OMB CIRCULAR A-21 Principles for Determining Costs Applicable to Grants, Contracts, and Other Agreements with Educational Institutions A. PURPOSE AND SCOPE * A 1. Objectives. * A 2. Policy guides. * A 3. Application. B. DEFINITION OF TERMS * B 1. Major functions of an institution * B 2. Sponsored agreement * B 3. Allocation C. BASIC CONSIDERATIONS * C 1. Composition of total costs. * C 2. Factors affecting allowability of costs. * C 3. Reasonable costs. * C 4. Allocable costs. * C 5. Applicable credits. * C 6. Costs incurred by State and local governments. * C 7. Limitations on allowance of costs. * C 8. Collection of unallowable costs. * C 9. Adjustment of previously negotiated indirect cost rates containing unallowable costs. D. DIRECT COSTS * D 1. General. * D 2. Application to sponsored agreements. E. INDIRECT COSTS * E 1. General. * E 2. Criteria for distribution. + E 2a. Base period. + E 2b. Need for cost groupings. + E 2c. General considerations on cost groupings. + E 2d. Selection of distribution method. + E 2e. Order of Distribution. F. IDENTIFICATION AND ASSIGNMENT OF INDIRECT COSTS * F 1. Definition of Facilities and Administration. * F 2. Depreciation and use allowances. * F 3. Interest * F 4. Operation and maintenance expenses. * F 5. General administration and general expenses. * F 6. Departmental administration expenses. * F 7. Sponsored projects administration. * F 8. Library expenses. * F 9. Student administration and services. * F 10. Offset for indirect expenses otherwise provided for by the Government. G. DETERMINATION AND APPLICATION OF INDIRECT COST RATE OR RATES * G 1. Indirect cost pools. * G 2. The distribution basis. * G 3. Negotiated lump sum for indirect costs. * G 4. Predetermined fixed rates for indirect costs. * G 5. Negotiated fixed rates and carry-forward provisions. * G 6. Provisional and final rates for indirect costs. * G 7. Limitation on reimbursement of administrative costs. * G 8. Alternative method for administrative costs. * G 9. Individual rate components. H. SIMPLIFIED METHOD FOR SMALL INSTITUTIONS * H 1. General. * H 2. Simplified procedure. J. GENERAL PROVISIONS FOR SELECTED ITEMS OF COST * J 1. Advertising and public relations costs. * J 2. Alcoholic beverages. * J 3. Alumni activities. * J 4. Bad debts. * J 5. Civil defense costs. * J 6. Commencement and convocation costs. * J 7. Communication costs. * J 8. Compensation for personal services. + J 8a. General. + J 8b. Payroll distribution. o J 8b(1) General principles. o J 8b(2) Criteria for acceptable methods. + J 8c. Examples of acceptable methods for payroll distribution: o J 8c(1) Plan--Confirmation: o J 8c(2) After-the-fact Activity Records: o J 8c(3) Multiple Confirmation Records: + J 8d. Salary rates for faculty members. + J 8e. Non-institutional professional activities. + J 8f. Fringe benefits. + J 8g. Institution-furnished automobiles. * J 9. Contingency provisions. * J 10. Deans of faculty and graduate schools. * J 11. Defense and prosecution of criminal and civil proceedings, claims, appeals and patent infringement. + J 11a. Definitions. * J 12. Depreciation and use allowances. * J 13. Donation and contributions. * J 14. Employee morale, health, and welfare costs and credits. * J 15. Entertainment costs. * J 16. Equipment and other capital expenditures. * J 17. Executive lobbying costs. * J 18. Fines and penalties. * J 19. Goods or services for personal use. * J 20. Housing and personal living expenses. * J 21. Insurance and indemnification. * J 22. Interest, fund raising, and investment management costs. * J 23. Labor relations costs. * J 24. Lobbying: * J 25. Losses on other sponsored agreements or contracts. * J 26. Maintenance and repair costs. * J 27. Material costs. * J 28. Memberships, subscriptions and professional activity costs. * J 29. Patent costs. * J 30. Plant security costs. * J 31. Preagreement costs. * J 32. Professional services costs. * J 33. Profits and losses on disposition of plant equipment or other capital assets. * J 34. Proposal costs. * J 35. Rearrangement and alteration costs. * J 36. Reconversion costs. * J 37. Recruiting costs. * J 38. Rental cost of buildings and equipment. * J 39. Royalties and other costs for use of patents. * J 40. Sabbatical leave costs. * J 41. Scholarships and student aid costs. * J 42. Selling and marketing. * J 43. Severance pay. * J 44. Specialized service facilitie * J 45. Student activity costs. * J 46. Taxes. * J 47. Transportation costs. * J 48. Travel costs. + J 48a. General. + J 48b. Lodging and subsistence. + J 48c. Commercial Air Travel. + J 48d. Air travel by other than commercial carrier. * J 49. Termination costs applicable to sponsored agreements. * J 50. Trustees. K. CERTIFICATION OF CHARGES * K 1. Payment. * K 2. Certification of Indirect costs. + K 2a. Policy. + K 2b. Certificate. List of Colleges and Universities Subject to Section J12f of Circular A-21 OMB CIRCULAR A-21 Principles for Determining Costs Applicable to Grants, Contracts, and Other Agreements with Educational Institutions A. PURPOSE AND SCOPE A 1. OBJECTIVES. This Circular provides principles for determining the costs applicable to research and development, training, and other sponsored work performed by colleges and universities under grants, contracts, and other agreements with the Federal Government. These agreements are referred to as sponsored agreements. A 2. POLICY GUIDES . The successful application of these cost accounting principles requires development of mutual understanding between representatives of universities and of the Federal Government as to their scope, implementation, and interpretation. It is recognized that-- + A 2a. The arrangements for Federal agency and institutional participation in the financing of a research, training, or other project are properly subject to negotiation between the agency and the institution concerned, in accordance with such Government-wide criteria or legal requirements as may be applicable. + A 2b. Each institution, possessing its own unique combination of staff, facilities, and experience, should be encouraged to conduct research and educational activities in a manner consonant with its own academic philosophies and institutional objectives. + A 2c. The dual role of students engaged in research and the resulting benefits to sponsored agreements are fundamental to the research effort and shall be recognized in the application of these principles. + A 2d. Each institution, in the fulfillment of its obligations, should employ sound management practices. + A 2e. The application of these cost accounting principles should require no significant changes in the generally accepted accounting practices of colleges and universities. However, the accounting practices of individual colleges and universities must support the accumulation of costs as required by the principles, and must provide for adequate documentation to support costs charged to sponsored agreements. + A 2f. Cognizant Federal agencies involved in negotiating indirect cost rates and auditing should assure that institutions are generally applying these cost accounting principles on a consistent basis. Where wide variations exist in the treatment of a given cost item among institutions, the reasonableness and equitableness of such treatments should be fully considered during the rate negotiations and audit. A 3. APPLICATION. These principles shall be used in determining the allowable costs of work performed by colleges and universities under sponsored agreements. The principles shall also be used in determining the costs of work performed by such institutions under subgrants, cost-reimbursement subcontracts, and other awards made to them under sponsored agreements. They also shall be used as a guide in the pricing of fixed-price contracts and subcontracts where costs are used in determining the appropriate price. The principles do not apply to: + A 3a. Arrangements under which Federal financing is in the form of loans, scholarships, fellowships, traineeships, or other fixed amounts based on such items as education allowance or published tuition rates and fees of an institution. + A 3b. Capitation awards. + A 3c. Other awards under which the institution is not required to account to the Government for actual costs incurred. B. DEFINITION OF TERMS + B 1. Major functions of an institution refers to instruction, organized research, other sponsored activities, and other institutional activities as defined below: o B 1a. Instruction means the teaching and training activities of an institution. Except for research training as provided in B1b(1) below, this term includes all teaching and training activities, whether they are offered for credits toward a degree or certificate or on a non-credit basis, and whether they are offered through regular academic departments or separate divisions, such as a summer school division or an extension division. Also considered part of this major function are departmental research, and, where agreed to, university research. # B 1a(1) Sponsored instruction and training means specific instructional or training activity established by grant, contract, or cooperative agreement. For purposes of the cost principles, this activity may be considered a major function even though an institution's accounting treatment may include it in the instruction function. # B 1a(2) Departmental research means research development and scholarly activities that are not organized research and, consequently, are not separately budgeted and accounted for. Departmental research, for purposes of this document, is not considered as a major function, but as a part of the instruction function of the institution. o B 1b. Organized research means all research and development activities of an institution that are separately budgeted and accounted for. It includes: # B 1b(1) Sponsored research means all research and development activities that are sponsored by Federal and non-Federal agencies and organizations. This term includes activities involving the training of individuals in research techniques (commonly called research training) where such activities utilize the same facilities as other research and development activities and where such activities are not included in the instruction function. # B 1b(2) University research means all research and development activities that are separately budgeted by the institution under an internal application of institutional funds. University research, for purposes of this document, shall be combined with sponsored research under the function of organized research. o B 1c. Other sponsored activities means programs and projects sponsored by Federal and non-Federal agencies and organizations which involve the performance of work other than instruction and organized research. Examples of such programs and projects are health service projects, and community service programs. However, when any of these activities are undertaken by the institution without outside support, they may be classified as other institutional activities. o B 1d. Other institutional activities means all activities of an institution except: # (1) instruction, departmental research, organized research, and other sponsored activities, as defined above; # (2) indirect cost activities identified in Section F; and # (3) specialized service facilities described in Section J44. Other institutional activities include operation of residence halls, dining halls, hospitals and clinics, student unions, intercollegiate athletics, bookstores, faculty housing, student apartments, guest houses, chapels, theaters, public museums, and other similar auxiliary enterprises. This definition also includes any other categories of activities, costs of which are "unallowable" to sponsored agreements, unless otherwise indicated in the agreements. + B 2. Sponsored agreement, for purposes of this Circular, means any grant, contract, or other agreement between the institution and the Federal Government. + B 3. Allocation means the process of assigning a cost, or a group of costs, to one or more cost objectives, in reasonable and realistic proportion to the benefit provided or other equitable relationship. A cost objective may be a major function of the institution, a particular service or project, a sponsored agreement, or an indirect cost activity, as described in Section F. The process may entail assigning a cost(s) directly to a final cost objective or through one or more intermediate cost objectives. C. BASIC CONSIDERATIONS C 1. COMPOSITION OF TOTAL COSTS. The cost of a sponsored agreement is comprised of the allowable direct costs incident to its performance, plus the allocable portion of the allowable indirect costs of the institution, less applicable credits as described in C5 below. C 2. FACTORS AFFECTING ALLOWABILITY OF COSTS. The tests of allowability of costs under these principles are: (a) they must be reasonable; (b) they must be allocable to sponsored agreements under the principles and methods provided herein; (c) they must be given consistent treatment through application of those generally accepted accounting principles appropriate to the circumstances; and (d) they must conform to any limitations or exclusions set forth in these principles or in the sponsored agreement as to types or amounts of cost items. C 3. REASONABLE COSTS. A cost may be considered reasonable if the nature of the goods or services acquired or applied, and the amount involved therefore, reflect the action that a prudent person would have taken under the circumstances prevailing at the time the decision to incur the cost was made. Major considerations involved in the determination of the reasonableness of a cost are: + (a) whether or not the cost is of a type generally recognized as necessary for the operation of the institution or the performance of the sponsored agreement; + (b) the restraints or requirements imposed by such factors as arm's-length bargaining, Federal and State laws and regulations, and sponsored agreement terms and conditions; + (c) whether or not the individuals concerned acted with due prudence in the circumstances, considering their responsibilities to the institution, its employees, its students, the Government, and the public at large; + (d) the extent to which the actions taken with respect to the incurrence of the cost are consistent with established institutional policies and practices applicable to the work of the institution generally, including sponsored agreements. C 4. ALLOCABLE COSTS. + C 4a. A cost is allocable to a particular cost objective (i.e., a specific function, project, sponsored agreement, department, or the like) if the goods or services involved are chargeable or assignable to such cost objective in accordance with relative benefits received or other equitable relationship. Subject to the foregoing, a cost is allocable to a sponsored agreement if o (1) it is incurred solely to advance the work under the sponsored agreement; o (2) it benefits both the sponsored agreement and other work of the institution, in proportions that can be approximated through use of reasonable methods; or o (3) it is necessary to the overall operation of the institution and, in light of the principles provided in this Circular, is deemed to be assignable in part to sponsored projects. + Where the purchase of equipment or other capital items is specifically authorized under a sponsored agreement, the amounts thus authorized for such purchases are assignable to the sponsored agreement regardless of the use that may subsequently be made of the equipment or other capital items involved. + C 4b. Any costs allocable to a particular sponsored agreement under the standards provided in this Circular may not be shifted to other sponsored agreements in order to meet deficiencies caused by overruns or other fund considerations, to avoid restrictions imposed by law or by terms of the sponsored agreement, or for other reasons of convenience. + C 4c. Any costs allocable to activities sponsored by industry, foreign governments or other sponsors may not be shifted to federally-sponsored agreements. + C 4d. Allocation and documentation standard. o C 4d(1) Cost principles. The recipient institution is responsible for ensuring that costs charged to a sponsored agreement are allowable, allocable, and reasonable under these cost principles. o C 4d(2) Internal controls. The institution's financial management system shall ensure that no one person has complete control over all aspects of a financial transaction. o C 4d(3) Direct cost allocation principles. If a cost benefits two or more projects or activities in proportions that can be determined without undue effort or cost, the cost should be allocated to the projects based on the proportional benefit. If a cost benefits two or more projects or activities in proportions that cannot be determined because of the interrelationship of the work involved, then, notwithstanding subsection C.4.b., the costs may be allocated or transferred to benefited projects on any reasonable basis, consistent with d.(1) and (2). C 5. APPLICABLE CREDITS. + C 5a. The term applicable credits refers to those receipts or negative expenditures that operate to offset or reduce direct or indirect cost items. Typical examples of such transactions are: purchase discounts, rebates, or allowances; recoveries or indemnities on losses; and adjustments of overpayments or erroneous charges. This term also includes "educational discounts" on products or services provided specifically to educational institutions, such as discounts on computer equipment, except where the arrangement is clearly and explicitly identified as a gift by the vendor. + C 5b. In some instances, the amounts received from the Federal Government to finance institutional activities or service operations should be treated as applicable credits. Specifically, the concept of netting such credit items against related expenditures should be applied by the institution in determining the rates or amounts to be charged to sponsored agreements for services rendered whenever the facilities or other resources used in providing such services have been financed directly, in whole or in part, by Federal funds. (See Sections F10 and F44 for areas of potential application in the matter of direct Federal financing.) C 6. COSTS INCURRED BY STATE AND LOCAL GOVERNMENTS. Costs incurred or paid by State or local governments on behalf of their colleges and universities for fringe benefit programs such as pension costs and FICA and any other costs specifically incurred on behalf of, and in direct benefit to, the institutions are allowable costs of such institutions whether or not these costs are recorded in the accounting records of the institutions, subject to the following: + C 6a. The costs meet the requirements of C1 through 5 above. + C 6b. The costs are properly supported by cost allocation plans in accordance with applicable Federal cost accounting principles. + C 6c. The costs are not otherwise borne directly or indirectly by the Federal Government. C 7. LIMITATIONS ON ALLOWANCE OF COSTS. Sponsored agreements may be subject to statutory requirements that limit the allowance of costs. When the maximum amount allowable under a limitation is less than the total amount determined in accordance with the principles in this Circular, the amount not recoverable under a sponsored agreement may not be charged to other sponsored agreements. C 8. COLLECTION OF UNALLOWABLE COSTS. Costs specifically identified as unallowable in Section J and charged to the government, either directly or indirectly, will be refunded (including interest chargeable in accordance with applicable Federal agency regulations). C 9. ADJUSTMENT OF PREVIOUSLY NEGOTIATED INDIRECT COST RATES CONTAINING UNALLOWABLE COSTS. Negotiated indirect cost rates based on a proposal later found to have included costs that (a) are unallowable as specified by (i) law or regulation, (ii) section J of this Circular, (iii) terms and conditions of sponsored agreements or (b) are unallowable because they are clearly not allocable to sponsored agreements, shall be adjusted, or a refund shall be made, in accordance with the requirements of this section. These adjustments or refunds are designed to correct the proposals used to establish the rates and do not constitute a reopening of the rate negotiation. The adjustments or refunds will be made regardless of the type of rate negotiated (predetermined, final, fixed, or provisional). + C 9a. For rates covering a future fiscal year of the institution, the unallowable costs will be removed from the indirect cost pools and the rates appropriately adjusted. + C 9b. For rates covering a past period, the Federal share of the unallowable costs will be computed for each year involved and a cash refund (including interest chargeable in accordance with applicable regulations) will be made to the Federal Government. If cash refunds are made for past periods covered by provisional or fixed rates, appropriate adjustments will be made when the rates are finalized to avoid duplicate recovery of the unallowable costs by the Federal Government. + C 9c. For rates covering the current period, either a rate adjustment or a refund, as described in subsections a and b, shall be required by the cognizant agency. The choice of method shall be at the discretion of the cognizant agency, based on its judgement as to which method would be not practical. + C 9d. The amount or proportion of unallowable costs included in each year's rate will be assumed to be the same as the amount or proportion of unallowable costs included in the base year proposal used to establish the rate. D. DIRECT COSTS D 1. GENERAL. Direct costs are those costs that can be identified specifically with a particular sponsored project, an instructional activity, or any other institutional activity; or that can be directly assigned to such activities relatively easily with a high degree of accuracy. Costs incurred for the same purpose in like circumstances must be treated consistently as either direct or indirect costs. Where an institution treats a particular type of cost as a direct cost of sponsored agreements, all costs incurred for the same purpose in like circumstances shall be treated as direct costs of all activities of the institution. D 2. APPLICATION TO SPONSORED AGREEMENTS. Identification with the sponsored work rather than the nature of the goods and services involved is the determining factor in distinguishing direct from indirect costs of sponsored agreements. Typical costs charged directly to a sponsored agreement are the compensation of employees for performance of work under the sponsored agreement, including related fringe benefit costs to the extent they are consistently treated, in like circumstances, by the institution as direct rather than indirect costs; the costs of materials consumed or expended in the performance the work; and other items of expense incurred for the sponsored agreement, including extraordinary utility consumption. The cost of materials supplied from stock or services rendered by specialized facilities or other institutional service operations may be included as direct costs of sponsored agreements, provided such items are consistently treated, in like circumstances, by the institution as direct rather than indirect costs, and are charged under recognized method of computing actual costs, and conform to generally accepted cost accounting practices consistently followed by the institution. E. INDIRECT COSTS E 1. GENERAL. Indirect costs are those that are incurred for common or joint objectives and therefore cannot be identified readily and specifically with a particular sponsored project, an instructional activity, or any other institutional activity. At educational institutions such costs normally are classified under the following indirect cost categories: depreciation and use allowances, general administration and general expenses, sponsored projects administration expenses, operation and maintenance expenses, library expenses, departmental administration expenses, and student administration and services. E 2. CRITERIA FOR DISTRIBUTION. + E 2a. Base period. A base period for distribution of indirect costs is the period during which the costs are incurred. The base period normally should coincide with the fiscal year established by the institution, but in any event the base period should be so selected as to avoid inequities in the distribution of costs. + E 2b. Need for cost groupings. The overall objective of the indirect cost allocation process is to distribute the indirect costs described in Section F to the major functions of the institution in proportions reasonably consistent with the nature and extent of their use of the institution's resources. In order to achieve this objective, it may be necessary to provide for selective distribution by establishing separate groupings of cost within one or more of the indirect cost categories referred to in E1 above. In general, the cost groupings established within a category should constitute, in each case, a pool of those items of expense that are considered to be of like nature in terms of their relative contribution to (or degree of remoteness from) the particular cost objectives to which distribution is appropriate. Cost groupings should be established considering the general guides provided in c below. Each such pool or cost grouping should then be distributed individually to the related cost objectives, using the distribution base or method most appropriate in the light of the guides set forth in d below. + E 2c. General considerations on cost groupings. The extent to which separate cost groupings and selective distribution would be appropriate at an institution is a matter of judgement to be determined on a case-by-case basis. Typical situations which may warrant the establishment of two or more separate cost groupings (based on account classification or analysis) within an indirect cost category include but are not limited to the following: o E 2c(1) Where certain items or categories of expense relate solely to one of the major functions of the institution or to less than all functions, such expenses should be set aside as a separate cost grouping for direct assignment or selective allocation in accordance with the guides provided in E2b and d. o E 2c(2) Where any types of expense ordinarily treated as general administration or departmental administration are charged to sponsored agreements as direct costs, expenses applicable to other activities of the institution when incurred for the same purposes in like circumstances must, through separate cost groupings, be excluded from the indirect costs allocable to those sponsored agreements and included in the direct cost of other activities for cost allocation purposes. o E 2c(3) Where it is determined that certain expenses are for the support of a service unit or facility whose output is susceptible of measurement on a workload or other quantitative basis, such expenses should be set aside as a separate cost grouping for distribution on such basis to organized research, instructional, and other activities at the institution or within the department. o E 2c(4) Where activities provide their own purchasing, personnel administration, building maintenance or similar service, the distribution of general administration and general expenses, or operation and maintenance expenses to such activities should be accomplished through cost groupings which include only that portion of central indirect costs (such as for overall management) which are properly allocable to such activities. o E 2c(5) Where the institution elects to treat fringe benefits as indirect charges, such costs should be set aside as a separate cost grouping for selective distribution to related cost objectives. o E 2c(6) The number of separate cost groupings within a category should be held within practical limits, after taking into consideration the materiality of the amounts involved and the degree of precision attainable through less selective methods of distribution. E 2d. Selection of distribution method. o E 2d(1) Actual conditions must be taken into account in selecting the method or base to be used in distributing individual cost groupings. The essential consideration in selecting a base is that it be the one best suited for assigning the pool of costs to cost objectives in accordance with benefits derived; a traceable cause and effect relationship; or logic and reason, where neither benefit nor cause and effect relationship is determinable. o E 2d(2) Where a cost grouping can be identified directly with the cost objective benefited, it should be assigned to that cost objective. o E 2d(3) Where the expenses in a cost grouping are more general in nature, the distribution may be based on a cost analysis study which results in an equitable distribution of the costs. Such cost analysis studies may take into consideration weighting factors, population, or space occupied if appropriate. Cost analysis studies, however, must(a) be appropriately documented in sufficient detail for subsequent review by the cognizant Federal agency, (b) distribute the costs to the related cost objectives in accordance with the relative benefits derived, (c) be statistically sound, (d) be performed specifically at the institution at which the results are to be used and (e) be reviewed periodically, but not less frequently than every two years, updated if necessary, and used consistently. Any assumptions made in the study must be stated and explained. The use of cost analysis studies and periodic changes in the method of cost distribution must be fully justified. o E 2d(4) If a cost analysis study is not performed, or if the study does not result in an equitable distribution of the costs, the distribution shall be made in accordance with the appropriate base cited in Section F, unless one of the following conditions is met: (a) it can be demonstrated that the use of a different base would result in a more equitable allocation of the costs, or that a more readily available base would not increase the costs charged to sponsored agreements, or(b) the institution qualifies for, and elects to use, the simplified method for computing indirect cost rates described in Section H. + E 2e. Order of Distribution. o E 2e(1) Indirect cost categories consist of depreciation and use allowance, operation and maintenance, general administration and general expenses, departmental administration, sponsored projects administration, library, and student administration and services, as described in Section F. o E 2e(2) Depreciation and use allowances, operation and maintenance expenses, and general administrative and general expenses should be allocated in that order to the remaining indirect cost categories as well as to the major functions and specialized service facilities of the institution. Other cost categories may be allocated in the order determined to be most appropriate by the institutions. When cross allocation of costs is made as provided in (3) below, this order of allocation does not apply. o E 2e(3) Normally an indirect cost category will be considered closed once) it has been allocated to other cost objectives, and costs may not be subsequently allocated to it. However, a cross allocation of costs between two or more indirect cost categories may be used if such allocation will result in a more equitable allocation of costs. If a cross allocation is used, an appropriate modification to the composition of the indirect cost categories described in Section F is required. F. IDENTIFICATION AND ASSIGNMENT OF INDIRECT COSTS F 1. DEFINITION OF FACILITIES AND ADMINISTRATION. Indirect costs are classified within two broad categories: "Facilities" and "Administration." "Facilities" is defined as depreciation and use allowances, interest on debt associated with certain buildings, equipment and capital improvements, operations and maintenance expenses, and library expenses. "Administration: is defined as general administration and general expenses; departmental administration; sponsored projects administration; student administration and services, and all other types of expenditures not listed specifically under one of the subcategories of Facilities (including cross allocations from other pools). F 2. DEPRECIATION AND USE ALLOWANCES. + F 2a. The expenses under this heading are the portion of the costs of the institution's buildings, capital improvements to land and buildings, and equipment which are computed in accordance with Section J12. + F 2b. In the absence of the alternatives provided for in Section E2d , the expenses included in this category shall be allocated in the following manner: o F 2b(1) Depreciation or use allowances on buildings used exclusively in the conduct of a single function, and on capital improvements and equipment used in such buildings, shall be assigned to that function. o F 2b(2) Depreciation or use allowances on buildings used for more than one function, and on capital improvements and equipment used in such buildings, shall be allocated to the individual functions performed in each building on the basis of usable square feet of space, excluding common areas such as hallways, stairwells, and restrooms. o F 2b(3) Depreciation or use allowances on buildings, capital improvements and equipment related to space (e.g., individual rooms, laboratories) used jointly by more than one function (as determined by the users of the space) shall be treated as follows. The cost of each jointly used unit of space shall be allocated to the benefiting functions on the basis of: # F 2b(3)(a) The employee FTEs or salaries and wages of those individual functions benefiting from the use of that space; or # F 2b(3)(b) Institution-wide employee FTEs or salaries and wages applicable to the benefiting Major Functions (see B1) of the institution. o F 2b(4) Depreciation or use allowances on certain capital improvements to land, such as paved parking areas, fences, sidewalks, and the like, not included in the cost of buildings, shall be allocated to user categories of students and employees on a full-time equivalent basis. The amount allocated to the student category shall be assigned to the instruction function of the institution. The amount allocated to the employee category shall be further allocated to the major functions of the institution in proportion to the salaries and wages of all employees applicable to those functions. F 3. INTEREST Interest on debt associated with certain buildings, equipment and capital improvements, as defined in Section J22e., shall be classified as an expenditure under the category Facilities. These costs shall be allocated in the same manner as the depreciation or use allowances on the buildings, equipment and capital improvements to which the interest relates. F 4. OPERATION AND MAINTENANCE EXPENSES. + F 4a. The expenses under this heading are those that have been incurred for the administration, supervision, operation, maintenance, preservation, and protection of the institution's physical plant. They include expenses normally incurred for such items as janitorial and utility services; repairs and ordinary or normal alterations of buildings, furniture and equipment; care of grounds; maintenance and operation of buildings and other plant facilities; security; earthquake and disaster preparedness; environmental safety; hazardous waste disposal; property, liability and all other insurance relating to property; space and capital leasing; facility planning and management; and central receiving. The operation and maintenance expense category should also include its allocable share of fringe benefit costs, depreciation and use allowances, and interest costs. + F 4b. In the absence of the alternatives provided for in Section E2d, the expenses included in this category shall be allocated in the same manner as described in Section F2b for depreciation and use allowances. F 5. GENERAL ADMINISTRATION AND GENERAL EXPENSES. + F 5a. The expenses under this heading are those that have been incurred for the general executive and administrative offices of educational institutions and other expenses of a general character which do not relate solely to (1) instruction, (2) organized research, (3) other sponsored activities, or (4) other institutional activities. The general administration and general expense category should also include its allocable share of fringe benefit costs, operation and maintenance expense, depreciation and use allowances, and interest costs. Examples of general administration and general expenses include: those expenses incurred by administrative offices that serve the entire university system of which the institution is a part; central offices of the institution such as the President's or Chancellor's office, the offices for institution-wide financial management, business services, budget and planning, personnel management, and safety and risk management; the office of the General Counsel; and, the operations of the central administrative management information systems. General administration and general expenses shall not include expenses incurred within non-university-wide deans' offices, academic departments, organized research units, or similar organizational units (See Section F6, Departmental administration expenses). + F 5b. In the absence of the alternatives provided for in Section E2d., the expenses included in this category shall be grouped first according to common major functions of the institution to which they render services or provide benefits. The aggregate expenses of each group shall then be allocated to serviced or benefited functions on the modified total cost basis. Modified total costs consist of the same cost elements as those in Section G2. When an activity included in this indirect cost category provides a service or product to another institution or organization, an appropriate adjustment must be made to either the expenses or the basis of allocation or both, to assure a proper allocation of costs. F 6. DEPARTMENTAL ADMINISTRATION EXPENSES. + F 6a. The expenses under this heading are those that have been incurred for administrative and supporting services that benefit common or joint departmental activities or objectives in academic deans' offices, academic departments and divisions, and organized research institutes, study centers and research centers. Departmental administration expenses are subject to the following limitations. o F 6a(1) Academic deans' offices, salaries and operating expenses are limited to those attributable to administrative functions. o F 6a(2) Academic departments: # F 6a(2)(a) Salaries and fringe benefits attributable to the administrative work (including bid and proposal preparation) of faculty (including department heads) and other professional personnel conducting research and/or instruction shall be allowed at a rate of 3.6 percent of modified total direct costs. This category does not include professional business or professional administrative officers. This allowance shall be added to the computation of the indirect cost rate for major functions in section G; the expenses covered by the allowance shall be excluded from the departmental administration cost pool. No documentation is required to support this allowance. # F 6a(2)(b) Other administrative and supporting expenses incurred within academic departments are allowable provided they are treated consistently in like circumstances. This would include expenses such as the salaries of secretarial and clerical staffs, the salaries of administrative officers and assistants, travel, office, supplies, stockrooms, and the like. # F 6a(3) Other fringe benefit costs applicable to the salaries and wages included in F4a(1) and F4a(2) above are allowable, as well as an appropriate share of general administration and general expenses, operation and maintenance expenses, and depreciation and/or use allowances. + F 6b. In developing the departmental administration cost pool, special care should be exercised to ensure that costs incurred for the same purpose in like circumstances are treated consistently as either direct or indirect costs. For example, salaries of technical staff, laboratory supplies (e.g., chemicals), telephone toll charges, animals, animal care costs, computer costs, travel costs, and specialized shop costs shall be treated as direct cost wherever identifiable to a particular cost objective. Direct charging of these costs may be accomplished through specific identification of individual costs to benefiting cost objectives, or through recharge centers or specialized service facilities, as appropriate under the circumstances. The salaries of administrative and clerical staff should normally be treated as indirect costs. Direct charging of these costs may be appropriate where a major project or activity explicitly budgets for administrative or clerical services and individuals involved can be specifically identified with the project or activity. Items such as office supplies, postage, local telephone costs, and memberships shall normally be treated as indirect costs. + F 6c. In the absence of the alternatives provided for in Section E2d, the expenses included in this category shall be allocated as follows: o F 6c(1) The administrative expenses of the dean's office of each college and school shall be allocated to the academic departments within that college or school on the modified total cost basis. o F 6c(2) The administrative expenses of each academic department, and the department's share of the expenses allocated in F4a(1) shall be allocated to the appropriate functions of the departments on the modified total cost basis. F 7. SPONSORED PROJECTS ADMINISTRATION. + F 7a. The expenses under this heading are limited to those incurred by a separate organization(s) established primarily to administer sponsored projects, including such functions as grant and contract administration (Federal and non-Federal), special security, purchasing, personnel administration, and editing and publishing of research and other reports. They include the salaries and expenses of the head of such organization, assistants, and immediate staff, together with the salaries and expenses of personnel engaged in supporting activities maintained by the organization, such as stock rooms, stenographic pools and the like. This category also includes an allocable share of fringe benefit costs, general administration and general expenses, operation and maintenance expenses, and depreciation/use allowances. Appropriate adjustments will be made for services provided to other functions or organizations. + Federal agencies may authorize reimbursement of additional costs for department heads and faculty only in exceptional cases where an institution can demonstrate undue hardship of detriment to project performance. + Federal agencies are authorized to implement these changes earlier if they choose. + F 7b. In the absence of the alternatives provided for in Section E2d, the expenses included in this category shall be allocated to the major functions of the institution under which the sponsored projects are conducted on the basis of the modified total cost of sponsored projects. + F 7c. An appropriate adjustment shall be made to eliminate any duplicate charges to sponsored agreements when this category includes similar or identical activities as those included in the general administration and general expense category or other indirect cost items, such as accounting, procurement, or personnel administration. F 8. LIBRARY EXPENSES. + F 8a. The expenses under this heading are those that have been incurred for the operation of the library, including the cost of books and library materials purchased for the library, less any items of library income that qualify as applicable credits under Section C5. The library expense category should also include the fringe benefits applicable to the salaries and wages included therein, an appropriate share of general administration and general expense, operation and maintenance expense and depreciation and use allowances. Costs incurred in the purchases of rare books (museum-type books) with no value to sponsored agreements should not be allocated to them. + F 8b. In the absence of the alternatives provided for in Section E2d, the expenses included in this category shall be allocated first on the basis of primary categories of users, including students, professional employees, and other users. o F 8b(1) The student category shall consist of full-time equivalent students enrolled at the institution, regardless of whether they earn credits towards a degree or certificate. o F 8b(2) The professional employee category shall consist of all faculty members and other professional employees of the institution, on a full-time equivalent basis. o F 8b(3) The other users category shall consist of all other users of library facilities. + F 8c. Amounts allocated in b above shall be assigned further as follows: o F 8c(1) The amount in the student category shall be assigned to the instruction function of the institution. o F 8c(2) The amount in the professional employee category shall be assigned to the major functions of the institution in proportion to the salaries and wages of all faculty members and other professional employees applicable to those functions. o F 8c(3) The amount in the other users category shall be assigned to the other institutional activities function of the institution. F 9. STUDENT ADMINISTRATION AND SERVICES. + F 9a. The expenses under this heading are those that have been incurred for the administration of student affairs and for services to students, including expenses of such activities as deans of students, admissions, registrar, counseling and placement services, student advisers, student health and infirmary services, catalogs, and commencements and convocations. The salaries of members of the academic staff whose responsibilities to the institution require administrative work that benefits sponsored projects may also be included to the extent that the portion changed to Student Administration is determined in accordance with Section J8. This expense category also includes the fringe benefit costs applicable to the salaries and wages included therein, an appropriate share of general administration and general expenses, operation and maintenance, and use allowances and/or depreciation. + F 9b. In the absence of the alternatives provided for in Section E2d, the expenses in this category shall be allocated to the instruction function and subsequently to sponsored agreements in that function. F 10. OFFSET FOR INDIRECT EXPENSES OTHERWISE PROVIDED FOR BY THE GOVERNMENT. + F 10a. The items to be accumulated under this heading are the reimbursements and other payments from the Federal Government which are made to the institution to support solely, specifically, and directly, in whole or in part, any of the administrative or service activities described in F1 through F7 above. + F 10b. These items in this group shall be treated as credit to the affected individual indirect cost category before that category is allocated to benefiting functions. G. DETERMINATION AND APPLICATION OF INDIRECT COST RATE OR RATES G 1. INDIRECT COST POOLS. o G 1a(1) Subject to subsection b, the separate categories of indirect costs allocated to each major function of the institution as described in Section F shall be aggregated and treated as a common pool for that function. The amount in each pool shall be divided by the distribution base described in G2 to arrive at a single indirect cost rate for each function. o G 1a(2) The rate for each function issued to distribute costs to individual sponsored agreements of that function. Since a common pool is established for each major function of the institution, a separate indirect cost rate would be established for each of the major functions described in Section B1 under which sponsored agreements are carried out. o G 1a(3) Each institution's indirect cost rate process must be appropriately designed to ensure that Federal sponsors do not in anyway subsidize the indirect costs of other sponsors, specifically activities sponsored by industry and foreign governments. Accordingly, each allocation method used to identify and allocate the indirect cost pools, as described in sections E2 and F1 through F9, must contain the full amount of the institution's modified total costs or other appropriate units of measurement used to make the computations. In addition, the final rate distribution base (as defined in section G2) for each major function (organized research, instruction, etc., as described in section B1) shall contain all the programs or activities which utilize the indirect costs allocated to that major function. At the time an indirect cost proposal is submitted to a Federal cognizant agency, each institution must describe the process it uses to ensure that Federal funds are not used to subsidize industry and foreign government funded programs. + G 1b. In some instances a single rate basis for use across the board on all work within a major function at an institution may not be appropriate. A single rate for research, for example, might not take into account those different environmental factors and other conditions which may affect substantially the indirect costs applicable to a particular segment of research at the institution. A particular segment of research may be that performed under a single sponsored agreement or may consist of research under a group of sponsored agreements performed in a common environment. The environmental factors are not limited to the physical location of the work. Other important factors are the level of the administrative support required, the nature of the facilities or other resources employed, the scientific disciplines or technical skills involved, the organizational arrangements used, or any combination thereof. Where a particular segment of a sponsored agreement is performed within an environment which appears to generate a significantly different level of indirect costs, provisions should be made for a separate indirect cost pool applicable to such work. The separate indirect cost pool should be developed during the regular course of the rate determination process and the separate indirect cost rate resulting therefrom should be utilized, provided it is determined that (1) such indirect cost rate differs significantly from that which would have been obtained under a above, and (2) the volume of work to which such rate would apply is material in relation to other sponsored agreements at the institution. G 2. THE DISTRIBUTION BASIS. Indirect costs shall be distributed to applicable sponsored agreements and other benefiting activities within each Major Function (see B1) on the basis of modified total direct costs, consisting of all salaries and wages, fringe benefits, materials and supplies, services, travel, and subgrants and subcontracts up to the first $25,000 of each subgrant or subcontract (regardless of the period covered by the subgrant or subcontract). Equipment, capital expenditures, charges for patient care and tuition remission, rental costs, scholarships, and fellowships as well as the portion of each subgrant and subcontract in excess of $25,000 shall be excluded from modified total direct costs. Other items may only be excluded where necessary to avoid a serious inequity in the distribution of indirect costs. For this purpose, an indirect cost rate should be determined for each of the separate indirect cost pools developed pursuant to G1. The rate in each case should be stated as the percentage which the amount of the particular indirect cost pool is of the modified total direct costs identified with such pool. G 3. NEGOTIATED LUMP SUM FOR INDIRECT COSTS. A negotiated fixed amount in lieu of indirect cost may be appropriate for self-contained, off-campus, or primarily subcontracted activities where the benefits derived from an institution's indirect services cannot be readily determined. Such negotiated indirect costs will be treated as an offset before allocation to instruction, organized research, other sponsored activities, and other institutional activities. The base on which such remaining expenses are allocated should be appropriately adjusted. G 4. PREDETERMINED FIXED RATES FOR INDIRECT COSTS. Public Law 87-638(76 Stat. 437) authorizes the use of predetermined rates in determining the indirect costs applicable under research agreements with educational institutions. The stated objectives of the law are to simplify the administration of cost-type research and development contracts (including grants) with educational institutions, to facilitate the preparation of their budgets, and to permit more expeditious closeout of such contracts when the work is completed. In view of the potential advantages offered by this procedure, negotiation of predetermined rates for indirect costs in those situations where the cost experience and other pertinent facts available are deemed sufficient to enable the parties involved to reach an informed judgement as to the probable level of indirect costs during the ensuing accounting periods. G 5. NEGOTIATED FIXED RATES AND CARRY-FORWARD PROVISIONS. When a fixed rate is negotiated in advance for a fiscal year (or other time period), the over- or under-recovery for that year may be included as an adjustment to the indirect cost for the next rate negotiation. When the rate is negotiated before the carry-forward adjustment is determined, the carry-forward amount may be applied to the next subsequent rate negotiation. When such adjustments are to be made, each fixed rate negotiated in advance for a given period will be computed by applying the expected indirect costs allocable to sponsored agreements for the forecast period plus or minus the carry forward adjustment (over- or under-recovery) from the prior period, to the forecast distribution base. Unrecovered amounts under lump-sum agreements or cost-sharing provisions of prior years shall not be carried forward for consideration in the new rate negotiation. There must, however, be an advance understanding in each case between the institution and the cognizant Federal agency as to whether these differences will be considered in the rate negotiation rather than making the determination after the differences are known. Further, institutions electing to use this carry-forward provision may not subsequently change without prior approval of the cognizant Federal agency. In the event that an institution returns to a post determined rate, any over- or under-recovery during the period in which negotiated fixed rates and carry-forward provisions were followed will be included in the subsequent post determined rates. Where multiple rates are used, the same procedure will be applicable for determining each rate. G 6. PROVISIONAL AND FINAL RATES FOR INDIRECT COSTS. Where the cognizant agency determines that cost experience and other pertinent facts do not justify the use of predetermined rates, or a fixed rate with a carry-forward, or if the parties cannot agree on an equitable rate, a provisional rate shall be established. To prevent substantial overpayment or underpayment, the provisional rate may be adjusted by the cognizant agency during the institution's fiscal year. Predetermined or fixed rates may replace provisional rates at any time prior to the close of the institution's fiscal year. If a provisional rate is not replaced by a predetermined or fixed rate prior to the end of the institution's fiscal year, a final rate will be established and upward or downward adjustments will be made based on he actual allowable costs incurred for the period involved. G 7. LIMITATION ON REIMBURSEMENT OF ADMINISTRATIVE COSTS. + G 7a. Notwithstanding the provisions of G1a, the administrative costs charged to sponsor agreements awarded or amended (including continuation and renewal awards) with effective dates beginning on or after the start of the institution's first fiscal year which begins on or after October 1, 1991, shall be limited to 26% of modified total direct costs (as defined in Section G2) for the total of General Administration and General Expenses, Departmental Administration and Sponsored Projects Administration (including their allocable share of depreciation and/or use allowances, interest costs, operation and maintenance expenses, and fringe benefits (sic) costs as provided by Sections F5, F6, F7, and F9) and all other types of expenditures not listed specifically under one of the subcategories of facilities in Sections F. + G 7b. Existing indirect cost rates that affect institution's fiscal years which begin on or after October 1, 1991, shall be unilaterally amended by the cognizant Federal agency to reflect the cost limitation in subsection a above. + G 7c. Permanent rates established prior to this revision which have been amended in accordance with subsection b may be renegotiated. However, no such renegotiated rate may exceed the rate which would have been in effect if the agreement had remained in effect; nor may the administrative portion of any renegotiated rate exceed the limitation in subsection a. + G 7d. Institutions should not change their accounting or cost allocation methods which were in effect on May 1, 1991, if the effect is to: (i) change the charging of a particular type of cost from indirect to direct, or (ii) reclassify costs, or increase allocations, from the administrative pools identified in subsection a above to the other indirect cost pools or fringe benefits. Cognizant Federal agencies are authorized to permit changes where an institution's charging practices are at variance with acceptable practices followed by a substantial majority of other institutions. G 8. ALTERNATIVE METHOD FOR ADMINISTRATIVE COSTS. + G 8a. Notwithstanding the provisions of Section G1a., an institution may elect to claim a fixed allowance for the "Administration" portion of indirect costs. The allowance could be either 24% of modified total direct costs or a percentage equal to 95% of the most recently negotiated fixed or predeterimed rate for the cost pools included under "Administration" as defined in Section F1, whichever is less, provided that no accounting or cost allocation changes with the effects described in Section G7d have occurred. Under this alternative, no cost proposal need be prepared for the "Administration" portion of the indirect cost rate nor is further identification or documentation of these costs required (but see subsection c.). Where a negotiated indirect cost agreement includes this alternative, an institution shall make no further charges for the expenditure categories described in Sections F5, F.6, F7, and F9. + G 8b. In negotiations of rates for subsequent periods, an institution that has elected the option of Section G8a may continue to exercise it at the same rate without further identification or documentation of costs, provided that no accounting or cost allocation changes with the effects described in Section G7d have occurred. + G 8c. If an institution elects to accept a threshold rate, it is not required to perform a detailed analysis of its administrative costs. However, in order to compute the facilities components of its indirect cost rate, the institution must reconcile its indirect cost proposal to its financial statements and make appropriate adjustments and reclassifications to identify the costs of each major function as defined in B1., as well as to identify and allocate the facilities components. Administrative costs that are not identified as such by the institution's accounting system (such as those incurred in academic department) will be classified as instructional costs for purposes of reconciling indirect cost proposals to financial statements and allocating facilities costs. G 9. INDIVIDUAL RATE COMPONENTS. In order to satisfy the requirements of Section J12f and to provide mutually agreed upon information for management purposes, each indirect cost rate negotiation or determination shall include development of a rate for each indirect cost pool as well as the overall indirect cost rate. H. SIMPLIFIED METHOD FOR SMALL INSTITUTIONS H 1. GENERAL. + H 1a. Where the total direct cost of work covered by this Circular at an institution does not exceed $10 million in a fiscal year, the use of the simplified procedure described in subsection 2., may be used in determining allowable indirect costs. Under this simplified procedure, the institution's most recent annual financial report and immediately available supporting information with salaries and wages segregated from other costs, will be utilized as a basis for determining the indirect cost rate applicable to all sponsored agreements. + H 1b. The simplified procedure should not be used where it produces results which appear inequitable to the Government or the institution. In any such case, indirect costs should be determined through use of the regular procedure. H 2. SIMPLIFIED PROCEDURE. + H 2a. Establish the total amount of salaries and wages paid to all employees of the institution. + H 2b. Establish an indirect cost pool consisting of the expenditures (exclusive of capital items and other costs specifically identified as unallowable) which customarily are classified under the following titles or their equivalents: o H 2b(1) General administration and general expenses (exclusive of costs of student administration and services, student activities, student aid, and scholarships). o H 2b(2) Operation and maintenance of physical plant; and depreciation and use allowances; after appropriate adjustment for cost applicable to other institutional activities. o H 2b(3) Library. o H 2b(4) Department administration expenses, which will be computed as 20 percent of the salaries and expenses of deans and heads of departments. In those cases where expenditures classified under (1) above have previously been allocated to other institutional activities, they may be included in the indirect cost pool. The total amount of salaries and wages included in the indirect cost pool must be separately identified. + H 2c. Establish a salary and wage distribution base, determined by deducting from the total of salaries and wages as established in a above the amount of salaries and wages included under b above. + H 2d. Establish the indirect cost rate, determined by dividing the amount in the indirect cost pool, b above, by the amount of the distribution base, c above. + H 2e. Apply the indirect cost rate to direct salaries and wages for individual agreements to determine the amount of indirect costs allocable to such agreements. J. GENERAL PROVISIONS FOR SELECTED ITEMS OF COST Sections 1 through 50 below provide principles to be applied in establishing the allowability of certain items involved in determining cost. These principles should apply irrespective of whether a particular item of cost is properly treated as direct cost or indirect cost. Failure to mention a particular item of cost is not intended to imply that it is either allowable or unallowable; rather determination as to allowability in each case should be based on the treatment provided for similar or related items of cost. In case of a discrepancy between the provisions of a specific sponsored agreement and the provisions below, the agreement should govern. J 1. ADVERTISING AND PUBLIC RELATIONS COSTS. + J 1a. The term advertising costs means the costs of advertising media and corollary administrative costs. Advertising media include magazines, newspapers, radio and television programs, direct mail, exhibits and the like. + J 1b. The term public relations includes community relations and means those activities dedicated to maintaining the image of the institution or maintaining or promoting understanding and favorable relations with the community or public at large or any segment of the public. + J 1c. The only allowable advertising costs are those which are solely for: o J 1c(1) The recruitment of personnel required for the performance by the institution of obligations arising under the sponsored agreement, when considered in conjunction with all other recruitment costs, as set forth in Section J37; o J 1c(2) The procurement of goods and services for the performance of the sponsored agreement; o J 1c(3) The disposal of scrap or surplus materials acquired in the performance of the sponsored agreement except when institutions are reimbursed for disposal costs at a predetermined amount in accordance with Attachment N, OMB Circular No. A-110; or o J 1c(4) Other specific purposes necessary to meet the requirements of the sponsored agreement. + J 1d. The only allowable public relations costs are: o J 1d(1) Costs specifically required by sponsored agreements; o J 1d(2) Costs of communicating with the public and press pertaining to specific activities or accomplishments which result from performance of sponsored agreements; or o J 1d(3) Costs of conducting general liaison with news media and government public relations officers, to the extent that such activities are limited to communication and liaison necessary to keep the public informed on matters of public concern such as notices of contract/grant award, financial matters, etc. + J 1e. Costs identified in c through d, if incurred for more than one sponsored agreement or for both sponsored work and other work of the institution, are allowable to the extent that the principles in section D and E are observed. + J 1f. Unallowable advertising and public relations costs include the following: o J 1f(1) All advertising and public relations costs other than as specified in subsections c, d, and e above; o J 1f(2) Costs of convocations or other events related to instruction or other institutional activities including: # J 1f(2)(i) Costs of displays, demonstrations, and exhibits; # J 1f(2)(ii) Costs of meeting rooms, hospitality suites, and other special facilities used in conjunction with shows and other special events; and # J 1f(2)(iii) Salaries and wages of employees engaged in setting up and displaying exhibits, making demonstrations, and providing briefings; o J 1f(3) Costs of promotional items and memorabilia, including models, gifts, and souvenirs; o J 1f(4) Costs of advertising and public relations designed solely to promote the institution. J 2. ALCOHOLIC BEVERAGES. Costs of alcoholic beverages are unallowable. J 3. ALUMNI ACTIVITIES. Costs incurred for, or in support of, alumni activities and similar activities and similar services are unallowable. J 4. BAD DEBTS. Any losses, whether actual or estimated, arising from uncollectible accounts and other claims, related collection costs, and related legal costs, are unallowable. J 5. CIVIL DEFENSE COSTS. Civil defense costs are those incurred in planning for, and the protection of life and property against, the possible effects of enemy attack. Reasonable costs of civil defense measures (including costs in excess of normal plant protection costs, first-aid training and supplies, firefighting training, posting of additional exit notices and directions, and other approved civil defense measures) undertaken on the institution's premises pursuant to suggestions or requirements of civil defense authorities are allowable when distributed to all activities of the institution. Capital expenditures for civil defense purposes will not be allowed, but a use allowance or depreciation may be permitted in accordance with provision or depreciation may be permitted in accordance with provisions set forth in Section J12. Costs of local civil defense projects not on the institution's premises are unallowable. J 6. COMMENCEMENT AND CONVOCATION COSTS. Costs incurred for commencements and convocations are unallowable, except as provided in Section F7. J 7. COMMUNICATION COSTS. Costs incurred for telephone services, local and long distance telephone calls, telegrams, radiograms, postable and the like, are allowable. J 8. COMPENSATION FOR PERSONAL SERVICES. + J 8a. General. Compensation for personal services covers all amounts paid currently or accrued by the institution for services of employees rendered during the period of performance under sponsored agreements. Such amounts include salaries, wages, and fringe benefits (See Section J8f]). These costs are allowable to the extent that the total compensation to individual employees conforms to the established policies of the institution, consistently applied, and provided that the charges for work performed directly on sponsored agreements and for other work allocable as indirect costs are determined and supported as provided below. Charges to sponsored agreements may include reasonable amounts for activities contributing and intimately related to work under the agreements, such as delivering special lectures about specific aspects of the ongoing activity, writing reports and articles, participating in the appropriate seminars, consulting with colleagues and graduate students, and attending meetings and conferences. Incidental work (that in excess of normal for the individual), for which supplemental compensation is paid by an institution under institutional policy, need not be included in the payroll distribution systems described below, provided such work and compensation are separately identified and documented in the financial management system of the institution. + J 8b. Payroll distribution. o J 8b(1) General principles. # J 8b(1)(a) The distribution of salaries and wages whether treated as direct or indirect costs, will be based on payrolls documented in accordance with the general accepted practices of colleges and universities. Institutions may include in a residual category all activities that are not directly charged to sponsored agreements and that need not be distributed to more than one activity for purposes of identifying indirect costs and the functions to which they are allocable. The components of the residual category are not required to be separately documented. # J 8b(1)(b) The apportionment of employees' salaries and wages which are chargeable to more than one sponsored agreement or other cost objective will be accomplished by methods which will (1) be in accordance with Section A2 and C above, (2) produce an equitable distribution of charges for employees' activities, and (3) distinguish the employee's direct activities from their indirect activities. # J 8b(1)(c) In the use of any methods for apportioning salaries, it is recognized that, in an academic setting, teaching, research, service, and administration are often inextricably intermingled. A precise assessment of factors that contribute to costs is not always feasible, nor is it expected. Reliance, therefore, is placed on estimates in which a degree of tolerance is appropriate. # J 8b(1)(d) There is no single best method for documenting the distribution of charges for personal services. Methods for apportioning salaries and wages, however, must meet the criteria specified in J8b(2) below. Examples of acceptable methods are contained in c below. Other methods which meet the criteria specified in J8b(2) below also shall be deemed acceptable, if a mutually satisfactory alternative agreement is reached. o J 8b(2) Criteria for acceptable methods. # J 8b(2)(a) The payroll distribution system will (i) be incorporated into the official records of the institution, (ii) reasonably reflect the activity for which the employee is compensated by the institution, and (iii) encompass both sponsored and all other activities on an integrated basis, but may include the use of subsidiary records. (Compensation for incidental work described in J8a need not be included.) # J 8b(2)(b) The method must recognize the principle of after-the- fact confirmation or determination so that costs distributed represent actual costs, unless a mutually satisfactory alternative agreement is reached. Direct cost activities and indirect cost activities may be confirmed by responsible persons with suitable means of verification that the work was performed. Confirmation by the employee is not a requirement for either direct or indirect cost activities if other responsible persons make appropriate confirmations. # J 8b(2)(c) The payroll distribution system will allow confirmation of activity allocable to each sponsored agreement and each of the categories of activity needed to identify indirect costs and the functions to which they are allocable. The activities chargeable to indirect cost categories or the major functions of the institution for employees whose salaries must be apportioned (see J8b(1)(b) above), if not initially identified as separate categories, may be subsequently distributed by any reasonable method mutually agreed to, including, but not limited to, suitably conducted surveys, statistical sampling procedures, or the application of negotiated fixed rates. # J 8b(2)(d) Practices vary among institutions and within institutions as to the activity constituting a full workload. Therefore, the payroll distribution system may reflect categories of activities expressed as a percentage distribution of total activities. # J 8b(2)(e) Direct and indirect charges may be made initially to sponsored agreements on the basis of estimates made before services are performed. When such estimates are used, significant changes in the corresponding work activity must be identified and entered into the payroll distribution system. Short-term (such as one or two months) fluctuation between workload categories need not be considered as long as the distribution of salaries and wages is reasonable over the longer term, such as an academic period. # J 8b(2)(f) The system will provide for independent internal evaluations to ensure the system's effectiveness and compliance with the above standards. # J 8b(2)(g) For systems which meet these standards, the institution will not be required to provide additional support or documentation for the effort actually performed. + J 8c. Examples of acceptable methods for payroll distribution: o J 8c(1) Plan--Confirmation: Under this method, the distribution of salaries and wages of professional or professional staff applicable to sponsored agreements is based on budgeted, planned, or assigned work activity, updated to reflect any significant changes in work distribution. A plan-confirmation system used for salaries and wages charged directly or indirectly to sponsored agreements will meet the following standards: # J 8c(1)(a) A system of budgeted, planned, or assigned work activity will be incorporated into the official records of the institution and encompass both sponsored and all other activities on an integrated basis. The system may include the use of subsidiary records. # J 8c(1)(b) The system will reasonably reflect only the activity for which the employee is compensated by the institution (compensation for incidental work described in J8a need not be included). Practices vary among institutions and within institutions as to the activity constituting full workload. Hence, the system will reflect categories of activities expressed as a percentage distribution of total activities. (But see Section H for treatment of indirect costs under the simplified method for small institutions.) # J 8c(1)(c) The system will reflect activity applicable to each sponsored agreement and to each category needed to identify indirect costs and the functions to which they are allocable. The system may treat indirect cost activities initially within a residual category and subsequently determine them by alternate methods as discussed in J8b(2)(c). # J 8c(1)(d) The system will provide for modification of an individual's salary or salary distribution commensurate with a significant change in the employee's work activity. Short term (such as one or two months) fluctuation between workload categories need not be considered as long as the distribution of salaries and wages is reasonable over the longer term such as an academic period. Whenever it is apparent that a significant change in work activity which is directly or indirectly charged to sponsored agreements will occur or has occurred, the change will be documented over the signature of a responsible official and entered into the system. # J 8c(1)(e) At least annually a statement will be signed by the employee, principal investigator, or responsible official(s) using suitable means of verification that the work was performed, stating that salaries and wages charged to sponsored agreements as direct charges, and to residual, indirect cost or other categories are reasonable in relation to work performed. # J 8c(1)(f) The system will provide for independent internal evaluation to ensure the system's integrity and compliance with the above standards. # J 8c(1)(g) In the use of this method, an institution shall not be required to provide additional support or documentation for the effort actually performed. o J 8c(2) After-the-fact Activity Records: Under this system the distribution of salaries and wages by the institution will be supported by activity reports as prescribed below. # J 8c(2)(a) Activity reports will reflect the distribution of activity expended by employees covered by the system (compensation for incidental work as described in J8a need not be included). # J 8c(2)(b) These reports will reflect an after-the-fact reporting of the percentage distribution of activity of employees. Charges may be made initially on the basis of estimates made before the services are performed, provided that such charges are promptly adjusted if significant differences are indicated by activity records. # J 8c(2)(c) Reports will reasonably reflect the activities for which employees are compensated by the institution. To confirm that the distribution of activity represents a reasonable estimate of the work performed by the employees during the period, the reports will be signed by the employee, principal investigator, or responsible official(s) using suitable means of verification that the work was performed. # J 8c(2)(d) The system will reflect activity applicable to each sponsored agreement and to each category needed to identify indirect costs and the functions to which they are allocable. The system may treat indirect cost activities initially within a residual category and subsequently determine them by alternate methods as discussed in J8b(2)(c). # J 8c(2)(e) For the professorial and professional staff, the reports will be prepared each academic term, but no less frequently than every six months. For other employees, unless alternate arrangements are agreed to, the reports will be prepared no less frequently than monthly and will coincide with one or more pay periods. # J 8c(2)(f) Where the institution uses time cards or other forms of after-the-fact payroll documents as original documentation for payroll and payroll charges, such documents shall qualify as records for this purpose provided that they meet the requirements in (a) through (e) above. o J 8c(3) Multiple Confirmation Records: Under this system the distribution of salaries and wages of professorial and professional staff will be supported by records which certify separately for direct and indirect cost activities as prescribed below. # J 8c(3)(a) For employees covered by this system, there will be direct cost records to reflect the distribution of that activity expended which is to be allocable as direct cost to each sponsored agreement. There will also be indirect cost records to reflect the distribution of that activity to indirect costs. These records may be kept jointly or separately (but are to be certified separately, see below). # J 8c(3)(b) Salary and wage charges may be made initially on the basis of estimates made before the services are performed provided that such charges are promptly adjusted if significant differences occur. # J 8c(3)(c) Institutional records will reasonably reflect only the activity for which employees are compensated by the institution (compensation for incidental work as described in J8a need not be included). # J 8c(3)(d) The system will reflect activity applicable to each sponsored agreement and to each category needed to identify indirect costs and the functions to which they are allocable. # J 8c(3)(e) To confirm that distribution of activity represents a reasonable estimate of the work performed by the employee during the period, the record for each employee will include: @ J 8c(3)(e)(1) The signature of the employee or of a person having direct knowledge of the work, confirming that the record of activities allocable as direct costs of each sponsored agreement is appropriate. @ J 8c(3)(e)(2) The record of indirect costs will include the signature of responsible person(s) who use suitable means of verification that the work was performed and is consistent with the overall distribution of the employee's compensated activities. These signatures may all be on the same document. # J 8c(3)(f) The reports will be prepared each academic term, but no less frequently than every six months. # J 8c(3)(g) Where the institution uses time cards or other forms of after-the-fact payroll documents as original documentation for payroll and payroll charges, such documents shall qualify as records for this purpose provided they meet the requirements in J8b(2)(a) through J8b(2)(f) above. + J 8d. Salary rates for faculty members. o J 8d(1) Salary rates for academic year. Charges for work performed on sponsored agreements by faculty members during the academic year will be based on the individual faculty member's regular compensation for the continuous period which, under the policy of the institution concerned, constitutes the basis of his salary. Charges for work performed on sponsored agreements during all or any portion of such period are allowable at the base salary rate. In no event will charges to sponsored agreements, irrespective of the basis of computation, exceed the proportionate share of the base salary for that period. This principle applies to all members of the faculty at an institution. Since intra-university consulting is assumed to be undertaken as a university obligation requiring no compensation in addition to full-time base salary, the principle also applies to faculty members who function as consultants or otherwise contribute to a sponsored agreement conducted by another faculty member of the same institution. However, in unusual cases where consultation is across departmental lines or involves a separate or remote operation, and the work performed by the consultant is in addition to his regular departmental load, any charges for such work representing representing extra compensation above the base salary are allowable provided that such consulting arrangements are specifically provided for in the agreement or approved in writing by the sponsoring agency. o J 8d(2) Periods outside the academic year. # J 8d(2)(a) Except as otherwise specified for teaching activity in (b) below, charges for work performed by faculty members on sponsored agreements during the summer months or other period not included in the base salary period will be determined for each faculty member at a rate not in excess of the base salary divided by the period to which the base salary relates, and will be limited to charges made in accordance with other parts of this section. The base salary period used in computing charges for work performed during the summer months will be the number of months covered by the faculty member's official academic year appointment. # J 8d(2)(b) Charges for teaching activities performed by faculty members on sponsored agreements during the summer months or other periods not included in the base salary period will be based on the normal policy of the institution governing compensation to faculty members for teaching assignments during such periods. o J 8d(3) Part-time faculty. Charges for work performed on sponsored agreements by faculty members having only part-time appointments will be determined at a rate not in excess of that regularly paid for the part-time assignments; e.g., an institution pays $5,000 to a faculty member for half-time teaching during the academic year. He devoted one-half of his remaining time to a sponsored agreement. Thus, his additional compensation, chargeable by the institution to the agreement, would be one-half of $5,000, or $2,500. + J 8e. Non-institutional professional activities. Unless an arrangement is specifically authorized by a Federal sponsoring agency, an institution must follow its institution-wide policies and practices concerning the permissible extent of professional services that can be provided outside the institution for non-institutional compensation. Where such institution-wide policies do not exist or do not adequately define the permissible extent of consulting or other non-institutional activities undertaken for extra outside pay, the Government may require that the effort of professional staff working on sponsored agreements be allocated between (1) institutional activities, and (2) non-institutional professional activities. If the sponsoring agency considers the extent of non-institutional professional effort excessive, appropriate arrangements governing compensation will be negotiated on a case-by case basis. + J 8f. Fringe benefits. o J 8f(1) Fringe benefits in the form of regular compensation paid to employees during periods of authorized absences from the job, such as annual leave, sick leave, military leave, and the like, are allowable, provided such costs are distributed to all institutional activities in proportion to the relative amount of time or effort actually devoted by the employees. See Section J40 for treatment of sabbatical leave. o J 8f(2) Fringe benefits in the form of employer contributions or expenses for social security, employee insurance, workmen's compensation insurance, tuition or remission of tuition for individual employees or their families and the like are allowable, provided such benefits are granted in accordance with established institutional policies, and are distributed to all institutional activities on an equitable basis. See Section J41b for treatment of tuition remission provided to students. o J 8f(3) Rules for pension plan costs are as follows: # J 8f(3)(a) Costs of the institution's pension plan which are incurred in accordance with the established policies of the institution are allowable, provided: @ (i) Such policies meet the test of reasonableness, @ (ii) the methods of cost allocation are equitable for all activities, @ (iii) the amount of pension cost assigned to each fiscal year is determined in accordance with J8f(3)(b) below, and @ (iv) the cost assigned to a given fiscal year is paid or funded for all plan participants within six months after the end of that year. # However, increases to normal and past service pension costs caused by a delay in funding the actuarial liability beyond 30 days after each quarter of the year to which such costs are assignable are unallowable. # J 8f(3)(b) The amount of pension cost assigned to each fiscal year shall be determined in accordance with generally accepted accounting principles. Institutions may elect to follow the "Cost Accounting Standard for Composition and Measurement of Pension Cost" (4 CFR Part 412). # J 8f(3)(c) Premiums paid for pension plan termination insurance pursuant to the Employee Retirement Income Security Act of 1974 (Public Law 93-046) are allowable. Late payment charges on such premiums are unallowable. Excise taxes on accumulated funding deficiencies and prohibited transactions of pension plan fiduciaries imposed under the Employee Retirement Income Security Act are also unallowable. # J 8f(4) Fringe benefits may be assigned to cost objectives by identifying specific benefits to specific individual employees or by allocating on the basis of institution-wide salaries and wages of the employees receiving the benefits. When the allocation method is used, separate allocations must be made to selective groupings of employees, unless the institution demonstrates that costs in relationship to salaries and wages do not differ significantly for different groups of employees. Fringe benefits shall be treated in the same manner as the salaries and wages of the employees receiving the benefits. The benefits related to salaries and wages treated as direct costs shall also be treated as direct costs; the benefits related to salaries and wages treated as indirect costs shall be treated as indirect costs. o J 8g. Institution-furnished automobiles. That portion of the cost of institution-furnished automobiles that relates to personal use by employees (including transportation to and from work) is unallowable regardless of whether the cost is reported as taxable income to the employees. J 9. CONTINGENCY PROVISIONS. Contributions to a contingency reserve or any similar provision made for events, the occurrence of which cannot be foretold with certainty as to time, intensity, or with an assurance of their happening, are unallowable. (But see also Section J21c). J 10. DEANS OF FACULTY AND GRADUATE SCHOOLS. The salaries and expenses of deans of faculty and graduate schools, or their equivalents, and their staffs, are allowable. J 11. DEFENSE AND PROSECUTION OF CRIMINAL AND CIVIL PROCEEDINGS, CLAIMS, APPEALS AND PATENT INFRINGEMENT. + J 11a. Definitions. o J 11a(1) "Conviction," as used herein, means a judgement or conviction of a criminal offense by any court of competent jurisdiction, whether entered upon verdict or a plea, including a conviction due to a plea of nolo contendere. o J 11a(2) "Costs," include, but are not limited to, administrative and clerical expenses; the cost of legal services, whether performed by in-house or private counsel; the costs of the services of accountants, consultants, or others retained by the institution to assist it; costs of employees, officers and trustees, and any similar costs incurred before, during, and after commencement of a judicial or administrative proceeding that bears a direct relationship to the proceedings. o J 11a(3) "Fraud," as used herein, means (i) acts of fraud or corruption or attempts to defraud the Government or to corrupt its agents, (ii) acts that constitute a cause for debarment or suspension (as specified in agency regulations), and (iii) acts which violate the False Claims Act, 31 U.S.C., sections 3729-3731, or the Anti-kickback Act, 41 U.S.C., Sections 51 and 54. o J 11a(4) "Penalty," does not include restitution, reimbursement, or compensatory damages. o J 11a(5) "Proceeding," includes an investigation. + J 11b. o J 11b(1) Except as otherwise described herein, costs incurred in connection with any criminal, civil or administrative proceeding (including filing of a false certification) commenced by the Federal Government, or a State, local or foreign government, are not allowable if the proceeding (1) relates to a violation of, or failure to comply with, a Federal, State, local or foreign statue or regulation, by the institution (including its agents and employees); and (2) results in any of the following dispositions: # J 11b(1)(a) In a criminal proceeding, a conviction. # J 11b(1)(b) In a civil or administrative proceeding involving an allegation or fraud or similar misconduct, a determination of institutional liability. # J 11b(1)(c) In the case of any civil or administrative proceeding, the imposition of a monetary penalty. # J 11b(1)(d) A final decision by an appropriate Federal official to debar or suspend the institution, to rescind or void an award, or to terminate an award for default by reason of a violation of failure to comply with a law or regulation. # J 11b(1)(e) A disposition by consent or compromise, if the action could have resulted in any of the dispositions described in (a), (b), (c), or (d) of b(1) above. o J 11b(2) If more than one proceeding involves the same alleged misconduct, the costs of all such proceedings shall be unallowable if any one of them results in one of the dispositions shown in b(1) above. + J 11c. If a proceeding referred to in paragraph b is commenced by the Federal Government and is resolved by consent or compromise pursuant to an agreement entered into by the institution and the Federal Government, then the costs incurred by the institution in connection with such proceedings that are otherwise unallowable under paragraph b may be allowed to the extent specifically provided in such agreement. + J 11d. If a proceeding referred to in paragraph b is commenced by a State, local or foreign government, the authorized Federal official may allow the costs incurred by the institution for such proceedings, if such authorized official determines that the costs were incurred as a result of: (1) a specific term or condition of a Federally sponsored agreement, or (2) specific written direction of an authorized official of the sponsoring agency. + J 11e. Costs incurred in connection with proceedings described in paragraph b, but which are not made unallowable by that paragraph, may be allowed by the Government but only to the extent that: o J 11e(1) The costs are reasonable in relation to the activities required to deal with the proceeding and the underlying cause of action; o J 11e(2) Payment of the costs incurred, as allowable and allocable costs, is not prohibited by any other provision(s) of the sponsored agreement; o J 11e(3) The costs are not otherwise recovered from the Federal Government or a third party, either directly as a result of the proceeding or otherwise; and o J 11e(4) The percentage of costs allowed does not exceed the percentage determined by an authorized Federal official to be appropriate considering the complexity of procurement litigation, generally accepted principles governing the award of legal fees in civil actions involving the United States as a party, and such other factors as may be appropriate. Such percentage shall not exceed 80%. However, if an agreement reached under paragraph c has explicitly considered this 80 percent limitation and permitted a higher percentage, then the full amount of costs resulting from that agreement shall be allowable. + J 11f. Costs incurred by the institution in connection with the defense of suits brought by its employees or ex-employees under section 2 of the Major Fraud Act of 1988 (Pub. L. 100-700), including the cost of all relief necessary to make such employee whole, where the institution was found liable or settled, are unallowable. + J 11g. Costs of legal, accounting, and consultant services, and related costs, incurred in connection with defense against Government claims or appeals, or the prosecution of claims or appeals against the Government, are unallowable. + J 11h. Costs of legal, accounting, and consulting services, and related costs, incurred in connection with patent infringement litigation, are unallowable unless otherwise provided for in the sponsored agreements. + J 11i. Costs which may be unallowable under this section, including directly associated costs, shall be segregated and accounted for by the institution separately. During the pendency of any proceeding covered by paragraph b and f of this section, the Government shall generally withhold payment of such costs. However, if in the best interests of the Government, the Government may provide for conditional payment upon provision of adequate security, or other adequate assurance, and agreement by the institution to repay all unallowable costs, plus interest, if the costs are subsequently determined to be unallowable. J 12. DEPRECIATION AND USE ALLOWANCES. Institutions may be compensated for the use of their buildings, capital improvements, and equipment; provided that they are used, needed in the institution's activities, and properly allocable to sponsored agreements. Such compensation shall be made by computing either depreciation or use allowance. Use allowances are the means of providing such compensation when depreciation or other equivalent costs are not computed. The allocation for depreciation or use allowance shall be made in accordance with Section F1. Depreciation and use allowances are computed applying the following rules: + J 12a. The computation of depreciation or use allowances; shall be based on the acquisition cost of the assets involved. For this purpose, the acquisition cost will exclude (1) the cost of the land; (2) any portion of the cost of building and equipment borne by or donated by the Government, irrespective of where title was originally vested or where it is presently located; and (3) any portion of the cost of buildings and equipment contributed by or for the institution where law or agreement prohibit recovery. For an asset donated to the institution by a third party, its fair market value at the time of the donation shall be considered as the acquisition cost. + J 12b. In the use of the depreciation method, the following shall be observed: o J 12b(1) The period of useful service or useful life established in each case for usable capital assets must take into consideration such factors as the type of construction, nature of the equipment, technological developments in the particular area, and the renewal and replacement policies followed for the individual items or classes of assets involved. o J 12b(2) The depreciation method used to charge the cost of an asset(or group of assets) to accounting periods shall reflect the pattern of consumption of the asset during its useful life. In the absence of clear evidence indicating that the expected consumption of the asset will be significantly greater in the early portions than in the later portions of its useful life, the straight-line method shall be presumed to be the appropriate method. Depreciation methods once used shall not be changed unless approved in advance by the cognizant Federal agency. o J 12b(3) Where the depreciation method is introduced for application to assets for which use allowance was previously charged, the aggregate amount of use allowances and depreciation applicable to such assets must not exceed the total acquisition cost of the assets. o J 12b(4) When the depreciation method is used for buildings, a building "shell" may be treated separately from other building components, such as plumbing system and heating and air conditioning system. Each component item may then be depreciated over its estimated useful life. On the other hand, the entire building, including the shell and all components, may be treated as a single asset and depreciated over a single useful life. o J 12b(5) Where the depreciation method is used for a particular class of assets, no depreciation may be allowed on any such assets that have outlived their depreciable lives. (But see also c(3), below.) + J 12c. Under the use allowance method, the following shall be observed: o J 12c(1) The use allowance for buildings and improvements (including improvements such as paved parking areas, fences, and sidewalks) will be computed at an annual rate not exceeding two percent of acquisition cost. The use allowance for equipment will be computed at an annual rate not exceeding six and two-thirds percent of acquisition cost. o J 12c(2) In contrast to the depreciation method, the entire building must be treated as a single asset without separating its "shell" from other building components under the use allowance method. The entire building must be treated as a single asset, and the two-percent use allowance limitation must be applied to all parts of the building. The two-percent limitation, however, need not be applied to equipment or other assets that are merely attached or fastened to the building but not permanently fixed and are used as furnishings, decorations or for specialized purposes (e.g., dentist chairs and dental treatment units, counters, laboratory benches bolted to the floor, dishwashers, and carpeting). Such equipment and assets will be considered as not being permanently fixed to the building if they can be removed without the need for costly or extensive alterations or repairs to the building to make the space usable for other purposes. Equipment and assets which meet these criteria will be subject to the six and two-thirds percent equipment use allowance. o J 12c(3) A reasonable use allowance may be negotiated for any assets that are considered to be fully depreciated, after taking into consideration the amount of depreciation previously charged to the Government, the estimated useful life remaining at the time of negotiation, the effect of any increased maintenance charges, decreased efficiency due to age, and any other factors pertinent to the utilization of the asset for the purpose contemplated. + J 12d. Except as otherwise provided in b and c above, a combination of the depreciation and use allowance methods may not be used, in like circumstances, for a single class of assets (e.g., buildings, office equipment, and computer equipment.) + J 12e. Charges for use allowances or depreciation must be supported by adequate property records and physical inventories must be taken at least once every two years to ensure that the assets exist and are usable, used, and needed. Statistical sampling techniques may be used in taking these inventories. In addition, when the depreciation method is used, adequate depreciation records showing the amount of depreciation taken each period must also be maintained. + J 12f. This section applies to the largest college and university recipients of Federal research and development funds as displayed in Exhibit A. o J 12f(1) Institutions shall expend currently, or reserve for expenditure within the next five years, the portion of indirect cost payments made for depreciation or use allowances under sponsored research agreements, consistent with Section G7, to acquire or improve research facilities. This provision applies only to federal agreements which reimburse indirect costs at a full negotiated rate. These funds may only be used for: (a) liquidation of the principal of debts incurred to acquire assets that are used directly for organized research activities, or (b) payments to acquire, repair, renovate, or improve buildings or equipment directly used for organized research. For buildings or equipment not exclusively used for organized research activity, only appropriately proportionate amounts will be considered to have been expended for research facilities. o J 12f(2) An assurance that an amount equal to the Federal reimbursements has been appropriately expended or reserved to acquire or improve research facilities shall be submitted as part of each indirect cost proposal submitted to the cognizant federal agency which is based on costs incurred on or after October 1, 1991. This assurance will cover the cumulative amounts of funds received and expended during the period after the period covered by the previous assurance and ending with the fiscal year on which the proposal is based. The assurance shall also cover any amounts reserved from a prior period in which the funds received exceeded the amount expended. J 13. DONATION AND CONTRIBUTIONS. + J 13a. The value of donated services and property are not allowable either as a direct or indirect cost, except that depreciation or use allowances on donated assets are permitted in accordance with Section J12a. The value of donated services and property may be used to meet cost sharing or matching requirements, in accordance with OMB Circular No. A-110. + J 13b. Donations or contributions made by the institution, regardless of the recipient, are unallowable. J 14. EMPLOYEE MORALE, HEALTH, AND WELFARE COSTS AND CREDITS. The costs of house publications, health or first-aid clinics and/or infirmaries, recreational activities, food services, employees' counseling services, and other expenses incurred in accordance with the institution's established practice or custom for the improvement of working conditions, employer-employee relations, employee morale, and employee performance, are allowable. Such costs will be equitably apportioned to all activities of the institution. Income generated from any of these activities will be credited to the cost thereof unless such income has been irrevocably set over to the employee welfare organizations. Losses resulting from operating food services are allowable only if the institution's objective is to operate such services on a break-even basis. Losses sustained because of operating objectives other than the above are allowable only (a)where the institution can demonstrate unusual circumstances, and (b) with the approval of the cognizant Federal agency. J 15. ENTERTAINMENT COSTS. Costs of entertainment, including amusement, diversion, and social activities and any costs directly associated with such costs (such as tickets to shows or sports events, meals, lodging, rentals, transportation, and gratuities) are unallowable. J 16. EQUIPMENT AND OTHER CAPITAL EXPENDITURES. + J 16a. For purposes of this paragraph, the following definitions apply: o J 16a(1) Equipment means an article of non-expendable tangible personal property having a useful life of more than two years, and an acquisition cost of $500 or more per unit. However, consistent with institutional policy, lower limits may be established. o J 16a(2) Capital expenditure means the cost of the asset including the cost to put it in place. Capital expenditure for equipment, for example, means the net invoice price of the equipment, including the cost of any modifications, attachments, accessories, or auxiliary apparatus necessary to make it usable for the purpose for which it is acquired. Ancillary charges, such as taxes, duty, protective intransit insurance, freight, and installation may be included in, or excluded from, capital expenditure cost in accordance with the institution's regular accounting practices. o J 16a(3) Special purpose equipment means equipment which is used only for research, medical, scientific, or other technical activities. o J 16a(4) General purpose equipment means equipment, the use of which is not limited only to research, medical, scientific or other technical activities. Examples of general purpose equipment include office equipment and furnishings, air conditioning equipment, reproduction and printing equipment, motor vehicles, and automatic data processing equipment. + J 16b. The following rules of allowability shall apply to equipment and other capital expenditures: o J 16b(1) Capital expenditures for general purpose equipment, buildings, and land are unallowable as direct charges, except where approved in advance by the sponsoring agency. o J 16b(2) Capital expenditures for special purpose equipment are allowable as direct charges, provided that the acquisition of items having a unit cost of $1,000 or more is approved in advance by the sponsoring agency. o J 16b(3) Capital expenditures for improvements to land, buildings, or equipment which materially increase their value or useful life are unallowable as direct charges, except where approved in advance by the sponsoring agency. o J 16b(4) Capital expenditures are unallowable as indirect costs. But see Section J12 for allowability of depreciation or use allowance on buildings, capital improvements, and equipment. Also see Section J38 for allowability of rental costs on land, buildings, and equipment. J 17. EXECUTIVE LOBBYING COSTS. Costs incurred in attempting to improperly influence either directly or indirectly, an employee or officer of the executive branch of the Federal Government to give consideration or to act regarding a sponsored agreement or a regulatory matter are unallowable. Improper influence means any influence that induces or tends to induce a Government employee or officer to give consideration or to act regarding a Government-sponsored agreement or regulatory matter on any basis other than the merits of the matter. J 18. FINES AND PENALTIES. Costs resulting from violations of, or failure of the institution to comply with, Federal, State, local or foreign laws and regulations are unallowable, except when incurred as a result of compliance with specific provisions of the sponsored agreement, or instructions in writing from the authorized official of the sponsoring agency authorizing in advance such payments. J 19. GOODS OR SERVICES FOR PERSONAL USE. Costs of goods or services for personal use of the institution's employees are unallowable regardless of whether the cost is reported as taxable income to the employees. J 20. HOUSING AND PERSONAL LIVING EXPENSES. + J 20a. Costs of housing (e.g., depreciation, maintenance, utilities, furnishings, rent, etc.), housing allowances and personal living expenses for/of the institution's officers are unallowable regardless of whether the cost is reported as taxable income to the employees. + J 20b. The term officers includes current and past officers. J 21. INSURANCE AND INDEMNIFICATION. + J 21a. Costs of insurance required or approved, and maintained, pursuant to the sponsored agreement, are allowable. + J 21b. Costs of other insurance maintained by the institution in connection with the general conduct of its activities, are allowable subject to the following limitations: (1) types and extent and cost of coverage must be in accordance with sound institutional practice; (2) costs of insurance or of any contributions to any reserve covering the risk of loss of or damage to Government-owned property are unallowable, except to the extent that the Government has specifically required or approved such costs; and (3) costs of insurance on the lives of officers or trustees are unallowable except where such insurance is part of an employee plan which is not unduly restricted. + J 21c. Contributions to a reserve for a self-insurance program are allowable, to the extent that the types of coverage, extent of coverage, and the rates and premiums would have been allowed had insurance been purchased to cover the risks. + J 21d. Actual losses which could have been covered by permissible insurance (whether through purchased insurance or self-insurance) are unallowable, unless expressly provided for in the sponsored agreement, except that costs incurred because of losses not covered under existing deductible clauses for insurance coverage provided in keeping with sound management practice as well as minor losses not covered by insurance, such as spoilage, breakage and disappearance of small hand tools, which occur in the ordinary course of operations, are allowable. + J 21e. Indemnification includes securing the institution against liabilities to third persons and other losses not compensated by insurance or otherwise. The Government is obligated to indemnify the institution only to the extent expressly provided for the sponsored agreement, except as provided in d above. + J 21f. Insurance against defects. Costs of insurance with respect to any costs incurred to correct defects in the institution's materials or workmanship are unallowable. + J 21g. Medical liability (malpractice) insurance is an allowable cost of research programs only to the extent that the research involves human subjects. Medical liability insurance costs shall be treated as a direct cost and shall be assigned to individual projects based on the manner in which the insurer allocates the risk to the population covered by the insurance. J 22. INTEREST, FUND RAISING, AND INVESTMENT MANAGEMENT COSTS. + J 22a. Costs incurred for interest on borrowed capital or temporary use of endowment funds, however represented, are unallowable, "except as indicated in e below." + J 22b. Costs of organized fund raising, including financial campaigns, endowment drives, solicitation of gifts and bequests, and similar expenses incurred solely to raise capital or obtain contributions, are unallowable. + J 22c. Costs of investment counsel and staff and similar expenses incurred solely to enhance income from investments are unallowable. + J 22d. Costs related to the physical custody and control of monies and securities are allowable. + J 22e. The cost of interest paid to an external party is allowable where associated with the following assets, provided the assets are used in support of sponsored agreements, and the total cost (including depreciation or use allowance, operation and maintenance costs, interest, etc.,) does not exceed the rental cost of comparable assets in the same locality. o J 22e(1) Buildings acquired or completed on or after July 1, 1982. o J 22e(2) Major reconstruction and remodeling of existing buildings completed on or after July 1, 1982. o J 22e(3) Acquisition or fabrication of capital equipment (as defined in paragraph J16 "Equipment and other capital expenditures"), completed on or after July 1, 1982, costing $10,000 or more, if agreed to by the Government. J 23. LABOR RELATIONS COSTS. Costs incurred in maintaining satisfactory relations between the institution and its employees, including costs of labor management committees, employees' publications, and other related activities, are allowable. J 24. LOBBYING: Reference is made to the common rule published ar 55 FR 6736 (2/26/90) and the Office of Management and Budget government wide guidance and notice published at 54 FR 52306 (12/20/89) and 55 FR 24540 (6/15/90), respectively. In addition, the following restrictions shall apply: + J 24a. Notwithstanding other provisions of this Circular, costs associated with the following activities are unallowable: o J 24a(1) Attempts to influence the outcomes of any Federal, State, or local election, referendum, initiative, or similar procedure, through in kind or cash contributions, endorsements, publicity or similar activity; o J 24a(2) Establishing, administering, contributing to, or paying the expenses of a political party, campaign, political action committee, or other organization established for the purpose of influencing the outcomes of elections; o J 24a(3) Any attempt to influence (i) the introduction of Federal or State legislation (ii) the enactment or modification of any pending Federal or State legislation through communication with any member or employee of the Congress or State legislature (including efforts to influence State or local officials to engage in similar lobbying activity) or (iii) any government official or employee in connection with a decision to sign or veto enrolled legislation; o J 24a(4) Any attempt to influence (i) the introduction of Federal or State legislation; or (ii) the enactment or modification of any pending Federal or State legislation by preparing, distributing or using publicity or propaganda, or by urging members of the general public, or any segment thereof, to contribute to or participate in any mass demonstration, march, rally, fund raising drive, lobbying campaign or letter writing or telephone campaign; or o J 24a(5) Legislative liaison activities including attendance at legislative sessions or committee hearings, gathering information regarding legislation, and analyzing the effect of legislation, when such activities are carried on in support of or in knowing preparation for an effort to engage in unallowable lobbying. + J 24b. The following activities are excepted from the coverage of subsection a: o J 24b(1) Technical and factual presentations on topics directly related to the performance of a grant, contract or other agreement (through hearing testimony, statements or letters to the Congress or a State legislature, or subdivision, member, or cognizant staff member thereof), in response to a documented request (including a Congressional Record notice requesting testimony or statements for the record at a regularly scheduled hearing) made by the recipient member, legislative body or subdivision, or a cognizant staff member thereof; provided such information is readily obtainable and can be readily put in deliverable form; and further provided that costs under this section for travel, lodging or meals are unallowable unless incurred to offer testimony at a regularly scheduled Congressional hearing pursuant to a written request for such presentation made by the Chairman or Ranking Minority Member of the Committee or Subcommittee conducting such hearing; o J 24b(2) Any lobbying made unallowable by section a(3) to influence State legislation in order to directly reduce the cost, or to avoid material impairment of the institution's authority to perform the grant, contract, or other agreement; or o J 24b(3) Any activity specifically authorized by statue to be undertaken with funds from the grant, contract, or other agreement. + J 24c. When an institution seeks reimbursement for indirect costs, total lobbying costs shall be separately identified in the indirect cost rate proposal, and thereafter treated as other unallowable activity cost in accordance with the procedures of subsection B1e. + J 24d. Institutions shall submit as part of their annual indirect cost rate proposal a certification that the requirements and standards of this section have been complied with. + J 24e. Institutions shall maintain adequate records to demonstrate that the determination of costs as being allowable or unallowable pursuant to this section J24 complies with the requirements of this Circular. + J 24f. Time logs, calendars, or similar records shall not be required to be created for purposes of complying with this section during any particular calendar month when: (1) the employee engages in lobbying (as defined in subsections a and b above) 25 percent or less of the employee's compensated hours of employment during that calendar month, and (2) within the preceding five-year period, the institution has not materially misstated allowable or unallowable costs of any nature, including legislative lobbying costs. When conditions (1) and (2) are met, institutions are not required to establish records to support the allowability of claimed costs in addition to records already required or maintained. Also, when conditions (1) and (2) are met, the absence of time logs, calendars, or similar records will not serve as a basis for disallowing costs by contesting estimates of lobbying time spent by employees during a calendar month. + J 24g. Agencies shall establish procedures for resolving in advance, in consultation with OMB, any significant questions or disagreements concerning the interpretation or application of this section J24. Any such advance resolutions shall be binding in any subsequent settlements, audits, or investigations with respect to that grant or contract for purposes of interpretation of this Circular; provided, however, that this shall not be construed to prevent a contractor or grantee from contesting the lawfulness of such a determination. J 25. LOSSES ON OTHER SPONSORED AGREEMENTS OR CONTRACTS. Any excess of costs over income under any other sponsored agreement or contract of any nature is unallowable. This includes, but is not limited to, the institution's contributed portion by reason of cost-sharing agreement or any under-recoveries through negotiation of flat amounts for indirect costs. J 26. MAINTENANCE AND REPAIR COSTS. Costs incurred for necessary maintenance, repair or upkeep of property (including Government property unless otherwise provided for) which neither add to the permanent value of the property nor appreciably prolong its intended life but keep it in an efficient operating condition, are allowable. J 27. MATERIAL COSTS. Costs incurred for purchased materials, supplies, and fabricated parts directly or indirectly related to the sponsored agreement, are allowable. Purchases made specifically for the sponsored agreement should be charged thereto at their actual prices after deducting all cash discounts, trade discounts, rebates, and allowances received by the institution. Withdrawals from general stores or stockrooms should be charged at their cost under any recognized method of pricing stores withdrawals conforming to sound accounting practices consistently followed by the institution. Incoming transportation charges are a proper part of material cost. Direct material cost should include only the materials and supplies actually used for the performance of the sponsored agreement, and due credit should be given for any excess materials retained, or returned to vendors. Due credit should be given for all proceeds or value received for any scrap resulting from work under the sponsored agreement. Where Government-donated or furnished materials is used in performing the sponsored agreement, such material will be used without charge. J 28. MEMBERSHIPS, SUBSCRIPTIONS AND PROFESSIONAL ACTIVITY COSTS. + J 28a. Costs of the institution's membership in business, technical, and professional organizations are allowable. + J 28b. Costs of the institution's subscriptions to business, professional, and technical periodicals are allowable. + J 28c. Costs of meetings and conferences, when the primary purpose is the dissemination of technical information, are allowable. This includes costs of meals, transportation, rental of facilities, and other items incidental to such meetings or conferences. + J 28d. Costs of membership in any civic or community organization are unallowable. + J 28e. Costs of membership in any country club or social or dining club or organization are unallowable. J 29. PATENT COSTS. Costs of preparing disclosures, reports, and other documents required by the sponsored agreement, and of searching the art to the extent necessary to make such invention disclosures, are allowable. In accordance with the clauses of the sponsored agreement relating to patents, costs of preparing documents and any other patent costs, in connection with the filing of a patent application where title is conveyed to the Government, are allowable. (See also Section J39) J 30. PLANT SECURITY COSTS. Necessary expenses incurred to comply with security requirements, including wages, uniforms and equipment of personnel engaged in plant protection, are allowable. J 31. PREAGREEMENT COSTS. Costs incurred prior to the effective date of the sponsored agreement, whether or not they would have been allowable thereunder if incurred after such date, are unallowable unless approved by the sponsoring agency. J 32. PROFESSIONAL SERVICES COSTS. J 32a. Costs of professional and consulting services, including legal services rendered by the members of a particular profession who are not employees of the institution, are allowable, subject to J32b and J11, when reasonable in relation to the services rendered and when not contingent upon recovery of the costs from the Federal Government. Retainer fees, to be allowable, must be reasonably supported by evidence of services rendered. J 32b. Factors to be considered in determining the allowability of costs in a particular case include (1) the past pattern of such costs, particularly in the years prior to the award of sponsored agreements; (2) the impact of sponsored agreements on the institution's total activity; (3) the nature and scope of managerial services expected of the institution's own organizations; and (4) whether the proportion of Government work to the institution's total activity is such as to influence the institution in favor of incurring the cost, particularly where the services rendered are not of a continuing nature and have little relationship to work under sponsored agreements. J 33. PROFITS AND LOSSES ON DISPOSITION OF PLANT EQUIPMENT OR OTHER CAPITAL ASSETS. Profits or losses arising from the sale or exchange of plant, facilities, equipment or other capital assets, including sale or exchange of either short-term or long-term investments, shall not be considered in computing costs of sponsored agreements, except for pension plans as provided in Section J8f. When assets acquired with Federal funds, in part or wholly, are disposed of, the distribution of the proceeds shall be made in accordance with Attachment N, OMB Circular No. A-110. J 34. PROPOSAL COSTS. Proposal costs are the costs of preparing bids or proposals on potential Government and non-government sponsored agreements or projects, including the development of data necessary to support the institution's bids or proposals. Proposal costs of the current accounting period of both successful and unsuccessful bids and proposals normally should be treated as indirect costs and allocated currently to all activities of the institution, and no proposal costs of past accounting periods will be allocable to the current period. However, the institution's established practices may be to treat proposal costs by some other recognized method. Regardless of the method used, the results obtained may be accepted only if found to reasonable and equitable. J 35. REARRANGEMENT AND ALTERATION COSTS. Cost incurred for ordinary or normal rearrangement and alteration of facilities are allowable. Special arrangement and alteration costs incurred specifically for the project are allowable when such work has been approved in advance by the sponsoring agency. J 36. RECONVERSION COSTS. Costs incurred in the restoration or rehabilitation of the institution's facilities to approximately the same condition existing immediately prior to commencement of a sponsored agreement, fair wear and tear excepted, are allowable. J 37. RECRUITING COSTS. + J 37a. Subject to b, c, and d below, and provided that the size of the staff recruited and maintained is in keeping with workload requirements, costs of "help wanted" advertising, operating costs of an employment office necessary to secure and maintain an adequate staff, costs of operating an aptitude and educational testing program, travel costs of employees while engaged in recruiting personnel, travel costs of applicants for interviews for prospective employment, and relocation costs incurred incident to recruitment of new employees, are allowable to the extent that such costs are incurred pursuant to a well managed recruitment program. Where the institution uses employment agencies, costs not in excess of standard commercial rates for such services are allowable. + J 37b. In publications, costs of help wanted advertising that includes color, includes advertising material for other than recruitment purposes, or is excessive in size (taking into consideration recruitment purposes for which intended and normal institutional practices in this respect), are unallowable. + J 37c. Costs of help wanted advertising, special emoluments, fringe benefits, and salary allowances incurred to attract professional personnel from other institutions that do not meet the test of reasonableness or do not conform with the established practices of the institution, are unallowable. + J 37d. Where relocation costs incurred incident to recruitment of a new employee have been allowed either as an allocable direct or indirect cost, and the newly hired employee resigns for reasons within his control within twelve months after hire, the institution will be required to refund or credit such relocation costs to the Government. J 38. RENTAL COST OF BUILDINGS AND EQUIPMENT. + J 38a. Rental costs of buildings or equipment are allowable to the extent that the decision to rent or lease is in accord with Section C3. Rental arrangements should be reviewed periodically to determine if circumstances have changed and other options are available. + J 38b. Rental costs under "sale and lease back" arrangements are allowable only up to the amount that would be allowed if the institution continued to own the property. + J 38c. Rental costs under "less-than-arm's length" leases are allowable only up to the amount that would be allowed if the institution owned the property. For this purpose, a "less-than-arm's-length" lease is one under which one party to the lease agreement is able to control or substantially influence the actions of the other. + J 38d. Where significant rental costs are incurred under leases which create a material equity in the leased property, they are allowable only up to the amount that would be allowed if the institution purchased the property on the date the lease agreement was executed. For this purpose, a material equity in the property exists when the lease: o J 38d(1) Is non-cancelable or is cancelable only upon the occurrence of some remote contingency, and o J 38d(2) Has one or more of the following characteristics: # J 38d(2)(a) Title to the property passes to the institution at some time during or after the lease period. # J 38d(2)(b) The term of the lease corresponds substantially to the estimated useful life of the property (i.e., the period of economic usefulness to the legal owner of the property). # J 38d(2)(c) The initial term is less than the useful life of the property and the institution has the option to renew the lease for the remaining useful life at substantially less than fair rental value. # J 38d(2)(d) The property was acquired by the lessor to meet the special needs of the institution and will probably be usable only for that purpose and only by the institution. # J 38d(2)(e) The institution has the right, during or at the expiration of the lease, to purchase the property at a price which at the inception of the lease appears to be substantially less than the probable fair market value at the time it is permitted to purchase the property (commonly called a lease with a bargain purchase option), except for any discount normally given to educational institutions. J 39. ROYALTIES AND OTHER COSTS FOR USE OF PATENTS. Royalties on a patent or amortization of the cost of acquiring a patent or invention or rights thereto, necessary for the proper performance of the sponsored agreement and applicable to tasks or processes thereunder, are allowable unless the Government has a license or the right to free use of the patent, the patent has been adjudicated to be invalid or has been administratively determined to be invalid, the patent is considered to be unenforceable, or the patent has expired. J 40. SABBATICAL LEAVE COSTS. Costs of leave of absence by employees for performance of graduate work or sabbatical study, travel or research are allowable provided the institution has a uniform policy on sabbatical leave for persons engaged in instruction and persons engaged in research. Such costs will be allocated on an equitable basis among all related activities of the institution. Where sabbatical leave is included in fringe benefits for which a cost is determined for assessment as a direct charge, the aggregate amount of such assessments applicable to all work of the institution during the base period must be reasonable in relation to the institution's actual experience under its sabbatical leave policy. J 41. SCHOLARSHIPS AND STUDENT AID COSTS. + J 41a. Costs of scholarships, fellowships, and other programs of student aid are allowable only when the purpose of the sponsored agreement is to provide training to selected participants and the charge is approved by the sponsoring agency. However, tuition remission and other forms of compensation paid as, or in lieu of, wages to students performing necessary work are allowable provided that (1) there is a bonafide employer- employee relationship between the student and the institution for the work performed, and (2) the tuition or other payments are reasonable compensation for the work performed and are conditioned explicitly upon the performance of necessary work, and (3) it is the institution's practice to similarly compensate students in non-sponsored as well as sponsored activities. + J 41b. Charges for tuition remission and other forms of compensation paid to students as, or in lieu of, salaries and wages shall be subject to the reporting requirements stipulated in Section J8, and shall be treated as direct or indirect cost in accordance with the actual work being performed. Tuition remission may be charged on an average rate basis. J 42. SELLING AND MARKETING. Costs of selling and marketing any products or services of the institution (unless allowed under J1c or section J34) are unallowable. J 43. SEVERANCE PAY. + J 43a. Severance pay is compensation in addition to regular salary and wages which is paid by an institution to employees whose services are being terminated. Costs of severance pay are allowable only to the extent that such payments are required by law, by employer-employee agreement, by established policy that constitutes in effect an implied agreement on the institution's part, or by circumstances of the particular employment. + J 43b. Severance payments that are due to normal recurring turnover and which otherwise meet the conditions of a above may be allowed provided the actual costs of such severance payments are regarded as expenses applicable to the current fiscal year and are equitably distributed among the institution's activities during that period. + J 43c. Severance payments that are due to abnormal or mass terminations are of such conjectural nature that allowability must be determined on a case-by-case basis. However, the Government recognizes its obligation to participate, to the extent of its fair share, in any specific payment. + J 43d. Costs incurred in excess of the institution's normal severance pay policy applicable to all persons employed by the Institution upon termination of employment are unallowable. J 44. SPECIALIZED SERVICE FACILITIES. + J 44a. The costs of institutional services involving the use of highly complex or specialized facilities such as electronic computers, wind tunnels, and reactors are allowable, provided the charge for the service meets the conditions of b through d below. + J 44b. The cost of each service normally shall consist of both its direct costs and its allocable share of indirect costs with deductions for appropriate income or Federal financing as described in Section C5. + J 44c. The cost of such institutional services when material in amount will be charged directly to users, including sponsored agreements based on actual use of the services and a schedule of rates that does not discriminate between federally and non-federally supported activities of the institution, including use by the institution for internal purposes. Charges for the use of specialized facilities should be designed to recover not more than the aggregate cost of the services over a long-term period agreed to by the institution and the cognizant Federal agency. Accordingly, it is not necessary that the rates charged for services be equal to the cost of providing those services during any one fiscal year as long as rates are reviewed periodically for consistency with the long-term plan and adjusted if necessary. + J 44d. Where the costs incurred for such institutional services are not material, they may be allocated as indirect costs. Such arrangements must be agreed to by the institution and the cognizant Federal agency. + J 44e. Where it is in the best interest of the Government and the institution to establish alternative costing arrangements, such arrangements may be worked out with the cognizant Federal agency. J 45. STUDENT ACTIVITY COSTS. Costs incurred for intramural activities, student publications, student clubs, and other student activities, are unallowable, unless specifically provided for in the sponsored agreements. J 46. TAXES. + J 46a. In general, taxes which the institution is required to pay and which are paid or accrued in accordance with generally accepted accounting principles are allowable. Payments made to local governments in lieu of taxes which are commensurate with the local government services received are allowable, except for (1) taxes from which exemptions are available to the institution directly or which are available to the institution based on an exemption afforded the Government, and in the latter case when the sponsoring agency makes available the necessary exemption certificates; and (2) special assessments on land which represent capital improvements. + J 46b. Any refund of taxes, interest, or penalties, and any payment to the institution of interest thereon, attributable to taxes, interest, or penalties which were allowed as sponsored agreement costs, will be credited or paid to the Government in the manner directed by the Government. However, any interest actually paid or credited to an institution incident to a refund of tax, interest, and penalty will be paid or credited to the Government only to the extent that such interest accrued over the period during which the institution had been reimbursed by the Government for the taxes, interest, and penalties. J 47. TRANSPORTATION COSTS. Costs incurred for freight, express, cartage, postage, and other transportation services relating either to goods purchased, in process, or delivered, are allowable. When such costs can readily be identified with the items involved, they may be charged directly as transportation costs or added to the cost of such items. Where identification with the materials received cannot readily be made, inbound transportation costs may be charged to the appropriate indirect cost accounts if the institution follows a consistent, equitable procedure in this respect. Outbound freight, if reimbursable under the terms of the sponsored agreement, should be treated as a direct cost. J 48. TRAVEL COSTS. + J 48a. General. Travel costs are the expenses for transportation, lodging, subsistence and related items incurred by employees who are in travel status on official business of the institution. Such costs may be charged on an actual basis, on a per diem or mileage basis in lieu of actual costs incurred, or on a combination of the two, provided the method used is applied to an entire trip and not to selected days of the trip, results in reasonable charges, and is in accordance with the institution's travel policy and practices consistently applied to all institutional travel activities. + J 48b. Lodging and subsistence. Costs incurred by employees and officers for travel, including costs of lodging, other subsistence, and incidental expenses, shall be considered reasonable and allowable only to the extent such costs do not exceed charges normally allowed by the institution in its regular operations as a result of an institutional policy and the amounts claimed under sponsored agreements represent reasonable and allocable costs. In the absence of an acceptable institutional policy regarding travel costs, the rates and amounts established under subchapter I of Chapter 57 of Title 5, United States Code, or by the Administrator of General Services, or the President (or his designee) pursuant to any provisions of such subchapter shall apply to sponsored agreements (41 U.S.C. 420). + J 48c. Commercial Air Travel. Airfare costs in excess of the lowest available commercial discount airfare, Federal Government contract airfare (where authorized and available), or customary standard (coach or equivalent) airfare, are unallowable except when such accommodations would: require circuitous routing; require travel during unreasonable hours; excessively prolong travel; greatly increase the duration of the flight; result in increased cost that would offset the transportation savings; or offer accommodations not reasonably adequate for the medical needs of the traveler. Where an institution can reasonably demonstrate to the sponsoring agency either the non-availability of discount airfare or Government contract airfare for individual trips or, on an overall basis, that it is the institution's practice to make routine use of such airfare, specific determinations of non-availability will generally not be questioned by the Government, unless a pattern of avoidance is detected. However in order for airfare costs in excess of the customary standard commercial airfare to be allowable, e.g., use of first-class airfare, the institution must justify and document on a case-by-case basis the applicable conditions(s) set forth above. + J 48d. Air travel by other than commercial carrier. "Cost of travel by institution-owned, -leased, or -chartered aircraft," as used in this paragraph, includes the cost of lease, charter, operation (including personnel costs), maintenance, depreciation, insurance, and other related costs. Costs of travel via institution-owned, -leased, or -chartered aircraft shall not exceed the cost of allowable commercial air travel, as provided for in section c above. J 49. TERMINATION COSTS APPLICABLE TO SPONSORED AGREEMENTS. + J 49a. Termination of sponsored agreements generally gives rise to the incurrence of costs or to the need for special treatment of costs, which would not have arisen had the agreement not been terminated. Items peculiar to termination are set forth below. They are to be used in conjunction with all other provisions of this Circular in the case of termination. + J 49b. The cost of common items of material reasonably usable on the tution's other work will not be allowable unless the institution submits evidence that it could not retain such items at cost without sustaining a loss. In deciding whether such items are reasonably usable on other work of the institution, consideration should be given to the institution's plans and orders for current and scheduled work. Contemporaneous purchases of common items by the institution will be regarded as evidence that such items are reasonably usable on the institution's other work. Any acceptance of common items as allowable to the terminated portion of the agreement should be limited to the extent that the quantities of such items on hand, in transit, and on order are in excess of the reasonable quantitative requirements of other work. + J 49c. If in particular case, despite all reasonable efforts by the institution, certain costs cannot be discontinued immediately after the effective date of termination, such costs are generally allowable within the limitations set forth in this Circular, except that any such costs continuing after termination due to the negligent or willful failure of the institution to discontinue such costs will be considered unacceptable. + J 49d. Loss of useful value of special tooling, and special machinery and equipment is generally allowable, provided (1) such special tooling, machinery, or equipment is not reasonably capable of use in the other work of the institution; (2) the interest of the Government is protected by transfer of title or by other means deemed appropriate by the contracting officer or equivalent; and (3) the loss of useful value as to any one terminated agreement is limited to that portion of the acquisition cost which bears the same ratio to the total acquisition cost as the terminated portion of the agreement bears to the entire terminated agreement and other Government agreements for which the special tooling, special machinery, or equipment was acquired. + J 49e. Rental costs under unexpired leases are generally allowable where clearly shown to have been reasonably necessary for the performance of the terminated agreement, less the residual value of such leases, if (1) the amount of such rental claimed does not exceed the reasonable use value of the property leased for the period of the agreement and such further period as may be reasonable; and (2) the institution makes all reasonable efforts to terminate, assign, settle, or otherwise reduce the cost of such lease. There also may be included the cost of alterations of such leased property, provided such alterations were necessary for the performance of the agreement, and of reasonable restoration required by the provisions of the lease. + J 49f. Settlement expenses including the following are generally allowable: (1) accounting, legal, clerical, and similar costs reasonably necessary for the preparation and presentation to contracting officers or equivalent of settlement claims and supporting data with respect to the terminated portion of the agreement, and the termination and settlement of subagreements; and (2) reasonable costs for the storage, transportation, protection, and disposition of property provided by the Government or acquired or produced by the institution for the agreement, except when the institution is reimbursed for disposals at a predetermined amount in accordance with the provisions of Circular No. A-110. + J 49g. Claims under subagreements, including the allocable portion of claims which are common to the agreement and to other work of the institution, are generally allowable. >J 50. TRUSTEES. Travel and subsistence costs of trustees, regardless of the purpose of the trip, are unallowable. K. CERTIFICATION OF CHARGES K 1. PAYMENT. To assure that expenditures for sponsored agreements are proper and in accordance with the agreement documents and approved project budgets, the annual and/or final fiscal reports or vouchers requesting payment under the agreements, will include a certification, signed by an authorized official of the university which reads essentially as follows: "I certify that all expenditures reported (or payment requested) are for appropriate purposes and in accordance with the provisions of the application and award documents." K 2. CERTIFICATION OF INDIRECT COSTS. + K 2a. Policy. o K 2a(1) No proposal to establish indirect cost rates shall be acceptable unless such costs have been certified by the educational institution using the Certificate of Indirect Costs set forth in paragraph b below. The certificate must be signed on behalf of the institution by an individual at a level no lower than vice president or chief financial officer of the institution that submits the proposal. o K 2a(2) No indirect cost rate shall be binding upon the Federal Government if the most recent required proposal from the institution has not been certified. Where it is necessary to establish indirect cost rates, and the institution has not submitted a certified proposal for establishing such rates in accordance with the requirements of this section, the Federal Government shall unilaterally establish such rates. Such rates may be based upon audited historical data or such other data that have been furnished to the cognizant Federal agency and for which it can be demonstrated that all unallowable costs have been excluded. When indirect cost rates are unilaterally established by the Federal Government because of failure of the institution to submit a certified proposal for establishing such rates in accordance with this section, the rates established will be set at a level low enough to ensure that potentially unallowable costs will not be reimbursed. K 2b. Certificate. The certificate required by this section shall be in the following form: Certificate of Indirect costs This is to certify that to the best of my knowledge and belief: (1) I have reviewed the indirect cost proposal submitted herewith; (2) All costs included in this proposal to establish billing or final indirect costs rate for are allowable in accordance with the requirements of the Federal agreement(s) to which they apply and with the cost principles applicable to those agreements. (3) This proposal does not include any costs which are unallowable under applicable cost principles such as (without limitation): advertising and public relations costs, contributions and donations, entertainment costs, fines and penalties, lobbying costs, and defense of fraud proceedings; and (4) All costs included in this proposal are properly allocable to Federal agreements on the basis of a beneficial or causal relationship between the expenses incurred and the agreements to which they are allocated in accordance with the applicable requirements. I declare under penalty of perjury that the foregoing is true and correct. Institution: Signature: Name of Official: Title: Date of Execution: Exhibit A LIST OF COLLEGES AND UNIVERSITIES SUBJECT TO SECTION J12F OF CIRCULAR A-21 + 1. Johns Hopkins University + 2. Stanford University + 3. Massachusetts Institute of Technology + 4. University of Washington + 5. University of California - Los Angeles + 6. University of Michigan + 7. University of California - San Diego + 8. University of California - San Francisco + 9. University of Wisconsin - Madison + 10. Columbia University + 11. Yale University + 12. Harvard University + 13. Cornell University + 14. University of Pennsylvania + 15. University of California - Berkeley + 16. University of Minnesota + 17. Pennsylvania State University + 18. University of Southern California + 19. Duke University + 20. Washington University + 21. University of Colorado + 22. University of Illinois - Urbana + 23. University of Rochester + 24. University of North Carolina - Chapel Hill + 25. University of Pittsburgh + 26. University of Chicago + 27. University of Texas - Austin + 28. University of Arizona + 29. New York University + 30. University of Iowa + 31. Ohio State University + 32. University of Alabama - Birmingham + 33. Case Western Reserve + 34. Baylor College of Medicine + 35. California Institute of Technology + 36. Yeshiva University + 37. University of Massachusetts + 38. Vanderbilt University + 39. Purdue University + 40. University of Utah + 41. Georgia Institute of Technology + 42. University of Maryland - College Park + 43. University of Miami + 44. University of California - Davis + 45. Boston University + 46. University of Florida + 47. Carnegie-Mellon University + 48. Northwestern University + 49. Indiana University + 50. Michigan State University + 51. University of Virginia + 52. University of Texas-SW Medical Center Dallas + 53. University of California - Irvine + 54. Princeton University + 55. Tulane University of Louisiana + 56. Emory University + 57. University of Georgia + 58. Texas A & M University - all campuses + 59. New Mexico State University + 60. North Carolina State University - Raleigh + 61. University of Illinois - Chicago + 62. Utah State University + 63. Virginia Commonwealth University + 64. Oregon State University + 65. SUNY - Stony Brook + 66. University of Cincinnati + 67. CUNY - Mount Sinai School of Medicine + 68. University of Connecticut + 69. Louisiana State University + 70. Tufts University + 71. University of California - Santa Barbara + 72. University of Hawaii - Manoa + 73. Rutgers State University of New Jersey + 74. Colorado State University + 75. Rockefeller University + 76. University of Maryland - Baltimore + 77. Virginia Polytechnic Institute & State University + 78. SUNY - Buffalo + 79. Brown University + 80. University of Medicine & Dentistry of New Jersey + 81. University of Texas - Health Science Center San Antonio + 82. University of Vermont + 83. University of Texas - Health Science Center Houston + 84. Florida State University + 85. University of Texas - MD Anderson Cancer Center + 86. University of Kentucky + 87. Wake Forest University + 88. Wayne State University + 89. Iowa State University of Science & Technology + 90. University of New Mexico + 91. Georgetown University + 92. Dartmouth College + 93. University of Kansas + 94. Oregon Health Sciences University + 95. University of Texas - Medical Branch - Galveston + 96. University of Missouri - Columbia + 97. Temple University + 98. George Washington University + 99. University of Dayton