This Attachment establishes principles for determining the allowable costs
incurred by State, local, and federally-recognized Indian tribal governments
(governmental units) under grants, cost reimbursement contracts, and other
agreements with the Federal Government (collectively referred to in this
Circular as "Federal awards"). The principles are for the purpose of cost
determination and are not intended to identify the circumstances or dictate
the extent of Federal or governmental unit participation in the financing
of a particular program or project. The principles are designed to provide
that Federal awards bear their fair share of cost recognized under these
principles except where restricted or prohibited by law. Provision for
profit or other increment above cost is outside the scope of this Circular.
2. Policy guides.
a. The application
of these principles is based on the fundamental premises that:
b. Federal agencies
should work with States or localities which wish to test alternative
mechanisms for paying costs for administering Federal programs. The
Office of Management and Budget (OMB) encourages Federal agencies to
test fee-for-service alternatives as a replacement for current cost-reimbursement
payment methods in response to the National Performance Review's (NPR)
recommendation. The NPR recommended the fee-for-service approach to
reduce the burden associated with maintaining systems for charging administrative
costs to Federal programs and preparing and approving cost allocation
plans. This approach should also increase incentives for administrative
efficiencies and improve outcomes.
units are responsible for the efficient and effective administration
of Federal awards through the application of sound management practices.
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.
- Each governmental
unit, in recognition of its own unique combination of staff, facilities,
and experience, will have the primary responsibility for employing
whatever form of organization and management techniques may be necessary
to assure proper and efficient administration of Federal awards.
a. These principles
will be applied by all Federal agencies in determining costs incurred
by governmental units under Federal awards (including subawards) except
those with (1) publicly-financed educational institutions subject to
OMB Circular A-21, "Cost Principles for Educational Institutions," and
(2) programs administered by publicly-owned hospitals and other providers
of medical care that are subject to requirements promulgated by the
sponsoring Federal agencies. However, this Circular does apply to all
central service and department/agency costs that are allocated or billed
to those educational institutions, hospitals, and other providers of
medical care or services by other State and local government departments
b. All subawards
are subject to those Federal cost principles applicable to the particular
organization concerned. Thus, if a subaward is to a governmental unit
(other than a college, university or hospital), this Circular shall
apply; if a subaward is to a commercial organization, the cost principles
applicable to commercial organizations shall apply; if a subaward
is to a college or university, Circular A-21 shall apply; if a subaward
is to a hospital, the cost principles used by the Federal awarding
agency for awards to hospitals shall apply, subject to the provisions
of subsection A.3.a. of this Attachment; if a subaward is to some
other non-profit organization, Circular A-122, "Cost Principles for
Non-Profit Organizations," shall apply.
c. These principles
shall be used as a guide in the pricing of fixed price arrangements
where costs are used in determining the appropriate price.
d. Where a Federal
contract awarded to a governmental unit incorporates a Cost Accounting
Standards (CAS) clause, the requirements of that clause shall apply.
In such cases, the governmental unit and the cognizant Federal agency
shall establish an appropriate advance agreement on how the governmental
unit will comply with applicable CAS requirements when estimating,
accumulating and reporting costs under CAS-covered contracts. The
agreement shall indicate that OMB Circular A-87 requirements will
be applied to other Federal awards. In all cases, only one set of
records needs to be maintained by the governmental unit.
1. "Approval or
authorization of the awarding or cognizant Federal agency" means documentation
evidencing consent prior to incurring a specific cost. If such costs
are specifically identified in a Federal award document, approval of
the document constitutes approval of the costs. If the costs are covered
by a State/local-wide cost allocation plan or an indirect cost proposal,
approval of the plan constitutes the approval.
2. "Award" means
grants, cost reimbursement contracts and other agreements between a
State, local and Indian tribal government and the Federal Government.
3. "Awarding agency"
means (a) with respect to a grant, cooperative agreement, or cost reimbursement
contract, the Federal agency, and (b) with respect to a subaward, the
party that awarded the subaward.
4. "Central service
cost allocation plan" means the documentation identifying, accumulating,
and allocating or developing billing rates based on the allowable costs
of services provided by a governmental unit on a centralized basis to
its departments and agencies. The costs of these services may be allocated
or billed to users.
5. "Claim" means
a written demand or written assertion by the governmental unit or grantor
seeking, as a matter of right, the payment of money in a sum certain,
the adjustment or interpretation of award terms, or other relief arising
under or relating to the award. A voucher, invoice or other routine
request for payment that is not a dispute when submitted is not a claim.
Appeals, such as those filed by a governmental unit in response to questioned
audit costs, are not considered claims until a final management decision
is made by the Federal awarding agency.
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.
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.
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.
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.
cost rate proposal" means the documentation prepared by a governmental
unit or component thereof to substantiate its request for the establishment
of an indirect cost rate as described in Attachment E of this Circular.
16. "Local government"
means a county, municipality, city, town, township, local public authority,
school district, special district, intrastate district, council of governments
(whether or not incorporated as a non-profit corporation under State
law), any other regional or interstate government entity, or any agency
or instrumentality of a local government.
17. "Public assistance
cost allocation plan" means a narrative description of the procedures
that will be used in identifying, measuring and allocating all administrative
costs to all of the programs administered or supervised by State public
assistance agencies as described in Attachment D of this Circular.
18. "State" means
any of the several States of the United States, the District of Columbia,
the Commonwealth of Puerto Rico, any territory or possession of the
United States, or any agency or instrumentality of a State exclusive
of local governments.
C. Basic Guidelines
1. Factors affecting
allowability of costs. To be allowable under Federal awards, costs must
meet the following general criteria:
a. Be necessary
and reasonable for proper and efficient performance and administration
of Federal awards.
2. Reasonable costs.
A cost is reasonable if, in its nature and amount, it does not exceed
that which would be incurred by a prudent person under the circumstances
prevailing at the time the decision was made to incur the cost. The question
of reasonableness is particularly important when governmental units or
components are predominately federally- funded. In determining reasonableness
of a given cost, consideration shall be given to:
b. Be allocable
to Federal awards under the provisions of this Circular.
c. Be authorized
or not prohibited under State or local laws or regulations.
d. Conform to
any limitations or exclusions set forth in these principles, Federal
laws, terms and conditions of the Federal award, or other governing
regulations as to types or amounts of cost items.
e. Be consistent
with policies, regulations, and procedures that apply uniformly to
both Federal awards and other activities of the governmental unit.
f. Be accorded
consistent treatment. A cost may not be assigned to a Federal award
as a direct cost if any other cost incurred for the same purpose in
like circumstances has been allocated to the Federal award as an indirect
g. Except as
otherwise provided for in this Circular, be determined in accordance
with generally accepted accounting principles.
h. Not be included
as a cost or used to meet cost sharing or matching requirements of
any other Federal award in either the current or a prior period, except
as specifically provided by Federal law or regulation.
i. Be the net
of all applicable credits.
j. Be adequately
a. Whether the
cost is of a type generally recognized as ordinary and necessary for
the operation of the governmental unit or the performance of the Federal
3. Allocable costs.
b. The restraints
or requirements imposed by such factors as: sound business practices;
arms length bargaining; Federal, State and other laws and regulations;
and, terms and conditions of the Federal award.
c. Market prices
for comparable goods or services.
d. Whether the
individuals concerned acted with prudence in the circumstances considering
their responsibilities to the governmental unit, its employees, the
public at large, and the Federal Government.
deviations from the established practices of the governmental unit
which may unjustifiably increase the Federal award's cost.
a. A cost is
allocable to a particular cost objective if the goods or services involved
are chargeable or assignable to such cost objective in accordance with
relative benefits received.
4. Applicable credits.
b. All activities
which benefit from the governmental unit's indirect cost, including
unallowable activities and services donated to the governmental unit
by third parties, will receive an appropriate allocation of indirect
c. Any cost
allocable to a particular Federal award or cost objective under the
principles provided for in this Circular may not be charged to other
Federal awards to overcome fund deficiencies, to avoid restrictions
imposed by law or terms of the Federal awards, or for other reasons.
However, this prohibition would not preclude governmental units from
shifting costs that are allowable under two or more awards in accordance
with existing program agreements.
d. Where an
accumulation of indirect costs will ultimately result in charges to
a Federal award, a cost allocation plan will be required as described
in Attachments C, D, and E.
credits refer to those receipts or reduction of expenditure-type transactions
that offset or reduce expense items allocable to Federal awards as direct
or indirect costs. Examples of such transactions are: purchase discounts,
rebates or allowances, recoveries or indemnities on losses, insurance
refunds or rebates, and adjustments of overpayments or erroneous charges.
To the extent that such credits accruing to or received by the governmental
unit relate to allowable costs, they shall be credited to the Federal
award either as a cost reduction or cash refund, as appropriate.
b. In some instances,
the amounts received from the Federal Government to finance activities
or service operations of the governmental unit should be treated as
applicable credits. Specifically, the concept of netting such credit
items (including any amounts used to meet cost sharing or matching
requirements) should be recognized in determining the rates or amounts
to be charged to Federal awards. (See Attachment B, item 15, "Depreciation
and use allowances," for areas of potential application in the matter
of Federal financing of activities.)
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.
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.
1. General. Direct
costs are those that can be identified specifically with a particular
final cost objective.
Typical direct costs chargeable to Federal awards are:
of employees for the time devoted and identified specifically to the
performance of those awards.
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.
b. Cost of materials
acquired, consumed, or expended specifically for the purpose of those
and other approved capital expenditures.
d. Travel expenses
incurred specifically to carry out the award.
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
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.
on indirect or administrative costs.
a. In addition
to restrictions contained in this Circular, there may be laws that further
limit the amount of administrative or indirect cost allowed.
b. Amounts not
recoverable as indirect costs or administrative costs under one Federal
award may not be shifted to another Federal award, unless specifically
authorized by Federal legislation or regulation.
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.
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
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.