OMB CIRCULAR A-87
CIRCULAR NO. A-87
TO THE HEADS
OF EXECUTIVE DEPARTMENTS AND ESTABLISHMENTS
SUBJECT: Cost Principles for State, Local, and Indian
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).
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").
As part of the governmentwide grant streamlining effort under P.L. 106-107,
Federal Financial Award Management Improvement Act of 1999, OMB led an
interagency workgroup to simplify and make consistent, to the extent feasible,
the various rules used to award Federal grants. An interagency task force
was established in 2001 to review existing cost principles for Federal
awards to State, local, and Indian tribal governments; Colleges and Universities;
and Non-Profit organizations. The task force studied Selected Items of
Cost in each of the three cost principles to determine which items of
costs could be stated consistently and/or more clearly. A proposed revised
Circular reflecting the results of those efforts was issued on August 12,
2002 at 67 FR 52558. Extensive comments on the proposed revisions, discussions
with interest groups, and related developments were considered in developing
This Circular rescinds and supersedes Circular A 87, as amended, issued
May 4, 1995.
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.
Definitions of key terms used in this Circular are contained in Attachment
A, Section B.
Action. Agencies responsible for administering programs that involve
cost reimbursement contracts, grants, and other agreements with governmental
units shall issue regulations to implement the provisions of this Circular
and its Attachments.
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
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.
Review Date. OMB Circular A 87 will have a policy review three years
from the date of issuance.
Date. This Circular is effective as follows:
as otherwise provided herein, these rules are effective June 9, 2004.
A General Principles for Determining Allowable Costs
Attachment B Selected Items of Cost
Attachment C State/Local Wide Central Service Cost
Attachment D Public Assistance Cost Allocation Plans
Attachment E State and Local Indirect Cost Rate Proposals
GENERAL PRINCIPLES FOR DETERMININGALLOWABLE COSTS
TABLE OF CONTENTS
A. Purpose and Scope
- Policy guides
- Approval or authorization of the awarding or cognizant Federal agency
- Awarding agency
- Central service cost allocation plan
- Cognizant agency
- Common rule
- Cost allocation plan
- Cost objective
- Federally recognized Indian tribal government
- Governmental unit
- Grantee department or agency
- Indirect cost rate proposal
- Local government
- Public assistance cost allocation plan
C. Basic Guidelines
- Factors affecting allowability of costs
- Reasonable costs
- Allocable costs
- Applicable credits
D. Composition of Cost
- Total cost
- Classification of costs
E. Direct Costs
- Minor items
F. Indirect Costs
- Cost allocation plans and indirect cost proposals
- 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.
- The application of these principles is based on the fundamental premises
(1) Governmental units are responsible for the efficient and effective
administration of Federal awards through the application of sound management
(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
- 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.
- 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.
- 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.
- These principles shall be used as a guide in the pricing of fixed
price arrangements where costs are used in determining the appropriate
- 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.
- 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
(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.
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
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:
- Be necessary and reasonable for proper and efficient performance and
administration of Federal awards.
- Be allocable to Federal awards under the provisions of this Circular.
- Be authorized or not prohibited under State or local laws or regulations.
- 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.
- Be consistent with policies, regulations, and procedures that apply
uniformly to both Federal awards and other activities of the governmental
- 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.
- Except as otherwise provided for in this Circular, be determined
in accordance with generally accepted accounting principles.
- 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.
- Be the net of all applicable credits.
- 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
- 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.
- 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.
- Market prices for comparable goods or services.
- 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.
- Significant deviations from the established practices of the governmental
unit which may unjustifiably increase the Federal award's cost.
3. Allocable costs.
- 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.
- 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
- 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.
- 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.
- 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.
- 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
11, "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:
- Compensation of employees for the time devoted and identified specifically
to the performance of those awards.
- Cost of materials acquired, consumed, or expended specifically for
the purpose of those awards.
- Equipment and other approved capital expenditures.
- 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
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.
- In addition to restrictions contained in this Circular, there may
be laws that further limit the amount of administrative or indirect
- 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.
Circular No. A 87
ITEMS OF COST
- Advertising and public relations costs
- Advisory councils
- Alcoholic beverages
- Audit costs and related services
- Bad debts
- Bonding costs
- Communication costs
- Compensation for personal services
- Contingency provisions
- Defense and prosecution of criminal and civil proceedings,
- Depreciation and use allowances
- Donations and contributions
- Employee morale, health, and welfare costs
- Entertainment costs
- Equipment and other capital expenditures
- Fines and penalties
- Fund raising and investment management costs
- Gains and losses on disposition of depreciable property
and other capital assets and substantial relocation of Federal programs
- General government expenses
- Goods or services for personal use
- Idle facilities and idle capacity
- Insurance and indemnification
- Maintenance, operations, and repairs
- Materials and supplies costs
- Meetings and conferences
- Memberships, subscriptions, and professional activity
- Patent costs
- Plant and homeland security costs
- Pre award costs
- Professional service costs
- Proposal costs
- Publication and printing costs
- Rearrangement and alteration costs
- Reconversion costs
- Rental costs of building and equipment
- Royalties and other costs for the use of patents
- Selling and marketing
- Termination costs applicable to sponsored agreements
- Training costs
- Travel costs
Sections 1 through
43 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.
and public relations costs.
- The term advertising costs means the costs of advertising media and
corollary administrative costs.
Advertising media include magazines, newspapers, radio and television,
direct mail, exhibits, electronic or computer transmittals, and the
- 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.
- The only allowable advertising costs are those which are solely for:
(1) The recruitment of personnel required for the performance by the
governmental unit of obligations arising under a Federal award ;
(2) The procurement of goods and services for the performance of a Federal
(3) The disposal of scrap or surplus materials acquired in the performance
of a Federal award except when governmental units are reimbursed for
disposal costs at a predetermined amount; or
(4) Other specific purposes necessary to meet the requirements of the
- The only allowable public relations costs are:
(1) Costs specifically required by the Federal award;
(2) Costs of communicating
with the public and press pertaining to specific activities or accomplishments
which result from performance of Federal awards (these costs are considered
necessary as part of the outreach effort for the Federal award); or
(3) Costs of conducting general liaison with news media and government
public relations officers, to the extent that such activities are limited
to communication and liaison necessary keep the public informed on matters
of public concern, such as notices of Federal contract/grant awards,
financial matters, etc.
- Costs identified in subsections c and d if incurred for more than
one Federal award or for both sponsored work and other work of the governmental
unit, are allowable to the extent that the principles in Attachment
A, sections E. (“Direct Costs”) and F. (“Indirect
Costs”) are observed.
- Unallowable advertising and public relations costs include the following:
(1) All advertising and public relations costs other than as specified
in subsections c, d, and e;
(2) Costs of meetings, conventions, convocations, 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,
(4) Costs of advertising and public relations designed solely to promote
the governmental unit.
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.
beverages. Costs of alcoholic beverages are unallowable.
Audit costs and related services.
The costs of audits required by, and performed in accordance with, the
Single Audit Act, as implemented by Circular A-133, "Audits of
States, Local Governments, and Non-Profit Organizations” are allowable.
Also see 31 USC 7505(b) and section 230 (“Audit Costs”)
of Circular A-133.
Other audit costs are allowable if included in a cost allocation plan
or indirect cost proposal, or if specifically approved by the awarding
agency as a direct cost to an award.
cost of agreed-upon procedures engagements to monitor subrecipients
who are exempted from A-133 under section 200(d) are allowable, subject
to the conditions listed in A-133, section 230 (b)(2).
debts. Bad debts, including losses (whether actual or estimated)
arising from uncollectable accounts and other claims, related collection
costs, and related legal costs, are unallowable.
Bonding costs arise when the Federal Government requires assurance against
financial loss to itself or others by reason of the act or default of
the governmental unit. They arise also in instances where the governmental
unit requires similar assurance. Included are such bonds as bid, performance,
payment, advance payment, infringement, and fidelity bonds.
Costs of bonding required pursuant to the terms of the award are allowable.
of bonding required by the governmental unit in the general conduct
of its operations are allowable to the extent that such bonding is in
accordance with sound business practice and the rates and premiums are
reasonable under the circumstances.
Communication costs. Costs incurred for telephone services, local
and long distance telephone calls, telegrams, postage, messenger, electronic
or computer transmittal services and the like are allowable.
Compensation for personal services.
- 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.
- 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.
- 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.
- 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
22, 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.
- 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
(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
(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
- 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
(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
(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
(5) To be allowable in the current year, the PRHB costs must be paid
(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
(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.
- 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.
- 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
(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
(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
(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
(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
Temporary Assistance to Needy Families (TANF), Medicaid, and other public
assistance programs) must meet acceptable statistical sampling standards
(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;
(iii) The results must be statistically valid and applied to the period
(b) Allocating charges for the sampled employees' supervisors, clerical
and support staffs, based on the results of the sampled employees, will
(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.
- 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.
provisions. Contributions to a contingency reserve or any similar
provision made for events the occurrence of which cannot be foretold with
certainty as to time, intensity, or with an assurance of their happening,
are unallowable. The term "contingency reserve" excludes self-insurance
reserves (see Attachment B, section 22.c.), pension plan reserves (see
Attachment B, section 8.e.), and post-retirement health and other benefit
reserves (see Attachment B, section 8.f.) computed using acceptable actuarial
and prosecution of criminal and civil proceedings, and claims.
- 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).
- Legal expenses required in the administration of Federal programs
are allowable. Legal expenses for prosecution of claims against the
Federal Government are unallowable.
and use allowances.
- Depreciation and use allowances are means of allocating the cost
of fixed assets to periods benefiting 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 for 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
- 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.
- 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.
- 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
- 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.
- 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.
- 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.
- 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.
- Contributions or donations rendered. Contributions or donations, including
cash, property, and services, made by the governmental unit, regardless
of the recipient, are unallowable.
- Donated services received:
(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 Federal Grants Management 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.
Employee morale, health, and welfare costs.
- The costs of employee information publications, health or first-aid
clinics and/or infirmaries, recreational activities, employee counseling
services, and any other expenses incurred in accordance with the governmental
unit's established practice or custom for the improvement of working
conditions, employer-employee relations, employee morale, and employee
performance are allowable.
- Such costs will be equitably apportioned to all activities of the
governmental unit. Income generated from any of these activities will
be offset against expenses.
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)
and other capital expenditures.
- For purposes of this subsection 15, the following definitions apply:
(1) "Capital Expenditures” means expenditures for the acquisition
cost of capital assets (equipment, buildings, land), or expenditures
to make improvements to capital assets that materially increase their
value or useful life. Acquisition cost means the cost of the asset including
the cost to put it in place. Acquisition cost for equipment, for example,
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 the acquisition
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 or exceeds the lesser of the capitalization
level established by the governmental unit for financial statement purposes,
(3) "Special purpose equipment" means equipment which is used
only for research, medical, scientific, or other technical activities.
Examples of special purpose equipment include microscopes, x-ray machines,
surgical instruments, and spectrometers.
(4) "General purpose equipment" means equipment, which is
not limited to research, medical, scientific or other technical activities.
Examples include office equipment and furnishings, modular offices,
telephone networks, information technology equipment and systems, air
conditioning equipment, reproduction and printing equipment, and motor
- The following rules of allowability shall apply to equipment and
other capital expenditures:
(1) Capital expenditures for general purpose equipment, buildings, and
land are unallowable as direct charges, except where approved in advance
by the awarding agency.
(2) Capital expenditures for special purpose equipment are allowable
as direct costs, provided that items with a unit cost of $5000 or more
have the prior approval of the awarding agency.
(3) Capital expenditures for improvements to land, buildings, or equipment
which materially increase their value or useful life are unallowable
as a direct cost except with the prior approval of the awarding agency.
(4) When approved as a direct charge pursuant to Attachment B, section
15.b (1), (2), and (3) above, capital expenditures will be charged in
the period in which the expenditure is incurred, or as otherwise determined
appropriate and negotiated with the awarding agency. In addition, Federal
awarding agencies are authorized at their option to waive or delegate
the prior approval requirement.
(5) Equipment and other capital expenditures are unallowable as indirect
costs. However, see section 11, Depreciation and use allowance, for
rules on the allowability of use allowances or depreciation on buildings,
capital improvements, and equipment. Also, see section 37, Rental costs,
concerning the allowability of rental costs for land, buildings, and
(6) The unamortized portion of any equipment written off as a result
of a change in capitalization levels may be recovered by continuing
to claim the otherwise allowable use allowances or depreciation on the
equipment, or by amortizing the amount to be written off over a period
of years negotiated with the cognizant agency.
(7) 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.
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.
raising and investment management costs.
- 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.
- 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
- 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.
and losses on disposition of depreciable property and other capital assets
and substantial relocation of Federal programs.
- (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
(a) The gain or loss is processed through a depreciation account
and is reflected in the depreciation allowable under sections 11 and
(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 22.d.
(d) Compensation for the use of the property was provided through use
allowances in lieu of depreciation.
- 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
- 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.
General government expenses.
- The general costs of government are unallowable (except as provided
in Attachment B, section 43, Travel costs). 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 executive
of federally recognized Indian tribal government;
(2) Salaries and other expenses of a State legislature, tribal council,
or similar local governmental body, such as a county supervisor, city
council, school board, etc., whether incurred for purposes of legislation
or executive direction;
(3) Costs of the judiciary branch of a government;
(4) Costs of prosecutorial activities unless treated as a direct cost
to a specific program if authorized by program statute or regulation
(however, this does not preclude the allowability of other legal activities
of the Attorney General); and
(5) Costs of other general types of government services normally provided
to the general public, such as fire and police, unless provided for
as a direct cost under a program statute or regulation.
- 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.
Goods or services for personal use. Costs of goods or services
for personal use of the governmental unit's employees are unallowable
regardless of whether the cost is reported as taxable income to the employees.
Idle facilities and idle capacity.
- 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
(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
(4) "Cost of idle facilities or idle capacity" means costs
such as maintenance, repair, housing, rent, and other related costs,
e.g., insurance, interest, property taxes and depreciation or use allowances.
- 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.
- 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.
Insurance and indemnification.
- Costs of insurance required or approved and maintained, pursuant
to the Federal award, are allowable.
- 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.
- 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.
- 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
(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.
- 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 8.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.
- Insurance refunds shall be credited against insurance costs in the
year the refund is received.
- 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.
- 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.
- 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.
- Financing costs (including interest) paid or incurred which are 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) through (4) of
this section 23.b. Financing costs (including interest) paid or incurred
on or after September 1, 1995 for land or associated with otherwise
allowable costs of equipment is allowable, subject to the conditions
in (1) through (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) Thee 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) For debt arrangements over $1 million, unless the governmental unit
makes an initial equity contribution to the asset purchase of 25 percent
or more, the governmental unit shall reduce claims for interest cost
by an amount equal to imputed interest earnings on excess cash flow,
which is to be calculated as follows. Annually, non-Federal entities
shall prepare a cumulative (from the inception of the project) report
of monthly cash flows that includes inflows and outflows, regardless
of the funding source. Inflows consist of depreciation expense, amortization
of capitalized construction interest, and annual interest cost. For
cash flow calculations, the annual inflow figures shall be divided by
the number of months in the year (i.e., usually 12) that the building
is in service for monthly amounts. Outflows consist of initial equity
contributions, debt principal payments (less the pro rata share attributable
to the unallowable costs of land) and interest payments. Where cumulative
inflows exceed cumulative outflows, interest shall be calculated on
the excess inflows for that period and be treated as a reduction to
allowable interest cost. The rate of interest to be used to compute
earnings on excess cash flows shall be the three-month Treasury bill
closing rate as of the last business day of that month.
(5) Interest attributable to fully depreciated assets is unallowable.
- General. 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.
- Executive lobbying costs. Costs incurred in attempting to improperly
influence either directly or indirectly, an employee or officer of the
Executive Branch of the Federal Government to give consideration or
to act regarding a sponsored agreement or a regulatory matter are unallowable.
Improper influence means any influence that induces or tends to induce
a Federal employee or officer to give consideration or to act regarding
a federally sponsored agreement or regulatory matter on any basis other
than the merits of the matter.
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 11 and 15).
and supplies costs.
- Costs incurred for materials, supplies, and fabricated parts necessary
to carry out a Federal award are allowable.
- Purchased materials and supplies shall be charged at their actual
prices, net of applicable credits. Withdrawals from general stores or
stockrooms should be charged at their actual net cost under any recognized
method of pricing inventory withdrawals, consistently applied. Incoming
transportation charges are a proper part of materials and supplies costs.
- Only materials and supplies actually used for the performance of
a Federal award may be charged as direct costs.
- Where federally donated or furnished materials are used in performing
the Federal award, such materials will be used without charge.
and conferences. Costs of meetings and conferences, the primary purpose
of which is the dissemination of technical information, are allowable.
This includes costs of meals, transportation, rental of facilities, speakers'
fees, and other items incidental to such meetings or conferences. But
see Attachment B, section 14, Entertainment costs.
Memberships, subscriptions, and professional activity costs.
- Costs of the governmental unit’s memberships in business, technical,
and professional organizations are allowable.
- Costs of the governmental unit’s subscriptions to business,
professional, and technical periodicals are allowable.
- Costs of membership in civic and community, social organizations
are allowable as a direct cost with the approval of the Federal awarding
- Costs of membership in organizations substantially engaged in lobbying
- The following costs relating to patent and copyright matters are allowable:
(i) cost of preparing disclosures, reports, and other documents required
by the Federal award and of searching the art to the extent necessary
to make such disclosures;
(ii) cost of preparing documents and any other patent costs in connection
with the filing and prosecution of a United States patent application
where title or royalty-free license is required by the Federal Government
to be conveyed to the Federal Government; and
(iii) general counseling services relating to patent and copyright matters,
such as advice on patent and copyright laws, regulations, clauses, and
employee agreements (but see Attachment B, sections 32, Professional
service costs, and 38, Royalties and other costs for use of patents
- The following costs related to patent and copyright matter are unallowable:
(i) Cost of preparing disclosures, reports, and other documents and
of searching the art to the extent necessary to make disclosures not
required by the award
(ii) Costs in connection with filing and prosecuting any foreign patent
application, or (ii) any United States patent application, where the
Federal award does not require conveying title or a royalty-free license
to the Federal Government (but see Attachment B, section 38., Royalties
and other costs for use of patents and copyrights).
Plant and homeland security costs. Necessary and reasonable expenses
incurred for routine and homeland security to protect facilities, personnel,
and work products are allowable. Such costs include, but are not limited
to, wages and uniforms of personnel engaged in security activities; equipment;
barriers; contractual security services; consultants; etc. Capital expenditures
for homeland and plant security purposes are subject to section 15., Equipment
and other capital expenditures, of this Circular.
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.
Professional service costs.
- Costs of professional and consultant services rendered by persons
who are members of a particular profession or possess a special skill,
and who are not officers or employees of the governmental unit, are
allowable, subject to subparagraphs b and c when reasonable in relation
to the services rendered and when not contingent upon recovery of the
costs from the Federal Government.
In addition, legal and related services are limited under Attachment
B, section 10.
- In determining the allowability of costs in a particular case, no
single factor or any special combination of factors is necessarily determinative.
However, the following factors are relevant:
(1) The nature and scope of the service rendered in relation to the
(2) The necessity of contracting for the service, considering the governmental
unit's capability in the particular area.
(3) The past pattern of such costs, particularly in the years prior
to Federal awards.
(4) The impact of Federal awards on the governmental unit's business
(i.e., what new problems have arisen).
(5) Whether the proportion of Federal work to the governmental unit's
total business is such as to influence the governmental unit in favor
of incurring the cost, particularly where the services rendered are
not of a continuing nature and have little relationship to work under
Federal grants and contracts.
(6) Whether the service can be performed more economically by direct
employment rather than contracting.
(7) The qualifications of the individual or concern rendering the service
and the customary fees charged, especially on non-Federal awards.
(8) Adequacy of the contractual agreement for the service (e.g., description
of the service, estimate of time required, rate of compensation, and
- In addition to the factors in subparagraph b, retainer fees to be
allowable must be supported by available or rendered evidence of bona
fide services available or rendered.
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.
Publication and printing costs.
Publication costs include the costs of printing (including the processes
of composition, plate-making, press work, binding, and the end products
produced by such processes), distribution, promotion, mailing, and general
handling. Publication costs also include page charges in professional
these costs are not identifiable with a particular cost objective, they
should be allocated as indirect costs to all benefiting activities of
the governmental unit.
charges for professional journal publications are allowable as a necessary
part of research costs where:
(1) The research papers report work supported by the Federal Government:
(2) The charges
are levied impartially on all research papers published by the journal,
whether or not by federally sponsored authors
Rearrangement and alteration costs. 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.
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.
Rental costs of buildings and equipment.
- 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. Rental arrangements should be reviewed periodically to determine
if circumstances have changed and other options are available.
- Rental costs under “sale and lease back” arrangements
are allowable only up to the amount that would be allowed had the governmental
unit continued to own the property. This amount would include expenses
such as depreciation or use allowance, maintenance, taxes, and insurance.
- Rental costs under "less-than-arms-length" leases are allowable
only up to the amount (as explained in Attachment B, section 37.b) that
would be allowed had title to the property vested in the governmental
unit. For this purpose, a less-than-arms-length lease is one under which
one party to the lease agreement is able to control or substantially
influence the actions of the other. Such leases include, but are not
limited to those between (i) divisions of a governmental unit; (ii)
governmental units under common control through common officers, directors,
or members; and (iii) a governmental unit and a director, trustee, officer,
or key employee of the governmental unit or his immediate family, either
directly or through corporations, trusts, or similar arrangements in
which they hold a controlling interest. For example, a governmental
unit may establish a separate corporation for the sole purpose of owning
property and leasing it back to the governmental unit.
- Rental costs under leases which are required to be treated as capital
leases under GAAP are allowable only up to the amount (as explained
in subsection b) that would be allowed had the governmental unit purchased
the property on the date the lease agreement was executed. The provisions
of Financial Accounting Standards Board Statement 13, Accounting for
Leases, 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 Attachment B, section 23. Unallowable costs
include amounts paid for profit, management fees, and taxes that would
not have been incurred had the governmental unit purchased the facility.
Royalties and other costs for the use of patents.
- Royalties on a patent or copyright or amortization of the cost of
acquiring by purchase a copyright, patent, or rights thereto, necessary
for the proper performance of the award are allowable unless:
(1) The Federal Government has a license or the right to free use of
the patent or copyright.
(2) The patent or copyright has been adjudicated to be invalid, or has
been administratively determined to be invalid.
(3) The patent or copyright is considered to be unenforceable.
(4) The patent or copyright is expired.
- Special care should be exercised in determining reasonableness where
the royalties may have been arrived at as a result of less-than-arm's-length
(1) Royalties paid to persons, including corporations, affiliated with
the governmental unit.
(2) Royalties paid to unaffiliated parties, including corporations,
under an agreement entered into in contemplation that a Federal award
would be made.
(3) Royalties paid under an agreement entered into after an award
is made to a governmental unit.
- In any case involving a patent or copyright formerly owned by the
governmental unit, the amount of royalty allowed should not exceed the
cost which would have been allowed had the governmental unit retained
and marketing. Costs of selling and marketing any products or services
of the governmental unit are unallowable (unless allowed under Attachment
B, section 1. as allowable public relations costs or under Attachment
B, section 33. as allowable proposal costs.
- 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.
- Gasoline taxes, motor vehicle fees, and other taxes that are in effect
user fees for benefits provided to the Federal Government are allowable.
- 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
costs applicable to sponsored agreements. Termination of awards generally
gives rise to the incurrence of costs, or the need for special treatment
of costs, which would not have arisen had the Federal award not been terminated.
Cost principles covering these items are set forth below. They are to
be used in conjunction with the other provisions of this Circular in termination
- The cost of items reasonably usable on the governmental unit's other
work shall not be allowable unless the governmental unit submits evidence
that it would not retain such items at cost without sustaining a loss.
In deciding whether such items are reasonably usable on other work of
the governmental unit, the awarding agency should consider the governmental
unit's plans and orders for current and scheduled activity.
Contemporaneous purchases of common items by the governmental unit shall
be regarded as evidence that such items are reasonably usable on the
governmental unit's other work. Any acceptance of common items as allocable
to the terminated portion of the Federal award shall be limited to the
extent that the quantities of such items on hand, in transit, and on
order are in excess of the reasonable quantitative requirements of other
- If in a particular case, despite all reasonable efforts by the governmental
unit, certain costs cannot be discontinued immediately after the effective
date of termination, such costs are generally allowable within the limitations
set forth in this Circular, except that any such costs continuing after
termination due to the negligent or willful failure of the governmental
unit to discontinue such costs shall be unallowable.
- Loss of useful value of special tooling, machinery, and equipment
is generally allowable if:
(1) Such special tooling, special machinery, or equipment is not reasonably
capable of use in the other work of the governmental unit,
(2) The interest of the Federal Government is protected by transfer
of title or by other means deemed appropriate by the awarding agency,
(3) The loss of useful value for any one terminated Federal award is
limited to that portion of the acquisition cost which bears the same
ratio to the total acquisition cost as the terminated portion of the
Federal award bears to the entire terminated Federal award and other
Federal awards for which the special tooling, machinery, or equipment
- Rental costs under unexpired leases are generally allowable where
clearly shown to have been reasonably necessary for the performance
of the terminated Federal award less the residual value of such leases,
(1) the amount of such rental claimed does not exceed the reasonable
use value of the property leased for the period of the Federal award
and such further period as may be reasonable, and
(2) the governmental unit makes all reasonable efforts to terminate,
assign, settle, or otherwise reduce the cost of such lease. There also
may be included the cost of alterations of such leased property, provided
such alterations were necessary for the performance of the Federal award,
and of reasonable restoration required by the provisions of the lease.
- Settlement expenses including the following are generally allowable:
(1) Accounting, legal, clerical, and similar costs reasonably necessary
(a) The preparation and presentation to the awarding agency of
settlement claims and supporting data with respect to the terminated
portion of the Federal award, unless the termination is for default
(see Subpart __.44 of the Grants Management Common Rule implementing
OMB Circular A-102); and
(b) The termination and settlement of subawards.
(2) Reasonable costs for the storage, transportation, protection, and
disposition of property provided by the Federal Government or acquired
or produced for the Federal award, except when grantees or contractors
are reimbursed for disposals at a predetermined amount in accordance
with Subparts__.31 and ___.32 of the Grants Management Common Rule implementing
OMB Circular A-102.
- Claims under subawards, including the allocable portion of claims
which are common to the Federal award, and to other work of the governmental
unit are generally allowable.
An appropriate share of the governmental unit's indirect expense may
be allocated to the amount of settlements with subcontractors and/or
subgrantees, provided that the amount allocated is otherwise consistent
with the basic guidelines contained in Attachment A. The indirect expense
so allocated shall exclude the same and similar costs claimed directly
or indirectly as settlement expenses.
Training costs. The cost of training provided for employee development
- General. Travel costs are the expenses for transportation, lodging,
subsistence, and related items incurred by employees who are in travel
status on official business of the governmental unit. 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 not to selected days
of the trip, and results in charges consistent with those normally allowed
in like circumstances in the governmental unit’s non-federally sponsored
activities. Notwithstanding the provisions of Attachment B, section
19, General government expenses, travel costs of officials covered by
that section are allowable with the prior approval of an awarding agency
when they are specifically related to Federal awards.
- 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 the result of the governmental unit’s
written travel policy. In the absence of an acceptable, written governmental
unit policy regarding travel costs, the rates and amounts established
under subchapter I of Chapter 57, Title 5, United States Code (“Travel
and Subsistence Expenses; Mileage Allowances”), or by the Administrator
of General Services, or by the President (or his or her designee) pursuant
to any provisions of such subchapter shall apply to travel under Federal
awards (48 CFR 31.205-46(a)).
- Commercial air travel.
(1) Airfare costs in excess of the customary standard commercial airfare
(coach or equivalent), Federal Government contract airfare (where authorized
and available), or the lowest commercial discount airfare are unallowable
except when such accommodations would:
(a) require circuitous routing;
(b) require travel during unreasonable hours;
(c) excessively prolong travel;
(d) result in additional costs that would offset the transportation
(e) offer accommodations not reasonably adequate for the traveler’s
medical needs. The governmental unit must justify and document these
conditions on a case-by-case basis in order for the use of first-class
airfare to be allowable in such cases.
(2) Unless a pattern of avoidance is detected, the Federal Government
will generally not question a governmental unit's determinations that
customary standard airfare or other discount airfare is unavailable
for specific trips if the governmental unit can demonstrate either of
the following: (a) that such airfare was not available in the specific
case; or (b) that it is the governmental unit’s overall practice
to make routine use of such airfare.
- Air travel by other than commercial carrier. Costs of travel by governmental
unit-owned, -leased, or -chartered aircraft include the cost of lease,
charter, operation (including personnel costs), maintenance, depreciation,
insurance, and other related costs. The portion of such costs that exceeds
the cost of allowable commercial air travel, as provided for in subsection
c., is unallowable.
- Foreign travel. Direct charges for foreign travel costs are allowable
only when the travel has received prior approval of the awarding agency.
Each separate foreign trip must receive such approval. For purposes
of this provision, “foreign travel” includes any travel
outside Canada, Mexico, the United States, and any United States territories
and possessions. However, the term “foreign travel” for
a governmental unit located in a foreign country means travel outside
Circular No. A 87
WIDE CENTRAL SERVICE COST ALLOCATION PLANS
- Billed central services
- Allocated central services
- Agency or operating agency
of the Central Service Cost Allocation Plans
Requirements for Submitted Plans
- Allocated central services
- Billed services
b. Internal service funds
c. Self insurance funds
d. Fringe benefits
- Required Certification
and Approval of Central Service Plans
- Billed central service activities
- Working capital reserves
- Carry forward adjustments of allocated central service costs
- Adjustments of billed central services
- Records retention
- OMB assistance
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.
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
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.
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.
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.
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.
- 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.).
- 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.
- 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:
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
I declare that the
foregoing is true and correct.
Name of Official:
Date of Execution:
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.
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
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.
Circular No. A 87
ASSISTANCE COST ALLOCATION PLANS
TABLE OF CONTENTS
- State public assistance agency
- State public assistance agency costs
Documentation, and Approval of Public Assistance Cost Allocation Plans
of Implementation of Approved Plans
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: Temporary Assistance to Needy Families (TANF), Medicaid,
Food Stamps, Child Support Enforcement, Adoption Assistance and Foster
Care, and Social Services Block Grant.
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.
public assistance agency costs" means all costs incurred by, or allocable
to, the State public assistance agency, except expenditures for financial
assistance, medical vendor
food stamps, and payments for services and goods provided directly to
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
Documentation, and Approval of Public Assistance Cost Allocation Plans.
public assistance agencies are required to promptly submit amendments
to the cost allocation plan to HHS for review and approval.
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.
Review of Implementation of Approved Plans.
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.
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.
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.
Indirect costs are those that have been incurred for common or joint puroses.
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.
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
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
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.
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. The following shall be included with each
indirect cost proposal:
3. Required certification. Each indirect cost rate proposal shall be accompanied
by a certification in the following form:
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
I declare that the foregoing is true and correct.
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
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.