Cost Principles for State, Local, and Indian Tribal Governments by b0b59b8a00175297


									     51910            Federal Register / Vol. 70, No. 168 / Wednesday, August 31, 2005 / Rules and Regulations

     OFFICE OF MANAGEMENT AND                                Circular A–87 as revised by the May 10,               § 225.15   Background.
     BUDGET                                                  2004 notice.                                             As part of the government-wide grant
                                                             List of Subjects in 2 CFR Part 225                    streamlining effort under Public Law
     2 CFR Part 225                                                                                                106–107, Federal Financial Award
                                                               Accounting, Grant administration,                   Management Improvement Act of 1999,
     Cost Principles for State, Local, and                   Grant programs, Reporting and                         OMB led an interagency workgroup to
     Indian Tribal Governments (OMB                          recordkeeping requirements, State,                    simplify and make consistent, to the
     Circular A–87)                                          local, and Indian tribal governments.                 extent feasible, the various rules used to
     AGENCY:  Office of Management and                         Dated: August 8, 2005.                              award Federal grants. An interagency
     Budget                                                  Joshua B. Bolten,                                     task force was established in 2001 to
     ACTION: Relocation of policy guidance to                Director.                                             review existing cost principles for
     2 CFR chapter II.                                                                                             Federal awards to State, local, and
                                                             Authority and Issuance                                Indian tribal governments; colleges and
     SUMMARY: The Office of Management                       ■ For the reasons set forth above, the                universities; and non-profit
     and Budget (OMB) is relocating Circular                 Office of Management and Budget                       organizations. The task force studied
     A–87, ‘‘Cost Principles for State, Local,               amends 2 CFR Subtitle A, Chapter II, by               ‘‘Selected Items of Cost’’ in each of the
     and Indian Tribal Governments,’’ to                     adding a part 225 as set forth below.                 three cost principles to determine which
     Title 2 in the Code of Federal                                                                                items of costs could be stated
     Regulations (2 CFR), Subtitle A, Chapter                PART 225—COST PRINCIPLES FOR                          consistently and/or more clearly.
     II, part 225 as part of an initiative to                STATE, LOCAL, AND INDIAN TRIBAL
     provide the public with a central                       GOVERNMENTS (OMB CIRCULAR                             § 225.20   Policy.
     location for Federal government policies                A–87)                                                    This part establishes principles and
     on grants and other financial assistance                                                                      standards to provide a uniform
                                                             Sec.                                                  approach for determining costs and to
     and nonprocurement agreements.                          225.5 Purpose.
     Consolidating the OMB guidance and                                                                            promote effective program delivery,
                                                             225.10 Authority
     co-locating the agency regulations                      225.15 Background
                                                                                                                   efficiency, and better relationships
     provides a good foundation for                          225.20 Policy.                                        between governmental units and the
     streamlining and simplifying the policy                 225.25 Definitions.                                   Federal Government. The principles are
     framework for grants and agreements as                  225.30 OMB responsibilities.                          for determining allowable costs only.
     part of the efforts to implement the                    225.35 Federal agency responsibilities.               They are not intended to identify the
                                                             225.40 Effective date of changes.                     circumstances or to dictate the extent of
     Federal Financial Assistance                            225.45 Relationship to previous issuance.
     Management Improvement Act of 1999                                                                            Federal and governmental unit
                                                             225.50 Policy review date.
     (Pub. L. 106–107).                                                                                            participation in the financing of a
                                                             225.55 Information Contact.
     DATES: This document is effective                       Appendix A to Part 225—General Principles             particular Federal award. Provision for
     August 31, 2005. This document                               for Determining Allowable Costs                  profit or other increment above cost is
     republishes the existing OMB Circular                   Appendix B to Part 225—Selected Items of              outside the scope of this part.
     A–87, which already is in effect.                                                                             § 225.25   Definitions.
                                                             Appendix C to Part 225—State/Local-Wide
     FOR FURTHER INFORMATION CONTACT: Gil                         Central Service Cost Allocation Plans              Definitions of key terms used in this
     Tran, Office of Federal Financial                       Appendix D to Part 225—Public Assistance              part are contained in Appendix A to this
     Management, Office of Management and                         Cost Allocation Plans                            part, Section B.
     Budget, telephone 202–395–3052                          Appendix E to Part 225—State and Local
     (direct) or 202–395–3993 (main office)                       Indirect Cost Rate Proposals                     § 225.30   OMB responsibilities.
     and e-mail:                      Authority: 31 U.S.C. 503; 31 U.S.C. 1111;              The Office of Management and Budget
     SUPPLEMENTARY INFORMATION: On May                       41 U.S.C. 405; Reorganization Plan No. 2 of           (OMB) will review agency regulations
     10, 2004 [69 FR 25970], we revised the                  1970; E.O. 11541, 35 FR 10737, 3 CFR, 1966–           and implementation of this part, and
                                                             1970, p. 939.                                         will provide policy interpretations and
     three OMB circulars containing Federal
     cost principles. The purpose of those                   § 225.5 Purpose.                                      assistance to insure effective and
     revisions was to simplify the cost                                                                            efficient implementation. Any
                                                               This part establishes principles and
     principles by making the descriptions of                standards for determining costs for                   exceptions will be subject to approval
     similar cost items consistent across the                Federal awards carried out through                    by OMB. Exceptions will only be made
     circulars where possible, thereby                       grants, cost reimbursement contracts,                 in particular cases where adequate
     reducing the possibility of                             and other agreements with State and                   justification is presented.
     misinterpretation. Those revisions, a                   local governments and federally-                      § 225.35   Federal agency responsibilities.
     result of OMB and Federal agency                        recognized Indian tribal governments                    Agencies responsible for
     efforts to implement Public Law 106–                    (governmental units).                                 administering programs that involve
     107, were effective on June 9, 2004.
        In this document, we relocate OMB                    § 225.10 Authority.                                   cost reimbursement contracts, grants,
     Circular A–87 to the CFR, in Title 2                       This part is issued under the authority            and other agreements with
     which was established on May 11, 2004                   of the Budget and Accounting Act of                   governmental units shall issue
     [69 FR 26276] as a central location for                 1921, as amended; the Budget and                      regulations to implement the provisions
     OMB and Federal agency policies on                      Accounting Procedures Act of 1950, as                 of this part and its appendices.
     grants and agreements.                                  amended; the Chief Financial Officers                 § 225.40   Effective date of changes.
        Our relocation of OMB Circular A–87                  Act of 1990; Reorganization Plan No. 2                  This part is effective August 31, 2005.
     does not change the substance of the                    of 1970; and Executive Order No. 11541
     circular. Other than adjustments needed                 (‘‘Prescribing the Duties of the Office of            § 225.45 Relationship to previous
     to conform to the formatting                            Management and Budget and the                         issuance.
     requirements of the CFR, this notice                    Domestic Policy Council in the                          (a) The guidance in this part
     relocates in 2 CFR the version of OMB                   Executive Office of the President’’).                 previously was issued as OMB Circular

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                      Federal Register / Vol. 70, No. 168 / Wednesday, August 31, 2005 / Rules and Regulations                                            51911

     A–87. Appendix A to this part contains                     3. Minor items                                     Federal awards (including subawards) except
     the guidance that was in Attachment A                   F. Indirect Costs                                     those with (1) publicly-financed educational
     (general principles) to the OMB circular;                  1. General                                         institutions subject to, 2 CFR part 220, Cost
                                                                2. Cost allocation plans and indirect cost         Principles for Educational Institutions (OMB
     Appendix B contains the guidance that
                                                                   proposals                                       Circular A–21), and (2) programs
     was in Attachment B (selected items of                     3. Limitation on indirect or administrative        administered by publicly-owned hospitals
     cost); Appendix C contains the                                costs                                           and other providers of medical care that are
     information that was in Attachment C                    G. Interagency Services                               subject to requirements promulgated by the
     (state/local-wide central service cost                  H. Required Certifications                            sponsoring Federal agencies. However, 2 CFR
     allocation plans); Appendix D contains                  General Principles for Determining                    part 225 does apply to all central service and
     the guidance that was in Attachment D                         Allowable Costs                                 department/agency costs that are allocated or
     (public assistance cost allocation plans);                 A. Purpose and Scope                               billed to those educational institutions,
                                                                1. Objectives. This Appendix establishes           hospitals, and other providers of medical
     and Appendix E contains the guidance
                                                             principles for determining the allowable              care or services by other State and local
     that was in Attachment E (state and                                                                           government departments and agencies.
                                                             costs incurred by State, local, and federally-
     local indirect cost rate proposals).                                                                             b. All subawards are subject to those
                                                             recognized Indian tribal governments
        (b) This part supersedes OMB Circular                (governmental units) under grants, cost               Federal cost principles applicable to the
     A–87, as amended May 10, 2004, which                    reimbursement contracts, and other                    particular organization concerned. Thus, if a
     superseded Circular A–87, as amended                    agreements with the Federal Government                subaward is to a governmental unit (other
     and issued May 4, 1995.                                 (collectively referred to in this appendix and        than a college, university or hospital), 2 CFR
                                                             other appendices to 2 CFR part 225 as                 part 225 shall apply; if a subaward is to a
     § 225.50 Policy review date.                            ‘‘Federal awards’’). The principles are for the       commercial organization, the cost principles
       This part will have a policy review                   purpose of cost determination and are not             applicable to commercial organizations shall
     three years from the date of issuance.                  intended to identify the circumstances or             apply; if a subaward is to a college or
                                                             dictate the extent of Federal or governmental         university, 2 CFR part 220 (Circular A–21)
     § 225.55 Information contact.                           unit participation in the financing of a              shall apply; if a subaward is to a hospital, the
                                                             particular program or project. The principles         cost principles used by the Federal awarding
       Further information concerning this                                                                         agency for awards to hospitals shall apply,
                                                             are designed to provide that Federal awards
     part may be obtained by contacting the                  bear their fair share of cost recognized under        subject to the provisions of subsection A.3.a.
     Office of Federal Financial                             these principles except where restricted or           of this Appendix; if a subaward is to some
     Management, Financial Standards and                     prohibited by law. Provision for profit or            other non-profit organization, 2 CFR part 230,
     Reporting Branch, Office of                             other increment above cost is outside the             Cost Principles for Non-Profit Organizations
     Management and Budget, Washington,                      scope of 2 CFR part 225.                              (Circular A–122), shall apply.
     DC 20503, telephone 202–395–3993.                          2. Policy guides.                                     c. These principles shall be used as a guide
                                                                a. The application of these principles is          in the pricing of fixed price arrangements
     Appendix A to Part 225—General                          based on the fundamental premises that:               where costs are used in determining the
     Principles for Determining Allowable                       (1) Governmental units are responsible for         appropriate price.
     Costs                                                   the efficient and effective administration of            d. Where a Federal contract awarded to a
                                                             Federal awards through the application of             governmental unit incorporates a Cost
     Table of Contents                                       sound management practices.                           Accounting Standards (CAS) clause, the
     A. Purpose and Scope                                       (2) Governmental units assume                      requirements of that clause shall apply. In
       1. Objectives                                         responsibility for administering Federal              such cases, the governmental unit and the
       2. Policy guides                                      funds in a manner consistent with                     cognizant Federal agency shall establish an
       3. Application                                        underlying agreements, program objectives,            appropriate advance agreement on how the
     B. Definitions                                          and the terms and conditions of the Federal           governmental unit will comply with
       1. Approval or authorization of the                   award.                                                applicable CAS requirements when
          awarding or cognizant Federal agency                  (3) Each governmental unit, in recognition         estimating, accumulating and reporting costs
       2. Award                                              of its own unique combination of staff,               under CAS-covered contracts. The agreement
       3. Awarding agency                                    facilities, and experience, will have the             shall indicate that 2 CFR part 225 (OMB
       4. Central service cost allocation plan               primary responsibility for employing                  Circular A–87) requirements will be applied
       5. Claim                                              whatever form of organization and                     to other Federal awards. In all cases, only one
       6. Cognizant agency                                   management techniques may be necessary to             set of records needs to be maintained by the
       7. Common rule                                        assure proper and efficient administration of         governmental unit.
       8. Contract                                           Federal awards.                                          e. Conditional exemptions.
       9. Cost                                                  b. Federal agencies should work with                  (1) OMB authorizes conditional exemption
       10. Cost allocation plan                              States or localities which wish to test               from OMB administrative requirements and
       11. Cost objective                                    alternative mechanisms for paying costs for           cost principles for certain Federal programs
       12. Federally-recognized Indian tribal 
              administering Federal programs. The Office            with statutorily-authorized consolidated
                                       of Management and Budget (OMB)                        planning and consolidated administrative
       13. Governmental unit                                 encourages Federal agencies to test fee-for-          funding, that are identified by a Federal
       14. Grantee department or agency                      service alternatives as a replacement for             agency and approved by the head of the
       15. Indirect cost rate proposal                       current cost-reimbursement payment                    Executive department or establishment. A
       16. Local government                                  methods in response to the National                   Federal agency shall consult with OMB
       17. Public assistance cost allocation plan            Performance Review’s (NPR)                            during its consideration of whether to grant
       18. State                                             recommendation. The NPR recommended the               such an exemption.
     C. Basic Guidelines                                     fee-for-service approach to reduce the burden            (2) To promote efficiency in State and local
       1. Factors affecting allowability of costs            associated with maintaining systems for               program administration, when Federal non-
       2. Reasonable costs                                   charging administrative costs to Federal              entitlement programs with common purposes
       3. Allocable costs                                    programs and preparing and approving cost             have specific statutorily-authorized
       4. Applicable credits                                 allocation plans. This approach should also           consolidated planning and consolidated
     D. Composition of Cost                                  increase incentives for administrative                administrative funding and where most of
       1. Total cost                                         efficiencies and improve outcomes.                    the State agency’s resources come from non-
       2. Classification of costs                               3. Application.                                    Federal sources, Federal agencies may
     E. Direct Costs                                            a. These principles will be applied by all         exempt these covered State-administered,
       1. General                                            Federal agencies in determining costs                 non-entitlement grant programs from certain
       2. Application                                        incurred by governmental units under                  OMB grants management requirements. The

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     51912            Federal Register / Vol. 70, No. 168 / Wednesday, August 31, 2005 / Rules and Regulations

     exemptions would be from all but the                    decision is made by the Federal awarding              cost rate as described in Appendix E of 2 CFR
     allocability of costs provisions of Appendix            agency.                                               part 225.
     A subsection C.3 of 2 CFR part 225, Cost                   6. ‘‘Cognizant agency’’ means the Federal             16. ‘‘Local government’’ means a county,
     Principles for State, Local, and Indian Tribal          agency responsible for reviewing,                     municipality, city, town, township, local
     Governments (OMB Circular A–87);                        negotiating, and approving cost allocation            public authority, school district, special
     Appendix A, Section C.4 of 2 CFR 220, Cost              plans or indirect cost proposals developed            district, intrastate district, council of
     Principles for Educational Institutions                 under 2 CFR part 225 on behalf of all Federal         governments (whether or not incorporated as
     (Circular A–21); Appendix A, subsection A.4             agencies. OMB publishes a listing of                  a non-profit corporation under State law),
     of 2 CFR 230 Cost Principles for Non-Profit             cognizant agencies.                                   any other regional or interstate government
     Organizations (Circular A–122); and from all               7. ‘‘Common Rule’’ means the ‘‘Uniform             entity, or any agency or instrumentality of a
     of the administrative requirements provisions           Administrative Requirements for Grants and            local government.
     of 2 CFR part 215, Uniform Administrative               Cooperative Agreements to State and Local                17. ‘‘Public assistance cost allocation plan’’
     Requirements for Grants and Agreements                  Governments; Final Rule’’ originally issued           means a narrative description of the
     with Institutions of Higher Education,                  at 53 FR 8034–8103 (March 11, 1988). Other            procedures that will be used in identifying,
     Hospitals, and Other Non-Profit                         common rules will be referred to by their             measuring and allocating all administrative
     Organizations (Circular A–110), and the                 specific titles.                                      costs to all of the programs administered or
     agencies’ grants management common rule.                   8. ‘‘Contract’’ means a mutually binding           supervised by State public assistance
        (3) When a Federal agency provides this              legal relationship obligating the seller to           agencies as described in Appendix D of 2
     flexibility, as a prerequisite to a State’s             furnish the supplies or services (including           CFR part 225.
     exercising this option, a State must adopt its          construction) and the buyer to pay for them.             18. ‘‘State’’ means any of the several States
     own written fiscal and administrative                   It includes all types of commitments that             of the United States, the District of Columbia,
     requirements for expending and accounting               obligate the government to an expenditure of          the Commonwealth of Puerto Rico, any
     for all funds, which are consistent with the            appropriated funds and that, except as                territory or possession of the United States,
     provisions of 2 CFR part 225 (OMB Circular              otherwise authorized, are in writing. In              or any agency or instrumentality of a State
     A–87), and extend such policies to all                  addition to bilateral instruments, contracts          exclusive of local governments.
     subrecipients. These fiscal and                         include (but are not limited to): Awards and             C. Basic Guidelines
     administrative requirements must be                     notices of awards; job orders or task orders             1. Factors affecting allowability of costs. To
     sufficiently specific to ensure that: Funds are         issued under basic ordering agreements;               be allowable under Federal awards, costs
     used in compliance with all applicable                  letter contracts; orders, such as purchase            must meet the following general criteria:
     Federal statutory and regulatory provisions,            orders, under which the contract becomes                 a. Be necessary and reasonable for proper
                                                                                                                   and efficient performance and administration
     costs are reasonable and necessary for                  effective by written acceptance or
                                                                                                                   of Federal awards.
     operating these programs, and funds are not             performance; and, bilateral contract
                                                                                                                      b. Be allocable to Federal awards under the
     used for general expenses required to carry             modifications. Contracts do not include
                                                                                                                   provisions of 2 CFR part 225.
     out other responsibilities of a State or its            grants and cooperative agreements covered
                                                                                                                      c. Be authorized or not prohibited under
     subrecipients.                                          by 31 U.S.C. 6301 et seq.
                                                                                                                   State or local laws or regulations.
        B. Definitions                                          9. ‘‘Cost’’ means an amount as determined             d. Conform to any limitations or exclusions
        1. ‘‘Approval or authorization of the                on a cash, accrual, or other basis acceptable         set forth in these principles, Federal laws,
     awarding or cognizant Federal agency’’                  to the Federal awarding or cognizant agency.          terms and conditions of the Federal award,
     means documentation evidencing consent                  It does not include transfers to a general or         or other governing regulations as to types or
     prior to incurring a specific cost. If such costs       similar fund.                                         amounts of cost items.
     are specifically identified in a Federal award             10. ‘‘Cost allocation plan’’ means central            e. Be consistent with policies, regulations,
     document, approval of the document                      service cost allocation plan, public assistance       and procedures that apply uniformly to both
     constitutes approval of the costs. If the costs         cost allocation plan, and indirect cost rate          Federal awards and other activities of the
     are covered by a State/local-wide cost                  proposal. Each of these terms is further              governmental unit.
     allocation plan or an indirect cost proposal,           defined in this section.                                 f. Be accorded consistent treatment. A cost
     approval of the plan constitutes the approval.             11. ‘‘Cost objective’’ means a function,           may not be assigned to a Federal award as
        2. ‘‘Award’’ means grants, cost                      organizational subdivision, contract, grant, or       a direct cost if any other cost incurred for the
     reimbursement contracts and other                       other activity for which cost data are needed         same purpose in like circumstances has been
     agreements between a State, local and Indian            and for which costs are incurred.                     allocated to the Federal award as an indirect
     tribal government and the Federal                          12. ‘‘Federally-recognized Indian tribal           cost.
     Government.                                             government’’ means the governing body or a               g. Except as otherwise provided for in 2
        3. ‘‘Awarding agency’’ means (a) with                governmental agency of any Indian tribe,              CFR part 225, be determined in accordance
     respect to a grant, cooperative agreement, or           band, nation, or other organized group or             with generally accepted accounting
     cost reimbursement contract, the Federal                community (including any native village as            principles.
     agency, and (b) with respect to a subaward,             defined in Section 3 of the Alaska Native                h. Not be included as a cost or used to meet
     the party that awarded the subaward.                    Claims Settlement Act, 85 Stat. 688) certified        cost sharing or matching requirements of any
        4. ‘‘Central service cost allocation plan’’          by the Secretary of the Interior as eligible for      other Federal award in either the current or
     means the documentation identifying,                    the special programs and services provided            a prior period, except as specifically
     accumulating, and allocating or developing              through the Bureau of Indian Affairs.                 provided by Federal law or regulation.
     billing rates based on the allowable costs of              13. ‘‘Governmental unit’’ means the entire            i. Be the net of all applicable credits.
     services provided by a governmental unit on             State, local, or federally-recognized Indian             j. Be adequately documented.
     a centralized basis to its departments and              tribal government, including any component               2. Reasonable costs. A cost is reasonable if,
     agencies. The costs of these services may be            thereof. Components of governmental units             in its nature and amount, it does not exceed
     allocated or billed to users.                           may function independently of the                     that which would be incurred by a prudent
        5. ‘‘Claim’’ means a written demand or               governmental unit in accordance with the              person under the circumstances prevailing at
     written assertion by the governmental unit or           term of the award.                                    the time the decision was made to incur the
     grantor seeking, as a matter of right, the                 14. ‘‘Grantee department or agency’’ means         cost. The question of reasonableness is
     payment of money in a sum certain, the                  the component of a State, local, or federally-        particularly important when governmental
     adjustment or interpretation of award terms,            recognized Indian tribal government which is          units or components are predominately
     or other relief arising under or relating to the        responsible for the performance or                    federally-funded. In determining
     award. A voucher, invoice or other routine              administration of all or some part of a               reasonableness of a given cost, consideration
     request for payment that is not a dispute               Federal award.                                        shall be given to:
     when submitted is not a claim. Appeals, such               15. ‘‘Indirect cost rate proposal’’ means the         a. Whether the cost is of a type generally
     as those filed by a governmental unit in                documentation prepared by a governmental              recognized as ordinary and necessary for the
     response to questioned audit costs, are not             unit or component thereof to substantiate its         operation of the governmental unit or the
     considered claims until a final management              request for the establishment of an indirect          performance of the Federal award.

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                      Federal Register / Vol. 70, No. 168 / Wednesday, August 31, 2005 / Rules and Regulations                                            51913

        b. The restraints or requirements imposed            either direct or indirect under every                 of the direct salary and wage cost of
     by such factors as: Sound business practices;           accounting system. A cost may be direct with          providing the service (excluding overtime,
     arm’s-length bargaining; Federal, State and             respect to some specific service or function,         shift premiums, and fringe benefits) may be
     other laws and regulations; and, terms and              but indirect with respect to the Federal              used in lieu of determining the actual
     conditions of the Federal award.                        award or other final cost objective. Therefore,       indirect costs of the service. These services
        c. Market prices for comparable goods or             it is essential that each item of cost be treated     do not include centralized services included
     services.                                               consistently in like circumstances either as a        in central service cost allocation plans as
        d. Whether the individuals concerned                 direct or an indirect cost. Guidelines for            described in Appendix C to this part.
     acted with prudence in the circumstances                determining direct and indirect costs charged            H. Required Certifications. Each cost
     considering their responsibilities to the               to Federal awards are provided in the                 allocation plan or indirect cost rate proposal
     governmental unit, its employees, the public            sections that follow.                                 required by Appendices C and E to this part
     at large, and the Federal Government.                      E. Direct Costs                                    must comply with the following:
        e. Significant deviations from the                      1. General. Direct costs are those that can           1. No proposal to establish a cost allocation
     established practices of the governmental               be identified specifically with a particular          plan or an indirect cost rate, whether
     unit which may unjustifiably increase the               final cost objective.                                 submitted to a Federal cognizant agency or
     Federal award’s cost.                                      2. Application. Typical direct costs               maintained on file by the governmental unit,
        3. Allocable costs.                                  chargeable to Federal awards are:                     shall be acceptable unless such costs have
        a. A cost is allocable to a particular cost             a. Compensation of employees for the time          been certified by the governmental unit using
     objective if the goods or services involved are         devoted and identified specifically to the            the Certificate of Cost Allocation Plan or
     chargeable or assignable to such cost                   performance of those awards.                          Certificate of Indirect Costs as set forth in
     objective in accordance with relative benefits             b. Cost of materials acquired, consumed, or        Appendices C and E to this part. The
     received.                                               expended specifically for the purpose of              certificate must be signed on behalf of the
        b. All activities which benefit from the             those awards.                                         governmental unit by an individual at a level
     governmental unit’s indirect cost, including               c. Equipment and other approved capital            no lower than chief financial officer of the
     unallowable activities and services donated             expenditures.                                         governmental unit that submits the proposal
     to the governmental unit by third parties,                 d. Travel expenses incurred specifically to        or component covered by the proposal.
     will receive an appropriate allocation of               carry out the award.                                     2. No cost allocation plan or indirect cost
     indirect costs.                                            3. Minor items. Any direct cost of a minor         rate shall be approved by the Federal
        c. Any cost allocable to a particular Federal        amount may be treated as an indirect cost for         Government unless the plan or rate proposal
     award or cost objective under the principles            reasons of practicality where such accounting         has been certified. Where it is necessary to
     provided for in 2 CFR part 225 may not be                                                                     establish a cost allocation plan or an indirect
                                                             treatment for that item of cost is consistently
     charged to other Federal awards to overcome                                                                   cost rate and the governmental unit has not
                                                             applied to all cost objectives.
     fund deficiencies, to avoid restrictions                                                                      submitted a certified proposal for
                                                                F. Indirect Costs
     imposed by law or terms of the Federal                                                                        establishing such a plan or rate in accordance
                                                                1. General. Indirect costs are those:
     awards, or for other reasons.                                                                                 with the requirements, the Federal
                                                             Incurred for a common or joint purpose
        d. Where an accumulation of indirect costs                                                                 Government may either disallow all indirect
                                                             benefiting more than one cost objective, and
     will ultimately result in charges to a Federal                                                                costs or unilaterally establish such a plan or
     award, a cost allocation plan will be required          not readily assignable to the cost objectives
                                                             specifically benefitted, without effort               rate. Such a plan or rate may be based upon
     as described in Appendices C, D, and E to                                                                     audited historical data or such other data that
     this part.                                              disproportionate to the results achieved. The
                                                             term ‘‘indirect costs,’’ as used herein, applies      have been furnished to the cognizant Federal
        4. Applicable credits.                                                                                     agency and for which it can be demonstrated
        a. Applicable credits refer to those receipts        to costs of this type originating in the grantee
                                                             department, as well as those incurred by              that all unallowable costs have been
     or reduction of expenditure-type transactions                                                                 excluded. When a cost allocation plan or
     that offset or reduce expense items allocable           other departments in supplying goods,
                                                             services, and facilities. To facilitate equitable     indirect cost rate is unilaterally established
     to Federal awards as direct or indirect costs.                                                                by the Federal Government because of failure
     Examples of such transactions are: Purchase             distribution of indirect expenses to the cost
                                                             objectives served, it may be necessary to             of the governmental unit to submit a certified
     discounts, rebates or allowances, recoveries                                                                  proposal, the plan or rate established will be
     or indemnities on losses, insurance refunds             establish a number of pools of indirect costs
                                                             within a governmental unit department or in           set to ensure that potentially unallowable
     or rebates, and adjustments of overpayments                                                                   costs will not be reimbursed.
     or erroneous charges. To the extent that such           other agencies providing services to a
     credits accruing to or received by the                  governmental unit department. Indirect cost           Appendix B to Part 225—Selected Items
     governmental unit relate to allowable costs,            pools should be distributed to benefitted cost        of Cost
     they shall be credited to the Federal award             objectives on bases that will produce an
     either as a cost reduction or cash refund, as           equitable result in consideration of relative         Table of Contents
     appropriate.                                            benefits derived.                                     1. Advertising and public relations costs
        b. In some instances, the amounts received              2. Cost allocation plans and indirect cost         2. Advisory councils
     from the Federal Government to finance                  proposals. Requirements for development               3. Alcoholic beverages
     activities or service operations of the                 and submission of cost allocation plans and           4. Audit costs and related services
     governmental unit should be treated as                  indirect cost rate proposals are contained in         5. Bad debts
     applicable credits. Specifically, the concept           Appendices C, D, and E to this part.                  6. Bonding costs
     of netting such credit items (including any                3. Limitation on indirect or administrative        7. Communication costs
     amounts used to meet cost sharing or                    costs.                                                8. Compensation for personal services
     matching requirements) should be recognized                a. In addition to restrictions contained in        9. Contingency provisions
     in determining the rates or amounts to be               2 CFR part 225, there may be laws that                10. Defense and prosecution of criminal and
     charged to Federal awards. (See Appendix B              further limit the amount of administrative or              civil proceedings, and claims
     to this part, item 11, ‘‘Depreciation and use           indirect cost allowed.                                11. Depreciation and use allowances
     allowances,’’ for areas of potential                       b. Amounts not recoverable as indirect             12. Donations and contributions
     application in the matter of Federal financing          costs or administrative costs under one               13. Employee morale, health, and welfare
     of activities.)                                         Federal award may not be shifted to another                costs
        D. Composition of Cost                               Federal award, unless specifically authorized         14. Entertainment costs
        1. Total cost. The total cost of Federal             by Federal legislation or regulation.                 15. Equipment and other capital
     awards is comprised of the allowable direct                G. Interagency Services. The cost of                    expenditures
     cost of the program, plus its allocable portion         services provided by one agency to another            16. Fines and penalties
     of allowable indirect costs, less applicable            within the governmental unit may include              17. Fund raising and investment management
     credits.                                                allowable direct costs of the service plus a               costs
        2. Classification of costs. There is no              pro rate share of indirect costs. A standard          18. Gains and losses on disposition of
     universal rule for classifying certain costs as         indirect cost allowance equal to ten percent               depreciable property and other capital

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     51914            Federal Register / Vol. 70, No. 168 / Wednesday, August 31, 2005 / Rules and Regulations

           assets and substantial relocation of                 (1) Costs specifically required by the             uncollectable accounts and other claims,
           Federal programs                                  Federal award;                                        related collection costs, and related legal
     19. General government expenses                            (2) Costs of communicating with the public         costs, are unallowable.
     20. Goods or services for personal use                  and press pertaining to specific activities or           6. Bonding costs.
     21. Idle facilities and idle capacity                   accomplishments which result from                        a. Bonding costs arise when the Federal
     22. Insurance and indemnification                       performance of Federal awards (these costs            Government requires assurance against
     23. Interest                                            are considered necessary as part of the               financial loss to itself or others by reason of
     24. Lobbying                                            outreach effort for the Federal award); or            the act or default of the governmental unit.
     25. Maintenance, operations, and repairs                   (3) Costs of conducting general liaison with       They arise also in instances where the
     26. Materials and supplies costs                        news media and government public relations            governmental unit requires similar assurance.
     27. Meetings and conferences                            officers, to the extent that such activities are      Included are such bonds as bid, performance,
     28. Memberships, subscriptions, and                     limited to communication and liaison                  payment, advance payment, infringement,
           professional activity costs                       necessary keep the public informed on                 and fidelity bonds.
     29. Patent costs                                        matters of public concern, such as notices of            b. Costs of bonding required pursuant to
     30. Plant and homeland security costs                   Federal contract/grant awards, financial              the terms of the award are allowable.
     31. Pre-award costs                                     matters, etc.                                            c. Costs of bonding required by the
     32. Professional service costs                             e. Costs identified in subsections c and d         governmental unit in the general conduct of
     33. Proposal costs                                      if incurred for more than one Federal award           its operations are allowable to the extent that
     34. Publication and printing costs                      or for both sponsored work and other work             such bonding is in accordance with sound
     35. Rearrangement and alteration costs                  of the governmental unit, are allowable to the        business practice and the rates and premiums
     36. Reconversion costs                                  extent that the principles in Appendix A to           are reasonable under the circumstances.
     37. Rental costs of building and equipment              this part, sections E. (‘‘Direct Costs’’) and F.         7. Communication costs. Costs incurred for
     38. Royalties and other costs for the use of            (‘‘Indirect Costs’’) are observed.                    telephone services, local and long distance
           patents                                              f. Unallowable advertising and public              telephone calls, telegrams, postage,
     39. Selling and marketing                               relations costs include the following:                messenger, electronic or computer
     40. Taxes                                                  (1) All advertising and public relations           transmittal services and the like are
     41. Termination costs applicable to                     costs other than as specified in subsections          allowable.
           sponsored agreements                              1.c, d, and e of this appendix;                          8. Compensation for personal services.
     42. Training costs                                         (2) Costs of meetings, conventions,                   a. General. Compensation for personnel
     43. Travel costs                                        convocations, or other events related to other        services includes all remuneration, paid
        Sections 1 through 43 provide principles to          activities of the governmental unit,                  currently or accrued, for services rendered
     be applied in establishing the allowability or          including:                                            during the period of performance under
     unallowability of certain items of cost. These             (a) Costs of displays, demonstrations, and         Federal awards, including but not necessarily
     principles apply whether a cost is treated as           exhibits;                                             limited to wages, salaries, and fringe benefits.
     direct or indirect. A cost is allowable for                (b) Costs of meeting rooms, hospitality            The costs of such compensation are
     Federal reimbursement only to the extent of             suites, and other special facilities used in          allowable to the extent that they satisfy the
     benefits received by Federal awards and its             conjunction with shows and other special              specific requirements of this and other
     conformance with the general policies and               events; and                                           appendices under 2 CFR Part 225, and that
     principles stated in Appendix A to this part.              (c) Salaries and wages of employees                the total compensation for individual
     Failure to mention a particular item of cost            engaged in setting up and displaying                  employees:
     in these sections is not intended to imply              exhibits, making demonstrations, and                     (1) Is reasonable for the services rendered
     that it is either allowable or unallowable;             providing briefings;                                  and conforms to the established policy of the
     rather, determination of allowability in each              (3) Costs of promotional items and                 governmental unit consistently applied to
     case should be based on the treatment or                memorabilia, including models, gifts, and             both Federal and non-Federal activities;
     standards provided for similar or related               souvenirs;                                               (2) Follows an appointment made in
     items of cost.                                             (4) Costs of advertising and public relations      accordance with a governmental unit’s laws
        1. Advertising and public relations costs.           designed solely to promote the governmental           and rules and meets merit system or other
        a. The term advertising costs means the              unit.                                                 requirements required by Federal law, where
     costs of advertising media and corollary                   2. Advisory councils. Costs incurred by            applicable; and
     administrative costs. Advertising media                 advisory councils or committees are                      (3) Is determined and supported as
     include magazines, newspapers, radio and                allowable as a direct cost where authorized           provided in subsection h.
     television, direct mail, exhibits, electronic or        by the Federal awarding agency or as an                  b. Reasonableness. Compensation for
     computer transmittals, and the like.                    indirect cost where allocable to Federal              employees engaged in work on Federal
        b. The term public relations includes                awards.                                               awards will be considered reasonable to the
     community relations and means those                        3. Alcoholic beverages. Costs of alcoholic         extent that it is consistent with that paid for
     activities dedicated to maintaining the image           beverages are unallowable.                            similar work in other activities of the
     of the governmental unit or maintaining or                 4. Audit costs and related services.               governmental unit. In cases where the kinds
     promoting understanding and favorable                      a. The costs of audits required by , and           of employees required for Federal awards are
     relations with the community or public at               performed in accordance with, the Single              not found in the other activities of the
     large or any segment of the public.                     Audit Act, as implemented by Circular A–              governmental unit, compensation will be
        c. The only allowable advertising costs are          133, ‘‘Audits of States, Local Governments,           considered reasonable to the extent that it is
     those which are solely for:                             and Non-Profit Organizations’’ are allowable.         comparable to that paid for similar work in
        (1) The recruitment of personnel required            Also see 31 U.S.C. 7505(b) and section 230            the labor market in which the employing
     for the performance by the governmental unit            (‘‘Audit Costs’’) of Circular A–133.                  government competes for the kind of
     of obligations arising under a Federal award;              b. Other audit costs are allowable if              employees involved. Compensation surveys
        (2) The procurement of goods and services            included in a cost allocation plan or indirect        providing data representative of the labor
     for the performance of a Federal award;                 cost proposal, or if specifically approved by         market involved will be an acceptable basis
        (3) The disposal of scrap or surplus                 the awarding agency as a direct cost to an            for evaluating reasonableness.
     materials acquired in the performance of a              award.                                                   c. Unallowable costs. Costs which are
     Federal award except when governmental                     c. The cost of agreed-upon procedures              unallowable under other sections of these
     units are reimbursed for disposal costs at a            engagements to monitor subrecipients who              principles shall not be allowable under this
     predetermined amount; or                                are exempted from A–133 under section                 section solely on the basis that they
        (4) Other specific purposes necessary to             200(d) are allowable, subject to the                  constitute personnel compensation.
     meet the requirements of the Federal award.             conditions listed in A–133, section 230 (b)(2).          d. Fringe benefits.
        d. The only allowable public relations                  5. Bad debts. Bad debts, including losses             (1) Fringe benefits are allowances and
     costs are:                                              (whether actual or estimated) arising from            services provided by employers to their

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                      Federal Register / Vol. 70, No. 168 / Wednesday, August 31, 2005 / Rules and Regulations                                            51915

     employees as compensation in addition to                agency may agree to an extension of the six              (5) To be allowable in the current year, the
     regular salaries and wages. Fringe benefits             month period if an appropriate adjustment is          PRHB costs must be paid either to:
     include, but are not limited to, the costs of           made to compensate for the timing of the                 (a) An insurer or other benefit provider as
     leave, employee insurance, pensions, and                charges to the Federal Government and                 current year costs or premiums, or
     unemployment benefit plans. Except as                   related Federal reimbursement and the                    (b) An insurer or trustee to maintain a trust
     provided elsewhere in these principles, the             governmental unit’s contribution to the               fund or reserve for the sole purpose of
     costs of fringe benefits are allowable to the           pension fund. Adjustments may be made by              providing post-retirement benefits to retirees
     extent that the benefits are reasonable and are         cash refund or other equitable procedures to          and other beneficiaries.
     required by law, governmental unit-employee             compensate the Federal Government for the                (6) The Federal Government shall receive
     agreement, or an established policy of the              time value of Federal reimbursements in               an equitable share of any amounts of
     governmental unit.                                      excess of contributions to the pension fund.          previously allowed post-retirement benefit
        (2) The cost of fringe benefits in the form             (3) Amounts funded by the governmental             costs (including earnings thereon) which
     of regular compensation paid to employees               unit in excess of the actuarially determined          revert or inure to the governmental unit in
     during periods of authorized absences from              amount for a fiscal year may be used as the           the form of a refund, withdrawal, or other
     the job, such as for annual leave, sick leave,          governmental unit’s contribution in future            credit.
     holidays, court leave, military leave, and              periods.                                                 g. Severance pay.
     other similar benefits, are allowable if: They             (4) When a governmental unit converts to              (1) Payments in addition to regular salaries
     are provided under established written leave            an acceptable actuarial cost method, as               and wages made to workers whose
     policies; the costs are equitably allocated to          defined by GAAP, and funds pension costs              employment is being terminated are
     all related activities, including Federal               in accordance with this method, the                   allowable to the extent that, in each case,
     awards; and, the accounting basis (cash or              unfunded liability at the time of conversion          they are required by law, employer-employee
     accrual) selected for costing each type of              shall be allowable if amortized over a period         agreement, or established written policy.
     leave is consistently followed by the                   of years in accordance with GAAP.                        (2) Severance payments (but not accruals)
     governmental unit.                                         (5) The Federal Government shall receive           associated with normal turnover are
        (3) When a governmental unit uses the                an equitable share of any previously allowed          allowable. Such payments shall be allocated
     cash basis of accounting, the cost of leave is          pension costs (including earnings thereon)            to all activities of the governmental unit as
     recognized in the period that the leave is              which revert or inure to the governmental             an indirect cost.
     taken and paid for. Payments for unused                 unit in the form of a refund, withdrawal, or             (3) Abnormal or mass severance pay will
     leave when an employee retires or terminates            other credit.                                         be considered on a case-by-case basis and is
     employment are allowable in the year of                    f. Post-retirement health benefits. Post-          allowable only if approved by the cognizant
                                                             retirement health benefits (PRHB) refers to           Federal agency.
     payment provided they are allocated as a
                                                             costs of health insurance or health services             h. Support of salaries and wages. These
     general administrative expense to all
                                                             not included in a pension plan covered by             standards regarding time distribution are in
     activities of the governmental unit or
                                                             subsection 8.e. of this appendix for retirees         addition to the standards for payroll
                                                             and their spouses, dependents, and                    documentation.
        (4) The accrual basis may be only used for
                                                             survivors. PRHB costs may be computed                    (1) Charges to Federal awards for salaries
     those types of leave for which a liability as           using a pay-as-you-go method or an                    and wages, whether treated as direct or
     defined by Generally Accepted Accounting                acceptable actuarial cost method in                   indirect costs, will be based on payrolls
     Principles (GAAP) exists when the leave is              accordance with established written polices           documented in accordance with generally
     earned. When a governmental unit uses the               of the governmental unit.                             accepted practice of the governmental unit
     accrual basis of accounting, in accordance                 (1) For PRHB financed on a pay as-you-go           and approved by a responsible official(s) of
     with GAAP, allowable leave costs are the                method, allowable costs will be limited to            the governmental unit.
     lesser of the amount accrued or funded.                 those representing actual payments to                    (2) No further documentation is required
        (5) The cost of fringe benefits in the form          retirees or their beneficiaries.                      for the salaries and wages of employees who
     of employer contributions or expenses for                  (2) PRHB costs calculated using an                 work in a single indirect cost activity.
     social security; employee life, health,                 actuarial cost method recognized by GAAP                 (3) Where employees are expected to work
     unemployment, and worker’s compensation                 are allowable if they are funded for that year        solely on a single Federal award or cost
     insurance (except as indicated in section 22,           within six months after the end of that year.         objective, charges for their salaries and wages
     Insurance and indemnification); pension                 Costs funded after the six month period (or           will be supported by periodic certifications
     plan costs (see subsection e.); and other               a later period agreed to by the cognizant             that the employees worked solely on that
     similar benefits are allowable, provided such           agency) are allowable in the year funded. The         program for the period covered by the
     benefits are granted under established                  cognizant agency may agree to an extension            certification. These certifications will be
     written policies. Such benefits, whether                of the six month period if an appropriate             prepared at least semi-annually and will be
     treated as indirect costs or as direct costs,           adjustment is made to compensate for the              signed by the employee or supervisory
     shall be allocated to Federal awards and all            timing of the charges to the Federal                  official having first hand knowledge of the
     other activities in a manner consistent with            Government and related Federal                        work performed by the employee.
     the pattern of benefits attributable to the             reimbursements and the governmental unit’s               (4) Where employees work on multiple
     individuals or group(s) of employees whose              contributions to the PRHB fund. Adjustments           activities or cost objectives, a distribution of
     salaries and wages are chargeable to such               may be made by cash refund, reduction in              their salaries or wages will be supported by
     Federal awards and other activities.                    current year’s PRHB costs, or other equitable         personnel activity reports or equivalent
        e. Pension plan costs. Pension plan costs            procedures to compensate the Federal                  documentation which meets the standards in
     may be computed using a pay-as-you-go                   Government for the time value of Federal              subsection 8.h.(5) of this appendix unless a
     method or an acceptable actuarial cost                  reimbursements in excess of contributions to          statistical sampling system (see subsection
     method in accordance with established                   the PRHB fund.                                        8.h.(6) of this appendix) or other substitute
     written policies of the governmental unit.                 (3) Amounts funded in excess of the                system has been approved by the cognizant
        (1) For pension plans financed on a pay-             actuarially determined amount for a fiscal            Federal agency. Such documentary support
     as-you-go method, allowable costs will be               year may be used as the government’s                  will be required where employees work on:
     limited to those representing actual payments           contribution in a future period.                         (a) More than one Federal award,
     to retirees or their beneficiaries.                        (4) When a governmental unit converts to              (b) A Federal award and a non-Federal
        (2) Pension costs calculated using an                an acceptable actuarial cost method and               award,
     actuarial cost-based method recognized by               funds PRHB costs in accordance with this                 (c) An indirect cost activity and a direct
     GAAP are allowable for a given fiscal year if           method, the initial unfunded liability                cost activity,
     they are funded for that year within six                attributable to prior years shall be allowable           (d) Two or more indirect activities which
     months after the end of that year. Costs                if amortized over a period of years in                are allocated using different allocation bases,
     funded after the six month period (or a later           accordance with GAAP, or, if no such GAAP             or
     period agreed to by the cognizant agency) are           period exists, over a period negotiated with             (e) An unallowable activity and a direct or
     allowable in the year funded. The cognizant             the cognizant agency.                                 indirect cost activity.

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     51916            Federal Register / Vol. 70, No. 168 / Wednesday, August 31, 2005 / Rules and Regulations

        (5) Personnel activity reports or equivalent         claimed as allowable costs under Federal                 b. The computation of depreciation or use
     documentation must meet the following                   awards.                                               allowances shall be based on the acquisition
     standards:                                                 i. Donated services.                               cost of the assets involved. Where actual cost
        (a) They must reflect an after-the-fact                 (1) Donated or volunteer services may be           records have not been maintained, a
     distribution of the actual activity of each             furnished to a governmental unit by                   reasonable estimate of the original
     employee,                                               professional and technical personnel,                 acquisition cost may be used. The value of
        (b) They must account for the total activity         consultants, and other skilled and unskilled          an asset donated to the governmental unit by
     for which each employee is compensated,                 labor. The value of these services is not             an unrelated third party shall be its fair
        (c) They must be prepared at least monthly           reimbursable either as a direct or indirect           market value at the time of donation.
     and must coincide with one or more pay                  cost. However, the value of donated services          Governmental or quasi-governmental
     periods, and                                            may be used to meet cost sharing or matching          organizations located within the same State
        (d) They must be signed by the employee.             requirements in accordance with the                   shall not be considered unrelated third
        (e) Budget estimates or other distribution           provisions of the Common Rule.                        parties for this purpose.
     percentages determined before the services                 (2) The value of donated services utilized            c. The computation of depreciation or use
     are performed do not qualify as support for             in the performance of a direct cost activity          allowances will exclude:
     charges to Federal awards but may be used               shall, when material in amount, be                       (1) The cost of land;
     for interim accounting purposes, provided               considered in the determination of the                   (2) Any portion of the cost of buildings and
     that:                                                   governmental unit’s indirect costs or rate(s)         equipment borne by or donated by the
        (i) The governmental unit’s system for               and, accordingly, shall be allocated a                Federal Government irrespective of where
     establishing the estimates produces                     proportionate share of applicable indirect            title was originally vested or where it
     reasonable approximations of the activity               costs.                                                presently resides; and
     actually performed;                                        (3) To the extent feasible, donated services          (3) Any portion of the cost of buildings and
        (ii) At least quarterly, comparisons of              will be supported by the same methods used            equipment contributed by or for the
     actual costs to budgeted distributions based            by the governmental unit to support the               governmental unit, or a related donor
     on the monthly activity reports are made.               allocability of regular personnel services.           organization, in satisfaction of a matching
     Costs charged to Federal awards to reflect                 9. Contingency provisions. Contributions to        requirement.
     adjustments made as a result of the activity            a contingency reserve or any similar                     d. Where the depreciation method is
     actually performed may be recorded annually             provision made for events the occurrence of           followed, the following general criteria
     if the quarterly comparisons show the                   which cannot be foretold with certainty as to         apply:
     differences between budgeted and actual                 time, intensity, or with an assurance of their           (1) The period of useful service (useful life)
                                                             happening, are unallowable. The term
     costs are less than ten percent; and                                                                          established in each case for usable capital
                                                             ‘‘contingency reserve’’ excludes self-
        (iii) The budget estimates or other                                                                        assets must take into consideration such
                                                             insurance reserves (see section 22.c. of this
     distribution percentages are revised at least                                                                 factors as type of construction, nature of the
                                                             appendix), pension plan reserves (see section
     quarterly, if necessary, to reflect changed                                                                   equipment used, historical usage patterns,
                                                             8.e.), and post-retirement health and other
     circumstances.                                                                                                technological developments, and the renewal
                                                             benefit reserves (section 8.f.) computed using
        (6) Substitute systems for allocating                                                                      and replacement policies of the governmental
                                                             acceptable actuarial cost methods.
     salaries and wages to Federal awards may be                10. Defense and prosecution of criminal            unit followed for the individual items or
     used in place of activity reports. These                and civil proceedings, and claims.                    classes of assets involved. In the absence of
     systems are subject to approval if required by             a. The following costs are unallowable for         clear evidence indicating that the expected
     the cognizant agency. Such systems may                  contracts covered by 10 U.S.C. 2324(k),               consumption of the asset will be significantly
     include, but are not limited to, random                 ‘‘Allowable costs under defense contracts.’’          greater in the early portions than in the later
     moment sampling, case counts, or other                     (1) Costs incurred in defense of any civil         portions of its useful life, the straight line
     quantifiable measures of employee effort.               or criminal fraud proceeding or similar               method of depreciation shall be used.
        (a) Substitute systems which use sampling            proceeding (including filing of false                    (2) Depreciation methods once used shall
     methods (primarily for Temporary Assistance             certification brought by the United States            not be changed unless approved by the
     to Needy Families (TANF), Medicaid, and                 where the contractor is found liable or has           Federal cognizant or awarding agency. When
     other public assistance programs) must meet             pleaded nolo contendere to a charge of fraud          the depreciation method is introduced for
     acceptable statistical sampling standards               or similar proceeding (including filing of a          application to an asset previously subject to
     including:                                              false certification).                                 a use allowance, the annual depreciation
        (i) The sampling universe must include all              (2) Costs incurred by a contractor in              charge thereon may not exceed the amount
     of the employees whose salaries and wages               connection with any criminal, civil or                that would have resulted had the
     are to be allocated based on sample results             administrative proceedings commenced by               depreciation method been in effect from the
     except as provided in subsection 8.h.(6)(c) of          the United States or a State to the extent            date of acquisition of the asset. The
     this appendix;                                          provided in 10 U.S.C. 2324(k).                        combination of use allowances and
        (ii) The entire time period involved must               b. Legal expenses required in the                  depreciation applicable to the asset shall not
     be covered by the sample; and                           administration of Federal programs are                exceed the total acquisition cost of the asset
        (iii) The results must be statistically valid        allowable. Legal expenses for prosecution of          or fair market value at time of donation.
     and applied to the period being sampled.                claims against the Federal Government are                e. When the depreciation method is used
        (b) Allocating charges for the sampled               unallowable.                                          for buildings, a building’s shell may be
     employees’ supervisors, clerical and support               11. Depreciation and use allowances.               segregated from the major component of the
     staffs, based on the results of the sampled                a. Depreciation and use allowances are             building (e.g., plumbing system, heating, and
     employees, will be acceptable.                          means of allocating the cost of fixed assets to       air conditioning system, etc.) and each major
        (c) Less than full compliance with the               periods benefiting from asset use.                    component depreciated over its estimated
     statistical sampling standards noted in                 Compensation for the use of fixed assets on           useful life, or the entire building (i.e., the
     subsection 8.h.(6)(a) of this appendix may be           hand may be made through depreciation or              shell and all components) may be treated as
     accepted by the cognizant agency if it                  use allowances. A combination of the two              a single asset and depreciated over a single
     concludes that the amounts to be allocated to           methods may not be used in connection with            useful life.
     Federal awards will be minimal, or if it                a single class of fixed assets (e.g., buildings,         f. Where the use allowance method is
     concludes that the system proposed by the               office equipment, computer equipment, etc.)           followed, the following general criteria
     governmental unit will result in lower costs            except as provided for in subsection g.               apply:
     to Federal awards than a system which                   Except for enterprise funds and internal                 (1) The use allowance for buildings and
     complies with the standards.                            service funds that are included as part of a          improvements (including land
        (7) Salaries and wages of employees used             State/local cost allocation plan, classes of          improvements, such as paved parking areas,
     in meeting cost sharing or matching                     assets shall be determined on the same basis          fences, and sidewalks) will be computed at
     requirements of Federal awards must be                  used for the government-wide financial                an annual rate not exceeding two percent of
     supported in the same manner as those                   statements.                                           acquisition costs.

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                      Federal Register / Vol. 70, No. 168 / Wednesday, August 31, 2005 / Rules and Regulations                                            51917

        (2) The use allowance for equipment will                13. Employee morale, health, and welfare              (2) Capital expenditures for special
     be computed at an annual rate not exceeding             costs.                                                purpose equipment are allowable as direct
     62⁄3 percent of acquisition cost.                          a. The costs of employee information               costs, provided that items with a unit cost of
        (3) When the use allowance method is used            publications, health or first-aid clinics and/        $5000 or more have the prior approval of the
     for buildings, the entire building must be              or infirmaries, recreational activities,              awarding agency.
     treated as a single asset; the building’s               employee counseling services, and any other              (3) Capital expenditures for improvements
     components (e.g., plumbing system, heating              expenses incurred in accordance with the              to land, buildings, or equipment which
     and air condition, etc.) cannot be segregated           governmental unit’s established practice or           materially increase their value or useful life
     from the building’s shell. The two percent              custom for the improvement of working                 are unallowable as a direct cost except with
     limitation, however, need not be applied to             conditions, employer-employee relations,              the prior approval of the awarding agency.
     equipment which is merely attached or                   employee morale, and employee performance                (4) When approved as a direct charge
     fastened to the building but not permanently            are allowable.                                        pursuant to section 15.b(1), (2), and (3)of this
     fixed to it and which is used as furnishings               b. Such costs will be equitably apportioned        appendix, capital expenditures will be
     or decorations or for specialized purposes              to all activities of the governmental unit.           charged in the period in which the
     (e.g., dentist chairs and dental treatment              Income generated from any of these activities         expenditure is incurred, or as otherwise
     units, counters, laboratory benches bolted to           will be offset against expenses.                      determined appropriate and negotiated with
     the floor, dishwashers, modular furniture,                 14. Entertainment. Costs of entertainment,         the awarding agency. In addition, Federal
     carpeting, etc.). Such equipment will be                including amusement, diversion, and social            awarding agencies are authorized at their
     considered as not being permanently fixed to            activities and any costs directly associated          option to waive or delegate the prior
     the building if it can be removed without the           with such costs (such as tickets to shows or          approval requirement.
     destruction of, or need for costly or extensive         sports events, meals, lodging, rentals,                  (5) Equipment and other capital
     alterations or repairs, to the building or the          transportation, and gratuities) are                   expenditures are unallowable as indirect
     equipment. Equipment that meets these                   unallowable.                                          costs. However, see section 11 of this
     criteria will be subject to the 62⁄3 percent               15. Equipment and other capital                    appendix, Depreciation and use allowance,
     equipment use allowance limitation.                     expenditures.                                         for rules on the allowability of use
        g. A reasonable use allowance may be                    a. For purposes of this subsection 15, the         allowances or depreciation on buildings,
     negotiated for any assets that are considered           following definitions apply:                          capital improvements, and equipment. Also,
     to be fully depreciated, after taking into                 (1) ‘‘Capital Expenditures’’ means                 see section 37 of this appendix, Rental costs,
     consideration the amount of depreciation                expenditures for the acquisition cost of              concerning the allowability of rental costs for
     previously charged to the government, the               capital assets (equipment, buildings, land), or       land, buildings, and equipment.
     estimated useful life remaining at the time of                                                                   (6) The unamortized portion of any
                                                             expenditures to make improvements to
     negotiation, the effect of any increased                                                                      equipment written off as a result of a change
                                                             capital assets that materially increase their
     maintenance charges, decreased efficiency                                                                     in capitalization levels may be recovered by
                                                             value or useful life. Acquisition cost means
     due to age, and any other factors pertinent to                                                                continuing to claim the otherwise allowable
                                                             the cost of the asset including the cost to put
     the utilization of the asset for the purpose                                                                  use allowances or depreciation on the
                                                             it in place. Acquisition cost for equipment,
     contemplated.                                                                                                 equipment, or by amortizing the amount to
                                                             for example, means the net invoice price of
        h. Charges for use allowances or                                                                           be written off over a period of years
     depreciation must be supported by adequate              the equipment, including the cost of any              negotiated with the cognizant agency.
     property records. Physical inventories must             modifications, attachments, accessories, or              (7) When replacing equipment purchased
     be taken at least once every two years (a               auxiliary apparatus necessary to make it              in whole or in part with Federal funds, the
     statistical sampling approach is acceptable)            usable for the purpose for which it is                governmental unit may use the equipment to
     to ensure that assets exist, and are in use.            acquired. Ancillary charges, such as taxes,           be replaced as a trade-in or sell the property
     Governmental units will manage equipment                duty, protective in transit insurance, freight,       and use the proceeds to offset the cost of the
     in accordance with State laws and                       and installation may be included in, or               replacement property.
     procedures. When the depreciation method is             excluded from the acquisition cost in                    16. Fines and penalties. Fines, penalties,
     followed, depreciation records indicating the           accordance with the governmental unit’s               damages, and other settlements resulting
     amount of depreciation taken each period                regular accounting practices.                         from violations (or alleged violations) of, or
     must also be maintained.                                   (2) ‘‘Equipment’’ means an article of              failure of the governmental unit to comply
        12. Donations and contributions.                     nonexpendable, tangible personal property             with, Federal, State, local, or Indian tribal
        a. Contributions or donations rendered.              having a useful life of more than one year            laws and regulations are unallowable except
     Contributions or donations, including cash,             and an acquisition cost which equals or               when incurred as a result of compliance with
     property, and services, made by the                     exceeds the lesser of the capitalization level        specific provisions of the Federal award or
     governmental unit, regardless of the                    established by the governmental unit for              written instructions by the awarding agency
     recipient, are unallowable.                             financial statement purposes, or $5000.               authorizing in advance such payments.
        b. Donated services received:                           (3) ‘‘Special purpose equipment’’ means               17. Fund raising and investment
        (1) Donated or volunteer services may be             equipment which is used only for research,            management costs.
     furnished to a governmental unit by                     medical, scientific, or other technical                  a. Costs of organized fund raising,
     professional and technical personnel,                   activities. Examples of special purpose               including financial campaigns, solicitation of
     consultants, and other skilled and unskilled            equipment include microscopes, x-ray                  gifts and bequests, and similar expenses
     labor. The value of these services is not               machines, surgical instruments, and                   incurred to raise capital or obtain
     reimbursable either as a direct or indirect             spectrometers.                                        contributions are unallowable, regardless of
     cost. However, the value of donated services               (4) ‘‘General purpose equipment’’ means            the purpose for which the funds will be used.
     may be used to meet cost sharing or matching            equipment, which is not limited to research,             b. Costs of investment counsel and staff
     requirements in accordance with the Federal             medical, scientific or other technical                and similar expenses incurred to enhance
     Grants Management Common Rule.                          activities. Examples include office equipment         income from investments are unallowable.
        (2) The value of donated services utilized           and furnishings, modular offices, telephone           However, such costs associated with
     in the performance of a direct cost activity            networks, information technology equipment            investments covering pension, self-insurance,
     shall, when material in amount, be                      and systems, air conditioning equipment,              or other funds which include Federal
     considered in the determination of the                  reproduction and printing equipment, and              participation allowed by this and other
     governmental unit’s indirect costs or rate(s)           motor vehicles.                                       appendices of 2 CFR part 225 are allowable.
     and, accordingly, shall be allocated a                     b. The following rules of allowability shall          c. Fund raising and investment activities
     proportionate share of applicable indirect              apply to equipment and other capital                  shall be allocated an appropriate share of
     costs.                                                  expenditures:                                         indirect costs under the conditions described
        (3) To the extent feasible, donated services            (1) Capital expenditures for general               in subsection C.3.b. of Appendix A to this
     will be supported by the same methods used              purpose equipment, buildings, and land are            part.
     by the governmental unit to support the                 unallowable as direct charges, except where              18. Gains and losses on disposition of
     allocability of regular personnel services.             approved in advance by the awarding agency.           depreciable property and other capital assets

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     51918            Federal Register / Vol. 70, No. 168 / Wednesday, August 31, 2005 / Rules and Regulations

     and substantial relocation of Federal                   the general public, such as fire and police,             22. Insurance and indemnification.
     programs.                                               unless provided for as a direct cost under a             a. Costs of insurance required or approved
        a. (1) Gains and losses on the sale,                 program statute or regulation.                        and maintained, pursuant to the Federal
     retirement, or other disposition of                        b. For federally-recognized Indian tribal          award, are allowable.
     depreciable property shall be included in the           governments and Councils Of Governments                  b. Costs of other insurance in connection
     year in which they occur as credits or charges          (COGs), the portion of salaries and expenses          with the general conduct of activities are
     to the asset cost grouping(s) in which the              directly attributable to managing and                 allowable subject to the following
     property was included. The amount of the                operating Federal programs by the chief               limitations:
     gain or loss to be included as a credit or              executive and his staff is allowable.                    (1) Types and extent and cost of coverage
     charge to the appropriate asset cost                       20. Goods or services for personal use.            are in accordance with the governmental
     grouping(s) shall be the difference between             Costs of goods or services for personal use of        unit’s policy and sound business practice.
     the amount realized on the property and the             the governmental unit’s employees are                    (2) Costs of insurance or of contributions
     undepreciated basis of the property.                    unallowable regardless of whether the cost is         to any reserve covering the risk of loss of, or
        (2) Gains and losses on the disposition of           reported as taxable income to the employees.          damage to, Federal Government property are
     depreciable property shall not be recognized               21. Idle facilities and idle capacity.             unallowable except to the extent that the
     as a separate credit or charge under the                   As used in this section the following terms        awarding agency has specifically required or
     following conditions:                                   have the meanings set forth below:                    approved such costs.
        (a) The gain or loss is processed through               (1) ‘‘Facilities’’ means land and buildings           c. Actual losses which could have been
     a depreciation account and is reflected in the          or any portion thereof, equipment                     covered by permissible insurance (through a
     depreciation allowable under sections 11 and            individually or collectively, or any other            self-insurance program or otherwise) are
     15 of this appendix.                                    tangible capital asset, wherever located, and         unallowable, unless expressly provided for in
        (b) The property is given in exchange as             whether owned or leased by the                        the Federal award or as described below.
     part of the purchase price of a similar item            governmental unit.                                    However, the Federal Government will
     and the gain or loss is taken into account in              (2) ‘‘Idle facilities’’ means completely           participate in actual losses of a self insurance
     determining the depreciation cost basis of the          unused facilities that are excess to the              fund that are in excess of reserves. Costs
     new item.                                               governmental unit’s current needs.                    incurred because of losses not covered under
        (c) A loss results from the failure to                  (3) ‘‘Idle capacity’’ means the unused             nominal deductible insurance coverage
     maintain permissible insurance, except as               capacity of partially used facilities. It is the      provided in keeping with sound management
     otherwise provided in subsection 22.d of this           difference between: that which a facility             practice, and minor losses not covered by
     appendix.                                               could achieve under 100 percent operating             insurance, such as spoilage, breakage, and
        (d) Compensation for the use of the                  time on a one-shift basis less operating              disappearance of small hand tools, which
     property was provided through use                       interruptions resulting from time lost for
                                                                                                                   occur in the ordinary course of operations,
     allowances in lieu of depreciation.                     repairs, setups, unsatisfactory materials, and
                                                                                                                   are allowable.
        b. Substantial relocation of Federal awards          other normal delays; and the extent to which
                                                                                                                      d. Contributions to a reserve for certain
     from a facility where the Federal Government            the facility was actually used to meet
                                                                                                                   self-insurance programs including workers
     participated in the financing to another                demands during the accounting period. A
                                                                                                                   compensation, unemployment compensation,
     facility prior to the expiration of the useful          multi-shift basis should be used if it can be
     life of the financed facility requires Federal          shown that this amount of usage would                 and severance pay are allowable subject to
     agency approval. The extent of the relocation,          normally be expected for the type of facility         the following provisions:
     the amount of the Federal participation in the          involved.                                                (1) The type of coverage and the extent of
     financing, and the depreciation charged to                 (4) ‘‘Cost of idle facilities or idle capacity’’   coverage and the rates and premiums would
     date may require negotiation of space charges           means costs such as maintenance, repair,              have been allowed had insurance (including
     for Federal awards.                                     housing, rent, and other related costs, e.g.,         reinsurance) been purchased to cover the
        c. Gains or losses of any nature arising             insurance, interest, property taxes and               risks. However, provision for known or
     from the sale or exchange of property other             depreciation or use allowances.                       reasonably estimated self-insured liabilities,
     than the property covered in subsection 18.a.              b. The costs of idle facilities are                which do not become payable for more than
     of this appendix, e.g., land or included in the         unallowable except to the extent that:                one year after the provision is made, shall not
     fair market value used in any adjustment                   (1) They are necessary to meet fluctuations        exceed the discounted present value of the
     resulting from a relocation of Federal awards           in workload; or                                       liability. The rate used for discounting the
     covered in subsection b. shall be excluded in              (2) Although not necessary to meet                 liability must be determined by giving
     computing Federal award costs.                          fluctuations in workload, they were                   consideration to such factors as the
        19. General government expenses.                     necessary when acquired and are now idle              governmental unit’s settlement rate for those
        a. The general costs of government are               because of changes in program requirements,           liabilities and its investment rate of return.
     unallowable (except as provided in section              efforts to achieve more economical                       (2) Earnings or investment income on
     43 of this appendix, Travel costs). These               operations, reorganization, termination, or           reserves must be credited to those reserves.
     include:                                                other causes which could not have been                   (3) Contributions to reserves must be based
        (1) Salaries and expenses of the Office of           reasonably foreseen. Under the exception              on sound actuarial principles using historical
     the Governor of a State or the chief executive          stated in this subsection, costs of idle              experience and reasonable assumptions.
     of a political subdivision or the chief                 facilities are allowable for a reasonable             Reserve levels must be analyzed and updated
     executive of federally-recognized Indian                period of time, ordinarily not to exceed one          at least biennially for each major risk being
     tribal government;                                      year, depending on the initiative taken to            insured and take into account any
        (2) Salaries and other expenses of a State           use, lease, or dispose of such facilities.            reinsurance, coinsurance, etc. Reserve levels
     legislature, tribal council, or similar local              c. The costs of idle capacity are normal           related to employee-related coverages will
     governmental body, such as a county                     costs of doing business and are a factor in the       normally be limited to the value of claims
     supervisor, city council, school board, etc.,           normal fluctuations of usage or indirect cost         submitted and adjudicated but not paid,
     whether incurred for purposes of legislation            rates from period to period. Such costs are           submitted but not adjudicated, and incurred
     or executive direction;                                 allowable, provided that the capacity is              but not submitted. Reserve levels in excess of
        (3) Costs of the judiciary branch of a               reasonably anticipated to be necessary or was         the amounts based on the above must be
     government;                                             originally reasonable and is not subject to           identified and justified in the cost allocation
        (4) Costs of prosecutorial activities unless         reduction or elimination by use on other              plan or indirect cost rate proposal.
     treated as a direct cost to a specific program          Federal awards, subletting, renting, or sale, in         (4) Accounting records, actuarial studies,
     if authorized by program statute or regulation          accordance with sound business, economic,             and cost allocations (or billings) must
     (however, this does not preclude the                    or security practices. Widespread idle                recognize any significant differences due to
     allowability of other legal activities of the           capacity throughout an entire facility or             types of insured risk and losses generated by
     Attorney General); and                                  among a group of assets having substantially          the various insured activities or agencies of
        (5) Costs of other general types of                  the same function may be considered idle              the governmental unit. If individual
     government services normally provided to                facilities.                                           departments or agencies of the governmental

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                      Federal Register / Vol. 70, No. 168 / Wednesday, August 31, 2005 / Rules and Regulations                                           51919

     unit experience significantly different levels          shall reduce claims for interest cost by an              a. Costs incurred for materials, supplies,
     of claims for a particular risk, those                  amount equal to imputed interest earnings on          and fabricated parts necessary to carry out a
     differences are to be recognized by the use of          excess cash flow, which is to be calculated           Federal award are allowable.
     separate allocations or other techniques                as follows. Annually, non-Federal entities               b. Purchased materials and supplies shall
     resulting in an equitable allocation.                   shall prepare a cumulative (from the                  be charged at their actual prices, net of
        (5) Whenever funds are transferred from a            inception of the project) report of monthly           applicable credits. Withdrawals from general
     self-insurance reserve to other accounts (e.g.,         cash flows that includes inflows and                  stores or stockrooms should be charged at
     general fund), refunds shall be made to the             outflows, regardless of the funding source.           their actual net cost under any recognized
     Federal Government for its share of funds               Inflows consist of depreciation expense,              method of pricing inventory withdrawals,
     transferred, including earned or imputed                amortization of capitalized construction              consistently applied. Incoming transportation
     interest from the date of transfer.                     interest, and annual interest cost. For cash          charges are a proper part of materials and
        e. Actual claims paid to or on behalf of             flow calculations, the annual inflow figures          supplies costs.
     employees or former employees for workers’              shall be divided by the number of months in              c. Only materials and supplies actually
     compensation, unemployment compensation,                the year (i.e., usually 12) that the building is      used for the performance of a Federal award
     severance pay, and similar employee benefits            in service for monthly amounts. Outflows              may be charged as direct costs.
     (e.g., subsection 8.f. for post retirement              consist of initial equity contributions, debt            d. Where federally-donated or furnished
     health benefits), are allowable in the year of          principal payments (less the pro rata share           materials are used in performing the Federal
     payment provided the governmental unit                  attributable to the unallowable costs of land)        award, such materials will be used without
     follows a consistent costing policy and they            and interest payments. Where cumulative               charge.
     are allocated as a general administrative               inflows exceed cumulative outflows, interest             27. Meetings and conferences. Costs of
     expense to all activities of the governmental           shall be calculated on the excess inflows for         meetings and conferences, the primary
     unit.                                                   that period and be treated as a reduction to          purpose of which is the dissemination of
        f. Insurance refunds shall be credited               allowable interest cost. The rate of interest to      technical information, are allowable. This
     against insurance costs in the year the refund          be used to compute earnings on excess cash            includes costs of meals, transportation, rental
     is received.                                            flows shall be the three-month Treasury bill          of facilities, speakers’ fees, and other items
        g. Indemnification includes securing the             closing rate as of the last business day of that      incidental to such meetings or conferences.
     governmental unit against liabilities to third          month.                                                But see section 14, Entertainment costs, of
     persons and other losses not compensated by                (5) Interest attributable to fully depreciated     this appendix.
     insurance or otherwise. The Federal                     assets is unallowable.                                   28. Memberships, subscriptions, and
     Government is obligated to indemnify the                   24. Lobbying.                                      professional activity costs.
                                                                                                                      a. Costs of the governmental unit’s
     governmental unit only to the extent                       a. General. The cost of certain influencing
                                                                                                                   memberships in business, technical, and
     expressly provided for in the Federal award,            activities associated with obtaining grants,
                                                                                                                   professional organizations are allowable.
     except as provided in subsection 22.d of this           contracts, cooperative agreements, or loans is
                                                                                                                      b. Costs of the governmental unit’s
     appendix.                                               an unallowable cost. Lobbying with respect
                                                                                                                   subscriptions to business, professional, and
        h. Costs of commercial insurance that                to certain grants, contracts, cooperative
                                                                                                                   technical periodicals are allowable.
     protects against the costs of the contractor for        agreements, and loans shall be governed by               c. Costs of membership in civic and
     correction of the contractor’s own defects in           the common rule, ‘‘New Restrictions on                community, social organizations are
     materials or workmanship are unallowable.               Lobbying’’ (see Section J.24 of Appendix A            allowable as a direct cost with the approval
        23. Interest.                                        to 2 CFR part 220), including definitions, and        of the Federal awarding agency.
        a. Costs incurred for interest on borrowed           the Office of Management and Budget                      d. Costs of membership in organizations
     capital or the use of a governmental unit’s             ‘‘Government-wide Guidance for New                    substantially engaged in lobbying are
     own funds, however represented, are                     Restrictions on Lobbying’’ and notices                unallowable.
     unallowable except as specifically provided             published at 54 FR 52306 (December 20,                   29. Patent costs.
     in subsection b. or authorized by Federal               1989), 55 FR 24540 (June 15, 1990), and 57               a. The following costs relating to patent
     legislation.                                            FR 1772 (January 15, 1992), respectively.             and copyright matters are allowable: cost of
        b. Financing costs (including interest) paid            b. Executive lobbying costs. Costs incurred        preparing disclosures, reports, and other
     or incurred which are associated with the               in attempting to improperly influence either          documents required by the Federal award
     otherwise allowable costs of building                   directly or indirectly, an employee or officer        and of searching the art to the extent
     acquisition, construction, or fabrication,              of the Executive Branch of the Federal                necessary to make such disclosures; cost of
     reconstruction or remodeling completed on               Government to give consideration or to act            preparing documents and any other patent
     or after October 1, 1980 is allowable subject           regarding a sponsored agreement or a                  costs in connection with the filing and
     to the conditions in section 23.b.(1) through           regulatory matter are unallowable. Improper           prosecution of a United States patent
     (4) of this appendix. Financing costs                   influence means any influence that induces            application where title or royalty-free license
     (including interest) paid or incurred on or             or tends to induce a Federal employee or              is required by the Federal Government to be
     after September 1, 1995 for land or associated          officer to give consideration or to act               conveyed to the Federal Government; and
     with otherwise allowable costs of equipment             regarding a federally-sponsored agreement or          general counseling services relating to patent
     is allowable, subject to the conditions in              regulatory matter on any basis other than the         and copyright matters, such as advice on
     section 23.b. (1) through (4) of this appendix.         merits of the matter.                                 patent and copyright laws, regulations,
        (1) The financing is provided (from other               25. Maintenance, operations, and repairs.          clauses, and employee agreements (but see
     than tax or user fee sources) by a bona fide            Unless prohibited by law, the cost of utilities,      sections 32, Professional service costs, and
     third party external to the governmental unit;          insurance, security, janitorial services,             38, Royalties and other costs for use of
        (2) The assets are used in support of                elevator service, upkeep of grounds,                  patents and copyrights, of this appendix).
     Federal awards;                                         necessary maintenance, normal repairs and                b. The following costs related to patent and
        (3) Earnings on debt service reserve funds           alterations, and the like are allowable to the        copyright matter are unallowable: Cost of
     or interest earned on borrowed funds                    extent that they: keep property (including            preparing disclosures, reports, and other
     pending payment of the construction or                  Federal property, unless otherwise provided           documents and of searching the art to the
     acquisition costs are used to offset the                for) in an efficient operating condition, do          extent necessary to make disclosures not
     current period’s cost or the capitalized                not add to the permanent value of property            required by the award; costs in connection
     interest, as appropriate. Earnings subject to           or appreciably prolong its intended life, and         with filing and prosecuting any foreign
     being reported to the Federal Internal                  are not otherwise included in rental or other         patent application; or any United States
     Revenue Service under arbitrage                         charges for space. Costs which add to the             patent application, where the Federal award
     requirements are excludable.                            permanent value of property or appreciably            does not require conveying title or a royalty-
        (4) For debt arrangements over $1 million,           prolong its intended life shall be treated as         free license to the Federal Government (but
     unless the governmental unit makes an initial           capital expenditures (see sections 11 and 15          see section 38, Royalties and other costs for
     equity contribution to the asset purchase of            of this appendix).                                    use of patents and copyrights, of this
     25 percent or more, the governmental unit                  26. Materials and supplies costs.                  appendix).

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     51920            Federal Register / Vol. 70, No. 168 / Wednesday, August 31, 2005 / Rules and Regulations

        30. Plant and homeland security costs.               allowable. Proposal costs should normally be          limited to those between divisions of a
     Necessary and reasonable expenses incurred              treated as indirect costs and should be               governmental unit; governmental units under
     for routine and homeland security to protect            allocated to all activities of the governmental       common control through common officers,
     facilities, personnel, and work products are            unit utilizing the cost allocation plan and           directors, or members; and a governmental
     allowable. Such costs include, but are not              indirect cost rate proposal. However,                 unit and a director, trustee, officer, or key
     limited to, wages and uniforms of personnel             proposal costs may be charged directly to             employee of the governmental unit or his
     engaged in security activities; equipment;              Federal awards with the prior approval of the         immediate family, either directly or through
     barriers; contractual security services;                Federal awarding agency.                              corporations, trusts, or similar arrangements
     consultants; etc. Capital expenditures for                 34. Publication and printing costs.                in which they hold a controlling interest. For
     homeland and plant security purposes are                   a. Publication costs include the costs of          example, a governmental unit may establish
     subject to section 15, Equipment and other              printing (including the processes of                  a separate corporation for the sole purpose of
     capital expenditures, of this appendix.                 composition, plate-making, press work,                owning property and leasing it back to the
        31. Pre-award costs. Pre-award costs are             binding, and the end products produced by             governmental unit.
     those incurred prior to the effective date of           such processes), distribution, promotion,                d. Rental costs under leases which are
     the award directly pursuant to the                      mailing, and general handling. Publication            required to be treated as capital leases under
     negotiation and in anticipation of the award            costs also include page charges in                    GAAP are allowable only up to the amount
     where such costs are necessary to comply                professional publications.                            (as explained in subsection 37.b of this
     with the proposed delivery schedule or                     b. If these costs are not identifiable with a      appendix) that would be allowed had the
     period of performance. Such costs are                   particular cost objective, they should be             governmental unit purchased the property on
     allowable only to the extent that they would            allocated as indirect costs to all benefiting         the date the lease agreement was executed.
     have been allowable if incurred after the date          activities of the governmental unit.                  The provisions of Financial Accounting
     of the award and only with the written                     c. Page charges for professional journal           Standards Board Statement 13, Accounting
     approval of the awarding agency.                        publications are allowable as a necessary part        for Leases, shall be used to determine
        32. Professional service costs.                      of research costs where:                              whether a lease is a capital lease. Interest
        a. Costs of professional and consultant                 (1) The research papers report work                costs related to capital leases are allowable to
     services rendered by persons who are                    supported by the Federal Government; and              the extent they meet the criteria in section 23
     members of a particular profession or possess              (2) The charges are levied impartially on          of this appendix. Unallowable costs include
     a special skill, and who are not officers or            all research papers published by the journal,         amounts paid for profit, management fees,
     employees of the governmental unit, are                 whether or not by federally-sponsored                 and taxes that would not have been incurred
     allowable, subject to subparagraphs b and c             authors.                                              had the governmental unit purchased the
     when reasonable in relation to the services                                                                   facility.
                                                                35. Rearrangement and alteration costs.
     rendered and when not contingent upon                                                                            38. Royalties and other costs for the use of
                                                             Costs incurred for ordinary and normal
     recovery of the costs from the Federal                                                                        patents.
                                                             rearrangement and alteration of facilities are
     Government. In addition, legal and related                                                                       a. Royalties on a patent or copyright or
                                                             allowable. Special arrangements and
     services are limited under section 10 of this                                                                 amortization of the cost of acquiring by
                                                             alterations costs incurred specifically for a
     appendix.                                                                                                     purchase a copyright, patent, or rights
                                                             Federal award are allowable with the prior
        b. In determining the allowability of costs                                                                thereto, necessary for the proper performance
     in a particular case, no single factor or any           approval of the Federal awarding agency.              of the award are allowable unless:
     special combination of factors is necessarily              36. Reconversion costs. Costs incurred in             (1) The Federal Government has a license
     determinative. However, the following                   the restoration or rehabilitation of the              or the right to free use of the patent or
     factors are relevant:                                   governmental unit’s facilities to                     copyright.
        (1) The nature and scope of the service              approximately the same condition existing                (2) The patent or copyright has been
     rendered in relation to the service required.           immediately prior to commencement of                  adjudicated to be invalid, or has been
        (2) The necessity of contracting for the             Federal awards, less costs related to normal          administratively determined to be invalid.
     service, considering the governmental unit’s            wear and tear, are allowable.                            (3) The patent or copyright is considered
     capability in the particular area.                         37. Rental costs of buildings and                  to be unenforceable.
        (3) The past pattern of such costs,                  equipment.                                               (4) The patent or copyright is expired.
     particularly in the years prior to Federal                 a. Subject to the limitations described in            b. Special care should be exercised in
     awards.                                                 subsections b. through d. of this section,            determining reasonableness where the
        (4) The impact of Federal awards on the              rental costs are allowable to the extent that         royalties may have been arrived at as a result
     governmental unit’s business (i.e., what new            the rates are reasonable in light of such             of less-than-arm’s-length bargaining, e.g.:
     problems have arisen).                                  factors as: rental costs of comparable                   (1) Royalties paid to persons, including
        (5) Whether the proportion of Federal work           property, if any; market conditions in the            corporations, affiliated with the
     to the governmental unit’s total business is            area; alternatives available; and the type, life      governmental unit.
     such as to influence the governmental unit in           expectancy, condition, and value of the                  (2) Royalties paid to unaffiliated parties,
     favor of incurring the cost, particularly where         property leased. Rental arrangements should           including corporations, under an agreement
     the services rendered are not of a continuing           be reviewed periodically to determine if              entered into in contemplation that a Federal
     nature and have little relationship to work             circumstances have changed and other                  award would be made.
     under Federal grants and contracts.                     options are available.                                   (3) Royalties paid under an agreement
        (6) Whether the service can be performed                b. Rental costs under ‘‘sale and lease back’’      entered into after an award is made to a
     more economically by direct employment                  arrangements are allowable only up to the             governmental unit.
     rather than contracting.                                amount that would be allowed had the                     c. In any case involving a patent or
        (7) The qualifications of the individual or          governmental unit continued to own the                copyright formerly owned by the
     concern rendering the service and the                   property. This amount would include                   governmental unit, the amount of royalty
     customary fees charged, especially on non-              expenses such as depreciation or use                  allowed should not exceed the cost which
     Federal awards.                                         allowance, maintenance, taxes, and                    would have been allowed had the
        (8) Adequacy of the contractual agreement            insurance.                                            governmental unit retained title thereto.
     for the service (e.g., description of the                  c. Rental costs under ‘‘less-than-arm’s-              39. Selling and marketing. Costs of selling
     service, estimate of time required, rate of             length’’ leases are allowable only up to the          and marketing any products or services of the
     compensation, and termination provisions).              amount (as explained in section 37.b of this          governmental unit are unallowable (unless
        c. In addition to the factors in                     appendix) that would be allowed had title to          allowed under section 1. of this appendix as
     subparagraph b, retainer fees to be allowable           the property vested in the governmental unit.         allowable public relations costs or under
     must be supported by available or rendered              For this purpose, a less-than-arm’s-length            section 33. of this appendix as allowable
     evidence of bona fide services available or             lease is one under which one party to the             proposal costs.
     rendered.                                               lease agreement is able to control or                    40. Taxes.
        33. Proposal costs. Costs of preparing               substantially influence the actions of the               a. Taxes that a governmental unit is legally
     proposals for potential Federal awards are              other. Such leases include, but are not               required to pay are allowable, except for self-

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                      Federal Register / Vol. 70, No. 168 / Wednesday, August 31, 2005 / Rules and Regulations                                             51921

     assessed taxes that disproportionately affect           the terminated portion of the Federal award           trip, and results in charges consistent with
     Federal programs or changes in tax policies             bears to the entire terminated Federal award          those normally allowed in like circumstances
     that disproportionately affect Federal                  and other Federal awards for which the                in the governmental unit’s non-federally-
     programs. This provision is applicable to               special tooling, machinery, or equipment was          sponsored activities. Notwithstanding the
     taxes paid during the governmental unit’s               acquired.                                             provisions of section 19 of this appendix,
     first fiscal year that begins on or after January          d. Rental costs under unexpired leases are         General government expenses, travel costs of
     1, 1998, and applies thereafter.                        generally allowable where clearly shown to            officials covered by that section are allowable
        b. Gasoline taxes, motor vehicle fees, and           have been reasonably necessary for the                with the prior approval of an awarding
     other taxes that are in effect user fees for            performance of the terminated Federal award           agency when they are specifically related to
     benefits provided to the Federal Government             less the residual value of such leases, if:           Federal awards.
     are allowable.                                             (1) The amount of such rental claimed does            b. Lodging and subsistence. Costs incurred
        c. This provision does not restrict the              not exceed the reasonable use value of the            by employees and officers for travel,
     authority of Federal agencies to identify taxes         property leased for the period of the Federal         including costs of lodging, other subsistence,
     where Federal participation is inappropriate.           award and such further period as may be               and incidental expenses, shall be considered
     Where the identification of the amount of               reasonable, and                                       reasonable and allowable only to the extent
     unallowable taxes would require an                         (2) The governmental unit makes all                such costs do not exceed charges normally
     inordinate amount of effort, the cognizant              reasonable efforts to terminate, assign, settle,      allowed by the governmental unit in its
     agency may accept a reasonable                          or otherwise reduce the cost of such lease.           regular operations as the result of the
     approximation thereof.                                  There also may be included the cost of                governmental unit’s written travel policy. In
        41. Termination costs applicable to                  alterations of such leased property, provided         the absence of an acceptable, written
     sponsored agreements. Termination of                    such alterations were necessary for the               governmental unit policy regarding travel
     awards generally gives rise to the incurrence           performance of the Federal award, and of              costs, the rates and amounts established
     of costs, or the need for special treatment of          reasonable restoration required by the                under subchapter I of Chapter 57, Title 5,
     costs, which would not have arisen had the              provisions of the lease.                              United States Code (‘‘Travel and Subsistence
     Federal award not been terminated. Cost                    e. Settlement expenses including the               Expenses; Mileage Allowances’’), or by the
     principles covering these items are set forth           following are generally allowable:                    Administrator of General Services, or by the
     below. They are to be used in conjunction                  (1) Accounting, legal, clerical, and similar       President (or his or her designee) pursuant to
     with the other provisions of this appendix in           costs reasonably necessary for:                       any provisions of such subchapter shall
     termination situations.                                    (a) The preparation and presentation to the        apply to travel under Federal awards (48 CFR
        a. The cost of items reasonably usable on            awarding agency of settlement claims and              31.205–46(a)).
     the governmental unit’s other work shall not            supporting data with respect to the                      c. Commercial air travel.
     be allowable unless the governmental unit               terminated portion of the Federal award,                 (1) Airfare costs in excess of the customary
     submits evidence that it would not retain               unless the termination is for default (see            standard commercial airfare (coach or
     such items at cost without sustaining a loss.           Subpart l.44 of the Grants Management                 equivalent), Federal Government contract
     In deciding whether such items are                      Common Rule (see § 215.5) implementing                airfare (where authorized and available), or
     reasonably usable on other work of the                  OMB Circular A–102); and                              the lowest commercial discount airfare are
     governmental unit, the awarding agency                     (b) The termination and settlement of              unallowable except when such
     should consider the governmental unit’s                 subawards.                                            accommodations would:
     plans and orders for current and scheduled                 (2) Reasonable costs for the storage,                 (a) Require circuitous routing;
     activity. Contemporaneous purchases of                  transportation, protection, and disposition of           (b) Require travel during unreasonable
     common items by the governmental unit                   property provided by the Federal                      hours;
     shall be regarded as evidence that such items           Government or acquired or produced for the               (c) Excessively prolong travel;
     are reasonably usable on the governmental               Federal award, except when grantees or                   (d) Result in additional costs that would
     unit’s other work. Any acceptance of                    contractors are reimbursed for disposals at a         offset the transportation savings; or
     common items as allocable to the terminated             predetermined amount in accordance with                  (e) Offer accommodations not reasonably
     portion of the Federal award shall be limited           Subparts l.31 and l.32 of the Grants                  adequate for the traveler’s medical needs.
     to the extent that the quantities of such items         Management Common Rule (see § 215.5)                  The governmental unit must justify and
     on hand, in transit, and on order are in                implementing OMB Circular A–102.                      document these conditions on a case-by-case
     excess of the reasonable quantitative                      f. Claims under subawards, including the           basis in order for the use of first-class airfare
     requirements of other work.                             allocable portion of claims which are                 to be allowable in such cases.
        b. If in a particular case, despite all              common to the Federal award, and to other                (2) Unless a pattern of avoidance is
     reasonable efforts by the governmental unit,            work of the governmental unit are generally           detected, the Federal Government will
     certain costs cannot be discontinued                    allowable. An appropriate share of the                generally not question a governmental unit’s
     immediately after the effective date of                 governmental unit’s indirect expense may be           determinations that customary standard
     termination, such costs are generally                   allocated to the amount of settlements with           airfare or other discount airfare is unavailable
     allowable within the limitations set forth in           subcontractors and/or subgrantees, provided           for specific trips if the governmental unit can
     this and other appendices of 2 CFR part 225,            that the amount allocated is otherwise                demonstrate either of the following:
     except that any such costs continuing after             consistent with the basic guidelines                     (aa) That such airfare was not available in
     termination due to the negligent or willful             contained in Appendix A to this part. The             the specific case; or
     failure of the governmental unit to                     indirect expense so allocated shall exclude              (b) That it is the governmental unit’s
     discontinue such costs shall be unallowable.            the same and similar costs claimed directly           overall practice to make routine use of such
        c. Loss of useful value of special tooling,          or indirectly as settlement expenses.                 airfare.
     machinery, and equipment is generally                      42. Training costs. The cost of training              d. Air travel by other than commercial
     allowable if:                                           provided for employee development is                  carrier. Costs of travel by governmental unit-
        (1) Such special tooling, special                    allowable.                                            owned, -leased, or -chartered aircraft include
     machinery, or equipment is not reasonably                  43. Travel costs.                                  the cost of lease, charter, operation
     capable of use in the other work of the                    a. General. Travel costs are the expenses          (including personnel costs), maintenance,
     governmental unit,                                      for transportation, lodging, subsistence, and         depreciation, insurance, and other related
        (2) The interest of the Federal Government           related items incurred by employees who are           costs. The portion of such costs that exceeds
     is protected by transfer of title or by other           in travel status on official business of the          the cost of allowable commercial air travel,
     means deemed appropriate by the awarding                governmental unit. Such costs may be                  as provided for in subsection 43.c. of this
     agency, and                                             charged on an actual cost basis, on a per             appendix, is unallowable.
        (3) The loss of useful value for any one             diem or mileage basis in lieu of actual costs            e. Foreign travel. Direct charges for foreign
     terminated Federal award is limited to that             incurred, or on a combination of the two,             travel costs are allowable only when the
     portion of the acquisition cost which bears             provided the method used is applied to an             travel has received prior approval of the
     the same ratio to the total acquisition cost as         entire trip and not to selected days of the           awarding agency. Each separate foreign trip

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     51922            Federal Register / Vol. 70, No. 168 / Wednesday, August 31, 2005 / Rules and Regulations

     must receive such approval. For purposes of                1. ‘‘Billed central services’’ means central       for those central services which have little or
     this provision, ‘‘foreign travel’’ includes any         services that are billed to benefitted agencies       no impact on Federal awards. Conversely, if
     travel outside Canada, Mexico, the United               and/or programs on an individual fee-for-             a review of a plan indicates that certain
     States, and any United States territories and           service or similar basis. Typical examples of         additional information is needed, and will
     possessions. However, the term ‘‘foreign                billed central services include computer              likely be needed in future years, it may be
     travel’’ for a governmental unit located in a           services, transportation services, insurance,         routinely requested in future plan
     foreign country means travel outside that               and fringe benefits.                                  submissions. Items marked with an asterisk
     country.                                                   2. ‘‘Allocated central services’’ means            (*) should be submitted only once;
                                                             central services that benefit operating               subsequent plans should merely indicate any
     Appendix C to Part 225—State/Local-                     agencies but are not billed to the agencies on        changes since the last plan.
     Wide Central Service Cost Allocation                    a fee-for-service or similar basis. These costs          1. General. All proposed plans must be
     Plans                                                   are allocated to benefitted agencies on some          accompanied by the following: An
                                                             reasonable basis. Examples of such services           organization chart sufficiently detailed to
     Table of Contents                                       might include general accounting, personnel           show operations including the central service
     A. General                                              administration, purchasing, etc.                      activities of the State/local government
     B. Definitions                                             3. ‘‘Agency or operating agency’’ means an         whether or not they are shown as benefiting
       1. Billed central services                            organizational unit or sub-division within a          from central service functions; a copy of the
       2. Allocated central services                         governmental unit that is responsible for the         Comprehensive Annual Financial Report (or
       3. Agency or operating agency                         performance or administration of awards or            a copy of the Executive Budget if budgeted
     C. Scope of the Central Service Cost                    activities of the governmental unit.                  costs are being proposed) to support the
          Allocation Plans                                      C. Scope of the Central Service Cost               allowable costs of each central service
     D. Submission Requirements                              Allocation Plans. The central service cost            activity included in the plan; and, a
     E. Documentation Requirements for                       allocation plan will include all central              certification (see subsection 4.) that the plan
          Submitted Plans                                    service costs that will be claimed (either as         was prepared in accordance with this and
       1. General                                            a billed or an allocated cost) under Federal          other appendices to this part, contains only
       2. Allocated central services                         awards and will be documented as described            allowable costs, and was prepared in a
       3. Billed services                                    in section E. Costs of central services omitted       manner that treated similar costs consistently
       a. General                                            from the plan will not be reimbursed.                 among the various Federal awards and
       b. Internal service funds                                D. Submission Requirements.                        between Federal and non-Federal awards/
       c. Self-insurance funds                                  1. Each State will submit a plan to the            activities.
       d. Fringe benefits                                    Department of Health and Human Services                  2. Allocated central services. For each
       4. Required certification                             for each year in which it claims central              allocated central service, the plan must also
     F. Negotiation and Approval of Central                  service costs under Federal awards. The plan          include the following: A brief description of
          Service Plans                                      should include a projection of the next year’s        the service*, an identification of the unit
     G. Other Policies                                       allocated central service cost (based either on       rendering the service and the operating
       1. Billed central service activities                  actual costs for the most recently completed          agencies receiving the service, the items of
       2. Working capital reserves                           year or the budget projection for the coming          expense included in the cost of the service,
       3. Carry-forward adjustments of allocated             year), and a reconciliation of actual allocated       the method used to distribute the cost of the
          central service costs                              central service costs to the estimated costs          service to benefitted agencies, and a
       4. Adjustments of billed central services             used for either the most recently completed           summary schedule showing the allocation of
       5. Records retention                                  year or the year immediately preceding the            each service to the specific benefitted
       6. Appeals                                            most recently completed year.                         agencies. If any self-insurance funds or fringe
       7. OMB assistance State/Local-Wide                       2. Each local government that has been             benefits costs are treated as allocated (rather
          Central Service Cost Allocation Plans              designated as a ‘‘major local government’’ by         than billed) central services, documentation
       A. General.                                           the Office of Management and Budget (OMB)             discussed in subsections 3.b. and c. shall also
       1. Most governmental units provide certain            is also required to submit a plan to its              be included.
     services, such as motor pools, computer                 cognizant agency annually. OMB periodically              3. Billed services.
     centers, purchasing, accounting, etc., to               lists major local governments in the Federal             a. General. The information described
     operating agencies on a centralized basis.              Register.                                             below shall be provided for all billed central
     Since federally-supported awards are                       3. All other local governments claiming            services, including internal service funds,
     performed within the individual operating               central service costs must develop a plan in          self-insurance funds, and fringe benefit
     agencies, there needs to be a process whereby           accordance with the requirements described            funds.
     these central service costs can be identified           in this appendix and maintain the plan and               b. Internal service funds.
     and assigned to benefitted activities on a              related supporting documentation for audit.              (1) For each internal service fund or similar
     reasonable and consistent basis. The central            These local governments are not required to           activity with an operating budget of $5
     service cost allocation plan provides that              submit their plans for Federal approval               million or more, the plan shall include: A
     process. All costs and other data used to               unless they are specifically requested to do          brief description of each service; a balance
     distribute the costs included in the plan               so by the cognizant agency. Where a local             sheet for each fund based on individual
     should be supported by formal accounting                government only receives funds as a sub-              accounts contained in the governmental
     and other records that will support the                 recipient, the primary recipient will be              unit’s accounting system; a revenue/expenses
     propriety of the costs assigned to Federal              responsible for negotiating indirect cost rates       statement, with revenues broken out by
     awards.                                                 and/or monitoring the sub-recipient’s plan.           source, e.g., regular billings, interest earned,
       2. Guidelines and illustrations of central               4. All central service cost allocation plans       etc.; a listing of all non-operating transfers (as
     service cost allocation plans are provided in           will be prepared and, when required,                  defined by Generally Accepted Accounting
     a brochure published by the Department of               submitted within six months prior to the              Principles (GAAP)) into and out of the fund;
     Health and Human Services entitled ‘‘A                  beginning of each of the governmental unit’s          a description of the procedures
     Guide for State and Local Government                    fiscal years in which it proposes to claim            (methodology) used to charge the costs of
     Agencies: Cost Principles and Procedures for            central service costs. Extensions may be              each service to users, including how billing
     Establishing Cost Allocation Plans and                  granted by the cognizant agency on a case-            rates are determined; a schedule of current
     Indirect Cost Rates for Grants and Contracts            by-case basis.                                        rates; and, a schedule comparing total
     with the Federal Government.’’ A copy of                   E. Documentation Requirements for                  revenues (including imputed revenues)
     this brochure may be obtained from the                  Submitted Plans. The documentation                    generated by the service to the allowable
     Superintendent of Documents, U.S.                       requirements described in this section may            costs of the service, as determined under this
     Government Printing Office, Washington, DC              be modified, expanded, or reduced by the              and other appendices of this part, with an
     20401.                                                  cognizant agency on a case-by-case basis. For         explanation of how variances will be
       B. Definitions.                                       example, the requirements may be reduced              handled.

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                      Federal Register / Vol. 70, No. 168 / Wednesday, August 31, 2005 / Rules and Regulations                                           51923

        (2) Revenues shall consist of all revenues           accordance with applicable requirements.              recovery of costs, are allowable. A working
     generated by the service, including unbilled            Further, the same costs that have been treated        capital reserve as part of retained earnings of
     and uncollected revenues. If some users were            as indirect costs have not been claimed as            up to 60 days cash expenses for normal
     not billed for the services (or were not billed         direct costs. Similar types of costs have been        operating purposes is considered reasonable.
     at the full rate for that class of users), a            accounted for consistently.                           A working capital reserve exceeding 60 days
     schedule showing the full imputed revenues                 I declare that the foregoing is true and           may be approved by the cognizant Federal
     associated with these users shall be provided.          correct.                                              agency in exceptional cases.
     Expenses shall be broken out by object cost             Governmental Unit: lllllllllll                          3. Carry-forward adjustments of allocated
     categories (e.g., salaries, supplies, etc.).            Signature: llllllllllllllll                           central service costs. Allocated central
        c. Self-insurance funds. For each self-
     insurance fund, the plan shall include: The             Name of Official: llllllllllll                        service costs are usually negotiated and
     fund balance sheet; a statement of revenue              Title: llllllllllllllllll                             approved for a future fiscal year on a ‘‘fixed
     and expenses including a summary of                     Date of Execution: llllllllllll                       with carry-forward’’ basis. Under this
     billings and claims paid by agency; a listing                                                                 procedure, the fixed amounts for the future
                                                                F. Negotiation and Approval of Central
     of all non-operating transfers into and out of                                                                year covered by agreement are not subject to
                                                             Service Plans.
     the fund; the type(s) of risk(s) covered by the            1. All proposed central service cost               adjustment for that year. However, when the
     fund (e.g., automobile liability, workers’              allocation plans that are required to be              actual costs of the year involved become
     compensation, etc.); an explanation of how              submitted will be reviewed, negotiated, and           known, the differences between the fixed
     the level of fund contributions are                     approved by the Federal cognizant agency on           amounts previously approved and the actual
     determined, including a copy of the current             a timely basis. The cognizant agency will             costs will be carried forward and used as an
     actuarial report (with the actuarial                    review the proposal within six months of              adjustment to the fixed amounts established
     assumptions used) if the contributions are              receipt of the proposal and either negotiate/         for a later year. This ‘‘carry-forward’’
     determined on an actuarial basis; and, a                approve the proposal or advise the                    procedure applies to all central services
     description of the procedures used to charge            governmental unit of the additional                   whose costs were fixed in the approved plan.
     or allocate fund contributions to benefitted            documentation needed to support/evaluate              However, a carry-forward adjustment is not
     activities. Reserve levels in excess of claims          the proposed plan or the changes required to          permitted, for a central service activity that
     submitted and adjudicated but not paid,                 make the proposal acceptable. Once an                 was not included in the approved plan, or for
     submitted but not adjudicated, and incurred             agreement with the governmental unit has
     but not submitted must be identified and                                                                      unallowable costs that must be reimbursed
                                                             been reached, the agreement will be accepted
     explained.                                                                                                    immediately.
                                                             and used by all Federal agencies, unless
        d. Fringe benefits. For fringe benefit costs,                                                                4. Adjustments of billed central services.
                                                             prohibited or limited by statute. Where a
     the plan shall include: A listing of fringe             Federal funding agency has reason to believe          Billing rates used to charge Federal awards
     benefits provided to covered employees, and             that special operating factors affecting its          shall be based on the estimated costs of
     the overall annual cost of each type of                 awards necessitate special consideration, the         providing the services, including an estimate
     benefit; current fringe benefit policies*; and          funding agency will, prior to the time the            of the allocable central service costs. A
     procedures used to charge or allocate the               plans are negotiated, notify the cognizant            comparison of the revenue generated by each
     costs of the benefits to benefitted activities.         agency.                                               billed service (including total revenues
     In addition, for pension and post-retirement               2. The results of each negotiation shall be        whether or not billed or collected) to the
     health insurance plans, the following                   formalized in a written agreement between             actual allowable costs of the service will be
     information shall be provided: the                      the cognizant agency and the governmental             made at least annually, and an adjustment
     governmental unit’s funding policies, e.g.,             unit. This agreement will be subject to re-           will be made for the difference between the
     legislative bills, trust agreements, or State-          opening if the agreement is subsequently              revenue and the allowable costs. These
     mandated contribution rules, if different from          found to violate a statute or the information         adjustments will be made through one of the
     actuarially determined rates; the pension               upon which the plan was negotiated is later           following adjustment methods: A cash refund
     plan’s costs accrued for the year; the amount           found to be materially incomplete or
                                                                                                                   to the Federal Government for the Federal
     funded, and date(s) of funding; a copy of the           inaccurate. The results of the negotiation
                                                             shall be made available to all Federal                share of the adjustment, credits to the
     current actuarial report (including the
     actuarial assumptions); the plan trustee’s              agencies for their use.                               amounts charged to the individual programs,
     report; and, a schedule from the activity                  3. Negotiated cost allocation plans based          adjustments to future billing rates, or
     showing the value of the interest cost                  on a proposal later found to have included            adjustments to allocated central service costs.
     associated with late funding.                           costs that: Are unallowable as specified by           Adjustments to allocated central services will
        4. Required certification. Each central              law or regulation, as identified in Appendix          not be permitted where the total amount of
     service cost allocation plan will be                    B of this part, or by the terms and conditions        the adjustment for a particular service
     accompanied by a certification in the                   of Federal awards, or are unallowable                 (Federal share and non-Federal) share
     following form:                                         because they are clearly not allocable to             exceeds $500,000.
                                                             Federal awards, shall be adjusted, or a refund          5. Records retention. All central service
     Certificate of Cost Allocation Plan                     shall be made at the option of the Federal            cost allocation plans and related
        This is to certify that I have reviewed the          cognizant agency. These adjustments or                documentation used as a basis for claiming
     cost allocation plan submitted herewith and             refunds are designed to correct the plans and         costs under Federal awards must be retained
     to the best of my knowledge and belief:                 do not constitute a reopening of the                  for audit in accordance with the records
        (1) All costs included in this proposal              negotiation.                                          retention requirements contained in the
     [identify date] to establish cost allocations or           G. Other Policies.                                 Common Rule.
     billings for [identify period covered by plan]             1. Billed central service activities. Each
                                                                                                                     6. Appeals. If a dispute arises in the
     are allowable in accordance with the                    billed central service activity must separately
                                                                                                                   negotiation of a plan between the cognizant
     requirements of 2 CFR Part 225, Cost                    account for all revenues (including imputed
     Principles for State, Local, and Indian Tribal          revenues) generated by the service, expenses          agency and the governmental unit, the
     Governments (OMB Circular A–87), and the                incurred to furnish the service, and profit/          dispute shall be resolved in accordance with
     Federal award(s) to which they apply.                   loss.                                                 the appeals procedures of the cognizant
     Unallowable costs have been adjusted for in                2. Working capital reserves. Internal              agency.
     allocating costs as indicated in the cost               service funds are dependent upon a                      7. OMB assistance. To the extent that
     allocation plan.                                        reasonable level of working capital reserve to        problems are encountered among the Federal
        (2) All costs included in this proposal are          operate from one billing cycle to the next.           agencies and/or governmental units in
     properly allocable to Federal awards on the             Charges by an internal service activity to            connection with the negotiation and approval
     basis of a beneficial or causal relationship            provide for the establishment and                     process, OMB will lend assistance, as
     between the expenses incurred and the                   maintenance of a reasonable level of working          required, to resolve such problems in a
     awards to which they are allocated in                   capital reserve, in addition to the full              timely manner.

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     51924            Federal Register / Vol. 70, No. 168 / Wednesday, August 31, 2005 / Rules and Regulations

     Appendix D to Part 225—Public                              2. Under the coordination process outlined         C. Allocation of Indirect Costs and
     Assistance Cost Allocation Plans                        in subsection E, affected Federal agencies                  Determination of Indirect Cost Rates
                                                             will review all new plans and plan                       1. General
     Table of Contents                                       amendments and provide comments, as                      2. Simplified method
     A. General                                              appropriate, to HHS. The effective date of the           3. Multiple allocation base method
     B. Definitions                                          plan or plan amendment will be the first day             4. Special indirect cost rates
        1. State public assistance agency                    of the quarter following the submission of the        D. Submission and Documentation of
        2. State public assistance agency costs              plan or amendment, unless another date is                   Proposals
     C. Policy                                               specifically approved by HHS. HHS, as the                1. Submission of indirect cost rate 

     D. Submission, Documentation, and                       cognizant agency acting on behalf of all                    proposals 

           Approval of Public Assistance Cost                affected Federal agencies, will, as necessary,           2. Documentation of proposals
           Allocation Plans                                  conduct negotiations with the State public               3. Required certification
     E. Review of Implementation of Approved                 assistance agency and will inform the State           E. Negotiation and Approval of Rates
           Plans                                             agency of the action taken on the plan or plan        F. Other Policies
     F. Unallowable Costs                                    amendment.                                               1. Fringe benefit rates
        A. General. Federally-financed programs                 E. Review of Implementation of Approved               2. Billed services provided by the grantee
     administered by State public assistance                 Plans.                                                      agency
     agencies are funded predominately by the                   1. Since public assistance cost allocation            3. Indirect cost allocations not using rates
     Department of Health and Human Services                 plans are of a narrative nature, the review              4. Appeals
     (HHS). In support of its stewardship                    during the plan approval process consists of             5. Collections of unallowable costs and
     requirements, HHS has published                         evaluating the appropriateness of the                       erroneous payments
     requirements for the development,                       proposed groupings of costs (cost centers)               6. OMB assistance
     documentation, submission, negotiation, and                                                                   A. General.
                                                             and the related allocation bases. As such, the
     approval of public assistance cost allocation                                                                    1. Indirect costs are those that have been
                                                             Federal Government needs some assurance
     plans in Subpart E of 45 CFR part 95. All                                                                     incurred for common or joint purposes.
                                                             that the cost allocation plan has been
     administrative costs (direct and indirect) are                                                                These costs benefit more than one cost
                                                             implemented as approved. This is
     normally charged to Federal awards by                                                                         objective and cannot be readily identified
                                                             accomplished by reviews by the funding
     implementing the public assistance cost                                                                       with a particular final cost objective without
     allocation plan. This appendix extends these            agencies, single audits, or audits conducted
                                                             by the cognizant audit agency.                        effort disproportionate to the results
     requirements to all Federal agencies whose                                                                    achieved. After direct costs have been
     programs are administered by a State public                2. Where inappropriate charges affecting
                                                             more than one funding agency are identified,          determined and assigned directly to Federal
     assistance agency. Major federally-financed                                                                   awards and other activities as appropriate,
     programs typically administered by State                the cognizant HHS cost negotiation office
                                                             will be advised and will take the lead in             indirect costs are those remaining to be
     public assistance agencies include:                                                                           allocated to benefitted cost objectives. A cost
     Temporary Assistance to Needy Families                  resolving the issue(s) as provided for in
                                                             Subpart E of 45 CFR part 95.                          may not be allocated to a Federal award as
     (TANF), Medicaid, Food Stamps, Child                                                                          an indirect cost if any other cost incurred for
     Support Enforcement, Adoption Assistance                   3. If a dispute arises in the negotiation of
                                                             a plan or from a disallowance involving two           the same purpose, in like circumstances, has
     and Foster Care, and Social Services Block                                                                    been assigned to a Federal award as a direct
     Grant.                                                  or more funding agencies, the dispute shall
                                                             be resolved in accordance with the appeals            cost.
        B. Definitions.
                                                             procedures set out in 45 CFR part 75.                    2. Indirect costs include the indirect costs
        1. ‘‘State public assistance agency’’ means
                                                             Disputes involving only one funding agency            originating in each department or agency of
     a State agency administering or supervising
                                                             will be resolved in accordance with the               the governmental unit carrying out Federal
     the administration of one or more public
     assistance programs operated by the State as            funding agency’s appeal process.                      awards and the costs of central governmental
     identified in Subpart E of 45 CFR part 95. For             4. To the extent that problems are                 services distributed through the central
     the purpose of this appendix, these programs            encountered among the Federal agencies                service cost allocation plan (as described in
     include all programs administered by the                and/or governmental units in connection               Appendix C to this part) and not otherwise
     State public assistance agency.                         with the negotiation and approval process,            treated as direct costs.
        2. ‘‘State public assistance agency costs’’          the Office of Management and Budget will                 3. Indirect costs are normally charged to
     means all costs incurred by, or allocable to,           lend assistance, as required, to resolve such         Federal awards by the use of an indirect cost
     the State public assistance agency, except              problems in a timely manner.                          rate. A separate indirect cost rate(s) is usually
     expenditures for financial assistance, medical             F. Unallowable Costs. Claims developed             necessary for each department or agency of
     vendor payments, food stamps, and                       under approved cost allocation plans will be          the governmental unit claiming indirect costs
     payments for services and goods provided                based on allowable costs as identified in 2           under Federal awards. Guidelines and
     directly to program recipients.                         CFR part 225. Where unallowable costs have            illustrations of indirect cost proposals are
        C. Policy. State public assistance agencies          been claimed and reimbursed, they will be             provided in a brochure published by the
     will develop, document and implement, and               refunded to the program that reimbursed the           Department of Health and Human Services
     the Federal Government will review,                     unallowable cost using one of the following           entitled ‘‘A Guide for State and Local
     negotiate, and approve, public assistance cost          methods: a cash refund, offset to a                   Government Agencies: Cost Principles and
     allocation plans in accordance with Subpart             subsequent claim, or credits to the amounts           Procedures for Establishing Cost Allocation
     E of 45 CFR part 95. The plan will include              charged to individual awards.                         Plans and Indirect Cost Rates for Grants and
     all programs administered by the State public                                                                 Contracts with the Federal Government.’’ A
     assistance agency. Where a letter of approval           Appendix E to Part 225—State and                      copy of this brochure may be obtained from
     or disapproval is transmitted to a State public         Local Indirect Cost Rate Proposals                    the Superintendent of Documents, U.S.
     assistance agency in accordance with Subpart                                                                  Government Printing Office, Washington, DC
                                                             Table of Contents                                     20401.
     E, the letter will apply to all Federal agencies
     and programs. The remaining sections of this            A. General                                               4. Because of the diverse characteristics
     appendix (except for the requirement for                B. Definitions                                        and accounting practices of governmental
     certification) summarize the provisions of                1. Indirect cost rate proposal                      units, the types of costs which may be
     Subpart E of 45 CFR part 95.                              2. Indirect cost rate                               classified as indirect costs cannot be
        D. Submission, Documentation, and                      3. Indirect cost pool                               specified in all situations. However, typical
     Approval of Public Assistance Cost                        4. Base                                             examples of indirect costs may include
     Allocation Plans.                                         5. Predetermined rate                               certain State/local-wide central service costs,
        1. State public assistance agencies are                6. Fixed rate                                       general administration of the grantee
     required to promptly submit amendments to                 7. Provisional rate                                 department or agency, accounting and
     the cost allocation plan to HHS for review                8. Final rate                                       personnel services performed within the
     and approval.                                             9. Base period                                      grantee department or agency, depreciation

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                      Federal Register / Vol. 70, No. 168 / Wednesday, August 31, 2005 / Rules and Regulations                                           51925

     or use allowances on buildings and                      costs are incurred and accumulated for                cost groupings. Each grouping shall then be
     equipment, the costs of operating and                   allocation to activities performed in that            allocated individually to benefitted functions
     maintaining facilities, etc.                            period. The base period normally should               by means of a base which best measures the
        5. This appendix does not apply to State             coincide with the governmental unit’s fiscal          relative benefits.
     public assistance agencies. These agencies              year, but in any event, shall be so selected             b. The cost groupings should be
     should refer instead to Appendix D to this              as to avoid inequities in the allocation of           established so as to permit the allocation of
     part.                                                   costs.                                                each grouping on the basis of benefits
        B. Definitions.                                         C. Allocation of Indirect Costs and                provided to the major functions. Each
        1. ‘‘Indirect cost rate proposal’’ means the         Determination of Indirect Cost Rates.                 grouping should constitute a pool of
     documentation prepared by a governmental                   1. General.                                        expenses that are of like character in terms
     unit or subdivision thereof to substantiate its            a. Where a governmental unit’s department          of the functions they benefit and in terms of
     request for the establishment of an indirect            or agency has only one major function, or             the allocation base which best measures the
     cost rate.                                              where all its major functions benefit from the        relative benefits provided to each function.
        2. ‘‘Indirect cost rate’’ is a device for            indirect costs to approximately the same              The number of separate groupings should be
     determining in a reasonable manner the                  degree, the allocation of indirect costs and          held within practical limits, taking into
     proportion of indirect costs each program               the computation of an indirect cost rate may          consideration the materiality of the amounts
     should bear. It is the ratio (expressed as a            be accomplished through simplified                    involved and the degree of precision needed.
     percentage) of the indirect costs to a direct           allocation procedures as described in                    c. Actual conditions must be taken into
     cost base.                                              subsection 2 of this appendix.                        account in selecting the base to be used in
        3. ‘‘Indirect cost pool’’ is the accumulated            b. Where a governmental unit’s department          allocating the expenses in each grouping to
     costs that jointly benefit two or more                  or agency has several major functions which           benefitted functions. When an allocation can
     programs or other cost objectives.                      benefit from its indirect costs in varying            be made by assignment of a cost grouping
        4. ‘‘Base’’ means the accumulated direct             degrees, the allocation of indirect costs may         directly to the function benefitted, the
     costs (normally either total direct salaries and        require the accumulation of such costs into           allocation shall be made in that manner.
     wages or total direct costs exclusive of any            separate cost groupings which then are                When the expenses in a grouping are more
     extraordinary or distorting expenditures)               allocated individually to benefitted functions        general in nature, the allocation should be
     used to distribute indirect costs to individual         by means of a base which best measures the            made through the use of a selected base
     Federal awards. The direct cost base selected           relative degree of benefit. The indirect costs        which produces results that are equitable to
     should result in each award bearing a fair              allocated to each function are then                   both the Federal Government and the
     share of the indirect costs in reasonable               distributed to individual awards and other            governmental unit. In general, any cost
     relation to the benefits received from the              activities included in that function by means         element or related factor associated with the
     costs.                                                  of an indirect cost rate(s).                          governmental unit’s activities is potentially
        5. ‘‘Predetermined rate’’ means an indirect             c. Specific methods for allocating indirect        adaptable for use as an allocation base
     cost rate, applicable to a specified current or         costs and computing indirect cost rates along         provided that: it can readily be expressed in
     future period, usually the governmental                 with the conditions under which each                  terms of dollars or other quantitative
     unit’s fiscal year. This rate is based on an            method should be used are described in                measures (total direct costs, direct salaries
     estimate of the costs to be incurred during             subsections 2, 3 and 4 of this appendix.              and wages, staff hours applied, square feet
     the period. Except under very unusual                      2. Simplified method.                              used, hours of usage, number of documents
     circumstances, a predetermined rate is not                 a. Where a grantee agency’s major                  processed, population served, and the like),
     subject to adjustment. (Because of legal                functions benefit from its indirect costs to          and it is common to the benefitted functions
     constraints, predetermined rates are not                approximately the same degree, the                    during the base period.
     permitted for Federal contracts; they may,              allocation of indirect costs may be                      d. Except where a special indirect cost
     however, be used for grants or cooperative              accomplished by classifying the grantee               rate(s) is required in accordance with
     agreements.) Predetermined rates may not be             agency’s total costs for the base period as           subsection 4, the separate groupings of
     used by governmental units that have not                either direct or indirect, and dividing the           indirect costs allocated to each major
     submitted and negotiated the rate with the              total allowable indirect costs (net of                function shall be aggregated and treated as a
     cognizant agency. In view of the potential              applicable credits) by an equitable                   common pool for that function. The costs in
     advantages offered by this procedure,                   distribution base. The result of this process         the common pool shall then be distributed to
     negotiation of predetermined rates for                  is an indirect cost rate which is used to             individual Federal awards included in that
     indirect costs for a period of two to four years        distribute indirect costs to individual Federal       function by use of a single indirect cost rate.
     should be the norm in those situations where            awards. The rate should be expressed as the              e. The distribution base used in computing
     the cost experience and other pertinent facts           percentage which the total amount of                  the indirect cost rate for each function may
     available are deemed sufficient to enable the           allowable indirect costs bears to the base            be total direct costs (excluding capital
     parties involved to reach an informed                   selected. This method should also be used             expenditures and other distorting items such
     judgment as to the probable level of indirect           where a governmental unit’s department or             as pass-through funds, major subcontracts,
     costs during the ensuing accounting periods.            agency has only one major function                    etc.), direct salaries and wages, or another
        6. ‘‘Fixed rate’’ means an indirect cost rate        encompassing a number of individual                   base which results in an equitable
     which has the same characteristics as a                 projects or activities, and may be used where         distribution. An indirect cost rate should be
     predetermined rate, except that the difference          the level of Federal awards to that                   developed for each separate indirect cost
     between the estimated costs and the actual,             department or agency is relatively small.             pool developed. The rate in each case should
     allowable costs of the period covered by the               b. Both the direct costs and the indirect          be stated as the percentage relationship
     rate is carried forward as an adjustment to             costs shall exclude capital expenditures and          between the particular indirect cost pool and
     the rate computation of a subsequent period.            unallowable costs. However, unallowable               the distribution base identified with that
        7. ‘‘Provisional rate’’ means a temporary            costs must be included in the direct costs if         pool.
     indirect cost rate applicable to a specified            they represent activities to which indirect              4. Special indirect cost rates.
     period which is used for funding, interim               costs are properly allocable.                            a. In some instances, a single indirect cost
     reimbursement, and reporting indirect costs                c. The distribution base may be total direct       rate for all activities of a grantee department
     on Federal awards pending the establishment             costs (excluding capital expenditures and             or agency or for each major function of the
     of a ‘‘final’’ rate for that period.                    other distorting items, such as pass-through          agency may not be appropriate. It may not
        8. ‘‘Final rate’’ means an indirect cost rate        funds, major subcontracts, etc.), direct              take into account those different factors
     applicable to a specified past period which             salaries and wages, or another base which             which may substantially affect the indirect
     is based on the actual allowable costs of the           results in an equitable distribution.                 costs applicable to a particular program or
     period. A final audited rate is not subject to             3. Multiple allocation base method.                group of programs. The factors may include
     adjustment.                                                a. Where a grantee agency’s indirect costs         the physical location of the work, the level
        9. ‘‘Base period’’ for the allocation of             benefit its major functions in varying degrees,       of administrative support required, the
     indirect costs is the period in which such              such costs shall be accumulated into separate         nature of the facilities or other resources

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     51926            Federal Register / Vol. 70, No. 168 / Wednesday, August 31, 2005 / Rules and Regulations

     employed, the organizational arrangements               service cost allocation plan for the same             Government will be notified of any
     used, or any combination thereof. When a                period has not been approved by that time,            accounting changes that would affect the
     particular award is carried out in an                   the indirect cost proposal may be prepared            predetermined rate.
     environment which appears to generate a                 including an amount for central services that            I declare that the foregoing is true and
     significantly different level of indirect costs,        is based on the latest federally-approved             correct.
     provisions should be made for a separate                central service cost allocation plan. The             Governmental Unit: lllllllllll
     indirect cost pool applicable to that award.            difference between these central service              Signature: llllllllllllllll
     The separate indirect cost pool should be               amounts and the amounts ultimately
     developed during the course of the regular              approved will be compensated for by an                Name of Official: llllllllllll
     allocation process, and the separate indirect           adjustment in a subsequent period.                    Title: llllllllllllllllll
     cost rate resulting therefrom should be used,              2. Documentation of proposals. The                 Date of Execution: llllllllllll
     provided that: the rate differs significantly           following shall be included with each                    E. Negotiation and Approval of Rates.
     from the rate which would have been                     indirect cost proposal:                                  1. Indirect cost rates will be reviewed,
     developed under subsections 2. and 3. of this              a. The rates proposed, including subsidiary        negotiated, and approved by the cognizant
     appendix, and the award to which the rate               work sheets and other relevant data, cross            Federal agency on a timely basis. Once a rate
     would apply is material in amount.                      referenced and reconciled to the financial            has been agreed upon, it will be accepted and
        b. Although 2 CFR part 225 adopts the                data noted in subsection b of this appendix.          used by all Federal agencies unless
     concept of the full allocation of indirect              Allocated central service costs will be               prohibited or limited by statute. Where a
     costs, there are some Federal statutes which            supported by the summary table included in            Federal funding agency has reason to believe
     restrict the reimbursement of certain indirect          the approved central service cost allocation          that special operating factors affecting its
     costs. Where such restrictions exist, it may be         plan. This summary table is not required to           awards necessitate special indirect cost rates,
     necessary to develop a special rate for the             be submitted with the indirect cost proposal          the funding agency will, prior to the time the
     affected award. Where a ‘‘restricted rate’’ is          if the central service cost allocation plan for       rates are negotiated, notify the cognizant
     required, the procedure for developing a non-           the same fiscal year has been approved by the         Federal agency.
     restricted rate will be used except for the             cognizant agency and is available to the                 2. The use of predetermined rates, if
     additional step of the elimination from the             funding agency.                                       allowed, is encouraged where the cognizant
     indirect cost pool those costs for which the               b. A copy of the financial data (financial         agency has reasonable assurance based on
     law prohibits reimbursement.                            statements, comprehensive annual financial            past experience and reliable projection of the
        D. Submission and Documentation of                   report, executive budgets, accounting reports,        grantee agency’s costs, that the rate is not
     Proposals.                                              etc.) upon which the rate is based.                   likely to exceed a rate based on actual costs.
        1. Submission of indirect cost rate                  Adjustments resulting from the use of                 Long-term agreements utilizing
     proposals.                                              unaudited data will be recognized, where              predetermined rates extending over two or
        a. All departments or agencies of the                appropriate, by the Federal cognizant agency          more years are encouraged, where
     governmental unit desiring to claim indirect            in a subsequent proposal.                             appropriate.
     costs under Federal awards must prepare an                 c. The approximate amount of direct base              3. The results of each negotiation shall be
     indirect cost rate proposal and related                 costs incurred under Federal awards. These            formalized in a written agreement between
     documentation to support those costs. The               costs should be broken out between salaries           the cognizant agency and the governmental
     proposal and related documentation must be              and wages and other direct costs.                     unit. This agreement will be subject to re-
     retained for audit in accordance with the                  d. A chart showing the organizational              opening if the agreement is subsequently
     records retention requirements contained in             structure of the agency during the period for         found to violate a statute, or the information
     the Common Rule.                                        which the proposal applies, along with a              upon which the plan was negotiated is later
        b. A governmental unit for which a                   functional statement(s) noting the duties and/        found to be materially incomplete or
     cognizant agency assignment has been                    or responsibilities of all units that comprise        inaccurate. The agreed upon rates shall be
     specifically designated must submit its                 the agency. (Once this is submitted, only             made available to all Federal agencies for
     indirect cost rate proposal to its cognizant            revisions need be submitted with subsequent           their use.
     agency. The Office of Management and                    proposals.)                                              4. Refunds shall be made if proposals are
     Budget (OMB) will periodically publish lists               3. Required certification. Each indirect cost      later found to have included costs that are
     of governmental units identifying the                   rate proposal shall be accompanied by a               unallowable as specified by law or
     appropriate Federal cognizant agencies. The             certification in the following form:                  regulation, as identified in Appendix B to
     cognizant agency for all governmental units                                                                   this part, or by the terms and conditions of
     or agencies not identified by OMB will be               Certificate of Indirect Costs                         Federal awards, or are unallowable because
     determined based on the Federal agency                     This is to certify that I have reviewed the        they are clearly not allocable to Federal
     providing the largest amount of Federal                 indirect cost rate proposal submitted                 awards. These adjustments or refunds will be
     funds. In these cases, a governmental unit              herewith and to the best of my knowledge              made regardless of the type of rate negotiated
     must develop an indirect cost proposal in               and belief:                                           (predetermined, final, fixed, or provisional).
     accordance with the requirements of 2 CFR                  (1) All costs included in this proposal               F. Other Policies.
     225 and maintain the proposal and related               [identify date] to establish billing or final            1. Fringe benefit rates. If overall fringe
     supporting documentation for audit. These               indirect costs rates for [identify period             benefit rates are not approved for the
     governmental units are not required to                  covered by rate] are allowable in accordance          governmental unit as part of the central
     submit their proposals unless they are                  with the requirements of the Federal award(s)         service cost allocation plan, these rates will
     specifically requested to do so by the                  to which they apply and 2 CFR part 225, Cost          be reviewed, negotiated and approved for
     cognizant agency. Where a local government              Principles for State, Local, and Indian Tribal        individual grantee agencies during the
     only receives funds as a sub-recipient, the             Governments (OMB Circular A–87).                      indirect cost negotiation process. In these
     primary recipient will be responsible for               Unallowable costs have been adjusted for in           cases, a proposed fringe benefit rate
     negotiating and/or monitoring the sub-                  allocating costs as indicated in the cost             computation should accompany the indirect
     recipient’s plan.                                       allocation plan.                                      cost proposal. If fringe benefit rates are not
        c. Each Indian tribal government desiring               (2) All costs included in this proposal are        used at the grantee agency level (i.e., the
     reimbursement of indirect costs must submit             properly allocable to Federal awards on the           agency specifically identifies fringe benefit
     its indirect cost proposal to the Department            basis of a beneficial or causal relationship          costs to individual employees), the
     of the Interior (its cognizant Federal agency).         between the expenses incurred and the                 governmental unit should so advise the
        d. Indirect cost proposals must be                   agreements to which they are allocated in             cognizant agency.
     developed (and, when required, submitted)               accordance with applicable requirements.                 2. Billed services provided by the grantee
     within six months after the close of the                Further, the same costs that have been treated        agency. In some cases, governmental units
     governmental unit’s fiscal year, unless an              as indirect costs have not been claimed as            provide and bill for services similar to those
     exception is approved by the cognizant                  direct costs. Similar types of costs have been        covered by central service cost allocation
     Federal agency. If the proposed central                 accounted for consistently and the Federal            plans (e.g., computer centers). Where this

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                      Federal Register / Vol. 70, No. 168 / Wednesday, August 31, 2005 / Rules and Regulations                                        51927

     occurs, the governmental unit should be                 agency efforts to implement the Federal               230.45 Relationship to previous issuance.
     guided by the requirements in Appendix C to             Financial Assistance Management                       230.50 Information Contact.
     this part relating to the development of                Improvement Act of 1999 (Pub. L. 106–                 Appendix A to Part 230—General Principles
     billing rates and documentation                                                                               Appendix B to Part 230—Selected Items of
     requirements, and should advise the                     107).
                                                             DATES: Part 230 is effective August 31,                   Cost
     cognizant agency of any billed services.
     Reviews of these types of services (including           2005. This document republishes the                   Appendix C to Part 230—Non-Profit
     reviews of costing/billing methodology,                 existing OMB Circular A–122, which                        Organizations Not Subject to This Part
     profits or losses, etc.) will be made on a case-        already is in effect.                                   Authority: 31 U.S.C. 503; 31 U.S.C. 1111;
     by-case basis as warranted by the                       FOR FURTHER INFORMATION CONTACT: Gil                  41 U.S.C. 405; Reorganization Plan No. 2 of
     circumstances involved.                                                                                       1970; E.O. 11541, 35 FR 10737, 3 CFR, 1966–
       3. Indirect cost allocations not using rates.         Tran, Office of Federal Financial
                                                             Management, Office of Management and                  1970, p. 939
     In certain situations, a governmental unit,
     because of the nature of its awards, may be             Budget, telephone 202–395–3052
                                                                                                                   § 230.5    Purpose.
     required to develop a cost allocation plan              (direct) or 202–395–3993 (main office)
     that distributes indirect (and, in some cases,          and e-mail:                    This part establishes principles for
     direct) costs to the specific funding sources.          SUPPLEMENTARY INFORMATION: On May                     determining costs of grants, contracts
     In these cases, a narrative cost allocation             10, 2004 [69 FR 25970], we revised the                and other agreements with non-profit
     methodology should be developed,
     documented, maintained for audit, or                    three OMB circulars containing Federal                organizations.
     submitted, as appropriate, to the cognizant             cost principles. The purpose of those
                                                             revisions was to simplify the cost                    § 230.10    Scope.
     agency for review, negotiation, and approval.
       4. Appeals. If a dispute arises in a                  principles by making the descriptions of                 (a) This part does not apply to
     negotiation of an indirect cost rate (or other          similar cost items consistent across the              colleges and universities which are
     rate) between the cognizant agency and the              circulars where possible, thereby                     covered by 2 CFR part 220 Cost
     governmental unit, the dispute shall be                 reducing the possibility of
     resolved in accordance with the appeals                                                                       Principles for Educational Institutions
     procedures of the cognizant agency.                     misinterpretation. Those revisions, a                 (OMB Circular A–21); State, local, and
       5. Collection of unallowable costs and                result of OMB and Federal agency                      federally-recognized Indian tribal
     erroneous payments. Costs specifically                  efforts to implement Public Law 106–                  governments which are covered by 2
     identified as unallowable and charged to                107, were effective on June 9, 2004.                  CFR part 225 Cost Principles for State,
     Federal awards either directly or indirectly               In this document, we relocate OMB                  Local, and Indian Tribal Governments
     will be refunded (including interest                    Circular A–122 to the CFR, in Title 2                 (OMB Circular A–87); or hospitals.
     chargeable in accordance with applicable
                                                             which was established on May 11, 2004                    (b) The principles deal with the
     Federal agency regulations).
       6. OMB assistance. To the extent that                 [69 FR 26276] as a central location for               subject of cost determination, and make
     problems are encountered among the Federal              OMB and Federal agency policies on                    no attempt to identify the circumstances
     agencies and/or governmental units in                   grants and agreements.                                or dictate the extent of agency and non-
     connection with the negotiation and approval               Our relocation of OMB Circular A–
                                                                                                                   profit organization participation in the
     process, OMB will lend assistance, as                   122 does not change the substance of
     required, to resolve such problems in a
                                                                                                                   financing of a particular project.
                                                             the circular. Other than adjustments
     timely manner.                                                                                                Provision for profit or other increment
                                                             needed to conform to the formatting
                                                                                                                   above cost is outside the scope of this
     [FR Doc. 05–16649 Filed 8–30–05; 8:45 am]               requirements of the CFR, this document
     BILLING CODE 3110–01–P                                  relocates in 2 CFR the version of OMB
                                                             Circular A–122 as revised by the May                  § 230.15    Policy.
                                                             10, 2004 notice.
                                                                                                                     The principles are designed to
     OFFICE OF MANAGEMENT AND                                List of Subjects in 2 CFR Part 230                    provide that the Federal Government
                                                               Accounting, Grant programs, Grants                  bear its fair share of costs except where
     2 CFR Part 230                                          administration, Non-profit                            restricted or prohibited by law. The
                                                             organizations, Reporting and                          principles do not attempt to prescribe
     Cost Principles for Non-Profit                          recordkeeping requirements.                           the extent of cost sharing or matching
     Organizations (OMB Circular A–122)                                                                            on grants, contracts, or other
                                                               Dated: August 8, 2005.
                                                                                                                   agreements. However, such cost sharing
     AGENCY:  Office of Management and 
        Joshua B. Bolten,
                                                                                                                   or matching shall not be accomplished
                                  Director.                                                          through arbitrary limitations on
     ACTION: Relocation of policy guidance to 

                                                Authority and Issuance                                             individual cost elements by Federal
     2 CFR chapter II. 
                                                ■ For the reasons set forth above, the
     SUMMARY: The Office of Management
                                                Office of Management and Budget                                    § 230.20    Applicability.
     and Budget (OMB) is relocating Circular
                                                amends 2 CFR Subtitle A, chapter II, by
     A–122, ‘‘Cost Principles for Non-Profit                                                                          (a) These principles shall be used by
                                                adding a part 230 as set forth below.
     Organizations,’’ to Title 2 in the Code of                                                                    all Federal agencies in determining the
     Federal Regulations (CFR), subtitle A,     PART 230—COST PRINCIPLES FOR                                       costs of work performed by non-profit
     chapter II, part 230. This relocation is   NON-PROFIT ORGANIZATIONS (OMB                                      organizations under grants, cooperative
     part of our broader initiative to create 2 CIRCULAR A–122)                                                    agreements, cost reimbursement
     CFR as a single location where the                                                                            contracts, and other contracts in which
     public can find both OMB guidance for      Sec.                                                               costs are used in pricing,
     grants and agreements and the              230.5 Purpose.                                                     administration, or settlement. All of
     associated Federal agency implementing 230.10 Scope.                                                          these instruments are hereafter referred
                                                230.15 Policy.
     regulations. The broader initiative        230.20 Applicability.
                                                                                                                   to as awards. The principles do not
     provides a good foundation for             230.25 Definitions                                                 apply to awards under which an
     streamlining and simplifying the policy 230.30 OMB responsibilities.                                          organization is not required to account
     framework for grants and agreements,       230.35 Federal agency responsibilities.                            to the Federal Government for actual
     one objective of OMB and Federal           230.40 Effective date of changes.                                  costs incurred.

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