).
7. Bad debts.
Any losses arising from uncollectible accounts and other claims,
and related costs, are unallowable unless provided for in Federal
program award regulations. 8. Bonding
costs. Costs of bonding employees and officials are allowable
to the extent that such bonding is in accordance with sound business
practice. 9. Budgeting.
Costs incurred for the development, preparation, presentation, and
execution of budgets are allowable. 10. Communications.
Costs of telephone, mail, messenger, and similar communication services
are allowable. 11. Compensation
for personnel services. a. General.
Compensation for personnel services includes all remuneration, paid
currently or accrued, for services rendered during the period of
performance under Federal awards, including but not necessarily
limited to wages, salaries, and fringe benefits. The costs of such
compensation are allowable to the extent that they satisfy the specific
requirements of this Circular, and that the total compensation for
individual employees: (1) Is reasonable
for the services rendered and conforms to the established policy
of the governmental unit consistently applied to both Federal and
non-Federal activities; (2) Follows
an appointment made in accordance with a governmental unit's laws
and rules and meets merit system or other requirements required
by Federal law, where applicable; and (3) Is determined
and supported as provided in subsection h. b. Reasonableness.
Compensation for employees engaged in work on Federal awards will
be considered reasonable to the extent that it is consistent with
that paid for similar work in other activities of the governmental
unit. In cases where the kinds of employees required for Federal
awards are not found in the other activities of the governmental
unit, compensation will be considered reasonable to the extent that
it is comparable to that paid for similar work in the labor market
in which the employing government competes for the kind of employees
involved. Compensation surveys providing data representative of
the labor market involved will be an acceptable basis for evaluating
reasonableness. c. Unallowable
costs. Costs which are unallowable under other sections of these
principles shall not be allowable under this section solely on the
basis that they constitute personnel compensation. d. Fringe benefits.
(1) Fringe
benefits are allowances and services provided by employers to their
employees as compensation in addition to regular salaries and wages.
Fringe benefits include, but are not limited to, the costs of leave,
employee insurance, pensions, and unemployment benefit plans. Except
as provided elsewhere in these principles, the costs of fringe benefits
are allowable to the extent that the benefits are reasonable and
are required by law, governmental unit-employee agreement, or an
established policy of the governmental unit. (2) The cost
of fringe benefits in the form of regular compensation paid to employees
during periods of authorized absences from the job, such as for
annual leave, sick leave, holidays, court leave, military leave,
and other similar benefits, are allowable if: (a) they are provided
under established written leave policies; (b) the costs are equitably
allocated to all related activities, including Federal awards; and,
(c) the accounting basis (cash or accrual) selected for costing
each type of leave is consistently followed by the governmental
unit. (3) When a
governmental unit uses the cash basis of accounting, the cost of
leave is recognized in the period that the leave is taken and paid
for. Payments for unused leave when an employee retires or terminates
employment are allowable in the year of payment provided they are
allocated as a general administrative expense to all activities
of the governmental unit or component. (4) The accrual
basis may be only used for those types of leave for which a liability
as defined by Generally Accepted Accounting Principles (GAAP) exists
when the leave is earned. When a governmental unit uses the accrual
basis of accounting, in accordance with GAAP, allowable leave costs
are the lesser of the amount accrued or funded. (5) The cost
of fringe benefits in the form of employer contributions or expenses
for social security; employee life, health, unemployment, and worker's
compensation insurance (except as indicated in section 25, Insurance
and indemnification); pension plan costs (see subsection e.); and
other similar benefits are allowable, provided such benefits are
granted under established written policies. Such benefits, whether
treated as indirect costs or as direct costs, shall be allocated
to Federal awards and all other activities in a manner consistent
with the pattern of benefits attributable to the individuals or
group(s) of employees whose salaries and wages are chargeable to
such Federal awards and other activities. e. Pension
plan costs. Pension plan costs may be computed using a pay-as-you-go
method or an acceptable actuarial cost method in accordance with
established written policies of the governmental unit. (1) For pension
plans financed on a pay-as-you-go method, allowable costs will be
limited to those representing actual payments to retirees or their
beneficiaries. (2) Pension
costs calculated using an actuarial cost- based method recognized
by GAAP are allowable for a given fiscal year if they are funded
for that year within six months after the end of that year. Costs
funded after the six month period (or a later period agreed to by
the cognizant agency) are allowable in the year funded. The cognizant
agency may agree to an extension of the six month period if an appropriate
adjustment is made to compensate for the timing of the charges to
the Federal Government and related Federal reimbursement and the
governmental unit's contribution to the pension fund. Adjustments
may be made by cash refund or other equitable procedures to compensate
the Federal Government for the time value of Federal reimbursements
in excess of contributions to the pension fund. (3) Amounts
funded by the governmental unit in excess of the actuarially determined
amount for a fiscal year may be used as the governmental unit's
contribution in future periods. (4) When a
governmental unit converts to an acceptable actuarial cost method,
as defined by GAAP, and funds pension costs in accordance with this
method, the unfunded liability at the time of conversion shall be
allowable if amortized over a period of years in accordance with
GAAP. (5) The Federal
Government shall receive an equitable share of any previously allowed
pension costs (including earnings thereon) which revert or inure
to the governmental unit in the form of a refund, withdrawal, or
other credit. f. Post-retirement
health benefits. Post-retirement health benefits (PRHB) refers to
costs of health insurance or health services not included in a pension
plan covered by subsection e. for retirees and their spouses, dependents,
and survivors. PRHB costs may be computed using a pay-as-you-go
method or an acceptable actuarial cost method in accordance with
established written polices of the governmental unit. (1) For PRHB
financed on a pay as-you-go method, allowable costs will be limited
to those representing actual payments to retirees or their beneficiaries.
(2) PRHB costs
calculated using an actuarial cost method recognized by GAAP are
allowable if they are funded for that year within six months after
the end of that year. Costs funded after the six month period (or
a later period agreed to by the cognizant agency) are allowable
in the year funded. The cognizant agency may agree to an extension
of the six month period if an appropriate adjustment is made to
compensate for the timing of the charges to the Federal Government
and related Federal reimbursements and the governmental unit's contributions
to the PRHB fund. Adjustments may be made by cash refund, reduction
in current year's PRHB costs, or other equitable procedures to compensate
the Federal Government for the time value of Federal reimbursements
in excess of contributions to the PRHB fund. (3) Amounts funded in excess of the actuarially determined amount for a fiscal year may be used as the government's contribution in a future period. (4) When a
governmental unit converts to an acceptable actuarial cost method
and funds PRHB costs in accordance with this method, the initial
unfunded liability attributable to prior years shall be allowable
if amortized over a period of years in accordance with GAAP, or,
if no such GAAP period exists, over a period negotiated with the
cognizant agency. (5) To be allowable
in the current year, the PRHB costs must be paid either to: (a) An insurer
or other benefit provider as current year costs or premiums, or
(b) An insurer
or trustee to maintain a trust fund or reserve for the sole purpose
of providing post-retirement benefits to retirees and other beneficiaries.
(6) The Federal
Government shall receive an equitable share of any amounts of previously
allowed post-retirement benefit costs (including earnings thereon)
which revert or inure to the governmental unit in the form of a
refund, withdrawal, or other credit. g. Severance
pay. (1) Payments in addition to regular salaries and wages made to workers whose employment is being terminated are allowable to the extent that, in each case, they are required by (a) law, (b) employer-employee agreement, or (c) established written policy. (2) Severance
payments (but not accruals) associated with normal turnover are
allowable. Such payments shall be allocated to all activities of
the governmental unit as an indirect cost. (3) Abnormal
or mass severance pay will be considered on a case-by-case basis
and is allowable only if approved by the cognizant Federal agency.
h. Support
of salaries and wages. These standards regarding time distribution
are in addition to the standards for payroll documentation. (1) Charges
to Federal awards for salaries and wages, whether treated as direct
or indirect costs, will be based on payrolls documented in accordance
with generally accepted practice of the governmental unit and approved
by a responsible official(s) of the governmental unit. (2) No further
documentation is required for the salaries and wages of employees
who work in a single indirect cost activity. (3) Where employees
are expected to work solely on a single Federal award or cost objective,
charges for their salaries and wages will be supported by periodic
certifications that the employees worked solely on that program
for the period covered by the certification. These certifications
will be prepared at least semi-annually and will be signed by the
employee or supervisory official having first hand knowledge of
the work performed by the employee. (4) Where employees
work on multiple activities or cost objectives, a distribution of
their salaries or wages will be supported by personnel activity
reports or equivalent documentation which meets the standards in
subsection (5) unless a statistical sampling system (see subsection
(6)) or other substitute system has been approved by the cognizant
Federal agency. Such documentary support will be required where
employees work on: (a) More than
one Federal award, (b) A Federal
award and a non-Federal award, (c) An indirect
cost activity and a direct cost activity, (d) Two or
more indirect activities which are allocated using different allocation
bases, or (e) An unallowable
activity and a direct or indirect cost activity. (5) Personnel
activity reports or equivalent documentation must meet the following
standards: (a) They must
reflect an after-the-fact distribution of the actual activity of
each employee, (b) They must
account for the total activity for which each employee is compensated,
(c) They must
be prepared at least monthly and must coincide with one or more
pay periods, and (d) They must
be signed by the employee. (e) Budget
estimates or other distribution percentages determined before the
services are performed do not qualify as support for charges to
Federal awards but may be used for interim accounting purposes,
provided that: (i) The governmental
unit's system for establishing the estimates produces reasonable
approximations of the activity actually performed; (ii) At least
quarterly, comparisons of actual costs to budgeted distributions
based on the monthly activity reports are made. Costs charged to
Federal awards to reflect adjustments made as a result of the activity
actually performed may be recorded annually if the quarterly comparisons
show the differences between budgeted and actual costs are less
than ten percent; and (iii) The budget
estimates or other distribution percentages are revised at least
quarterly, if necessary, to reflect changed circumstances. (6) Substitute
systems for allocating salaries and wages to Federal awards may
be used in place of activity reports. These systems are subject
to approval if required by the cognizant agency. Such systems may
include, but are not limited to, random moment sampling, case counts,
or other quantifiable measures of employee effort. (a) Substitute
systems which use sampling methods (primarily for Aid to Families
with Dependent Children (AFDC), Medicaid, and other public assistance
programs) must meet acceptable statistical sampling standards including:
(i) The sampling
universe must include all of the employees whose salaries and wages
are to be allocated based on sample results except as provided in
subsection (c); (ii) The entire
time period involved must be covered by the sample; and (iii) The results
must be statistically valid and applied to the period being sampled.
(b) Allocating
charges for the sampled employees' supervisors, clerical and support
staffs, based on the results of the sampled employees, will be acceptable.
(c) Less than
full compliance with the statistical sampling standards noted in
subsection (a) may be accepted by the cognizant agency if it concludes
that the amounts to be allocated to Federal awards will be minimal,
or if it concludes that the system proposed by the governmental
unit will result in lower costs to Federal awards than a system
which complies with the standards. (7) Salaries
and wages of employees used in meeting cost sharing or matching
requirements of Federal awards must be supported in the same manner
as those claimed as allowable costs under Federal awards. i. Donated
services. (1) Donated or volunteer services may be furnished to a governmental unit 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. However, the value of donated services may be used to meet cost sharing or matching requirements in accordance with the provisions of the Common Rule. (2) The value
of donated services utilized in the performance of a direct cost
activity shall, when material in amount, be considered in the determination
of the governmental unit's indirect costs or rate(s) and, accordingly,
shall be allocated a proportionate share of applicable indirect
costs. (3) To the
extent feasible, donated services will be supported by the same
methods used by the governmental unit to support the allocability
of regular personnel services. 12. Contingencies.
Contributions to a contingency reserve or any similar provision
made for events the occurrence of which cannot be foretold with
certainty as to time, or intensity, or with an assurance of their
happening, are unallowable. The term "contingency reserve" excludes
self-insurance reserves (see subsection 25.c.), pension plan reserves
(see subsection 11.e.), and post-retirement health and other benefit
reserves (see subsection 11.f.) computed using acceptable actuarial
cost methods. 13. Contributions
and donations. Contributions and donations, including cash,
property, and services, by governmental units to others, regardless
of the recipient, are unallowable. 14. Defense
and prosecution of criminal and civil proceedings, and claims.
a. The following
costs are unallowable for contracts covered by 10 U.S.C. 2324(k),
"Allowable costs under defense contracts." (1) Costs incurred
in defense of any civil or criminal fraud proceeding or similar
proceeding (including filing of false certification brought by the
United States where the contractor is found liable or has pleaded
nolo contendere to a charge of fraud or similar proceeding (including
filing of a false certification). (2) Costs incurred
by a contractor in connection with any criminal, civil or administrative
proceedings commenced by the United States or a State to the extent
provided in 10 U.S.C. 2324(k). b. Legal expenses
required in the administration of Federal programs are allowable.
Legal expenses for prosecution of claims against the Federal Government
are unallowable. 15. Depreciation
and use allowances. a. Depreciation
and use allowances are means of allocating the cost of fixed assets
to periods benefitting from asset use. Compensation for the use
of fixed assets on hand may be made through depreciation or use
allowances. 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.) except as provided in
subsection g. Except for enterprise funds and internal service funds
that are included as part of a State/local cost allocation plan,
classes of assets shall be determined on the same basis used for
the government-wide financial statements. b. The computation
of depreciation or use allowances shall be based on the acquisition
cost of the assets involved. Where actual cost records have not
been maintained, a reasonable estimate of the original acquisition
cost may be used. The value of an asset donated to the governmental
unit by an unrelated third party shall be its fair market value
at the time of donation. Governmental or quasi-governmental organizations
located within the same State shall not be considered unrelated
third parties for this purpose. c. The computation
of depreciation or use allowances 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
governmental unit, or a related donor organization, in satisfaction
of a matching requirement. d. Where the
use allowance method is followed, the use allowance for buildings
and improvements (including land improvements, such as paved parking
areas, fences, and sidewalks) will be computed at an annual rate
not exceeding two percent of acquisition costs. The use allowance
for equipment will be computed at an annual rate not exceeding 6
2/3 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 condition, 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, modular furniture, carpeting, etc.).
Such equipment will be considered as not being permanently fixed
to the building if it can be removed without the destruction of,
or need for costly or extensive alterations or repairs, to the building
or the equipment. Equipment that meets these criteria will be subject
to the 6 2/3 percent equipment use allowance limitation. e. Where the
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, historical usage patterns, technological
developments, and the renewal and replacement policies of the governmental
unit followed for the individual items or classes of assets involved.
In the absence of clear evidence indicating that the expected consumption
of the asset will be significantly greater in the early portions
than in the later portions of its useful life, the straight line
method of depreciation shall be used. Depreciation methods once
used shall not be changed unless approved by the Federal cognizant
or awarding agency. When the depreciation method is introduced for
application to an asset previously subject to a use allowance, the
annual depreciation charge thereon may not exceed the amount that
would have resulted had the depreciation method been in effect from
the date of acquisition of the asset. The combination of use allowances
and depreciation applicable to the asset shall not exceed the total
acquisition cost of the asset or fair market value at time of donation.
f. When the
depreciation method is used for buildings, a building's shell may
be segregated from the major component of the building (e.g., plumbing
system, heating, and air conditioning system, etc.) and each major
component 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 useful life. g. A reasonable use allowance may be negotiated for any assets that are considered to be fully depreciated, after taking into consideration the amount of depreciation previously charged to the 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 purpose contemplated. h. Charges
for use allowances or depreciation must be supported by adequate
property records. Physical inventories must be taken at least once
every two years (a statistical sampling approach is acceptable)
to ensure that assets exist, and are in use. Governmental units
will manage equipment in accordance with State laws and procedures.
When the depreciation method is followed, depreciation records indicating
the amount of depreciation taken each period must also be maintained.
16. Disbursing
service. The cost of disbursing funds by the Treasurer or other
designated officer is allowable. 17. Employee
morale, health, and welfare costs. The costs of health or first-aid
clinics and/or infirmaries, recreational facilities, employee counseling
services, employee information publications, and any related expenses
incurred in accordance with a governmental unit's policy are allowable.
Income generated from any of these activities will be offset against
expenses. 18. Entertainment.
Costs of entertainment, including amusement, diversion, and social
activities and any costs directly associated with such costs (such
as tickets to shows or sports events, meals, lodging, rentals, transportation,
and gratuities) are unallowable. 19. Equipment
and other capital expenditures. a. As used
in this section the following terms have the meanings as set forth
below: (1) "Capital
expenditure" means the cost of the asset including the cost to put
it in place. Capital expenditure for equipment means the net invoice
price of the 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 may be included in, or excluded from, capital expenditure
cost in accordance with the governmental unit's regular accounting
practices. (2) "Equipment"
means an article of nonexpendable, tangible personal property having
a useful life of more than one year and an acquisition cost which
equals the lesser of (a) the capitalization level established by
the governmental unit for financial statement purposes, or (b) $5000.
(3) "Other
capital assets" mean buildings, land, and improvements to buildings
or land that materially increase their value or useful life. b. Capital
expenditures which are not charged directly to a Federal award may
be recovered through use allowances or depreciation on buildings,
capital improvements, and equipment (see section 15). See also section
38 for allowability of rental costs for buildings and equipment.
c. Capital
expenditures for equipment, including replacement equipment, other
capital assets, and improvements which materially increase the value
or useful life of equipment or other capital assets are allowable
as a direct cost when approved by the awarding agency. Federal awarding
agencies are authorized at their option to waive or delegate this
approval requirement. d. Items of
equipment with an acquisition cost of less than $5000 are considered
to be supplies and are allowable as direct costs of Federal awards
without specific awarding agency approval. e. The unamortized
portion of any equipment written off as a result of a change in
capitalization levels may be recovered by (1) continuing to claim
the otherwise allowable use allowances or depreciation charges on
the equipment or by (2) amortizing the amount to be written off
over a period of years negotiated with the cognizant agency. f. When replacing
equipment purchased in whole or in part with Federal funds, the
governmental unit may use the equipment to be replaced as a trade-in
or sell the property and use the proceeds to offset the cost of
the replacement property. 20. Fines
and penalties. Fines, penalties, damages, and other settlements
resulting from violations (or alleged violations) of, or failure
of the governmental unit to comply with, Federal, State, local,
or Indian tribal laws and regulations are unallowable except when
incurred as a result of compliance with specific provisions of the
Federal award or written instructions by the awarding agency authorizing
in advance such payments. 21. Fund
raising and investment management costs. a. Costs of
organized fund raising, including financial campaigns, solicitation
of gifts and bequests, and similar expenses incurred to raise capital
or obtain contributions are unallowable, regardless of the purpose
for which the funds will be used. b. Costs of
investment counsel and staff and similar expenses incurred to enhance
income from investments are unallowable. However, such costs associated
with investments covering pension, self-insurance, or other funds
which include Federal participation allowed by this Circular are
allowable. c. Fund raising
and investment activities shall be allocated an appropriate share
of indirect costs under the conditions described in subsection C.3.b.
of Attachment A. 22. Gains
and losses on disposition of depreciable property and other capital
assets and substantial relocation of Federal programs. a. (1) Gains
and losses on the sale, retirement, or other disposition of depreciable
property shall be included in the year in which they occur as credits
or charges to the asset cost grouping(s) in which the property was
included. The amount of the gain or loss to be included as a credit
or charge to the appropriate asset 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 account and is reflected
in the depreciation allowable under sections 15 and 19. (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 subsection 25.d. (d) Compensation
for the use of the property was provided through use allowances
in lieu of depreciation. b. Substantial
relocation of Federal awards from a facility where the Federal Government
participated in the financing to another facility prior to the expiration
of the useful life of the financed facility requires Federal agency
approval. The extent of the relocation, the amount of the Federal
participation in the financing, and the depreciation charged to
date may require negotiation of space charges for Federal awards.
c. Gains or
losses of any nature arising from the sale or exchange of property
other than the property covered in subsection a., e.g., land or
included in the fair market value used in any adjustment resulting
from a relocation of Federal awards covered in subsection b. shall
be excluded in computing Federal award costs. 23. General
government expenses. a. The general
costs of government are unallowable (except as provided in section
41). These include: (1) Salaries
and expenses of the Office of the Governor of a State or the chief
executive of a political subdivision or the chief executives of
federally-recognized Indian tribal governments; (2) Salaries
and other expenses of State legislatures, tribal councils, or similar
local governmental bodies, such as county supervisors, city councils,
school boards, etc., whether incurred for purposes of legislation
or executive direction; (3) Cost of
the judiciary branch of a government; (4) Cost of
prosecutorial activities unless treated as a direct cost to a specific
program when authorized by program regulations (however, this does
not preclude the allowability of other legal activities of the Attorney
General); and (5) Other general
types of government services normally provided to the general public,
such as fire and police, unless provided for as a direct cost in
program regulations. b. For federally-recognized
Indian tribal governments and Councils Of Governments (COGs), the
portion of salaries and expenses directly attributable to managing
and operating Federal programs by the chief executive and his staff
is allowable. 24. Idle
facilities and idle capacity. a. As used
in this section the following terms have the meanings set forth
below: (1) "Facilities"
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 governmental unit. (2) "Idle facilities"
means completely unused facilities that are excess to the governmental
unit's current needs. (3) "Idle capacity"
means the unused capacity of partially used facilities. It is the
difference between (a) 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 (b) the extent to which the facility
was actually used to meet demands during the accounting period.
A multi-shift basis should be used if it can be shown that this
amount of usage would normally be expected for the type of facility
involved. (4) "Cost of
idle facilities or idle capacity" means costs such as maintenance,
repair, housing, rent, and other related costs, e.g., insurance,
interest, 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 subsection, costs of idle facilities
are allowable for a reasonable period of time, ordinarily not to
exceed one year, depending on the initiative taken to use, lease,
or dispose of such facilities. 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 that the capacity
is reasonably anticipated to be necessary or was originally reasonable
and is not subject to reduction or elimination by use on other Federal
awards, subletting, renting, or sale, in accordance with sound business,
economic, or security practices. Widespread idle capacity throughout
an entire facility or among a group of assets having substantially
the same function may be considered idle facilities. 25. Insurance
and indemnification. a. Costs of
insurance required or approved and maintained, pursuant to the Federal
award, are allowable. b. Costs of
other insurance in connection with the general conduct of activities
are allowable subject to the following limitations: (1) Types and
extent and cost of coverage are in accordance with the governmental
unit's policy and sound business practice. (2) Costs of
insurance or of contributions to any reserve covering the risk of
loss of, or damage to, Federal Government property are unallowable
except to the extent that the awarding agency has specifically required
or approved such costs. c. Actual losses
which could have been covered by permissible insurance (through
a self-insurance program or otherwise) are unallowable, unless expressly
provided for in the Federal award or as described below. However,
the Federal Government will participate in actual losses of a self
insurance fund that are in excess of reserves. Costs incurred because
of losses not covered under nominal deductible insurance coverage
provided in keeping with sound management practice, and minor losses
not covered by insurance, such as spoilage, breakage, and disappearance
of small hand tools, which occur in the ordinary course of operations,
are allowable. d. Contributions
to a reserve for certain self-insurance programs including workers
compensation, unemployment compensation, and severance pay are allowable
subject to the following provisions: (1) The type
of coverage and the extent of coverage and the rates and premiums
would have been allowed had insurance (including reinsurance) 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 discounted present value of the liability. The rate used for
discounting the liability must be determined by giving consideration
to such factors as the governmental unit's settlement rate for those
liabilities and its investment rate of return. (2) Earnings
or investment income on reserves must be credited to those reserves.
(3) Contributions
to reserves must be based on sound actuarial principles using historical
experience and reasonable assumptions. Reserve levels must be analyzed
and updated at least biennially for each major risk being insured
and take into account any reinsurance, coinsurance, etc. Reserve
levels related to employee-related coverages will normally be limited
to the value of claims (a) submitted and adjudicated but not paid,
(b) submitted but not adjudicated, and (c) incurred but not submitted.
Reserve levels in excess of the amounts based on the above must
be identified and justified in the cost allocation plan or indirect
cost rate proposal. (4) Accounting
records, actuarial studies, and cost allocations (or billings) must
recognize any significant differences due to types of insured risk
and losses generated by the various insured activities or agencies
of the governmental unit. If individual departments or agencies
of the governmental unit experience significantly different levels
of claims for a particular risk, those differences are to be recognized
by the use of separate allocations or other techniques resulting
in an equitable allocation. (5) Whenever
funds are transferred from a self-insurance reserve to other accounts
(e.g., general fund), refunds shall be made to the Federal Government
for its share of funds transferred, including earned or imputed
interest from the date of transfer. e. Actual claims paid to or on behalf of employees or former employees for workers' compensation, unemployment compensation, severance pay, and similar employee benefits (e.g., subsection 11.f. for post retirement health benefits), are allowable in the year of payment provided (1)
the governmental unit follows a consistent costing policy and (2)
they are allocated as a general administrative expense to all activities
of the governmental unit. f. Insurance
refunds shall be credited against insurance costs in the year the
refund is received. g. Indemnification
includes securing the governmental unit against liabilities to third
persons and other losses not compensated by insurance or otherwise.
The Federal Government is obligated to indemnify the governmental
unit only to the extent expressly provided for in the Federal award,
except as provided in subsection d. h. Costs of
commercial insurance that protects against the costs of the contractor
for correction of the contractor's own defects in materials or workmanship
are unallowable. 26. Interest.
a. Costs incurred
for interest on borrowed capital or the use of a governmental unit's
own funds, however represented, are unallowable except as specifically
provided in subsection b. or authorized by Federal legislation.
b. Financing
costs (including interest) paid or incurred on or after the effective
date of this Circular associated with the otherwise allowable costs
of building acquisition, construction, or fabrication, reconstruction
or remodeling completed on or after October 1, 1980 is allowable,
subject to the conditions in (1)-(4). Financing costs (including
interest) paid or incurred on or after the effective date of this
Circular associated with otherwise allowable costs of equipment
is allowable, subject to the conditions in (1)-(4). (1) The financing
is provided (from other than tax or user fee sources) by a bona
fide third party external to the governmental unit; (2) The assets
are used in support of Federal awards; (3) Earnings
on debt service reserve funds or interest earned on borrowed funds
pending payment of the construction or acquisition costs are used
to offset the current period's cost or the capitalized interest,
as appropriate. Earnings subject to being reported to the Federal
Internal Revenue Service under arbitrage requirements are excludable.
(4) Governmental
units will negotiate the amount of allowable interest whenever cash
payments (interest, depreciation, use allowances, and contributions)
exceed the governmental unit's cash payments and other contributions
attributable to that portion of real property used for Federal awards.
27. Lobbying.
The cost of certain influencing activities associated with obtaining
grants, contracts, cooperative agreements, or loans is an unallowable
cost. Lobbying with respect to certain grants, contracts, cooperative
agreements, and loans shall be governed by the common rule, "New
Restrictions on Lobbying" published at 55 FR 6736 (February 26,
1990), including definitions, and the Office of Management and Budget
"Government-wide Guidance for New Restrictions on Lobbying" and
notices published at 54 FR 52306 (December 20, 1989), 55 FR 24540
(June 15, 1990), and 57 FR 1772 (January 15, 1992), respectively.
28. Maintenance,
operations, and repairs. Unless prohibited by law, the cost
of utilities, insurance, security, janitorial services, elevator
service, upkeep of grounds, necessary maintenance, normal repairs
and alterations, and the like are allowable to the extent that they:
(1) keep property (including Federal property, unless otherwise
provided for) in an efficient operating condition, (2) do not add
to the permanent value of property or appreciably prolong its intended
life, and (3) are not otherwise included in rental or other charges
for space. Costs which add to the permanent value of property or
appreciably prolong its intended life shall be treated as capital
expenditures (see sections 15 and 19). 29. Materials
and supplies. The cost of materials and supplies is allowable.
Purchases should be charged at their actual prices after deducting
all cash discounts, trade discounts, rebates, and allowances received.
Withdrawals from general stores or stockrooms should be charged
at cost under any recognized method of pricing, consistently applied.
Incoming transportation charges are a proper part of materials and
supply costs. 30. Memberships,
subscriptions, and professional activities. a. Costs of
the governmental unit's memberships in business, technical, and
professional organizations are allowable. b. Costs of
the governmental unit's subscriptions to business, professional,
and technical periodicals are allowable. c. Costs of
meetings and conferences where the primary purpose is the dissemination
of technical information, including meals, transportation, rental
of meeting facilities, and other incidental costs are allowable.
d. Costs of
membership in civic and community, social organizations are allowable
as a direct cost with the approval of the Federal awarding agency.
e. Costs of
membership in organizations substantially engaged in lobbying are
unallowable. 31. Motor
pools. The costs of a service organization which provides automobiles
to user governmental units at a mileage or fixed rate and/or provides
vehicle maintenance, inspection, and repair services are allowable.
32. Pre-award
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. 33. Professional
service costs. a. Cost of
professional and consultant services rendered by persons or organizations
that are members of a particular profession or possess a special
skill, whether or not officers or employees of the governmental
unit, are allowable, subject to section 14 when reasonable in relation
to the services rendered and when not contingent upon recovery of
the costs from the Federal Government. b. Retainer
fees supported by evidence of bona fide services available or rendered
are allowable. 34. Proposal
costs. Costs of preparing proposals for potential Federal awards
are allowable. Proposal costs should normally be treated as indirect
costs and should be allocated to all activities of the governmental
unit utilizing the cost allocation plan and indirect cost rate proposal.
However, proposal costs may be charged directly to Federal awards
with the prior approval of the Federal awarding agency. 35. Publication
and printing costs. Publication costs, including the costs of
printing (including the processes of composition, plate-making,
press work, and binding, and the end products produced by such processes),
distribution, promotion, mailing, and general handling are allowable.
36. Rearrangements
and alterations. Costs incurred for ordinary and normal rearrangement
and alteration of facilities are allowable. Special arrangements
and alterations costs incurred specifically for a Federal award
are allowable with the prior approval of the Federal awarding agency.
37. Reconversion
costs. Costs incurred in the restoration or rehabilitation of
the governmental unit's facilities to approximately the same condition
existing immediately prior to commencement of Federal awards, less
costs related to normal wear and tear, are allowable. 38. Rental
costs. a. Subject
to the limitations described in subsections b. through d. of this
section, 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 governmental unit 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 governmental unit. For this purpose, less-than-arms-length leases
include, but are not limited to, those where: (1) One party
to the lease is able to control or substantially influence the actions
of the other; (2) Both parties
are parts of the same governmental unit; or (3) The governmental
unit creates an authority or similar entity to acquire and lease
the facilities to the governmental unit and other parties. 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 governmental unit purchased the property on the date the
lease agreement was executed. This amount would include expenses
such as depreciation or use allowance, maintenance, and insurance.
The provisions of Financial Accounting Standards Board Statement
13 shall be used to determine whether a lease is a capital lease.
Interest costs related to capital leases are allowable to the extent
they meet the criteria in section 26. 39. Taxes.
a. Taxes that
a governmental unit is legally required to pay are allowable, except
for self-assessed taxes that disproportionately affect Federal programs
or changes in tax policies that disproportionately affect Federal
programs. This provision becomes effective for taxes paid during
the governmental unit's first fiscal year that begins on or after
January 1, 1998, and applies thereafter. b. Gasoline
taxes, motor vehicle fees, and other taxes that are in effect user
fees for benefits provided to the Federal Government are allowable.
c. This provision
does not restrict the authority of Federal agencies to identify
taxes where Federal participation is inappropriate. Where the identification
of the amount of unallowable taxes would require an inordinate amount
of effort, the cognizant agency may accept a reasonable approximation
thereof. 40. Training.
The cost of training provided for employee development is allowable.
41. Travel
costs. a. General.
Travel costs are allowable for expenses for transportation, lodging,
subsistence, and related items incurred by employees traveling on
official business. Such costs may be charged on an actual cost 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 is applied
to an entire trip, and results in charges consistent with those
normally allowed in like circumstances in non-federally-sponsored
activities. Notwithstanding the provisions of section 23, travel
costs of officials covered by that section, when specifically related
to Federal awards, are allowable with the prior approval of a grantor
agency. b. Lodging
and subsistence. Costs incurred by employees and officers for
travel, including costs of lodging, other subsistence, and incidental
expenses, shall be considered reasonable and allowable only to the
extent such costs do not exceed charges normally allowed by the
governmental unit in its regular operations as a result of the governmental
unit's policy. In the absence of a written governmental unit policy
regarding travel costs, the rates and amounts established under
subchapter I of Chapter 57 of Title 5, United States Code "Travel
and Subsistence Expenses; Mileage Allowances," or by the Administrator
of General Services, or the President (or his designee) pursuant
to any provisions of such subchapter shall be used as guidance for
travel under Federal awards (41 U.S.C. 420, "Travel Expenses of
Government Contractors"). c. Commercial
air travel. Airfare costs in excess of the customary standard
(coach or equivalent) airfare, are unallowable except when such
accommodations would: require circuitous routing, require travel
during unreasonable hours, excessively prolong travel, greatly increase
the duration of the flight, result in increased cost that would
offset transportation savings, or offer accommodations not reasonably
adequate for the medical needs of the traveler. Where a governmental
unit can reasonably demonstrate to the awarding agency either the
nonavailability of customary standard airfare or Federal Government
contract airfare for individual trips or, on an overall basis, that
it is the governmental unit's practice to make routine use of such
airfare, specific determinations of nonavailability will generally
not be questioned by the Federal Government, unless a pattern of
avoidance is detected. However, in order for airfare costs in excess
of the customary standard commercial airfare to be allowable, e.g.,
use of first-class airfare, the governmental unit must justify and
document on a case-by-case basis the applicable condition(s) set
forth above. d. Air travel
by other than commercial carrier. Cost of travel by governmental
unit-owned, -leased, or -chartered aircraft, as used in this section,
includes the cost of lease, charter, operation (including personnel
costs), maintenance, depreciation, interest, insurance, and other
related costs. Costs of travel via governmental unit-owned, -leased,
or -chartered aircraft are unallowable to the extent they exceed
the cost of allowable commercial air travel, as provided for in
subsection c. 42. Underrecovery of costs under Federal agreements. Any excess costs over the Federal contribution under one award agreement are unallowable under other award agreements.
ATTACHMENT
C STATE/LOCAL-WIDE
CENTRAL SERVICE COST ALLOCATION PLANS TABLE OF CONTENTS
A. General
B. Definitions 1. Billed central services 2. Allocated central services 3. Agency or
operating agency C. Scope of
the Central Service Cost Allocation Plans D. Submission
Requirements E. Documentation Requirements for Submitted Plans 1. General 2. Allocated central services 3. Billed services a. General b. Internal service funds c. Self-insurance funds d. Fringe benefits 4. Required
certification F. Negotiation
and Approval of Central Service Plans G. Other Policies 1. Billed central service activities 2. Working capital reserves 3. Carry-forward adjustments of allocated central service costs 4. Adjustments of billed central services 5. Records retention 6. Appeals 7. OMB assistance
A. General.
1. Most governmental units provide certain services, such as motor pools, computer centers, purchasing, accounting, etc., to operating agencies on a centralized basis. Since federally-supported awards are performed within the individual operating agencies, there needs to be a process whereby these central service costs can be identified and assigned to benefitted activities on a reasonable and consistent basis. The central service cost allocation plan provides that process. All costs and other data used to distribute the costs included in the plan should be supported
by formal accounting and other records that will support the propriety
of the costs assigned to Federal awards. 2. Guidelines
and illustrations of central service cost allocation plans are provided
in a brochure published by the Department of Health and Human Services
entitled "A Guide for State and Local Government Agencies: Cost
Principles and Procedures for Establishing Cost Allocation Plans
and Indirect Cost Rates for Grants and Contracts with the Federal
Government." A copy of this brochure may be obtained from the Superintendent
of Documents, U.S. Government Printing Office. B. Definitions.
1. "Billed
central services" means central services that are billed to benefitted
agencies and/or programs on an individual fee-for-service or similar
basis. Typical examples of billed central services include computer
services, transportation services, insurance, and fringe benefits.
2. "Allocated
central services" means central services that benefit operating
agencies but are not billed to the agencies on a fee-for-service
or similar basis. These costs are allocated to benefitted agencies
on some reasonable basis. Examples of such services might include
general accounting, personnel administration, purchasing, etc. 3. "Agency
or operating agency" means an organizational unit or sub-division
within a governmental unit that is responsible for the performance
or administration of awards or activities of the governmental unit.
C. Scope
of the Central Service Cost Allocation Plans. The central service
cost allocation plan will include all central service costs that
will be claimed (either as a billed or an allocated cost) under
Federal awards and will be documented as described in section E.
Costs of central services omitted from the plan will not be reimbursed.
D. Submission
Requirements. 1. Each State will submit a plan to the Department of Health and Human Services for each year in which it claims central service costs under Federal awards. The plan should include (a) a projection of the next year's allocated central service cost (based either on actual costs for the most recently completed year or the budget projection for the coming year), and (b) a reconciliation of actual allocated central service costs to the estimated costs used for either the most recently
completed year or the year immediately preceding the most recently
completed year. 2. Each local
government that has been designated as a "major local government"
by the Office of Management and Budget (OMB) is also required to
submit a plan to its cognizant agency annually. OMB periodically
lists major local governments in the Federal Register.
3. All other
local governments claiming central service costs must develop a
plan in accordance with the requirements described in this Circular
and maintain the plan and related supporting documentation for audit.
These local governments are not required to submit their plans for
Federal approval unless they are specifically requested to do so
by the cognizant agency. Where a local government only receives
funds as a sub-recipient, the primary recipient will be responsible
for negotiating indirect cost rates and/or monitoring the sub-recipient's
plan. 4. All central
service cost allocation plans will be prepared and, when required,
submitted within six months prior to the beginning of each of the
governmental unit's fiscal years in which it proposes to claim central
service costs. Extensions may be granted by the cognizant agency
on a case-by-case basis. E. Documentation
Requirements for Submitted Plans. The documentation requirements
described in this section may be modified, expanded, or reduced
by the cognizant agency on a case-by-case basis. For example, the
requirements may be reduced for those central services which have
little or no impact on Federal awards. Conversely, if a review of
a plan indicates that certain additional information is needed,
and will likely be needed in future years, it may be routinely requested
in future plan submissions. Items marked with an asterisk (*) should
be submitted only once; subsequent plans should merely indicate
any changes since the last plan. 1. General.
All proposed plans must be accompanied by the following: an organization
chart sufficiently detailed to show operations including the central
service activities of the State/local government whether or not
they are shown as benefiting from central service functions; a copy
of the Comprehensive Annual Financial Report (or a copy of the Executive
Budget if budgeted costs are being proposed) to support the allowable
costs of each central service activity included in the plan; and,
a certification (see subsection 4.) that the plan was prepared in
accordance with this Circular, contains only allowable costs, and
was prepared in a manner that treated similar costs consistently
among the various Federal awards and between Federal and non-Federal
awards/activities. 2. Allocated central services. For each allocated central service, the plan must also include the following: a brief description of the service*, an identification of the unit rendering the service and the operating agencies receiving the service, the items of expense included in the cost of the service, the method used to distribute the cost of the service to benefitted agencies, and a summary schedule showing the allocation of each service to the specific benefitted agencies. If any self-insurance funds or fringe benefits costs are treated as allocated (rather than billed) central services, documentation discussed in subsections 3.b. and c. shall also be included. 3. Billed services.
a. General.
The information described below shall be provided for all billed
central services, including internal service funds, self-insurance
funds, and fringe benefit funds. b. Internal
service funds. (1) For each
internal service fund or similar activity with an operating budget
of $5 million or more, the plan shall include: a brief description
of each service; a balance sheet for each fund based on individual
accounts contained in the governmental unit's accounting system;
a revenue/expenses statement, with revenues broken out by source,
e.g., regular billings, interest earned, etc.; a listing of all
non-operating transfers (as defined by Generally Accepted Accounting
Principles (GAAP)) into and out of the fund; a description of the
procedures (methodology) used to charge the costs of each service
to users, including how billing rates are determined; a schedule
of current rates; and, a schedule comparing total revenues (including
imputed revenues) generated by the service to the allowable costs
of the service, as determined under this Circular, with an explanation
of how variances will be handled. (2) Revenues
shall consist of all revenues generated by the service, including
unbilled and uncollected revenues. If some users were not billed
for the services (or were not billed at the full rate for that class
of users), a schedule showing the full imputed revenues associated
with these users shall be provided. Expenses shall be broken out
by object cost categories (e.g., salaries, supplies, etc.). c. Self-insurance
funds. For each self-insurance fund, the plan shall include: the
fund balance sheet; a statement of revenue and expenses including
a summary of billings and claims paid by agency; a listing of all
non-operating transfers into and out of the fund; the type(s) of
risk(s) covered by the fund (e.g., automobile liability, workers'
compensation, etc.); an explanation of how the level of fund contributions
are determined, including a copy of the current actuarial report
(with the actuarial assumptions used) if the contributions are determined
on an actuarial basis; and, a description of the procedures used
to charge or allocate fund contributions to benefitted activities.
Reserve levels in excess of claims (1) submitted and adjudicated
but not paid, (2) submitted but not adjudicated, and (3) incurred
but not submitted must be identified and explained. d. Fringe benefits.
For fringe benefit costs, the plan shall include: a listing of fringe
benefits provided to covered employees, and the overall annual cost
of each type of benefit; current fringe benefit policies*; and procedures
used to charge or allocate the costs of the benefits to benefitted
activities. In addition, for pension and post-retirement health
insurance plans, the following information shall be provided: the
governmental unit's funding policies, e.g., legislative bills, trust
agreements, or State-mandated contribution rules, if different from
actuarially determined rates; the pension plan's costs accrued for
the year; the amount funded, and date(s) of funding; a copy of the
current actuarial report (including the actuarial assumptions);
the plan trustee's report; and, a schedule from the activity showing
the value of the interest cost associated with late funding. 4. Required
certification. Each central service cost allocation plan will be
accompanied by a certification in the following form: CERTIFICATE
OF COST ALLOCATION PLAN This is to
certify that I have reviewed the cost allocation plan submitted
herewith and to the best of my knowledge and belief: (1) All costs
included in this proposal [identify date] to establish cost allocations
or billings for [identify period covered by plan] are allowable
in accordance with the requirements of OMB Circular A-87, "Cost
Principles for State, Local, and Indian Tribal Governments," and
the Federal award(s) to which they apply. Unallowable costs have
been adjusted for in allocating costs as indicated in the cost allocation
plan. (2) All costs
included in this proposal are properly allocable to Federal awards
on the basis of a beneficial or causal relationship between the
expenses incurred and the awards to which they are allocated in
accordance with applicable requirements. Further, the same costs
that have been treated as indirect costs have not been claimed as
direct costs. Similar types of costs have been accounted for consistently.
I declare that
the foregoing is true and correct. Governmental
Unit: _____________________ Signature:
____________________________ Name of Official:
_______________________ Title: _______________________________
Date of Execution: _____________________ F. Negotiation
and Approval of Central Service Plans. 1. All proposed
central service cost allocation plans that are required to be submitted
will be reviewed, negotiated, and approved by the Federal cognizant
agency on a timely basis. The cognizant agency will review the proposal
within six months of receipt of the proposal and either negotiate/approve
the proposal or advise the governmental unit of the additional documentation
needed to support/evaluate the proposed plan or the changes required
to make the proposal acceptable. Once an agreement with the governmental
unit has been reached, the agreement will be accepted and used by
all Federal agencies, unless prohibited or limited by statute. Where
a Federal funding agency has reason to believe that special operating
factors affecting its awards necessitate special consideration,
the funding agency will, prior to the time the plans are negotiated,
notify the cognizant agency. 2. The results
of each negotiation shall be formalized in a written agreement between
the cognizant agency and the governmental unit. This agreement will
be subject to re-opening if the agreement is subsequently found
to violate a statute or the information upon which the plan was
negotiated is later found to be materially incomplete or inaccurate.
The results of the negotiation shall be made available to all Federal
agencies for their use. 3. Negotiated
cost allocation plans based on a proposal later found to have included
costs that: (a) are unallowable (i) as specified by law or regulation,
(ii) as identified in Attachment B of this Circular, or (iii) by
the terms and conditions of Federal awards, or (b) are unallowable
because they are clearly not allocable to Federal awards, shall
be adjusted, or a refund shall be made at the option of the Federal
cognizant agency. These adjustments or refunds are designed to correct
the plans and do not constitute a reopening of the negotiation.
G. Other
Policies. 1. Billed central
service activities. Each billed central service activity must separately
account for all revenues (including imputed revenues) generated
by the service, expenses incurred to furnish the service, and profit/loss.
2. Working
capital reserves. Internal service funds are dependent upon a reasonable
level of working capital reserve to operate from one billing cycle
to the next. Charges by an internal service activity to provide
for the establishment and maintenance of a reasonable level of working
capital reserve, in addition to the full recovery of costs, are
allowable. A working capital reserve as part of retained earnings
of up to 60 days cash expenses for normal operating purposes is
considered reasonable. A working capital reserve exceeding 60 days
may be approved by the cognizant Federal agency in exceptional cases.
3. Carry-forward
adjustments of allocated central service costs. Allocated central
service costs are usually negotiated and approved for a future fiscal
year on a "fixed with carry-forward" basis. Under this procedure,
the fixed amounts for the future year covered by agreement are not
subject to adjustment for that year. However, when the actual costs
of the year involved become known, the differences between the fixed
amounts previously approved and the actual costs will be carried
forward and used as an adjustment to the fixed amounts established
for a later year. This "carry-forward" procedure applies to all
central services whose costs were fixed in the approved plan. However,
a carry-forward adjustment is not permitted, for a central service
activity that was not included in the approved plan, or for unallowable
costs that must be reimbursed immediately. 4. Adjustments
of billed central services. Billing rates used to charge Federal
awards shall be based on the estimated costs of providing the services,
including an estimate of the allocable central service costs. A
comparison of the revenue generated by each billed service (including
total revenues whether or not billed or collected) to the actual
allowable costs of the service will be made at least annually, and
an adjustment will be made for the difference between the revenue
and the allowable costs. These adjustments will be made through
one of the following adjustment methods: (a) a cash refund to the
Federal Government for the Federal share of the adjustment, (b)
credits to the amounts charged to the individual programs, (c) adjustments
to future billing rates, or (d) adjustments to allocated central
service costs. Adjustments to allocated central services will not
be permitted where the total amount of the adjustment for a particular
service (Federal share and non-Federal) share exceeds $500,000.
5. Records
retention. All central service cost allocation plans and related
documentation used as a basis for claiming costs under Federal awards
must be retained for audit in accordance with the records retention
requirements contained in the Common Rule. 6. Appeals.
If a dispute arises in the negotiation of a plan between the cognizant
agency and the governmental unit, the dispute shall be resolved
in accordance with the appeals procedures of the cognizant agency.
7. OMB assistance. To the extent that problems are encountered among the Federal agencies and/or governmental units in connection with the negotiation and approval process, OMB will lend assistance, as required, to resolve such problems in a timely manner. ATTACHMENT
D PUBLIC
ASSISTANCE COST ALLOCATION PLANS TABLE OF CONTENTS
A. General
B. Definitions 1. State public assistance agency 2. State public
assistance agency costs C. Policy D. Submission,
Documentation, and Approval of Public Assistance Cost Allocation
Plans E. Review of
Implementation of Approved Plans F. Unallowable
Costs A. General.
Federally-financed programs administered by State public assistance
agencies are funded predominately by the Department of Health and
Human Services (HHS). In support of its stewardship requirements,
HHS has published requirements for the development, documentation,
submission, negotiation, and approval of public assistance cost
allocation plans in Subpart E of 45 CFR Part 95. All administrative
costs (direct and indirect) are normally charged to Federal awards
by implementing the public assistance cost allocation plan. This
Attachment extends these requirements to all Federal agencies whose
programs are administered by a State public assistance agency. Major
federally-financed programs typically administered by State public
assistance agencies include: Aid to Families with Dependent Children,
Medicaid, Food Stamps, Child Support Enforcement, Adoption Assistance
and Foster Care, and Social Services Block Grant. B. Definitions.
1. "State public
assistance agency" means a State agency administering or supervising
the administration of one or more public assistance programs operated
by the State as identified in Subpart E of 45 CFR Part 95. For the
purpose of this Attachment, these programs include all programs
administered by the State public assistance agency. 2. "State public assistance agency costs" means all costs incurred by, or allocable to, the State public assistance agency, except expenditures for financial assistance, medical vendor payments, food
stamps, and payments for services and goods provided directly to
program recipients. C. Policy.
State public assistance agencies will develop, document and implement,
and the Federal Government will review, negotiate, and approve,
public assistance cost allocation plans in accordance with Subpart
E of 45 CFR Part 95. The plan will include all programs administered
by the State public assistance agency. Where a letter of approval
or disapproval is transmitted to a State public assistance agency
in accordance with Subpart E, the letter will apply to all Federal
agencies and programs. The remaining sections of this Attachment
(except for the requirement for certification) summarize the provisions
of Subpart E of 45 CFR Part 95. D. Submission,
Documentation, and Approval of Public Assistance Cost Allocation
Plans. 1. State public
assistance agencies are required to promptly submit amendments to
the cost allocation plan to HHS for review and approval. 2. Under the
coordination process outlined in subsection E, affected Federal
agencies will review all new plans and plan amendments and provide
comments, as appropriate, to HHS. The effective date of the plan
or plan amendment will be the first day of the quarter following
the submission of the plan or amendment, unless another date is
specifically approved by HHS. HHS, as the cognizant agency acting
on behalf of all affected Federal agencies, will, as necessary,
conduct negotiations with the State public assistance agency and
will inform the State agency of the action taken on the plan or
plan amendment. E. Review
of Implementation of Approved Plans. 1. Since public
assistance cost allocation plans are of a narrative nature, the
review during the plan approval process consists of evaluating the
appropriateness of the proposed groupings of costs (cost centers)
and the related allocation bases. As such, the Federal Government
needs some assurance that the cost allocation plan has been implemented
as approved. This is accomplished by reviews by the funding agencies,
single audits, or audits conducted by the cognizant audit agency.
2. Where inappropriate
charges affecting more than one funding agency are identified, the
cognizant HHS cost negotiation office will be advised and will take
the lead in resolving the issue(s) as provided for in Subpart E
of 45 CFR Part 95. 3. If a dispute arises in the negotiation of a plan or from a disallowance involving two or more funding agencies, the dispute shall be resolved in accordance with the appeals procedures
set out in 45 CFR Part 75. Disputes involving only one funding agency
will be resolved in accordance with the funding agency's appeal
process. 4. To the extent
that problems are encountered among the Federal agencies and/or
governmental units in connection with the negotiation and approval
process, the Office of Management and Budget will lend assistance,
as required, to resolve such problems in a timely manner. F. Unallowable Costs. Claims developed under approved cost allocation plans will be based on allowable costs as identified in this Circular. Where unallowable costs have been claimed and reimbursed, they will be refunded to the program that reimbursed the unallowable cost using one of the following methods: (a) a cash refund, (b) offset to a subsequent claim, or (c) credits to the amounts charged to individual awards. ATTACHMENT
E STATE
AND LOCAL INDIRECT COST RATE PROPOSALS TABLE OF CONTENTS
A. General
B. Definitions 1. Indirect cost rate proposal 2. Indirect cost rate 3. Indirect cost pool 4. Base 5. Predetermined rate 6. Fixed rate 7. Provisional rate 8. Final rate 9. Base period
C. Allocation of Indirect Costs and Determination of Indirect Cost Rates 1. General 2. Simplified method 3. Multiple allocation base method 4. Special
indirect cost rates D. Submission and Documentation of Proposals 1. Submission of indirect cost rate proposals 2. Documentation of proposals 3. Required
certification E. Negotiation
and Approval of Rates F. Other Policies 1. Fringe benefit rates 2. Billed services provided by the grantee agency 3. Indirect cost allocations not using rates 4. Appeals 5. Collections of unallowable costs and erroneous payments 6. OMB assistance
A. General.
1. Indirect
costs are those that have been incurred for common or joint purposes.
These costs benefit more than one cost objective and cannot be readily
identified with a particular final cost objective without effort
disproportionate to the results achieved. After direct costs have
been determined and assigned directly to Federal awards and other
activities as appropriate, indirect costs are those remaining to
be allocated to benefitted cost objectives. A cost may not be allocated
to a Federal award as an indirect cost if any other cost incurred
for the same purpose, in like circumstances, has been assigned to
a Federal award as a direct cost. 2. Indirect
costs include (a) the indirect costs originating in each department
or agency of the governmental unit carrying out Federal awards and
(b) the costs of central governmental services distributed through
the central service cost allocation plan (as described in Attachment
C) and not otherwise treated as direct costs. 3. Indirect
costs are normally charged to Federal awards by the use of an indirect
cost rate. A separate indirect cost rate(s) is usually necessary
for each department or agency of the governmental unit claiming
indirect costs under Federal awards. Guidelines and illustrations
of indirect cost proposals are provided in a brochure published
by the Department of Health and Human Services entitled "A Guide
for State and Local Government Agencies: Cost Principles and Procedures
for Establishing Cost Allocation Plans and Indirect Cost Rates for
Grants and Contracts with the Federal Government." A copy of this
brochure may be obtained from the Superintendent of Documents, U.S.
Government Printing Office. 4. Because
of the diverse characteristics and accounting practices of governmental
units, the types of costs which may be classified as indirect costs
cannot be specified in all situations. However, typical examples
of indirect costs may include certain State/local-wide central service
costs, general administration of the grantee department or agency,
accounting and personnel services performed within the grantee department
or agency, depreciation or use allowances on buildings and equipment,
the costs of operating and maintaining facilities, etc. 5. This Attachment
does not apply to State public assistance agencies. These agencies
should refer instead to Attachment D. B. Definitions.
1. "Indirect
cost rate proposal" means the documentation prepared by a governmental
unit or subdivision thereof to substantiate its request for the
establishment of an indirect cost rate. 2. "Indirect
cost rate" is a device for determining in a reasonable manner the
proportion of indirect costs each program should bear. It is the
ratio (expressed as a percentage) of the indirect costs to a direct
cost base. 3. "Indirect
cost pool" is the accumulated costs that jointly benefit two or
more programs or other cost objectives. 4. "Base" means
the accumulated direct costs (normally either total direct salaries
and wages or total direct costs exclusive of any extraordinary or
distorting expenditures) used to distribute indirect costs to individual
Federal awards. The direct cost base selected should result in each
award bearing a fair share of the indirect costs in reasonable relation
to the benefits received from the costs. 5. "Predetermined
rate" means an indirect cost rate, applicable to a specified current
or future period, usually the governmental unit's fiscal year. This
rate is based on an estimate of the costs to be incurred during
the period. Except under very unusual circumstances, a predetermined
rate is not subject to adjustment. (Because of legal constraints,
predetermined rates are not permitted for Federal contracts; they
may, however, be used for grants or cooperative agreements.) Predetermined
rates may not be used by governmental units that have not submitted
and negotiated the rate with the cognizant agency. In view of the
potential advantages offered by this procedure, negotiation of predetermined
rates for indirect costs for a period of two to four years should
be the norm in those situations where the cost experience and other
pertinent facts available are deemed sufficient to enable the parties
involved to reach an informed judgment as to the probable level
of indirect costs during the ensuing accounting periods. 6. "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, allowable costs of the period covered by the
rate is carried forward as an adjustment to the rate computation
of a subsequent period. 7. "Provisional
rate" means a temporary indirect cost rate applicable to a specified
period which is used for funding, interim reimbursement, and reporting
indirect costs on Federal awards pending the establishment of a
"final" rate for that period. 8. "Final rate"
means an indirect cost rate applicable to a specified past period
which is based on the actual allowable costs of the period. A final
audited rate is not subject to adjustment. 9. "Base period"
for the allocation of indirect costs is the period in which such
costs are incurred and accumulated for allocation to activities
performed in that period. The base period normally should coincide
with the governmental unit's fiscal year, but in any event, shall
be so selected as to avoid inequities in the allocation of costs.
C. Allocation
of Indirect Costs and Determination of Indirect Cost Rates.
1. General.
a. Where a
governmental unit's department or agency has only one major function,
or where all its major functions benefit from the 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 subsection
2. b. Where a
governmental unit's department or agency has several major functions
which benefit from its indirect costs in varying degrees, the allocation
of indirect costs may require the accumulation of such costs into
separate cost groupings which then are allocated individually to
benefitted 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. 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 subsections 2, 3 and 4. 2. Simplified
method. a. Where a
grantee agency's major functions benefit from its indirect costs
to approximately the same degree, the allocation of indirect costs
may be accomplished by (1) classifying the grantee agency's total
costs for the base period as either direct or indirect, and (2)
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 Federal 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 a governmental
unit's department or agency has only one major function encompassing
a number of individual projects or activities, and may be used where
the level of Federal awards to that department or agency is relatively
small. b. Both the
direct costs and the indirect costs shall exclude capital expenditures
and unallowable costs. However, unallowable costs must be included
in the direct costs if they represent activities to which indirect
costs are properly allocable. c. The distribution
base may be (1) total direct costs (excluding capital expenditures
and other distorting items, such as pass-through funds, major subcontracts,
etc.), (2) direct salaries and wages, or (3) another base which
results in an equitable distribution. 3. Multiple
allocation base method. a. Where a
grantee agency's indirect costs benefit its major functions in varying
degrees, such costs shall be accumulated into separate cost groupings.
Each grouping shall then be allocated individually to benefitted
functions by means of a base which best measures the relative benefits.
b. The cost
groupings should be established so as to permit the allocation of
each grouping on the basis of benefits provided to the major functions.
Each grouping should constitute a pool of expenses that are of like
character in terms of the functions they benefit and in terms of
the allocation base which best measures the relative benefits provided
to each function. The number of separate groupings should be held
within practical limits, taking into consideration the materiality
of the amounts involved and the degree of precision needed. c. Actual conditions
must be taken into account in selecting the base to be used in allocating
the expenses in each grouping to benefitted functions. When an allocation
can be made by assignment of a cost grouping directly to the function
benefitted, the allocation shall be made in that manner. When the
expenses in a grouping are more general in nature, the allocation
should be made through the use of a selected base which produces
results that are equitable to both the Federal Government and the
governmental unit. In general, any cost element or related factor
associated with the governmental unit's activities is potentially
adaptable for use as an allocation base provided that: (1) it can
readily be expressed in terms of dollars or other quantitative measures
(total direct costs, direct salaries and wages, staff hours applied,
square feet used, hours of usage, number of documents processed,
population served, and the like), and (2) it is common to the benefitted
functions during the base period. d. Except where
a special indirect cost rate(s) is required in accordance with subsection
4, 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 Federal awards included in that function by use of
a single indirect cost rate. e. The distribution
base used in computing the indirect cost rate for each function
may be (1) total direct costs (excluding capital expenditures and
other distorting items such as pass-through funds, major subcontracts,
etc.), (2) direct salaries and wages, or (3) another base which
results in an equitable distribution. An indirect cost rate should
be developed for each separate indirect cost pool developed. The
rate in each case should be stated as the percentage relationship
between the particular indirect cost pool and the distribution base
identified with that pool. 4. Special
indirect cost rates. a. In some
instances, a single indirect cost rate for all activities of a grantee
department or agency or for each major function of the agency may
not be appropriate. It may not take into account those different
factors which may substantially affect the indirect costs applicable
to a particular program or group of programs. The 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 organizational arrangements used, or any combination thereof.
When a particular award is carried out 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 that
award. 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 that: (1)
the rate differs significantly from the rate which would have been
developed under subsections 2. and 3., and (2) the award to which
the rate would apply is material in amount. b. Although
this Circular adopts the concept of the full allocation of indirect
costs, there are some Federal statutes which restrict the reimbursement
of certain indirect costs. Where such restrictions exist, it may
be necessary to develop a special rate for the affected award. Where
a "restricted rate" is required, the procedure for developing a
non-restricted rate will be used except for the additional step
of the elimination from the indirect cost pool those costs for which
the law prohibits reimbursement. D. Submission
and Documentation of Proposals. 1. Submission
of indirect cost rate proposals. a. All departments
or agencies of the governmental unit desiring to claim indirect
costs under Federal awards must prepare an indirect cost rate proposal
and related documentation to support those costs. The proposal and
related documentation must be retained for audit in accordance with
the records retention requirements contained in the Common Rule.
b. A governmental
unit for which a cognizant agency assignment has been specifically
designated must submit its indirect cost rate proposal to its cognizant
agency. The Office of Management and Budget (OMB) will periodically
publish lists of governmental units identifying the appropriate
Federal cognizant agencies. The cognizant agency for all governmental
units or agencies not identified by OMB will be determined based
on the Federal agency providing the largest amount of Federal funds.
In these cases, a governmental unit must develop an indirect cost
proposal in accordance with the requirements of this Circular and
maintain the proposal and related supporting documentation for audit.
These governmental units are not required to submit their proposals
unless they are specifically requested to do so by the cognizant
agency. Where a local government only receives funds as a sub-recipient,
the primary recipient will be responsible for negotiating and/or
monitoring the sub-recipient's plan. c. Each Indian
tribal government desiring reimbursement of indirect costs must
submit its indirect cost proposal to the Department of the Interior
(its cognizant Federal agency). d. Indirect
cost proposals must be developed (and, when required, submitted)
within six months after the close of the governmental unit's fiscal
year, unless an exception is approved by the cognizant Federal agency.
If the proposed central service cost allocation plan for the same
period has not been approved by that time, the indirect cost proposal
may be prepared including an amount for central services that is
based on the latest federally-approved central service cost allocation
plan. The difference between these central service amounts and the
amounts ultimately approved will be compensated for by an adjustment
in a subsequent period. 2. Documentation
of proposals. The following shall be included with each indirect
cost proposal: a. The rates
proposed, including subsidiary work sheets and other relevant data,
cross referenced and reconciled to the financial data noted in subsection
b. Allocated central service costs will be supported by the summary
table included in the approved central service cost allocation plan.
This summary table is not required to be submitted with the indirect
cost proposal if the central service cost allocation plan for the
same fiscal year has been approved by the cognizant agency and is
available to the funding agency. b. A copy of
the financial data (financial statements, comprehensive annual financial
report, executive budgets, accounting reports, etc.) upon which
the rate is based. Adjustments resulting from the use of unaudited
data will be recognized, where appropriate, by the Federal cognizant
agency in a subsequent proposal. c. The approximate
amount of direct base costs incurred under Federal awards. These
costs should be broken out between salaries and wages and other
direct costs. d. A chart
showing the organizational structure of the agency during the period
for which the proposal applies, along with a functional statement(s)
noting the duties and/or responsibilities of all units that comprise
the agency. (Once this is submitted, only revisions need be submitted
with subsequent proposals.) 3. Required
certification. Each indirect cost rate proposal shall be accompanied
by a certification in the following form: CERTIFICATE
OF INDIRECT COSTS This is to
certify that I have reviewed the indirect cost rate proposal submitted
herewith and to the best of my knowledge and belief: (1) All costs
included in this proposal [identify date] to establish billing or
final indirect costs rates for [identify period covered by rate]
are allowable in accordance with the requirements of the Federal
award(s) to which they apply and OMB Circular A-87, "Cost Principles
for State, Local, and Indian Tribal Governments." Unallowable costs
have been adjusted for in allocating costs as indicated in the cost
allocation plan. (2) All costs
included in this proposal are properly allocable to Federal awards
on the basis of a beneficial or causal relationship between the
expenses incurred and the agreements to which they are allocated
in accordance with applicable requirements. Further, the same costs
that have been treated as indirect costs have not been claimed as
direct costs. Similar types of costs have been accounted for consistently
and the Federal Government will be notified of any accounting changes
that would affect the predetermined rate. I declare that
the foregoing is true and correct. Governmental
Unit: ________________________ Signature:
________________________ Name of Official:
________________________ Title: _________________________
Date of Execution:
_________________________ E. Negotiation
and Approval of Rates. 1. Indirect
cost rates will be reviewed, negotiated, and approved by the cognizant
Federal agency on a timely basis. Once a rate has been agreed upon,
it will be accepted and used by all Federal agencies unless prohibited
or limited by statute. Where a Federal funding agency has reason
to believe that special operating factors affecting its awards necessitate
special indirect cost rates, the funding agency will, prior to the
time the rates are negotiated, notify the cognizant Federal agency.
2. The use
of predetermined rates, if allowed, is encouraged where the cognizant
agency has reasonable assurance based on past experience and reliable
projection of the grantee agency's costs, that the rate is not likely
to exceed a rate based on actual costs. Long-term agreements utilizing
predetermined rates extending over two or more years are encouraged,
where appropriate. 3. The results
of each negotiation shall be formalized in a written agreement between
the cognizant agency and the governmental unit. This agreement will
be subject to re-opening if the agreement is subsequently found
to violate a statute, or the information upon which the plan was
negotiated is later found to be materially incomplete or inaccurate.
The agreed upon rates shall be made available to all Federal agencies
for their use. 4. Refunds
shall be made if proposals are later found to have included costs
that (a) are unallowable (i) as specified by law or regulation,
(ii) as identified in Attachment B of this Circular, or (iii) by
the terms and conditions of Federal awards, or (b) are unallowable
because they are clearly not allocable to Federal awards. These
adjustments or refunds will be made regardless of the type of rate
negotiated (predetermined, final, fixed, or provisional). F. Other
Policies. 1. Fringe benefit rates. If overall fringe benefit rates are not approved for the governmental unit as part of the central service cost allocation plan, these rates will be reviewed, negotiated and approved for individual grantee agencies during the indirect cost negotiation process. In these cases, a proposed fringe benefit rate computation should accompany the indirect cost proposal. If fringe benefit rates are not used at the grantee agency level (i.e., the agency specifically identifies fringe benefit costs to individual employees), the governmental unit should so advise the cognizant agency. 2. Billed services
provided by the grantee agency. In some cases, governmental units
provide and bill for services similar to those covered by central
service cost allocation plans (e.g., computer centers). Where this
occurs, the governmental unit should be guided by the requirements
in Attachment C relating to the development of billing rates and
documentation requirements, and should advise the cognizant agency
of any billed services. Reviews of these types of services (including
reviews of costing/billing methodology, profits or losses, etc.)
will be made on a case-by-case basis as warranted by the circumstances
involved. 3. Indirect cost allocations not using rates. In certain situations, a governmental unit, because of the nature of its awards, may be required to develop a cost allocation plan that distributes indirect (and, in some cases, direct) costs to the specific funding sources. In these cases, a narrative cost allocation methodology should be developed, documented, maintained for audit, or submitted, as appropriate, to the cognizant agency for review, negotiation, and approval. 4. Appeals.
If a dispute arises in a negotiation of an indirect cost rate (or
other rate) between the cognizant agency and the governmental unit,
the dispute shall be resolved in accordance with the appeals procedures
of the cognizant agency. 5. Collection
of unallowable costs and erroneous payments. Costs specifically
identified as unallowable and charged to Federal awards either directly
or indirectly will be refunded (including interest chargeable in
accordance with applicable Federal agency regulations). 6. OMB assistance. To the extent that problems are encountered among the Federal agencies and/or governmental units in connection with the negotiation and approval process, OMB will lend assistance, as required, to resolve such problems in a timely manner. |
 |
|||
President's Budget
Management
Information &
Regulatory Affairs
Legislative Information
Agency Information
|
|
||
 | |||
|
Federal Register
| Jobs at OMB | FOIA | No FEAR | OMB Locator | USA.gov | Accessibility
| Privacy Policy
| Site Search
| Help
|