RESPONSES TO COMMENTS

GENERAL COMMENT

COMMENT: A state agency commented that in the Preamble it was proposed that language would be dropped from Attachment A, C.3.c of A-87 that allows cost shifting that is currently allowable within existing program legislation. This change would limit state flexibility in administering programs and is contrary to legislative intent.

RESPONSE: The referenced language, which was added to the 1995 revision to A-87, was not intended to change policy existing prior to the revision. The intent was to make it clear that where two or more programs allowed identical services to an identical eligible population, the state agency had the flexibility to decide which program to charge. However, in an effort to make this clarification, it was inadvertently implied that cost shifting was an allowable practice which has resulted in unnecessary confusion. Cost shifting, as defined in the first sentence of A-87, Attachment A, paragraph C.3.c., has never been allowed under Federal awards. The confusing language has been deleted from the final rule.

RESULT: No change to the proposed language.

COST ITEMS FOUND IN ALL THREE CIRCULARS

Advertising and Public Relations

COMMENT: Several commenters stated that the revised language for A-21 in Part e. makes reference to Attachment A of A-21; and, in Attachment A, paragraph b.(4) provides a definition of General Administration and Expenses that includes the Library Cost Pool. The commenters further stated that under existing OMB policy, the Library Cost Pool is part of the F&A component, and this appears to be a major policy change that would move the Library Cost Pool under the 26% administrative cap, which is not currently applicable to A-122 institutions. The commenters recommended that the reference to Attachment A be removed and include specific references for each circular.

RESPONSE: We agree.

RESULT: The reference to Attachment A will be removed in A-21 and the language will be revised to use appropriate references for A-21, i.e., Section D. Direct Costs and Section E. F&A Costs. In addition, the language will be revised for A-87 to use appropriate references, i.e., Attachment A, Section E. Direct Costs and Section F. Indirect Costs.

COMMENT: One commenter stated that no reference is made to the OMB Circular A-110 (A-110) provisions concerning the disposal of scrap or surplus materials; and, to ensure the A-21 and A-122 entities are aware of the A-110 provision, recommended that A-21 and A-122 include a reference to A-110.

RESPONSE: We disagree. A-110 provides the basis for applying the cost principles in A-21 and A-122 to educational institutions, non-profit organizations and hospitals. The cost principles do not need a reference back to A-110 and since A-110 does not apply to State and Local Governments (A-87); generic terminology was used for all three circulars to ensure consistency.

RESULT: No change to the proposed language.

COMMENT: Several commenters stated that under paragraph e., the proposed change would incorporate Attachment A of A-122 and reference sections B and C of that circular which would require recipients subject to circulars A-21 and A-87 subject to the Direct Costs and Indirect Costs principles of A-122. This was noted as being very confusing and inappropriate, and that the language for A-21 should remain unchanged.

RESPONSE: We agree.

RESULT: The language will be revised in A-21 and A-87 to use appropriate references for those circulars, i.e., Section D. Direct Costs and Section E. F&A Costs for A-21 and Attachment A, Section E. Direct Costs and Section F. Indirect Costs for A-87.

COMMENT: One commenter stated that the revision adds "electronic or computer transmittals and the like" to the examples of the type of media covered by this section and mentioned that it is unclear what types of costs OMB is referring to. Further, the commenter asked if it includes web sites and electronic mail; and stated, if so, that would make the portion of these costs associated with advertising or promotion unallowable, and segregation of these costs for allowability vs. unallowability might be difficult for the awardee institutions. The commenter questioned, for example, how "webmaster" effort would be divided?

RESPONSE: We disagree. Web sites and electronic mail are examples of electronic or computer transmittals. A Webmaster’s effort should be equitably apportioned between allowable and unallowable costs.

RESULT: No change to the proposed language.

COMMENT: One commenter stated that the specific reference to fundraising has been deleted from A-122. The commenter stated that the reference to fundraising should remain as these types of costs are commonly incurred by non-profit awardees and the specific reference ensures that they are treated as unallowable costs by awardee organizations.

RESPONSE: The allowability of fundraising costs is addressed under “fundraising and investment management costs,” as a separate section.

RESULT: No change to the proposed language. “Fundraising and investment management costs” and “interest” are now discussed in two separate sections in the circulars.

COMMENT: One commenter stated that the term "government public relations officers" should be changed to reflect the commonly used term of "government public information officers."

RESPONSE: We disagree, the terms can be used interchangeably, and there are many terms to describe this type of position used by different recipients.

RESULT: No change to the proposed language.

COMMENT: One commenter stated that coordination is needed between paragraph (f)(2) and paragraph 29 of A-122 dealing with meetings for the general management of the organization so that it is clearly understood that the latter are allowable.

RESPONSE: We disagree, the recommendation is not necessary – paragraph 29 is very clear, and no such coordination currently exists in A-122.

RESULT: No change to the proposed language.

COMMENT: One commenter stated that the "Recruiting and relocations costs" section contains detailed language concerning "help wanted advertising". Reference should be made to that section (paragraph (b)).

RESPONSE: We agree.

RESULT: A cross reference in c. (1) will be added, i.e., see Recruiting in A-21 and A-122 for “help wanted advertising.”

COMMENT: One commenter stated that the “outreach effort” language in paragraph d. should not be used since it is not defined.

RESPONSE: We disagree. The language is self-explanatory in the context in which it is stated.

RESULT: No change to the proposed language.

COMMENT: One commenter stated that in paragraph e. of the proposed language the change is confusing and inconsistent in that "Federal award" replaces the terms "sponsored agreement” and “sponsored award;” however, the term "sponsored work" is retained. Also, the commenter noted that examples of "other work of the non-Federal entity" would be helpful.

RESPONSE: The standard terminology “Federal award” replaces “sponsored agreement” and “sponsored award” throughout the proposed revisions to the circulars. “Other work of the non-Federal entity” is synonymous with non-sponsored activities.

RESULT: No change to the proposed language.

Alcoholic beverages

We did not propose changes to this item and no comments were received about it.

Bad Debts

COMMENT: All circulars would prohibit these costs but A-87 is qualified with “unless provided for in Federal program award regulations”. Why would this exception only be made for A-87?

RESPONSE: There was no exception made for A-87 during this proposed rule. The exception for A-87 was codified in the May 5, 1995 Federal Register to address concerns expressed at that time. However, the qualifier in A-87 will be deleted because, as a matter of law, clear outcomes in program statutes and program regulations supersede the circulars.

RESULT: The Final Rule will remove the qualifier in A-87.

Communication Costs

COMMENT: To reflect modern communication methods, “radiograms” should be dropped as an example.

RESPONSE: We agree.

RESULT: The example of radiograms will be deleted.

Compensation for personal services

We did not propose any changes to the general treatment of compensation for personal services and we received no comment on this decision. However, some items that were treated elsewhere in the circulars are now addressed in this part of the circulars as they are related to personal services. We address those items at the places where they appeared in the existing circulars.

Contingency Provisions

COMMENT: For A-87 the reference should be “12” rather than “2”

RESPONSE: We agree.

RESULT: The reference is corrected in the final revision.

COMMENT: A-87 excludes from this definition benefit and insurance reserves that are “computed using acceptable actuarial cost methods”. This language should be added to A-21 and A-122 to be consistent and to prevent any misunderstanding on what methods are acceptable.

RESPONSE: We disagree, adding the language is not necessary because the concept of using acceptable actuarial cost methods is discussed in the related sections on pension, post-retirement benefits, etc. It is further not appropriate in A-122, which specifically identifies severance pay as an allowable cost, and severance pay is not “computed using acceptable actuarial cost methods.”

RESULT: No change to the existing language.

Donations and contributions

COMMENT: A commenter suggested that a section on donated property be included in A-87 for clarity and consistency with A-21 and A-122.

RESPONSE: The section regarding donated property was not included in A-87 due to concerns regarding the use of donated property, which has been fully depreciated or funded by Federal sources, to meet matching requirements.

RESULT: No change to the existing language.

Defense and prosecution of criminal and civic proceedings, claims, appeals and patent infringement

We did not propose any changes to this item but received comments asking that we improve it and make the same principle apply to all entities. That would be beyond the scope of the proposed changes. However, OMB will consider this comment when it takes up substantive changes to the circulars.

Depreciation and use allowance

COMMENT: Several commenters suggested that OMB Circular A-21, Section J.12.f.(1) be eliminated. Neither OMB Circular A-122 and A-87 have the requirement to expend in the current year or reserve for expenditure within the next five years, the portion of F&A cost payments made for depreciation or use allowances under sponsored research agreements to acquire or improve research facilities.

RESPONSE: The suggestion would create a significant policy change to A-21 and therefore was not included in the August 12, 2002 proposed changes to the circulars. OMB will address this issue when it considers other substantive changes to the cost principles.

RESULT: No change to the existing language.

COMMENT: One commenter suggested that the reference to change paragraph “d.(1)” in A-21, Section J.12.should be “b.(1)”.

RESPONSE: We disagree, the reference to change paragraph “d.(1)” in A-21, Section J.12 is correct, but there are several editorial corrections that have been made to the proposed numbering of this item.

RESULT: The final revisions are amended to correct editorial errors in the proposed circulars.

COMMENT: One commentor recommends that the practice of use allowance should be abolished and all grantees be required to comply with GAAP because the Government Accounting Standards Board (GASB) has promulgated Statements 34 and 35, which require governments and government schools to depreciate capital assets, subsequent to the most current revision to OMB A-87 and A-21. The commenter points out that private educational institutions and non-profit organizations are already depreciating capital assets under Generally Accepted Accounting Practices (GAAP), as required by the Financial Accounting Standards Board (FASB).

RESPONSE: The promulgations of GASB and FASB provide financial reporting standards. Currently, A-21, A-122 and A-87 all permit the use of either depreciation or use allowance in the development of a non-federal entity’s indirect cost or facilities and administrative (F&A) cost rate(s). The elimination of use allowance from all three circulars is considered a significant policy change, and therefore was not included in the August 12, 2002 NPRM. Based on this comment, however, we will propose it when OMB considers other proposed substantive changes to the cost principles.

RESULT: No change to the existing language.

COMMENT: A-21 currently provides guidance for converting from non-GAAP (use allowance) to GAAP (depreciation) but the proposed changes did not consider extending this treatment to A-87 and A-122.

RESPONSE: We did not propose extending the guidance to A-87 and A-122 to avoid changing policy. Based on this comment, however, we will propose extending this guidance when OMB considers other proposed substantive changes to the cost principles.

RESULT: No change to the existing language.

Employee morale, health, and welfare costs

No comment was received on this item and there is no changes made to the proposed language in the final cost principles.

Entertainment costs

No comment was received on this item and there are no changes made to the proposed language in the final cost principles.

Equipment and other capital expenditures

COMMENT: Under A-21, the new requirement that "original complement of low cost equipment" required to outfit a new facility/building would have to be capitalized, regardless of costs, separately from other assets. This change would be an excessive burden compared to our current administrative practices and resulted in a change in policy.

RESPONSE: The proposed language was not intended to create new policy. However, it did create much confusion among readers.

RESULT: No change to the existing language.

COMMENT: A commenter expressed concern that the proposed text did not authorize awarding and cognizant agencies to waive prior approval requirements, as A-87 currently does.

RESPONSE: This was an oversight and we corrected the error in the final circular text.

RESULT: The waiver provision has been restored.

COMMENT: Several university commenters suggested that with the proposed change in A-21, 16. b.(2), we should add “prior approval should not be required if the item of equipment was included in the approved budget.” The prior approval and waiver request processes are already addressed in the administrative rules of A-110.

RESPONSE: Since this language is currently not in A-21, adding it at this time is not appropriate.

RESULT: No change to the existing language.

COMMENT: One commenter asks if OMB is now requiring that capital equipment be direct charged and not allocated.

RESPONSE: OMB is not requiring that capital equipment be direct charged. The section primarily addresses when and how a capital expenditure may be charged direct. Such costs when not charged direct are capitalized and expensed via depreciation and allocated to all applicable indirect cost pools (see section on Depreciation for more information).

RESULT: No change to the proposed language.

COMMENT: One commenter noted that the proposed revision excludes the reference to prior approval waivers that was included in A-87, and asks if agencies will still be able to authorize prior approval waivers.

RESPONSE: The prior approval waiver is included in the administrative rules which cover universities and other non-profit organizations, but is not included in the administrative rules which cover state and local governments. Therefore, in A-87, the final rule has been amended to reaffirm that awarding agencies have the authority to waive prior approvals.

RESULT: In A-87, the final rule has been amended to reaffirm that awarding agencies have the authority to waive prior approvals.

COMMENT: One commenter had questions as to whether installation and consultants’ costs were to be included in the $5,000 threshold amount and how costs can be recovered if prior approval was not obtained.

RESPONSE: These costs should be charged in accordance with the non-federal entity’s policy for capitalization.

RESULT: No change to the existing language.

COMMENT: One commenter noted that the NPRM specifies that when a direct charge is approved by an awarding agency, the equipment must be charged to the current period, which is both new policy, and does not permit an agency to charge the asset over multiple periods if appropriate.

RESPONSE: We agree.

RESULT: The final revision has been amended to provide alternatives at the awarding agencies discretion.

COMMENT: A commenter had concerns regarding charging capital expenditures in the period they are incurred since oftentimes it is not known until the end of a project whether it will be expensed or capitalized.

RESPONSE: The specific comment relates to “work in progress” projects such as roof repairs or replacements which would normally be treated as an indirect cost and either expended or capitalized in accordance with the non-Federal entity’s policies. Circumstances for direct charging of “work in progress” projects should be fully disclosed to and approved by the awarding agency at the time the award is made.

RESULT: No change to the existing language.

Fines and penalties

No comment was received on this item and there are no changes made to the proposed language in the final circulars.

(Interest), Fund raising and investment management costs

We proposed to separate the principles regarding interest expenses from those principles regarding fund raising and investment management costs. No comments were received regarding this proposal and the final circulars treat these distinct items of cost separately.

COMMENT: Regarding A-21 & A-122, the word "solely" was removed which will significantly impact the allowability of these costs and is a change in policy contrary to the P.L. 106-107 initiative.

RESPONSE: We agree.

RESULT: No change to the existing language.

COMMENT: Fund raising and investment management costs (pg.103) - A-122: The specific reference to "fundraising" has been deleted. This reference should remain as these types of costs are commonly incurred by non-profit grantees and the specific reference ensures that they are treated as unallowable costs.

RESPONSE: This is a misreading because of the way the page was broken.

RESULT: No change to the proposed language. “Fundraising” stays in the title.

COMMENT: Fund raising and investment management costs (pg. 103) - A-21 & A-122: The proposed circular says "fund raising and investment activities shall be allocated an appropriate share of indirect costs" while the paragraphs prior to this state that fund raising is unallowable. Isn't this a contradiction?

RESPONSE: We disagree. There is no contradiction because, even though the costs are unallowable, those costs also are incurred for activities or functions that must share the entity’s indirect costs to accurately calculate the Federal share of the indirect costs incurred by the non-Federal entity.

RESULT: No change to the proposed language.

Insurance and indemnification

No comment was received on this item and there are no changes made to these final circulars.

Interest

COMMENT: Section b.(1) has new language that appears to make currently allowable interest costs unallowable or otherwise changes the previous effective dates for these costs. Was this intended or an editing error? If intended, this constitutes a major change in policy and will have a very negative effect on previous long-term investment decisions.

RESPONSE: We agree. There was an editing error regarding the effective dates. There was no intention to change the effective dates stipulated in the circulars when last revised. The effective dates for interest for each of the circulars remain unchanged.

RESULT: The final Circulars reflect the corrections, as follows:

A-21:

7/1/82 - Interest allowed on buildings, major renovation acquired and capital equipment costing $10,000 or more, completed on or after 7/1/-82. However, interest is still unallowable on equipment and land.

5/8/96 – Interest on equipment and land acquired after 5/8/96 was made allowable.

A-87:

10/1/80 – Interest made allowable on newly occupied space (buildings) acquired after 10/1/80. Interest is unallowable on equipment and land.

9/1/95 - Interest made allowable on equipment regardless when acquired. (Because other circulars allowed interest on land, OMB instructed HHS to allow interest on land acquired after 9/1/95 in the ASMB C-10, the implementing guide for the 5/17/95 OMB revision.)

A-122:

9/29/95 – Interest made allowable on assets acquired after 9/29/95, including interest on buildings, land and equipment.

COMMENT: Perhaps due to a drafting error, the requirement for a lease-purchase analysis would be applied retroactively to the period 7/1/82 – 5/7/96. This requirement is currently required for facilities acquired after 5/8/96 and should be retained.

RESPONSE: We disagree we did not change the policy regarding the lease-purchase analysis. The change desired by the commenter would require rulemaking and is outside the scope of this effort. It is not uncommon for universities to build idle capacity in the construction of new facilities to meet future growth needs. Prior to needing the shell space for their own projects, the space is leased out to others requiring research space. In addition, the policy does not just pertain only to research space but all acquisitions that may be charged to Federal awards. Lastly, the performance of a lease-purchase analysis would most likely occur in the absence of a Federal award.

RESULT: No change to the existing language.

COMMENT: A commenter representing users of the three circulars raised the concern that the new language would prohibit non-Federal recipients from claiming interest on fully depreciated assets. Where different asset lives are used for different classes of assets acquired under a single debt instrument, an organization would need to segregate interest allocable to fully depreciated assets from interest allocable to existing debt-financed assets. This is not a simplification of the rules but creates a new administrative burden.

RESPONSE: We disagree. The new language is a clarification of existing policy. OMB has in many instances states (the policy enunciated in the 10/6/95 Preamble of the A-122 revisions, FR Vol. 60, No. 194, 52520, and the 5/8/96 Preamble of the A-21 revisions, FR Vol. 61, No. 90, 20887) that interest expense on fully depreciated assets is unallowable based on the “allocability” provisions of each Circular. Where a single debt instrument is used to finance assets having varying lives, only current period interest allocable to existing debt-financed assets is allowable.

RESULT: No change to the proposed language.

COMMENT: In the proposed rule, OMB added current policy contained in the 1996 A-21 and the 1995 A-122 Preambles that interest expense on fully depreciated assets is unallowable based on the “allocability” provisions of each Circular. However, no such clarification was added to A-87. As A-87 contains the same “allocability” provisions as the other Circulars, was this an oversight? The policy should be consistent in all the Circulars. The clarification/codification of the OMB policy in the proposed rules will eliminate any confusion.

RESPONSE: We agree. The NPRM omission of consistent policy in A-87 was not intended. As such, the clarification has been included in the final A-87.

COMMENT: Concerning A-21, several commenters requested that the existing requirement for a lease-purchase analysis for facilities costing more than $500,000 be eliminated. Leasing research space is almost never an option due to special requirements. Further, the Federal government only pays a portion of space costs and colleges and universities have much more incentive to seek out the lowest cost space.

RESPONSE: We did not propose the elimination of the lease-purchase analysis as it would result in a change in current policy.

RESULT: No change to the existing language

COMMENT: The allowability of interest on land has been subject to some confusion. Did OMB intend to allow interest on land unrelated to the acquisition of facilities or construction? If not, this needs to be clarified.

RESPONSE: Interest on land may be allowed only in support of the Federal award and in compliance with the organization’s law and procedure. OMB began allowing interest on facility debt incurred by non-profit entities in 1995. Not only was this done to be consistent with A-21 and A-87 but also to encourage small service non-profit entities to acquire facilities rather than rent, thereby saving them and the Federal government the added expense. As many of these entities were primarily dependent upon Federal awards, allowing interest only on facility debt would not meet that objective. As such, OMB also authorized interest on the attendant land the facility was sited on. For purposes of consistency, the allowability of interest on land was added to A-21 in 1996 and, through the ASMB C-10, to A-87 effective 9/1/95. OMB never intended that interest would be allowable on land not associated with the acquisition/construction of a facility allocable to Federal awards. This clarification has been added to the final circulars.

RESULT: No change to the proposed language.

COMMENT: Under the existing A-21 and A-122, specific guidance is provided as to when earnings on positive cash flow are to be recovered and at what interest rate. A-87, however, only states that recovery is to be negotiated when this condition exists. This is inconsistent with the other Circulars and there is no compelling reason to treat governments inconsistently with other group of entities. Was this an oversight?

RESPONSE: We agree. This was an editing error. For purposes of consistency, OMB agrees there is no compelling reason to exclude governments from this requirement. Since 4/8/97 the ASMB C-10 has provided guidance to Federal awarding agencies in interpreting the A-87 language, which is the A-21 and A-122 rules regarding off-sets for interest earnings on positive cash flow.

RESULT: No change to the proposed language

COMMENT: The cash flow analysis for debt over $1 million where an equity contribution is less than 25% should be eliminated. This is an administrative burden and usually has no effect on the F&A rates.

RESPONSE: This recommendation would require rulemaking to change the policy, which is outside the scope of this effort.

RESULT: No change to the existing language.

COMMENT: Concerning the requirement to perform a monthly cash flow analysis where equity contribution is less than 25%. The requirement should be eliminated or modified to require an annual analysis.

RESPONSE: We disagree. OMB did not propose any change to this policy in the proposed circulars

RESULT: No change to the existing language.

COMMENT: The adjustment for “substantial relocations” is a very vague and subjective requirement that is difficult to comply with or enforce. It should be eliminated.

RESPONSE: We disagree. OMB did not change this policy.

RESULT: No change to the existing circular language.

COMMENT: In A-87, Paragraph 26.a. would remain unchanged. To be consistent with A-21 and A-122, should this section also stipulate that “costs incurred for interest on the non-Federal entity’s own funds are unallowable’?

RESPONSE: We agree, “non-Federal entity” will replace the term “government unit” in paragraph 26a. It prohibits interest on the use of the entity’s own funds.

RESULT: The final A-87 uses existing “non-Federal entity”.

Gains and losses on depreciable assets

This item is now addressed in the “Profits and losses on disposition of plant,equipment.”

COMMENT: One comment suggested that the A-87 title language remain as “Gains and Losses. . .” since the text uses the “Gains and Losses” terminology and so does GAAP.

RESPONSE: We agree. This change was proposed to have consistent headings among the three circulars. However, since the text of all circulars refers to “gains and losses”, in the final circulars we changed A-21 and A-122 headings to “Gains and Losses…” to agree with A-87.

RESULT: The headings for all three circulars have been changed to “Gains and Losses. . .”

Lobbying

No comment was received on this item and there are no changes made to these final circulars.

Losses on other sponsored agreements or contracts

No comment was received on this item and there are no changes made to these final cost principles.

Maintenance and repair costs

COMMENT: One commenter recommended adding “in accordance with institutional policy” for those maintenance and repair costs which should be treated as capital expenditures.

RESPONSE: We disagree, this addition is not necessary because it is addressed in the respective circulars sections on capital expenditures. However, for further clarity, each of the final circulars now references the appropriate capital expenditures paragraph number.

RESULT: The final circulars reflect these changes.

Material costs

COMMENT: Some commenters thought that the proposed changes from the existing circular texts make it unclear whether the cost of materials and supplies would continue to be allowable as an indirect cost. They believed that OMB’s use of such phrases as “actually used in” and “purchased specifically for” suggested that only direct materials and supplies would be allowable.

RESPONSE: We have modified the proposed text to remove phrases suggesting that materials and supplies are allowable only as a direct cost. We have also inserted a statement clarifying that direct costs may include only the cost of materials and supplies actually used in carrying out a Federal award. Such a statement currently appears in A-21.

RESULT: The final circulars reflect these changes.

COMMENT: The term “federally donated or furnished materials” needs clarification because readers could confuse it with materials purchased with award funds.

RESPONSE: The term “federally donated or furnished supplies” is currently used in A-21 and has not been questioned. Therefore, we have not changed it in the final text.

RESULT: No change to the proposed language.

Memberships, subscriptions and professional activity

No comment was received on this item and there are no changes made to these final cost principles.

Preagreement costs

COMMENT: Several commenters stated that the language in paragraph (b)(2) of the proposed principle changed policy by adding a requirement that a recipient subject to OMB Circular A-110 notify the cognizant agency before the start of the grant about any costs incurred before the start of the grant.

RESPONSE: We agree.

RESULT: No change to the existing language.

COMMENT: Some commenters were concerned that the proposed principle established a different approval policy for those entities subject to OMB Circular A-110 or the Federal Demonstration Partnership than the policy for other recipients.

RESPONSE: We agree.

RESULT: No change to the existing language.

Professional services costs

COMMENT: State representatives were concerned that the eight factors included in the analysis of whether a particular professional service cost was appropriate were not needed and were subjective, contentious and infringed on state prerogatives.

RESPONSE: The factors that came from Circular A-122 are not new. They articulate the considerations that any entity should take into account when deciding whether to incur these costs.

RESULT: No change to the proposed language.

COMMENT: A number of universities commented that the proposed principle imposed new additional documentation and assessment requirements that would increase burden.

RESPONSE: The proposed principle on professional service costs does not impose any additional documentation requirements. It only provides guidance for recipients on how to approach the decision about whether to procure professional service costs. Please see our response to the prior comment for the basis of our determination.

RESULT: No change to the proposed language.

Rearrangement and alteration costs

COMMENT: It would be helpful if guidance were provided as to the difference between "normal" and "special" rearrangement costs.

RESPONSE: Normal operations and maintenance costs would be considered as facility costs. Special rearrangement and alteration costs are those that are “specifically performed by the project.”

RESULT: No change to the proposed language.

Reconversion costs

No comment was received on this item and the proposed changes are made final in the three circulars.

Rental cost of buildings and equipment

COMMENT: One commenter believed that the language regarding the reasonableness of rental costs that has been added to A-21 creates an additional administrative burden. Also, the commenter pointed out that a reference contained in 38.d may be incorrect after the changes are finalized.

RESPONSE: The proposed change should not create an additional burden on the institution as all cost items must be analyzed to determine that they are “reasonable”. This language is intended to provide additional guidance and clarification in A-21. The commenter is correct regarding the incorrect reference to section 23.a.

RESULT: No change to A-21 as proposed however the incorrect reference in section 38.d has been corrected in the final revisions.

COMMENT: One commenter suggests adding an example of a “less-than-arms-length” transaction regarding “the non-Federal entity and another entity created by the former to acquire and lease facilities” for purposes of clarity.

RESPONSE: We have added an example of a “less-than-arms-length” transaction to the final cost principles.

RESULT: An example was added to the final cost principles.

COMMENT: A commenter expressed concerns regarding “profit, management fees, and taxes” remitted to vendors under capital leases.

RESPONSE: The section addresses capital leases and profit, management fees, and taxes are unallowable under this type of lease.

RESULT: No change to the proposed language.

COMMENT: A commenter requested that the language from A-21 that has been added to A-87 and A-122 stating the “rental arrangements should be reviewed periodically to determine if circumstances have changed and other options exist” be quantified.

RESPONSE: The intent is to leave this time period to the determination of the entity.

RESULT: No change to the proposed language.

Taxes

No comment was received on this item and no changes were proposed. No change is made to the final circulars.

Travel costs

COMMENT: Regarding A-21: The prior approval and pre-notification requirements for foreign travel increase the regulatory burden they represent a step backwards in the streamlining of administrative requirements. Prior approval requirements for colleges and universities were eliminated 10 years ago. This constitutes new policy and is inconsistent with A-110.

RESPONSE: We agree.

RESULT: No change to the existing language.

COMMENT: In paragraph c.2., the "Unless a pattern of avoidance is detected…" language currently in A-87 and proposed for all the circulars would restrict or limit the Federal government or other audit review and is unnecessary. It should be deleted from all the circulars.

RESPONSE: We disagree. The proposed language states the Federal government “will generally not question . . . ” travel costs unless there is pattern or practice of avoidance. Because the language uses the word “generally,” the item does not restrict the scope of audits or reviews.

RESULT: No change to the proposed language.

COMMENT: In paragraph e., why is travel to Canada not considered foreign travel but travel to Mexico is?

RESPONSE: Taking into account the North American Free Trade Agreement, we agree that Mexico should no longer be considered foreign travel and will make the appropriate change.

RESULT: We have eliminated the distinction between Canada and Mexico in the final revisions.

COMMENT: A number of commenters stated the proposed requirement in paragraph b. would require grantees and contractors to use the Federal travel rules where organizational policies don't exist. The Government Employees and Contractor Travel Act of 1985 prohibited the applicability of those rules to non- Federal entities. The proposed OMB language would "back-door" these policies contrary to Congressional intent.

RESPONSE: We disagree. Grantee/contractors have the choice to create their own travel policies or to use the Federal Government’s policies. Many grantees/contractors do not have the resources to create their own travel policies; therefore, utilizing the Federal Government’s policies is a substitute system for them.

RESULT: No change to the proposed language.

COMMENT: In A-21 and A-87, it is not clear how the determination is to be made as to what is "acceptable" for non-Federal entity travel policies. OMB needs to stipulate the criteria for making such a determination.

RESPONSE: Expanding the narrative concerning “acceptable travel policies” would be a change in policy; therefore, the language used in A-21 and A-87 was used. Although grantees/contractors are not required to comply with Federal travel regulations, Federal regulations may be used to determine reasonableness (also see reasonableness criteria for assistance).

RESULT: No change to the proposed language.

COMMENT: Currently, State governments must follow their prescribed rules. Under the proposed circulars, State governments are now subject to a litany of requirements. Why are these additional restrictions/qualifiers necessary?

RESPONSE: We disagree. If a State or local government has an acceptable travel policy, it can use that policy. The Federal Government’s travel policies serve as a substitute system for non-Federal entities that do not have their own policies.

RESULT: No change to the proposed language.

COST ITEMS FOUND IN TWO CIRCULARS

Bonding costs

COMMENT: One commenter stated that this item is only in A-122 and A-87 and extending this cost item to A-21 is inconsistent with the stated goals, that no new restrictions be added to the cost principles circulars.

RESPONSE: We disagree. The addition of the bonding costs language in A-21 does not add any new restrictions; it clarifies existing policy to make clear that such costs are allowable.

RESULT: No change to the proposed language.

Goods or services for personal use

COMMENT: A commenter recommended incorporating the language contained in A-21 and A-122 into A-87 in order to be consistent.

RESPONSE: The commenter is mistaken. The proposed item does add this cost item to A-87.

RESULT: No change to the proposed language.

Housing and personal living expenses

COMMENT: The A-21 and A-122 requirements should be incorporated into A-87 to be consistent.

RESPONSE: We did not propose any changes to this item and believe there are sufficient differences that any amendments should be considered in a proposal that would cover substantive changes to the circulars.

RESULT: No change to the existing language.

Idle facilities and idle capacity

COMMENT: Many commenters, both from government and universities, were pleased with the clear, specific and consistent guidance provided by the proposed language. However, some universities commented that additional guidance is not necessary since the paragraph on depreciation (J.12. in A-21) sufficiently address unused facilities. “Institutions may be compensated for the use of their buildings…provided that they are used, needed in the institutions’ activities, and properly allocable.” —italics added for emphasis]. They were further concerned that the addition of this section to A-21 would ultimately result in more contentious F&A rate negotiations and inappropriate questioned costs.

RESPONSE: We disagree. While paragraph J.12. does specify that costs will be reimbursed provided the buildings/equipment is used and needed, this paragraph covers only depreciation and there are many other costs involved in facilities. In addition, the inclusion of more specific guidelines in A-21 should result in more consistent treatment across governmental and non-governmental entities and fewer disagreements between institutions and F&A rate negotiators.

RESULT: No change to the proposed language.

COMMENT: One commenter recommended that the definition of the word “facilities” used in subparagraph a.(1) should be explicitly limited to only this section.

RESPONSE: We agree.

RESULT: The final circulars address this issue in the introductory paragraph a., by stating “As used in this section the following terms have the meanings set forth below”.

COMMENT: One commenter indicated that the phrase “or any portion thereof” should be eliminated in paragraph a.1. from the definition of facilities, as it may cause confusion as to which portion of the rules apply.

RESPONSE: We disagree. Both the original language in A-87 and A-122 and the proposed language for all circulars use this terminology to identify all the related parts of the facility to be considered for idle facilities and idle capacity. Eliminating the language in A-87 and A-122 would likely create more confusion than including it in A-21.

RESULT: No change to the proposed language.

Labor relations costs

No comment was received on this item and no changes were proposed. No change is made to the final circulars.

Patent costs

COMMENT: One commenter suggested that because patent costs are also incurred on non-Federal awards, language should be changed to indicate that patent costs are allowable regardless of funding source.

RESPONSE: We disagree. Both the original and proposed texts were clear on this issue. Costs are allowable only when required by the Federal award or where title is required by the Federal government to be conveyed to the Federal government. If these costs were made allowable, the Federal government could be subsidizing patent costs for patents that do not benefit any Federal assistance program.

RESULT: No change to the proposed language.

COMMENT: One commenter agrees with the changes in general, but believes the wording was confusing and recommended revisions for clarity.

RESPONSE: We agree.

RESULT: The final language has been revised to be more clear.

COMMENT: One commenter preferred the proposed language because it explicitly recognizes the provision in the Bayh-Dole Act that universities may provide the Federal government with a royalty-free license rather than title to an invention. However, the commenter thought that the change would constitute a new policy.

RESPONSE: We disagree. Because the Bayh-Dole Act imposes an outcome that agencies and grantees must comply with, inclusion of this reference is not a change to Federal policy. It just adds a reference to the circulars.

RESULT: No change to the proposed language.

Plant security costs

COMMENT: The proposed language would be to limit such costs to those necessary to "comply with Federal security requirements". There is a lack of specific guidance and examples in the proposal. This may yield cost requirements above the means of most organizations if security must meet requirements in high-risk federal facilities (e.g., nuclear reactors, military installations).

RESPONSE: The title of this section has been changed to reflect not only routine protection from theft and vandalism but acts of terrorism as well. The revised text makes allowable those costs the non-federal entity deems appropriate to the circumstances. Where Federal awards require enhancements to security for purposes of undertaking the Federal work, such costs may be treated either as a direct or indirect cost, as appropriate.

RESULT: No change to the proposed language

COMMENT: The proposed language would be to limit such costs to those necessary to "comply with Federal security requirements". What about non-Federally mandated costs that are still necessary and reasonable? Does OMB intend to make these costs unallowable?

RESPONSE: The revised language makes it clear that the costs of providing security to both plant an employees is not limited to just those arrangements to comply with “Federal security requirements”. Reasonable and necessary plant and homeland security costs appropriate to the circumstances, whether specifically required by the Federal awarding agency or not, are allowable.

RESULT: Change made to the proposed language to allow all reasonable plant security costs.

Proposal costs

No comment was received on this item and no changes were proposed. No change is made to the final circulars.

Publication and printing costs

COMMENT: One commenter stated that including the cost of publications in the proposal budget should constitute prior approval by the awarding agency and the proposed language should clarify this requirement.

RESPONSE: We agree. We no longer believe that grantees should be required to get prior approval for publication costs that are directly allocable to Federal awards.

RESULT: The final circulars eliminate the prior approval requirement.

COMMENT: Several commenters stated that this is a new section for A-21 and would create new policy for publication costs, requiring prior approval for publication costs that directly benefit a Federal award. Other commenters that deal with both A-21 and A-122 stated that the prior approval requirement adds another new administrative burden for researchers as well as for Federal agencies which is contrary to the PL 106/107 goal of streamlining and simplifying the application, administration and reporting procedures for Federal financial assistance programs. Finally, another commenter asked if every publication had to be submitted to the awarding agency for prior review and approval.

RESPONSE: We agree that the proposed language requiring prior approval added unneeded burden. Publication and printing costs have been allowable in the past under A-21 and A-122. With the elimination of the prior approval for direct charges to a Federal award, this item does not change policy for these entities.

RESULT: All three final circulars reflect the elimination of the prior approval requirement.

COMMENT: One commenter stated that the proposed language relative to page charges would add a new allowable cost element to A-21 and A-87.

RESPONSE: We disagree. This does not add a new allowable cost element to A-21 and A-87 as publication/printing costs allocable to a Federal award have been allowable costs in the past.

RESULT: No change to the proposed language.

COMMENT: One commenter noted that Page charges often aren't received until after an award is over and stated that language should be added to allow for such "post-award" costs when approved by the awarding agency.

RESPONSE: We disagree, the allowablility of post-award page charges should be treated the same as any other post award costs and not addressed separately for each item of cost.

RESULT: No change to the proposed language.

Recruitment and relocation costs

The current A-21 and A-87 treat relocation costs very briefly. The current A-122 treats relocation costs separately and with greater detail. Under the proposed revisions, recruitment and relocation would be treated together, relying on the relocation costs item in A-122.

COMMENT: One commenter stated that paragraph d. of the proposed language has been greatly expanded for A-21 and is very detailed and prescriptive, which is considered new policy. Further, there are inconsistencies e.g., closing costs on the sale of a home are allowable but the closing costs on the purchase of a new home are unallowable. The commenter thought that this section needed to be revised to establish general allowable criteria more like the section on travel costs.

RESPONSE: We agree. The proposed revisions are withdrawn.

RESULT: No change to the existing language.

Royalties and other costs for use of patents

COMMENT: One commenter recommended clarifying language that indicates these costs are allowable “when they are specified as a requirement for the performance of the award.”

RESPONSE: Both the original and proposed languages specify allowability as “necessary for the proper performance” of the award. Making the recommended change would result in a new, more burdensome requirement.

RESULT: No change to the proposed language.

Selling and marketing

COMMENT: Several commenters recommended adding to A-21 the second sentence of the revision that only applies to A-122 with one commenter adding that the requirement for prior approval be dropped.

RESPONSE: We disagree. The language was left in A-122, as it currently exists which includes the prior approval requirement. It is understood for A-21 that these costs would be allowable as direct costs with prior approval by the awarding agency when they are necessary for the performance of Federal programs.

RESULT: No change to the proposed language.

COMMENT: One commenter stated the language in the proposal should reflect that grantees legitimately earn program income as a result of selling goods and services created with grant funds that were not anticipated when the award was made. OMB’s administrative circulars create a default alternative for capturing and expending program income generated under these circumstances. The cost principles should create a parallel and consistent policy concerning the expenditures incurred in earning the unanticipated income.

RESPONSE: We disagree. The cost principles are not incompatible or inconsistent with the administrative circulars, i.e., A-110 and A-102. Under A-110, if authorized by Federal awarding agency regulations or the terms and conditions of the award, costs incident to the generation of program income may be deducted from gross income to determine program income, but only if these costs have not been charged to the award. A-102 has similar language.

RESULT: No change to the proposed language.

Severance pay

No comments were received on the technical proposal to move this item to the compensation for personal services part of A-21 and A-122. The final circulars include the coverage of severance pay under compensation for the personal services cost principle.

Specialized services facilities

COMMENT: A number of commenters raised concerns that the new language would require that the costs of these centers be adjusted “bi-annually”. Was it intended that this be “bi-ennually” or every two years? If it were intended that the review occur twice a year, this would create an unnecessary administrative burden. Commenters went on to propose varying adjustment timeframes: no less frequently than annually; every 2 years; and a 5-year moving average.

RESPONSE: The proposed rule contained an editing error requiring an adjustment twice a year. The final rule stipulates that an adjustment for actual costs shall be made bi-ennially.

RESULT: The editing error is corrected in the final circulars.

COMMENT: Some commenters objected to the proposed change that would eliminate the current option permitting alternative costing arrangements when it is in the best interest of the government and is approved by the cognizant agency. These commenters believed that this proposed change would be a major policy change that no longer recognizes the need for flexibility in unusual situations. They urged OMB to retain this alternative.

RESPONSE: We agree.

RESULT: The final circulars restore alternate costing methods when they are in the best interest of the Federal Government.

COMMENT: Comments were received that the examples provided in the revised language added “motor pools” to the current examples. They noted that motor pools are not specialized service facilities.

RESPONSE: We agree.

RESULT: No change to the existing language.

COMMENT: One commenter objected to language that would stipulate the frequency of adjusting rates back to cost. This was viewed as new policy and contrary to the P.L. 106-107 initiative.

RESPONSE: The current A-21 and A-122 cost principles do not specify a timeframe for adjusting billing rates to reflect actual costs. This has been an issue in several audits where the awarding agency, and by extension OMB, were faulted for failing to provide clarity as to when these adjustments had to be made. As a result, there was much confusion and inconsistent (as well as non-existent) practices among recipient organizations. The task of the P.L. 106-107 work group was to identify items of cost that could be standardized among the circulars as well as clarify and make the policies more understandable, consistent with original intent, wherever possible. The requirement of adjusting rates at least every two years will result in the consistent treatment of these costs and is viewed as being reasonable.

RESULT: No change to the proposed language.

Termination costs applicable to sponsored agreements

COMMENT: The language under proposed paragraph c.(3) is confusing: "The loss of useful value as to any one terminated Federal award is limited to…for which…was acquired."

RESPONSE: We agree.

RESULT: We changed the language to a clearer description that is also consistent with the FAR language.

COMMENT: A commenter noted that the proposed language would clarify existing cost policy in A-21. However, the commenter thought paragraph f. had to be revised to remove the reference to "Attachment A" as it does not apply to A-21 but to A-122.

RESPONSE: We agree.

RESULT: The reference to Attachment A has been eliminated.

Training

COMMENT: One commenter believed that adding a section on training (employee development) costs to A-21 changed cost policy for universities.

RESPONSE: Expressly articulating the Federal Government’s policy on employee development costs in a document that has previously been silent on that subject does not change the policy. The proposed text consists of a simple statement making expressly allowable a cost item that would easily meet the general allowability criteria. Accordingly, we have retained this cost item in A-21.

RESULT: “Training costs” is added to A-21.

Transportation costs

No comment was received on this item and no changes were proposed. No change is made to the final circulars.

Trustees

No comment was received on this item and no changes were proposed. No change is made to the final circulars.

COST ITEMS FOUND IN ONLY ONE CIRCULAR

Accounting

COMMENT: One commenter questioned whether deleting this cost item in A-87 means that this cost item is no longer an allowable cost for State and local governments.

RESPONSE: That is not correct. This cost item is only addressed in A-87. A-87 simply states that the following costs items are allowable: accounting, automatic electronic data processing, and disbursing service. Although their references are deleted in the final circular, they remain allowable costs. We deleted their reference in the Circular since these costs are allowable without any added conditions/guidance (unlike other cost items in the Circular such as advertising and audit services) other than the general principles of the Circular (i.e., reasonable, allocable and allowable and properly supported). They are also not mentioned in other Circulars, and are always allowed by federal officials for universities and non-profit organizations.

RESULT: This cost item is deleted from A-87

Advisory Councils

COMMENT: One commenter questioned whether adding the advisory councils provision to circulars A-21 and A-122 was consistent with our stated intent not to change policy.

RESPONSE: The provision on advisory councils in A-87 was included in that Circular because numerous Federal statutes imposed requirements on States and local governments to establish advisory councils. In recent years, Federal statutes have imposed similar requirements on non-profit organizations and institutions of higher education. The advisory council provision was added to A-21 and A-122 so that these entities would have the same guidance as governmental agencies.

The advisory council item should not lead recipients that are covered by these circulars to change current policy, as the provision requires only that which is obvious: that an advisory council can be charged directly to a grant if the recipient must establish the council in order to be eligible to receive the grant. In these cases, the recipient verifies the advisory council requirement by obtaining the consent of the Federal awarding agency. Other advisory councils necessary for the general management of the entitiy are allowable only when the council is allocable to Federal awards and charged as indirect costs.

RESULT: No change to the proposed language.

Alumni/ae activities

The proposed circulars did not contain any change to this item and this item is only in the final A-21 circular.

Audit and related services

COMMENT: OMB Circulars A-21 and A-122 are currently silent on the subject of audit costs. Adding this cost item to those two circulars would change existing policy for universities and not-for-profit organizations, respectively.

RESPONSE: We disagree. The incorporation of guidance on audit costs into A-21 and A-122 actually expresses existing policy. The requirement to obtain audits under the Single Audit Act of 1984, as amended (31 USC 7501, et. seq.) and OMB Circular A-133 (Audits of States, Local Governments, and Non-Profit Organizations) applies equally to State and local governments, not-for-profit organizations, and universities.

RESULT: The final A-21 and A-122 circulars include this cost item.

COMMENT: Some commenters viewed the proposed guidance for assigning A-133 audit costs to Federal awards as flawed, confusing, and unnecessary in the university environment. They noted that it would preclude a non-Federal entity from charging an aggregate amount to Federal awards that exceeded the percentage of the cost of an A-133 single audit represented by the ratio of the entity’s expenditures under Federal awards, to the entity’s total expenditures of funds from all sources. A greater aggregate audit cost could be allowed only if supported by documentation of actual costs incurred. They thought that the denominator of the ratio used to compute the percentage of the A-133 audit cost allocable to Federal awards should be the entity’s total expenditures for Federal and non-federal awards, not its total expenditures of funds from all sources.

RESPONSE: We have deleted the proposed passages on allocation methodologies referenced in this comment, and simply referred the reader to applicable portions of the Single Audit Act and OMB Circular A-133.

RESULT: The proposed language is withdrawn. The final circulars provide references to applicable portions of the Single Audit Act and OMB Circular A-133.

COMMENT: Rather than prescribing a method for assigning audit costs to Federal awards, the cost principles should simply identify the A-133 audit costs as an allowable cost that a university should treat as a regular facilities and administrative (F & A) cost.

RESPONSE: We have deleted the proposed passages on allocation methodologies referenced in this comment, and simply referred the reader to applicable portions of the Single Audit Act and OMB Circular A-133.

RESULT: The proposed language is withdrawn. The final circulars provide references to applicable portions of the Single Audit Act and OMB Circular A-133.

COMMENT: One commenter thought that the rules on audit costs would require entities currently exempt from A-133, such as foreign entities, to obtain A-133 audits.

RESPONSE: This is incorrect. A-133 is addressed to State, local, and tribal governments, universities, and not-for-profit organizations. It is not addressed to for-profit organizations, foreign entities, etc. Neither A-133 nor the three cost principles circulars can require a foreign entity to obtain an A-133 audit. That entity must follow A-133 only if required to do so by a program’s authorizing statute or regulations, or by the terms and conditions of the Federal award. In such a case, the non-Federal entity would charge the audit cost to Federal awards in accordance with whichever set of cost principles applied.

RESULT: No change to the proposed language.

COMMENT: By restricting allowable audit costs to the cost of A-133 audits, OMB would create a disincentive for States and other pass-through entities to make necessary audits of subrecipients. Examples of such audits include financial statement audits and audits of particular program aspects. Nor does the proposed discussion of agreed-upon procedures engagements contemplate such auditing by pass-through entities.

RESPONSE: As a general rule, the proposed text would not preclude non-Federal pass-through entities from claiming the cost of non-A-133 audits used to monitor subrecipients. It would simply require the pass-through entity to include this cost item in a cost allocation plan or indirect cost rate proposal, if applicable, or to obtain the awarding agency’s approval to claim it as direct costs. That is substantially the same as the existing policy, as stated in A-87, Attachment B, item 5.

However, existing policy also makes unallowable any cost of auditing subrecipients that do not have audit requirements under A-133. The original preamble to A-133 stated that “for subrecipients that expend less than $300,000 in Federal awards annually, the cost of audits or attestation engagements, other than agreed-upon procedures engagements described in the previous paragraph, are not allowable costs and, therefore, cannot be charged to any Federal award. This provision would prohibit the cost of a financial statement audit conducted in accordance with generally accepted auditing standards or generally accepted government auditing standards (GAGAS) issued by the Comptroller General of the United States from being charged, by either a pass-through entity or subrecipient to Federal awards for a subrecipient that expends less than $300,000 in Federal awards annually.” (62 FR 35280, June 30, 1997). The rationale for this policy is that audits of entities whose level of Federal expenditure did not rise to the level triggering an A-133 audit requirement would represent an inefficient use of Federal funds, and would circumvent the principle of exempting smaller entities from the A-133 audit requirement. This prohibition against claiming the cost of auditing such entities does not, of course, preclude pass-through entities from claiming the cost of other monitoring tools, such as agreed-upon procedures engagements, programmatic reviews, and the analysis of reports and requests for payment, regardless of the level of a subrecipient’s Federal expenditure.

RESULT: No change to the proposed language.

COMMENT: One commenter asserted that the term “agreed-upon”, used in the new passage allowing the cost of agreed-upon procedures engagements as tools to monitor subrecipients, is too vague. The commenter also thought that the requirement for A-133 audits of subrecipients makes the discussion of this kind of public accounting service unnecessary.

RESPONSE: We have retained this subsection in the final guidance for the following reasons. First, the term “agreed-upon procedures” has a precise meaning in the public accounting profession. It refers to engagements in which the accountant makes an on-site inspection requiring accounting skills, but for which the accountant does not have sole discretion to determine the procedures to be applied. Rather, the client and other “specified parties” agree with the accountant on the procedures, and they take the responsibility for the procedures’ sufficiency. The accountant is precluded from expressing an opinion; he/she reports only the results of having applied the agreed-upon procedures. For this reason, the professional literature identifies an accountant performing agreed-upon procedures as a “practitioner” rather than an “auditor.”

Second, agreed-upon procedures engagements do not duplicate required audits of subrecipients. A pass-through entity has the option to arrange for agreed-upon procedures and charge the related cost to Federal awards only with respect to subrecipients that do not have audit requirements under A-133.

RESULT: No change to the proposed language. We have retained the term ‘agreed-upon procedures.” In addition, the final circulars provide reference to applicable portions of OMB Circular A-133.

COMMENT: The proposed language would restrict the allowable cost of auditing subrecipients to the cost of examining their compliance with the specific types of compliance requirements listed in A-133.

RESPONSE: This is incorrect. The types of compliance requirements referenced by the commenter form the scope of agreed-upon procedures engagements described in subsection 230 (b)(2) of A-133, which are used to monitor subrecipients that do not have A-133 audit requirements. As noted above, these services are not audits and are unrelated to the cost of obtaining them. A-133 makes agreed-upon procedures available as a tool for monitoring subrecipients that do not have audit requirements under A-133.

RESULT: No change to the proposed language.

COMMENT: The discussion of the cost of agreed-upon procedures engagements should use the term “pass-through entity” rather than “non-Federal entity.” While all pass-through entities are non-Federal entities, only pass-through entities are required to monitor subrecipients through the use of agreed-upon procedures and other tools.

RESPONSE: We agree.

RESULT: The final circulars do not use the new term “pass-through entity” in subsection c. The reference to using agreed-upon procedures engagements as subrecipient monitoring tools conveys the message that this subsection is addressed to pass-through entities, without actually using that term. This subsection implies that the engagements are being performed by the grantees responsible for the monitoring of its subrecipients.

Automatic Electronic data processing

COMMENT: One commenter questioned whether deleting this cost item in A-87 means that this cost item is no longer an allowable cost for State and local governments.

RESPONSE: See response under the “accounting” section.

RESULT: This cost item is deleted from A-87.

Bid and Proposal costs

No comment was received on the proposal to remove this item from A-122 and the decision to remove the item is final.

Budgeting

No comment was received on the proposal to remove this item from A-87 and the decision to remove the item is final.

Civil defense costs

COMMENT: A number of commenters thought that the proposed deletion of this subject from A-21 might be appropriate only if the discussion of “Plant security costs,” elsewhere in the circular, is sufficiently broad to encompass these costs. Given the world situation, the commenters thought there should be no question that costs necessary to safeguard property and employees from U.S. enemies are allowable.

RESPONSE: It was not OMB’s intent to make such costs unallowable. In the final rule the discussion of “Plant security costs” has been expanded to make clear costs related to the safeguard of property and employees are allowable.

RESULT: “Civil defense costs” is no longer a separate item in A-21, these costs are now included with “Plant and homeland security costs” applicable to all circulars.

Commencement and convocation

We did not propose to change this item in A-21 and no comment was received on the item. We have made no changes to the final circular.

Deans of faculty and graduate schools

We did not propose to change this item in A-21 and no comment was received on the item. We have made no changes to the final circular.

Disbursing service

COMMENT: One commenter questioned whether deleting this cost item in A-87 means that this cost item is no longer an allowable cost for State and local governments.

RESPONSE: See response under the “accounting” section.

RESULT: This cost item is deleted from A-87.

Executive lobbying costs

No comment was received on the proposal to move this item in A-21 to appear with the other provisions regarding lobbying and the decision to move the item is final.

Fringe benefits

No comment was received on the proposal to remove this cross-reference from A-122 and the decision to remove the cross-reference is final.

General government expenses

COMMENT: A Federal agency commented that additional clarification of this item of cost would be helpful. Examples of unallowable general government costs should be provided to include: the budgeting functions in support of the state legislature; taxing functions of the state treasurer; and criminal prosecutions by the state Attorney General.

RESPONSE: While the examples would constitute unallowable general costs of government, unless otherwise provided by law, the proposed text already covers these types of costs.

RESULT: No change to the proposed language.

Independent Research and Development

No comment was received on the proposal to remove this cross-reference from A-122 and the decision to remove the cross-reference is final.

Meetings and Conferences

COMMENT: Some commenters noted that circulars A-21 and A-87 do not currently treat meetings and conferences as a discrete cost item and asserted that giving it such treatment in these two circulars resulted in a change in policy.

RESPONSE: Actually, the rules for this cost item do currently appear in A-21 and A-87. They are treated as components of the cost of memberships, subscriptions, and professional activities (A-21, item J.28.c. and A-87, Attachment B, item 30.c.). For the sake of consistency, we proposed setting up meetings and conferences as a discrete cost item in all three circulars. This amounts to a repackaging of existing policy, not a policy change.

RESULT: The expansion of this item to A-21 and A-87 and the removal of this treatment from other parts of those two circulars are retained in the final circulars.

COMMENT: Some commenters noted that OMB proposed to include in A-122 a statement allowing the cost of meetings to conduct the general business of a not-for-profit organization without proposing parallel statements in the other two circulars. The commenter noted that the three circulars collectively identify two classes of meetings and conferences: those held for technical purposes related to Federal awards, and those held to conduct the general business of the non-Federal entity. The commenter concluded that the silence of A-21 and A-87 regarding the general business meetings should be interpreted as allowing the cost of such meetings so long as the costs satisfied the general criteria in section C. of A-21 and in Attachment A of A-87. Therefore, the commenters recommended that OMB should either strike the statement on general-purpose meetings from A-122 or add it to the other two circulars.

RESPONSE: The statement expressly allowing the cost of meetings to conduct the general business of the organization currently appears only in A-122. In proposing its retention, therefore, OMB followed existing policy.

After considering the comments received, however, OMB agrees that retaining this statement in A-122 magnifies the risk that users may misconstrue the text on Meetings and Conferences in all three circulars. Meetings to conduct the general business of the non-Federal entity fall under the heading of general administration and general expenses. Section F.5. of the current A-21 defines this cost grouping as including costs “incurred for the general executive and administrative offices of educational institutions and other expenses of a general character which do not relate solely to any major function of the institution....” Examples of these costs include “central offices of the institution such as the President’s or Chancellor’s office, the offices for institution-wide financial management, business services, budget and planning, personnel management, and safety and risk management; the office of the General Counsel; and, the operations of the central administrative management information systems.” Comparable text appears at A-122, Attachment A, subparagraph D.3.b.(4). This guidance provides for the inclusion of general administration and general expenses in indirect cost pools, which are allocated to Federal awards in proportion to the benefits received.

The cost of meetings held to conduct the general business of the non-Federal entity is thus part of a cost grouping that the general guidance expressly allows as a component of indirect costs. A statement in the specific rules on Meetings and Conferences identifying this item as allowable would therefore be redundant. As the commenters noted, it would also magnify the risk of misinterpretation; many had construed the absence of parallel statements in the other circulars to mean that the cost of holding this kind of meeting could be allowed only for non-Federal entities subject to A-122.

RESULT: We have deleted the statement allowing the cost of meetings to conduct the general business of a non profit organization from A-122.

COMMENT: A commenter questioned whether the proposed text applies to sending staff to meetings and conferences sponsored by others as well as to the cost of hosting such events.

RESPONSE: We have reviewed the proposed text and believe it refers solely to meetings and conferences hosted by the non-Federal entity. The text specifically mentions cost items essential to hosting a meeting or conference (facilities rental, speakers’ fees, etc.) but not the kinds of costs incurred to send staff to an event sponsored by others (such as registration fees). The cost of sending staff to meetings and conferences sponsored by others would fall under the heading of training (i.e., employee development).

RESULT: No change to the proposed language.

Motor pools

COMMENT: One commenter questioned whether deleting this cost item in A-87 means that this cost item is no longer an allowable cost for State and local governments.

RESPONSE: This is not correct. The cost remains allowable. We delete the reference of “motor pools” in this attachment of A-87 since the provision for its allowability is already discussed in Attachment C of A-87, State/Local-Wide Central Service Cost Allocation Plans.

RESULT: This cost item is deleted from A-87.

Organization costs

We did not propose to change this item in A-122 and no comment was received on the item. We have made no changes to the final circular.

Overtime, extra-pay shift, and multi shift premiums

COMMENT: The new guidance for “overtime, extra-pay shift, and multi shift premiums” represents additional requirements for A-21 and A-87. It constitutes a new policy.

RESPONSE: We agree.

RESULT: No change to existing language in A-21 and A-87. The cost item is, however, relocated in the “Compensation for “Compensation for personal services” in A-122.

Page charges in professional journals

COMMENT: The new guidance for “page charge in professional journal” that requires prior approval by federal agency for direct charges represents additional requirements for A-21 and A-87. It constitutes a new policy.

RESPONSE: We agree. The new guidance, as revised in the final version, provides general criteria for allowability for this cost item and eliminates the requirement for prior approval by federal agencies in all circulars.

RESULT: The proposed language has been changed to eliminate the prior approval requirements for page charges.

Participant support costs

COMMENT: We received a number of comments stating that adding this section to Circulars A-21 and A-87 would constitute new policy.

RESPONSE: We agree.

RESULT: This section will remain in Circular A-122 but is not added to Circulars A-21 and A-87.

Pension plans

No comment was received on the proposal to remove this cross-reference from A-122 and the decision to remove the cross-reference is final.

Relocation costs

COMMENT: Several commenters stated that the relocation language in A-21 is very detailed and prescriptive and constitutes a policy change with respect to what is an allowable cost and is inconsistent with stated objectives of this consolidation that there would be no new restrictions added to the cost principle circulars.

RESPONSE: We agree.

RESULT: No change to the existing language. We will reevaluate expanding the guidance on this cost item to A-21 and A-87 when we consider other proposed substantive changes to the cost principles.

Sabbatical leave costs

No comment was received on the proposal to move this treatment in A-21 to the fringe benefits provisions under "Compensation for personal services” of A-21. The decision to move the item is final.

Scholarships and student aid costs

No comment was received on the proposal to amend this treatment to incorporate the clarification in OMB memorandum M-01-06, regarding tuition remission costs. The clarification is in the final version of A-21.

Student activity costs

We did not propose to change this item in A-21 and no comment was received on the item. We have made no changes to the final circular.

Under recovery of costs under Federal agreements

No comment was received on the proposal to remove this item from A-87 and the decision to remove it is final.